HUMAN GENOME SCIENCES INC - 10-K Annual Report

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

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 the 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The number of shares of the registrant’s common stock outstanding on January 31, 2003 was 128,863,098. As of June 28, 2002, the aggregate market value of the common stock held by non-affiliates of the registrant based on the closing price reported on the National Association of Securities Dealers Automated Quotations System was approximately $1,145,139,250.*

Portions of Human Genome Sciences, Inc.’s Notice of Annual Stockholder’s Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report.

Excludes 43,167,652 shares of common stock deemed to be held by officers and directors and stockholders whose ownership exceeds five percent of the shares outstanding at June 28, 2002. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

This annual report on Form 10-K contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, that involve risks and uncertainties. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in the section titled “Factors That May Affect Our Business,” Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. We urge you to review and consider the various disclosures made by us in this report, and those detailed from time to time in our filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our future results.

Human Genome Sciences is dedicated to discovery for health. Our goal is to build a global bio-pharmaceutical company that discovers, develops, manufactures and markets gene-based drugs to treat and cure disease. The success of our drug discovery efforts derives from our expertise in genomics, the systematic collection and understanding of human genes and their functions, and from our exclusive focus on developing human protein and antibody drugs. We focus our internal product development efforts on novel human protein and antibody drugs discovered through genomics-based research, and on new improved long-acting versions of existing protein drugs created using our albumin fusion technology. We use collaborations for the development of gene therapy products, small molecule drugs, and diagnostic products discovered using our genomics-based technology.

We are conducting clinical trials with eight of our products. Four additional products are in clinical trials by companies with which we are collaborating. The number of new drugs we have in advanced preclinical studies continues to grow.

We have developed and continue to enhance the human resource and physical infrastructure necessary to achieve our goal of becoming a fully integrated global biopharmaceutical company, including:


	•	Extensive genomics and informatics capabilities;

	•	A significant and growing patent estate to protect our genomic discoveries, proprietary technologies and product pipeline;

	•	Significant expertise in the discovery of novel protein and antibody drug candidates;

	•	Protein formulation technology, including the albumin fusion technology we use to create long-acting protein drugs;

	•	The clinical and regulatory capabilities necessary to design and implement clinical trials of our own drugs; and

	•	Specialized manufacturing facilities designed for the production of protein and antibody drugs for preclinical studies and clinical trials.

We are expanding our manufacturing facilities to allow us to produce larger quantities and larger numbers of protein and antibody drugs for clinical development. We are also in the design phase of a large-scale manufacturing facility to support our increasing needs for protein and antibody drug production capacity related to the continuing progress of our product candidates and, eventually, the initial commercialization of our products in North America. We may add sales and marketing staff as our products approach commercialization.

We have strategic partnerships with a number of leading pharmaceutical and biotechnology companies to leverage our strengths and to gain access to complementary technologies and sales and marketing infrastructure. Some of these partnerships have provided us with research funding and milestone payments, along with royalty payments as products are developed and commercialized. We also are entitled to certain co-promotion, co-development, revenue sharing and other product rights.

Our goal is to build a global biopharmaceutical company that discovers, develops, manufactures and markets gene-based drugs to treat and cure disease. A central element of our scientific and business strategy is our focus on protein and antibody drugs. Our strategy consists of the following key elements:


	•	Concentrate on new protein and antibody drugs and on long-acting versions of existing protein drugs. We intend to concentrate our internal product development efforts on novel human protein and antibody drugs and on new improved long-acting versions of existing protein drugs created using our albumin fusion technology. Novel human protein and antibody drugs derived from our gene discoveries account for the majority of our current product pipeline.

	•	Discover and expand our understanding of medically useful genes. We have created a set of integrated skills that allow us to discover new genes and to understand their natural function. We test the effects of the proteins encoded by these genes on human cells whose behavior we wish to change for medical benefit. Proteins selected for further study are made and purified, then subjected to continued evaluation.

	•	Develop, manufacture and commercialize our gene-based products on our own and with our strategic partners. Most of the new drugs we intend to develop are designed to meet unmet medical needs representing significant markets. We intend to select a limited number of the products in our current pipeline to develop, manufacture and market ourselves. Our goal is to co-develop and co-market a number of our products with partners. We also intend to license certain products to strategic partners in exchange for upfront payments, product milestone payments, royalties on sales, and other rights.

	•	Expand our technology platform to accelerate our product development activities. We will continue to invest resources to expand and enhance our technology platform. We also may establish collaborations with leading biotechnology companies to gain access to complementary technologies for our product development efforts.

	•	Pursue strategic acquisitions. We may pursue strategic acquisitions to augment our capabilities, to provide access to complementary technologies, and to expand our portfolio of new drug candidates in therapeutic categories we have identified as strategic areas of concentration.

	•	Capitalize on and expand our intellectual property portfolio. We pursue patents to protect our intellectual property and have developed a significant intellectual property portfolio. We intend to capitalize on and expand our portfolio as we make further discoveries. As of March 3, 2003, we had 301 issued U.S. patents covering genes, proteins and antibodies, and had filed U.S. patent applications covering many more human genes, the proteins they encode, antibodies, and proprietary technologies.

We have discovered a large number of medically useful genes. Five of the eight novel drugs that we have entered in clinical trials are derived from genomics-based research, including three therapeutic proteins and two human monoclonal antibodies. Our other three drugs in clinical trials are albumin fusion proteins – novel long-acting forms of existing therapeutic proteins that we have modified to improve their pharmacological properties by using our albumin fusion technology. Our therapeutic proteins currently in clinical development are repifermin (KGF-2), BLyS™ (B-lymphocyte stimulator), and LymphoRad^{TM 131} (radioiodinated BLyS). Repifermin is in Phase 2b clinical trials for the treatment of chronic venous ulcers, and in Phase 2 clinical trials for the treatment of chemotherapy-induced mucositis. We have completed a Phase 1 clinical trial of

BLyS in patients with common variable immunodeficiency (CVID). The results demonstrate that BLyS is safe and well tolerated. BLyS also is the subject of an ongoing Phase 1 clinical trial in patients with immunoglobulin-A (IgA) deficiency. LymphoRad¹³¹ is in Phase 1 clinical trials for the treatment of B-cell tumors such as multiple myeloma. Our two antibodies in clinical development are LymphoStat-B™ and TRAIL-R1 agonistic human monoclonal antibody (TRAIL-R1 mAb). LymphoStat-B is in clinical development for the treatment of autoimmune diseases such as lupus and rheumatoid arthritis, and is the subject of a Phase 1 study in patients with systemic lupus erythematosus. TRAIL-R1 mAb is in Phase 1 clinical trials for the treatment of certain solid tumors and tumors of hematopoietic origin. Our three albumin fusion proteins in clinical development are Albuferon™-alpha (albumin-interferon alpha), Albutropin™ (albumin-human growth hormone) and Albuleukin™ (albumin-interleukin-2). We have completed a Phase 1 clinical trial of Albuferon-alpha in patients with hepatitis C. Results show that Albuferon-alpha is well tolerated, has a prolonged half-life, and is biologically active. We are continuing to evaluate Albuferon-alpha’s safety, tolerability and pharmacology at higher doses under an amended protocol designed to seek the maximum biological response that can be achieved at a tolerable dose. We have completed a Phase 1 clinical trial of Albutropin in adults with growth hormone deficiency. The results are positive and support initiation of Phase 2 clinical trials of Albutropin in the first half of 2003. Albuleukin is the subject of ongoing Phase 1 clinical studies in patients with solid tumors.

Our partners have advanced four additional products derived from our technology to clinical development. GlaxoSmithKline (GSK) has entered three small-molecule drugs into clinical development that were discovered by GSK using our technology. 480848, an Lp-PLA2 inhibitor, is in Phase 2 clinical trials for the control and treatment of cardiovascular disease. Lp-PLA2 (lipoprotein-associated phospholipase A2) has been identified as a significant risk factor for heart disease. A second Lp-PLA2 inhibitor, 659032, is in Phase 1 clinical trials in patients with cardiovascular disease. 462795 is in Phase 1 clinical trials for the treatment of patients with osteoporosis. 462795 inhibits the activity of cathepsin K, an enzyme that appears to be implicated in osteoporosis and certain other disorders causing bone degradation. We licensed VEGF-2, a gene that we discovered and characterized, to Corautus Genetics, Inc. for use in gene therapy. Corautus was formed in February 2003 from the merger of Vascular Genetics, Inc. and GenStar Therapeutics Corporation. Corautus has completed Phase 1/2 clinical trials of VEGF-2 for the treatment of coronary artery disease and critical limb ischemia. A clinical hold that the FDA had placed on VEGF-2 gene therapy has been removed, and Corautus has said that it expects to seek FDA clearance to begin Phase 2b/3 clinical trials of VEGF-2 in 2003.

We also have a rapidly evolving pipeline of additional products in discovery and preclinical drug development to treat diseases such as cancer, HIV/AIDS, diabetes, osteoporosis, and other debilitating and life-threatening diseases.

Human Genome Sciences is conducting clinical trials of eight drugs to treat diseases including cancer, lupus, hepatitis C, growth hormone deficiency, chronic venous ulcers, and immunodeficiencies. Our partners are conducting clinical trials of four additional drugs to treat cardiovascular disease and osteoporosis. Our internal research and development efforts are focused on novel protein and antibody drugs discovered through genomics-based research, and on new improved long-acting versions of existing drugs created using our albumin fusion technology.

BLyS is a novel human protein discovered by Human Genome Sciences. BLyS stimulates immune system cells called B cells to mature into plasma B cells, which produce antibodies. Plasma B cells and the antibodies they produce constitute a critical part of the body’s defense against infections and cancer. We are currently developing BLyS as a potential treatment for patients with immunodeficiencies.

In 2002, we completed a Phase 1 clinical trial to evaluate the safety and pharmacology of BLyS in patients with common variable immunodeficiency, a group of immunodeficiency syndromes in which B cell immunity is abnormal. Results from this trial show that BLyS is safe and well tolerated. BLyS also is the subject of an ongoing Phase 1 clinical trial to evaluate its potential as a treatment for an immune disorder known as immunoglobulin-A (IgA) deficiency. The Phase 1 study in IgA deficiency continues to enroll patients.

In 2001, BLyS received an “orphan” drug designation from the FDA for the treatment of common variable immunodeficiency.

LymphoRad¹³¹ is a radioiodinated form of B-lymphocyte stimulator (BLyS), a novel human protein discovered by Human Genome Sciences. Preclinical studies show that LymphoRad¹³¹ binds to receptors found exclusively on B cells and B-cell tumors, and delivers low doses of radiation that cause cell death.

We are developing LymphoRad¹³¹ as a potential treatment for certain B-cell cancers, including multiple myeloma and non-Hodgkin’s lymphoma. Preclinical studies of LymphoRad in animal models of multiple myeloma and non-Hodgkin’s lymphomas show that LymphoRad rapidly and specifically targets lymphoid tissues and B-cell tumors following intravenous injection. Such studies demonstrate inhibition of tumor growth and prolonged survival.

In 2002, Human Genome Sciences initiated Phase 1 clinical trials of LymphoRad¹³¹ to evaluate its safety and pharmacology. The first trial is in patients with multiple myeloma. Enrollment is expected to continue throughout 2003 and into 2004.

Repifermin is a novel human protein discovered by Human Genome Sciences that stimulates the repair of injured skin and mucosal tissues. We are developing repifermin as a potential treatment for chronic venous ulcers and cancer therapy-induced mucositis.

Results from a Phase 2a clinical trial of repifermin in patients with chronic venous ulcers demonstrated that repifermin is well tolerated and capable of accelerating wound healing. In 2002, we completed enrollment of 352 randomized patients into a double-blind placebo-controlled Phase 2b clinical trial of topically administered repifermin for the treatment of chronic venous ulcers. We expect to complete the treatment and follow-up phase of the Phase 2b protocol and to have results available before the end of 2003. Decisions regarding the appropriate design of a pivotal Phase 3 trial will be made following analysis of data from the Phase 2b trial.

Human Genome Sciences also is conducting ongoing Phase 2 clinical trials to evaluate the safety, optimal dosing and preliminary efficacy of intravenously administered repifermin for the treatment of cancer therapy-induced mucositis.

Our partner, GlaxoSmithKline, has exercised its option to develop and commercialize repifermin jointly with Human Genome Sciences. We expect to share equally in clinical development costs for Phase 3 clinical trials and beyond.

LymphoStat-B is the first antibody drug to emerge from our human antibody drug discovery program. LymphoStat-B is a fully human monoclonal antibody designed to inhibit the biological activity of B-lymphocyte stimulator, or BLyS. Preclinical studies indicate that higher than normal levels of BLyS may trigger autoimmune diseases by stimulating production of autoantibodies — antibodies that attack and destroy the body’s own healthy tissues. Over-production of autoantibodies may be counteracted by reducing BLyS

In 2002, we completed patient enrollment in a Phase 1 clinical trial to evaluate the safety and pharmacology of LymphoStat-B in patients with systemic lupus erythematosus. We are in the process of completing the treatment and follow-up phase of the protocol and expect to have results available in the first half of 2003.

TRAIL Receptor-1 agonistic human monoclonal antibody (TRAIL-R1 mAb) is a novel anticancer drug that specifically recognizes and binds to the TRAIL (tumor necrosis factor-related apoptosis-inducing ligand) Receptor-1 protein. This protein was discovered by Human Genome Sciences and is found on the surface of a number of solid tumor and hematopoietic cancer cells.

Preclinical studies demonstrate that solid tumors and tumors of hematopoietic origin are sensitive to killing by apoptosis, or programmed cell death, induced by binding to TRAIL or to TRAIL-R1 mAb. Because TRAIL-R1 mAb mimics the activity of native TRAIL when it binds to TRAIL Receptor 1, it is considered an agonistic antibody.

We initiated a Phase 1 clinical trial in 2002 to evaluate the safety and pharmacology of TRAIL-R1 mAb in patients with advanced tumors. This trial is currently enrolling patients.

Albuferon-alpha is a novel long-acting form of interferon alpha. Recombinant interferon alpha is approved for the treatment of hepatitis C, hepatitis B, and a broad range of cancers. Human Genome Sciences modified interferon alpha to improve its pharmacological properties by using the Company’s albumin fusion technology. We are developing Albuferon-alpha as a potential treatment for chronic hepatitis C. Albuferon-alpha may provide patients with similar or improved efficacy and safety compared to either recombinant interferon alpha or pegylated interferon, with a potentially more convenient administration schedule compared to currently available treatments.

In 2002, we completed a Phase 1 clinical trial of Albuferon-alpha designed to determine the safety, tolerability and pharmacology of Albuferon-alpha in adults with chronic hepatitis C who have failed previous interferon alpha treatments. Results demonstrate that Albuferon-alpha is well tolerated, has a prolonged half-life, and is biologically active. We are continuing to evaluate Albuferon-alpha’s safety, tolerability, and pharmacology at higher doses, in single-dose and repeat-dose cohorts, under an amended protocol designed to seek the maximum biological response that can be achieved at a tolerable dose.

Albuleukin is a novel long-acting form of interleukin-2, a drug approved for cancer treatment. Human Genome Sciences modified interleukin-2 to improve its pharmacological properties by using the Company’s albumin fusion technology. We are developing Albuleukin as a potential treatment for a broad range of cancers. Albuleukin may provide patients with a long-acting therapeutic option that may offer less frequent dosing and an improved side effect profile.

Preclinical studies in mice demonstrate that Albuleukin has an improved ability to mediate a potent anti-tumor response, with less frequent dosing and less administered drug, compared with recombinant interleukin-2. The data also show improved survival outcomes for Albuleukin.

In 2002, we initiated a Phase 1 clinical trial to evaluate the safety and pharmacology of Albuleukin in patients with solid tumors. This trial is currently enrolling patients.

Albutropin is a novel long-acting form of human growth hormone. Recombinant human growth hormone is approved for the treatment of growth hormone deficiency in adults, and for the treatment of growth retardation due to growth hormone deficiency in children. Human Genome Sciences modified human growth hormone to improve its pharmacological properties by using the Company’s albumin fusion technology. We are developing Albutropin as a potential treatment for growth hormone deficiency in adults, and for growth retardation due to growth hormone deficiency in children. Albutropin may provide patients with a long-acting treatment option that has efficacy and safety similar to that of currently available treatments, but with fewer injections, less discomfort, and better compliance.

In 2002, we completed a Phase 1 trial evaluating the safety, tolerability and pharmacology of Albutropin in adults with growth hormone deficiency. Results demonstrate that Albutropin is biologically active and well tolerated. Albutropin remains in the blood substantially longer than is reported for recombinant native human growth hormone. The positive results support advancing Albutropin into the next phase of clinical development. During 2003, we plan to initiate a Phase 2 trial of Albutropin in adults with growth hormone deficiency and a Phase 1/2 trial of Albutropin in children with growth retardation due to growth hormone deficiency.

The first genomics-derived small molecule drug to enter clinical trials was discovered by our partner, GlaxoSmithKline, using Human Genome Sciences’ technology. The drug is an inhibitor of Lipoprotein-associated phospholipase A2 (Lp-PLA2). Lp-PLA2 is an enzyme associated with the formation of atherosclerotic plaques.

Under the terms of an agreement signed in 1993, Human Genome Sciences is entitled to receive clinical development milestone payments and royalties for compounds discovered by GlaxoSmithKline through the use of Human Genome Sciences’ technology and intellectual property. In September 2001, we received a $1.0 million milestone payment from GlaxoSmithKline in connection with the initiation of Phase 1 clinical trials of 480848 to investigate its potential use in the treatment of cardiovascular disease. We are entitled to receive an additional milestone payment if 480848 moves through clinical development into registration and will receive royalties if the compound is successfully commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

659032 is a second small molecule inhibitor of Lp-PLA2. Our partner, GlaxoSmithKline, discovered 659032 using Human Genome Sciences’ technology. In early 2003, GlaxoSmithKline initiated Phase 1 clinical trials to evaluate 659032 for the control and treatment of cardiovascular disease.

Pursuant to the terms of the 1993 agreement noted above, Human Genome Sciences received a $1.0 million milestone payment from GlaxoSmithKline in February 2003, in connection with the initiation of clinical trials of 659032. We are entitled to receive an additional milestone payment if 659032 moves through clinical development into registration and will receive royalties if the compound is successfully commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

In 2002, GlaxoSmithKline initiated clinical trials of 462795 to evaluate its potential use in the treatment of patients with osteoporosis. 462795 is a genomics-derived small-molecule compound that inhibits the activity of cathepsin K, an enzyme that appears to be implicated in osteoporosis and certain other disorders causing bone degradation. 462795 was discovered by GlaxoSmithKline using Human Genome Sciences’ technology.

Under the terms of the 1993 agreement, Human Genome Sciences received a $1.0 million milestone payment from GlaxoSmithKline in 2002, in connection with the initiation of clinical trials of 462795. We are entitled to receive an additional milestone payment if 462795 moves through clinical development into registration and will receive royalties if the compound is successfully commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

VEGF-2 is a novel gene that was discovered and characterized by Human Genome Sciences. The VEGF-2 gene encodes the VEGF-2 protein, which scientists believe signals the body to grow new blood vessels. We licensed VEGF-2 to Corautus for use in the field of gene therapy. Corautus was formed in February 2003 from the merger of Vascular Genetics and GenStar Therapeutics. As of December 31, 2002, we owned approximately 29% of Vascular Genetics and, as of February 5, 2003, we owned approximately 18% of Corautus. VEGF-2 gene therapy is being developed for the treatment of critical limb ischemia and refractory coronary artery disease.

Corautus has completed Phase 1/2 clinical trials of VEGF-2 for the treatment of coronary artery disease and critical limb ischemia. A clinical hold that the FDA had placed on VEGF-2 gene therapy has been removed, and Corautus has said that it expects to seek FDA clearance to begin Phase 2b/3 clinical trials of VEGF-2 in 2003. Human Genome Sciences is entitled to receive up to a 10% royalty on net sales of any product brought to market by Corautus that is based on the VEGF-2 gene.

Human Genome Sciences has a pipeline of compounds in internal preclinical development, including novel human protein and antibody drugs discovered through genomics-based research, and new improved long-acting versions of existing proteins created using our albumin fusion technology. Our preclinical candidates fall into several therapeutic areas, including oncology, immunology, endocrinology/metabolism, and infectious disease.

In addition, we have initiated a number of research programs related to biodefense, in which we are using our protein and antibody drug development capabilities to develop therapeutic candidates to address microbial targets including anthrax and other infectious agents. In March 2003, we announced that we have developed a human monoclonal antibody drug called ABthrax™ that is effective in protecting against anthrax in multiple animal models. ABthrax specifically recognizes and neutralizes Bacillus anthracis protective antigen, a central component of the anthrax toxins that contribute collectively to the pathogenesis of anthrax infection. We plan to develop ABthrax for use as a prophylactic and therapeutic drug to prevent and treat anthrax infection.

Human Genome Sciences has developed core competencies in the discovery and understanding of human genes and their biological functions, and in the discovery and development of human protein and antibody drugs. We focus our internal research and development efforts on novel human protein and antibody drugs discovered through genomics-based research, and on new improved long-acting versions of existing protein drugs created using our albumin fusion technology.

We have created a set of skills that allow us to discover new genes and to understand their natural function. We have isolated a large collection of human genes in their useful messenger RNA form. A gene in the form of messenger RNA can be used to make one protein that carries out a specific function in the human body. We have developed methods to make small quantities of proteins. We have developed automated systems to analyze the effects of these proteins on human cells and tissues.

Collectively, these new methods make up our Functional Proteomics Program. Our Functional Proteomics Program begins with a large set of human genes. From these we select a set of genes that produce proteins that we predict should be located on the outside of human cells. Such proteins are called secreted proteins. We test the effects of the secreted proteins by placing each of them on an individual culture of a human cell whose behavior we wish to change for medical benefit. In the course of these experiments, we monitor many parameters of change in each cell culture at intervals. We have developed an informatics system to store and integrate the biological data points that result from these experiments. Proteins selected for further study are made and purified, then subjected to preclinical evaluation.

Proteins may be useful as drugs themselves, or they may be useful as targets for other therapeutic approaches such as human antibodies or small molecule drugs. Some proteins are located partly in and partly on the surface of the cell. Many such proteins function as receptors for biological signals. Antibody drugs that block receptors or that trigger receptors to respond to artificial signals can have significant biological effects.

We have acquired rights to a variety of human antibody technologies. We use our own set of antibody targets arising from our collection of human secreted proteins. We have integrated these technologies into our internal research and development program. In addition, we have designed and leased manufacturing facilities that allow us to make human monoclonal antibodies for clinical trials. We also continue to collaborate with a number of leading antibody companies.

Many medical conditions are the result of an excess of a specific protein in the body. Some antibody drugs can inactivate such proteins and bring therapeutic benefits to patients. Such drugs are known as antagonistic antibodies. For example, LymphoStat-B, which is currently in Phase 1 trials for the treatment of autoimmune diseases such as lupus and rheumatoid arthritis, is an antagonistic human monoclonal antibody. All currently marketed antibody drugs are antagonistic antibodies. In recent years, a number of antagonistic antibody drugs have been approved for sale and have been highly successful.

In certain medical conditions, it may be desirable to stimulate artificially a specific biological activity. For example, a great deal of scientific work is currently focused on the study of apoptosis, or programmed cell death. If scientists can discover a way to promote the death of cancer cells while causing minimal or no damage to normal cells, it might constitute significant progress in cancer therapy. Human Genome Sciences has one such drug in clinical trials – the TRAIL-R1 mAb. TRAIL-R1 mAb is currently in Phase 1 clinical trials for the treatment of certain solid tumors and tumors of hematopoietic origin. TRAIL-R1 mAb recognizes the TRAIL Receptor-1 protein. Binding of TRAIL-R1 mAb to TRAIL Receptor-1 triggers cell death. TRAIL-R1 mAb is an agonistic human monoclonal antibody that mimics the cancer-killing activity of the natural TRAIL ligand. We believe that TRAIL-R1 mAb is the first human agonistic antibody to enter clinical trials.

Our albumin fusion technology allows us to create long-acting forms of protein drugs by fusing the gene that expresses human albumin to the gene that expresses a therapeutically active protein. We are actively pursuing the development of albumin-fusion drugs based on therapeutic proteins already on the market, as well as albumin-fusion versions of therapeutic proteins that we are developing ourselves. For example: Albuferon-alpha results from the genetic fusion of human albumin and human interferon-alpha; Albutropin results from the genetic fusion of human albumin and human growth hormone; and Albuleukin results from the genetic fusion of human albumin and human interleukin-2. Based on preclinical and clinical results to date, we believe that albumin fusion proteins may provide patients with long-acting treatment options that have efficacy and safety similar to or better than that of the existing protein drugs, with the potential additional benefit of considerably more convenient dosage schedules.

Albumin fusion technology also provides for efficient manufacture and purification of the product in our existing facilities. Creation of albumin fusion proteins that meet significant medical need provides Human Genome Sciences with many additional product opportunities. This strategy reduces development risk by

For the past several years, we have concentrated on building drug development and regulatory expertise. We seek to gather, document and analyze clinical trial data in such a way that they can be submitted to regulatory authorities and used to support Biologics License Applications at the appropriate time. We have assembled experienced teams in key strategic areas of development, including:


	•	Clinical Research. The clinical research group is responsible for the design, planning and analysis of clinical trials, and matches novel biological molecules emerging from our protein and antibody discovery programs to unmet medical needs. The group includes our biostatistics team.

	•	Clinical Operations. The clinical operations group executes clinical trials and is responsible for managing clinical trial sites and ensuring that all proper procedures are followed during the collection of clinical data. The group includes our data management team.

	•	Project Management. Our project management team oversees the process of development of a drug from the earliest stages of research through the conduct of clinical development and regulatory filings.

	•	Drug Safety. As our products advance in clinical testing, our medical affairs group collects and analyzes information on drug experience and safety, and ensures that accurate medical information is distributed.

	•	Bioanalytical Sciences. The bioanalytical sciences group develops highly specialized assays that are used during monitoring of preclinical tests and clinical trials. Other assays ensure the quality and consistency of our products.

	•	Regulatory Affairs and Clinical Quality Assurance. The regulatory affairs group manages communications with and submissions to regulatory authorities, while the quality assurance group ensures compliance with all regulatory requirements for the clinical development of new products.

Forming strategic alliances with leading pharmaceutical and biotechnology companies is an element of our strategy. We currently have three major types of collaborations:


	•	Human Gene Therapeutic Consortium. Between 1993 and 1997, we entered into major collaborations with GlaxoSmithKline, Takeda, Schering-Plough, Merck KGaA and Sanofi-Synthelabo. We refer to these collaborations collectively as the Human Gene Therapeutic Consortium. The initial research term of these collaborations ended in June 2001, although certain aspects of these arrangements continue. Under these collaborations, we provided our drug discovery capabilities in exchange for access to our partners’ drug development and commercialization expertise as well as research funding and long-term value creation through potential milestone and royalty payments. We also are entitled to certain co-promotion, co-development, revenue sharing and other product rights.

	•	Technology. These are collaborations in which we gain access to our partners’ technology to complement our own drug discovery and development capabilities in exchange for license fees, potential milestone and royalty payments, as well as equity investments.

	•	Microbial. These are collaborations in which we provide other companies with access to gene sequence data for specific microbial organisms in exchange for license fees and royalty payments.

General. We entered into collaboration agreements with GlaxoSmithKline in May 1993, which we amended in June 1996 and July 1997. Under these agreements, we granted GlaxoSmithKline rights to develop and commercialize therapeutic and diagnostic products based on human genes discovered by us in GlaxoSmithKline’s field, which is the field of human and animal health care, including gene therapy vaccines but excluding other gene therapy products, antisense products and the use of genes for synthesizing drugs that were known in May 1993. We and GlaxoSmithKline jointly entered into collaboration agreements with four additional pharmaceutical companies: Takeda, Schering-Plough, Merck KGaA and Sanofi-Synthelabo. These partners, together with GlaxoSmithKline, form our Human Gene Therapeutic Consortium.

Post-Initial Research Term. The initial research term of our Human Gene Therapeutic Consortium expired on June 30, 2001. Our partners have informed us that they have been pursuing a large number of research programs involving many different genes for the creation of small molecule, protein and antibody drugs. We cannot assure you that any of these programs will be continued or result in any approved drugs.

GlaxoSmithKline. We share equally with GlaxoSmithKline any license fees and product-development milestone payments made under our Human Gene Therapeutic Consortium, but we receive all royalty and research support payments under those agreements. We are entitled to receive royalty payments, based on net sales of products developed from any of our patents or technologies that fall within GlaxoSmithKline’s field, for any sales made by GlaxoSmithKline or its licensees. We also are entitled to milestone payments in connection with the development of these products. In 2001, we received a $1.0 million payment from GlaxoSmithKline for 480848 in connection with a development milestone met by GlaxoSmithKline. In 2002, we received a $1.0 million payment from GlaxoSmithKline for 462795 in connection with a development milestone met by GlaxoSmithKline. In February 2003, we received a $1.0 million payment from

GlaxoSmithKline for 659032 in connection with a milestone met by GlaxoSmithKline. We hold an option to co-promote any products sold by GlaxoSmithKline in the U.S., Canada, Mexico and Europe, subject to the rights granted to Takeda and other collaborators. If we develop and market or license to a third party any product in GlaxoSmithKline’s field pursuant to our rights under these agreements, GlaxoSmithKline will usually be entitled to royalty payments from, or to share in milestone payments and license fees we receive with respect to, those products.

Our collaboration agreements with GlaxoSmithKline include an option for GlaxoSmithKline to co-develop and co-commercialize products in GlaxoSmithKline’s field to which we have exclusive development and commercialization rights under our collaboration agreements with GlaxoSmithKline and for which Schering-Plough has not exercised its option. In 2000, GlaxoSmithKline exercised its option to develop and commercialize repifermin jointly. GlaxoSmithKline is also entitled to royalty payments on and an option to co-promote products outside GlaxoSmithKline’s field sold by us which are based on or incorporate patents or information developed by GlaxoSmithKline using our human gene technology.

Takeda. GlaxoSmithKline and Takeda entered into a license agreement relating to the development and sale of products in GlaxoSmithKline’s field based upon rights licensed from us. We are entitled to all royalty payments and one-half of the milestone payments due from Takeda to GlaxoSmithKline under this license agreement on sales of products developed by Takeda. We entered into an option and license agreement with Takeda pursuant to which we granted Takeda an exclusive option to license rights under our patents and technology in the field of human health care, other than gene therapy, antisense and diagnostics, in order to make and sell up to three products in Japan. The option period terminates on June 30, 2004. During 2002, Takeda discontinued development of mirostipen and exercised its option to develop and commercialize TRAIL-R1 mAb in Japan. Takeda has two options remaining.

Schering-Plough. In June 1996, we entered into a collaboration agreement with Schering-Plough. Under this agreement, Schering-Plough has the right to use our human gene technology and biological information developed by us and GlaxoSmithKline to discover, develop and commercialize products. Schering-Plough was also granted an option to co-develop and co-commercialize up to two of our therapeutic protein products to which we have exclusive development and commercialization rights under our agreements with GlaxoSmithKline. This option could also have been exercised with respect to proteins we elect to license to third parties. In 2000, Schering-Plough exercised one of its two options with the selection of a novel interferon discovered by us. We will receive milestones and royalty payments for any product developed from this protein. In 2002, we granted Schering-Plough exclusive rights to two human antigens in lieu of its remaining option to a second therapeutic protein. Schering-Plough is obligated to pay license fees, research payments and milestone payments in connection with the development of products. We also have a collaboration with Schering-Plough related to gene therapy by which Schering-Plough was granted a non-exclusive license to use our human gene technology to conduct research and an option to obtain an exclusive license to specific genes in the field of gene therapy.

Sanofi-Synthelabo. In June 1996, we entered into a collaboration agreement with Sanofi-Synthelabo. Under this agreement, Sanofi-Synthelabo has the right to use our human gene technology and biological information developed by us and GlaxoSmithKline to discover, develop and commercialize products. Sanofi-Synthelabo is obligated to pay license fees, research payments and milestone payments in connection with the development of products.

Merck KGaA. In July 1996, we entered into a collaboration agreement with Merck KGaA. Under this agreement, Merck KGaA has the right to use our human gene technology and biological information developed by us and GlaxoSmithKline to discover, develop and commercialize products. Merck KGaA is obligated to pay license fees, research payments, and milestone payments in connection with the development of products.

Abgenix. In November 1999, we entered into a collaboration and license agreement with Abgenix relating to the field of fully human antibody drug candidates, which was amended in 2001. Pursuant to this agreement, as amended, we licensed technology from Abgenix that we can use to generate fully human antibody drug candidates. We will independently develop and seek to commercialize antibody-based drugs from this collaboration. Abgenix also has an option to develop and commercialize products derived from our antigens. We and Abgenix will pay reciprocal milestone and royalty payments for products developed and commercialized.

Cambridge Antibody Technology (CAT). In August 1999, we entered into an antibody license agreement with CAT for the development of fully human antibody therapeutics for up to three of our target human proteins. Pursuant to this agreement, we have entered into an exclusive license agreement to an anti-BLyS antibody discovered in collaboration with CAT. Under this 1999 agreement, we have paid CAT $2.3 million for one milestone and fees through the end of 2002. In February 2000, we entered into a broader agreement with CAT that provides us with the right to use their technology to develop and sell an unlimited number of fully human antibodies for therapeutic and diagnostic purposes. Under this 2000 agreement, we paid CAT $12.0 million for ten years of committed research support. We also plan to combine our resources to develop and sell a significant number of therapeutic antibody products. CAT has the right to select up to twenty-four of our proprietary antigens for preclinical development. We have the option to share clinical development costs and to share the profits equally with them on up to eighteen such products. CAT has rights to develop six such products on their own. We are entitled to clinical development milestone and royalty payments on those six products. We have exercised our option with respect to TRAIL Receptor 1 and TRAIL Receptor 2. Under the 2000 agreement, we have paid to CAT $3.5 million in milestone payments through the end of 2002.

Dyax. In February 2000, we entered into a license agreement with Dyax relating to Dyax’s phage display and peptide technology, which was amended in 2001. Under the agreement, as amended, we have the right to use Dyax’s phage display technology to develop an unlimited number of therapeutic and diagnostic products that we may sell or outlicense. In 2000, we paid Dyax $6.0 million for the technology license. Through 2002, we have paid $5.7 million for research support. In 2003, we will pay Dyax approximately $0.3 million for committed research support. We will provide milestone and royalty payments to Dyax on products we develop and sell or will share revenue we receive from outlicensees. The licensed technologies include Dyax’s phage display technology to create peptide drugs, human monoclonal antibody drugs and in vitro diagnostic products. In addition, we have the right to require that Dyax perform research in the fields of protein separation and high-throughput screening technology. We also have rights to improvements in Dyax’s phage display technology.

Kirin. In October 2002, we entered into a license agreement with the Pharmaceutical Division of Kirin Brewery Company, Ltd. relating to the development and commercialization of agonistic human antibodies to TRAIL Receptor-2. Under the agreement, we will work together to identify and optimize the best candidate for clinical development. Kirin will develop and commercialize any resulting drug in Japan and Asia/ Australasia. We will develop and commercialize any resulting drug in North America, Europe and the rest of the world.

Medarex. In July 2001, we entered into a collaboration agreement with Medarex relating to the creation of fully human antibodies. Under the agreement, Medarex plans to use its technology to create antibody leads that are specific for target proteins that we discovered. We have the option to exclusively license therapeutic and diagnostic antibody products and Medarex is entitled to receive license fees, milestone payments and royalties on any commercial sales of products resulting from the collaboration.

Transgene. In February 1998, we entered into an agreement with Transgene relating to the field of human gene therapy, including gene therapy vaccines, to the extent that it will not conflict with our other

collaboration agreements. Under this agreement, we granted Transgene the right to license exclusively up to 10 genes. We obtained a 10% equity interest in Transgene and certain co-development and co-marketing rights. Transgene selected two genes from our database, CTGF-2 and TIMP-4, as its first two exclusive gene therapy products. CTGF-2 stimulates the formation of blood vessels and could be an effective tool in the control of coronary artery disease. TIMP-4 prevents restenosis, which is the growth of blood-vessel obstruction following an angioplasty. Our collaboration with Transgene will end in 2008.

Vical. In February 2000, we entered into a license agreement with Vical relating to the field of gene therapy. Under this agreement, we licensed technology from Vical and granted Vical the right to license up to three genes. The agreement provides for reciprocal royalty payments. Our collaboration with Vical will end in 2004.

Corautus. In November 1997, we entered into an agreement with Vascular Genetics, the predecessor to Corautus, whereby we granted an exclusive license in the field of gene therapy for our VEGF-2 gene. As of December 31, 2002, we owned approximately 29% of Vascular Genetics and, as of February 5, 2003, approximately 18% of Corautus.

Dow Chemical. In October 2000, we entered into an agreement with Dow Chemical Company to develop a drug for the treatment of B-cell malignancies. This agreement combines one of Dow’s patented technologies, bifunctional chelation agents (BFCA) with BLyS, one of our protein discoveries. Dow’s BFCA technology is capable of attaching a variety of radioactive metals to BLyS, resulting in a “radioiodinated” version of the protein.

MDS Nordion. In October 2001, we entered into an agreement with MDS Nordion, a unit of MDS Inc., whereby MDS Nordion will radioiodinate proteins for us at a cGMP manufacturing suite at its Ottawa, Canada facility. We will supply MDS Nordion with the targeting protein, BLyS, and MDS Nordion will use a process it developed for us that covalently binds the radioactive isotopes to the BLyS protein.

MedImmune. We entered into a collaboration and license agreement with MedImmune in July 1995, which we amended in March and December 1997. This agreement is related to the development of drugs based upon certain infectious agents sequenced by us or The Institute For Genomic Research (TIGR) or to which we hold licenses. Programs under this agreement include the creation of vaccines and immunotherapeutics for non-encapsulated Haemophilus influenzae, Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori and Borrelia burgdorferi. MedImmune sub-licensed the Streptococcus pneumoniae vaccine technology to GlaxoSmithKline. We are entitled to a portion of the payments received by MedImmune under its sub-license. In 2000, we received $1.0 million from MedImmune.

Pharmacia. In October 1996, we entered into an agreement with Pharmacia in which we granted to Pharmacia a nonexclusive license to conduct research and to make, use and sell products based on genes of Staphylococcus aureus and the pathogenicity islands of Escherichia coli sequenced by us.

We seek U.S. and foreign patent protection for the genes, proteins and antibodies that we discover, as well as patents on therapeutic and diagnostic products and processes, screening and manufacturing technologies, and other inventions based on genes, proteins and antibodies. We also seek patent protection or rely upon trade secret rights to protect certain technologies which may be used to discover and characterize genes, proteins and antibodies and which may be used to develop novel therapeutic and diagnostic products and processes. We believe that, in the aggregate, our patent applications, patents and licenses under patents owned by third parties are of material importance to our operations.

Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the U.S. and other important markets outside the U.S. We expect

that litigation or administrative proceedings will likely be necessary to determine the validity and scope of certain of our and others’ proprietary rights. We are currently involved in a number of administrative proceedings relating to the scope of protection of our patents and those of others. Any such lawsuit or proceeding may result in a significant commitment of resources in the future. In addition, changes in, or different interpretations of, patent laws in the U.S. and other countries may result in patent laws that allow others to use our discoveries or develop and commercialize our products. We cannot assure you that the patents we obtain or the unpatented technology we hold will afford us significant commercial protection.

We have filed U.S. patent applications with respect to many human genes and their corresponding proteins. We have also filed U.S. patent applications with respect to all or portions of the genomes of several infectious and non-infectious microorganisms. As of March 3, 2003, we had 301 U.S. patents covering genes and proteins. Our remaining applications may not result in the issuance of any patents. Our applications may not be sufficient to meet the statutory requirements for patentability in all cases. In certain instances, we will be dependent upon our collaborators to file and prosecute patent applications.

Other companies or institutions have filed, and may in the future file, patent applications which attempt to patent genes similar to those covered in our patent applications, including applications based on our potential products. Any patent application filed by a third party may prevail over our patent applications, in which event the third party may require us to stop pursuing a potential product or to negotiate a royalty arrangement to pursue the potential product.

We also are aware that others, including universities and companies working in the biotechnology and pharmaceutical fields, have filed patent applications and have been granted patents in the U.S. and in other countries that cover subject matter potentially useful or necessary to our business. Some of these patents and patent applications claim only specific products or methods of making products, while others claim more general processes or techniques useful in the discovery and manufacture of a variety of products. The risk of additional patents and patent applications will continue to increase as the biotechnology industry expands. We cannot predict the ultimate scope and validity of existing patents and patents that have been or may be granted to third parties, nor can we predict the extent to which we may wish or be required to obtain licenses to such patents, or the availability and cost of acquiring such licenses. To the extent that licenses are required, the owners of the patents could bring legal actions against us to claim damages or to stop our manufacturing and marketing of the affected products.

Issued patents may not provide commercially meaningful protection against competitors and may not provide us with competitive advantages. Other parties may challenge our patents or design around our issued patents or develop products providing effects similar to our products. In addition, others may discover uses for genes, proteins or antibodies other than those uses covered in our patents, and these other uses may be separately patentable. The holder of a patent covering the use of a gene, protein or antibody for which we have a patent claim could exclude us from selling a product for a use covered by its patent.

We rely on trade secret protection to protect our confidential and proprietary information. We believe we have developed proprietary procedures for making libraries of DNA sequences and genes. We have not sought patent protection for these procedures. We have developed a substantial database concerning genes we have identified. We have taken security measures to protect our data and continue to explore ways to further enhance the security for our data. However, we may not be able to meaningfully protect our trade secrets. While we have entered into confidentiality agreements with employees and academic collaborators, we may not be able to prevent their disclosure of these data or materials. Others may independently develop substantially equivalent information and techniques.

General. We face intense competition from a wide range of pharmaceutical, biotechnology and diagnostic companies, as well as academic and research institutions and government agencies. Some of these competitors have substantially greater financial, marketing, research and development and human resources. Most large pharmaceutical companies have considerably more experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products.


	•	the quality and breadth of an organization’s technology;

	•	the skill of an organization’s employees and its ability to recruit and retain skilled employees;

	•	an organization’s intellectual property estate;

	•	the range of capabilities, from target identification and validation to drug discovery and development to manufacturing and marketing; and

	•	the availability of substantial capital resources to fund discovery, development and commercialization activities.

We believe that the quality and breadth of our technology platform, the skill of our employees and our ability to recruit and retain skilled employees, our patent portfolio, our capabilities for early stage research and drug discovery and our capital resources are competitive strengths. However, many large pharmaceutical and biotechnology companies have significantly larger intellectual property estates than we do, more substantial capital resources than we have, and greater capabilities and experience than we do in preclinical and clinical development, sales, marketing, manufacturing and regulatory affairs.

Products. We are aware of products in research or development by our competitors that address all of the diseases we are targeting. Any of these products may compete with our product candidates. Our competitors may succeed in developing their products before we do, obtaining approvals from the FDA or other regulatory agencies for their products more rapidly than we do, or developing products that are more effective than our products. These products or technologies might render our technology obsolete or noncompetitive. In addition, our fusion protein products are designed to be long-acting versions of existing products. While we believe our fusion protein products will be a more attractive alternative to the existing products, the existing product in many cases has an established market that may make the introduction of our product more difficult. Competition is based primarily on product efficacy, safety, timing and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, price and patent position.

Regulations in the U.S. and other countries have a significant impact on our research, product development and manufacturing activities and will be a significant factor in the marketing of our products. All of our products will require regulatory approval prior to commercialization. In particular, our products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and similar regulatory authorities in other countries. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of our products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect our ability to commercialize our products in a timely manner, or at all.

Preclinical Testing. Before a drug may be marketed in the U.S., it must be the subject of rigorous preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an investigational new drug application, which is reviewed by the FDA before clinical testing in humans can begin.

Clinical Testing. Typically, clinical testing involves a three-phase process, which generally lasts four to seven years, and sometimes longer:


	•	Phase 1 clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism.


	•	Phase 2 clinical trials are conducted with groups of patients afflicted with a specified disease in order to provide enough data to statistically evaluate preliminary efficacy and optimal dosages and to expand evidence of safety.

	•	Phase 3 clinical trials are large-scale, multicenter, comparative trials, which are designed to gather additional information for proper dosage and labeling of the drug and to demonstrate its overall safety and efficacy.

The FDA monitors the progress of each phase of testing, and may require the modification, suspension, or termination of a trial if it is determined to present excessive risks to patients. The clinical trial process may be accompanied by substantial delay and expense and there can be no assurance that the data generated in these studies will ultimately be sufficient for marketing approval by the FDA.

Marketing Approvals. Before a product can be marketed and sold, the results of the preclinical and clinical testing must be submitted to the FDA for approval. This submission will be either a new drug application or a biologic license application, depending on the type of drug. In responding to a new drug application or a biologic license application, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. We cannot assure you that any approval required by the FDA will be obtained on a timely basis, or at all.

In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy. Rigorous and extensive FDA regulation of pharmaceutical products continues after approval, particularly with respect to compliance with current good manufacturing practices, or cGMPs, reporting of adverse effects, advertising, promotion and marketing. Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions, any of which could materially adversely affect our business.

Other Regulation. We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with our research, including radioactive compounds and infectious disease agents. We also cannot accurately predict the extent of regulations that might result from any future legislative or administrative action.

In addition, ethical, social and legal concerns about gene therapy, genetic testing and genetic research could result in additional regulations restricting or prohibiting the processes we or our suppliers may use. Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that our products are unsafe or pose a hazard could prevent us from commercializing our products.

Foreign Regulation. We must obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in those countries. Foreign regulatory systems may be just as rigorous, costly and uncertain as in the U.S.

Possible Pricing Restrictions. The levels of revenues and profitability of biopharmaceutical companies like ours may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the U.S. there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. While we cannot predict whether any legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. In addition, in the U.S. and elsewhere, sales of therapeutic and other pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services. We cannot assure you that any of our products will be considered cost

Raw materials and other supplies required in our business are generally available from various suppliers in quantities adequate to meet our needs. However, we rely on one manufacturer, MDS Nordion of Ottawa, Canada, for all of our current radioiodinating requirements. If we are unable to secure an adequate supply of this product at commercially reasonable rates, our ability to continue with intended clinical trials would be adversely affected.

We are able to manufacture multiple protein and antibody drugs for use in research and clinical activities. We produce and purify these protein and antibody drugs at a 127,000 square foot process development and manufacturing facility. We do not manufacture any products for commercial use and do not have any experience in manufacturing materials suitable for commercial use.

We are actively building our manufacturing organization and facilities with the intent of manufacturing our own commercial materials. Our long-range plan is to establish additional manufacturing capabilities to allow us to meet our commercial manufacturing requirements. We are designing a 290,000 square foot large-scale manufacturing facility to allow for the production of protein and antibody drugs for both clinical and commercial use. This facility is expected to be available for occupancy in 2005. The FDA must inspect and license these facilities to determine compliance with cGMP requirements for commercial production. We may not be able successfully to establish manufacturing capabilities or manufacture our products economically or in compliance with cGMPs and other regulatory requirements. For a description of the financing arrangements for these facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

While we are expanding our manufacturing capabilities, we also may contract with third party manufacturers or develop products with partners and use the partners’ manufacturing capabilities. If we use others to manufacture our products, we will depend on those parties to comply with cGMPs and other regulatory requirements, and to deliver materials on a timely basis. These parties may not perform adequately. Any failures by these third parties may delay our development of products or the submission of these products for regulatory approval.

We do not have any marketed products. We have established a strategic marketing group to analyze the commercial value of our product portfolio and the competitive environment. The strategic marketing group also analyzes patient needs and customer preferences with respect to our product development and planning. If we develop products that can be marketed, we intend to market the products either independently or together with collaborators or strategic partners. GlaxoSmithKline, Schering-Plough and others have co-marketing rights with respect to certain of our products. If we decide to market any products independently, we will incur significant additional expenditures and commit significant additional management resources to establish a sales force. For any products that we market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We may also contract with third parties to market certain of our products. Ultimately, we and our partners may not be successful in marketing our products.

As of March 3, 2003, we had 1,086 full-time employees, of whom 850 were in research and development, including 279 scientists holding doctoral degrees. We anticipate hiring approximately 70 additional employees during the next six months, including process development, manufacturing, and clinical development staff. None of our employees is covered by a collective bargaining agreement and we consider relations with our employees to be good.

There are a number of important factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements. Those factors include, without limitation, those listed below and elsewhere herein.

Because our business strategy is still largely untested, we do not know whether we will be able to commercialize any of our products or to what extent we will generate revenue.

We do not know whether we can implement our business strategy successfully because we are in the early stages of development. We initially set out to find as many genes as possible and are now using that information to develop medical and pharmacological products. We use automated high-speed technology to:


	•	rapidly identify the function of, and obtain proprietary rights to, a substantial number of genes; and

	•	select genes with the greatest potential for the treatment and diagnosis of human disease.

Nobody has tested our strategy. Other companies first target particular diseases and try to find cures for them through gene-based therapies. If our strategy does not result in the development of products that we can sell profitably, we will be unable to generate revenue.

If we are unable to commercialize products, we may not be able to recover our investment in our product development and manufacturing efforts.

We invested significant time and resources to isolate and study genes and determine their functions. We now devote an ever-increasing portion of our resources to identifying and developing proteins, antibodies and other compounds for the treatment of human disease. We are also devoting substantial resources to the establishment of our own manufacturing capabilities, both to support clinical testing and eventual commercialization. We have made and are continuing to make substantial expenditures and have hired and are continuing to hire additional personnel to foster these activities. Before we can commercialize a product, we must rigorously test the product in the laboratory and complete extensive human studies. We cannot assure you that expenses for testing and study will yield profitable products or even products approved for marketing by the FDA. We will incur additional costs to continue these activities. If we are not successful in commercializing products, we may be unable to recover the large investment we have made in research, development and manufacturing.

Because our product development efforts depend on new and rapidly-evolving technologies, we do not know whether our efforts will be successful.

To date, companies have developed and commercialized relatively few gene-based products. Our work depends on new, rapidly evolving technologies and on the marketability and profitability of innovative products. Commercialization involves risks of failure inherent in the development of products based on innovative technologies and the risks associated with drug development generally. These risks include the possibility that:


	•	these technologies or any or all of the products based on these technologies will be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances;

	•	the products, if safe and effective, will be difficult to manufacture on a large scale or uneconomical to market;

	•	proprietary rights of third parties will prevent us or our collaborators from exploiting technologies or marketing products;

	•	third parties will market superior or equivalent products; and

	•	we may not be able to obtain or exploit new and superior technology, which could render obsolete the technologies we use.

Because we are an early stage company, we do not know whether we can develop our business or achieve profitability.

We expect to continue to incur increasing losses and we cannot assure you that we will ever become profitable. We are in the early stages of development, and it will be a number of years, if ever, before we are likely to receive revenue from product sales or royalty payments. We will continue to incur substantial expenses relating to research and development efforts. We anticipate that we will increase these efforts as we focus on the laboratory and human studies that are required before we can sell a product. The development of our products requires significant further research, development, testing and regulatory approvals. We may not be able to develop products that will be commercially successful or that will generate revenue in excess of the cost of development.

Because we have limited experience in developing and commercializing products, we may be unsuccessful in our efforts to do so.

Our ability to develop and commercialize products based on proteins, antibodies and other compounds will depend on our ability to:


	•	develop products internally;

	•	complete laboratory testing and human studies;

	•	obtain and maintain necessary intellectual property rights to our products;

	•	obtain and maintain necessary regulatory approvals related to the efficacy and safety of our products;

	•	develop efficient production facilities meeting all regulatory requirements or enter into arrangements with third parties to manufacture our products on our behalf; and

	•	deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these functions.

Although we are conducting human studies with respect to eight products, we have limited experience with these activities and may not be successful in developing or commercializing these or other products.

Because clinical trials for our products will be expensive and protracted and their outcome is uncertain, we must invest substantial amounts of time and money that may not yield viable products.

Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any product, we must demonstrate through laboratory, animal and human studies that such product is both effective and safe for use in humans. We will incur substantial expense for and devote a significant amount of time to these studies.

Before a drug may be marketed in the U.S., it must be the subject of rigorous preclinical testing. The results of these studies must be submitted to the FDA as part of an investigational new drug application, which is reviewed by the FDA before clinical testing in humans can begin. The results of preliminary studies do not predict clinical success. A number of potential drugs have shown promising results in early testing but subsequently failed to obtain necessary regulatory approvals. Data obtained from tests are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. Regulatory authorities may refuse or delay approval as a result of many other factors, including changes in regulatory policy during the period of product development.

Completion of clinical trials may take many years. The length of time required varies substantially according to the type, complexity, novelty and intended use of the product candidate. The FDA monitors the progress of each phase of testing, and may require the modification, suspension, or termination of a trial if it is


	•	our inability to manufacture sufficient quantities of materials for use in clinical trials;

	•	variability in the number and types of patients available for each study;

	•	difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

	•	unforeseen safety issues or side effects;

	•	poor or unanticipated effectiveness of products during the clinical trials; or

	•	government or regulatory delays.

For all of our trials except the repifermin wound healing trial, only a limited number of patients are involved. To date, data obtained from these clinical trials have been insufficient to demonstrate safety and efficacy under applicable FDA guidelines and are not sufficient to support an application for regulatory approval without further studies. In two trials of repifermin and in one study of mirostipen, the drug was shown to be safe, but was not shown to be effective. Studies conducted by us or by third parties on our behalf may not demonstrate sufficient effectiveness and safety to obtain the requisite regulatory approvals for these or any other potential products. Regulatory authorities may not permit us to undertake any additional clinical trials. The clinical trial process may be accompanied by substantial delay and expense and there can be no assurance that the data generated in these studies will ultimately be sufficient for marketing approval by the FDA.

Clinical trials of VEGF-2 gene therapy by Corautus were placed on clinical hold by the FDA in February 2000. These trials were removed from clinical hold in October 2001. Corautus is seeking clearance for new trials of VEGF-2 gene therapy. These trials would be conducted with patients for whom conventional treatments have been unsuccessful or for whom no conventional treatment exists. During the course of treatment, these patients could die or suffer adverse medical effects for reasons that may not be related to VEGF-2. Deaths in the patient population for the earlier VEGF-2 trials did occur, in both active and placebo groups, and Corautus has reviewed the relevant data regarding these patients and provided an analysis of the reasons for these deaths to the FDA. These adverse effects may affect the interpretation of the clinical trial results and the success of the trials. Later clinical trials may be extensive, expensive and time-consuming. VEGF-2 gene therapy may never be approved for use in humans.

We face risks in connection with our ABthrax product in addition to risks generally associated with drug development.

Our entry into the biodefense field with the development of ABthrax presents risks beyond those associated with the development of our other products. Numerous other companies and governmental agencies, including the U.S. Army, are known to be developing biodefense pharmaceuticals and related products to combat anthrax. These competitors may have financial or other resources greater than ours, and may have easier or preferred access to the likely distribution channels for biodefense products. In addition, since the primary purchaser of biodefense products is the U.S. government and its agencies, the success of ABthrax will depend on government spending policies and pricing restrictions. The funding of government biodefense programs is dependent, in part, on budgetary constraints, political partisanship and military developments. Moreover, even if ABthrax is approved by the FDA, the revenues available for the sale of ABthrax could be significantly curtailed by the efforts of government payors to limit the selling price of ABthrax. In the case of the U.S. government, executive or legislative action could attempt to impose production and pricing requirements on us. Moreover, we do not know whether the U.S. government will purchase ABthrax, and if it does, the timing, extent and amount of such purchases.

Because neither we nor any of our collaboration partners have received marketing approval for any product resulting from our research and development efforts, and may never be able to obtain any such approval, we may not be able to generate any product revenue.

We have not completed development of any product based on our genomics research. It is possible that we will not receive FDA marketing approval for any of our products. Although a number of our potential products have entered clinical trials, we cannot assure you that any of these products will receive marketing approval. All the products being developed by our collaboration partners will also require additional research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaboration partners to achieve various regulatory approval milestones may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaboration partners may need to successfully address a number of technical challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

Our plan to use collaborations to leverage our capabilities and to grow in part through the strategic acquisition of other companies and technologies will not be successful if we are unable to integrate our partners’ capabilities or the acquired companies with our other operations or if they do not meet our expectations.

As part of our strategy, we intend to continue to evaluate strategic partnership opportunities and consider acquiring complementary technologies and businesses. In order for our future collaboration efforts to be successful, we must first identify partners whose capabilities complement and integrate well with ours. Technologies to which we gain access may prove ineffective or unsafe. Our partners may prove difficult to work with or less skilled than we originally expected. In addition, any past collaborative successes are no indication of potential future success in this area. In order to achieve the anticipated benefits of an acquisition, we must integrate the acquired company’s business, technology and employees in an efficient and effective manner. The successful combination of companies in a rapid


Delaware		22-3178468
(State of organization)		(I.R.S. employer identification number)


For the fiscal year ended December 31, 2002	Commission File Number 0-22962


YEAR ESTABLISHED	PARTNER	FOCUS

HUMAN GENE
THERAPEUTIC CONSORTIUM
1993-97	GlaxoSmithKline	Therapeutic proteins, antibodies, small molecule drugs, gene therapy vaccines and diagnostics
1995	Takeda	Therapeutic proteins, antibodies and small molecule drugs
1996	Schering-Plough	Therapeutic proteins, antibodies, small molecule drugs and gene therapy
1996	Sanofi-Synthelabo	Therapeutic proteins, antibodies and small molecule drugs
1996	Merck KGaA	Therapeutic proteins, antibodies and small molecule drugs
TECHNOLOGY COLLABORATIONS
1997	Corautus (Vascular Genetics)	Gene therapy
1998	Transgene	Gene therapy
1999	Abgenix	Antibodies
2000	Cambridge Antibody Technology	Antibodies
2000	Dyax	Antibodies and peptides
2000	Vical	Gene therapy
2000	Aventis Behring	Albumin fusion technology
2000	Dow Chemical	Chelator technology
2001	Medarex	Antibodies
2001	MDS Nordion	Radioiodinating technology
2002	Kirin	Antibodies
MICROBIAL COLLABORATIONS
1995-97	MedImmune	Infectious agents
1996	Pharmacia	Staphylococcus aureus and other