Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended June 30, 2004

OR

For the transition period from                               to                              .

Commission file number: 000-24207

ABGENIX, INC.
(Exact name of registrant as specified in its charter)

(510) 284-6500
(Registrant's telephone number, including area code)

        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 in 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 ý    No o

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

        As of July 30, 2004 there were 88,843,481 shares of the Registrant's Common Stock outstanding.

TABLE OF CONTENTS

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ABGENIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)

See accompanying notes

3

ABGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

See accompanying notes

4

ABGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See accompanying notes

5

ABGENIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(unaudited)

1.    Basis of Presentation and Summary of Significant Accounting Policies

        Basis of Presentation—The unaudited condensed consolidated financial statements of Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003, and accompanying notes included in the Company's annual report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three months and six months ended June 30, 2004, are not necessarily indicative of the results to be expected for the full year or for any other future period.

        Foreign Exchange—Accounts denominated in foreign currency have been remeasured using the U.S. dollar as the functional currency. The aggregate exchange gain/loss included in determining net loss was a $247,000 exchange gain in the three months June 30, 2004 and a $455,000 exchange loss in the six months ended June 30, 2004 compared to an exchange gain of $130,000 and $174,000, respectively, in the three and six months ended June 30, 2003.

        Consolidation—In January 2003, the FASB issued Interpretation No. 46 (the "Interpretation"), Consolidation of Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The interpretation was effective immediately for variable interests created after January 31, 2003. The Company adopted the remaining provision of the Interpretation, pertaining to variable interests existing prior to January 31, 2003, in the quarter ending March 31, 2004. The adoption of the Interpretation did not have a material impact on the results of operations and the financial position of the Company. Significant intercompany accounts and transactions have been eliminated.

        Revenue Recognition—The Company receives payments from customers for license, option, service and milestone fees, as well as for contract manufacturing the Company performs. These payments are generally non-refundable but are reported as deferred revenue until they are recognizable as revenue. The Company has followed the following principles in recognizing revenue:

•

Abgenix enters into revenue arrangements with multiple deliverables in order to meet its customer's needs. For example, the arrangements may include a combination of up-front fees, license payments, joint development revenue, research services, milestone payments, future royalties, and manufacturing arrangements. Multiple element revenue agreements entered into on or July 1, 2003 are evaluated under Emerging Issues Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables," to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. Deliverables in an arrangement that do not meet the separation criteria in Issue 00-21 must be treated as one unit of accounting for purposes of revenue recognition. Generally, the revenue recognition guidance applicable to the last deliverable is followed for the combined unit of accounting. For certain arrangements, the period of time over which certain deliverables will be provided is not contractually defined. Accordingly,

6

management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

•

Abgenix has joint development arrangements under which the collaborative partners share the costs of developing and commercializing antibody therapeutic product candidates equally. In periods where Abgenix incurs more costs under the arrangement than the collaborative partner, Abgenix records contract revenue for the services rendered. In periods where the collaborative partner incurs more costs under the arrangement than Abgenix, Abgenix records expense for the services received.



•

Research and product license fees are generally recognized only after both the license period has commenced and the technology has been delivered.



•

Option fees for granting options to obtain product licenses to develop a product are recognized when the option is exercised or when the option period expires, whichever occurs first.



•

Fees the Company receives for research services the Company performs under its technology out-licensing agreements are generally recognized ratably over the entire period the Company performs these services. Research services include process sciences services the Company performs under its production services agreements, such as cell line development.



•

Incentive milestone payments are recognized as revenue when the specified milestone is achieved. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Abgenix, such as regulatory approval to market a product. Incentive milestone payments are substantially at risk at the inception of the contract, and the values assigned thereto are commensurate with the type of milestone achieved. The Company has no future performance obligations related to an incentive milestone that has been achieved.



•

Contract manufacturing fees the Company receives under its production services agreements are recognized when the manufacture of an antibody product candidate is complete; and the antibody product candidate is released and delivered, as defined in the relevant agreement.

        Stock-Based Compensation—The Company accounts for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company does not recognize compensation expense for employee stock options granted at fair market value. For purposes of disclosures pursuant to Statement of Financial Accounting Standards (SFAS 123), as amended by SFAS 148, the estimated fair value of options is amortized to expense on a straight-line basis over the options' vesting period. The following table illustrates what the net loss would have been had the

7

Company accounted for its stock-based awards under the provisions of SFAS 123. Pro forma amounts may not be representative of future periods.

        The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the three months and six months ended June 30, 2004 and 2003:

        These same assumptions were applied in the determination of the option values related to stock options granted to non-employees, except the option life, for which the term of the consulting contracts, 1 to 5 years, was used. The value has been recorded in the financial statements.

        Net Loss Per Share—Basic net loss per share is calculated based on the weighted-average number of shares outstanding during the period. The impact of common stock options, warrants and shares issuable upon the conversion of convertible subordinated notes and the redeemable convertible preferred stock was excluded from the computation of diluted net loss per share, as their effect is antidilutive for the periods presented.

        Reclassifications—Certain prior period balances may have been reclassified to conform to the current period presentation.

8

2.    Comprehensive Income (Loss)

        Other comprehensive income/(losses) consist of unrealized gains or losses on available-for-sale securities. The components of comprehensive loss, net of tax, were as follows:

3.    Impairment of Identified Intangible Assets and Balances

        During the three months ended June 30, 2004, management determined that an impairment of the Company's acquired technology in the field of catalytic antibodies had occurred and that the estimated value had declined to zero. This technology, which includes intellectual property, was acquired in 2001 through the acquisition of Hesed Biomed, Inc. The Company decided to focus its resources on other research and development projects and decided to wind down its catalytic antibody program. Additionally, after assessing the associated patent position and the likelihood of sale or license of the technology to a third party, management further determined in the three months ended June 30, 2004 that the possibility of generating positive future cash flows from the technology was remote. As a result of this determination, the Company recorded an impairment charge of $17.2 million in the quarter ended June 30, 2004.

        During the six months ended June 30, 2003, the Company decided to discontinue the development of anti-properdin antibodies. As a result, the Company recorded an impairment charge of $1.4 million for previously capitalized costs related to licenses and research funding for the development of therapeutic antibodies to the complement protein properdin, which the Company licensed from Gliatech, Inc.

        Identified intangible assets consisted of the following (in thousands):

        Amortization of acquisition-related intangibles was approximately $1.8 million and $3.6 million, respectively, in each of the three and six months periods ended June 30, 2004 and 2003. Amortization of other intangible assets was approximately $22,000 and $45,000, respectively, for the three and six months ended June 30, 2004 and $22,000 and $68,000, respectively, for the three and six months ended June 30, 2003.

9

        Expected amortization expense related to identified intangible assets for the six-month period from July 1, 2004 to December 31, 2004, and each of the fiscal years thereafter is as follows (in thousands):

4.    Segment Information

        The operations of the Company and its wholly owned subsidiaries constitute one business segment.

        Information about customers who provided 10% or more of contract revenues for the period is as follows:

5.    Convertible Subordinated Note

        In October 2003, in connection with a collaboration agreement, the Company entered into a securities purchase agreement with AstraZeneca. Pursuant to the agreement, the Company issued to AstraZeneca $50.0 million of Series A-1 convertible preferred stock and $50.0 million of Series A-2 convertible preferred stock. The net proceeds from the securities were $99.7 million. Pursuant to its terms, the Series A-2 preferred stock was redeemed at the option of AstraZeneca on February 19, 2004 and the Company issued AstraZeneca a convertible subordinated note with a principal amount of $50.0 million, which matures on October 29, 2013. No interest is payable on the note except in the event of a payment default by the Company.

Conversion rights

        The Company, subject to certain conditions, can convert the convertible subordinated note into shares of common stock at a conversion price equal to the lower of (a) the average market price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be higher than 101% of the market price on the trading day immediately preceding the conversion date) or (b) $30.00 per share.

        AstraZeneca may convert the convertible subordinated note into shares of common stock at a conversion price of $30.00 per share, at any time prior to the repayment of the principal amount of the note.

Redemption rights and maturity

        The convertible subordinated note matures on October 29, 2013, if still outstanding. The Company can, upon 15 days notice to the holder repay the principal amount of the convertible subordinated note in cash.

        AstraZeneca has the right to require Abgenix to repay the convertible subordinated note at its face amount, upon the occurrence of a change in control of Abgenix after the completion of a defined

10

research period. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon such an event.

        AstraZeneca has the right to require Abgenix to repay a specified portion of the convertible subordinated note upon the occurrence of (a) a material breach by Abgenix of a material obligation under the Collaboration Agreement between the Company and AstraZeneca or (b) a change in control of Abgenix or an acquisition by Abgenix in which the other party to the change in control or acquisition, as the case may be, is a competitor of AstraZeneca, in each case that occurs during a defined research period and results in AstraZeneca's termination of all research programs and future programs under the collaboration agreement. The amount that AstraZeneca may require Abgenix to redeem will be based upon the extent of completion of the research programs that are the subject of the collaboration between the Company and AstraZeneca. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon such events.

        Upon the occurrence of certain events of default, (1) the holders of the convertible subordinated note shall have the right to make the entire outstanding principal amount of the note due and payable and (2) if the event of default is a payment default, quarterly interest payments shall begin to accrue on the convertible subordinated note at a default rate equal to the 10-year U.S. treasury rate plus three percent (3%) compounded annually. Events of default for purposes of this provision include, but are not limited to, the following (i) a failure to make a required payment, or a breach by the Company of any of the Company's other obligations under, the Series A-1 preferred stock, the convertible subordinated note or any subordinated promissory note that may be issued by the Company in the circumstances described below under "Aggregate ownership limitation"; (ii) a breach of the Company of specified obligations under the securities purchase agreement with AstraZeneca; (iii) the securities purchase agreement, or any other agreement or instrument contemplated by the securities purchase agreement, is asserted by the Company not to be a legal, valid and binding instrument; (iv) certain bankruptcy and insolvency events involving the Company; and (v) a cross-acceleration of $25 million or more of other indebtedness of the Company.

Liquidation and Voting rights

        The convertible subordinated note has an aggregate principal amount of $50 million. The convertible note does not have any voting rights unless it is converted into common stock and will not bear any interest unless there is an occurrence of a default that is a payment default. Upon an event of default that is a payment default, the convertible note will bear interest at a rate equal to the 10-year U.S. treasury rate plus 3% compounded annually.

        The convertible subordinated note is senior to the preferred stock and the common stock and is junior to all senior indebtedness and to the Company's 3.5% convertible subordinated notes due in 2007.

Aggregate ownership limitation

        At no tim