Back to GetFilings.com

UNITED STATES

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

HUMAN GENOME SCIENCES, INC.

14200 Shady Grove Road, Rockville, Md. 20850-7464

(301) 309-8504

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

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.     þ

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, 2004 was 129,478,427. As of June 30, 2003, 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 $1,124,564,760.*

DOCUMENTS INCORPORATED BY REFERENCE

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 40,259,506 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 30, 2003. 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.

PART I

ITEM 1.  BUSINESS

      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.

Overview

      Human Genome Sciences is a mid-stage development biopharmaceutical company with a significant product pipeline derived from proprietary genomic technology. Our goal is to build a global biopharmaceutical company that discovers, develops, manufactures and markets gene-based protein and antibody 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. We focus our internal product development efforts on novel human protein and antibody drugs discovered through genomics-based research, and on new long-acting versions of existing protein drugs created using our albumin fusion technology. We use collaborations for the development of additional protein and antibody drugs, gene therapy products, small molecule drugs, and diagnostic products discovered using our genomics-based technology.

      We are conducting clinical trials with a number of our products. Our current focus is to advance clinical trials in two main therapeutic areas: immunology/ infectious disease and oncology. Additional products are in clinical development by companies with which we are collaborating. We also have a number of new drugs in advanced preclinical studies.

      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 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 development 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 construction 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

1

      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, licensing fees 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.

      We are a Delaware corporation headquartered at 14200 Shady Grove Road, Rockville, Maryland 20850-7464. Our telephone number is (301) 309-8504. Our website is www.hgsi.com. Information contained on our website is not a part of, and is not incorporated into, this annual report on Form 10-K. Our filings with the SEC are available without charge on our website as soon as reasonably practicable after filing.

Strategy

      Our goal is to build a global biopharmaceutical company that discovers, develops, manufactures and markets gene-based protein and antibody drugs to treat and cure disease. 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 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.
	•	Expand our understanding of medically useful genes. We have created a set of integrated skills that allow us to understand the natural function of new genes. 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 either by ourselves or 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 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 our portfolio. As of March 1, 2004, we had 384 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.

Products

      We have discovered a large number of medically useful genes. A majority of the novel protein and antibody drugs that we have entered into clinical trials are derived from genomics-based research. Our other

2

      Our antibody drugs in clinical development are LymphoStat-BTM (human monoclonal antibody to BLyS), ABthrax™ (human monoclonal antibody to Bacillus anthracis protective antigen), TRAIL-R1 agonistic human monoclonal antibody (HGS-ETR1, TRAIL-R1mAb), and TRAIL-R2 agonistic human monoclonal antibody (HGS-ETR2, TRAIL-R2 mAb). LymphoStat-B is in clinical development for the treatment of autoimmune diseases such as lupus and rheumatoid arthritis. Results of a Phase 1 clinical trial show that LymphoStat-B is well tolerated and biologically active. Phase 2 clinical trials of LymphoStat-B in patients with systemic lupus erythematosus and in patients with rheumatoid arthritis are ongoing. ABthrax is in clinical development for the prevention and treatment of anthrax infections. We recently completed enrollment and dosing in a Phase 1 clinical trial designed to evaluate the safety and pharmacokinetics of ABthrax in healthy adult volunteers. Data collection and analysis are underway. HGS-ETR1 and HGS-ETR2 are in Phase 1 clinical trials for the treatment of certain solid tumors and hematological malignancies. A therapeutic protein, LymphoRad^{TM 131} (radioiodinated B-lymphocyte stimulator) is in Phase 1 clinical trials for the treatment of B-cell tumors such as multiple myeloma and non-Hodgkin’s lymphomas. Interim results suggest that LymphoRad is well tolerated and biologically active. Our albumin fusion proteins in clinical development are Albuferon™ (albumin-interferon alpha), Albutropin™ (albumin-human growth hormone), and Albuleukin™(albumin-interleukin-2). Interim results of an ongoing Phase 1/2 clinical trial have shown that Albuferon is well tolerated, has a prolonged half-life, and is biologically active. We have completed a Phase 1 clinical trial of Albutropin in adults with growth hormone deficiency. Albuleukin is the subject of ongoing Phase 1 clinical studies in patients with solid tumors.

      Our partners have advanced a number of 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, has completed 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. GlaxoSmithKline has indicated that it expects to enter 480848 into Phase 3 clinical trials in 2004 and to submit a New Drug Application (NDA) to the FDA in 2008. An additional 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 and expects to seek FDA clearance to begin Phase 2b clinical trials of VEGF-2 in 2004.

      We also have an evolving pipeline of additional products in discovery and preclinical drug development.

Clinical Programs

      The Human Genome Sciences clinical development pipeline includes drugs to treat such diseases as cancer, lupus, rheumatoid arthritis, and hepatitis C. Our partners are conducting clinical trials of 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 long-acting versions of existing drugs created using our albumin fusion technology.

Genomics-Derived Human Antibody Drugs

      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

3

      In 2003, we reported results of a Phase 1 clinical trial designed to evaluate the safety and pharmacology of LymphoStat-B in patients with systemic lupus erythematosus. Results show that LymphoStat-B is well tolerated and biologically active. Currently, we are conducting Phase 2 clinical trials of LymphoStat-B in patients with systemic lupus erythematosus and in patients with rheumatoid arthritis. We plan to complete the enrollment of both Phase 2 clinical trials of LymphoStat-B in 2004.

      HGS-ETR1 is a novel anticancer drug that specifically recognizes, binds to and activates 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 HGS-ETR1. Because HGS-ETR1 mimics the activity of native TRAIL when it binds to TRAIL Receptor 1, it is considered an agonistic antibody.

      We currently are conducting Phase 1 clinical trials to evaluate the safety and pharmacology of HGS-ETR1 in patients with advanced solid tumors and hematological malignancies. We plan to advance HGS-ETR1 to Phase 2 clinical trials in 2004.

      HGS-ETR2 is a novel anticancer drug that specifically recognizes and binds to the TRAIL Receptor-2 protein. The TRAIL Receptor-2 protein was originally identified by Human Genome Sciences, and is found on the surface of a number of solid tumor and hematopoietic cancer cells.

      Human Genome Sciences is currently enrolling patients with advanced tumors into a Phase 1 open-label, dose-escalating clinical trial of HGS-ETR2. The study will evaluate the drug’s safety and pharmacology, and is being conducted in the United Kingdom. We plan to complete enrollment of this trial in 2004. The Company recently received clearance from the FDA of an IND application to initiate an additional Phase 1 clinical trial of HGS-ETR2 in the United States.

      ABthrax is a novel drug developed by Human Genome Sciences for the prevention and treatment of anthrax infections. ABthrax is a human monoclonal antibody that blocks the binding to cell surfaces of Bacillus anthracis protective antigen, the key facilitator of anthrax infection. ABthrax has received a Fast Track Product designation from the FDA for its potential use in preventing and treating anthrax infections.

      As previously reported, a single dose of ABthrax administered prior to spore challenge increases survival significantly in both rabbit and nonhuman primate models of inhalational anthrax. Results from a more recent study in a rabbit model of inhalational anthrax demonstrate that a single dose of ABthrax also increases survival significantly when the dose is administered following spore challenge, suggesting that the drug may have the potential to protect against anthrax infection when administered either prior to or after infection.

      In March 2004, we reported the results of a Phase 1 placebo-controlled, dose-escalation clinical trial designed to evaluate the safety, tolerability and pharmacokinetics of ABthrax in healthy adult volunteers. Data

4

Genomics-Derived Human Protein Drugs

      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 LymphoRad as a potential treatment for certain B-cell cancers, including multiple myeloma and non-Hodgkin’s lymphomas. 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 December 2003, Human Genome Sciences reported interim results of Phase 1 clinical trials of LymphoRad that are designed to evaluate its safety and pharmacology in patients with multiple myeloma and in patients with non-Hodgkin’s lymphoma. The results to date suggest that LymphoRad is safe and well tolerated, shows signs of anti-tumor activity, and exhibits excellent dosimetry and tumor targeting. Preliminary pharmacokinetic data from the first dose cohorts in the Phase 1 studies show that the administered radioactivity has a terminal half-life of approximately eighteen to twenty-three hours, which is much shorter than is reported for radiolabeled anti-CD20 antibodies. Enrollment in both trials is expected to continue throughout most of 2004.

      Repifermin is a novel human protein discovered by Human Genome Sciences that stimulates the repair of injured skin and mucosal tissues.

      In February 2004, Human Genome Sciences reported that a Phase 2 clinical trial to evaluate repifermin for the treatment of cancer therapy-induced mucositis did not meet its primary endpoint, which was efficacy. Repifermin was well tolerated across all doses administered, with a safety profile similar to placebo. Based on the new data, we have decided not to proceed with further development of repifermin. No other clinical trials of repifermin are underway or planned in any indication.

      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. In 2003, we completed a Phase 1 clinical trial designed to evaluate the safety and pharmacology of BLyS in patients with an immune disorder known as immunoglobulin-A (IgA) deficiency. Results from this trial, along with the results of an earlier Phase 1 clinical trial in patients with common variable immunodeficiency (CVID), show that BLyS is safe and well tolerated. Human Genome Sciences does not plan to advance BLyS into Phase 2 clinical trials at this time.

Albumin Fusion Protein Drugs

      Albuferon 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 as a potential treatment for chronic hepatitis C.

      In October 2003, interim results of a Phase 1/2 clinical trial designed to determine the safety, tolerability and pharmacology of Albuferon in adults with chronic hepatitis C who have failed previous interferon alpha

5

      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.

      Phase 1 clinical trials to evaluate the safety and pharmacology of Albuleukin in patients with solid tumors are ongoing. We plan to complete the Phase 1 trials, but do not plan to advance Albuleukin to Phase 2 clinical trials at this time.

      Albutropin is a novel long-acting form of human growth hormone. 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.

      Results of a Phase 1 clinical trial of Albutropin in adults with growth hormone deficiency were reported in 2002. Results demonstrate that Albutropin is biologically active, well tolerated, and support advancing Albutropin into the next phase of clinical development. Human Genome Sciences submitted proposed trial designs to the FDA for Phase 2 studies of Albutropin in 2003. Although no antibodies have been detected in the Phase 1 clinical trials, the FDA has requested that we develop supplemental immunoassays for the detection of the functional relevance of antibodies, should they develop, to human growth hormone before initiating Phase 2 studies. We are in the process of responding to the FDA’s request. At this time, the Company intends to seek a partner before conducting further clinical trials.

Genomics-Derived Small Molecule Drugs

      The first genomics-derived small molecule drug to enter clinical trials was discovered by our partner, GlaxoSmithKline, using Human Genome Sciences’ technology. 480848 is an inhibitor of Lipoprotein-associated phospholipase A2 (Lp-PLA2). Lp-PLA2 is an enzyme associated with the formation of atherosclerotic plaques. In 2003, GlaxoSmithKline announced that 480848 had completed Phase 2 clinical trials and would be advanced to Phase 3 clinical trials in 2004. GlaxoSmithKline has stated that a New Drug Application (NDA) submission is expected in 2008.

      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 commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

6

     659032

      An additional small-molecule inhibitor of Lp-PLA2, 659032, has been discovered by our partner, GlaxoSmithKline, using Human Genome Sciences’ technology. Phase 1 clinical trials to evaluate 659032 for the control and treatment of cardiovascular disease are ongoing. GlaxoSmithKline is conducting these trials.

      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 additional milestone payments if 659032 moves through clinical development into registration, and will receive royalties if either compound is commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

     462795

      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. GlaxoSmithKline is conducting Phase 1 clinical trials of 462795 to evaluate its potential use in the treatment of patients with osteoporosis.

      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 commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

Gene Therapy

      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 and expects to seek FDA clearance to begin Phase 2b clinical trials of VEGF-2 in 2004. 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.

Preclinical Programs

      Human Genome Sciences has a pipeline of compounds in preclinical development, including novel human protein and antibody drugs discovered through genomics-based research, and new long-acting versions of existing proteins created using our albumin fusion technology.

Research and Development Capabilities

      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 long-acting versions of existing protein drugs created using our albumin fusion technology.

7

Gene and Protein Discovery 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.

Human Antibody Discovery and Development

      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 2 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 two such drugs in clinical trials – HGS-ETR1 (TRAIL-R1 mAb) and HGS-ETR2 (TRAIL-R2 mAb). HGS-ETR1 and HGS-ETR2 are currently in Phase 1 clinical trials for the treatment of certain solid tumors and tumors of hematopoietic origin. HGS-ETR1 recognizes the TRAIL Receptor-1 protein, while HGS-ETR2 recognizes the TRAIL Receptor-2 protein. Binding of the antibodies to their respective TRAIL receptor triggers cell death. HGS-ETR1 and HGS-ETR2 are agonistic human monoclonal antibodies that mimic the cancer-killing activity of the natural TRAIL ligand. We believe that HGS-ETR1 and HGS-ETR2 are the first human agonistic antibodies to enter clinical trials.

Albumin Fusion Technology

      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 results from the genetic fusion of human albumin and human interferon-alpha; Albutropin results

8

      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 additional product opportunities. This strategy potentially reduces development risk by broadening the profile of our product portfolio. We have research and development staff dedicated to the development of new drugs based on our albumin fusion technology.

Drug Development and Regulatory Expertise

      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.

Collaborative Arrangements

      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.

9

	•	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.

      A summary of our most important collaborations is provided below:

Human Gene Therapeutic Consortium

      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 research programs

10

      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. 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. Takeda has 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-

11

      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.

Technology Collaborations

      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. In May 2003, Human Genome Sciences announced that we had acquired an exclusive worldwide license from Abgenix to develop and commercialize a fully human monoclonal antibody to the CCR5 receptor. CCR5 mAb is currently in late-stage preclinical development at Human Genome Sciences.

      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 for Lymphostat-B, which was 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 2003. 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, TRAIL Receptor 2 and ABthrax. Under the 2000 agreement, we have paid to CAT $4.5 million in milestone payments through the end of 2003.

      Dyax. In March 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 2003, we have paid $6.5 million for 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.

      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 license exclusively 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.

12

      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.

      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, which has subsequently been diluted down to 5.9%, 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 February 2003, we obtained approximately an 18% equity interest in Corautus Genetics Inc. (“Corautus”), a publicly-traded company that resulted from the merger of Vascular Genetics, Inc. (“VGI”) and GenStar Therapeutics Corporation. Corautus assumed the exclusive license in the field of gene therapy for our VEGF-2 gene, previously granted to VGI.

          Other

      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, B-Lymphocyte Stimulator (BLyS), and MDS Nordion will use a process it developed for us that covalently binds the radioactive isotopes to the BLyS protein.

Microbial Collaborations

      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 2003, we received a clinical development milestone payment from MedImmune relating to the initiation of clinical trials of a vaccine against Streptococcus pneumoniae by GlaxoSmithKline, a partner of MedImmune’s. Through 2003, we have received $1.1 million from MedImmune.

13

      Pfizer. In October 1996, we entered into an agreement with Pharmacia in which we granted to Pharmacia a non-exclusive license to conduct research and to make, use and sell products based on genes of Staphylococcus aurreus and the pathogenicity islands of Escherichia coli sequenced by us. In 2003, we amended the Pharmacia agreement with Pfizer Corporation (“Pfizer”), which acquired Pharmacia. We received and recognized in full the license fee paid as a result of the amendment.

Other

      diaDexus. During 2003, diaDexus announced that the FDA had cleared its PLAC™ test for marketing as a diagnostic aid for use in helping predict an individual’s risk for coronary heart disease. The PLAC test measures the level of lipoprotein-associated phospholipase A2 (Lp-PLA2) in human blood. The PLAC test was discovered through the use of Human Genome Sciences’ technology, and Human Genome Sciences is entitled to receive royalties on sales of the PLAC test.

      In 2003, Human Genome Sciences acquired exclusive, worldwide rights from diaDexus to develop and commercialize diagnostic immunohistochemical (IHC) tests based on the TRAIL Receptor-1 (TRAIL-R1) and TRAIL Receptor-2 (TRAIL-R2) proteins.

      Genentech. In August 2003, we entered into an agreement with Genentech in which we granted to Genentech an exclusive, worldwide patent rights to develop and commercialize therapeutic biologic products for human use based on a human gene discovered by Human Genome Sciences that may have potential applications in immunology, oncology and neurology. Non-exclusive, worldwide rights for the development and commercialization of diagnostic and small molecule products for human use based on the same gene also were granted.

Patents and Proprietary Rights

      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 1, 2004, we had 384 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

14

      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.

Competition

      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.

      Basis of Competition. Principal competitive factors in our industry include:

	•	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

15

      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.

Government Regulation

      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

16

      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 effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive and profitable basis.

Sources of Supply

      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.

Manufacturing

      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 within 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.

17

      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 currently expanding the capacity of our existing process development and manufacturing facility. We have completed construction and are in the process of commissioning 102,600 square feet of manufacturing space at our Traville site to be completed in 2004. We are constructing a 291,000 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.

Marketing

      We do not have any marketed products. We have 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.

Employees

      As of March 1, 2004, we had 1,100 full-time employees. None of our employees is covered by a collective bargaining agreement and we consider relations with our employees to be good.

FACTORS THAT MAY AFFECT OUR BUSINESS

      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 still in development of our products. We initially set out to find as many genes as possible and are now using that information to develop medical and pharmacological products. We used 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.

18

      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 most of our resources to developing proteins and antibodies 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. 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 a mid-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 mid-stage 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.

      We continually evaluate our business strategy and may modify this strategy in light of developments in our business and other factors.

      In the past, we have redirected the focus of our business from the discovery of genes to the development of medically useful products based on those genes. We continue to evaluate our business strategy and, as a result, may modify this strategy in the future. In this regard, we may, from time to time, focus our product development efforts on different products or may delay or halt the development of various products. In

19

PRODUCT DEVELOPMENT RISKS

      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 a number of 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 determined to present excessive risks to patients. Our rate of commencement and completion of clinical trials may be delayed by many factors, including: