FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

HUMAN GENOME SCIENCES, INC.

14200 Shady Grove Road, Rockville, Maryland 20850-7464
(Address of principal executive offices and zip code)

(301) 309-8504
(Registrant’s telephone Number)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [   ]

     The number of shares of the registrant’s common stock outstanding on September 30, 2004 was 130,341,391.

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying Notes to Consolidated Financial Statements are an integral part hereof.

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HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part hereof.

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The accompanying Notes to Consolidated Financial Statements are an integral part hereof.

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Note 1. Interim Financial Statements

The accompanying unaudited consolidated financial statements of Human Genome Sciences, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments necessary to present fairly the results of operations for the three and nine months ended September 30, 2004 and 2003, the Company’s financial position at September 30, 2004, and the cash flows for the nine months ended September 30, 2004 and 2003. These adjustments are of a normal recurring nature.

Certain notes and other information have been condensed or omitted from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s 2003 Annual Report on Form 10-K and the Company’s March 31, 2004 and June 30, 2004 Quarterly Reports on Form 10-Q.

The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of future financial results.

Note 2. Stock-Based Compensation

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS No. 148”), the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), to stock-based employee compensation is as follows:

For the three and nine months ended September 30, 2004 and 2003, diluted net income (loss) per share is the same as basic net income (loss) per share as the inclusion of outstanding stock options and convertible debt would be antidilutive.

The effect of applying SFAS No. 123 on the pro forma net loss and net loss per share for the three and nine months ended September 30, 2004 and 2003 as stated above, is not necessarily representative of the effects on reported net loss for future years due to, among other things, (1) the

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Note 2. Stock-Based Compensation (continued)

vesting period of the stock options and (2) the fair value of additional stock option grants in future years.

Note 3. Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, requires unrealized gains or losses on the Company’s available-for-sale short-term securities, long-term investments and the activity for the cumulative translation adjustment to be included in other comprehensive income.

During the three and nine months ended September 30, 2004 and 2003, total comprehensive income (loss) amounted to:

During third quarter of 2004, the Company sold a total of 145,338 shares of Cambridge Antibody Technology Ltd., a long-term investment, for total net proceeds of $1,357, and realized a total loss of $20. The Company also sold 11,667 shares of Transgene, S.A., a long-term investment, for net proceeds of $111, and realized a loss of $8.

During the second quarter of 2004, the Company sold 246,275 shares of Cambridge Antibody Technology Ltd., for net proceeds of $2,266, and realized a loss of $68.

During the first quarter of 2004, the Company sold its remaining 66,767 shares of Ciphergen Biosystems, Inc., a long-term investment, for net proceeds of $662, and realized a gain of $352.

Realized gains and losses on securities sold before maturity, which are included in the Company’s investment income for the three and nine months ended September 30, 2004 and 2003, and their respective net proceeds were as follows:

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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(dollars in thousands, except share and per share data)

Note 3. Comprehensive Income (Loss) (continued)

Note 4. Commitments and Other Matters

The Company leases all of its research and development and administrative facilities. The Company’s primary research and development and administrative facility, located on the Traville site in Rockville, Maryland, is owned by Wachovia Development Corporation (“WDC”). WDC, a wholly-owned subsidiary of Wachovia Corporation, is primarily engaged in real estate finance, development and leasing activities. The total financed cost of the Traville lease facility is $200,000. As of September 30, 2004, the total financed cost of the Traville facility relative to WDC’s total direct real estate investments and net real estate lease investments was below the level requiring consolidation of WDC into the Company’s consolidated financial statements. The construction of the research and development and administrative facility was substantially completed by November 2003, at which time the rent obligations under the Traville lease commenced. The Company’s rent obligation approximates the lessor’s debt service costs plus a return on the lessor’s equity investment. The Company’s rent obligation under the Traville lease is floating and is based primarily on short-term commercial paper, but the lessor can lock in a fixed interest rate at any time at the Company’s request. The floating rate was approximately 1.7% as of September 30, 2004.

In addition, the Company leases a research facility, located at 9800 Medical Center Drive (“9800 MCD”), but is evaluating alternatives relating to its possible exit from the lease at 9800 MCD. The total financed cost of the facility covered under the 9800 MCD lease is $76,000. The Company’s rent obligation began in 2001 and approximates the lessor’s debt service costs. The lessor has fixed the interest rate on the total financed cost at a weighted-average interest rate of approximately 4.3% for the remaining term of the lease. See Note 6, Charge for Restructuring, for additional discussion.

The Company’s restricted investments which collateralize the Traville lease, the 9800 MCD lease and other leases for the existing process development and manufacturing facility, will reach approximately $295,000. The Company will be required to restrict investments equal to 102% of the full amount of the $200,000 financed project cost for the Traville lease, or $204,000, with the payment of the remaining construction period obligations, and 100% of the full amount of the $76,000 financed project cost for the 9800 MCD lease. In addition, the Company is also required to maintain up to a maximum of $15,000 in restricted investments with respect to the process development and manufacturing facility leases. The Company’s restricted investments were $294,388 and $280,776 as of September 30, 2004 and December 31, 2003, respectively.

Under the Traville and 9800 MCD lease agreements, which the Company has accounted for as operating leases, the Company has the option to purchase the properties, during or at the end of the

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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(dollars in thousands, except share and per share data)

Note 4. Commitments and Other Matters (continued)

lease terms, for an aggregate amount of $276,000. Alternatively, the Company can cause the properties to be sold to third parties.

With respect to the Traville lease, the Company has a maximum residual value guarantee of $175,500, or 87.75% of the total financed cost at lease termination. With respect to the 9800 MCD lease, the Company has a maximum residual value guarantee of $64,600, or 85% of the total financed cost at lease termination. As of September 30, 2004, the Company’s residual value guarantees for the Traville and 9800 MCD leases were $175,500 and $64,600, respectively. There are not any recourse provisions under either the Traville or 9800 MCD leases that would enable the Company to recover from third parties any of the amounts paid under the residual value guarantees. The Company has set aside collateral in the form of restricted investments sufficient to satisfy all current obligations under the guarantees. In addition, the Company has the right to cause the sale of the properties covered by the leases and may recover all or a portion of the money paid under the guarantees.

In connection with the Traville lease, the Company must maintain minimum levels of unrestricted cash, cash equivalents and marketable securities and certain debt ratios. In connection with the 9800 MCD lease, the Company must maintain minimum levels of unrestricted cash, cash equivalents and marketable securities, as well as comply with certain dividend restrictions.

Note 5. Stockholders’ Equity

Stock Option Exchange Program

In May 2004, the Company’s stockholders approved a Stock Option Exchange Program. In June 2004, the Company made an offer to exchange options outstanding under the Company’s Amended and Restated 2000 Stock Incentive Plan. Pursuant to this offer, eligible employees, other than the Company’s executive officers, were offered a one-time opportunity to exchange their stock options that had an exercise price of at least $35.00 per share for a lesser number of options to be issued at a later date. In exchange for the tendered options, the Company will issue new options to purchase shares of the Company’s common stock in January 2005. Pursuant to the offer to exchange, in July 2004 the Company accepted for exchange options to purchase an aggregate of approximately 4,200,000 shares of the Company’s common stock. The Company expects to issue new options to purchase up to approximately 1,650,000 shares of the Company’s common stock in January 2005.

Note 6. Charge for Restructuring

During the first quarter of 2004, the Company announced plans to sharpen its focus on its most promising drug candidates. In order to reduce significantly future expenses, and thus enable the Company to dedicate more resources to the most promising drugs, the Company has reduced staff, streamlined operations and is consolidating facilities. The results for the three and nine months ended September 30, 2004 include a charge of $5,799 and $11,297, respectively, which is shown as a charge for restructuring in the consolidated statement of operations. For the three months ended September 30, 2004, the charge relates to an accrual for facility closure costs of $4,000 and costs associated with the retirement of the Company’s Chairman and Chief Executive Officer (“CEO”) of approximately $1,800. For the nine months ended September 30, 2004, the charge relates to costs associated with the

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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(dollars in thousands, except share and per share data)

Note 6. Charge for Restructuring (continued)

retirement of the Company’s CEO of approximately $4,800, an accrual for facility closure costs of $4,000 and the total cost of employee severance benefits of $2,500. During the first quarter of 2004, the Company recorded a deferred compensation charge of $4,151 related to the modification of the CEO’s stock options and is recognizing this charge ratably over his remaining service period, which is through October 2004. The unamortized balance of this charge is $414 as of September 30, 2004.

With respect to the consolidation of facilities, the Company is evaluating alternatives relating to its possible exit from the lease of 9800 MCD. With respect to this lease, the Company has a residual value guarantee (“RVG”) to the lessor. In the event the property is sold for net proceeds below the financed cost of $76,000, the Company would record a charge relating to its RVG obligation. As of September 30, 2004, the Company estimates that the net realized value would not fall below $76,000, and accordingly, has not recorded an expense relating to the RVG obligation. The Company may or may not be able to fully recover the net book value of its leasehold improvements at 9800 MCD, which are approximately $9,400 as of September 30, 2004. In addition, the Company is evaluating its equipment located at 9800 MCD, which has a net book value of approximately $8,900 as of September 30, 2004, to determine which items may be redeployed or sold. The Company may or may not be able to fully recover the net book value of this equipment.

In addition, during the third quarter of 2004, the Company exited a smaller laboratory and production facility at 9410 Key West Avenue (“9410”), for which it has a remaining operating lease obligation of approximately $2,700 through 2008. The Company is currently in discussions with respect to a sublease of this facility and the sale of leasehold improvements and equipment located at 9410 with a net book value of approximately $8,500 as of September 30, 2004. The Company has reviewed the carrying value of the assets compared to its expected fair value less costs to sell. Based upon current market information, the Company has recorded an accrual for an estimated restructuring charge of $4,000 for the three months ended September 30, 2004. The Company will adjust this accrual if estimates of sublease rental income and proceeds from the sale of the fixed assets at the facility change. The Company will continue to evaluate this and other facility consolidation alternatives during 2004.

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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(dollars in thousands, except share and per share data)

Note 6. Charge for Restructuring (continued)

The following table summarizes the activity related to the liability for restructuring costs as of September 30, 2004:

The liability for restructuring costs of $5,081 as of September 30, 2004 was shown within accounts payable and accrued expenses on the consolidated balance sheets.

The CEO related charge excludes the amortization of the non-cash deferred compensation charge of $4,151 related to the modification of the CEO’s stock options. The Company recognized amortization of $3,737 for the nine months ended September 30, 2004.

Note 7. Fair Value of Financial Instruments

The carrying amounts for the Company’s cash and cash equivalents, investments, other assets, accounts payable and accrued expenses and other accrued expenses reflected in the consolidated balance sheets at September 30, 2004 and December 31, 2003 approximate their respective fair values.

The carrying value of the Company’s debt was approximately $504,000 as of both September 30, 2004 and December 31, 2003. The fair value of the Company’s long-term debt is based primarily on quoted market prices. The quoted market prices of the Company’s convertible debt increased to approximately $498,000 as of September 30, 2004 from $466,000 as of December 31, 2003. See Note 8, Subsequent Events, for additional discussion.

Note 8. Subsequent Events

Long-term debt

In October 2004, the Company completed the private placement of $280,000 of 2¼% Convertible Subordinated Notes due 2011 (“2¼ Notes”), convertible into common stock at approximately $15.55 per share. Debt issuance costs for the $280,000 of 2¼ Notes amounted to approximately $8,700, including accrued expenses, which will be amortized on a straight-line basis, which approximates the effective interest method, over the life of the 2¼ Notes. The Company completed the repurchase of $60,079 of 5% Convertible Subordinated Notes due 2007 and $218,126 of 3¾% Convertible Subordinated Notes due 2007 with an aggregate principal amount of approximately $278,205 for an aggregate purchase price of approximately $272,892. The Company will record a one-time gain on the extinguishment of this debt of approximately $2,400, net of unamortized debt refinancing costs associated with the repurchased debt.

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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(dollars in thousands, except share and per share data)

Note 8. Subsequent Events (continued)

The Company’s components of long-term debt, as if the above transactions occurred on September 30, 2004, are as follows:

Annual maturities of all long-term debt, as if the above transactions occurred on September 30, 2004, are as follows:

Collaborations

In October 2004, the Company entered into License Agreement with GlaxoSmithKline (“GSK”), pursuant to which GSK was granted an exclusive license to develop and commercialize Albugon, one of the Company’s albumin fusion drug candidates. The Company will receive a non-refundable license fee and is entitled to receive future milestone and royalty payments related to this agreement.

Note 9. Reclassifications

Certain prior period balances have been reclassified to conform to 2004 presentation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three Months and Nine Months Ended September 30, 2004 and 2003

Overview

     Human Genome Sciences is a mid-stage development company with a significant product pipeline derived primarily 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 other protein and antibody drugs, gene therapy products, small molecule drugs, and diagnostic products discovered using our genomics-based technology.

     We have a number of products in clinical development. Companies with which we are collaborating have additional products in clinical trials. We continue to evaluate new drugs for advancement into clinical development. We have responded to a Request for Proposal from the U.S. Government for the acquisition of anthrax therapeutic products for the treatment of inhalation anthrax disease.

     We have established 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 provide us with 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 have not received any significant product sales revenue or royalties from product sales and any significant revenue from product sales or from royalties on product sales in the next several years is uncertain. To date, all of our revenue relates to payments made under our collaboration agreements with GlaxoSmithKline (“GSK”) and, to a lesser extent, other agreements. The initial research term associated with our 1993 GSK collaboration agreement and many of our other collaboration agreements expired in 2001 and those agreements will only generate additional milestone and royalty payments if our collaborators successfully develop drugs based on our technology. We may not receive any of these payments and may not be able to enter into additional collaboration agreements.

     We expect that any significant revenue or income for at least the next several years may be limited to investment income, payments under various collaboration agreements to the extent milestones are met, payments from the sale of product rights and other payments from other collaborators and licensees under existing or future arrangements, to the extent that we enter into any future arrangements. We expect to continue to incur substantial expenses relating to our research and development efforts, as we focus on preclinical and clinical trials required for the development of therapeutic protein, antibody and fusion protein product candidates. As a result, we expect to incur continued and significant losses over the next several years unless we are able to realize additional revenues under existing or new collaboration agreements. The timing and amounts of such revenues, if any, cannot be predicted with certainty and will likely fluctuate sharply. Results of operations for any period may be unrelated to the results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.

Results of Operations

     Revenues. Revenues were $0.7 million for the three months ended September 30, 2004 compared to revenues of $1.2 million for the three months ended September 30, 2003. Revenues for the three months ended September 30, 2004 represent primarily $0.6 million in revenue recognized from Transgene, S.A.

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Results of Operations (continued)

(“Transgene”). Revenues for the three months ended September 30, 2003 represent $0.6 million in revenue recognized from Transgene and an aggregate of $0.6 million in revenue recognized from Genentech, Inc. (“Genentech”) and from MedImmune, Inc. (“MedImmune”). Revenues were $3.0 million for the nine months ended September 30, 2004 compared to revenues of $3.5 million for the nine months ended September 30, 2003. Revenues for the nine months ended September 30, 2004 represent primarily $1.9 million in revenue recognized from Transgene and a $1.0 million milestone payment earned and received from GSK. Revenues for the nine months ended September 30, 2003 represent $1.9 million in revenue recognized from Transgene, a $1.0 million milestone payment earned and received from GSK and an aggregate of $0.6 million in revenue recognized from Genentech and from MedImmune.

     Expenses. Research and development expenses were $52.2 million for the three months ended September 30, 2004 compared to $48.4 million for the three months ended September 30, 2003. Research and development expenses were $159.5 million for the nine months ended September 30, 2004 compared to $142.4 million for the nine months ended September 30, 2003. We track our research and development expenditures by type of cost incurred — research, drug development, manufacturing and clinical development costs.

     Our research costs decreased to $6.9 million for the three months ended September 30, 2004 from $8.8 million for the three months ended September 30, 2003. Research costs decreased to $21.8 million for the nine months ended September 30, 2004 from $25.2 million for the nine months ended September 30, 2003. The decrease in research costs for both the three and nine months ended September 30, 2004 is primarily due to reduced activity and staff in the study of preclinical therapeutic protein and antibody drug candidates.

     Our drug development costs decreased to $11.2 million for the three months ended September 30, 2004 from $14.2 million for the three months ended September 30, 2003. Drug development costs decreased to $39.6 million for the nine months ended September 30, 2004 from $41.4 million for the nine months ended September 30, 2003. The decrease in drug development costs for both the three and nine months ended September 30, 2004 is primarily due to decreased process development activities and our increased focus on manufacturing and clinical development activities.

     Our manufacturing costs increased to $19.0 million for the three months ended September 30, 2004 from $14.9 million for the three months ended September 30, 2003. Manufacturing costs increased to $57.1 million for the nine months ended September 30, 2004 from $46.1 million for the nine months ended September 30, 2003. The increase in manufacturing costs for both the three and nine months ended September 30, 2004 is primarily due to the increased production activities within our process development and manufacturing facilities and payments made to a third-party manufacturer to support our increased clinical activities.

     Our clinical development costs increased to $15.1 million for the three months ended September 30, 2004 from $10.5 million for the three months ended September 30, 2003. Clinical development costs increased to $41.0 million for the nine months ended September 30, 2004 from $29.7 million for the nine months ended September 30, 2003. The increase in clinical development costs for both the three and nine months ended September 30, 2004 is primarily due to the cost of continuing ongoing trials from 2003 and initiating new trials in 2004.

     General and administrative expenses decreased to $8.3 million for the three months ended September 30, 2004 from $10.8 million for the three months ended September 30, 2003. General and administrative expenses decreased to $25.7 million for the nine months ended September 30, 2004 from $30.1 million for the nine months ended September 30, 2003. The decrease for both the three and nine months ended September 30, 2004 resulted primarily from lower facility and marketing research costs.

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