ALEXION PHARMACEUTICALS INC - 10-K Annual Report

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

FORM 10-K

[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the fiscal year ended July 31, 2001

or

[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ___________

Commission file number: 0-27756
________________

ALEXION PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 13-3648318
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

352 Knotter Drive, Cheshire Connecticut 06410
(Address of Principal Executive Offices) (Zip Code)

203-272-2596
(Registrant's telephone number, including area code)
________________

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.0001

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the Common Stock held by non-affiliates
of the registrant, based upon the last sale price of the Common Stock reported
on the National Association of Securities Dealers Automated Quotation (NASDAQ)
National Market System on October 24, 2001, was approximately $321,829,000.

The number of shares of Common Stock outstanding as of October 24, 2001
was 18,110,801.

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PART I

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD LOOKING STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY,
MANAGEMENT'S BELIEFS AND CERTAIN ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT.
WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
SET FORTH HEREIN UNDER "IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS,"
ATTACHED HERETO AS EXHIBIT 99, AS WELL AS THOSE NOTED IN THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES
NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.

Item 1. BUSINESS.

Overview

We seek to develop pharmaceutical products for the treatment of heart
disease, inflammation, diseases of the immune system and cancer in humans.
During the fiscal years ended July 31, 2001, 2000, and 1999, we spent $38.8
million, $40.2 million, and $23.7 million, respectively, on research and
development activities excluding acquisition related non-cash charges for
in-process research and development and amortization of purchased intangibles.
Our two lead product candidates are genetically altered antibodies that target
specific diseases that arise when the human immune system induces undesired
inflammation in the human body. Antibodies are proteins that bind to specific
targets and are used by the immune system to protect the body.

Our two lead product candidates are designed to block components of the
human immune system that cause undesired inflammation while allowing beneficial
components of the immune system to remain functional. Our two lead product
candidates are "humanized" antibodies, designed to block the inflammatory
effects of the components of the immune system known as "complement." A
humanized antibody is an antibody genetically altered to minimize or avoid an
immune response in humans. Our two lead product candidates are:

. Pexelizumab. We completed a Phase IIb trial for the treatment
of acute inflammation caused by the trauma of heart and lung
bypass procedures during open heart surgery, and we are
enrolling patients in two Phase II heart attack trials. We are
developing pexelizumab in collaboration with Procter & Gamble
Pharmaceuticals; and

. 5G1.1. We completed a Phase II trial for the chronic treatment
of rheumatoid arthritis or RA and a Phase I pilot trial for
psoriasis. We are enrolling patients in Phase II trials for
the treatment of membranous nephritis and lupus nephritis, and
in a Phase I pilot trial for bullous pemphigoid. We have
completed enrollment in a Phase

-2-

I pilot trial in dermatomyositis patients. On-going 12-month
extension studies in RA and membranous nephritis will help us
assess long-term safety. We are developing 5G1.1 ourselves.

In September 2000, we acquired Prolifaron, Inc., through a merger with
Alexion Antibody Technologies, Inc. (AAT), a newly created, wholly owned
subsidiary of Alexion. Prolifaron was a biopharmaceutical company that possessed
extensive research expertise and technologies in the area of creating fully
human antibodies from libraries containing billions of human antibody genes.

In addition to our antibody product candidates which inhibit the
inflammatory effects of complement and our technology programs focusing on human
antibody discovery and development, we are developing products to block the
harmful effects of a component of the immune system known as "T-cells" in
pre-clinical studies. We call these products "apogens." We targeted our first
apogen product candidate, known as MP4, for the treatment of patients with
multiple sclerosis. We are also developing methods of blocking the human immune
system to permit the use of cells and organs from non-human species in the
treatment of diseases in humans. This product development program with
genetically altered pig cells is initially targeting the treatment of patients
with Parkinson's disease and patients with spinal cord injury.

The Immune System

The human immune system defends the body from attack or invasion by
infectious agents or pathogens. This is accomplished through a complex system of
proteins and cells, primarily complement proteins, antibodies and white blood
cells, each with a specialized function. Under normal circumstances, complement
proteins, together with antibodies and white blood cells, act to protect the
body by removing:

. harmful microorganisms;

. cells containing foreign proteins known as antigens; and

. disease-causing combinations of antigens and antibodies known
as immune complexes.

When activated by stimuli, the immune system triggers a series of
enzymatic and biochemical reactions called the complement cascade that results
in an inflammatory response. This inflammatory response is one of the immune
system's weapons against foreign pathogens or otherwise diseased tissue.
However, under certain circumstances, the complement cascade may be activated
inappropriately to direct an inflammatory response at healthy tissue, which may
result in acute and chronic inflammatory conditions.

Common heart diseases and procedures in which the complement cascade is
activated include:

. cardiopulmonary bypass surgery;

. myocardial infarction or heart attack;

. unstable angina or painful chest pains associated with an
insufficient blood supply to the heart;

. angioplasty or procedures for opening up narrowed or blocked
arteries that supply the heart; and

. stroke and other peripheral vascular or blood circulatory
diseases.

Common autoimmune diseases in which the complement cascade is activated
include:

. rheumatoid arthritis;

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. kidney diseases;

. lupus;

. inflammatory bowel diseases;

. inflammatory skin disorders; and

. multiple sclerosis.

T-cells, a type of white blood cell, play a critical role in the normal
immune response by recognizing cells containing antigens and initiating the
immune response. This response results in T-cells:

. attacking the antigen-containing tissue; and

. directing the production of antibodies by white blood cells to
eliminate the antigen-bearing foreign organism.

In autoimmune diseases, T-cells may mistakenly attack healthy host
tissue and may cause an inflammatory response resulting in tissue destruction.
In the case of multiple sclerosis, this may cause paralysis due to destruction
of nerve fibers in the brain.

Product Development Programs

We have focused our product development programs on anti-inflammatory
therapeutics for diseases for which we believe current treatments are either
non-existent or inadequate. Currently available drugs for certain autoimmune,
cardiovascular and neurologic or nervous system diseases, in which the immune
system attacks the patient's own tissue, broadly suppress the entire immune
system, and may also cause potentially severe side effects. Our lead product
candidates, which are genetically altered antibodies known as C5 Complement
Inhibitors, are designed to selectively block the production of
inflammation-causing proteins in the complement cascade. We believe that
selective suppression of this immune response may provide a significant
therapeutic advantage relative to existing therapies.

Additionally, we are developing selective T-cell inhibitors known as
apogens and UniGraft xenotransplants or use of non-human cells and tissues for
neurologic or nervous systems disorders.

Our product candidates are as follows:

Product candidate Technology Indication Status
----------------- ---------- ---------- ------

Pexelizumab C5 Complement Inhibitor Cardiopulmonary bypass Phase IIb trial completed
(single chain antibody)
Myocardial infarction
(1) Thrombolysis -a) Phase II trial ongoing
(2) PTCA -b) Phase II trial ongoing

5G1.1 C5 Complement Inhibitor Rheumatoid arthritis Phase II trial completed
(antibody)
Membranous nephritis Phase II trial ongoing

Lupus Nephritis Phase II trial ongoing

Psoriasis Phase Ib trial completed

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Dermatomyositis Phase Ib trial enrollment
completed

Bullous Pemphigoid Phase Ib trial ongoing

MP4 Apogen Multiple sclerosis Pre-clinical

UniGraft-SCI Cell replacement Spinal cord injury Pre-clinical
UniGraft-PD Cell replacement Parkinson's disease Pre-clinical

(a- dissolving clots that block heart vessels
(b- percutaneous transluminal coronary angioplasty or PTCA, a
procedure for opening up narrowed or blocked arteries that supply
blood to the heart

C5 Complement Inhibitors

Complement proteins are a series of inactive proteins circulating in
the blood. When activated by stimuli, including those associated with both acute
and chronic inflammatory disorders, these inactive complement proteins are split
by enzymes known as convertases into activated byproducts through the complement
cascade.

Some of these byproducts, notably C3b, are helpful in fighting
infections and inhibiting autoimmune disorders. However, the byproducts
generated by the cleavage of C5, known as C5a and C5b-9, generally cause harmful
inflammation. The inflammatory byproducts of C5 cause:

. activation of white blood cells;

. attraction of white blood cells;

. production of injurious hormones including tumor necrosis
factor-alpha;

. activation of blood vessel-lining cells called endothelial
cells, allowing leakage of white blood cells into tissue; and

. activation of blood-clotting cells called platelets.

The following diagram describes the complement cascade:

[diagram]

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[GRAPHIC APPEARS HERE]

Because of the generally beneficial effects of the components of the
complement cascade prior to C5 and the greater inflammatory disease-promoting
effects of the cleavage products of C5, we have identified C5 as a potentially
effective anti-inflammatory drug target. Our first two C5 Inhibitors
specifically and tightly bind to C5 blocking its cleavage into harmful
byproducts and are designed to inhibit subsequent damage from the inflammatory
response.

In laboratory and animal models of human disease, we have shown that
the administration of C5 Inhibitor, as compared to placebo, is effective in:

. preventing inflammation during cardiopulmonary bypass;

. reducing heart tissue damage during myocardial infarction;

. reducing brain damage in cerebral ischemia or reduced blood
flow to brain tissue;

. enhancing survival in a model of lupus; and

. preserving kidney function in nephritis or inflammation of
kidney tissue.

In addition, in human clinical trials, we have shown that C5 Inhibitors
may be associated with reduction of:

. inflammation during cardiopulmonary bypass surgery;

. heart tissue damage during cardiopulmonary bypass surgery;

. new cognitive or mental faculty deficits after cardiopulmonary
bypass surgery;

. an objective measure of disease activity in rheumatoid
arthritis patients; and

. the incidence of proteinuria or abnormal loss of substantial
amounts of protein in a patient's urine in lupus patients.

C5 Inhibitor Immunotherapeutic Product Candidates

-6-

We are developing one of our two lead C5 Inhibitor product candidates,
pexelizumab, for the treatment of inflammation related to acute cardiovascular
diseases and procedures. Our initial indications for pexelizumab are
cardiopulmonary bypass surgery, myocardial infarction utilizing thrombolysis,
and myocardial infarction utilizing PTCA. We are developing our other C5
Inhibitor product candidate, 5G1.1, for the treatment of inflammation related to
chronic autoimmune disorders. The initial indications for which we have pursued
clinical development activities for 5G1.1 are rheumatoid arthritis, membranous
nephritis, lupus nephritis, dermatomyositis, bullous pemphigoid, and psoriasis.
The selection of these eight indications is based upon our belief that each
represents a clinical condition which is:

. closely tied to the production of activated complement
byproducts;

. characterized by clear development pathways;

. inadequately treated by current therapies; and

. associated with substantial health care costs.

To date, pexelizumab and 5G1.1 have been observed to be safe and well
tolerated in completed and ongoing clinical trials in which over 2,700
individuals were treated with either C5 Inhibitor or placebo.

Pexelizumab

Pexelizumab is a humanized, single chain antibody that has been shown
to block complement activity for up to 20 hours after a single injection at the
doses tested and is designed for the treatment of acute inflammatory conditions.
In January 1999, we entered into a collaboration arrangement with Procter &
Gamble to develop and commercialize pexelizumab. Under this collaboration, we
expect to pursue the development of pexelizumab for the treatment of
inflammation caused by various acute cardiovascular indications and procedures
such as cardiopulmonary bypass surgery, myocardial infarction and angioplasty.
Procter & Gamble has agreed to fund clinical development and manufacturing costs
relating to pexelizumab for these indications.

Cardiopulmonary Bypass Surgery

In cardiopulmonary bypass surgery, blood is diverted from a patient's
heart and lungs to a cardiopulmonary, heart-lung, bypass machine in the
operating room. The machine adds oxygen to the blood and circulates the
oxygenated blood to the organs in the patient's body. Significant side effects
of CPB or cardiopulmonary bypass surgery include tissue damage and excessive
bleeding during and after the procedure. We believe these side effects may
result from the activation of the complement cascade when the patient's blood
comes into contact with the plastic lining of the machine and when insufficient
blood flows through the heart as a result of the procedure and after blood flow
through the heart is reintroduced following completion of the procedure.
Activated complement byproducts may be increased by over 1000% in patients
undergoing CPB. The inflammation is also characterized by the activation of
leukocytes, a type of white blood cell, and platelets, cells responsible for
clotting. We believe that this leukocyte activation is associated with impaired
lung, heart, brain and kidney function. We further believe that platelet
activation and subsequent platelet dysfunction during the procedure impair a
patient's ability to stop the bleeding that occurs after extensive surgery.

Pexelizumab is designed to rapidly penetrate the patient's tissues and
to inhibit complement activation in patients immediately before, during and
after cardiopulmonary bypass in order to reduce the cardiovascular and brain
tissue damage and bleeding complications. We believe inhibition of the
inflammatory response may reduce:

. the incidence of death;

. the incidence of heart tissue damage;

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. the incidence of stroke or blockage of blood vessels in brain;

. post-operative or after surgery complications;

. the time spent by patients in the intensive care unit or ICU;

. the scope of required treatments associated with CPB; and

. the need for blood transfusions.

The American Heart Association estimates that in 1997, approximately
600,000 cardiopulmonary bypass operations were performed in the United States.
Currently, products utilized in patients undergoing cardiopulmonary bypass are
designed to enhance the coagulation of blood so as to reduce the need for blood
transfusions. However, we believe these products have little beneficial effect
on the heart and brain inflammatory complications associated with the surgery.

Our pre-clinical studies indicated that C5 Inhibitors can prevent
activation of platelets and leukocytes and the subsequent inflammatory response
that occurs during the circulation of human blood in a closed-loop
cardiopulmonary bypass machine. These pre-clinical studies additionally
indicated that administration of a C5 Inhibitor may reduce cardiac damage
associated with reduced heart blood flow.

Clinical Trials - CPB

In January 1999, we commenced dosing in a Phase IIb clinical trial with
pexelizumab in patients undergoing coronary artery bypass graft surgery with or
without accompanying valve surgery during CPB. The objective of this
multi-center, double-blinded, randomized, placebo-controlled study was to assess
the safety and effectiveness of pexelizumab in these patients. After completion
of this trial, preliminary results from this trial were released in January 2001
which suggested that pexelizumab blocked complement, reduced inflammation and
appeared to be safe and well-tolerated. Some patients in the trial experienced
serious adverse events which included irregular heartbeat, infection, right
heart failure and internal bleeding. The most common adverse events were
irregular heartbeat, nausea and anemia. The primary therapeutic, exploratory
pre-set goal of the trial, referred to as the primary endpoint, was not
achieved. However, in the pre-specified population that included approximately
90% of the patient population, the 800 patients who had coronary artery bypass
graft surgery, or CABG, without valve surgery, those that received pexelizumab
at the highest dose level experienced a significant reduction in larger
post-surgical heart attacks.

We are currently evaluating the data from this trial. If our final
analysis is positive, and if the FDA agrees with the analysis, we expect to
initiate a Phase III trial of the safety and effectiveness of pexelizumab. We
expect that this trial would focus on treating patients undergoing CABG along
with CPB, and would be conducted with Procter & Gamble, our partner in the
development and commercialization of pexelizumab.

Acute Myocardial Infarction

Myocardial infarction is an acute cardiovascular disorder in which the
coronary arteries, the blood vessels that supply nutrients to the heart muscle,
are blocked to such an extent that the flow of blood is insufficient to supply
enough oxygen and nutrients to keep the heart muscle alive. With insufficient
supply of blood, oxygen, and nutrients, the heart muscle may subsequently
infarct or die. Upon the reduction in blood flow in the coronary artery, a
complex cascade of inflammatory events involving complement proteins, platelets
and leukocytes and their secreted factors, and endothelial cells, commences
within the blood vessel. In patients suffering a myocardial infarction,
activated complement byproducts are significantly elevated. This severe
inflammatory response targeting the area of insufficient blood flow to cardiac
muscle is associated with subsequent death of heart muscle. Restoration of blood
flow is also associated with an additional inflammatory reaction with an
accompanying production of activated complement byproducts. In addition to the
high incidence of sudden cardiac death at the onset, severe complications
associated with the initial survival of an acute myocardial

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infarction include congestive heart failure, stroke, and death. The American
Heart Association estimates that approximately 1.1 million people in the United
States will have a heart attack in 2000.

We are developing pexelizumab to inhibit inflammation associated with
complement activation in order to reduce the extent of death of heart muscle in
patients suffering an acute myocardial infarction. In contrast, most drugs
currently being developed or on the market to treat myocardial infarction are
designed to improve blood flow through the heart, rather than treating the
damaging effects of inflammation caused by myocardial infarction. We and our
scientific collaborators have performed pre-clinical studies in rodents which
have demonstrated that administration of a C5 Inhibitor during periods of
insufficient supply of blood to the heart muscle and prior to restoration of
normal flow to the heart muscle significantly reduced the extent of subsequent
death of heart muscle compared to control animal studies. Additionally,
administration of a C5 Inhibitor significantly reduced the extent of cardiac
damage associated with reduced heart blood flow without subsequent restoration
of blood flow.

Clinical Trials - Acute Myocardial Infarction

In October 1998, we commenced dosing subjects in a Phase I clinical
trial in healthy individuals that was designed to evaluate dosing regimens for
subsequent cardiopulmonary bypass and myocardial infarction clinical trials. We
have used the results of this trial to select dosing regimens for subsequent
clinical trials in acute myocardial infarction and CPB patients. The results of
this trial indicated that pexelizumab was well tolerated at doses more than
three times as high as had been previously administered. We are conducting two
Phase II clinical trials, each one designed to enroll approximately 1,000
patients, with our collaborator Procter & Gamble, that test the safety and
effectiveness of pexelizumab for the treatment of acute inflammation in patients
suffering an acute myocardial infarction.

5G1.1

5G1.1 is a humanized antibody that blocks complement activity for one
to two weeks at the doses tested and is designed for the chronic treatment of
autoimmune diseases such as rheumatoid arthritis and nephritis. 5G1.1 is not
included in the collaboration with Procter & Gamble, and we have retained full
rights to 5G1.1.

Rheumatoid Arthritis

Rheumatoid arthritis is a chronic autoimmune disease directed at
various organ and tissue linings, including the lining of the joints, causing
inflammation and joint destruction. Clinical signs and symptoms of the disease
include weight loss, joint pain, morning stiffness and fatigue. Further, the
joint destruction can progress to redness, swelling and pain with frequent and
severe joint deformity. Diagnostic procedures, which may include obtaining a
sample of joint fluid, routinely demonstrate substantial elevations in the
levels of activated complement byproducts in the joint fluid of affected
rheumatoid arthritis patients. Rheumatoid arthritis is generally believed to be
caused by different types of white blood cells, including T-cells, which both
directly attack the patient's joints and also activate B-cells, another type of
white blood cell, to produce antibodies which activate complement proteins in
the joint leading to inflammation with subsequent tissue and joint destruction.
It is estimated that more than 2.0 million people are currently affected by
rheumatoid arthritis in the United States.

We are developing 5G1.1 for the treatment of patients with chronic
inflammatory diseases, including rheumatoid arthritis. We have performed
pre-clinical studies in rodent models of rheumatoid arthritis which have shown
that C5 Inhibitor administration, as compared to placebo-treated subjects:

. reduced the swelling in joints;

. prevented the onset of erosion of joints;

. reduced the inflammatory white blood cell infiltration into
the joints;

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. prevented the spread of disease to additional joints;

. blocked the onset of clinical signs of rheumatoid arthritis; and

. reduced established disease.

Currently, there are a large number of anti-inflammatory drugs under
development or on the market for the treatment of patients with rheumatoid
arthritis. These drugs include non-steroidal anti-inflammatory drugs, and their
more recent analog the COX-2 inhibitors, which generally treat the symptoms of
the disease, but do not alter disease progression. There are also several
currently available drugs that are disease-modifying agents, but these are
associated with undesirable side effects. Recently, tumor necrosis factor, or
TNF, inhibitors have been approved or are under development to reduce the
inflammatory response. TNF is one of the many injurious substances that may be
generated downstream of the complement cascade. In contrast to single agent
inhibitors like TNF inhibitors, by acting at C5 of the complement cascade, we
expect 5G1.1 both to block complement activation and reduce the production of
many of these downstream harmful substances. Because of this dual action, we
believe that 5G1.1 may provide a more potent anti-inflammatory effect.

Clinical Trials - Rheumatoid Arthritis

In December 1997, we filed an IND with the FDA for 5G1.1 in the
treatment of rheumatoid arthritis patients. In our early clinical trials, single
doses of 5G1.1 were safe and well tolerated in the study populations as compared
to placebo, showed dose-dependent reduction in complement activity in the study
subjects, and showed a reduction in C-reactive protein blood levels in the study
subjects. C-reactive protein is considered by many physicians to be the most
objective component of the American College of Rheumatology's definition of
efficacy criteria for rheumatoid arthritis drug trials. Biological and clinical
results from our Phase I/II trial demonstrated that 50% of rheumatoid arthritis
patients receiving 8.0 mg/kg of 5G1.1 achieved an ACR 20 score, a measure of
clinical benefit, as compared to 10% of placebo-treated patients.

We completed our first Phase II clinical trial testing the safety and
effectiveness of repetitive dosing of 5G1.1 in patients with rheumatoid
arthritis. Results showed that 5G1.1 appeared to be safe and well tolerated in
patients in this trial. The most commonly observed adverse events were nausea
and diarrhea. The results of this study suggested a significant three-month
efficacy as measured by ACR 20 criteria for the active arm with a dosage regimen
starting with five weekly loading doses followed by monthly intravenous or IV
administration, compared to placebo. The primary endpoint, or therapeutic
pre-set goal, for this trial was met by the group of patients who received this
mid-level dosing regimen of 5G1.1. Patients who received higher or lower doses
of 5G1.1 in the clinical trial, did not achieve the primary endpoint. Our
six-month safety data from this clinical trial showed that 5G1.1 appeared to be
safe and well tolerated in this study population. Our on-going 12-month open
label extension studies in RA and membranous nephritis will help us assess
long-term safety.

We are planning to initiate two Phase IIb RA studies, one of which we
expect may serve as a pivotal study if we obtain strong efficacy and safety
results.

Membranous Nephritis

The kidneys are responsible for filtering blood to remove toxic
metabolites or breakdown by-products and maintaining the minerals and proteins
in the blood that are required for normal metabolism. Each kidney consists of
millions of individual filtering units, or glomeruli. When glomeruli are
damaged, the kidney can no longer adequately maintain its normal filtering
function. This may result in the build-up of toxins in the blood and the loss of
valuable minerals and proteins in the urine. Clinically severe nephritis, or
kidney inflammation, is found in many patients suffering from lupus and other
autoimmune diseases. This condition occurs when more than 90% of the kidney is
destroyed by disease. Kidney failure is frequently associated with:

. hypertension;

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. strokes;

. infections;

. anemia;

. heart, lung and joint inflammation;

. coma; and

. death.

Many forms of damage to the glomeruli are mediated by the immune system,
particularly by antibodies and activated complement proteins. Membranous
nephritis is a form of kidney inflammation that is believed to be caused by a
chronic autoimmune disorder that targets the kidney. We estimate that there are
approximately 100,000 people currently afflicted with membranous nephritis in
the United States.

Membranous nephritis is characterized by kidney inflammation and
dysfunction that may eventually progress to kidney failure. Diagnostic criteria
for membranous nephritis include kidney biopsies that may demonstrate the
presence of antibodies and activated complement byproducts in the kidneys of
affected patients. The subsequent kidney inflammation leads to the abnormal loss
of substantial amounts of protein in the patient's urine; this condition is
known as proteinuria and is recognized as an objective measurement of kidney
disease. Loss of protein in the urine disturbs the normal control of water in
the blood vessels and also is believed to directly further injure the kidney.
Moreover, clinical studies by others have shown that the degree of proteinuria
is associated with the incidence of subsequent kidney failure. Additional
clinical signs associated with proteinuria may include:

. abnormally low levels of protein in the blood;

. a propensity for abnormal blood clotting;

. abnormal lipid or fat elevations; and

. substantial swelling in the abdomen, under the skin and in the legs.

Current therapies for membranous nephritis include potentially toxic drugs
more frequently used in other indications such as cancer. These drugs generally
act to suppress broadly the proliferation of many types of cells, including
white blood cells. We believe that the use of such therapies is generally
limited due to their unfavorable side effects. Even with current therapies, in
such a severe disease population more than 30% of the patients are expected to
progress to renal or kidney failure, which may require dialysis or
transplantation. In contrast, 5G1.1 directly targets the inhibition of
deleterious complement activation. We believe 5G1.1 may exert more selective and
effective anti-inflammatory activity without the adverse effects associated with
current therapies.

We have performed pre-clinical studies in rodent models of nephritis and
observed that C5 Inhibitor administration, as compared to placebo-treated
subjects, substantially reduced:

. scarring of the kidney;

. breakdown of kidney tissue into the urine;

. clogging of the kidney filtering units; and

. proteinuria.

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Clinical Trials - Membranous Nephritis

We are developing 5G1.1 for a group of kidney and kidney-related chronic
autoimmune disorders, which include membranous nephritis, lupus nephritis, and
lupus. Our strategy is to develop 5G1.1 in kidney disease by initially obtaining
safety data in the more readily available lupus patient population and then to
commence efficacy trials in patients with a kidney disorder known as membranous
nephritis. We are initially starting Phase II trials with 5G1.1 for the
treatment of membranous nephritis patients because of the more uniform clinical
presentations of membranous nephritis patients as compared to lupus patients. We
then intend to expand our efforts to conduct advanced clinical trials in other
kidney diseases and lupus.

In June 1999, we announce the results of our initial Phase I single-center
clinical trial in 24 lupus patients receiving a single bolus administration of
5G1.1. This trial showed that a single dose of 5G1.1 was safe and well
tolerated, reduced complement activity in a dose-dependent manner, and a single
8.0 mg/kg dose significantly lowered the incidence of proteinuria.

In August 1999, we commenced a Phase II multi-center, double-blinded,
randomized, placebo-controlled clinical safety and efficacy trial with multiple
doses of 5G1.1 at two to four week dosing intervals that is intended to enroll
approximately 120 membranous nephritis patients.

In February 2000, we announced that the FDA designated Fast Track status
for development of 5G1.1 for the treatment of patients with membranous
nephritis. This designation provides for expedited development and application
review for approval of a drug through the FDA.

Lupus

Lupus is an autoimmune disorder that damages the brain, lungs, heart,
joints and especially the kidneys. In lupus, antibodies deposit within
particular organs causing complement activation, inflammation and tissue
destruction. For decades, clinical studies by others have demonstrated the
presence of complement activation in lupus patients undergoing flares. Studies
have further shown an abundant deposition of activated complement proteins with
localized inflammation in tissue biopsies from kidney or other tissues in lupus
patients. The Lupus Foundation estimates that approximately 1.4 million people
in the United States have lupus. Further, up to one-half of individuals
estimated to be afflicted with lupus have nephritis. Although lupus may affect
people of either gender, women are 10 to 15 times more likely to suffer from the
disease than men.

Patients with active lupus may have a broad range of symptoms related to
the antibody and activated complement deposition and inflammation. Inflammation
of the brain may cause seizures and other neurologic abnormalities. Inflammation
of the heart may cause heart failure or sudden death. Lung inflammation causes
shortness of breath. Lupus may also cause swollen joints and arthritis. One of
the most common complications associated with lupus, however, is kidney disease,
which often leads to kidney failure requiring dialysis or transplantation.

Current therapies generally act to suppress broadly the proliferation of
many types of cells, including white blood cells. In contrast, 5G1.1 directly
targets the inhibition of deleterious complement activation. We believe 5G1.1
may exert more selective and effective anti-inflammatory activity without the
adverse effects associated with current therapies.

We are developing 5G1.1 for the prevention and treatment of inflammation in
lupus patients. We have performed pre-clinical studies in a rodent model of
lupus. In this chronic rodent model that spontaneously develops a disease
similar to lupus, substantially more animals treated with a C5 Inhibitor
survived as compared to untreated control animals.

Clinical Trials - Lupus

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We filed an IND with the FDA in late December 1997 for 5G1.1 in the
treatment of patients suffering from lupus and began a Phase I clinical trial in
lupus patients in July 1998. As discussed above, in the Clinical Trials section
of Membranous Nephritis, we announced results of a 24 patient, placebo-
controlled clinical study in June 1999. This trial showed that a single dose of
5G1.1 was safe and well tolerated, reduced complement activity in a dose-
dependent manner, and a single 8.0 mg/kg dose significantly lowered the
incidence of proteinuria.

In June 2001, we announced the commencement of a Phase II 5G1.1 trial for
lupus nephritis. This trial is expected to enroll approximately 40 lupus
nephritis patients at several clinical sites in the United States and is
designed to test the safety and biological efficacy of chronic administration of
5G1.1 for up to six months. The National Institute of Health has awarded an
approximately $1.0 million grant to the University of Colorado Health Sciences
Center to fund this multi-center Phase II study of 5G1.1 in patients with lupus
nephritis.

Psoriasis, Dermatomyositis, and Pemphigoid

In addition to the above disease indications, we filed INDs for, and
commenced Phase I pilot clinical trials with, 5G1.1 in patients afflicted with
the chronic, autoimmune disorders psoriasis, bullous pemphigoid, and
dermatomyositis. Psoriasis is life-long autoimmune disorder in which the immune
system attacks the patient's skin, which may cause red, painful and disfiguring
scaling in the affected areas. According to the National Centers for Health
Statistics, psoriasis afflicts approximately 3 million peoples in the U.S. with
an estimated 2 million physician visits a year. Bullous pemphigoid is an
autoimmune disorder in which the immune system attacks the patient's skin, which
may cause extensive and striking blistering and is associated with one-year
mortality rates of between 20 - 40%. According to published reports,
approximately 2,500 new cases of pemphigoid are expected to be diagnosed each
year in the U.S., providing an estimated prevalence of approximately 25,000
patients. Dermatomyositis is an autoimmune disorder in which the immune system
attacks the patients' muscles and skin, which may cause extensive rash and
progressive and severe muscle weakness, pain and fatigue. According to the
Muscular Dystrophy Association, approximately 2,000 - 3,000 new cases of
dermatomyositis are diagnosed each year in the U.S., with an estimated
prevalence of approximately 5,000 - 20,000 patients.

Clinical Trials - Psoriasis, Dermatomyositis, and Pemphigoid

We are testing 5G1.1 in two separate pilot Phase I clinical trials in
patients suffering from dermatomyositis, a severe inflammatory muscle disorder,
and bullous pemphigoid, a severe inflammatory skin disorder. We recently
completed a Phase I clinical trial to investigate the safety of 5G1.1 in
psoriasis patients. 5G1.1 appeared to be safe and well tolerated in this
patient population. According to a standard measure of disease activity, 5G1.1
treatment did not influence the outcome of psoriasis in this trial.

In October 2000, we announced that the FDA granted Orphan Drug status for
development of 5G1.1 for the treatment of patients with dermatomyositis. The
Orphan Drug designation provides Alexion with market exclusivity for 5G1.1 for
this indication for seven years from the drug's approval date.

Antibody Discovery Technology Platform

Combinatorial Human Antibody Library Technologies

In order to expand our pipeline of potential antibody therapeutics, in
September 2000, we acquired Prolifaron, Inc., a privately held biopharmaceutical
company, through a merger with our newly organized, wholly owned subsidiary,
Alexion Antibody Technologies, Inc. (AAT). AAT possesses extensive research
expertise and technologies in the area of creating fully human antibodies from
libraries containing billions of human antibody genes.

AAT's goal is to develop new fully human therapeutic antibodies addressing
multiple disease areas, including autoimmune and inflammatory disorders, cancer
and infectious disease. AAT's technologies involve

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the generation of diverse libraries of human antibodies derived from patients'
blood samples, and the screening of these libraries against a wide array of
potential drug targets. We believe that these technologies may be optimally
suited to the rapid generation of novel, fully human, therapeutic antibodies
directed at validated clinical targets. To date, we have focused on identifying
antibodies which may be therapeutically effective in different autoimmune or
inflammatory disorders, cancer, and infectious diseases. In addition, we believe
that these technologies could permit the pre-clinical validation of new gene
targets that are coming out of the international effort to sequence the human
genome. We also believe that these technologies might provide new therapeutic
antibodies when the libraries are screened against certain of these new gene
targets.

In May 2001, we announced the results of a pre-clinical study of a new
class of therapeutic antibodies that accelerated the return to normal platelet
levels in an animal model of bone marrow toxicity commonly found in cancer
patients. Antibodies in this new class function as agonists that stimulate
their cell target, rather than blocking it, and were created using a rational
design and selection process utilizing proprietary technology developed at AAT.
This new class of antibody agonists is designed to selectively bind to the c-Mpl
receptor on the surface of platelet precursors and then to stimulate platelet-
specific proliferation and differentiation both in vitro and in vivo.

Pre-Clinical Programs

Apogen T-Cell Immunotherapeutic Technology and Product Candidates

MP4

MP4 is a recombinant or genetically-modified protein consisting of parts of
two brain-derived proteins. These two proteins are believed to be major targets
of disease-causing T-cells in patients with multiple sclerosis. MP4 is designed
to bind specifically to, and eliminate, the small population of T-cells in
multiple sclerosis patients which are responsible for attacking the patient's
brain cells, while leaving the vast majority of uninvolved T-cells unaffected.
In addition, MP4 is designed to induce other white blood cells to suppress other
inflammatory cells.

In February 1998, we filed an IND with the FDA for MP4 for the treatment of
patients suffering from multiple sclerosis. The FDA has accepted a plan for a
Phase I clinical trial of MP4. We will determine whether we will conduct this
trial or continue to develop MP4. We may seek to license our rights to MP4 or
to otherwise collaborate with a partner in its development.

UniGraft Xenotransplantation Technologies Program

Most transplant procedures today are whole organ transplants. We believe
that there is a far greater number of patients with medical disorders, such as
Parkinson's disease and spinal cord injury, that are caused by the functional
loss of highly specialized cells. The number of these patients is likely to grow
due to both the aging of the population, with subsequent increase in the
incidence of degenerative diseases, and with the increasing incidence of trauma.
Therefore, cell transplantation could be an important benefit to a large number
of previously untreated, or severely under-treated patients suffering from
severe medical disorders. However, since there are no human donors of such
specialized cells, there is currently no available supply of such cells for
replacement therapy. Further, the immune system prevents the transplantation of
cells from other species, known as xenografts, as they are recognized by the
immune system as foreign and they are rejected. We are developing a portfolio of
UniGraft anti-rejection technologies designed to permit the therapeutic
transplantation of such cells without rejection.

Although approximately 21,000 people received whole organ transplants in
the United States in 1999, there are many times that number of patients who have
disorders that may be amenable to cell or tissue transplantation. It is
estimated that this broader population includes approximately 200,000 patients
suffering from spinal cord injury and 1.0 million individuals with Parkinson's
disease. In particular, we believe that use of a safe and effective cell
transplantation therapy for patients with spinal cord injury or Parkinson's
disease would

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represent major therapeutic advances. We are developing a portfolio of UniGraft
anti-rejection technologies designed to permit the therapeutic transplantation
of such cells without rejection.

Neurologic Cell Transplantation

We have developed methods of blocking the immune system which are designed
to permit the replacement of damaged human brain cells and other neurologic
cells with potentially highly therapeutic genetically modified porcine or pig
cells.

Rejection of non-human tissue by patients is generally believed to occur in
two stages:

. the hyperacute phase, which is very rapid, extending from minutes to
hours; and

. the acute phase, which is somewhat less rapid, extending from days to
months.

Hyperacute rejection is generally believed to be mediated by naturally-
occurring antibodies in the patient, most of which target a sugar antigen
uniquely present on the surface of non-human tissue but not on the patient's own
tissue. After binding to the foreign tissue, these antibodies stimulate the
activation of the recipient's inactive complement proteins on the surface of the
donor tissue with subsequent destruction of the donor tissue. Subsequently,
acute rejection of xenografts is generally believed to be mediated by white
blood cells.

We are designing UniGraft cell products to resist complement/antibody-
mediated hyperacute rejection. We have commenced pre-clinical studies employing
the UniGraft technologies during transplantation of genetically modified and
proprietary porcine cells that are resistant to destruction by human complement
proteins. We are currently focusing our anti-rejection and molecular engineering
technologies primarily on the development of UniGraft cells to treat Parkinson's
disease and injuries to the spinal cord. We are currently performing pre-
clinical studies in the spinal cord injury and Parkinson's disease programs and
optimizing manufacturing methods of the genetically modified pig cells.

Grants from Advanced Technology Program and National Institute of Standards and
Technology

In November 1997, both ourselves and United States Surgical Corporation
("US Surgical", a division of Tyco International, Ltd.) were awarded a three-
year $2.0 million cooperative agreement from the National Institute of Standards
and Technology or NIST under its Advanced Technology Program for funding a joint
xenotransplantation project. In February 1999, this funding was amended to a
single company award to us with our reacquisition of the rights to all aspects
of our xenotransplantation program from US Surgical which had been acquired by
Tyco International Ltd. As of July 31, 2001, this award has been completed.

In October 1998, we were granted our third award under this program, a
three-year grant supporting product development within our neurologic disorder
transplantation program. Through the program, we may receive up to approximately
$2.0 million over three years to support our UniGraft program to develop a
spinal cord injury product within our neurologic disorder xenotransplantation
program. Through July 31, 2001, we had received approximately $1.2 million under
this award.

In November 1999, we were granted our fourth award under this program, a
three-year grant supporting product development within our UniGraft program.
Through the program, we may receive up to approximately $2.0 million over three
years to support our production of UniGraft products. Through July 31, 2001, we
had received approximately $442,000 under this award.

Strategic Alliance with Procter & Gamble

In January 1999, we entered into an exclusive collaboration with Procter &
Gamble to develop and commercialize pexelizumab. Under this collaboration, we
expect to initially pursue the development of pexelizumab for the treatment of
inflammation caused by cardiopulmonary bypass surgery, myocardial infarction

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or heart attack, and angioplasty. Under the current agreement, Procter & Gamble
is expected to fund clinical development and manufacturing costs relating to
pexelizumab for these indications. Additionally, under this agreement, Procter &
Gamble has contracted to pay us up to $95 million in payments, which included a
one-time non-refundable up-front license fee, as well as milestone and research
and development support payments. In addition, we will receive royalties on
worldwide sales of pexelizumab for all indications. We also have a preferred
position relative to third-party manufacturers to manufacture pexelizumab
worldwide. We share co-promotion rights with Procter & Gamble to market
pexelizumab in the United States, and have granted Procter & Gamble the
exclusive rights to sell, market and distribute pexelizumab outside of the
United States. Through July 31, 2001, we received proceeds of $44.8 million from
Procter & Gamble, including a non-refundable up-front license fee of $10.0
million and $34.8 million in research and development support payments.

Manufacturing

We obtain drug product to meet our requirements for clinical studies using
both internal and third-party contract manufacturing capabilities. We have a
pilot manufacturing plant suitable for the fermentation and purification of
certain of our recombinant compounds for clinical studies. Our pilot plant has
the capacity to manufacture under cGMP or current good manufacturing practices
regulations. We have also secured the production of clinical supplies of certain
other recombinant products through third-party manufacturers. In each case, we
have contracted product finishing, vial filling, and packaging through third
parties. Procter & Gamble is responsible for securing commercial supplies of
pexelizumab.

To date, we have not invested in the development of commercial
manufacturing capabilities. Although we have established a pilot manufacturing
facility for the production of material for clinical trials for some of our
potential products, we do not have sufficient capacity to manufacture more than
one drug candidate at a time or to manufacture our drug candidates for later
stage clinical development or commercialization. In the longer term, we may
contract the manufacture of our products for commercial sale or may develop
large-scale manufacturing capabilities for the commercialization of some of our
products. The key factors which will be given consideration when making the
determination of which products will be manufactured internally and which
through contractual arrangements will include the availability and expense of
contracting this activity, control issues and the expertise and level of
resources required for us to manufacture products. In addition, as our product
development efforts progress, we expect that we will need to hire additional
personnel skilled in product testing and regulatory compliance.

Sales and Marketing

We currently have no sales, marketing, or distribution capabilities. We
will need to establish or contract these capabilities to commercialize
successfully any of our drug candidates. We may promote our products in
collaboration with marketing partners or rely on relationships with one or more
companies with established distribution systems and direct sales forces. Under
our current collaboration agreement, Procter & Gamble is obligated to sell,
market and distribute pexelizumab for all approved indications worldwide. We
share with Procter & Gamble co-promotion rights for pexelizumab in the United
States. For other future drug products, as well as for pexelizumab in the United
States, we may elect to establish our own specialized sales force and marketing
organization to market our products.

Patents and Proprietary Rights

Patents and other proprietary rights are important to our business. Our
policy is to file patent applications to protect technology, inventions and
improvements to our technologies that are considered important to the
development of our business. We also rely upon our trade secrets, know-how, and
continuing technological innovations to develop and maintain our competitive
position, as well as patents that we have licensed or may license from other
parties.

We have filed several U.S. patent applications and international
counterparts of certain of these applications. In addition, we have licensed
several additional U.S. and international patents and patent

-16-

applications. Of our owned and licensed patents and patent applications as of
July 31, 2001, 18 relate to technologies or products in the C5 Inhibitor
program, 8 relate to the Apogen program, 33 relate to the UniGraft program, 11
relate to the recombinant human antibody program and 1 relates to the high
throughput compound screening program. We will owe royalties and other fees to
the licensors of some of those patents and patent applications in connection
with the commercial manufacture and sale of our expected product candidates,
including, pexelizumab and 5G1.1.

Our success will depend in part on our ability to obtain United States and
international patent protection for our products and development programs, to
preserve our trade secrets and proprietary rights, and to operate without
infringing on the proprietary rights of third parties or having third parties
circumvent our rights. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the health care industry has traditionally placed considerable
importance on obtaining patent and trade secret protection for significant new
technologies, products and processes.

We are aware of broad patents owned by third parties relating to the
manufacture, use, and sale of recombinant humanized antibodies, recombinant
humanized single-chain antibodies, recombinant human antibodies, recombinant
human single-chain antibodies, and genetically engineered animals. Many of our
product candidates are genetically engineered antibodies, including recombinant
humanized antibodies, recombinant humanized single chain antibodies, recombinant
human antibodies, and recombinant human single chain antibodies, and other
products are tissues from animals. We have received notices from the owners of
some of these patents in which the owners claim that some of these patents may
be relevant to the development and commercialization of some of our drug
candidates. With respect to certain of these patents which we believe are
relevant for the expeditious development and commercialization of certain of our
products as currently contemplated, we have acquired licenses. With regard to
certain other patents, we have either determined in our judgment that our
products do not infringe the patents or we can license such patents on
commercially reasonable terms or we have identified and are testing various
approaches which we believe should not infringe the patents and which should
permit commercialization of our products.

It is our policy to require our employees, consultants, members of our
scientific advisory board, and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of employment or consulting
relationships or collaborations with us. These agreements generally provide that
all confidential information developed or made known during the course of
relationship with us is to be kept confidential and not to be disclosed to third
parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions resulting from work performed for us,
utilizing our property or relating to our business and conceived or completed by
the individual during employment shall be our exclusive property to the extent
permitted by applicable law.

Government Regulation

The pre-clinical studies and clinical testing, manufacture, labeling,
storage, record keeping, advertising, promotion, export, and marketing, among
other things, of our proposed products are subject to extensive regulation by
governmental authorities in the United States and other countries. In the United
States, pharmaceutical products are regulated by the FDA under the Federal Food,
Drug, and Cosmetic Act and other laws, including, in the case of biologics, the
Public Health Service Act. At the present time, we believe that our currently
anticipated products will be regulated by the FDA as biologics.

The steps required before a novel biologic may be approved for marketing in
the United States generally include:

(1) pre-clinical laboratory tests and in vivo, or within a living
organism, pre-clinical studies;

(2) the submission to the FDA of an IND for human clinical testing, which
must become effective before human clinical trials may commence;

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(3) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product;

(4) the submission to the FDA of a biologics license application or BLA;
and

(5) FDA review and approval of such application.

The testing and approval process requires substantial time, effort and
financial resources. Prior to and following approval, if granted, the
establishment or establishments where the product is manufactured are subject to
inspection by the FDA and must comply with cGMP requirements enforced by the FDA
through its facilities inspection program. Manufacturers of biological materials
also may be subject to state regulation.

Pre-clinical studies include animal studies to evaluate the mechanism of
action of the product, as well as animal studies to assess the potential safety
and efficacy of the product. Pre-clinical safety tests must be conducted in
compliance with FDA regulations regarding good laboratory practices and
compounds used for clinical trials must be produced according to applicable cGMP
requirements. The results of the pre-clinical tests, together with manufacturing
information and analytical data, are submitted to the FDA as part of an IND,
which must become effective before human clinical trials may be commenced. The
IND will automatically become effective 30 days after receipt by the FDA, unless
the FDA before that time requests an extension to review or raises concerns
about the conduct of the trials as outlined in the application. In such latter
case, the sponsor of the application and the FDA must resolve any outstanding
concerns before clinical trials can proceed. We cannot assure you that
submission of an IND will result in FDA authorization to commence clinical
trials.

Clinical trials involve the administration of the investigational product
to healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with
protocols that detail many items, including:

. the objectives of the study;

. the parameters to be used to monitor safety; and

. the efficacy criteria to be evaluated.

Each protocol must be submitted to the FDA as part of the IND. Further,
each clinical study at each clinical site must be reviewed and approved by an
independent institutional review board, prior to the recruitment of subjects.

Clinical trials typically are conducted in three sequential phases, but the
phases may overlap and different trials may be initiated with the same drug
within the same phase of development in similar or differing patient
populations. In Phase I, the initial introduction of the drug into human
subjects, the drug is tested for safety and, as appropriate, for absorption,
metabolism, distribution, excretion, pharmacodynamics and pharmacokinetics.
Phase II usually involves studies in a limited patient population to:

. evaluate preliminarily the efficacy of the drug for specific, targeted
indications;

. determine dosage tolerance and optimal dosage; and

. identify possible adverse effects and safety risks.

Phase III trials are undertaken to further evaluate clinical efficacy of a
specific endpoint and to test further for safety within an expanded patient
population at geographically dispersed clinical study sites. Phase I, Phase II
or Phase III testing may not be completed successfully within any specific time
period, if at all, with respect to any products being tested by a sponsor.
Furthermore, the FDA may suspend clinical trials at any time

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on various grounds, a finding that the subjects or patients are being exposed to
an unacceptable health risk.

The results of the pre-clinical studies and clinical trials, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA as part of a BLA requesting approval for the marketing of
the product. The FDA will occasionally convene an Advisory Panel of experts to
review and recommend a non-binding course of action regarding a sponsor's BLA
requests. The FDA may deny approval of the application if applicable regulatory
criteria are not satisfied, or if additional testing or information is required.
Post-marketing testing and surveillance to monitor the safety or efficacy of a
product may be required. FDA approval of any application may include many delays
or never be granted. Moreover, if regulatory approval of a product is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if safety or manufacturing problems
occur following initial marketing. Among the conditions for approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to cGMP requirements. These requirements must
be followed at all times in the manufacture of the approved product. In
complying with these requirements, manufacturers must continue to expend time,
monies and effort in the area of production and quality control to ensure full
compliance.

Both before and after the FDA approves a product, the manufacturer and the
holder or holders of the BLA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the pre-clinical and clinical testing process, the review process, or
at any time afterward, including after approval, may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or the BLA holder.
In addition, later discovery of previously unknown problems may result in
restrictions on a product, its manufacturer, or the BLA holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of our products
under development.

For clinical investigation and marketing outside the United States, we are
also subject to foreign regulatory requirements governing human clinical trials
and marketing approval for drugs. The foreign regulatory approval process
includes all of the risks associated with FDA approval set forth above as well
as country-specific regulations.

No xenotransplantation-based therapeutic product has been approved for sale
by the FDA. The FDA has not yet established definitive regulatory guidelines for
xenotransplantation, but has proposed interim guidelines in an attempt to reduce
the risk of contamination of transplanted organ and cellular products with
infectious agents. Definitive guidelines in the United States may never be
issued, if at all. Current companies involved in this field, including
ourselves, may not be able to comply with any final and definitive federal
guidelines that may be issued.

Competition

Currently, many companies, including major pharmaceutical and chemical
companies as well as specialized biotechnology companies, are engaged in
activities similar to our activities. Universities, governmental agencies and
other public and private research organizations also conduct research and may
market commercial products on their own or through joint ventures. These
companies and organizations are in the United States, Europe and elsewhere.
Many of these entities may have:

. substantially greater financial and other resources;

. larger research and development staffs;

. lower labor costs; and/or

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. more extensive marketing and manufacturing organizations.

Many of these companies and organizations have significant experience in
pre-clinical testing, human clinical trials, product manufacturing, marketing
and distribution and other regulatory approval procedures. They may also have a
greater number of significant patents and greater legal resources to seek
remedies for cases of alleged infringement of their patents by us to block,
delay, or compromise our own drug development process.

We compete with large pharmaceutical companies that produce and market
synthetic compounds and with specialized biotechnology firms in the United
States, Europe and elsewhere, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Many biotechnology companies have focused their developmental efforts in the
human therapeutics area, and many major pharmaceutical companies have developed
or acquired internal biotechnology capabilities or have made commercial
arrangements with other biotechnology companies. A number of biotechnology and
pharmaceutical companies are developing new products for the treatment of the
same diseases being targeted by us; in some instances these products have
already entered clinical trials or are already being marketed. Other companies
are engaged in research and development based on complement proteins, T-cell
therapeutics, gene therapy and xenotransplantation.

Each of Avant Immunotherapeutics, Inc., Millennium Pharmaceuticals, Inc.,
Tanox, Inc., Abbott Laboratories, Baxter International Inc., Gliatech Inc.,
Neurogen Corporation, and Biocryst Pharmaceuticals Inc. has publicly announced
intentions to develop complement inhibitors to treat diseases related to trauma,
inflammation or certain brain or nervous system disorders. Avant has initiated
clinical trials for a proposed complement inhibitor to treat acute respiratory
distress syndrome, myocardial infarction, lung transplantation, and in infants
and adults undergoing heart and/or lung bypass procedures. We are aware that
Pfizer, Inc., GlaxoSmithKline plc, and, Merck & Co., Inc. are also attempting to
develop complement inhibitor therapies. We believe that our potential C5
Inhibitors differ substantially from those of our competitors due to our
compounds' demonstrated ability to specifically intervene in the complement
cascade at what we believe to be the optimal point so that the disease-causing
actions of complement proteins generally are inhibited while the normal disease-
preventing functions of complement proteins generally remain intact as do other
aspects of immune function.

We further believe that, under conditions of inflammation, a complement
inhibitor compound which only indirectly addresses the harmful activity of
complement may be bypassed by pathologic mechanisms present in the inflamed
tissue. Each of Bayer AG, Immunex Corp., Pharmacia & Upjohn Inc. and Rhone-
Poulenc SA sells a product which is used clinically to reduce surgical bleeding
during cardiopulmonary bypass surgery, but has little beneficial effect on other
significant inflammatory morbidities associated with cardiopulmonary bypass
surgery. We believe that each of these drugs does not significantly prevent
complement activation and subsequent inflammation that lead to organ damage and
blood loss during cardiopulmonary bypass surgery, but instead each drug attempts
to reduce blood loss by shifting the normal blood thinning/blood clotting
balance in the blood towards enhanced blood clotting.

Nextran Inc., a subsidiary of Baxter International Inc., and Imutran Ltd.,
a wholly-owned subsidiary of Novartis Pharma AG, are seeking to develop pig cell
xenograft technology. Novartis Pharma AG is also collaborating with
Biotransplant Inc. to commercially develop xenograft organs in a joint venture
known as Immerge, Inc. We are aware that Diacrin Inc. and Genzyme Tissue
Repair, Inc. are working in this field.

Each of Cambridge Antibody Technology, PLC, MorphoSys AG, and Dyax
Corporation have publicly announced intentions to develop therapeutic
genetically altered human antibodies from libraries of human antibody genes.
Additionally, each of Abgenix, Inc. and Medarex, Inc. have publicly announced
intentions to develop therapeutic genetically altered human antibodies from mice
that have been bred to include some human antibody genes.

Employees

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As of October 1, 2001, we had 140 full-time employees, of which 123
were engaged in research, development, manufacturing, and clinical development,
and 17 in administration and finance. Doctorates are held by 42 of our
employees. Each of our employees has signed a confidentiality agreement.

Item 2. PROPERTIES.

Facilities
We lease our headquarters and research and development facilities in
Cheshire, Connecticut, where we relocated in November 2000. The lease has a term
of ten years and six months. At this site, we lease a total of approximately
82,000 square feet of space, which includes approximately 62,000 square feet
related to research and laboratories. We have incurred initial leasehold
improvements aggregating approximately $4.8 million. In addition, we are paying
a pro rata percentage of real estate taxes and operating expenses. Our pilot
manufacturing plant, which may be used for producing compounds for some of our
current and anticipated clinical trials, is expected to remain in New Haven,
Connecticut encompassing approximately 30,000 square feet of labs and offices.
We are currently negotiating a longer-term arrangement for this facility. We
believe our new facilities and our pilot manufacturing facility will be adequate
for our ongoing current clinical activities. Alexion Antibody Technologies, Inc.
leases approximately 7,500 square feet of labs and office space in San Diego,
California.

Item 3. LEGAL PROCEEDINGS.

We are not a party to any material legal proceeding.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY

The executive officers and key employees of the Company and their respective
ages and positions with the Company as of October 1, 2001 were as follows:

Name Age Position with Alexion
---- --- ---------------------

Leonard Bell, M.D................................... 43 President, Chief Executive Officer, Secretary,
Treasurer, Director
David W. Keiser..................................... 50 Executive Vice President, Chief Operating
Officer
Stephen P. Squinto, Ph.D............................ 45 Executive Vice President and Head of Research
Katherine S. Bowdish, Ph.D.......................... 44 Senior Vice President of Antibody Discovery,
President of Alexion Antibody Technologies
Samuel S. Chu, Ph.D................................. 51 Vice President of Process Sciences and
Manufacturing
Thomas I.H. Dubin, J.D.............................. 39 Vice President and General Counsel
Barry P. Luke....................................... 43 Vice President of Finance and Administration,
Assistant Secretary
Christopher F. Mojcik, M.D., Ph.D................... 41 Vice President of Clinical Development
Nancy Motola, Ph.D.................................. 48 Vice President of Regulatory Affairs and
Quality Assurance
Scott A. Rollins, Ph.D.............................. 38 Vice President of Drug Development and
Project Management
Russell P. Rother, Ph.D............................. 40 Vice President of Discovery Research

-21-

Daniel N. Caron..................................... 38 Senior Director of Operations and Engineering
William Fodor, Ph.D................................. 43 Senior Director of Xenotransplantation

Leonard Bell, M.D. is the principal founder of Alexion, and has been a
director of Alexion since February 1992 and the Company's President and Chief
Executive Officer, Secretary and Treasurer since January 1992. From 1991 to
1992, Dr. Bell was an Assistant Professor of Medicine and Pathology and
co-Director of the program in Vascular Biology at the Yale University School of
Medicine. From 1990 to 1992, Dr. Bell was an attending physician at the Yale-New
Haven Hospital and an Assistant Professor in the Department of Internal Medicine
at the Yale University School of Medicine. Dr. Bell was a recipient of the
Physician Scientist Award from the National Institutes of Health and
Grant-in-Aid from the American Heart Association as well as various honors and
awards from academic and professional organizations. His work has resulted in
more than 20 scientific publications and three patent applications. Dr. Bell is
a director of The Medicines Company, and Connecticut United for Research
Excellence, Inc. He also served as a director of the Biotechnology Research and
Development Corporation from 1993 to 1997. Dr. Bell received his A.B. from Brown
University and M.D. from Yale University School of Medicine. Dr. Bell is
currently an Adjunct Assistant Professor of Medicine and Pathology at Yale
University School of Medicine.

David W. Keiser has been Executive Vice President and Chief Operating
Officer of Alexion since July 1992. From 1990 to 1992, Mr. Keiser was Senior
Director of Asia Pacific Operations for G.D. Searle & Company Limited, a
manufacturer of pharmaceutical products. From 1986 to 1990, Mr. Keiser was
successively Licensing Manager, Director of Product Licensing and Senior
Director of Product Licensing for Searle. From 1984 to 1985, Mr. Keiser was New
Business Opportunities Manager for Mundipharma AG, a manufacturer of
pharmaceutical products, in Basel, Switzerland where he headed pharmaceutical
licensing and business development activities in Europe and the Far East. From
1978 to 1983, he was Area Manager for F. Hoffmann La Roche Ltd., a manufacturer
of pharmaceutical products, in Basel, Switzerland. Mr. Keiser received his B.A.
from Gettysburg College.

Stephen P. Squinto, Ph.D. is a founder of Alexion and has been
Executive Vice President and Head of Research since August 2000. He has held the
positions of Senior Vice President and Chief Technical Officer from March 1998
to July 2000, Vice President of Research, Molecular Sciences, from August 1994
to March 1998, Senior Director of Molecular Sciences from July 1993 to July
1994, and Director of Molecular Development from 1992 to July 1993. From 1989 to
1992 Dr. Squinto held various positions at Regeneron Pharmaceuticals, Inc. most
recently serving as Senior Scientist and Assistant Head of the Discovery Group.
From 1986 to 1989, Dr. Squinto was an Assistant Professor of Biochemistry and
Molecular Biology at Louisiana State University Medical Center. Dr. Squinto's
work has led to over 70 scientific papers in the fields of gene regulation,
growth factor biology and gene transfer. Dr. Squinto's work is primarily in the
fields of regulation of eukaryotic gene expression, mammalian gene expression
systems and growth receptor and signal transduction biology. Dr. Squinto also
serves as a Director of the BRDC since 1997. Dr. Squinto received his B.A. in
Chemistry and Ph.D. in Biochemistry and Biophysics from Loyola University of
Chicago.

Katherine S. Bowdish, Ph.D. has been Senior Vice President of Antibody
Discovery since August 2001 and was Vice President of Antibody Discovery from
September 2000 upon joining the Company. Dr. Bowdish has also been President of
Alexion Antibody Technologies, Inc., a wholly-owned subsidiary of the Company,
since September 2000. Dr. Bowdish was a co-founder and Chief Scientific Officer
and Executive Vice President of Prolifaron, Inc. Prolifaron, a San Diego,
California based antibody engineering company was merged into Alexion Antibody
Technologies, Inc. in September 2000. From 1997 to 1998, and the Chief Executive
Officer and Chief Scientific Officer of Prolifaron from 1998 to 2000. Dr.
Bowdish previously held positions at The Scripps Research Institute, Monsanto,
and Rockefeller University. Dr. Bowdish is an internationally recognized expert
in the field of antibody engineering and has 19 years of experience in
biotechnology research. Dr. Bowdish received her B.S. degree in biology from the
College of William and Mary, M.A. degree in cell biology from Columbia
University, and Ph.D. degree in genetics from Columbia University.

-22-

Samuel S. Chu, Ph.D. has been Vice President of Process Sciences and
Manufacturing since September 2000. Before joining Alexion Dr. Chu was Director
of the Biotech Development and Pilot Plant, Bio-Chemistry Division operations at
Bristol-Meyers Squibb, Co from 1993 to 2000. From 1990 to 1993 Dr. Chu was an
Associate Director of Product Development and Scale-up at Lederle-Praxis
Biologicals, a division of American Cyanamid. From 1985 to 1990 Dr. Chu was the
Associate Director of Product Development and Scale-up at Praxis Biologics. Dr.
Chu received his B.S. from National Chung-Hsing University, M.S. from Illinois
Institute of Technology, and Ph.D. degree from the University of Toronto.

Thomas I.H. Dubin, J.D. joined the Company in January 2001 as Vice
President and General Counsel. From February 1999 to September 2000 he served as
Vice President, General Counsel and Secretary for ChiRex Inc., a NASDAQ-traded
international corporation providing advanced process development services and
specialty manufacturing to the pharmaceutical industry, which in September 2000
was acquired by and merged into Rhodia. From 1992 to 1999, Mr. Dubin held
various positions with Warner-Lambert Company, including Assistant General
Counsel, Pharmaceuticals. Prior to his tenure with Warner-Lambert, Mr. Dubin was
a corporate attorney for five years with Cravath, Swaine & Moore in New York.
Mr. Dubin received his J.D. from New York University and his B.A., cum laude,
from Amherst College.

Barry P. Luke has been Vice President of Finance and Administration
since September 1998 and Senior Director of Finance and Administration of
Alexion from August 1995 to September 1998 and prior thereto as Director of
Finance and Accounting of the Company from May 1993. From 1989 to 1993, Mr. Luke
was Chief Financial Officer, Secretary and Vice President-Finance and
Administration at Comtex Scientific Corporation, a publicly held distributor of
electronic news and business information. From 1985 to 1989, he was Controller
and Treasurer of Softstrip, Inc., a manufacturer of computer peripherals and
software. From 1980 to 1985, Mr. Luke was employed by General Electric Company
where he held positions at GE's Corporate Audit Staff after completing GE's
Financial Management Program. Mr. Luke received a B.A. in Economics from Yale
University and an M.B.A. in management and marketing from the University of
Connecticut.

Christopher F. Mojcik, M.D., Ph.D. has been Vice President of Clinical
Development since August 2000. Since joining the Alexion in July 1998 to July
2000, Dr. Mojcik was Senior Director of Clinical Development. From 1996 until
July 1998, he was an Associate Director in the Metabolics/Rheumatics Department
at Bayer Corporation's Pharmaceuticals Division. Dr. Mojcik was responsible for
Phase II and III development of certain arthritis programs and certain Phase IV
programs in cardiopulmonary bypass. From 1993 to 1996, he was a Senior Staff
Fellow in the Cellular Immunology Section of the Laboratory of Immunology in the
NIAID at the NIH. From 1991 to 1993, he completed his Fellowship in Rheumatology
in the National Institute of Arthritis and Musculoskeletal and Skin Diseases at
the NIH. He received his B.A. from Washington University in St. Louis, Missouri,
and his M.D. and Ph.D. from the University of Connecticut.

Nancy Motola, Ph.D. has been the Vice President of Regulatory Affairs
and Quality Assurance since 1998. From 1991 to 1998, Dr. Motola served as
Assistant, Associate and then Deputy Director, Regulatory affairs for the Bayer
Corporation Pharmaceuticals Division where she was responsible for regulatory
aspects of product development programs for cardiovascular, neuroscience,
metabolic and oncology drugs and included drugs targeting arthritis, cardiac
disorders, stroke and cognitive dysfunction. Dr. Motola has been responsible for
the filing of numerous INDs, other regulatory submissions and has filed New Drug
Applications for marketing approval resulting in three currently marketed drugs.
Dr. Motola held regulatory affairs positions of increasing responsibility at
Abbott Laboratories from 1989 to 1991 and at E.R. Squibb and Sons, Inc. from
1983 to 1989. She also served as past Chairperson of the Regulatory Affairs
Section of the American Association of Pharmaceuticals Scientists. Dr. Motola
received her B.A. from Central Connecticut State University and M.S. and Ph.D.
degrees in medical chemistry from the University of Rhode Island.

Scott A. Rollins, Ph.D. is a co-founder of Alexion and has been Vice
President of Drug Development and Project Management since August 2000. Dr.
Rollins was Senior Director of Project Management and Drug Development from
August 1999 to July 2000, Senior Director of Complement Biology from 1997 to
1999, Director of Complement Biology from 1996 to 1997, Principal Scientist from
1994 to 1996, and Staff Scientist from 1992 to 1994. Since 1994, Dr. Rollins has
been responsible for the pre-clinical development of our anti-

-23-

inflammatory compound 5G1.1-SC. Since 1999, Dr. Rollins has been additionally
responsible for the project management functions of 5G1.1-SC, currently under
joint development with Procter & Gamble Pharmaceuticals. Prior to 1992, Dr.
Rollins was a postdoctoral research fellow in the Department of Immunobiology at
Yale University School of Medicine. Dr. Rollins' work has led to over 50
scientific papers and patents in the fields of complement biology. He received
his B.S. in Cytotechnology and Ph.D. in Microbiology and Immunology from the
University of Oklahoma Health Sciences Center.

Russell P. Rother, Ph.D. has been Vice President of Discovery Research
since August 2001, Senior Director of Discovery Research from 1999 to 2001,
Director of Gene Technologies from 1996 to 1999, Senior Staff Scientist from
1994 to 1996 and Staff Scientist from 1992 to 1994. As one of the original
scientists at Alexion, Dr. Rother has played a critical role in the engineering
and development of Alexion's current antibody therapeutics and continues to lead
discovery efforts in the identification of new targets. Prior to 1992, Dr.
Rother was a Postdoctoral Research Fellow in the Department of Immunobiology at
Yale University School of Medicine. Dr. Rother's work has led to over 30
scientific papers and issued patents in the fields of gene therapy, autoimmunity
and complement biology. Dr. Rother received a B.S. in Biology from Southwestern
Oklahoma State University and a Ph.D. in Microbiology and Immunology from the
University of Oklahoma Health Sciences Center in conjunction with the Oklahoma
Medical Research Foundation.

Daniel N. Caron has been Senior Director of Operations and Engineering
since 1998. After joining the Company in 1992, Mr. Caron was Operations Manager
from 1992 to 1993, Senior Operations Manager from 1993 to 1996, and Director of
Operations from 1996 to 1998. Mr. Caron has been responsible for managing the
engineering, build-out, validation and maintenance of all of the Company's
research, manufacturing, and administrative facilities. Prior to 1992, Mr. Caron
was a research scientist at Imclone Systems, Inc., a biopharmaceutical firm. Mr.
Caron received his B.A. in Biology from Adelphia University and M.S. in
Biomedical Engineering from Polytechnic University of New York.

William Fodor, Ph.D. has been Senior Director of Xenotransplantation
since 1997. After joining Alexion in 1992, Dr. Fodor was a Staff Scientist from
1992 to 1994, Principal Scientist from 1994 to 1996, and Director of
Xenotransplantation from 1996 to 1997. Dr. Fodor has been responsible for
managing the pre-clinical development and manufacturing of our
xenotransplantation product candidates. Prior to 1992, Dr. Fodor was a
postdoctoral research fellow in the Section of Immunobiology at Yale University
School of Medicine and at Biogen, Inc., a biopharmaceutical firm. Dr. Fodor's
work has led to over 30 scientific papers and patents in the fields of
immunobiology and molecular biology. Dr. Fodor received his B.S. in Genetics and
Ph.D. in Molecular Genetics from Ohio State University.

-24-

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Our common stock is quoted on The Nasdaq National Market under the symbol
"ALXN." The following table sets forth the range of high and low sales prices
for our common stock on The Nasdaq National Market for the periods indicated
since August 1, 1998.

Fiscal 1999 High Low
----------- ---- ---

First Quarter
(August 1, 1998 to October 31, 1998).......................... $ 10.25 $ 5.50
Second Quarter
(November 1, 1998 to January 31, 1999)........................ $ 17.75 $ 8.38
Third Quarter
(February 1, 1999 to April 30, 1999).......................... $ 14.25 $ 8.38
Fourth Quarter
(May 1, 1999 to July 31, 1999)................................ $ 12.75 $ 8.75

Fiscal 2000 High Low
----------- ---- ---

First Quarter
(August 1, 1999 to October 31, 1999).......................... $ 16.25 $10.00
Second Quarter
(November 1, 1999 to January 31, 2000)........................ $ 50.13 $12.75
Third Quarter
(February 1, 2000 to April 30, 2000).......................... $119.88 $34.81
Fourth Quarter
(May 1, 2000 to July 31, 2000)................................ $ 84.50 $30.50

Fiscal 2001 High Low
----------- ---- ---

First Quarter
(August 1, 2000 to October 31, 2001).......................... $118.63 $64.00
Second Quarter
(November 1, 2000 to January 31, 2001)........................ $112.00 $42.75
Third Quarter
(February 1, 2001 to April 30, 2001).......................... $ 54.50 $16.88
Fourth Quarter
(May 1, 2001to July 31, 2001)................................. $ 29.99 $18.50

As of October 23, 2001, we had 141 stockholders of record of our common
stock and an estimated 4,000 beneficial owners. The closing sale price of our
common stock on October 23, 2001 was $17.83 per share.

In March 2000, we completed a $120 million private placement of our
5.75% Convertible Subordinated Notes due March 15, 2007. The notes bear interest
semi-annually on September 15 and March 15 of each year, beginning September 15,
2000. The holders of the notes may convert all or a portion of the notes into
common stock at any time on or before March 15, 2007 at a conversion price of
$106.425 per share. The notes were offered to qualified institutional buyers
under the exemption from registration provided by Rule 144A under the Securities
Act of 1933, as amended, and to persons outside the United States under
Regulation S under the Securities Act. We incurred issuance costs related to
this offering of approximately $4.0 million, including discounts to J.P. Morgan
& Co., U.S. Bancorp Piper Jaffray, Chase H&Q and Warburg Dillon Read LLC, the

-25-

initial purchasers of the notes. The costs are being amortized into interest
expense over the seven-year term of the notes.

In October 2000, we filed a shelf registration statement to offer up to
$300 million of equity securities. On November 1, 2000, we sold 2.3 million
shares of common stock at a price of $90.75 per share resulting in net proceeds
of approximately $208.5 million, net of fees and other expenses of approximately
$201,000 related to the transaction.

DIVIDEND POLICY

We have never paid cash dividends. We do not expect to declare or pay
any dividends on our common stock in the foreseeable future. We intend to retain
all earnings, if any, to invest in our operations. The payment of future
dividends is within the discretion of our board of directors and will depend
upon our future earnings, if any, our capital requirements, financial condition
and other relevant factors.

-26-

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.

(in thousands, except per share data)

Fiscal Year Ended July 31,
-----------------------------------------------------
Consolidated Statements of Operations Data:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----

Contract research revenues................................. $ 11,805 $ 21,441 $ 18,754 $ 5,037 $ 3,811
--------- -------- -------- ------- -------
Operating expenses:

Research and development................................ 38,871 40,187 23,710 12,323 9,079
General and administrative.............................. 7,135 4,175 2,953 2,666 2,827
In-process research and development (IPRD).............. 21,000 - - - -
Amortization of goodwill (GW)........................... 2,901 - - - -
--------- -------- -------- ------- -------
Total operating expenses................................... 69,907 44,362 26,663 14,989 11,906
--------- -------- -------- ------- -------
Operating loss............................................. (58,102) (22,921) (7,909) (9,952) (8,095)
Other income, net.......................................... 10,177 2,694 1,514 2,087 843
--------- -------- -------- ------- -------
Loss before cumulative effect of SAB 101................... (47,925) (20,227) (6,395) (7,865) (7,252)
Cumulative effect of adoption of SAB 101................... (9,118) - - - -
--------- -------- -------- ------- -------
Net Loss................................................... $ (57,043) $(20,227) $ (6,395) $(7,865) $(7,252)

Preferred Stock dividends................................. - - - (900) -
-------- -------- -------- ------- ------
Net loss applicable to common shareholders................. $ (57,043) $(20,227) $ (6,395) $(8,765) $(7,252)
========= ======== ======== ======= =======

Basic and diluted net loss per common share................ $ (3.28) $ (1.45) (0.57) $ (0.87) $ (0.97)
========= ======== ======== ======= =======

Shares used in computing net loss per common share......... 17,371 13,914 11,265 10,056 7,451
========= ======== ======== ======= =======

As of July 31,
------------------------------------------------------

Consolidated Balance Sheet Data: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----

Cash, cash equivalents, and marketable securities.............. $355,274 $174,529 $28,328 $37,494 $22,749
Total current assets........................................... 362,747 180,080 35,662 37,840 22,981
Total assets................................................... 400,259 192,702 44,374 42,085 24,260
Notes payable, less current portion............................ 3,920 3,920 4,383 832 -
Convertible subordinated notes................................. 120,000 120,000 - - -
Total stockholders' equity..................................... 260,408 61,604 33,301 39,190 21,846

-27-

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
our plans and results to differ significantly from plans and results discussed
in forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in "Important
Factors Regarding Forward-Looking Statements" attached hereto as Exhibit 99.

Overview

We are engaged in the discovery and development of therapeutic products
aimed at treating patients with a wide array of severe disease states, including
cardiovascular and autoimmune disorders, inflammation and cancer. Since our
inception in January 1992, we have devoted substantially all of our resources to
drug discovery, research, product and clinical development. Additionally,
through our wholly owned subsidiary, Alexion Antibody Technologies, Inc. or AAT,
we are engaged in discovering and developing a portfolio of additional antibody
therapeutics targeting severe unmet medical needs.

We are currently examining our two lead antibody product candidates in
eight clinical development programs. One of our antibody product candidates,
pexelizumab, is an antibody fragment being developed in collaboration with
Procter & Gamble Pharmaceuticals, and has completed a Phase IIb study in CPB or
cardiopulmonary bypass surgery patients undergoing CABG or coronary artery
bypass graft surgery. Pending FDA or Food and Drug Administration discussions,
we expect to initiate a Phase III efficacy trial with pexelizumab in CPB
patients at the earliest possible opportunity. Also in collaboration with
Procter & Gamble, we are currently conducting two additional large Phase II
studies with pexelizumab in acute myocardial infarction or heart attack
patients: one study in patients receiving thrombolytic therapy, a procedure for
dissolving clots that block heart vessels, and the other in patients receiving
angioplasty, a procedure for opening up narrowed or blocked arteries that supply
blood to the heart. In September 2000, the FDA granted Fast Track status for the
development of pexelizumab in CPB.

Our other lead antibody product candidate, 5G1.1, is in clinical
development for the treatment of a variety of chronic autoimmune diseases. We
initiated a Phase II study in lupus nephritis, a kidney disease, and a separate
Phase II study in membranous nephritis, a kidney disease, is ongoing. We
completed a Phase II clinical study in rheumatoid arthritis or RA patients and
we are planning to initiate two Phase IIb RA studies, one of which we expect may
serve as a pivotal study if we obtain strong efficacy and safety results.

In both rheumatoid arthritis and membranous nephritis, enrollment has
commenced in additional 12-month open-label extension studies to test long-term
safety. In addition, we have two separate on-going early stage clinical programs
to study 5G1.1 in patients with dermatomyositis, a muscle disorder, and bullous
pemphigoid, a severe inflammatory skin disorder. In October 2000, the FDA
granted us Orphan Drug status for the development of 5G1.1 for the treatment of
dermatomyositis. We recently completed a Phase I pilot safety trial of 5G1.1 in
psoriasis patients.

To date, we have not received any revenues from the sale of products. We
have incurred operating losses since our inception. As of July 31, 2001 we had
an accumulated deficit of $124.3 million. We expect to incur substantial and
increasing operating loses for the next several years due to expenses associated
with:

. product research and development;

. pre-clinical studies and clinical testing;

. regulatory activities;

. manufacturing development, scale-up and commercial manufacturing;
and

-28-

. developing a sales and marketing force.

In September 2000, we acquired Prolifaron, Inc. a privately held
biopharmaceutical company located in San Diego, California, through the issuance
of common stock and fully vested options having an aggregate fair value of
approximately $43.9 million at the date of acquisition. Prolifaron was
developing therapeutic antibodies addressing multiple diseases, including
cancer. The acquisition was in the form of a merger between our new wholly owned
subsidiary of Alexion to form Alexion Antibody Technologies, Inc., and
Prolifaron. We accounted for the acquisition of Prolifaron using the purchase
method of accounting. Through AAT0, we have developed important additional
capabilities to discover and develop additional antibody product candidates for
the treatment of inflammatory diseases and cancer.

In October 2000, we contributed technology to help form a new company,
Arradial Inc., which is aimed at commercializing our novel, desktop
silicon-based microarray assay technology. The technology is expected to have
applications in genomics and drug discovery. We are a minority shareholder of
Arradial, Inc.

We plan to develop and commercialize on our own those product
candidates for which the clinical trials and marketing requirements can be
funded by our own resources. For those products which require greater resources,
our strategy is to form corporate partnerships with major pharmaceutical
companies for product development and commercialization.

Results of Operations

Fiscal Years Ended July 31, 2001, 2000, and 1999

We earned contract research revenues of $11.8 million, $21.4 million, and
$18.8 million for the fiscal years ended July 31, 2001, 2000, and 1999,
respectively. The decrease in revenues in fiscal year 2001 as compared to 2000
was primarily due to lower contract research revenues resulting from the
completion of the Phase II pexelizumab CPB study related to our collaborative
research and development agreement with Procter & Gamble. The increase in
revenues in fiscal year 2000 as compared to 1999 was primarily due to the
increased contract revenues from our collaborative research and development
agreement with Procter & Gamble.

During fiscal year 2001, we incurred research and development expenses of
$38.9 million, excluding non-cash charges related to our acquisition of
Prolifaron. These non-cash charges included the in-process research and
development charge of $21 million and the amortization of goodwill or purchased
intangibles of $2.9 million. For fiscal years 2000 and 1999, we incurred
research and development expenses of $40.2 million and $23.7 million,
respectively. The decrease in research and development expenses for fiscal 2001
as compared to 2000 was primarily attributable to lower clinical manufacturing
and clinical trial costs associated with the completion of the Phase II
pexelizumab CPB study. These lower costs were offset by increased costs from
clinical trials, manufacturing development, and manufacturing of our other lead
C5 Inhibitor product candidate, 5G1.1, and the consolidated on-going research
and development costs of AAT which was formed through the September 2000
acquisition of Prolifaron. The increase in research and development costs for
fiscal 2000 as compared to 1999 was primarily attributable to the on-going
clinical trials of our lead C5 Inhibitor product candidates and the cost of
manufacturing development and manufacturing of our C5 Inhibitors for our
clinical trials.

Our general and administrative expenses were $7.1 million, $4.2 million and
$3.0 million for fiscal years 2001, 2000, and 1999, respectively. The increase
in general and administrative expenses in fiscal 2001 as compared to 2000 was
principally due to increased personnel and professional fees as well as higher
facilities expenses resulting from our relocation and expansion of our
operations to support its growth, including our acquisition of Prolifaron. The
increase in fiscal 2000 as compared to 1999 was principally due to higher
payroll-related costs, as well as higher facilities expenses related to
increased rent expense and professional fees related to public relations and
patent/legal costs.

-29-

Total operating expenses were substantially higher in the twelve months
ended July 31, 2001 due principally to the one-time non-cash in-process research
and development charge of $21.0 million and the non-cash amortization of
goodwill of $2.9 million resulting from the September 2000 acquisition of
Prolifaron.

Other income, net, was $10.1 million, $2.7 million, and $1.5 million
for fiscal years 2001, 2000, and 1999, respectively. The increase in fiscal year
2001 as compared to 2000 was due to increased interest income from higher cash
balances resulting from the $208.5 million of net proceeds received from the
sale of common stock in November 2000. The increase in other income, net, for
fiscal 2000 as compare to 1999 was due to increased interest income from higher
cash balances resulting from the net proceeds obtained from the issuance of $120
million of subordinated convertible notes in March 2000.

During fiscal year 2001, we recorded a $9.1 million non-cash charge
that is related to the cumulative change in accounting principle per the
adoption of Staff Accounting Bulletin No. 101 or SAB 101. We were required to
adopt SAB 101 no later than July 31, 2001. We elected to adopt SAB 101 in the
quarter ended April 30, 2001 and recognized the non-cash cumulative effect
adjustment of $9.1 million as of August 1, 2000.

As a result of the above factors, we incurred net losses of $57.0
million, $20.2 million, and $6.4 million for fiscal years ended July 31, 2001,
2000, and 1999, respectively. Shown below are our statements of operations for
fiscal years ended 2001, 2000, and 1999. Excluding the impact of the non-cash
charges resulting from our acquisition of Prolifaron, we incurred a pro forma
net loss of $24.0 million for the fiscal year ended July 31, 2001.

Twelve months ended July 31,
(amounts in 000s, except per share data) -----------------------------------------------------
2001 2001 2000 1999
---- ---- ---- ----
pro forma -a)

Contract Research Revenues $ 11,805 $ 11,805 $ 21,441 $18,754
-------- -------- -------- -------
Operating Expenses:
Research and development 38,871 38,871 40,187 23,710
General and administrative 7,135 7,135 4,175 2,953
In-process research & development (IPRD) - 21,000 - -
Amortization of goodwill (GW) - 2,901 - -
-------- -------- -------- -------
Total operating expenses 46,006 69,907 44,362 26,663
-------- -------- -------- -------
Operating Loss (34,201) (58,102) (22,921) (7,909)

Other Income, net 10,177 10,177 2,694 1,514
-------- -------- -------- -------
Loss before cumulative effect of SAB 101 (24,024) (47,925) (20,227) (6,395)
Cumulative effect of adoption of SAB 101 - (9,118) - -
-------- -------- -------- -------
Net Loss $(24,024) $(57,043) $(20,227) $(6,395)
======== ======== ======== =======

Net Loss per share $ (1.38) $ (3.28) $ (1.45) $ (0.57)
======== ======== ======== =======

(a - excludes non-cash IPRD, Amortization of GW, and Cumulative effect
of adoption of SAB 101

Liquidity and Capital Resources

-30-

Since our inception in January 1992, we have financed our operations and
capital expenditures principally through private placements of our common and
preferred stock, an initial public offering of our common stock and subsequent
follow-on offerings, convertible subordinated notes, other debt financing,
payments under corporate collaborations and grants, and equipment and leasehold
improvements financing.

In October 2000, we filed a shelf registration statement to offer up to
$300 million of equity securities. On November 1, 2000, we sold 2.3 million
shares of our common stock at a price of $90.75 per share resulting in net
proceeds to us of approximately $208.5 million, net of fees and other expenses
of approximately $201,000 related to the transaction.

In March 2000, we completed a $120 million private placement of our 5.75%
Convertible Subordinated Notes due March 15, 2007. The notes bear interest semi-
annually on September 15 and March 15 of each year, beginning September 15,
2000. The holders may convert all or a portion of the notes into common stock at
any time on or before March 15, 2007 at a conversion price of $106.425 per
share. We incurred issuance costs related to this offering of approximately $4.0
million, which are being amortized into interest expense over the seven-year
term of the notes. In May 2000, pursuant to a registration rights agreement, we
filed a registration statement under the Securities Act of 1933 with the SEC to
register resales of the notes and the shares of common stock into which the
notes are convertible.

In November 1999, we sold 3.415 million shares of common stock at a price
of $14.00 per share in a follow-on public offering, resulting in net proceeds to
us of approximately $44.4 million.

In February 1999, we acquired the manufacturing assets, principally land,
buildings and laboratory equipment, for the xenotransplantation program
developed by US Surgical. We financed the purchase of the manufacturing assets
through a $3.9 million term note payable to US Surgical. Interest is 6.0% per
annum and is payable quarterly. The principal balance under the note is due in
May 2005. Security for this term note is the manufacturing assets that we
purchased.

As of July 31, 2001, our cash, cash equivalents, and marketable securities
totaled $355.3 million. At July 31, 2001, our cash and cash equivalents
consisted of $135.2 million that we hold in short-term highly liquid investments
with original maturities of less than three months. The increase in cash, cash
equivalents and marketable securities as compared to July 31, 2000 was due to
the increase in available cash resulting from our follow-on public offering of
our common stock in November 2000. As of July 31, 2001, we have invested $20.0
million in property and equipment to support our research and development
efforts. We anticipate our research and development expense will increase
significantly for the foreseeable future to support our clinical and
manufacturing development of our product candidates.

We lease our headquarters and research and development facility in
Cheshire, Connecticut that we relocated to in November 2000. The lease has a
term of ten years and six months. At this site, we lease a total of 82,000
square feet of space, which includes approximately 62,000 square feet related to
research and laboratories. We have incurred initial leasehold improvements
aggregating approximately $4.8 million. In addition, we are paying a pro rata
percentage of real estate taxes and operating expenses. Our pilot manufacturing
plant, which may be used for producing compounds for some of our current and
anticipated clinical trials, is expected to remain in New Haven, Connecticut and
encompasses approximately 30,000 square feet of labs and offices. We are
currently negotiating a longer-term arrangement for the facilities in New Haven,
Connecticut. We believe our new space and our pilot manufacturing facility will
be adequate for our current ongoing activities. Alexion Antibody Technologies,
Inc., our wholly-owned subsidiary, leases approximately 7,500 square feet of
labs and office space in San Diego, California.

Procter & Gamble has agreed to fund clinical development and manufacturing
of pexelizumab, initially for use in cardiopulmonary bypass surgery, myocardial
infarction and angioplasty. The Procter & Gamble collaboration does not involve
any of our other product candidates.

We anticipate that our existing available capital resources together with
the anticipated funding from our

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collaboration agreement with Procter and Gamble, as well as the addition of our
interest and investment income earned on available cash and marketable
securities should provide us adequate resources to fund our operating expenses
and capital requirements as currently planned for at least the next thirty-six
months. Our future capital requirements will depend on many factors, including:

. progress of our research and development programs;

. progress and results of clinical trials;

. time and costs involved in obtaining regulatory approvals;

. costs involved in obtaining and enforcing patents and any nec