ABGENIX INC, 10-Q, 1998-08-17

ABGENIX INC
10-Q, 1998-08-17
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------

FORM 10-Q

----------------

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the period ended June 30, 1998

[ ] 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 [ ] No [X]

As of August 1, 1998 there were 11,054,728 shares of the Registrant's Common
Stock outstanding.

================================================================================

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ABGENIX, INC.

FORM 10-Q

INDEX

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Cover Page................................................................................... 1

Index........................................................................................ 2

PART I - Financial Information

ITEM 1 - Financial Statements

Condensed Balance sheets - June 30, 1998, December 31, 1997 and pro forma
stockholders' equity at June 30, 1998........................................... 3

Condensed Statements of operations - three months ended June 30, 1998 and
June 30, 1997 and six months ended June 30, 1998 and June 30, 1997.............. 4

Condensed Statements of cash flows - three months ended June 30, 1998 and
June 30, 1997 and six months ended June 30, 1998 and June 30, 1997.............. 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........................................................... 24

ITEM 2 - Changes in Securities and Use of Proceeds................................... 24

ITEM 3 - Defaults Upon Senior Securities............................................. 24

ITEM 4 - Submission of Matters to a Vote of Security Holders......................... 24

ITEM 5 - Other Information........................................................... 24

ITEM 6 - Exhibits and Reports on Form 8-K............................................ 24

SIGNATURES................................................................................... 29
</TABLE>

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ABGENIX, INC.

CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
1997 JUNE 30, 1998
JUNE 30, 1998 (NOTE 1) (NOTE 1)
------------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 794 $ 4,617
Short-term investments .............................................. 7,022 10,704
Receivable from related party ....................................... 406 --
Prepaid expenses and other current assets ........................... 998 550
-------- --------
Total current assets ................................................... 9,220 15,871
Property and equipment, net ............................................ 5,341 5,776
Deposits and other assets .............................................. 539 437
-------- --------
$ 15,100 $ 22,084
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Short-term payable to parent ........................................ $ 158 $ 212
Payable to Xenotech for cross-license and settlement
obligation ..................................................... 3,750 3,750
Accounts payable .................................................... 452 426
Accrued stock issuance costs ........................................ -- 1,200
Other accrued liabilities ........................................... 1,761 2,000
Current portion of long-term debt ................................... 1,642 1,646
-------- --------
Total current liabilities .............................................. 7,763 9,234
Long-term debt ......................................................... 3,136 3,979
Commitments:
Redeemable convertible preferred stock, $0.0001 par value;
20,000,000 shares authorized, 7,844,352 and 7,263,209
shares issued and outstanding at June 30, 1998 and
December 31, 1997, at amount paid in; aggregate redemption
and liquidation value of approximately $49,020 and $45,003
at June 30, 1998 and December 31, 1997, respectively ............. 35,125 31,189 $ --
Redeemable convertible preferred stock subscription receivable ...... -- (2,737) --
Redeemable convertible preferred stock issuable ..................... -- 2,737 --
Stockholders' equity (net capital deficiency):
Common stock, $0.0001 par value; 50,000,000 shares
authorized, 324,242 and 233,542 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively; at amount paid in ..................................... 442 351 35,567
Contributions from parent ........................................... 29,277 29,277 29,277
Additional paid-in capital .......................................... 2,296 1,776 2,296
Deferred compensation ............................................... (1,470) (1,248) (1,470)
Accumulated deficit ................................................. (61,469) (52,474) (61,472)
-------- -------- --------
Total stockholders' equity (net capital deficiency)..................... (30,924) (22,318) $ 4,198
-------- -------- ========
$ 15,100 $ 22,084
======== ========
</TABLE>

See accompanying notes.

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ABGENIX, INC.

CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Revenue under collaborative agreements from
related parties (net of equity in losses of
Xenotech of $195 and $375 for the three months
ended June 30, 1998 and 1997 and $310 and
$485 for the six months ended June 30, 1998
and 1997, respectively) ................................... $ 212 $ 430 $ 502 $ 765
Contract revenue .......................................... 523 -- 1,123 --
-------- -------- -------- ----------
Total revenues ................................................. 735 430 1,625 765
Operating expenses:
Research and development .................................. 3,553 2,582 8,919 5,132
General and administrative ................................ 803 672 1,721 1,204
Charge for cross-license and settlement-
amount allocated from Cell Genesys ...................... -- -- 11,250
Equity in losses from the Xenotech joint
venture (charge for cross-license and settlement) ....... -- -- -- 3,750
-------- -------- -------- ----------
Total operating expenses ....................................... 4,356 3,254 10,640 21,336
-------- -------- -------- ----------
Operating loss ................................................. (3,621) (2,824) (9,015) (20,571)
Other income and expenses:
Interest income ........................................... 132 89 330 213
Interest expense .......................................... (161) (186) (310) (263)
-------- -------- -------- ----------
Net loss ....................................................... $ (3,650) $ (2,921) $ (8,995) $ (20,621)
======== ======== ======== ==========
Basic net loss per share ....................................... $ (11.59) $(265.55) $ (30.80) $(3,436.83)
======== ======== ======== ==========
Shares used in computing basic net loss per share .............. 315 11 292 6
======== ======== ======== ==========
</TABLE>

See accompanying notes.

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ABGENIX, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ....................................................... $ (8,995) $(20,621)
Adjustments to reconcile net loss to net cash used by
operating activities:
Equity in losses of Xenotech (including the charge
for cross-license and settlement) ..................... 310 4,235
Depreciation and amortization ............................. 895 324
Charge for cross-license and settlement ................... -- 11,250
Changes in certain assets and liabilities:
Receivable from related party ......................... (406) --
Prepaid expenses and other current assets ............. (448) (917)
Deposits and other assets ............................. (102) (100)
Short-term payable to parent .......................... (54) (1,073)
Accounts payable ...................................... 26 --
Deferred revenue from related parties ................. -- (376)
Accrued stock issuance costs .......................... (1,200) --
Other accrued liabilities ............................. (239) (1,250)
-------- --------
Net cash used in operating activities .......................... (10,213) (8,528)
-------- --------
INVESTING ACTIVITIES
Purchases of short-term investments ............................ (7,023) (4,978)
Sales of short-term investments at maturity .................... 10,705 2,982
Capital expenditures ........................................... (151) (2,455)
Contributions to Xenotech ...................................... (321) (434)
-------- --------
Net cash provided by (used in) investing activities ............ 3,210 (4,885)
-------- --------
FINANCING ACTIVITIES
Net proceeds from issuances of redeemable convertible
preferred stock ........................................... 3,936 --
Proceeds from issuance of note payable to parent ............... -- 1,579
Proceeds from long-term debt ................................... -- 5,946
Payments under long-term debt .................................. (847) (49)
Proceeds from issuance of common stock ......................... 91 9
-------- --------
Net cash provided by financing activities ...................... 3,180 7,485
-------- --------
Net increase (decrease) in cash and cash equivalents ........... (3,823) (5,928)
Cash and cash equivalents at the beginning of the period ....... 4,617 7,190
-------- --------
Cash and cash equivalents at the end of the period ............. $ 794 $ 1,262
======== ========
</TABLE>

See accompanying notes.

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ABGENIX, INC.

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998

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, 1997 and accompanying notes included in the Company's Prospectus
dated July 2, 1998 filed as part of a Registration Statement on Form S-1 (Reg.
No. 333-49415), as amended. The results of operations for the quarter ended June
30, 1998 are not necessarily indicative of the results to be expected for the
full year.

Unaudited Pro Forma Stockholders' Equity (Net Capital Deficiency)

In July 1998, the Company completed its initial public offering and
issued 2,500,000 shares of its common stock to the public at a price of $8.00
per share. The Company received cash of $18.6 million, after deducting
underwriting discounts and commissions and before deducting expenses payable by
the Company. Upon the closing of the initial public offering, each outstanding
share of the Company's then outstanding convertible redeemable preferred stock
was automatically converted into one share of common stock. On July 27, 1998,
the Company's underwriters exercised an option to purchase an additional 375,000
shares of common stock at a price of $8.00 per share to cover over-allotments.
The Company received cash of approximately $2.8 million, net of underwriting
discounts and commissions.

Reclassification

Certain 1997 balances have been reclassified to conform to the 1998
presentation.

2. NET LOSS PER SHARE

In 1997, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share is computed using the weighted average number of
common shares outstanding and excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Potentially dilutive
securities have been excluded from the computation as their effect is
antidilutive.

Pro forma net loss per share has been computed to give effect to the
automatic conversion of redeemable convertible preferred stock into common stock
upon completion of the Company's initial public offering (using the
as-if-converted method) from the original date of issuance.

A reconciliation of shares used in calculation of basic and diluted and
pro forma net loss per share follows (in thousands except per share data):

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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss .............................................. $ (3,650) $ (3,091) $ (8,995) $(20,791)
======== ======== ======== =========
Basic:
Weighted-average shares of common stock
outstanding used in computing basic
and diluted net loss per share .................. 315 11 292 6
======== ======== ======== =========
Basic net loss per share .............................. $ 11.59 $ 281.00 $ 30.80 $3,465.17
======== ======== ======== =========
Pro forma:
Shares used in computing basic
net loss per share (from above) ................. 315 11 292 6
Adjusted to reflect the effect of the assumed
conversion of preferred stock from the
date of issuance ................................ 7,844 3,750 7,844 3,750
-------- -------- -------- ---------
Weighted-average shares used in computing
pro forma net loss per share .................... 8,159 3,761 8,136 3,756
======== ======== ======== =========
Pro forma net loss per share .......................... $ (0.45) $ (0.82) $ (1.11) $ (5.54)
======== ======== ======== =========
</TABLE>

Diluted net loss per share has not been presented separately as, due to
the Company's net loss position, it is antidilutive.

3. COLLABORATION AGREEMENT WITH XENOTECH

Xenotech

In 1991, Cell Genesys and JT America, Inc. formed Xenotech to develop
genetically modified strains of mice which can produce human monoclonal
antibodies and to commercialize products generated from these mice. Upon the
creation of Abgenix, Cell Genesys' rights in the joint venture were assigned to
the Company. Xenotech funds its research, which is generally conducted by
Abgenix, through capital contributions from the partners. The Company paid and
expensed as research and development $0, $0, $195,000 and $0 related to
licensing the rights to this technology from Xenotech for the three months ended
June 30, 1998 and 1997 and the six months ended June 30, 1998 and 1997,
respectively.

The Company is obligated to pay 50% of all Xenotech's funding
requirements. The Company accounts for its investment in Xenotech under the
equity method; 50% of Xenotech's research and development expenses up to the
Company's investment amount. Details are as follows:

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Abgenix's share of
Xenotech losses .................................... 195 258 312 4,094

Losses associated with
cross-license and settlement ....................... -- -- -- (3,750)

Unabsorbed losses .................................... -- -- (2) --

Difference due to timing and
change in deferred revenue ......................... -- 117 -- 141
------ ------ ------ ------
Equity in losses of Xenotech ......................... 195 375 310 485

</TABLE>

The company recognized revenue of $212,000, $430,000, $502,000 and
$765,000 for the three months ended June 30, 1998 and 1997 and the six months
ended June 30, 1998 and 1997, respectively, net of its own payments to the
joint venture related to this revenue.

Summary unaudited financial information for Xenotech is as follows:

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>

Research and license revenues
from partners ...................................... 100 -- 310 25
Expenses:
Research and development ........................... 420 481 858 696
General and administrative ......................... 70 37 77 52
Cross-license and settlement
expense .......................................... -- -- -- 7,470
------ ------ ------ ------
Total expenses ....................................... 490 518 935 8,218
Interest income ...................................... -- 3 -- 6
------ ------ ------ ------
Net loss ............................................. (390) (515) (625) (8,187)

</TABLE>

4. SUBSEQUENT EVENT

In July 1998, Abgenix established a research collaboration with
Millennium BioTherapeutics in which Millennium BioTherapeutics will make
payments to the Company for performance of research activities. In addition, the
agreement provides Millennium BioTherapeutics with an option, for a limited
time, to enter into a research license and option agreement that provides
Millennium BioTherapeutics with an option to obtain a license to develop, make,
use and sell antibody products derived from the research collaboration. If the
option is exercised, the research license and option agreement may provide
Abgenix with up to approximately $7.5 million in license fees and milestone
payments to be made in the future upon completion of certain milestones,
including completion of research, clinical trials and the receipt of regulatory
approvals. Additionally, if a product receives marketing approval from the FDA
or equivalent foreign agency, the Company is entitled to receive royalties on
future product sales by Millennium BioTherapeutics.

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<PAGE> 8
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 the Company's commercialization
strategy, the statements in paragraph four under "Overview" regarding future
revenues from current and potential future collaborative arrangements, the
statements in paragraph eight and paragraph nine under "Results of Operations"
regarding future increases on research and development and general and
administrative expenses, respectively, the statements in paragraph four under
"Liquidity and Capital Resources" regarding the Company's use of available
resources during future periods, the statements in paragraph five under
"Liquidity and Capital Resources" regarding the sufficiency of the Company's
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 below
under "Additional Factors Affecting Future Operating Results".

OVERVIEW

The business and operations of Abgenix commenced in 1989 and were
initially conducted within Cell Genesys, Inc. ("Cell Genesys"). On June 24,
1996, Abgenix was incorporated and subsequently on July 15, 1996 was organized
pursuant to a Stock Purchase and Transfer Agreement between the Company and Cell
Genesys. The agreement set forth the terms and conditions for the transfer of
the antibody business unit within Cell Genesys to Abgenix.

Abgenix develops and intends to commercialize antibody therapeutic
products for the prevention and treatment of a variety of disease conditions,
including transplant-related diseases, inflammatory and autoimmune disorders,
and cancer. The Company has developed XenoMouse technology, a proprietary
technology which it believes enables it to quickly generate high affinity, fully
human antibody product candidates to essentially any disease target appropriate
for antibody therapy. Abgenix intends to use its XenoMouse technology to build
and commercialize a large and diversified product portfolio through the
establishment of corporate collaborations and internal product development
programs. The Company has recently established collaborative arrangements with
Pfizer Inc. ("Pfizer"), Schering-Plough Research Institute ("Schering-Plough"),
Genentech, Inc. ("Genentech") and Millennium BioTherapeutics, Inc. ("Millennium
BioTherapeutics"). In certain instances, the Company intends to commercialize
select products on its own in niche markets such as Graft Versus Host Disease
("GVHD"). In addition, the Company has four proprietary antibody product
candidates that are under development internally, two of which are in human
clinical trials.

In 1991, Cell Genesys and JT America, Inc. ("JT America") formed
Xenotech, L.P. ("Xenotech"), an equally owned joint venture, to develop
genetically modified strains of mice which can produce human monoclonal
antibodies and to commercialize products generated from these mice. 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 the Company and JT America and the Company is obligated to
fund 50% of all Xenotech expenses. Pursuant to contractual arrangements, the
Company performs research for the joint venture and receives payments for such
research. The Company accounts for its investment in Xenotech under the equity
method of accounting.

The Company expects that substantially all of its revenues for the
foreseeable future will result from payments under collaborative arrangements,
including fees upon signing, reimbursement for research and development and
milestone payments. The Company has established collaborative arrangements with
Pfizer, Schering-Plough, Genentech and Millennium BioTherapeutics. Pursuant to
the Company's research collaboration with Pfizer, Pfizer may make additional
payments to the Company upon completion of certain research milestones. Pfizer
has an option to expand the

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<PAGE> 9
research collaboration to include up to two additional antigen targets. If
Pfizer chooses to exercise its option, the Company could receive potential
license fees and milestone payments of up to approximately $8.0 million per
antigen target upon the completion of certain milestones. Additionally, if a
product receives marketing approval from the United States Food and Drug
Administration ("FDA") or an equivalent foreign agency, the Company is entitled
to receive royalties on future product sales by Pfizer. Pursuant to the
Company's research collaboration with Schering-Plough, Schering-Plough will be
obligated to make additional payments to the Company upon completion of the
research. In addition, the agreement provides Schering-Plough with an option,
for a limited time, to enter into a research, option and license agreement. If
the option is exercised, the research, option and license agreement may provide
the Company with up to approximately $8.0 million in additional research fees
and milestone payments upon the completion of certain milestones. Additionally,
if a product receives marketing approval from the FDA or an equivalent foreign
agency, the Company is entitled to receive royalties on future product sales by
Schering-Plough. Pursuant to the Company's research collaboration with
Genentech, Genentech is obligated to make payments to the Company for
performance of research activities. In addition, the agreement provides
Genentech with options, for a limited time, to enter into product license
agreements with respect to each of two antigens. If an option is exercised, a
product license agreement may provide Abgenix with up to approximately $5.5
million per antigen target in license fees and milestone payments to be made
upon completion of certain milestones. Additionally, if a product receives
marketing approval from the FDA or an equivalent foreign agency, the Company is
entitled to receive royalties on future product sales by Genentech. Pursuant to
the Company's research collaboration with Millennium BioTherapeutics entered
into in July 1998, Millennium BioTherapeutics will make payments to the Company
for performance of research activities. In addition, the agreement provides
Millennium BioTherapeutics with an option, for a limited time, to enter into a
research license and option agreement that provides Millennium BioTherapeutics
with an option to obtain a license to develop, make, use and sell antibody
products derived from the research collaboration. If the option is exercised,
the research license and option agreement may provide Abgenix with up to
approximately $7.5 million in license fees and milestone payments to be made in
the future upon completion of certain milestones, including completion of
research, clinical trials and the receipt of regulatory approvals. Additionally,
if a product receives marketing approval from the FDA or equivalent foreign
agency, the Company is entitled to receive royalties on future product sales by
Millennium BioTherapeutics. Payments under these collaborative arrangements will
be subject to significant fluctuation in both timing and amount and therefore
the Company's revenues and results of operations for any period may not be
comparable to the revenues or results of operations for any other period. To
date, all of the Company's revenues have resulted primarily from research and
development funding and milestone payments and may not be indicative of the
Company's future performance or of the ability of the Company to continue to
achieve such milestones.

Since inception, the Company has funded its research and development
activities primarily through contributions from Cell Genesys, revenues from
collaborative arrangements, private placements of preferred stock, equipment
leaseline financings and loan facilities and most recently through an initial
public offering in July 1998 yielding $23 million, gross of underwriting fees
and expenses. The Company has incurred operating losses in each of the last
three years of operation, including net losses of approximately $8.3 million,
$7.1 million, $35.9 million and $9.0 million in 1995, 1996, 1997 and the six
months ended June 30, 1998, respectively, and as of June 30, 1998, had an
accumulated deficit of approximately $61.5 million. The Company's losses have
resulted principally from costs incurred in performing research and development
to develop its XenoMouse technology and subsequent antibody product candidates,
from the non-recurring cross-license and settlement charge (described below) and
from general and administrative costs associated with the Company's operations.
The Company expects to incur additional operating losses until at least the year
2000 as a result of its expenditures for research and product development,
including costs associated with conducting preclinical testing and clinical
trials. The Company expects the amount of such losses will fluctuate
significantly from quarter to quarter as a result of increases or decreases in
the Company's research and development efforts, the execution or termination of
collaborative arrangements, or the initiation, success or failure of clinical
trials.

In 1994, Cell Genesys and GenPharm International, Inc., a subsidiary of
Medarex, Inc. ("GenPharm"), and, beginning in 1996, Abgenix became involved in
litigation primarily related to intellectual property rights associated with a
method for inactivating a mouse's antibody genes and technology pertaining to
transgenic mice capable of producing

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<PAGE> 10

human antibodies. Rather than endure the cost and business interruption of
protracted litigation, on March 27, 1997, Cell Genesys announced, along with
Abgenix, Xenotech and Japan Tobacco, Inc. ("Japan Tobacco"), that it had signed
a comprehensive patent cross-license and settlement agreement with GenPharm that
resolved all related litigation and claims between the parties. Under the
cross-license and settlement agreement, the Company has licensed on a
non-exclusive basis certain patents, patent applications, third party licenses
and inventions pertaining to the development and use of certain transgenic
rodents including mice that produce fully human antibodies. The Company uses its
XenoMouse technology to generate fully human antibody products and has not
licensed the use of, and does not use, any transgenic rodents developed or used
by GenPharm. As initial consideration for the cross-license and settlement
agreement, Cell Genesys issued a note to GenPharm due September 30, 1998 for
$15.0 million payable by Cell Genesys and convertible into shares of Cell
Genesys common stock. Of this note, approximately $3.8 million satisfied certain
of Xenotech's obligations under the agreement. Japan Tobacco also made an
initial payment. During 1997, two patent milestones were achieved and Xenotech
was obligated to pay $7.5 million for each milestone. Xenotech paid $7.5 million
to satisfy the first milestone and has recorded a payable to GenPharm for the
remaining $7.5 million. The Company has recorded a liability of approximately
$3.8 million in its balance sheet representing its share of the Xenotech
obligation. The payable is due on or before November 1998. No additional
payments will accrue under this agreement. The Company has recognized, as a
non-recurring charge for cross-license and settlement, a total of $22.5 million.
The Company concluded that the cost of the cross-license and settlement
agreement was properly expensed under Statement of Financial Accounting
Standards No. 2, "Accounting for Research and Development Costs" because the
cross-license received by the Company from GenPharm is non-exclusive and has no
alternative future uses for the Company. The Company does not have any future
financial obligations under the cross-license and settlement agreement.

In connection with the grant of stock options since the Company's
organization on July 15, 1996, the Company has recorded aggregate deferred
compensation of approximately $2.3 million through June 30, 1998, representing
the difference between the deemed fair value of the Common Stock for accounting
purposes and the option exercise price at the date of grant. These amounts are
presented as a reduction of stockholders' equity and are amortized ratably over
the vesting period of the applicable options, generally four years. These
valuations resulted in charges to operations of $528,000 and $298,000 in 1997
and the six months ended June 30, 1998, respectively.

RESULTS OF OPERATIONS

Three Months Ended June 30, 1998 and 1997

Revenue under collaborative agreements from related parties consists of
revenue derived principally from performing research for Xenotech. See "Six
Months Ended June 30, 1998 and 1997." Revenues from Xenotech decreased from
$430,000 in the three months ended June 30, 1997 to $212,000 in the three months
ended June 30, 1998.

Contract revenue of $523,000 in the three months ended June 30, 1998
consisted of fees paid for the achievement of research milestones under
collaborative agreements.

Research and development expenses consist primarily of compensation and
other expenses related to research and development personnel, costs associated
with preclinical testing and planned clinical trials of the Company's product
candidates and facilities expenses. Research and development expenses increased
from $2.6 million in the three months ended June 30, 1997 to $3.6 million in the
three months ended June 30, 1998. The increase in research and development
expenses reflected increased expenses primarily for the manufacture of antibody
products in connection with the preparation for and the initiation of clinical
trials of ABX-CBL and ABX-IL8 in addition to the expenses of conducting these
trials.

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<PAGE> 11

and administration employees and increased financing activity, primarily related
to the Company's initial 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 maintained by
the Company.

Six Months Ended June 30, 1998 and 1997

Revenue under collaborative agreements from related parties consists of
revenue derived principally from performing research for Xenotech. Revenues from
the Xenotech joint venture are recognized when earned, net of the Company's cash
contributions to Xenotech, under the terms of the related agreements. Research
and development funding received in advance under these agreements is recorded
as deferred revenue. Revenues from the achievement of milestone events are
recognized when the milestones have been achieved. Revenues from Xenotech
decreased from $765,000 in the six months ended June 30, 1997 to $502,000 in the
six months ended June 30, 1998. Revenues from Xenotech decreased because
Xenotech's research related to developing the genetically modified mice was
essentially completed during 1996.

Contract revenues of $1.12 million in the six months ended June 30, 1998
consisted principally of a non-refundable signing fee paid in connection with
the execution of a collaborative agreement in February 1998 and fees paid for
the achievement of research milestones under existing collaborative agreements.

Research and development expenses consist primarily of compensation and
other expenses related to research and development personnel, costs associated
with preclinical testing and planned clinical trials of the Company's product
candidates and facilities expenses. Research and development expenses increased
from $5.1 million in the six months ended June 30, 1997 to $8.9 million in the
six months ended June 30, 1998. The increase in research and development
expenses reflected increased expenses primarily for the manufacture of antibody
products in connection with the preparation for and the initiation of clinical
trials of two of the Company's antibody product candidates under development,
ABX-CBL and ABX-IL8 in addition to the expenses of conducting these trials. The
Company anticipates that research and development expenses will increase in
future periods as it expands research and development efforts and clinical
trials.

General and administrative expenses include compensation and other
expenses related to finance and administrative personnel, professional services
expenses and facilities expenses. General and administrative expenses increased
from $1.2 million in the six months ended June 30, 1997 to $1.7 million in the
six months ended June 30, 1998. The increase in general and administrative
expenses reflected the hiring of four finance personnel to take over the
administrative functions formerly performed for the Company by Cell Genesys and
increased financing activity, primarily related to the Company's initial public
offering. The Company anticipates that general and administrative expenses will
increase in the future as additional personnel are added to support its
operations.

The aggregate nonrecurring charge for cross-license and settlement of
$15.0 million in the six months ended June 30, 1997 relates to the initial
payment under the comprehensive patent cross-license and settlement agreement.
The Company recorded the initial settlement amount of $15.0 million in March
1997. The remaining $7.5 million was recorded in December 1997. See "Overview".

Other income and expenses consist of interest income from cash, cash
equivalents and short-term investments and interest expense incurred in
connection with equipment leaseline financing and loan facilities maintained by
the Company.

LIQUIDITY AND CAPITAL RESOURCES

Since formation, the Company has financed its operations primarily
through capital contributions by, and borrowings from Cell Genesys, revenue from
collaborative arrangements, private placements of Preferred Stock,

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<PAGE> 12

equipment leaseline financings and loan facilities and an initial public
offering of its Common Stock. Through June 30, 1998, the Company has received
net cash of $55.7 million from financing activities, consisting principally of
approximately $14.3 million from contributions by Cell Genesys, $31.1 million
from private placements of Preferred Stock, $4.3 million from construction
financing, $2.0 million in lease financing and $4.0 million borrowed from Cell
Genesys and converted to Preferred Stock. Cell Genesys is not obligated to
provide any future funding to the Company. The Company's initial public offering
of Common Stock in July 1998 generated net proceeds to the Company of
approximately $21.4 million after deducting underwriting discounts and
commissions, and before deducting expenses payable by the Company.

The Company's net cash used in operating activities was $10.2 million
and $8.5 million for the six months ended June 30, 1998 and 1997, 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 June 30, 1998, the Company had cash, cash equivalents and
short-term investments of $7.8 million. The Company has an agreement with a
financing company under which the Company has financed purchases of about $2.0
million of its laboratory and office equipment. The lease term is 48 months and
bears interest at rates ranging from 12.5% to 13.0%, which are based on the
change in the five year U.S. Treasury rate. The Company also has a construction
financing line with a bank in the amount of $4.3 million that was used to
finance construction of leasehold improvements at its current facility. The line
matures in January 2001, bears interest at a rate of prime plus one percent
(9.5% at June 30, 1998). As of June 30, 1998, no further borrowings were
available under the construction financing line.

Over the next 10 to 12 months, the Company intends to use the net
proceeds of its initial public offering, together with the Company's previous
cash balances, cash equivalents, short term investments and cash generated from
collaborative arrangements as follows: (i) approximately $15.0 million for
research and development, including the performance of preclinical and clinical
trials; and (ii) approximately $3.75 million for the final cross-license and
settlement payment reflected as a short-term payable to related party on the
Company's balance sheet as of June 30, 1998. The balance of the net proceeds
from the initial public offering, together with the Company's previous cash
balances, cash equivalents, short term investments and cash generated from
collaborative arrangements will be used for working capital and for other
general corporate purposes over such 10 to 12 month period and thereafter. The
amounts actually expended for each purpose and the timing of such expenditures
may vary significantly depending upon numerous factors, including the results of
clinical trials and preclinical testing, the achievement of milestones under
collaborative arrangements, the ability of the Company to maintain existing and
establish additional collaborative arrangements, the timing and outcome of
regulatory actions regarding the Company's potential products, the costs and
timing of expansion of marketing, sales and manufacturing activities, the costs
involved in preparing, filing, protecting, maintaining and enforcing patent
claims and other intellectual property rights and competing technological and
market developments. Pending the foregoing uses, the Company has invested the
net proceeds of the initial public offering in short-term, interest-bearing,
investment grade securities.

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<PAGE> 13

Company's control. Although the Company believes that the proceeds from the
initial public offering, together with the Company's previous cash balances,
cash equivalents, short-term investments and cash generated from collaborative
arrangements will be sufficient to meet the Company's operating and capital
requirements for at least the next two years, there can be no assurance that the
Company will not require additional financing within this timeframe. The Company
may be required to raise additional funds through public or private financing,
collaborative relationships or other arrangements. There can be no assurance
that such additional funding, if needed, will be available on terms attractive
to the Company, if at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations.

As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $15.4 million. The Company's net operating loss
carryforwards exclude losses incurred prior to the organization of Abgenix in
July 1996. Further, the amounts associated with the cross-license and settlement
have been expensed for financial statement accounting purposes and have been
capitalized and amortized over a period of approximately fifteen years for tax
purposes. The net operating loss and credit carryforwards will expire in the
years 2011 through 2012, if not utilized. Utilization of the net operating
losses and credits may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.

YEAR 2000

The Company relies on computers and computer software in the operation
of its business as do its vendors, suppliers and customers. These computers and
computer software may not be able to properly recognize the dates commencing in
the year 2000. To date, the Company has not found any material impact which may
result from the failure of its computers and computer software or that of its
vendors, suppliers and customers. The Company believes that its business,
financial condition and results of operations will not be materially impacted by
the year 2000 date recognition issue. However, the Company plans to further
assess this issue during 1998 and, if appropriate, develop an action plan to
correct it.

ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS

Since Abgenix became a public company in July 1998, included here are
risk factors as updated from the Company's Prospectus dated July 2, 1998 as
amended. The following factors represent current challenges to the Company which
create risk and uncertainty. Failure to adequately overcome any of the following
challenges, either singly or in combination, could have a materially adverse
effect on the Company's results of operations, business, or financial position.

UNCERTAINTY ASSOCIATED WITH XENOMOUSE TECHNOLOGY

The Company's XenoMouse technology is a new approach to the generation
and development of antibody therapeutic products. To date, the Company has not
commercialized any antibody products based on its XenoMouse technology. In
addition, the Company is not aware of any commercialized antibody therapeutic
product that has been generated or developed from any transgenic technologies.
Current antibody product candidates based on, utilizing or derived from
XenoMouse technology are at a very early stage of development. To date, the
Company has begun clinical trials with respect to only one such antibody product
candidate. While to date XenoMouse technology has been able to generate
antibodies against the antigens to which it had been exposed, there can be no
assurance that it will be able to do so with respect to all future antigens.
Failure of the Company's XenoMouse technology to generate antibody product
candidates that lead to the successful development and commercialization of
products would have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company believes
that its XenoMouse technology offers certain advantages, there can be no
assurance that these advantages will be realized or, if

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<PAGE> 14
realized, that XenoMouse technology will result in any meaningful benefits to
current or potential collaborative partners or patients. There can be no
assurance that the Company's XenoMouse technology will enable the Company or any
of its collaborative partners to identify, generate, develop or commercialize
antibody therapeutic products or product candidates in an efficient and timely
manner, if at all.

EARLY STAGE OF DEVELOPMENT; HISTORY OF LOSSES AND UNCERTAINTY OF FUTURE
PROFITABILITY

The Company is at an early stage of development and must be evaluated in
light of the uncertainties and complexities present in an early stage
biopharmaceutical company. The product candidates under development by the
Company are in the research or preclinical development stage or are in the early
stage of clinical trials. Significant investment in additional research and
development, preclinical and clinical testing, regulatory and sales and
marketing activities will be necessary in order for the Company to commercialize
its current and any future product candidates. There can be no assurance that
the Company's product candidates under development will be successfully
developed or that such product candidates, if successfully developed, will
generate sufficient or sustainable revenues to enable the Company to be
profitable.

Since inception, the Company has funded its research and development
activities primarily through contributions from Cell Genesys, revenues from
collaborative arrangements, private placements of preferred stock, equipment
leaseline financings and loan facilities and most recently through an initial
public offering in July 1998 yielding $23 million, gross of underwriting fees
and expenses. The Company has incurred net losses in each of the last three
years of operation, including net losses of approximately $8.3 million, $7.1
million, $35.9 million and $9.0 million in 1995, 1996, 1997 and the six months
ended June 30, 1998, respectively, and as of June 30, 1998, had an accumulated
deficit of approximately $61.5 million. The Company's losses have resulted
principally from costs incurred in performing research and development to
develop its XenoMouse technology and subsequent antibody product candidates,
from the non-recurring cross-license and settlement charge and from general and
administrative costs associated with the Company's operations. The Company
expects to incur additional operating losses until at least the year 2000 as a
result of increases in its expenditures for research and product development,
including costs associated with conducting preclinical testing and clinical
trials. The Company expects that the amount of such losses will fluctuate
significantly from quarter to quarter as a result of increases or decreases in
the Company's research and development efforts, the execution or termination of
collaborative arrangements, or the initiation, success or failure of clinical
trials.

The Company expects that substantially all of its revenues for the
foreseeable future will result from payments under collaborative arrangements,
including fees upon signing, reimbursement for research and development and
milestone payments. To date, all of the Company's revenues have resulted
primarily from research and development funding and milestone payments and may
not be indicative of the Company's future performance or of the ability of the
Company to continue to achieve such milestones. The Company's ability to
generate revenue or achieve profitability depends in part on its ability to
enter into further collaborative or licensing arrangements, successfully
complete preclinical or clinical trials, obtain regulatory approval for its
product candidates and develop the capacity, either alone or through third
parties, to manufacture, market and sell its products. Payments under the
Company's existing and any future collaborative arrangements will be subject to
significant fluctuation in both timing and amount and therefore the Company's
revenues and results of operations for any period may not be comparable to the
revenues or results of operations for any other period. There can be no
assurance that the Company will enter into further collaborative arrangements,
successfully complete preclinical or clinical trials, obtain required regulatory
approvals, or successfully develop, manufacture and market product candidates.
Failure to do so will have a material adverse effect on the Company's business,
financial condition, and results of operations. There can be no assurance that
the Company will ever achieve product revenues or profitability.

NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT

All of the Company's product candidates are in the early stages of
research and development and only ABX-CBL and ABX-IL8 have been used in human
clinical trials. All of the Company's product candidates will require
significant additional preclinical or clinical testing prior to obtaining
regulatory approval for commercial use. In

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<PAGE> 15

addition, the Company must file a product approval application with the United
States Food and Drug Administration (the "FDA") prior to commercialization of
any of the Company's products. The Company currently does not expect to file a
product approval application with the FDA or corresponding regulatory filings in
Europe for its product candidates at least prior to 1999 and does not expect to
have any products commercially available at least prior to 2000, if at all.

In addition, the Company's strategy includes building a large and
diversified product portfolio, including a mix of out-licensed and internally
developed product candidates. There can be no assurance that the Company will be
able to implement this strategy or that current or future product candidates
will ever result in viable commercial products. In order to develop a single
product, the Company must develop and test multiple product candidates.
Development of the Company's current and any future product candidates are
subject to the risks of failure inherent in the development of new
pharmaceutical products and products based on new technologies. These risks
include the possibility that the Company will experience delays in development,
testing or marketing, that such development, testing or marketing will result in
unplanned expenditures or in expenditures above those anticipated by the
Company, that the Company's products will not be proven safe or effective, that
the Company's product candidates will not be easy to use or cost-effective, that
third parties will develop and market superior or equivalent products, that any
or all of the Company's product candidates will fail to receive any necessary
regulatory approvals, that such product candidates will be difficult or
uneconomical to manufacture on a commercial scale, that proprietary rights of
third parties will preclude the Company or its collaborative partners from
marketing such products and that the Company's products will not achieve market
acceptance. As a result of these risks, there can be no assurance that research
and development efforts conducted by the Company or its collaborative partners
will result in any commercially viable products. If a significant portion of the
Company's development programs are not successfully completed, required
regulatory approvals are not obtained, or any approved products are not
commercially successful, there will be a material adverse effect on Company's
business, financial condition and results of operations.

DEPENDENCE ON COLLABORATIVE ARRANGEMENTS

The Company's strategy for the development and commercialization of
antibody therapeutic products depends, in large part, upon the formation and
maintenance of collaborative and licensing arrangements with several corporate
partners. In order to successfully develop and commercialize new products and
product candidates, the Company must enter into such collaborations, including
collaborations with pharmaceutical and biotechnology companies, academic
institutions and other entities to access proprietary antigens, to fund and
complete its research and development activities, preclinical and clinical
testing and manufacturing, to seek and obtain regulatory approvals and to
achieve successful commercialization of existing and future product candidates.
The Company has recently entered into collaborative arrangements with Pfizer,
Schering-Plough, Genentech and Millenneum BioTherapeutics to generate fully
human antibodies to specific antigens in the fields of cancer, inflammation,
growth factor modulation and autoimmune disease, respectively. To date, only a
limited number of antibody product candidates have been generated pursuant to
such collaborations, and there can be no assurance that any such collaboration
will be successful. There can also be no assurance that the Company will be able
to establish additional collaborative or licensing arrangements, that any such
arrangements or licenses will be on terms favorable to the Company, that any
such collaborative arrangements or licenses will result in commercially
successful products or that the current or any future collaborative or licensing
arrangements will ultimately be successful. Failure of the Company to maintain
its significant collaborative arrangements or enter into additional
collaborative arrangements would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's dependence on collaborative and licensing arrangements
with third parties subjects it to a number of risks. Agreements with
collaborative partners typically allow such partners significant discretion in
electing whether to pursue any of the planned activities. The Company cannot
control the amount and timing of resources its collaborative partners may devote
to the product candidates, and there can be no assurance that such partners will
perform their obligations as expected. Business combinations or significant
changes in a corporate partner's business strategy may adversely affect such
partners ability to complete its obligations under the arrangements. If any
collaborative partner were to terminate or breach its agreement with the
Company, or otherwise fail to complete its obligations in a timely manner, such
conduct could have a material adverse effect on the Company's business,
financial

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<PAGE> 16

condition and results of operations. To the extent that the Company is not able
to establish further collaborative arrangements or that any or all of the
Company's existing collaborative arrangements are terminated, the Company would
be required to seek new collaborative arrangements or to undertake product
development and commercialization at its own expense, which could significantly
increase the Company's capital requirements, place additional strain on its
human resource requirements and limit the number of product candidates which the
Company would be able to develop and commercialize. In addition, there can be no
assurance that existing and future collaborative partners will not pursue
alternative technologies or develop alternative products either on their own or
in collaboration with others, including the Company's competitors. There can
also be no assurance that disputes will not arise in the future with respect to
the ownership of rights to any technology or products developed with any future
collaborative partner. Lengthy negotiations with potential new collaborative
partners or disagreements between established collaborative partners and the
Company could lead to delays or termination in the research, development or
commercialization of certain product candidates or result in litigation or
arbitration, which would be time consuming and expensive. Failure by any
collaborative partner to develop or commercialize successfully any product
candidate to which it has obtained rights from the Company or the decision by a
collaborative partner to pursue alternative technologies or develop alternative
products, either on their own or in collaboration with others, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has an option to obtain licenses from
Xenotech to commercialize antibody products generated by XenoMouse technology.
Such option is for a certain number of targets each year. There can be no
assurance that in any year the Company will exercise its rights for the full
number of targets subject to such option or that such option will not limit the
Company's ability to fully realize the commercial potential of its XenoMouse
technology. In addition, disputes with Japan Tobacco could result in the loss of
the right to commercialize a product candidate by either party.

UNCERTAINTIES RELATED TO CLINICAL TRIALS

Before obtaining regulatory approvals for the commercial sale of any
products, the Company must demonstrate through preclinical testing and clinical
trials that its product candidates are safe and effective for use in the target
disease indication. With the exception of the recently initiated multi-center
confirmatory Phase II trial in Graft Versus Host Disease ("GVHD"), clinical
trials of the Company's ABX-CBL product candidate were conducted by third
parties prior to the Company obtaining license rights to technologies related to
this product candidate. As of June 30, 1998, ABX-CBL had only been administered
to a total of 106 patients in GVHD and organ transplant rejection indications,
and Phase I clinical trials for ABX-IL8 in psoriasis commenced in April 1998. As
a result, patient follow up has been limited and clinical data obtained thus far
have been insufficient to demonstrate safety and efficacy under applicable FDA
guidelines to support an application for regulatory approval. In addition, the
results from preclinical testing and early clinical trials may not be predictive
of results obtained in later clinical trials. A number of new drugs and
biologics have shown promising results, even in later stage clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain
necessary regulatory approvals in advanced clinical trials. There can be no
assurance that clinical trials conducted by the Company or by third parties on
behalf of the Company will demonstrate sufficient safety and efficacy to obtain
the requisite regulatory approvals for ABX-CBL or ABX-IL8. In addition, the
Company's other two product candidates are still in preclinical development. The
Company has not submitted investigational new drug applications ("IND") nor
begun clinical trials for these two product candidates. No assurance can be
given that any of the Company's preclinical or clinical development programs
will be successfully completed, that any further IND will be filed or become
effective, that additional clinical trials will be allowed by the FDA or other
regulatory authorities, or that clinical trials will commence as planned.

The commencement and rate of completion of clinical trials conducted by
the Company 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 or any other adverse event reported
during the clinical trials. The Company has limited experience in conducting or
managing clinical trials and relies, and will continue to rely, on third parties
to assist the Company in managing and monitoring clinical trials. Dependence on
such third parties may result in delays in completing, or failure to complete,

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<PAGE> 17

such trials if such third parties fail to perform under their agreements with
the Company. Completion of trials may take several years or more, and the length
of time generally varies substantially with the type, complexity, novelty and
intended use of the product candidate. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. In addition, delays or rejections
by regulatory authorities may be encountered as a result of many factors,
including changes in regulatory policy during the period of product development.
There can be no assurance that the Company will be permitted by regulatory
authorities to undertake any additional clinical trials for its potential
products or, if such additional trials are conducted, that any of the Company's
product candidates will prove to be safe and efficacious or will receive
regulatory approvals. In addition, the Company's clinical trials are often
conducted with patients who have failed conventional treatments and, in the case
of GVHD, patients are often in the most advanced stages of the disease. During
the course of treatment, these patients can die or suffer adverse medical
effects for reasons that may not be related to the pharmaceutical agent being
tested but which can nevertheless adversely affect the interpretation of
clinical trial results. Failure of the Company's product candidates to
demonstrate safety and efficacy in clinical trials could result in delays in
developing other product candidates and conducting related preclinical testing
and clinical trials, as well as a potential need for additional financing, any
or all of which would have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, any delays in, or
termination of, the Company's clinical trials would also have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be permitted by regulatory
authorities to undertake any additional clinical trials for its product
candidates or, if such additional trials are conducted, that any of the
Company's product candidates will prove to be safe and efficacious or will
receive regulatory approvals.

UNCERTAINTY OF PATENT POSITION AND DEPENDENCE ON PROPRIETARY RIGHTS

The Company's success depends in part on its ability to obtain patents,
protect trade secrets, operate without infringing upon the proprietary rights of
others and prevent others from infringing on the proprietary rights of the
Company. The Company's policy is to seek to protect its proprietary position by,
among other methods, filing United States and foreign patent applications
related to its proprietary technology, inventions and improvements that are
important to the development of its business. Proprietary rights relating to the
Company's technologies will be protected from unauthorized use by third parties
only to the extent that they are covered by valid and enforceable patents or are
effectively maintained as trade secrets. There can be no assurance that any
patents owned by, or licensed to, the Company will afford protection against
competitors or that any pending patent applications now or hereafter filed by,
or licensed to, the Company will result in patents being issued. In addition,
the laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States. The
patent position of biopharmaceutical companies involves complex legal and
factual questions and, therefore, their enforceability cannot be predicted with
certainty. There can be no assurance that any of the Company's patents or patent
applications, if issued, will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection or
competitive advantages to the Company against competitors with similar
technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company.

While the Company has multiple patent applications pending in the United
States, to date, the Company has no United States patents relating to XenoMouse
technology. One issued European Patent owned by the Company relating to
XenoMouse technology is currently undergoing opposition proceedings within the
European Patent Office, and no assurance can be given regarding the outcome of
this opposition. The Company intends to continue to file patent applications as
appropriate for patents covering both its product candidates and processes.
There can be no assurance that patents will issue from any of these
applications, that any patent will issue on technology arising from additional
research or that patents that may issue from such applications will be
sufficient to protect the Company's technologies.

Pursuant to the cross-license and settlement agreement with GenPharm
International, Inc., a subsidiary of Medarex, Inc., ("GenPharm"), the Company
entered into a cross-license agreement with Cell Genesys, Xenotech, Japan
Tobacco and GenPharm, whereby the Company has licensed on a non-exclusive basis
certain patents, patent applications, third party licenses, and inventions
pertaining to the development and use of certain transgenic rodents

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<PAGE> 18

including mice that produce fully human antibodies that are integral to the
Company's products and business. The Company uses its XenoMouse technology to
generate fully human antibody products and has not licensed the use of, and does
not use, any transgenic rodents developed or used by GenPharm. Breach of the
cross-license agreement would have a material adverse effect on the Company's
business, financial condition and results of operations.

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, and publication of discoveries
in the scientific or patent literature frequently occurs substantially later
than the date on which the underlying discoveries were made. The commercial
success of the Company depends significantly on its ability to operate without
infringing the patents and other proprietary rights of third parties. There can
be no assurance that the Company's technologies do not and will not infringe the
patents or violate other proprietary rights of third parties. In the event of
such infringement or violation, the Company and its corporate partners may be
enjoined from pursuing development or commercialization of their products. Such
action would have a material adverse affect on the Company's business, financial
condition and results of operations.

The biotechnology and pharmaceutical industries have been characterized
by extensive litigation regarding patents and other intellectual property
rights, and the Company, together with Cell Genesys, Xenotech and Japan Tobacco,
recently settled litigation with GenPharm regarding certain patents and other
intellectual property rights. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations, paragraph six under the caption
'Overview'." The defense and prosecution of intellectual property suits, United
States Patent and Trademark Office ("USPTO") interference proceedings and
related legal and administrative proceedings in the United States and
internationally involve complex legal and factual questions. As a result, such
proceedings are costly and time-consuming to pursue and their outcome is
uncertain. Litigation may be necessary to enforce patents issued or licensed to
the Company, to protect trade secrets or know-how owned by or licensed by the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation, interference or other
administrative proceedings will result in substantial expense to the Company and
significant diversion of effort and resources by the Company's technical and
management personnel. An adverse determination in such proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties or require the Company to seek licenses which may not be
available from third parties or prevent the Company from selling its products in
certain markets, if at all. Although patent and intellectual property disputes
are often settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that the necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could restrict or prevent the Company from manufacturing and
selling its products, if any, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidentiality or proprietary information agreements will
provide meaningful protection or adequate remedies for the Company's technology
in the event of unauthorized use or disclosure of such information, that the
parties to such agreements will not breach such agreements or that the Company's
trade secrets will not otherwise become known to or be independently developed
by competitors.

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

The biotechnology and pharmaceutical industries are highly competitive
and subject to significant and rapid technological change. The Company is aware
of several pharmaceutical and biotechnology companies, which are actively
engaged in research and development in areas related to antibody therapy, that
have commenced clinical trials of antibody therapeutics products or have
successfully commercialized antibody products. Many of these companies are
addressing diseases and disease indications which are being targeted by the
Company or its collaborative partners. Certain of these competitors have
specific expertise or technology related to antibody development, such as
Centocor,

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<PAGE> 19

Inc., Protein Design Labs, Inc., IDEC Pharmaceuticals Corporation, Cambridge
Antibody Technology Group, Inc. and GenPharm. Certain of the Company's
competitors are developing or testing product candidates that may be directly
competitive with the Company's product candidates. For example, the Company is
aware that several companies, including Genentech, Inc., have potential product
candidates that may inhibit the activity of IL-8. Furthermore, the Company is
aware that ImClone Systems, Inc. has a potential product candidate in clinical
development that may inhibit the activity of EGF. Many of these companies and
institutions, either alone or together with their corporate partners, have
substantially greater financial resources and larger research and development
staffs than the Company. In addition, many of these competitors, either alone or
together with their corporate partners, have significantly greater experience
than the Company in developing products, undertaking preclinical testing and
human clinical trials, obtaining FDA and other regulatory approvals of products
and manufacturing and marketing products. Accordingly, the Company's competitors
may succeed in obtaining patent protection, receiving FDA approval or
commercializing products more rapidly than the Company. If the Company commences
commercial sales of products, it will be competing against companies with
greater marketing and manufacturing capabilities, areas in which it has limited
or no experience.

In addition to biotechnology and pharmaceutical companies, the Company
faces, 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 the Company is
seeking to develop therapeutic products. In addition, any product candidate
successfully developed by the Company 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 and new small molecule or other classes of therapeutic
agents. There can be no assurance that developments by others will not render
the Company's product candidates or technologies obsolete or noncompetitive. The
Company faces and will continue to face intense competition from other
companies, including Japan Tobacco, 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 corporate partners, may succeed in
developing technologies or products that are more effective than those of the
Company. The Company's collaborative partners may elect to develop other
antibody products which compete with the Company's products.

SIGNIFICANT GOVERNMENT REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS

All new biopharmaceutical products, including the Company's product
candidates under development and anticipated future products, are subject to
extensive and rigorous regulation by the federal government, principally the FDA
under the Federal Food, Drug and Cosmetic Act (the "FD&C Act") and other laws
including the Public Health Service Act, and by state and local governments.
Such regulations govern, among other things, the development, testing,
manufacture, safety, efficacy, record keeping, labeling, storage, approval,
advertising, promotion, sale and distribution of such products. If
biopharmaceutical products are marketed abroad, they also are subject to
extensive regulation by foreign governments. To date, none of the Company's
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 approvals requires the submission of
extensive preclinical and clinical data and supporting information to the FDA
for each indication to establish the product candidates' safety and efficacy.
The approval process takes many years, requires the expenditure of substantial
resources, involves post-marketing surveillance, and may involve ongoing
requirements for post-marketing studies. Delays in obtaining regulatory
approvals could adversely affect the successful commercialization of any drugs
developed by the Company or its collaborative partners, impose costly procedures
upon the Company's or its collaborative partners' activities, diminish any
competitive advantages that the Company or its collaborative partners may attain
and adversely affect the Company's receipt of revenues or royalties. There can
be no assurance that regulatory approval will be obtained for any therapeutic
product candidate developed by the Company or its collaborative partners.
Furthermore, regulatory approval may entail limitations on the indicated uses of
a drug. Product

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<PAGE> 20

approvals, if granted, can be withdrawn for failure to comply with ongoing
regulatory requirements or upon the occurrence of unforeseen problems following
initial marketing.

Certain material changes to an approved product such as manufacturing
changes or additional labeling claims are subject to further FDA review and
approval. There can be no assurance that any approvals that are required, once
obtained, will not be withdrawn or that compliance with other regulatory
requirements can be maintained. Further, failure to comply with applicable FDA
and other regulatory requirements at any stage during the regulatory process can
result in sanctions being imposed on the Company or the manufacturers of its
products, including delays, warning letters, fines, product recalls or seizures,
injunctions, refusal of the FDA to review pending market approval applications
or supplements to approval applications, total or partial suspension of
production, civil penalties, withdrawals of previously approved marketing
applications and criminal prosecutions. The Company may rely on its
collaborative partners to file INDs and generally direct the regulatory approval
process. There can be no assurance that the Company's collaborative partners
will be able to conduct clinical testing or obtain necessary approvals from the
FDA or other regulatory authorities for any product candidates. Failure to
obtain required governmental approvals will delay or preclude the Company's
collaborative partners from marketing drugs or diagnostic products developed
through the Company's research or limit the commercial use of such product
candidates and could have a material adverse effect on the Company's business,
financial condition and results of operations.

Manufacturers of biopharmaceutical products also are required to comply
with the applicable FDA current good manufacturing practice ("cGMP")
regulations, which 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, including
unannounced inspection, and must be approved before they can be used in
commercial manufacturing of the Company's products. There can be no assurance
that the Company or its suppliers will be able to comply with the applicable
cGMP requirements and other FDA regulatory requirements. Such failure would have
a material adverse effect on the Company's business, financial condition and
results of operations.

NO ASSURANCE OF MARKET ACCEPTANCE

There can be no assurance that the Company's product candidates will
gain any significant degree of market acceptance among physicians, patients,
healthcare payors and the medical community in general even if clinical trials
demonstrate safety and efficacy and necessary regulatory and reimbursement
approvals are obtained. The degree of market acceptance of any product
candidates developed by the Company will depend on a number of factors,
including the establishment and demonstration of the clinical efficacy and
safety as well as cost-effectiveness of the product candidates, their potential
advantage over alternative treatment methods and reimbursement policies of
government and third-party payors. Physicians will not recommend therapies using
the Company's products until such time, if at all, as clinical data or other
factors demonstrate the efficacy of such procedures as compared to conventional
drug and other treatments. Even if the clinical efficacy of therapies using the
Company's products were established, physicians may elect not to recommend the
therapies for any number of other reasons. The Company's product candidates, if
successfully developed, will compete with a number of alternative drugs and
therapies manufactured and marketed by major pharmaceutical and other
biotechnology companies, and possibly new products currently under development
by such companies and others. There can be no assurance that physicians,
patients, third-party payors or the medical community in general will accept and
utilize any product candidates that may be developed by the Company or its
collaborative partners. Failure of the Company's products to achieve significant
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.

LIMITED MANUFACTURING EXPERIENCE

The Company currently has limited experience in manufacturing its
product candidates and lacks the resources or capability to manufacture any of
its products on a commercial scale. While the Company currently manufactures
limited quantities of antibody products for preclinical testing, the Company
relies on contract manufacturers to produce ABX-CBL and ABX-IL8. With respect to
products other than ABX-CBL and ABX-IL8, the Company will either be responsible
for manufacturing or contract out manufacturing to third parties.

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<PAGE> 21

The Company's contract manufacturers have limited experience in
manufacturing ABX-CBL and ABX-IL8 in quantities sufficient for conducting
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. Furthermore, there
are only a limited number of other third-party contract manufacturers who have
the ability and capacity to produce the Company's product candidates. Failure by
any contract manufacturer to deliver the required quantities of the Company's
product candidates for either clinical or commercial use on a timely basis and
at commercially reasonable prices and failure by the Company to find a
replacement manufacturer would have a material adverse affect on the Company's
business, financial condition and results of operations.

In addition, the Company and its third party manufacturers are required
to register their manufacturing facilities with the FDA and foreign regulatory
authorities. The facilities will then be subject to inspections confirming
compliance with cGMP established by the FDA or corresponding foreign
regulations. Failure to maintain compliance with the cGMP requirements would
materially adversely effect the Company's business, financial condition and
results of operations.

NO MARKETING AND SALES EXPERIENCE

The Company has no experience in marketing or selling pharmaceutical
products and currently does not have a marketing, sales or distribution
capability. The Company intends to enter into arrangements with third parties to
market and sell most of its products. For select products, the Company may
establish an internal marketing and sales force. There can be no assurance that
the Company will be able to enter into marketing and sales arrangements with
others on acceptable terms, if at all. To the extent that the Company enters
into marketing and sales arrangements with other companies, any revenues to be
received by the Company will be dependent on the efforts of others. There can be
no assurance that such efforts will be successful. If the Company is unable to
enter into such third party arrangements, then the Company must develop a
marketing and sales force, which may be substantial in size, in order to achieve
commercial success for any product candidate approved by the FDA. There can be
no assurance that the Company will successfully develop such experience or have
sufficient resources to do so. If the Company develops its own marketing and
sales capabilities, it will compete with other companies that have experienced
and well-funded marketing and sales operations. The Company's failure to
establish successful marketing and sales capabilities or to enter into
successful marketing arrangements with third parties would have a material
adverse effect on the Company's business, financial condition and results of
operations.

DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND
CONSULTANTS

The Company is highly dependent on the principal members of its
scientific and management staff. The loss of any of these persons could have a
material adverse effect on the Company's business, financial condition and
results of operations. In order to pursue its product development, marketing and
commercialization plans, the Company will be required to hire additional
qualified scientific personnel to perform research and development, as well as
personnel with expertise in clinical testing, government regulation,
manufacturing and marketing. Attracting and retaining qualified personnel will
be critical to the Company's success. There can be no assurance that the Company
will 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, the Company relies on members of its Scientific and Medical Advisory
Boards and other consultants to assist the Company in formulating its research
and development strategy. All of the Company's consultants and the members of
the Company's Scientific and Medical Advisory Boards are employed by entities
other than the Company, and may have commitments to, or advisory or consulting
agreements with, other entities that may limit their availability to the
Company. The loss of services of any of these personnel could impede the
achievement of the Company's development objectives and could have a material
adverse effect on the Company's business, financial condition and results of
operations.

SIGNIFICANT INFLUENCE BY CELL GENESYS, INC.

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<PAGE> 22
Cell Genesys beneficially owns 40.6% of the outstanding capital stock as
of August 1, 1998. As a result, Cell Genesys will have significant influence
over all matters requiring the approval of the Company's stockholders, including
the election of the Company's Board of Directors and changes in control of the
Company. Cell Genesys and the Company have entered into a governance agreement,
as amended (the "Governance Agreement"), which provides that so long as Cell
Genesys or a group to which it belongs owns (i) a majority of the outstanding
voting stock of the Company, Cell Genesys or the group shall have the right to
nominate four out of the seven directors of the Company, (ii) less than a
majority but greater than 25% of the outstanding voting stock of the Company,
then Cell Genesys or such group shall have the right to nominate three out of
the seven directors of the Company, or (iii) less than 25% but greater than 15%
of the outstanding voting stock of the Company, then Cell Genesys or such group
shall have the right to nominate one out of the seven directors of the Company.
The Governance Agreement also provides that Cell Genesys and each officer and
director of the Company who owns voting stock shall agree to vote for the
persons nominated as set forth above. There can be no assurance that the Company
will not be adversely impacted by the significant influence which Cell Genesys
will have with respect to matters affecting the Company.

CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED
ENTITIES

The Company's directors, executive officers, principal stockholders and
affiliated entities, in the aggregate, beneficially own approximately 53.7% of
the Company's outstanding Common Stock as of August 1, 1998. These stockholders,
if acting together, would be able to control substantially all matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers or other business combination transactions. There
can be no assurance that the Company will not be adversely impacted by the
control which such stockholders will have with respect to matters affecting the
Company.

FUTURE CAPITAL REQUIREMENTS

The Company plans to continue to expend substantial resources for the
expansion of research and development, including costs associated with
conducting preclinical testing and clinical trials. The Company may be required
to expend greater-than-anticipated funds if unforeseen difficulties arise in the
course of completing required additional development of product candidates,
performing preclinical testing and clinical trials of such product candidates,
obtaining necessary regulatory approvals or other aspects of the Company's
business. The Company's future liquidity and capital requirements will depend on
many factors, including continued scientific progress in its research and
development programs, the size and complexity of these programs, the scope and
results of preclinical testing and clinical trials, the time and expense
involved in obtaining regulatory approvals, if any, competing technological and
market developments, the establishment of further collaborative arrangements, if
any, 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, product in-licensing
and other factors not within the Company's control. Although the Company
believes that its current cash balances, cash equivalents, and short-term
investments as well as cash generated from collaborative arrangements will be
sufficient to meet the Company's operating and capital requirements for at least
the next two years, there can be no assurance that the Company will not require
additional financing within this timeframe. The Company may be required to raise
additional funds through public or private financing, collaborative
relationships or other arrangements. There can be no assurance that such
additional funding, if needed, will be available on terms attractive to the
Company, if at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive
covenants. Collaborative arrangements, if necessary to raise additional funds,
may require the Company to relinquish its rights to certain of its technologies,
products or marketing territories. The failure of the Company to raise capital
when needed could have a material adverse effect on the Company's business,
financial condition and results of operations.

UNCERTAINTY RELATING TO REIMBURSEMENT; UNCERTAINTY RELATING TO HEALTHCARE REFORM

In both domestic and foreign markets, sales of the Company's potential
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed

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<PAGE> 23

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. The Company may need to conduct post-marketing studies in order to
demonstrate the cost-effectiveness of its products. Such studies may require
significant amount of resources to be provided by the Company. There can be no
assurance that the Company's product candidates will be considered cost
effective or that adequate third-party reimbursement will be available to enable
the Company to maintain price levels sufficient to realize an appropriate return
on its investment in product development. Both federal and state governments in
the United States 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 the
Company's proposed products are approved for marketing. Adoption of such
legislation could further limit reimbursement for pharmaceuticals. If adequate
coverage and reimbursement rates are not provided by the government and
third-party payors for the Company's potential products, the market acceptance
of these products could be adversely affected, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

POTENTIAL PRODUCT LIABILITY EXPOSURE AND LIMITED INSURANCE COVERAGE

The use of any of the Company's product candidates in clinical trials,
and the sale of any approved products, may expose the Company to liability
claims resulting from such use or sale of its products. These claims might be
made directly by consumers, healthcare providers or by pharmaceutical companies
or others selling such products. There can be no assurance that the Company will
not experience financial losses in the future due to product liability claims.
Abgenix has obtained limited product liability insurance coverage for its
clinical trials in the amount of $5.0 million per occurrence and $5.0 million in
the aggregate. The Company intends to expand its 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 and no assurance can be given that the Company will be able to
maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect the Company against losses. A successful product liability claim or
series of claims brought against the Company for uninsured liabilities or in
excess of insured liabilities could have a material adverse effect on its
business, financial condition and results of operations.

HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS

The Company's research and development processes involve the controlled
use of hazardous and radioactive materials, chemicals and waste products. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and waste
products. The risk of accidental contamination or injury from these materials
and waste products cannot be completely eliminated and the Company does not
expect to make material capital expenditures for environmental control
facilities in the near-term. There can be no assurance that the Company will not
be required to incur significant costs to comply with environmental laws and
regulations in the future, or that the operations, business or assets of the
Company will not be materially adversely affected by the costs of compliance
with current or future environmental laws or regulations.

VOLATILITY OF COMMON STOCK PRICE

The market prices for securities of biotechnology and pharmaceutical
companies have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new therapeutic products by the Company or others, clinical trial
results, developments concerning strategic alliance agreements, government
regulation, developments in patent or other proprietary rights, public concern
as to the safety of products developed by the Company or others, future sales of
substantial amounts of Common Stock by existing stockholders, comments by
securities analysts and general market conditions can have an adverse effect on
the market price of the Common Stock. In addition, the realization of any of the
risks described in these "ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS"
could have a dramatic and adverse impact on market price of the Company's Common
Stock.

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<PAGE> 24

ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW

Certain provisions of the Company's Certificate of Incorporation and
Bylaws may make it more difficult for a third party to acquire, or discourage a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. Certain of these provisions
allow the Company to issue up to 5,000,000 shares of Preferred Stock without any
vote or further action by the stockholders, eliminate the right of stockholders
to act by written consent without a meeting, specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings. In addition, the Company is subject to certain
provisions of Delaware law, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
possible issuance of Preferred Stock, the elimination of the right of
stockholders to act by written consent without a meeting, the procedures
required for director nominations and stockholder proposals and Delaware law
could have the effect of delaying, deferring or preventing a change in control
of the Company, including without limitation, discouraging a proxy contest or
making more difficult the acquisition of a substantial block of the Company's
Common Stock. These provisions could also limit the price that investors might
be willing to pay in the future for shares of the Company's Common Stock.

ABSENCE OF DIVIDENDS

The Company has never declared or paid any cash dividends and does not
anticipate paying cash dividends in the foreseeable future.

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<PAGE> 25
PART II

ITEM 1 - LEGAL PROCEEDINGS

Not applicable.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

In July 1998, the Company closed an initial public offering of 2,875,000
shares of its 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 Company's managing underwriters for the
offering were BancAmerica Robertson Stephens and Lehman Brothers Inc. Of the
$23,000,000 in gross proceeds raised in connection with the offering, (i)
$1,610,000 was paid to the managing underwriters in connection with underwriting
discounts and (ii) approximately $924,000 is payable by the Company in
connection with expenses, including legal, printing and filing fees, in
connection with the offering. Of the remaining net proceeds, the Company has
reserved $3,750,000 for payment of the cross-license and settlement with
GenPharm. There were no direct or indirect payments to directors or officers of
the Company or to any other person or entity. None 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. The Company is 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 twelve 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 the Company.

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

3.1(12) Certificate of Incorporation of the Registrant, as currently in
effect.

3.2(12) Bylaws of the Registrant, as currently in effect.

10.1(12) Form of Indemnification Agreement between the Registrant and each
of its directors and officers.

10.2(12) 1996 Incentive Stock Plan and form of agreement thereunder.

10.3(12) 1998 Employee Stock Purchase Plan and form of agreement
thereunder.

10.4(12) 1998 Director Option Plan and form of agreement thereunder.

10.5(12) Warrant dated January 23, 1997 exercisable for shares of Series A
Preferred Stock.
</TABLE>

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<PAGE> 26

<TABLE>
<S> <C>
10.6(12) Warrant dated March 27, 1997 exercisable for shares of Series A
Preferred Stock.

+10.7(1) Joint Venture Agreement dated June 12, 1991 between Cell Genesys
and JT Immunotech USA Inc.

+10.7A(4) Amendment No. 1 dated January 1, 1994 to Joint Venture Agreement.

+10.7B(7) Amendment No. 2 dated June 28, 1996 to Joint Venture Agreement.

+10.8(1) Collaboration Agreement dated June 12, 1991 among Cell Genesys,
Xenotech, Inc. and JT Immunotech USA Inc.

+10.8A(3) Amendment No. 1 dated June 30, 1993 to Collaboration Agreement.

10.8B(11) Amendment No. 2 dated January 1, 1994 to Collaboration Agreement.

+10.8C(5) Amendment No. 3 dated July 1, 1995 to Collaboration Agreement.

+10.8D(7) Amendment No. 4 dated June 28, 1996 to Collaboration Agreement.

+10.8E(12) Amendment No. 5 dated November 1997 to Collaboration Agreement.

+10.9(1) Limited Partnership Agreement dated June 12, 1991 among Cell
Genesys, Xenotech, Inc. and JT Immunotech USA Inc.

+10.9A(4) Amendment No. 2 dated January 1, 1994 to Limited Partnership
Agreement.

10.9B(6) Amendment No. 3 dated July 1, 1995 to Limited Partnership
Agreement.

10.9C(8) Amendment No. 4 dated June 28, 1996 to Limited Partnership
Agreement.

10.10(2) Field License dated June 12, 1991 among Cell Genesys, JT
Immunotech USA Inc. and Xenotech, L.P.

10.10A(8) Amendment No. 1 dated March 22, 1996 to Field License.

10.10B(8) Amendment No. 2 dated June 28, 1996 to Field License.

+10.11(1) Expanded Field License dated June 12, 1991 among Cell Genesys, JT
Immunotech USA Inc. and Xenotech, L.P.

10.11A(8) Amendment No. 1 dated June 28, 1996 to Expanded Field License.

+10.12(12) Amended and Restated Anti-IL-8 License Agreement dated March 19,
1996 among Xenotech, L.P., Cell Genesys and Japan Tobacco Inc.

+10.13(7) Master Research License and Option Agreement dated June 28, 1996
among Cell Genesys, Japan Tobacco Inc. and Xenotech, L.P.

+10.13A(12) Amendment No. 1 dated November 1997 to the Master Research License
and Option Agreement.

+10.14(12) Stock Purchase and Transfer Agreement dated July 15, 1996 by and
between Cell Genesys and the Registrant.

10.15(12) Governance Agreement dated July 15, 1996 between Cell Genesys and
the Registrant.

10.15A(12) Amendment No. 1 dated October 13, 1997 to the Governance
Agreement.
</TABLE>

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<PAGE> 27

<TABLE>
<S> <C>
10.15B(12) Amendment No. 2 dated December 22, 1997 to the Governance
Agreement.

10.16(12) Tax Sharing Agreement dated July 15, 1996 between Cell Genesys and
the Registrant.

+10.17(12) Gene Therapy Rights Agreement effective as of November 1, 1997
between the Registrant and Cell Genesys.

+10.18(12) Patent Assignment Agreement dated July 15, 1996 by Cell Genesys in
favor of the Registrant.

10.19(9) Lease Agreement dated July 31, 1996 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (Arrillaga
Family Trust) as amended, and Richard T. Peery, Trustee, or his
Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate
Property Trust) as amended, and the Registrant.

10.20(12) Loan and Security Agreement dated January 23, 1997 between Silicon
Valley Bank and the Registrant.

10.21(12) Master Lease Agreement dated March 27, 1997 between Transamerica
Business Credit Corporation and the Registrant.

+10.22(12) License Agreement dated February 1, 1997 between Ronald J.
Billing, Ph.D. and the Registrant.

+10.23(10) Release and Settlement Agreement dated March 26, 1997 among Cell
Genesys, the Registrant, Xenotech, L.P., Japan Tobacco Inc. and
GenPharm International, Inc.

+10.24(10) Cross License Agreement effective as of March 26, 1997, among Cell
Genesys, the Registrant, Xenotech, L.P., Japan Tobacco Inc. and
GenPharm International, Inc.

+10.25(10) Interference Settlement Procedure Agreement, effective as of March
26, 1997, among Cell Genesys, the Registrant, Xenotech, L.P.,
Japan Tobacco Inc. and GenPharm International, Inc.

+10.26(12) Agreement dated March 26, 1997 among Xenotech, L.P., Xenotech,
Inc., Cell Genesys, the Registrant, Japan Tobacco Inc. and JT
Immunotech USA Inc.

+10.27(12) Collaborative Research Agreement dated December 22, 1997 between
Pfizer, Inc. and the Registrant.

10.28(12) Amended and Restated Stockholder Rights Agreement dated
January 12, 1998 among the Registrant and certain holders of the
Registrant's capital stock.

+10.29(12) Collaborative Research Agreement effective as of January 28, 1998
between Schering-Plough Research Institute and the Registrant.

10.30(12) Excerpts from the Minutes of a Meeting of the Board of Directors
of the Registrant, dated October 23, 1996.

10.31(12) Excerpts from the Minutes of a Meeting of the Board of Directors
of the Registrant, dated October 22, 1997.

+10.32(12) Exclusive Worldwide Product License dated November 1997 between
Xenotech, L.P. and the Registrant.

</TABLE>

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<PAGE> 28

<TABLE>
<S> <C>
+10.33(12) Research License and Option Agreement effective as of April 6,
1998 between the Registrant and Genentech, Inc.

+10.33A(12) Amendment No. 1 effective as of June 18, 1998 to Research License
and Option Agreement between the Registrant and Genentech, Inc.

++10.34(13) Research Collaboration Agreement dated July 15, 1998 between
Millenneum BioTherapeutics, Inc. and the Registrant.

27.1 Financial Data Schedule.
</TABLE>

* Previously filed.

+ Confidential treatment granted for portions of these exhibits.

++ Confidential treatment requested for portions of this exhibit.

(1) Incorporated by reference to the same exhibit filed with Cell Genesys's
Registration Statement on Form S-1 (File No. 33-46452), portions of which
have been granted confidential treatment.

(2) Incorporated by reference to the same exhibit filed with Cell Genesys's
Registration Statement on Form S-1 (File No. 33-46452).

(3) Incorporated by reference to the same exhibit filed with Cell Genesys's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, portions
of which have been granted confidential treatment.

(4) Incorporated by reference to the same exhibit filed with Cell Genesys's
Annual Report on Form 10-K for the year ended December 31, 1993, portions
of which have been granted confidential treatment.

(5) Incorporated by reference to the same exhibit filed with Cell Genesys's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, portions
of which have been granted confidential treatment.

(6) Incorporated by reference to the same exhibit filed with Cell Genesys's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.

(7) Incorporated by reference to the same exhibit filed with Cell Genesys's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, portions
of which have been granted confidential treatment.

(8) Incorporated by reference to the same exhibit filed with Cell Genesys's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(9) Incorporated by reference to the same exhibit filed with Cell Genesys's
Quarterly report on Form 10-Q for the quarter ended September 30, 1996.

(10) Incorporated by reference to the same exhibit filed with Cell Genesys's
Annual Report on Form 10-K for the year ended December 31, 1996, as
amended, portions of which have been granted confidential treatment.

(11) Incorporated by reference to the same exhibit filed with Cell Genesys's
Annual Report on Form 10-K for the year ended December 31, 1993.

(12) Incorporated by reference to the same exhibit filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-49415).

-28-
<PAGE> 29

(13) Incorporated by reference to the same exhibit filed with the Registrant's
Current Report on Form 8-K filed with the Commission on July 17, 1998.

(b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1998. However, the Company did file a report on form 8-K
on July 17, 1998 relating to the agreement between the Company and Millennium
BioTherapeutics, Inc.

-29-
<PAGE> 30

SIGNATURES

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

Dated: August 17, 1998

ABGENIX, INC.
(Registrant)

/S/ R. SCOTT GREER
----------------------------------------------
R. Scott Greer
President and Chief Executive Officer
(Principal Executive Officer)

/S/ R. KURT LEUTZINGER
----------------------------------------------
Kurt Leutzinger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

-30-
<PAGE> 31
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
27.1 Financial Data Schedule
</TABLE>

-31-

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 794
<SECURITIES> 7,022
<RECEIVABLES> 406
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,220
<PP&E> 6,843
<DEPRECIATION> 1,501
<TOTAL-ASSETS> 15,100
<CURRENT-LIABILITIES> 7,763
<BONDS> 3,136
35,125
0
<COMMON> 442
<OTHER-SE> (31,366)
<TOTAL-LIABILITY-AND-EQUITY> 15,100
<SALES> 0
<TOTAL-REVENUES> 1,625
<CGS> 0
<TOTAL-COSTS> 10,640
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20)
<INCOME-PRETAX> (8,995)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,995)
<EPS-PRIMARY> (30.80)
<EPS-DILUTED> 0

</TABLE>