HUMAN GENOME SCIENCES INC - 10-K Annual Report

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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, 2005 was 130,618,047. As of June 30, 2004, 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 $1,086,285,426.*

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 36,794,671 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, 2004. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

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

Human Genome Sciences is a biopharmaceutical company with a pipeline of novel protein and antibody drugs directed toward large markets that have significant unmet medical need. 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.

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 have developed and continue to enhance the resources necessary to achieve our goal of becoming a fully integrated global biopharmaceutical company, including:


	•	A drug development organization with the expertise necessary to design and implement well focused, high quality clinical trials of multiple compounds;

	•	Manufacturing capability for the production of protein and antibody drugs for preclinical studies, clinical trials, and the initial commercialization of our products;

	•	A scientific and discovery base, including expertise in the discovery of novel protein and antibody drugs, as well as genomics, proteomics and informatics capabilities;

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

	•	A significant patent estate;

	•	A skilled and experienced management team and board of directors;

	•	Employees who are creative, well trained, hard-working and capable; and

	•	A strong balance sheet.

We have expanded our manufacturing facilities to allow us to produce larger quantities of protein and antibody drugs for clinical development. We are also in the final construction phase of a large-scale manufacturing facility to increase our capacity for protein and antibody drug production. We are strengthening our commercial operations staff, and our intent is to add marketing and sales staff as needed as our products approach commercialization.

We have strategic partnerships with a number of leading pharmaceutical and biotechnology companies to leverage our strengths and to gain access to complementary technologies and sales and marketing infrastructure. Some of these partnerships provide us, and have provided us, with research funding, licensing fees,

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.

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 concentrate 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. Novel human protein and antibody drugs derived from our gene discoveries account for the majority of our current product pipeline. We rely on collaborations for the development of other products discovered using our genomics-based technology, including additional protein and antibody drugs, gene therapy products, small molecule drugs, and diagnostic products.

	•	Develop, manufacture and commercialize our gene-based products on our own and with our strategic partners. The new drugs we intend to develop are designed to meet unmet medical needs representing significant markets. We will select a limited number of products 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.

	•	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.

	•	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 additional collaborations with leading biotechnology companies to gain access to complementary technologies for our product development efforts.

	•	Continue to 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.

	•	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, 2005, we had 432 issued U.S. patents covering genes, proteins and antibodies, and had filed U.S. patent applications covering many more human genes, the proteins they encode, antibodies, and proprietary technologies.

We have discovered a large number of medically useful genes. All but one of our drugs that are currently in clinical trials are derived from genomics-based research. The other drug in clinical trials is an albumin fusion protein — a novel long-acting form of an existing therapeutic protein that we have modified to improve its pharmacological properties by using our albumin fusion technology.

Our drugs in clinical development are: LymphoStat-B^TM (human monoclonal antibody to B-lymphocyte stimulator, BLyS^TM) for the treatment of lupus and rheumatoid arthritis; Albuferon^TM (albumin-interferon

alpha) for the treatment of chronic hepatitis C; HGS-ETR1 (agonistic human monoclonal antibody to TRAIL receptor 1), HGS-ETR2 (agonistic human monoclonal antibody to TRAIL receptor 2), HGS-TR2J (agonistic human monoclonal antibody to TRAIL receptor 2) for the treatment of solid and hematopoietic cancers; CCR5 mAb (human monoclonal antibody to the CCR5 receptor) for the treatment of HIV/ AIDS; and ABthrax^TM (human monoclonal antibody to Bacillus anthracis protective antigen) for the treatment of anthrax infection.

Our partners have advanced a number of products derived from our technology to clinical development. GlaxoSmithKline (GSK) has entered several small-molecule drugs into clinical development that were discovered by GSK using our technology, including 480848, an inhibitor of Lp-PLA2 (lipoprotein-associated phospholipase A2) for the control and treatment of cardiovascular disease, and 462795, an inhibitor of cathepsin K for the treatment of osteoporosis. Corautus Genetics has entered VEGF-2 gene therapy into clinical trials for the treatment of severe cardiovascular disease.

We also have additional products in discovery and preclinical drug development. For example, we licensed Albugon^TM, a novel long-acting form of glucagon-like peptide-1 (GLP-1) for potential use in treating diabetes, to GSK under an agreement whereby GSK has acquired exclusive worldwide rights to develop and commercialize Albugon for all human and therapeutic applications (announced in October 2004 and described below under “Collaborative Arrangements”).

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 and metabolic diseases.

LymphoStat-B is a fully human monoclonal antibody designed to inhibit the biological activity of B-lymphocyte stimulator, or BLyS. Preclinical studies indicate that higher than normal levels of BLyS may trigger autoimmune diseases by stimulating production of autoantibodies — antibodies that attack and destroy the body’s own healthy tissues. Over-production of autoantibodies may be counteracted by reducing BLyS levels with LymphoStat-B. We are developing LymphoStat-B as a potential treatment for autoimmune diseases, such as systemic lupus erythematosus (SLE) and rheumatoid arthritis (RA). LymphoStat-B has received a Fast Track Product designation from the FDA for the treatment of systemic lupus erythematosus, and has been selected for inclusion in the FDA’s Continuous Marketing Application Pilot 2 Program. The Pilot 2 program provides for frequent scientific feedback and interactions based on a prospectively defined agreement between the FDA and participating companies.

In July 2004, we completed the enrollment, randomization and initiation of dosing for separate Phase 2 clinical trials of LymphoStat-B in RA and SLE. Each trial is designed to evaluate safety, tolerability and efficacy. A total of 283 patients with active moderate-to-severe rheumatoid arthritis who have failed prior treatment have been enrolled in the RA trial. A total of 449 patients with active systemic lupus erythematosus have been enrolled in the SLE trial. It is anticipated that the results of both of the Phase 2 studies of LymphoStat-B will be available in 2005, with the RA results expected in the Spring and the SLE results expected in the Fall. Based on the Phase 2 results, we plan to reach go/no go decisions regarding Phase 3 development of the compound in both indications. Assuming that the data emerging from the Phase 2 study in RA are sufficiently positive, we could initiate a Phase 3 clinical trial of LymphoStat-B in patients with rheumatoid arthritis in the second half of 2005.

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

In June and September 2004, we reported the interim results of two ongoing Phase 1 clinical trials of HGS-ETR1. The interim results demonstrate the safety and tolerability of HGS-ETR1 in patients with advanced solid tumors or non-Hodgkin’s lymphoma, and support further evaluation of HGS-ETR1 in Phase 2 clinical trials, both as a single agent and in combination with chemotherapy. Preliminary evidence of biological activity was reported.

In November 2004, we completed the enrollment and initial dosing of patients in an ongoing Phase 2 clinical trial of HGS-ETR1 to evaluate its efficacy, safety and tolerability in patients with advanced non-small cell lung cancer. In February 2005 and March 2005, respectively, we announced the completion of enrollment and initial dosing of patients in separate Phase 2 clinical trials of HGS-ETR1 for the treatment of colorectal cancer and non-Hodgkin’s lymphoma. Each of the trials is designed to evaluate the efficacy, safety and tolerability of HGS-ETR1 in patients with refractory or relapsed malignancies. In 2005, we plan to complete all three of the ongoing Phase 2 clinical trials of HGS-ETR1. In the second half of 2004, we also initiated two Phase 1b clinical trials to evaluate the safety and tolerability of HGS-ETR1 in combination with chemotherapeutic agents (with gemcitabine and cisplatin and with paclitaxel and carboplatin). Both studies are in patients with advanced solid malignancies. Based on the Phase 2 and Phase 1b data, we plan to reach go/no go decisions regarding single-agent and chemotherapy combination development of HGS-ETR1 as a treatment for cancer.

HGS-ETR2 and HGS-TR2J are novel anticancer drugs that specifically recognize and bind 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.

In September 2004, we reported the interim results of an ongoing Phase 1 clinical trial of HGS-ETR2. The interim results demonstrate that HGS-ETR2 can be administered safely and repetitively to patients with advanced solid tumors, and support continued dose-escalation of HGS-ETR2 in these patients. Stable disease was observed in some patients. In 2005, we plan to initiate Phase 2 clinical trials of HGS-ETR2 as a single agent, and to initiate Phase 1b clinical trials of HGS-ETR2 in combination with chemotherapeutic agents.

We began dosing patients for a Phase 1 clinical trial of HGS-TR2J in August 2004. The primary objectives of the study are to assess safety and tolerability. Pharmacokinetics and disease response also are being evaluated. Based on the results of the current Phase 1 clinical trial, we will make a decision regarding further clinical development of TR2J.

CCR5 mAb is entering Phase 1 clinical development as a treatment for HIV/ AIDS. We received clearance of this IND (Investigational New Drug) from the FDA in December 2004, and we now plan to proceed with a randomized, placebo-controlled, dose-escalation, multi-center Phase 1 clinical trial to evaluate the safety, tolerability and pharmacology of CCR5 mAb in patients who are infected with HIV-1.

The CCR5 receptor is a co-receptor on the cell surface that, together with CD4, mediates the binding of HIV-1 and its entry into the cell. Research has shown that the CCR5 receptor is the primary co-receptor for enabling HIV-1 transmission and replication from the early stages of disease through progression to AIDS. Preclinical studies demonstrate that CCR5 mAb binds specifically and with high affinity to human CCR5, prevents HIV-entry, demonstrates no agonistic activity or effector functions, and has a prolonged serum half-life.

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. In March 2004, we reported the results of a Phase 1 clinical trial of ABthrax in 105 healthy adult volunteers. The results demonstrate that ABthrax is safe and well tolerated, and achieves the blood levels predicted by relevant animal models as necessary to afford significant protection from the lethal effects of the anthrax toxin. In addition, in accordance with the FDA guidance that emerged following the Bioterrorism Act of 2002, we have conducted preclinical studies in multiple relevant animal models of inhalational anthrax, which demonstrate that ABthrax administered either prior to or following anthrax spore challenge increases survival significantly. Preclinical studies also demonstrate the dose-related efficacy of ABthrax in both prevention and treatment of anthrax infections. In October 2004, we submitted a proposal in response to a U.S. government Request for Proposals (RFP) for the “Acquisition of Therapeutic Products for Treatment of Inhalational Anthrax Disease for the Strategic National Stockpile.” Further development of ABthrax will depend on a government commitment to purchase the product.

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 November 2004, we reported the results of a Phase 1/2 clinical trial of Albuferon in treatment-experienced adults with chronic hepatitis C. The data, which were presented on 119 patients treated in the study, demonstrate that Albuferon is well tolerated, has a prolonged half-life, and is biologically active and able to reduce viral load with dose-dependent magnitude and durability. Immunogenicity data show that the vast majority of Albuferon antibody titers were low (<100 ng/mL), consistent with rates reported for pegylated interferons, and that there is no apparent correlation between the emergence of these antibodies and adverse events, antiviral response or pharmacokinetics. Albuferon exhibits a median half-life of 140 hours, supporting dosing at intervals of 2-4 weeks. This compares to a reported mean elimination half-life of 80 hours (50-140 hours) for Pegasys and 40 hours (22-60 hours) for PEG-Intron.

In November 2004, we began dosing patients in a Phase 2 study of Albuferon in combination with ribavirin to evaluate the safety, tolerability and efficacy of Albuferon in patients with chronic hepatitis C who have failed to respond to previous interferon alpha-based treatment regimens. In February 2005, we announced the completion of enrollment and dosing in a Phase 2 clinical trial of Albuferon to evaluate its safety, tolerability, pharmacology and optimal dosing in patients with chronic hepatitis C who are naïve to interferon-alpha treatments. In 2005, we plan to complete the ongoing Phase 2 clinical trial in patients who are naïve to interferon-alpha treatments, and plan to complete an interim safety analysis of data from the ongoing Phase 2 trial of Albuferon in combination with ribavirin in interferon-experienced patients. We also plan to initiate and complete the enrollment of a Phase 2b clinical trial of Albuferon in combination with ribavirin in patients who are naïve to interferon-alpha treatments.

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 it had completed a Phase 2 clinical trial of 480848. In November 2004, GSK indicated that it plans to advance 480848 to Phase 3 clinical trials for the treatment of cardiovascular disease in the coming months. Using our technology, GSK also has discovered two additional small-molecule inhibitors of Lp-PLA2, 659032 and 677116, which are in clinical development by GSK for the treatment of cardiovascular disease.

Under the terms of an agreement signed in 1993, as amended in 1996, Human Genome Sciences is entitled to receive clinical development milestone payments and royalties for compounds discovered by GSK through the use of our 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. In February 2003 and March 2004, we received $1.0 million milestone payments from GSK in connection with the initiation of clinical trials of 659032 and 677116, respectively. We are entitled to receive an additional milestone payment if 480848, 659032, or 677116 moves through clinical development into registration, and we will receive royalties if a compound is commercialized. In addition, we have an option to co-promote an approved drug in North America and Europe.

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 has entered 462795 into clinical trials 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.

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, 2004, we owned approximately 11% of Corautus. VEGF-2 gene therapy is being developed for the treatment of cardiovascular disease.

Corautus has completed Phase 1/2 clinical trials of VEGF-2, and announced in July 2004 that it has received FDA clearance to begin Phase 2b clinical trials of VEGF-2 in patients with severe cardiovascular disease. Human Genome Sciences is entitled to receive up to a 10% royalty on net sales of any product brought to market by Corautus that is based on the VEGF-2 gene.

Human Genome Sciences has a pipeline of compounds in 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.

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 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 methods make up our Functional Proteomics Program. 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.

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. 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 systemic lupus erythematosus and rheumatoid arthritis, is an antagonistic human monoclonal antibody. All currently marketed antibody drugs are antagonistic antibodies. In certain medical conditions, it may be desirable to stimulate artificially a specific biological activity. Antibodies that stimulate biological activity are known as agonistic antibodies. Human Genome Sciences has three such drugs in clinical trials — HGS-ETR1 (TRAIL-R1 mAb), HGS-ETR2 (TRAIL-R2 mAb) and HGS-TR2J (TRAIL-R2 mAb). HGS-ETR1 is currently in Phase 2 clinical trials for the treatment of non-small cell lung cancer, colorectal cancer and non-Hodgkin’s lymphoma. HGS-ETR1 recognizes the TRAIL receptor-1 protein, while HGS-ETR2 and HGS-TR2J recognize the TRAIL receptor-2 protein. Binding of the antibodies to their respective TRAIL receptor triggers cell death. HGS-ETR1, HGS-ETR2 and HGS-TR2J are agonistic human monoclonal antibodies that mimic the cancer-killing activity of the natural TRAIL ligand. We believe that they are the first human agonistic antibodies to enter clinical trials.

Our albumin fusion technology allows us to create long-acting forms of protein drugs by fusing the gene that expresses human albumin to the gene that expresses a therapeutically active protein. We are actively pursuing the development of albumin-fusion drugs based on therapeutic proteins already on the market, as well as albumin-fusion versions of therapeutic proteins that we are developing ourselves. For example: Albuferon results from the genetic fusion of human albumin and human interferon-alpha, and Albugon results from the genetic fusion of human albumin and glucagon-like peptide-1 (GLP-1). Based on preclinical and clinical results to date, we believe that albumin fusion proteins may provide long-acting treatment options that have efficacy and safety similar to or better than that of the existing protein drugs, with the potential additional benefit of considerably more convenient dosage schedules.

Albumin fusion technology also provides for efficient manufacture and purification of the product in our existing facilities.

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

Between 1993 and 1997, we entered into major collaborations with GlaxoSmithKline, Takeda, Schering-Plough, Sanofi-Synthelabo and Merck KGaA. 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. The initial research term of these agreements expired on June 30, 2001. Our partners have informed us that they have been pursuing research programs involving many different genes for the creation of small molecule, protein and antibody drugs. We cannot assure you that any of these programs will be continued or result in any approved drugs.

GSK or its licensees. We also are entitled to milestone payments in connection with the development of these products. We hold an option to co-promote any products sold by GSK in the U.S., Canada, Mexico and Europe, subject to the rights granted to Takeda and other collaborators. Our collaboration agreements with GSK include an option for GSK to co-develop and co-commercialize certain Human Genome Sciences products, including LymphoStat-B, HGS-ETR1 and HGS-ETR2 if we develop these products through Phase 2. GSK also would be entitled to share in license fees, milestone payments and royalty payments for certain products if we license the products to a third party.

Takeda. GlaxoSmithKline and Takeda entered into a license agreement relating to the development and sale of products in GSK’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 GSK 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. Pursuant to that agreement, Takeda has exercised its option to develop and commercialize TRAIL-R1 mAb in Japan.

Schering-Plough. In June 1996, we entered into a collaboration agreement under which Schering-Plough has the right to discover, develop and commercialize products using our technology and biological information developed by us and GSK. 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 GSK. 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. 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 which Sanofi-Synthelabo has the right to discover, develop and commercialize products using our technology and biological information developed by us and GSK. Sanofi-Synthelabo is obligated to pay license fees, research payments and milestone payments in connection with the development of products. We share equally with GSK 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.

Merck KGaA. In July 1996, we entered into a collaboration agreement with Merck KGaA under which Merck KGaA has the right to discover, develop and commercialize products using our technology and biological information developed by us and GSK. Merck KGaA is obligated to pay license fees, research payments, and milestone payments in connection with the development of products. We share equally with GSK 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.

GlaxoSmithKline. In October 2004, we announced an agreement with GlaxoSmithKline under which GSK has acquired exclusive worldwide rights to develop and commercialize Albugon (albumin-GLP-1) for all human therapeutic and prophylactic applications. Albugon, a novel long-acting form of glucagon-like peptide-1 (GLP-1), was created using Human Genome Sciences’ proprietary albumin fusion technology, and was brought to late-stage preclinical development by our scientists for potential use in the treatment of diabetes. GLP-1 is a peptide hormone that acts to help maintain healthy blood sugar levels and to control appetite. The primary obstacle to the use of GLP-1 as a therapeutic for diabetes is its extremely short half-life of about five minutes in the body. Preclinical studies show that Albugon retains the anti-diabetic and other

beneficial activities of GLP-1, but with a substantially prolonged half-life. Under the agreement, Human Genome Sciences is entitled to clinical development and commercial milestone payments that could amount to as much as $183.0 million, as well as additional milestones for other indications developed. We also will receive royalties on the annual net sales of any products developed and commercialized under the agreement. In 2004, we received an up-front fee and are recognizing this revenue ratably over the clinical development period, which is approximately seven years.

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.

Corautus. In February 2003, we obtained approximately an 18% equity interest in Corautus Genetics Inc., 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. As of December 31, 2004, we owned approximately 11% of Corautus.

diaDexus. During 2003, diaDexus announced that the FDA cleared its PLAC^TM 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 our technology, and Human Genome Sciences is entitled to receive royalties on sales of the PLAC test. DiaDexus also received from GSK the right to develop products based on a large number of diagnostic targets identified by Human Genome Sciences. We will be entitled to royalties on the sale of any products developed from these targets. In 2003, we acquired exclusive, worldwide rights from diaDexus to develop and commercialize diagnostic immunohistochemical tests based on the TRAIL receptor-1 TRAIL receptor-2 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.

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, including the creation of vaccines and immunotherapeutics for non-encapsulated Streptococcus pneumoniae. MedImmune sub-licensed the Streptococcus pneumoniae vaccine technology to GSK. 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 by GSK of clinical trials of a vaccine against Streptococcus pneumoniae. Through 2003, we have received $1.1 million from MedImmune.

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. The research term of this agreement will expire on November 30, 2005. 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. We received clearance from the FDA to initiate clinical development of CCR5 mAb in December 2004 and plan to initiate a Phase 1 clinical trial in patients infected with HIV-1 in the first half of 2005.

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 2004. 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 same agreement, we made an equity investment in CAT. We have sold a portion of this equity investment and as of December 31, 2004, we owned approximately 3% of CAT. 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 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 2004.

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. 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 monoclonal 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.

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 approximately 6.0%, 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.

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, and are likely to be involved in additional proceedings that may affect directly or indirectly patents and patent applications related to our products or the products of our partners. 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, 2005, we had 432 U.S. patents covering genes and proteins. Our remaining applications may not result in the issuance of any patents. Our applications may not be sufficient to meet the statutory requirements for patentability in all cases. In certain instances, we will be dependent upon our collaborators to file and prosecute patent applications.

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

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

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

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

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


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

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

	•	an organization’s intellectual property estate;

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Raw materials and other supplies required in our business are generally available from various suppliers in quantities adequate to meet our needs.

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 process development and manufacturing facilities that now total approximately 333,000 square feet. We do not manufacture any products for commercial use and do not have any experience in manufacturing materials suitable for commercial use.

We are 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. In 2004, we completed construction and commissioning of approximately 28,200 square feet of manufacturing space at our Traville site. 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. We plan to complete the construction of this facility in mid-2005 and to complete the validation process in 2006. 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.”

In June 2004, we entered into an agreement with Diosynth Biotechnology, a unit of Akzo Nobel, for process development and the production of clinical supplies for an undisclosed therapeutic monoclonal antibody. While we are expanding our manufacturing capabilities, we may contract with additional third party manufacturers or develop products with partners and use the partners’ manufacturing capabilities. If we use others to manufacture our products, we will depend on those parties to comply with cGMPs and other regulatory requirements, and to deliver materials on a timely basis. These parties may not perform adequately. Any failures by these third parties may delay our development of products or the submission of these products for regulatory approval.

We do not have any marketed products. We have 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.

In March 2004, as part of our overall effort to sharpen the company’s focus on preparation for commercialization of our most promising drug candidates, we embarked on a cost reduction program that included streamlining of operations, consolidation of facilities and reduction of staff to reflect current needs. As of March 1, 2005, we had approximately 840 full-time employees. None of our employees is covered by a collective bargaining agreement and we consider relations with our employees to be good.

We are not certain that we can implement our business strategy successfully because all of our products are still in the development stage. 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:

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.

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 substantial 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 facilities.

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


	•	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; and

	•	third parties will market superior or equivalent products.

Because we are currently a mid-stage development company, we cannot be certain that 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 and human studies. 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 are continually evaluating 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 addition, as a result of changes in our strategy, we may also change or refocus our existing drug discovery, development, commercialization and manufacturing activities. This could require changes in our facilities and personnel and the restructuring of various financial arrangements. We cannot assure you that changes will occur or that any changes that we implement will be successful.

During the first quarter of 2004, we announced plans to sharpen our focus on our most promising drug candidates. We have reduced the number of drugs in early development and are focusing our resources on the drugs that address the greatest unmet medical needs with substantial growth potential. In order to reduce significantly our expenses, and thus enable us to dedicate more resources to the most promising drugs, we have reduced staff, are streamlining operations and are consolidating facilities.

Because we have limited resources for discovering and developing new early stage pre-clinical products, we may be unsuccessful in our efforts to do so.

Our ability to discover and develop new early stage pre-clinical products will depend on our internal research capability. Our internal research capability was substantially reduced as a result of our first quarter of 2004 reduction in staff. Although we continue to conduct discovery and development efforts on early stage products, our limited resources for discovering and developing early stage pre-clinical products may not be sufficient to discover new pre-clinical drug candidates.

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 are 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 additional 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:


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

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

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

	•	unforeseen safety issues or side effects;

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

	•	government or regulatory delays.

To date, data obtained from our clinical trials have been insufficient to demonstrate safety and efficacy under applicable FDA guidelines and are not sufficient to support an application for regulatory approval

without further studies. Studies conducted by us or by third parties on our behalf may not demonstrate sufficient effectiveness and safety to obtain the requisite regulatory approvals for these or any other potential products. Based on the results of a human study for a particular product candidate, regulatory authorities may not permit us to undertake any additional clinical trials for that product candidate. The clinical trial process may also 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.

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

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

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

Neither we nor any of our collaboration partners have completed development of any product based on our genomics research. It is possible that we will not receive FDA marketing approval for any of our product candidates. Although a number of our potential products have entered clinical trials, we cannot assure you that any of these products will receive marketing approval. All the products being developed by our collaboration partners will also require additional research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaboration partners to achieve various regulatory approval milestones may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaboration partners may need to successfully address a number of technical challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

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

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

may be more difficult to accomplish than in other industries. The combination of two companies requires, among other things, integration of the companies’ respective technologies and research and development efforts. We cannot assure you that this integration will be accomplished smoothly or successfully. The difficulties of integration are increased by the necessity of coordinating geographically separated organizations and addressing possible differences in corporate cultures and management philosophies. The integration of certain operations will require the dedication of management resources which may temporarily distract attention from the day-to-day operations of the combined companies. The business of the combined companies may also be disrupted by employee retention uncertainty and lack of focus during integration. The inability of management to integrate successfully the operations of the two companies, in particular, to integrate and retain key scientific personnel, or the inability to integrate successfully two technology platforms, could have a material adverse effect on our business, results of operations and financial condition.

Because we depend on our collaboration partners for revenue, we may not become profitable if we cannot increase the revenue from our collaboration partners or other sources.

We have received all of our revenue from payments made under our collaboration agreements with GlaxoSmithKline and, to a lesser extent, other agreements. The initial research term of the GlaxoSmithKline collaboration agreement and many of our other collaboration agreements expired in 2001. None of these collaboration agreements was renewed. We may not be able to enter into additional collaboration agreements. We are entitled to certain milestone and royalty payments from the existing collaborators, but may not receive payments if our collaborators fail to:


	•	develop marketable products;

	•	obtain regulatory approvals for products; or

	•	successfully market products based on our research.

If one of our collaborators pursues a product that competes with our products, there could be a conflict of interest and we may not receive the milestone or royalty payments that we expect.

Each of our collaborators is developing a variety of products, some with other partners. Our collaborators may pursue existing or alternative technologies to develop drugs targeted at the same diseases instead of using our licensed technology to develop products in collaboration with us. Our collaborators may also develop products that are similar to or compete with products they are developing in collaboration with us. If our collaborators pursue these other products instead of our products, we may not receive milestone or royalty payments.

Because of our substantial indebtedness, we may be unable to adjust our strategy to meet changing conditions in the future.

As of December 31, 2004, we had long-term obligations of approximately $505.1 million. We also had a future guarantee obligation of $175.5 million under the current terms of one facility lease. Our substantial debt and future guarantee will have several important consequences for our future operations. For instance:


	•	payments of interest on, and principal of, our indebtedness will be substantial, and may exceed then current revenues and available cash;

	•	we may be unable to obtain additional future financing for capital expenditures, acquisitions or general corporate purposes;

	•	we may be unable to withstand changing competitive pressures, economic conditions and governmental regulations; and

	•	we may be unable to make acquisitions or otherwise take advantage of significant business opportunities that may arise.

We have entered into a facility lease arrangement that is not required to be reflected on our balance sheet but that constitutes a significant financial obligation and possible risks.

In the second quarter of 2003, we entered into a facility lease with respect to our research and development and administrative facility. Under accounting principles generally accepted in the United States, this lease was treated as an operating lease. In the event we default on our obligation under the lease, we may be responsible for up to $200.0 million of the cost of the facility because of a guarantee we made in connection with the lease. This obligation is not required to be reflected as a liability on our balance sheet, but is described in footnotes to our financial statements. We are required to pledge marketable securities as security for our obligation under the lease and the related documents. As of December 31, 2004, we included approximately $215.2 million of restricted investments on our balance sheet, of which approximately $202.7 million was held as restricted investments providing collateral for our obligation with respect to this facility. We expect that we will include approximately $219.0 million in restricted investments on our balance sheet when the final payments are made with respect to this and other facility obligations. If the value of our pledged investments declines, because of an increase in interest rates or otherwise, we would need to pledge additional investments, which would further reduce our working capital. The rent under this lease is based on a floating interest rate, but the lessors at our request can lock in a fixed interest rate at an interest rate premium. To the extent the lessors do not lock in a fixed interest rate, if interest rates increase, our rent obligation would also increase. The lease has a term of seven years. If we desire to remain in the facility upon lease expiration, we would need to refinance or buy the facility at the financed project cost. We cannot assure you that refinancing will be available on comparable terms, if at all. Further, in the event the facility is sold, we have a guarantee obligation which makes us responsible to the extent that the value of the facility is less than the financed project cost and which will reach a maximum guarantee obligation of approximately $175.5 million if the value of the facility declined below approximately 15% of the financed project cost. While we believe that this lease provides a useful financing mechanism for the facility, adverse public perception of such lease arrangements and the associated risks may cause our stock price to decline. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements”.

To pursue our current business strategy and continue developing our products, we are likely to need substantial additional funding in the future. If we do not obtain this funding on acceptable terms, we may not be able to continue to grow our business and generate enough revenue to recover our investment in our product development effort.

Since inception, we have expended, and will continue to expend, substantial funds to continue our research and development programs. We are likely to need additional financing to fund our operating expenses and capital requirements. We may not be able to obtain additional financing on acceptable terms. If we raise additional funds by issuing equity securities, the new securities may dilute the interests of our existing stockholders or contain restrictive financial covenants.

Our need for additional funding will depend on many factors, including, without limitation:


	•	the amount of revenue, if any, that we are able to obtain from any approved products, and the time and costs required to achieve those revenues;

	•	the timing, scope and results of preclinical studies and clinical trials;

	•	the size and complexity of our programs;

	•


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


For the fiscal year ended December 31, 2004	Commission File Number 0-22962


	•	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.

	•	Regulatory Affairs. The regulatory affairs group manages communications with and submissions to regulatory authorities.

	•	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.

	•	Quality Assurance. The quality assurance group ensures compliance with all regulatory requirements for the clinical development and manufacture of new products.

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

	•	Manufacturing. We have manufacturing capability for the production of protein and antibody drugs for our clinical trials, as well as for preclinical studies. We have expanded our manufacturing facilities as our development pipeline has progressed to allow us to produce larger quantities of protein and antibody drugs for clinical development. We are now 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 our products.


	•	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.


	LymphoStat-B (belimumab)


	HGS-ETR1 (mapatumumab)


	TRAIL-R2 mAbs (HGS-ETR2 and HGS-TR2J)


	CCR5 mAb (CCR5mAb004)