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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-K

 

(Mark One)

 

  x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004

 

OR

 

  ¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to                             

 

Commission file number: 0-32405

 


 

LOGO

Seattle Genetics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   91-1874389

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

21823 30th Drive SE

Bothell, WA 98021

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: (425) 527-4000

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of class


 

Name of each exchange on which registered


Common Stock, par value $0.001   Nasdaq National Market

 


 

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 than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days  YES  x    NO  ¨

 

Indicate by check mark 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 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.  x

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  YES  x    NO  ¨

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $160 million as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

There were 42,140,428 shares of the registrant’s Common Stock issued and outstanding as of March 9, 2005.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 13, 2005.

 



Table of Contents

SEATTLE GENETICS, INC.

 

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2004

 

TABLE OF CONTENTS

 

          Page

PART I

Item 1.

   Business    3

Item 2.

   Properties    16

Item 3.

   Legal Proceedings    16

Item 4.

   Submission of Matters to a Vote of Security Holders    16

PART II

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   17

Item 6.

   Selected Financial Data    18

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    38

Item 8.

   Financial Statements and Supplementary Data    39

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    67

Item 9A

   Controls and Procedures    67

Item 9B

   Other Information    67

PART III

Item 10.

   Directors and Executive Officers of the Registrant    68

Item 11.

   Executive Compensation    68

Item 12.

   Security Ownership of Certain Beneficial Owners and Management    68

Item 13.

   Certain Relationships and Related Transactions    68

Item 14.

   Principal Accounting Fees and Services    68

PART IV

Item 15.

   Exhibits, Financial Statement Schedules    69
     Signatures    73

 

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PART I

 

Item 1. Business.

 

Overview

 

Seattle Genetics is a biotechnology company focused on the development of monoclonal antibody-based therapeutic products for the treatment of cancer and immunologic diseases. We currently have three product candidates in clinical trials, SGN-30, SGN-15 and SGN-40, and four product candidates in preclinical development, SGN-35, SGN-70, SGN-75 and SGN-17/19. Our pipeline of product candidates is based upon three technologies: genetically engineered monoclonal antibodies, monoclonal antibody-drug conjugates (ADCs) and antibody-directed enzyme prodrug therapy (ADEPT). These technologies enable us to develop monoclonal antibodies that can kill target cells on their own as well as to increase the potency of monoclonal antibodies by enhancing their cell-killing ability. We have licensed our ADC technology to Genentech, UCB Celltech, Protein Design Labs, CuraGen and Bayer Pharmaceuticals and our ADEPT technology to Genencor International. We also have research and in-licensing programs for novel antigens and new monoclonal antibodies.

 

Monoclonal Antibodies for Cancer Therapy

 

Antibodies are proteins released by the immune system’s B-cells, a type of white blood cell, in response to the presence of a foreign substance in the body, such as a virus, or in some cases to an abnormal immunologic response. B-cells produce millions of different kinds of antibodies, which have slightly different shapes that enable them to bind to and inactivate specific molecular targets. Antibodies that have identical molecular structure and bind to a specific target are called monoclonal antibodies.

 

There are a growing number of antibody-based products that have been approved for the treatment of cancer. These include five genetically engineered monoclonal antibodies (Rituxan, Herceptin, Campath, Avastin and Erbitux), two radionuclide-conjugated monoclonal antibodies (Zevalin and Bexxar) and an antibody-drug conjugate (Mylotarg). Together, these eight products generated sales of more than $3 billion in 2004. Additionally, there are many monoclonal antibodies in preclinical development and clinical trials that are likely to increase the number of monoclonal antibody-based commercial products in the future.

 

Cancer is the leading cause of death for people in the United States under the age of 85, resulting in over 570,000 deaths annually. The American Cancer Society estimates that 1.3 million new cases of cancer will be diagnosed in the United States during 2005. The World Health Organization estimates that more than ten million people worldwide are diagnosed with cancer each year, a rate that is expected to increase to an estimated 15 million people annually by the year 2020. Cancer causes six million deaths worldwide each year, and according to the National Cancer Institute, approximately 40 percent of people diagnosed with cancer will die within five years after receiving their first treatment.

 

Our Monoclonal Antibody Technologies

 

Our monoclonal antibody technologies are designed to maximize the antitumor activity of antibodies. Some monoclonal antibodies have significant intrinsic antitumor activity; however, many are not potent enough on their own to represent effective therapeutic agents. We use our ADC and ADEPT technologies to develop monoclonal antibody-based therapies that can more effectively kill target cells. We also evaluate the use of our monoclonal antibodies in combination with conventional chemotherapy, which can result in synergistic antitumor activity that is greater than when either therapy is administered alone.

 

Three distinct but related technologies form our core business and provide the potential for discovery and development of an array of monoclonal antibody-based therapeutics:

 

    genetically engineered monoclonal antibodies;

 

    monoclonal antibody-drug conjugates (ADCs); and

 

    antibody-directed enzyme prodrug therapy (ADEPT).

 

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Genetically Engineered Monoclonal Antibodies

 

Our antibodies are genetically engineered to reduce non-human protein sequences, thereby lowering the potential for patients to develop a neutralizing immune response and extending the duration for use in therapy. In general, there are three types of genetically engineered monoclonal antibodies being developed for human therapeutic use: chimeric, humanized and fully-human. A chimeric antibody contains a mixture of mouse and human sequences, usually 30 percent mouse and 70 percent human. Rituxan, the largest selling antibody product for cancer therapy, and Erbitux are both chimeric antibodies. Humanized antibodies contain over 90 percent human protein sequences, while fully-human monoclonal antibodies contain 100 percent human sequences. Our product development pipeline includes both chimeric and humanized monoclonal antibodies. We have substantial expertise in humanizing antibodies and have non-exclusive licenses to Protein Design Labs’ antibody humanization patents.

 

Some monoclonal antibodies kill cancer cells without being conjugated to a toxin by either directly sending a cell-killing signal or by activating an immune response that leads to cell death. These antibodies can be effective in regressing tumors and have the advantage of low systemic toxicity. For example, antibodies targeted to antigens such as CD20 (Rituxan), HER2 (Herceptin), CD52 (Campath), VEGF (Avastin) and EGFR (Erbitux) have been approved by the FDA and are collectively generating over $3 billion in annual sales. SGN-30 and SGN-40 fall into this category of genetically engineered antibodies that have intrinsic antitumor activity on their own without conjugation to a toxin.

 

Antibody-Drug Conjugates (ADCs)

 

ADCs are monoclonal antibodies that are linked to potent cell-killing drugs. Our ADCs utilize monoclonal antibodies that internalize within target cells upon binding to their cell-surface receptors. The environment inside the cell causes the cell-killing drug to be released from the monoclonal antibody, allowing it to have the desired effect. An important component of an ADC is the conditional linker that holds and then releases the drug from the monoclonal antibody once it enters the target cell. We have a variety of linker technologies including enzyme-cleavable linkers that are designed to be very stable in blood, thereby minimizing toxicity to normal tissues. We use highly potent cell-killing drugs, such as Auristatin derivatives, that are synthetically produced and readily scaleable, in contrast to natural product drugs that are more difficult to produce and link to antibodies. We hold exclusive or partially-exclusive licenses to several issued patents and have filed multiple patent applications covering our ADC technology. We continue to create and evaluate new linkers and novel classes of potent, cell-killing drugs for use in our ADC program.

 

Antibody-Directed Enzyme Prodrug Therapy (ADEPT)

 

ADEPT represents a novel approach to minimize drug exposure to normal tissues through the combination of two relatively non-toxic agents to achieve potent antitumor activity specifically localized to tumor tissue. Our ADEPT technology utilizes monoclonal antibodies that remain bound to the cell surface, as distinguished from the antibodies that internalize within target cells used with our ADC technology. ADEPT administration is a two-step process. In the first step, an enzyme that is genetically fused to an antibody fragment is administered and accumulates on the surface of tumor cells. In the second step, relatively inactive forms of anti-cancer drugs (termed prodrugs) are administered and subsequently converted by the enzyme attached to the tumor cell surface into potent cell-killing drugs that can penetrate into tumor tissue and induce antitumor responses. This method of drug delivery results in higher drug concentrations within tumors relative to normal tissues, thus localizing the effects of the therapy.

 

Our Strategy

 

Our goal is to become a leading developer and marketer of monoclonal antibody-based therapies for cancer and immunologic diseases. Key elements of our strategy are to:

 

   

Advance Our Product Pipeline.    Our primary focus is advancing our pipeline of product candidates: SGN-30, SGN-15 and SGN-40, which are in clinical trials, and SGN-35, SGN-70, SGN-75 and SGN-17/19, which are in preclinical development. To that end, we have built strong internal expertise in

 

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our development, regulatory and clinical groups. We also enter into key relationships with scientific advisors, research organizations and contract manufacturers to supplement our internal efforts. For our clinical trials, we have established relationships with leading experts in oncology and hematology and have studies ongoing at over 60 cancer centers in the United States, Europe and Russia.

 

    Develop Industry-Leading Monoclonal Antibody Technologies.    We have developed industry-leading technologies to enhance the potency and efficacy of monoclonal antibodies. Our ADC and ADEPT technologies enable us to exploit the therapeutic potential of monoclonal antibodies that have target specificity by enhancing their cell-killing capabilities. We are currently developing several product candidates that employ these technologies, including our preclinical ADC product candidates, SGN-35 and SGN-75, and our preclinical ADEPT product candidate, SGN-17/19.

 

    Selectively License our Technologies.    We license our ADC and ADEPT technologies to generate near-term revenue and potentially earn future milestones and royalties which partially offset expenditures on our internal research and development activities. Presently, we have collaborations with Genentech, UCB Celltech, Protein Design Labs, CuraGen and Bayer for our ADC technology and with Genencor for our ADEPT technology.

 

    Identify and Develop Novel Monoclonal Antibodies.    We have focused on the research and development of monoclonal antibodies since our inception. We utilize both internal research efforts and in-licensing to identify targets that can be used to generate new monoclonal antibodies, including our ongoing collaboration with Celera Genomics. We believe these programs will enable us to continue to expand our pipeline of therapeutic candidates. In addition, we believe we have created valuable intellectual property by successfully identifying and filing patent applications for multiple novel monoclonal antibodies with potential therapeutic uses.

 

    Acquire or In-license Attractive Product Candidates and Technologies.    In addition to our internal research and development initiatives, we have ongoing efforts to identify products and technologies to in-license from academic groups and other biotechnology and pharmaceutical companies. We have entered into such license agreements with Bristol-Myers Squibb, Genentech, Protein Design Labs, ICOS Corporation, University of Miami, Arizona State University, Mabtech AB, CLB Research and Development and Imperial College London, among others. We plan to continue supplementing our internal research programs through strategic in-licensing transactions.

 

    Establish Strategic Collaborations to Advance our Product Pipeline.    We may enter into strategic collaborations at various stages in our research and development process to accelerate the commercialization of our product candidates. Collaborations can also supplement our own internal expertise in key areas such as clinical and manufacturing, as well as provide us with access to our collaborators’ marketing, sales and distribution capabilities. When establishing strategic collaborations, we endeavor to retain significant product rights.

 

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Development Programs

 

The following table summarizes the status of our product pipeline:

 

Product
Candidate


  

Technology


  

Disease/ Indication


  

Development Stage


SGN-30

   Genetically engineered monoclonal antibody    Systemic anaplastic large cell lymphoma (ALCL)    Phase II
          Hodgkin’s disease    Phase II
          Cutaneous ALCL    Phase II

SGN-15

   ADC    Non-small cell lung cancer in combination with Taxotere    Phase II

SGN-40

   Genetically engineered monoclonal antibody    Multiple myeloma    Phase I
          Non-Hodgkin’s lymphoma    Phase I
          Chronic Lymphocytic Leukemia (CLL)    Potential phase I planned in 2006
          Bladder and renal cancer; immunologic diseases    Preclinical

SGN-35

   ADC    Hematologic malignancies; immunologic diseases    Investigational New Drug Application (IND) candidate in early 2006

SGN-70

   Genetically engineered monoclonal antibody    Hematologic malignancies; immunologic diseases    IND candidate in 2006 or 2007

SGN-75

   ADC    Renal cancer; hematologic malignancies; immunologic diseases    IND candidate in 2006 or 2007

SGN-17/19

   ADEPT    Metastatic melanoma    Preclinical

 

SGN-30

 

We are currently conducting phase II clinical trials of SGN-30 for the treatment of three types of lymphoma: systemic ALCL, Hodgkin’s disease and cutaneous ALCL. SGN-30 is a monoclonal antibody targeting the CD30 antigen, which is expressed on hematologic malignancies including Hodgkin’s disease and some types of T-cell non-Hodgkin’s lymphomas. CD30 is an attractive target for cancer therapy because it has minimal expression on normal tissues. We have received orphan drug designation from the FDA for SGN-30 in both Hodgkin’s disease and T-cell lymphomas.

 

Market Opportunity

 

Lymphoma is the most common type of hematologic malignancy. Of the nearly 500,000 people in the United States with lymphoma, approximately 168,000 have Hodgkin’s disease. According to the American Cancer Society, approximately 7,350 cases of Hodgkin’s disease will be diagnosed in the United States during 2005, and an estimated 1,410 people will die of the disease. The prevalence of ALCL in the United States is not known, but worldwide ALCL accounts for approximately five percent of all non-Hodgkin’s lymphoma. Advances made in the use of combined chemotherapy and radiotherapy for malignant lymphomas have resulted in durable remission rates for front-line therapy in early stage lymphomas. However, the therapeutic options for refractory or relapsed patients are limited, and there are significant opportunities for new treatments in these patient populations.

 

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Clinical Results and Status

 

During 2002 and 2003, we treated a total of 37 patients in phase I clinical trials of SGN-30 for patients with CD30-expressing hematologic malignancies. In these studies, SGN-30 was well-tolerated and we observed some antitumor responses. Notably, all of these patients had failed prior treatment with chemotherapy, with the median patient having received five prior courses of treatment.

 

Based on these data, we initiated phase II clinical trials of SGN-30 during 2004 for patients with systemic ALCL, Hodgkin’s disease or cutaneous ALCL. These studies are designed to accrue up to 40 patients in each disease indication at multiple sites in the United States and Europe. The studies are designed to evaluate the antitumor activity, safety and immunogenicity of SGN-30.

 

We reported preliminary data from our systemic ALCL and Hodgkin’s disease phase II studies at the American Society of Hematology (ASH) annual meeting in December 2004. In the systemic ALCL study, we reported that two of the first six patients treated at six milligrams per kilogram had objective responses, consisting of one complete response and one partial response. In the Hodgkin’s disease study, we reported data from the first 16 evaluable patients. Of these patients, six had stable disease with an average duration of 4.8 months and ten had progressive disease. In both trials, SGN-30-related adverse events were mild and consistent with antibody administration.

 

Based on our encouraging data thus far in the systemic ALCL study, we are continuing to accrue patients and anticipate having over 40 cancer centers open in the United States and Europe by mid-2005. In Hodgkin’s disease, after evaluating preliminary data from the first 20 patients accrued to the study, we have decided not to continue to treat Hodgkin’s disease patients at the current dose level of 12 milligrams per kilogram. We are currently evaluating alternate trial designs for SGN-30 in Hodgkin’s disease, including higher single-agent doses, accruing less heavily pre-treated patients and/or combining SGN-30 with chemotherapy.

 

Additional data from our SGN-30 systemic ALCL and Hodgkin’s disease studies will be reported at the American Society of Clinical Oncology (ASCO) annual meeting in May 2005. We expect to report preliminary data from our ongoing SGN-30 cutaneous ALCL study during late 2005 or early 2006.

 

In addition to cancer, we believe that SGN-30 may have applications in immunologic diseases such as atopic dermatitis, rheumatoid arthritis, graft-versus-host disease and multiple sclerosis. In immunologic disease, the body’s immune system malfunctions and attacks its own healthy cells. Many therapies for immunologic disease rely on suppressing the immune system to prevent further damage to normal tissues, but have the unwanted side effect of making the patient more susceptible to infection or cancer. The CD30 antigen is expressed only on activated T- and B-cells but is absent on these cells when in a resting state. Since resting T-cells and B-cells make up approximately 95 percent of those types of cells circulating in the body, SGN-30 may be able to prevent or reduce a damaging immune response without globally suppressing the patient’s immune system, thus leaving the patient better able to fight off infection. Preclinical studies of SGN-30 in immunologic disease are ongoing internally and we plan to initiate outside collaborations to study the application of SGN-30 in immunologic disease.

 

SGN-15

 

We are currently conducting two phase II clinical trials of SGN-15 in combination with the FDA-approved chemotherapy Taxotere for the treatment of non-small cell lung cancer (NSCLC). SGN-15 is an ADC composed of a monoclonal antibody chemically attached by a hydrazone linker to the chemotherapeutic drug doxorubicin. The antibody component of SGN-15 binds to a Lewisy-related carbohydrate antigen that is highly expressed on many solid tumors, including lung, breast, prostate, ovarian, pancreatic and colon cancer. SGN-15 works by binding to the tumor cell and, upon entering the cell, releasing its payload of doxorubicin. Preclinical studies of SGN-15 in combination with Taxotere have demonstrated synergistic antitumor activity and clinical studies have established non-overlapping toxicity profiles.

 

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Market Opportunity

 

Lung cancer is the leading cause of all cancer-related deaths worldwide and, according to the American Cancer Society, will account for an estimated 163,000 deaths in the United States during 2005. Approximately 80 percent of lung cancer is NSCLC. Due to the lack of early symptoms, most NSCLC patients are already in the advanced stages of the disease at the time of diagnosis. Advanced stage and metastatic NSCLC remains an incurable disease with current therapies. Combination chemotherapy regimens have produced clinical response or stabilization in many cases, but have had little effect on overall survival. Response rates with standard chemotherapy are only approximately 25 percent and median survival is less than six months from time to progression. Consequently, there remains a significant unmet clinical need for patients with advanced stage NSCLC.

 

Clinical Results and Status

 

We are focusing our clinical development strategy for SGN-15 on the treatment of patients with NSCLC who have failed front-line or front-line and second-line therapies. We have also conducted several phase II clinical trials of SGN-15 in combination with Taxotere in other solid tumors.

 

During 2004, we completed a randomized 60-patient phase II NSCLC trial investigating SGN-15 dosed simultaneously in combination with Taxotere. This trial was designed to evaluate safety and antitumor activity of the combination therapy, as measured by reduction in tumor size, time to progression, quality of life and overall survival rates. Two-thirds of patients enrolled received the combination of SGN-15 and Taxotere and one-third of the patients received Taxotere alone. This study was not sufficiently large to definitively compare survival between the two arms. However, final data from this study suggested a median survival advantage of approximately six weeks for patients who received the combination therapy versus those who received Taxotere alone. There were no significant toxicities related to SGN-15 observed in the study other than moderate gastrointestinal symptoms.

 

While the phase II NSCLC study was ongoing, we were conducting preclinical experiments to evaluate the effects of sequencing the dosing schedule of SGN-15 and Taxotere. Preclinical data from these experiments demonstrate that administering SGN-15 prior to Taxotere results in a gain in antitumor activity versus the simultaneous dosing schedule that was utilized in our completed phase II NSCLC study. These data suggest that Taxotere, which has a direct effect on microtubules and can inhibit internalization, may best be dosed several days after SGN-15.

 

To evaluate whether a sequenced dosing schedule can improve the efficacy of the combination of SGN-15 plus Taxotere, we are currently conducting two 30-patient phase II clinical trials of SGN-15. The first trial is designed to accrue front-line NSCLC patients and the second trial is designed to accrue front-line and second-line patients. Half of the patients in each study receive SGN-15 dosed three days prior to Taxotere and half receive SGN-15 and Taxotere dosed simultaneously. Both trials utilize a biomarker that can be assessed using positron emission tomography (PET) imaging. This diagnostic technology can be used to determine the relative activity of the two dose schedules on an expedited basis. We are also evaluating response rate and time to progression in one of the studies. We have accrued a total of more than 40 patients in these trials and expect to report preliminary data in the second half of 2005. We intend to utilize the data from these trials to make key decisions about future clinical development and potential partnering of SGN-15.

 

SGN-40

 

We are currently conducting two phase I clinical trials of SGN-40 in patients with multiple myeloma or non-Hodgkin’s lymphoma. SGN-40 is a humanized monoclonal antibody that targets the CD40 antigen, which is expressed on hematologic malignancies such as multiple myeloma, non-Hodgkin’s lymphoma and chronic lymphocytic leukemia, as well as solid tumors such as bladder, renal and ovarian cancer. We have generated extensive preclinical data demonstrating that SGN-40 has direct antitumor activity in both in vitro and in vivo models of multiple myeloma and non-Hodgkin’s lymphoma via at least two distinct cell-killing mechanisms.

 

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Market Opportunity

 

We are focusing our initial clinical development of SGN-40 on three types of cancer: multiple myeloma, non-Hodgkin’s lymphoma and chronic lymphocytic leukemia.

 

Multiple Myeloma.    The American Cancer Society estimates that approximately 16,000 cases of multiple myeloma will be diagnosed in the United States during 2005, and approximately 11,300 people will die from the disease. Recent advances, such as the FDA’s approval of Velcade during 2003, have expanded the therapeutic options for patients with multiple myeloma. However, existing therapies for multiple myeloma have limited response rates and significant toxic side effects. Therefore, we believe there are substantial opportunities for targeted treatments in this disease.

 

Non-Hodgkin’s Lymphoma.    The American Cancer Society estimates approximately 56,300 cases of non-Hodgkin’s lymphoma, the majority of which are of B-cell origin, will be diagnosed in the United States during 2005, and approximately 19,200 people will die from the disease. Advances made in the use of combined chemotherapy and radiotherapy and the use of Rituxan have resulted in durable remission rates for front-line therapy in early stage disease. However, the therapeutic options for refractory or relapsed patients are still limited, and there are significant opportunities for new treatments in this patient population.

 

Chronic Lymphocytic Leukemia (CLL).    CLL is one of the most common types of leukemia. According to the American Cancer Society, approximately 9,730 new cases of CLL will be diagnosed and 4,600 patients will die of CLL in the United States during 2005. In recent years, the combination of chemotherapy agents with Rituxan has significantly increased the response rate and duration of remission in CLL patients. However, this therapy is not curative, has significant immunosuppression, and generally results in relapse within several years. Patients often cannot tolerate repeated treatments of these combination therapies, and Rituxan has lower efficacy as a single agent. Therefore, there is significant need for new therapies that are active in relapsed or refractory CLL.

 

Status

 

We opened phase I clinical trials of SGN-40 in multiple myeloma in February 2004 and in non-Hodgkin’s lymphoma in November 2004. Each study is an open-label, multi-dose, single-arm trial designed to accrue cohorts of at least three patients at escalating doses of SGN-40. All patients accrued to the studies are heavily pretreated and have relapsed or refractory disease. The objectives of both trials are to establish safety and pharmacokinetic profiles, evaluate effects on lymphocytes, determine whether patients develop an immune response to SGN-40 and assess antitumor activity of a multi-dose regimen of SGN-40. We plan to report preliminary data from our phase I studies of SGN-40 in multiple myeloma and non-Hodgkin’s lymphoma at the ASCO annual meeting in May 2005.

 

We are evaluating initiation of a phase I clinical trial of SGN-40 in CLL in 2006, and intend to explore potential uses of SGN-40 in immunologic diseases such as graft-versus-host disease, autoimmune (or idiopathic) thrombocytopenic purpura (ITP) and rheumatoid arthritis. We believe SGN-40 may have applications in immunologic diseases because of its ability, in both our clinical trials and preclinical studies, to deplete activated B-cells and plasma cells. This is similar to the mechanism of action of Rituxan, which has demonstrated promising data in clinical trials for patients with immunologic diseases such as rheumatoid arthritis, multiple sclerosis and lupus. We are also investigating the use of SGN-40 in CD40-expressing solid tumors.

 

SGN-35

 

SGN-35 is a second generation ADC composed of the same monoclonal antibody used in our SGN-30 product candidate attached by our proprietary, enzyme-cleavable linker to a derivative of the highly potent class of cell-killing drugs called Auristatins. In preclinical models, SGN-35 has induced complete regressions of tumors at doses as low as 0.5 milligrams per kilogram. We are currently conducting preclinical development of SGN-35 for the treatment of CD30-expressing hematologic malignancies such as Hodgkin’s disease and some types of non-Hodgkin’s lymphoma, and we plan to submit an IND for SGN-35 in early 2006. As with SGN-30, we are also considering possible uses of SGN-35 to treat immunologic diseases such as graft-versus-host disease, rheumatoid arthritis and multiple sclerosis due to expression of CD30 on activated, but not resting, T-cells.

 

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SGN-70 and SGN-75

 

We are developing two preclinical product candidates that target the CD70 antigen: SGN-70 is a humanized monoclonal antibody with intrinsic cell-killing ability and SGN-75 is an ADC comprised of the same antibody linked to an Auristatin derivative using our second generation ADC technology. The CD70 antigen is expressed on renal cancer, nasopharyngeal carcinoma and certain hematologic malignancies. SGN-70 has demonstrated potent antitumor activity in preclinical models of hematologic malignancies. SGN-75 is highly effective and well tolerated in preclinical models of human renal cell cancer. Since CD70 is expressed on recently activated T- and B-cells, but not while those cells are in a resting, inactive state, SGN-70 and SGN-75 may also have applications in immunologic and inflammatory diseases. In preclinical studies, SGN-75 has been shown to selectively eliminate activated T-cells without affecting resting T-cells. SGN-70 and SGN-75 are both potential IND candidates in 2006 or 2007.

 

SGN-17/19

 

SGN-17/19 is an ADEPT product candidate that we are developing for the treatment of metastatic melanoma. SGN-17 is a fusion protein containing the binding site of the L49 monoclonal antibody and the enzyme ß-lactamase. The L49 antibody component binds to the p97 cell surface antigen, which is non-internalizing and highly expressed on melanoma, as well as some ovarian, breast and lung carcinomas. SGN-19 is a prodrug form of the chemotherapeutic drug melphalan that has been inactivated through the addition of a chemical group that can be removed by the enzyme ß-lactamase. When SGN-17 is injected systemically, it accumulates on the tumor tissue and remains bound at the cell surface. SGN-19 is then administered systemically and converted to melphalan by the enzyme ß-lactamase, resulting in localized release of melphalan on the surface of cancer cells. Through genetic engineering efforts, we have made considerable advances in the production of the SGN-17 component. At present, the yield of active SGN-17 is suitable for scale-up to a clinical grade manufacturing process. We have also made improvements to the formulation and chemical synthesis of SGN-19, and are continuing to evaluate other types of novel, proprietary prodrugs that may be able to expand the therapeutic window of our ADEPT technology.

 

Research Programs

 

In addition to our pipeline of product candidates and antibody-based technologies, we have internal research programs directed towards identifying novel antigen targets and monoclonal antibodies, antibody engineering and developing new classes of stable linkers and potent, cell-killing drugs.

 

Novel Antigen Targets and Monoclonal Antibodies.    We are actively engaged in internal efforts to discover and develop antigen targets and monoclonal antibodies with novel specificities and activities. We focus on genes and proteins that are highly expressed in cancer to identify molecules that are located on the surface of cancer cells that may serve as targets for monoclonal antibodies. We then create and screen panels of cancer-reactive monoclonal antibodies in our laboratories to identify those with the highest specificity. We supplement these internal efforts by evaluating opportunities to in-license targets and antibodies from academic groups and other biotechnology and pharmaceutical companies, such as the agreements we entered into during 2005 with Celera Genomics and Imperial College London. The resulting monoclonal antibodies may represent product candidates on their own or may be utilized as part of our ADC or ADEPT technologies.

 

Antibody Engineering.    We have substantial internal expertise in antibody engineering, both for antibody humanization and engineering of antibodies to improve drug linkage sites for use with our ADC technology. By modifying the number and type of drug-linkage sites found on our antibodies, we can improve the robustness and cost-effectiveness of our manufacturing processes for conjugation of ADCs.

 

New Cell-Killing Drugs.    We continue to research new cell-killing drugs that can be linked to antibodies, such as the Auristatins that we use in our second generation ADC technology. We are evaluating multiple Auristatin derivatives, as well as other classes of cell-killing drugs, for potential applications as ADCs. We are also synthesizing novel classes of prodrugs for use in our ADEPT technology.

 

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Corporate Collaborations

 

Part of our business strategy is to establish corporate collaborations with biotechnology and pharmaceutical companies and academic institutions. We license our technologies to collaborators to improve the efficacy of their own monoclonal antibodies. The revenues derived from these collaborations partially offset expenditures on our internal research and development activities. We also seek collaborations to add to our pipeline and to advance the development and commercialization of our own product candidates. When partnering, we seek to retain significant downstream participation in product sales through either profit-sharing or product royalties paid on annual net sales. Our principal corporate collaborations are listed below.

 

ADC Collaborations

 

We have entered into agreements with five collaborators to allow them to use our proprietary ADC technology with their monoclonal antibodies:

 

Bayer.    In September 2004, we entered into an ADC collaboration with Bayer Corporation. Under the terms of the multi-year agreement, Bayer paid us a $2.0 million upfront fee for an exclusive license to our technology for a single antigen. Bayer is also paying service and reagent fees and has agreed to make milestone payments and pay royalties on net sales of any resulting products. Bayer is responsible for all costs associated with the development, manufacturing and marketing of any products generated as a result of this collaboration.

 

CuraGen.    In June 2004, we entered into an ADC collaboration with CuraGen Corporation. Under the terms of the multi-year agreement, CuraGen paid us a $2.0 million upfront fee for an exclusive license to our technology for a single antigen. In February 2005, CuraGen paid us an additional $1.0 million fee for an exclusive license to a second antigen. CuraGen is also paying service and reagent fees and has agreed to make milestone payments and pay royalties on net sales of any resulting products. CuraGen is responsible for all costs associated with the development, manufacturing and marketing of any products generated as a result of this collaboration. CuraGen is currently conducting preclinical development of CR011, an ADC targeting the first antigen designated under the collaboration, for the treatment of metastatic melanoma.

 

Genentech.    In April 2002, we entered into an ADC collaboration with Genentech. Upon entering into the multi-year agreement, Genentech paid us a $2.5 upfront fee and purchased $3.5 million of our common stock. We have subsequently expanded this collaboration on several occasions to include additional antigens, including in December 2003 when Genentech paid us a $3.0 million fee and purchased an additional $7.0 million of our common stock and in November 2004 when Genentech paid us a $1.6 million fee. The total payments we have received from Genentech under this collaboration, including upfront fees, equity investments, technology access and research fees, exceed $20 million. Genentech has also agreed to pay progress-dependent milestone payments and royalties on net sales of any resulting products. Genentech is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration. We are currently assisting Genentech with process development and manufacturing of a HER2-targeted ADC to support potential IND-enabling studies and possible future clinical trials. In March 2005, we achieved a milestone under this collaboration based on Genentech’s continued progress in preclinical development with an ADC utilizing our technology. Genentech is also utilizing our technology to conduct research on ADCs targeting multiple other antigens.

 

UCB Celltech.    In March 2002, we entered into an ADC collaboration with Celltech Group. The collaboration was assumed by UCB Celltech in 2004 upon UCB S.A.’s acquisition of Celltech. Under the terms of the multi-year agreement, UCB Celltech paid us an upfront technology access fee, is paying service and reagent fees and has agreed to make milestone payments and pay royalties on net sales of any resulting products. UCB Celltech is responsible for all costs associated with the development, manufacturing and marketing of any products generated as a result of this collaboration. During the past few years, we have achieved several preclinical milestones under our ADC collaboration with UCB Celltech, which have triggered payments to us.

 

Protein Design Labs.    In June 2001, we entered into an ADC collaboration with Eos Biotechnology. This collaboration was assumed by Protein Design Labs in 2003 upon its acquisition of Eos Biotechnology, and we agreed to expand the collaboration in January 2004. Under the expanded agreement, we agreed to provide

 

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additional support to Protein Design Labs in exchange for Protein Design Labs paying us increased fees, milestones and royalties on net sales of any ADC products resulting from the collaboration. Protein Design Labs also granted us a license and options for two additional licenses under their antibody humanization patents. Protein Design Labs is responsible for all costs associated with the development, manufacturing and marketing of any ADCs generated as a result of this collaboration.

 

Genencor ADEPT Collaboration

 

Genencor International.    In January 2002, we formed a strategic alliance with Genencor International to discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. As part of the collaboration, Genencor purchased $3.0 million of our common stock in a private placement. In July 2003, we amended and extended the collaboration for an additional two years in exchange for a payment from Genencor. Under the terms of the amended agreement, Genencor has non-exclusive rights to use our ADEPT technology with Genencor’s own antibodies and antigen targets. Genencor is paying us technology access and research fees and has agreed to pay milestones and royalties on sales of any products that utilize our ADEPT or prodrug technologies. We may also elect to co-develop ADEPT products with Genencor under the collaboration.

 

Celera Genomics Co-Development Agreement

 

Celera Genomics.    In July 2004, we formed a collaboration with Celera Genomics Group, an Applera Corporation business, to jointly discover and develop antibody-based therapies for cancer. Products developed under the collaboration may include either genetically engineered monoclonal antibodies or ADCs. Pursuant to the terms of the multi-year agreement, we will jointly designate with Celera a number of cell-surface antigens discovered and validated through Celera’s proprietary proteomic platform. We will carry out initial screening to generate and select the appropriate corresponding antibodies or ADCs for joint development and commercialization. Preclinical and clinical product development will be co-funded and we will jointly share any profits resulting from collaboration products. Either party may opt out of co-development of a particular product and receive royalties on net sales. Celera will also pay us progress-dependent commercialization milestones for any co-developed ADCs.

 

License Agreements

 

Bristol-Myers Squibb.    In March 1998, we obtained rights to some of our technologies and product candidates, portions of which are exclusive, through a license agreement with Bristol-Myers Squibb. Through this license, we secured rights to monoclonal antibody-based cancer targeting technologies, including 26 different patents, eight monoclonal antibodies, chemical linkers, a ribosome-inactivating protein and enabling technologies. We also received a substantial supply of vialed, clinical-grade SGN-15, which has been used in our clinical trials. Under the terms of the license agreement, we are required to pay royalties on net sales of future products incorporating technology licensed from Bristol-Myers Squibb.

 

Genentech.    In March 2003, we entered into license agreements with Genentech providing us with rights relating to our SGN-40 product candidate, including a license under Genentech’s Cabilly patents. We paid Genentech an upfront license fee and have agreed to make a progress-dependent milestone payment and pay royalties on net sales of anti-CD40 products that use Genentech’s technology.

 

Protein Design Labs.    In January 2004, as part of the expansion of our ADC collaboration, Protein Design Labs granted us one license and options for two additional licenses under Protein Design Lab’s antibody humanization patents. We have used the initial antibody humanization license for our SGN-40 product candidate. Under the terms of the license agreements, we are required to pay annual maintenance fees and royalties on net sales of products using Protein Design Labs’ technology.

 

ICOS Corporation.    In October 2000, we entered into a license agreement with ICOS Corporation for non-exclusive rights to use ICOS’ CHEF expression system. We have used this system to manufacture clinical supplies of SGN-30, and we may also use it for other monoclonal antibodies in the future. Under the terms of this

 

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agreement, we are required to make progress-dependent milestone payments and pay royalties on net sales of products manufactured using the CHEF expression system.

 

University of Miami.    In September 1999, we entered into an exclusive license agreement with the University of Miami, Florida, covering an anti-CD30 monoclonal antibody that is the basis for SGN-30 and the antibody component of SGN-35. Under the terms of this license, we made an upfront payment and are required to pay annual maintenance fees, progress-dependent milestone payments and royalties on net sales of products incorporating technology licensed from the University of Miami.

 

Mabtech AB.    In June 1998, we obtained exclusive, worldwide rights to a monoclonal antibody targeting the CD40 antigen, which is the basis for SGN-40, from Mabtech AB, located in Sweden. Under the terms of this license, we are required to make a progress-dependent milestone payment and pay royalties on net sales of products incorporating technology licensed from Mabtech.

 

CLB-Research and Development.    Pursuant to a license agreement we entered into in July 2001, we obtained an exclusive license to specific monoclonal antibodies that target cancer and immunologic disease targets from CLB-Research and Development, located in the Netherlands. One of these antibodies is the basis for SGN-70 and the antibody component of SGN-75. Under the terms of this agreement, we have made upfront and option exercise payments and are required to make progress-dependent milestone payments and pay royalties on net sales of products incorporating technology licensed from CLB-Research and Development.

 

Arizona State University.    In February 2000, we entered into a license agreement with Arizona State University for a worldwide, exclusive license to the cell-killing agent Auristatin E. We subsequently amended this agreement in August 2004. Under the terms of the amended agreement, we are required to pay annual maintenance fees to Arizona State University until expiration of their patents covering Auristatin E. We are not, however, required to pay any progress-dependent milestone payments or royalties on net sales of products incorporating the Auristatin derivatives currently used in our ADC technology, and thus we do not expect to pay any milestones or royalties to Arizona State University with respect to products employing our current ADC technology.

 

Imperial College London.    In May 2004, we in-licensed two issued U.S. patents covering a novel antigen target and several monoclonal antibodies from Imperial College London. Under the terms of this agreement, we made an upfront payment and are required to make progress-dependent milestone payments and pay royalties on net sales of products incorporating the licensed technology.

 

Patents and Proprietary Technology

 

We seek appropriate patent protection for our proprietary technologies by filing patent applications in the United States and other countries. As of December 31, 2004, we owned or held exclusive or partially exclusive licenses to 28 issued United States and corresponding foreign patents and owned 36 pending United States and corresponding foreign patent applications.

 

Our patents and patent applications are directed to product candidates, monoclonal antibodies, antigen targets, linker technologies, ADC technologies, immunotoxin technologies, ADEPT and enabling technologies. Although we believe our patents and patent applications provide us with a competitive advantage, the patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. We and our corporate collaborators may not be able to develop patentable products or processes or obtain patents from pending patent applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us or our corporate collaborators.

 

Our commercial success depends significantly on our ability to operate without infringing patents and proprietary rights of third parties. A number of pharmaceutical and biotechnology companies, universities and

 

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research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned, optioned by or licensed to us or to our corporate collaborators. Our or our corporate collaborators’ current patents, or patents that issue on pending applications, may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection to us. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our or our corporate collaborators’ ability to make, use or sell any products.

 

We also rely on trade secrets and proprietary know-how, especially when we do not believe that patent protection is appropriate or can be obtained. Our policy is to require each of our employees, consultants and advisors to execute a confidentiality and inventions assignment agreement before beginning their employment, consulting or advisory relationship with us. These agreements provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of their relationship with us except in limited circumstances. These agreements also provide that we shall own all inventions conceived by the individual in the course of rendering services to us.

 

Government Regulation

 

Our products are subject to extensive regulation by numerous governmental authorities, principally the U.S. Food and Drug Administration (FDA), as well as numerous state and foreign agencies. We need to obtain approval of our potential products by the FDA before we can begin marketing the products in the United States. Similar approvals are also required in other countries.

 

Product development and approval within this regulatory framework is uncertain, can take many years and requires the expenditure of substantial resources. The nature and extent of the governmental review process for our potential products will vary, depending on the regulatory categorization of particular products and various other factors.

 

The necessary steps before a new biopharmaceutical product may be sold in the United States ordinarily include:

 

    preclinical laboratory and animal tests;

 

    submission to the FDA of an investigational new drug application which must become effective before clinical trials may commence;

 

    completion of adequate and well controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;

 

    submission to the FDA of a marketing authorization application; and

 

    FDA review and approval of the marketing authorization application prior to any commercial sale.

 

Clinical trials generally are conducted in three sequential phases that may overlap. In phase I, the initial introduction of the product into humans, the product is tested to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase II usually involves trials in a limited patient population to determine the efficacy of the potential product for specific, targeted indications, determine dosage tolerance and optimum dosage and further identify possible adverse reactions and safety risks. Phase III trials are undertaken to evaluate further clinical efficacy in comparison to standard therapies within a broader patient population, generally at geographically dispersed clinical sites. Phase I, phase II or phase III testing may not be completed successfully within any specific period of time, if at all, with respect to any of our product candidates. Furthermore, the FDA, an institutional review board or we may suspend a clinical trial at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

 

The results of preclinical studies, pharmaceutical development and clinical trials are submitted to the FDA in the form of a new drug application (NDA) or a biologics licensing application (BLA) for approval of the manufacture, marketing and commercial shipment of the pharmaceutical product. The testing and approval

 

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process is likely to require substantial time, effort and resources, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny review of an application or not approve an application if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-market testing and surveillance to monitor the safety or efficacy of the product. In addition, after marketing approval is granted, the FDA may require post-marketing clinical trials, which typically entail extensive patient monitoring and may result in restricted marketing of an approved product for an extended period of time.

 

Competition

 

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Many third parties compete with us in developing various approaches to cancer therapy. They include pharmaceutical companies, biotechnology companies, academic institutions and other research organizations.

 

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approval and marketing than we do. In addition, many of these competitors are active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for use of technology that they have developed. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies complementary to our programs.

 

We expect that competition among products approved for sale will be based, among other things, on efficacy, reliability, product safety, price and patent position. Our ability to compete effectively and develop products that can be manufactured cost-effectively and marketed successfully will depend on our ability to:

 

    advance our technology platforms;

 

    license additional technology;

 

    maintain a proprietary position in our technologies and products;

 

    obtain required government and other public and private approvals on a timely basis;

 

    attract and retain key personnel; and

 

    enter into corporate partnerships.

 

We are aware of specific companies that have technologies that may be competitive with ours, including Wyeth, ImmunoGen and Medarex, all of which have antibody-drug conjugate technology. Wyeth markets the antibody-drug conjugate Mylotarg for patients with acute myeloid leukemia. While we are not developing lead agents for that specific disease, Wyeth may apply their antibody-drug conjugate technology to other monoclonal antibodies that may compete with our lead product candidates. ImmunoGen has several antibody-drug conjugates in development that may compete with our product candidates. ImmunoGen has also established partnerships with other pharmaceutical and biotechnology companies to allow those other companies to utilize ImmunoGen’s technology. We are also aware of a number of companies developing monoclonal antibodies directed at the same antigen targets or for the treatment of the same diseases as our product candidates. For example, Medarex is developing an anti-CD30 antibody that may be competitive with SGN-30 and Chiron is developing an anti-CD40 antibody that may be competitive with SGN-40. In addition, many other pharmaceutical and biotechnology companies are developing and/or marketing therapies for the same types of cancer and immunologic diseases that our product candidates are designed to treat. These include antibodies such as Genentech’s Rituxan and Imclone’s Erbitux, proteosome inhibitors such as Millennium’s Velcade, cancer vaccines such as Genitope’s MyVax, small molecule drugs such as Bayer’s/Onyx’s BAY-9006 and a variety of traditional chemotherapy drugs.

 

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Manufacturing

 

We received clinical-grade SGN-15 from Bristol-Myers Squibb for our previous clinical trials, and have entered into agreements with contract manufacturers to supplement our supplies of SGN-15 as necessary for future studies, including ICOS Corporation, Albany Molecular Research, Inc. and Sicor, Inc., now a wholly-owned subsidiary of Teva Pharmaceutical Industries Ltd. For SGN-30, we have contracted with ICOS to manufacture preclinical and early-stage clinical supplies and with Abbott Laboratories for late-stage clinical and commercial supplies. For SGN-40, Genentech manufactured substantial quantities of clinical grade material that have been transferred to us, and in February 2005 we entered into a manufacturing agreement with Abbott to supplement our clinical supplies. For our second generation ADC technology, we have contracted with Albany Molecular for drug-linker manufacturing and with several other contract manufacturers for conjugation. We have also entered into a preferred provider agreement with Albany Molecular to enable our ADC collaborators to order drug-linker materials directly from Albany Molecular to support their development of ADCs utilizing our technology. In the future, we will continue to rely on other third parties to perform additional steps in the manufacturing process, including synthesis of our second generation drug-linker systems, conjugation, vialing and storage of our product candidates.

 

We believe that our contract manufacturing relationships with ICOS, Abbott, Albany Molecular, Sicor and other potential contract manufacturers with whom we are in discussions, together with existing supplies of SGN-40 from Genentech, will be sufficient to accommodate clinical trials through phase II and in some cases phase III of our current product candidates. However, we may need to obtain additional manufacturing arrangements, if available on commercially reasonable terms, or increase our own manufacturing capability to meet our future needs, both of which would require significant capital investment. We may also enter into collaborations with pharmaceutical or larger biotechnology companies to enhance the manufacturing capabilities for our product candidates.

 

Employees

 

As of December 31, 2004, we had 134 employees, 44 of whom hold doctoral level degrees. Of these employees, 107 are engaged in or directly support research, development and clinical activities and 27 are in administrative and business-related positions.

 

Each of our employees has signed a confidentiality and inventions assignment agreement and none are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.

 

Website

 

Our website address is www.seattlegenetics.com. We make available, free of charge, through a hyperlink on our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on our website is not part of this report.

 

Item 2. Properties.

 

Our headquarters are in Bothell, Washington, where we lease approximately 63,900 square feet under a lease expiring May 2011. We may renew the lease, at our option, for two consecutive seven-year periods. We currently occupy and utilize the entire building as laboratory, discovery, research and development and general administration space.

 

Item 3. Legal Proceedings.

 

We are not a party to any material legal proceedings.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Prices of our Common Stock

 

Our common stock is traded on the Nasdaq National Market under the symbol SGEN.

 

The following table sets forth the high and low sales prices for our common stock, as quoted on the Nasdaq National Market, for each of the quarters indicated.

 

     High

   Low

2003

             

First Quarter

   $ 3.95    $ 2.25

Second Quarter

     5.92      2.15

Third Quarter

     7.00      4.18

Fourth Quarter

     9.00      5.16

2004

             

First Quarter

   $ 10.90    $ 8.10

Second Quarter

     9.95      6.50

Third Quarter

     7.21      4.33

Fourth Quarter

     7.85      5.63

2005

             

First Quarter (as of March 9, 2005)

   $ 6.60    $ 4.73

 

As of March 9, 2005, there were 131 holders of record of our common stock. Because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

Dividend Policy

 

We have not paid any cash dividends on our common stock since our inception. We do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business operations. In addition, for so long as 33 1/3% of the total number of shares of Series A convertible preferred stock we originally issued are outstanding, we need the approval of holders of 66 2/3% of such outstanding shares of Series A convertible preferred stock in order to declare, pay, set aside or reserve amounts for the payment of any dividend on our capital stock, other than the Series A convertible preferred stock.

 

Sales of Unregistered Securities and Issuer Repurchases of Securities

 

Other than sales disclosed in previous quarterly reports on Form 10-Q or current reports on Form 8-K, we did not make any unregistered sales of shares of our common stock in 2004. In addition, we did not repurchase any of our equity securities during the fourth quarter of 2004.

 

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Item 6. Selected Financial Data.

 

The following selected financial data should be read in conjunction with the financial statements and notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Form 10-K. The selected Statements of Operations data for the years ended December 31, 2004, 2003 and 2002 and Balance Sheet data as of December 31, 2004 and 2003 have been derived from our audited financial statements appearing elsewhere in this Form 10-K. The selected Statements of Operations data for the years ended December 31, 2001 and 2000 and Balance Sheet data as of December 31, 2002, 2001 and 2000 have been derived from our audited financial statements that are not included in this Form 10-K. Historical results are not necessarily indicative of future results.

 

     Years Ended December 31,

 
     2004

    2003

    2002

    2001

    2000

 
     (in thousands, except per share amounts)  

Statements of Operations Data:

                                        

Revenues

   $ 6,701     $ 5,070     $ 1,684     $ 274     $ 99  

Operating Expenses:

                                        

Research and development (1) (2)

     37,002       21,390       19,362       15,116       4,789  

General and administrative (1) (2)

     6,498       5,428       4,696       3,583       2,030  

Non-cash stock-based compensation expense

     869       1,515       2,821       5,175       3,138  
    


 


 


 


 


Loss from operations

     (37,668 )     (23,263 )     (25,195 )     (23,600 )     (9,858 )

Investment income, net

     2,229       1,177       2,035       2,907       2,020  
    


 


 


 


 


Net loss

     (35,439 )     (22,086 )     (23,160 )     (20,693 )     (7,838 )

Non-cash preferred stock deemed dividend

     (36,558 )     (201 )           (3 )     (504 )
    


 


 


 


 


Net loss attributable to common stockholders

   $ (71,997 )   $ (22,287 )   $ (23,160 )   $ (20,696 )   $ (8,342 )
    


 


 


 


 


Basic and diluted net loss per share

   $ (1.80 )   $ (0.73 )   $ (0.77 )   $ (0.86 )   $ (2.54 )
    


 


 


 


 


Weighted-average shares used in computing basic and diluted net loss per share

     39,985       30,722       30,138       23,965       3,290  
    


 


 


 


 


     December 31,

 
     2004

    2003

    2002

    2001

    2000

 
     (in thousands)  

Balance Sheet Data:

                                        

Cash, cash equivalents and investments

   $ 105,898     $ 73,682     $ 44,219     $ 54,375     $ 24,330  

Restricted investments

     977       976       980       982       3,421  

Working capital

     30,233       38,839       23,952       41,154       24,558  

Total assets

     119,109       81,999       52,536       63,028       29,874  

Mandatorily redeemable convertible preferred stock

                             37,556  

Additional paid-in capital

     217,995       154,497       105,229       98,485       14,798  

Stockholders’ equity (deficit)

     103,833       74,878       46,702       60,671       (8,493 )

(1)   Operating expenses exclude charges for non-cash stock-based compensation as follows (in thousands):

 

     Years Ended December 31,

     2004

   2003

   2002

   2001

   2000

Research and development

   $ 206    $ 538    $ 912    $ 1,746    $ 973

General and administrative

     663      977      1,909      3,429      2,165
    

  

  

  

  

     $ 869    $ 1,515    $ 2,821    $ 5,175    $ 3,138
    

  

  

  

  


(2)   Certain expense reclassifications have been made in prior period’s financial statements to conform to classifications used in the current year. These reclassifications have no impact on net loss, stockholders’ equity or cash flows as previously reported.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, might, will, should, expect, plan, anticipate, project, believe, estimate, predict, potential, intend or continue, the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Important Factors That May Affect Our Business, Results of Operations and Stock Price” set forth at the end of this Item 7 and those contained from time to time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

 

Critical Accounting Policies

 

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition.    Revenues from the sale of products and services are recognized when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the fees are fixed and determinable and collectibility is assured. Revenues from multiple element arrangements involving upfront payments, license fees and milestone payments received for the delivery of rights or services representing the culmination of a separate earnings process are recognized when due and the amounts are considered collectible. Revenues from upfront payments, license fees and milestone payments received in connection with other rights or services which represent continuing obligations of ours are deferred until all of the elements have been delivered or we have verifiable and objective evidence of the fair value of the undelivered elements. Upfront payments and license fees are recognized ratably over the collaboration research period. Payments for the achievement of substantive milestones are recognized when the milestone is achieved and payments for milestones which are not substantive are recognized ratably over the research period. We perform certain research and development activities on behalf of collaborative partners. We are generally reimbursed at pre-determined billing rates and recognize revenue as the activities are performed, but bill the collaborator monthly, quarterly or upon the completion of the effort, based on the terms of each agreement. Amounts earned, but not billed to the collaborator, if any, are included in accounts receivable in the accompanying balance sheets.

 

Investments.    Our investments are diversified among high-credit quality debt securities in accordance with our investment policy. We classify our investments as available-for-sale, which are reported at fair market value with the related unrealized gains and losses included as a component of stockholders’ equity. Realized gains and losses and declines in value of investments judged to be other than temporary are included in other income (expense). We have determined that unrealized losses are temporary as the duration of the decline in the value of the investments has been short, the extent of the decline, in both dollars and percentage of cost is not significant, and we have the ability and intent to hold the investments until we recover at least substantially all of the cost of the investment. The fair value of our investments is subject to volatility. To date, the carrying values of our investments have not been written down due to declines in value judged to be other than temporary. Declines in the fair value of our investments judged to be other than temporary could adversely affect our future operating results.

 

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Accrued Expenses.    As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of services performed and the associated costs incurred for such services where we have not yet been invoiced or otherwise notified of actual cost. We make these estimates as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include:

 

    Fees paid to contract research organizations in conjunction with clinical trials;

 

    Fees paid to contract manufacturers in conjunction with manufacturing clinical grade materials; and

 

    Professional service fees.

 

In accruing service fees, we estimate the time period over which services will be provided and the level of effort in each period. If the actual timing of the provision of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. In the event that we do not identify costs that have been incurred or we under-or-overestimated the level of services performed or the costs of such services, our actual expenses could differ from such estimates. The date on which some services commence, the level of services performed on or before a given date and the cost of such services are often subjective determinations. We make judgments based upon the facts and circumstances known to us at the time and in accordance with generally accepted accounting principles.

 

Research and Development.    We expense research and development costs as incurred. Research and development expenses consist of direct and overhead expenses for drug discovery and research, preclinical studies and for costs associated with clinical trial activities and are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred. Research and development expenses under government grants approximate the revenue recognized under such agreements. Reimbursements for shared expenses received from collaborative partners are recorded as reductions of research and development expenses. We account for our clinical trial costs by estimating the total cost to treat a patient in each clinical trial and recognize this cost, based on a variety of factors, beginning with the preparation for the clinical trial. This estimated cost includes payments to our contract research organizations for trial site and patient-related costs, including laboratory costs related to the conduct of the trial, and other costs. Our cost per patient varies based on the type of clinical trial, the site of the clinical trial and the length of the treatment period for each patient. As actual costs become known to us, we adjust our accrual; these changes in estimates may result in a change in our clinical study accrual, which could affect our results of operations.

 

Stock-based Compensation.    We grant stock options to employees for a fixed number of shares with an exercise price equal to the fair value of our common stock on the date of grant. We recognize no compensation expense on these employee stock option grants. For certain stock options granted to nonemployees, we recognize as expense the estimated fair value of such options as calculated by the Black-Scholes option pricing model, which is re-measured during the service period. Fair value is determined using the Black-Scholes option pricing model and the expense is amortized over the vesting period of each option or the recipient’s contractual arrangement, if shorter. Changes in the fair value of our common stock during the service period will cause fluctuations in recognized compensation expense for variable options. Please refer to additional discussion on SFAS No. 123 (revised 2004) “Shares-Based Payment,” or SFAS 123R, contained in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Non-cash stock-based compensation.”

 

Income Taxes.    We have net deferred tax assets which are fully offset by a valuation allowance due to our determination that net deferred assets will not be realized. We believe that a full valuation allowance will be required on losses reported in future periods. In the event we were to determine that we would be able to realize our net deferred tax assets in the future, an adjustment to the deferred tax asset would be made, a portion of which would increase income (or decrease losses) in the period in which such a determination was made.

 

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On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, accrued expenses, research and development, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions and conditions.

 

Overview

 

We focus on the development of monoclonal antibody-based therapeutic products for the treatment of cancer and immunologic diseases. We currently have three product candidates in clinical trials, SGN-30, SGN-15 and SGN-40, and four product candidates in preclinical development: SGN-35, SGN-70, SGN-75 and SGN-17/19. Our pipeline of product candidates is based upon three technologies: genetically engineered monoclonal antibodies, monoclonal antibody-drug conjugates (ADCs) and antibody-directed enzyme prodrug therapy (ADEPT). These technologies enable us to develop monoclonal antibodies that can kill target cells on their own as well as increase the potency of monoclonal antibodies by enhancing their cell-killing ability. We also have active discovery programs to identify novel antigens and new monoclonal antibodies.

 

Since our inception, we have incurred substantial losses and, as of December 31, 2004, we had an accumulated deficit of $114.1 million. These losses and accumulated deficit have resulted from the significant costs incurred in the development of our monoclonal antibody-based technologies, clinical trial costs, manufacturing expenses of preclinical and clinical grade materials, general and administrative costs and non-cash stock-based compensation expenses. We expect that our losses will continue for the foreseeable future as we continue to expand our research, development, clinical trial activities and infrastructure in support of these activities.

 

We do not currently have any commercial products for sale. To date, our revenues have been derived principally from our collaboration and license agreements and from Small Business Innovative Research (SBIR) grants. In the future, our revenues may consist of milestone payments, technology licensing fees and sponsored research fees under existing and future collaborative arrangements, royalties from collaborations with current and future strategic partners, grant revenues and commercial product sales. Because a substantial portion of our revenues for the foreseeable future will depend on entering into new collaboration and license agreements and achieving development and clinical milestones under existing collaboration and license agreements, our results of operations may vary substantially from year to year and quarter to quarter. We believe that period to period comparisons of our operating results are not meaningful and you should not rely on them as indicative of our future performance.

 

Results of Operations

 

Years Ended December 31, 2004, 2003 and 2002

 

Revenues

 

Revenues ($ in thousands)


                  Annual percentage
change


 
     2004

   2003

   2002

   2004/2003

    2003/2002

 

Funded research and material supply fees

   $ 3,394    $ 2,885    $ 707    18 %   308 %

Earned portion of technology access fees and milestones

     3,307      2,104      836    57 %   152 %
    

  

  

  

 

Collaborations and license agreements

   $ 6,701    $ 4,989    $ 1,543    34 %   223 %

Government grants

          81      141    -100 %   -43 %
    

  

  

  

 

Total

   $ 6,701    $ 5,070    $ 1,684    32 %   201 %
    

  

  

  

 

 

Total revenues increased 32% to $6.7 million in 2004 from 2003 and increased 201% to $5.1 million in 2003 from 2002, due to higher collaboration and license revenues.

 

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Funded research and material supply fees increased 18% to $3.4 million in 2004 from 2003 and increased 308% to $2.9 million in 2003 from 2002. In 2004, this revenue growth came from increased fees earned as part of the research programs of our new ADC collaborations with Bayer and CuraGen and continuation of our existing ADC collaborations with UCB Celltech, Genentech, Protein Design Labs and our ADEPT collaboration with Genencor. In 2003, this revenue growth came from increased research and material supply fees from our collaborations with UCB Celltech, Genentech, Protein Design Labs and Genencor.

 

The earned portion of technology access fees and milestones increased 57% to $3.3 million in 2004 from 2003 and increased 152% to $2.1 million in 2003 from 2002. This revenue growth is the result of new ADC collaborations and the expansion of existing ADC collaborations and consists primarily of upfront technology access fees that are being recognized ratably over the research period of each collaboration.

 

We expect that future revenues will vary from year to year and from quarter to quarter based on the timing and amounts of payments under our current license and collaboration agreements and our ability to enter into additional agreements and obtain additional government grants.

 

Research and development

 

Research and development ($ in thousands)


                 

Annual percentage

change


 
     2004

   2003

   2002

   2004/2003

    2003/2002

 

Total

   $ 37,002    $ 21,390    $ 19,362    73 %   10 %
    

  

  

  

 

 

Research and development expenses, excluding non-cash stock-based compensation expenses, increased 73% to $37.0 million in 2004 from 2003 and increased 10% to $21.4 million in 2003 from 2002. The increase in 2004 was principally due to increases in costs of manufacturing clinical grade materials of approximately $8.3 million, increases in external clinical trial costs of approximately $2.2 million, increases in personnel expenses of approximately $2.4 million and increases in lab supplies of approximately $1.1 million. The increase in 2003 was principally due to increases in personnel expenses of approximately $1.7 million, reduced collaboration expense reimbursement of approximately $291,000, increases in depreciation and occupancy costs of approximately $192,000 and increases in recruiting and relocation costs for new personnel of approximately $191,000. In 2003, these expenses were offset by decreases in external clinical trial costs of approximately $726,000. The number of research and development personnel increased to 107 at December 31, 2004 from 87 at December 31, 2003 and from 78 at December 31, 2002.

 

Our research and development expenses can be divided into research, development and contract manufacturing and clinical programs. We estimate the costs associated with these programs as follows:

 

Research & development ($ in thousands)


                 

Annual percentage

change


 
     2004

   2003

   2002

   2004/2003

    2003/2002

 

Research

   $ 9,319    $ 6,911    $ 5,599    35 %   23 %

Development and contract manufacturing

     21,363      10,862      9,844    97 %   10 %

Clinical

     6,320      3,617      3,919    75 %   -8 %
    

  

  

  

 

Total

   $ 37,002    $ 21,390    $ 19,362    73 %   10 %
    

  

  

  

 

 

Research expenses include, among other things, personnel, occupancy and laboratory expenses associated with the discovery and identification of new antigen targets and monoclonal antibodies and the development of novel classes of stable linkers and potent cell killing drugs. Research expenses increased primarily due to increased personnel expenses associated with higher staffing levels, which included the addition of our Vice President, Preclinical Therapeutics, and related increases in general lab supplies.

 

Development and contract manufacturing expenses include personnel and occupancy expenses and external contract manufacturing costs for the scale up and manufacturing of drug product for use in our clinical trials.

 

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Development costs increased in 2004 from 2003 due to both increased personnel expenses associated with higher staffing levels and increased contract manufacturing costs. Contract manufacturing costs increased by approximately $8.3 million primarily due to our agreement with Abbott Laboratories for the manufacturing of our SGN-30 monoclonal antibody product candidate, which is substantially complete. This antibody is also used in our SGN-35 ADC product candidate. Both research and development expenses include additional costs related to our expanded laboratory and office facilities.

 

Clinical expenses include personnel and occupancy expenses and external clinical trials costs including principal investigator fees, clinical site expenses, clinical research organization charges and regulatory activities associated with conducting human clinical trials. Clinical costs increased in 2004 from 2003 principally due to expanded third-party costs for our SGN-30 phase II trials, new patient enrollments in our SGN-40 phase I trials and costs for our SGN-15 phase II trials. Clinical costs also increased in 2004 from 2003 due to increased personnel expenses associated with higher staffing levels, which included two Medical Director positions. Costs associated with our clinical activities decreased in 2003 from 2002 due to the completion of patient enrollment in our SGN-30 phase I trials and our SGN-15 non-small cell lung phase II trial.

 

We allocate our employee and infrastructure resources across several projects, including our discovery and research programs directed towards identifying novel antigen targets, monoclonal antibodies and new classes of stable linkers and cell-killing drugs. Many of our costs are not attributable to a specifically identified project, but instead are directed to overall research efforts. Accordingly, we do not allocate our infrastructure costs and do not account for internal research and development costs on a project-by-project basis. As a result, we cannot report actual total costs incurred for each of our clinical and preclinical projects on a project-by-project basis.

 

We do, however, separately account for significant third-party costs of development programs identified as product candidates for further preclinical and clinical development. The following table shows, for the periods presented, total payments that we made or expenses incurred for preclinical study support, clinical supplies and clinical trial services provided by third parties for each of our product candidates and the remaining unallocated costs for such periods:

 

Product candidates ($’s in thousands)


                  Annual Percentage
Change


    (5 years)
January 1, 2000 to
December 31, 2004


     2004

   2003

   2002

   2004/2003

    2003/2002

   

SGN-30

   $ 12,133    $ 3,633    $ 342    234 %   962 %   $ 21,297

SGN-35

     2,532      860      677    194 %   27 %     4,069

SGN-15

     1,529      1,607      5,344    -5 %   -70 %     10,658

SGN-40

     515      76         578 %   100 %     591

SGN-70 and SGN-75

     23              100 %   0 %     23
    

  

  

  

 

 

Total third party costs

     16,732      6,176      6,363    171 %   -3 %     36,638

Unallocated costs and overhead

     20,270      15,214      12,999    33 %   17 %     61,021
    

  

  

  

 

 

Total research and development

   $ 37,002    $ 21,390    $ 19,362    73 %   10 %   $ 97,659
    

  

  

  

 

 

 

SGN-30 represents a majority of our total third party research and development expenditures due to the costs of manufacturing SGN-30 for clinical trials and the costs of expanding our clinical trials into Europe. For SGN-40, Genentech manufactured substantial quantities of clinical grade material that have been transferred to us, which has enabled us to keep our third party costs associated with SGN-40 low during the initiation of our clinical development of SGN-40. However, we expect the third party costs associated with SGN-40 to increase as we expand our clinical trial activities and conduct later-stage clinical and commercial manufacturing with Abbott Laboratories. We also expect third party costs for SGN-35 to increase as we conduct clinical grade manufacturing and initiate clinical trials. Our expenditures on current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. In order to advance our product candidates toward eventual commercialization, the product candidates are tested in

 

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numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical trials for those product candidates that may take several years or more to complete. The length of time varies substantially based upon the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

 

    The number of patients who participate in the trials;

 

    The length of time required to enroll trial participants;

 

    The number of sites included in the trials;

 

    The costs of producing supplies of the product candidates needed for clinical trials and regulatory submissions;

 

    The efficacy and safety profile of the product candidate; and

 

    The costs and timing of, and the ability to secure, regulatory approvals.

 

Furthermore, our strategy may include entering into collaborations with third parties to participate in the development and commercialization of some of our product candidates. In these situations, the preclinical development or clinical trial process for a product candidate and the estimated completion date may largely be under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

 

The risks and uncertainties associated with our research and development projects are discussed more fully in the section of this report titled “Important Factors That May Affect Our Business, Results of Operations and Stock Price.” As a result of the uncertainties discussed above, we are unable to determine with any degree of certainty the duration and completion costs of our research and development projects, anticipated completion dates or when and to what extent we will receive cash inflows from the commercialization and sale of a product candidate.

 

We anticipate that our research, development, contract manufacturing and clinical expenses will continue to grow in the foreseeable future as we expand our discovery and preclinical activities, as new product candidates enter clinical trials and as we advance our product candidates already in clinical trials, SGN-30, SGN-15 and SGN-40, to new clinical sites. These expenses will fluctuate based upon many factors including the degree of collaborative activities, timing of manufacturing campaigns, numbers of patients enrolled in our clinical trials and the outcome of each clinical trial event.

 

General and administrative

 

General and administrative ($ in thousands)


                 

Annual percentage

change


 
     2004

   2003

   2002

   2004/2003

    2003/2002

 

Total

   $ 6,498    $ 5,428    $ 4,696    20 %   16 %
    

  

  

  

 

 

General and administrative expenses, excluding non-cash stock-based compensation expenses, increased 20% to $6.5 million in 2004 from 2003 and increased 16% to $5.4 million in 2003 from 2002. In 2004, the increase was attributable to additional administrative personnel and increased professional service fees to facilitate compliance with Section 404 of the Sarbanes-Oxley Act of 2002. In 2003, the increase was principally due to additional administrative personnel, benefit and severance pay costs and increased expenses for liability and directors’ and officers’ insurance. The number of general and administrative personnel increased to 27 at December 31, 2004 from 21 at December 31, 2003 and from 19 at December 31, 2002. We anticipate that general and administrative expenses will continue to increase as our costs related to adding personnel in support of our operations increase. We will also continue to incur professional fees in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, but at anticipated levels below 2004 costs.

 

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Non-cash stock-based compensation

 

Non-cash stock-based compensation ($ in thousands)


                 

Annual percentage

change


 
     2004

   2003

   2002

   2004/2003

    2003/2002

 

Total

   $ 869    $ 1,515    $ 2,821    -43 %   -46 %
    

  

  

  

 

 

Non-cash stock-based compensation expense decreased 43% to $869,000 in 2004 from 2003 and decreased 46% to $1.5 million in 2003 from 2002. These decreases are primarily attributable to scheduled accelerated amortization of deferred stock-based compensation in accordance with Financial Accounting Standards Board Interpretation No. 28 over the vesting period of stock option grants issued prior to March 6, 2001. In 2004, the decrease also includes changes for unvested stock option forfeitures from terminated employees, changes in value of options subject to variable accounting and a non-cash stock-based compensation charge of approximately $348,000 for accelerated vesting of stock options for employee severance pay. Variable accounting treatment related to non-employee stock option grants results in charges or benefits, recorded to non-cash stock-based compensation, depending on fluctuations in the market value of our common stock.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment,” or SFAS 123R. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123.

 

We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. We have not yet determined which model we will use to measure the fair value of employee stock options upon the adoption of SFAS 123R.

 

We currently expect to adopt SFAS 123R effective July 1, 2005. If we adopt the modified prospective method and continue to use the standard option pricing model, we estimate share-based compensation expense to be approximately $1.0 million for the quarter ended September 30, 2005 and approximately $850,000 for the quarter ended December 31, 2005 based on stock options outstanding as of February 28, 2005. These estimates may increase as additional awards of equity instruments are granted. We currently do not anticipate any changes in compensation strategies due to the adoption of FAS 123R.

 

Investment income, net

 

Investment income, net ($ in thousands)


                  Annual percentage
change


 
     2004

   2003

   2002

   2004/2003

    2003/2002

 

Total

   $ 2,229    $ 1,177    $ 2,035    89 %   -42 %
    

  

  

  

 

 

Investment income increased 89% to $2.2 million in 2004 from 2003 and decreased 42% to $1.2 million in 2003 from 2002. In 2004, the increase was primarily due to additional interest income received from the net proceeds of approximately $62.1 million from our follow-on public offering of 8,050,000 shares of common stock that was completed in February 2004. In 2003, the decrease was primarily due to declining average interest yields. We anticipate that investment income will decline in 2005 based on lower average anticipated levels of cash and investment balances.

 

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Non-cash accretion of preferred stock deemed dividend

 

Non-cash accretion of preferred stock deemed dividend ($ in thousands)


              
     2004

   2003

   2002

Total

   $ 36,558    $ 201    $
    

  

  

 

Non-cash accretion of preferred stock deemed dividend was $36.6 million in 2004 and $201,000 in 2003. As part of our Series A convertible preferred stock financing in July 2003, we recorded a non-cash accretion of preferred stock deemed dividend, which represented an increase to reported net loss in arriving at net loss attributable to common stockholders, using the effective interest method through the date of earliest conversion in July 2004. In the future, we will not record any additional non-cash accretion of preferred stock deemed dividend as part of our Series A convertible preferred stock financing. The non-cash accretion of the preferred stock deemed dividend did not have an effect on net loss or cash flows for the applicable reporting periods or have an impact on total stockholders’ equity as of the applicable reporting dates.

 

Liquidity and Capital Resources

 

Liquidity and Capital Resources


   2004

    2003

    2002

 

At December 31:

                        

Cash, cash equivalents and short-term and long-term investments

   $ 105,898     $ 73,682     $ 44,219  

Working capital

   $ 30,233     $ 38,839     $ 23,952  

For the year ended December 31:

                        

Cash provided by (used in):

                        

Operating activities

   $ (23,279 )   $ (17,723 )   $ (14,140 )

Investing activities

   $ (40,330 )   $ (30,836 )   $ 8,379  

Financing activities

   $ 63,629     $ 49,003     $ 6,648  

Capital expenditures (included in investing activities above)

   $ (5,723 )   $ (589 )   $ (1,705 )

 

We have financed our operations primarily through the issuance of equity securities and funding from our collaboration and license agreements. For the previous three years, we received $62.1 million in net proceeds from our follow-on public offering, approximately $40.4 million of net proceeds from our private placement of Series A convertible preferred stock and common stock warrants, approximately $22.1 million in cash fees and milestone payments under our collaboration and license agreements, approximately $13.5 million in proceeds from the issuance of common stock to our collaborators pursuant to our collaboration and license agreements and approximately $2.4 million in cash from stock option exercises and from common stock issued pursuant to our employee stock purchase plan.

 

At December 31, 2004, cash, cash equivalents, short-term and long-term investments totaled $105.9 million. Our cash, cash equivalents, short-term and long-term investments and restricted investments are held in a variety of interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, mortgage-backed securities, commercial paper and money market accounts.

 

Capital expenditures of $5.7 million in 2004 consisted of improvements, lab equipment, furniture and fixtures, primarily in connection with the expansion of our existing headquarters and operations facility for lab and office expansion which was completed during August 2004. Capital expenditures of $589,000 in 2003 and $1.7 million in 2002 consisted primarily of lab equipment, computers and related information systems in support of our research and development activities and in support of employee growth. We expect that our 2005 capital expenditures will decrease from 2004 based on completion of improvements to our existing headquarters and operations facility during 2004.

 

We expect to incur substantial costs as we continue to develop and commercialize our product candidates. We anticipate that our rate of spending will accelerate as a result of the increased costs and expenses associated

 

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with adding personnel, clinical trials, regulatory filings, manufacturing, and research and development collaborations. However, we may experience fluctuations in incurring these costs from quarter to quarter based on the timing of manufacturing campaigns, accrual of patients to clinical trials and collaborative activities. Certain external factors may influence our cash spending including factors such as the progress of our research and development activities, the cost of filing and enforcing any patent claims and other intellectual property rights, competing technological and market developments and our ability to establish collaboration and license agreements.

 

Some of our manufacturing, license and collaboration agreements also provide for periodic maintenance fees over specified time periods, as well as payments by us upon the achievement of development and regulatory milestones and the payment of royalties based on commercial product sales. We do not expect to pay any royalties on net sales of products under any of these agreements for at least the next several years. The amounts set forth above could be substantially higher if we are required to make milestone payments or if we receive regulatory approvals and are required to pay royalties earlier than anticipated.

 

The following are our future minimum contractual commitments for the periods subsequent to December 31, 2004 (in thousands):

 

     Total

   2005

   2006

   2007

   2008

   2009

   Thereafter

Operating leases

   $ 14,120    $ 2,118    $ 2,139    $ 2,163    $ 2,201    $ 2,246    $ 3,253

Manufacturing, license and collaboration agreements

     8,475      7,625      205      210      215      220     
    

  

  

  

  

  

  

Total

   $ 22,595    $ 9,743    $ 2,344    $ 2,373    $ 2,416    $ 2,466    $ 3,253
    

  

  

  

  

  

  

 

The minimum payments under manufacturing, license and collaboration agreements in 2005 primarily represent contractual obligations related to manufacturing campaigns to perform scale-up and GMP manufacturing for monoclonal antibody and ADC products for use in our clinical trials.

 

As part of the terms of our office and laboratory lease, we have collateralized certain obligations under the lease with approximately $977,000 of our investments and the majority of our property and equipment. These investment securities are restricted as to withdrawal and are managed by a third party. Beginning in June 2005, the lease provides for decreases in the restricted account balance by approximately $385,000 per year provided that the total amount pledged does not fall below approximately $478,000. In the event that we fail to meet specific thresholds of market capitalization, stockholders’ equity or cash and investment balances, we would be obligated to increase our restricted investment balance. At December 31, 2004, we were in compliance with these thresholds.

 

We believe that our current cash and investment balances will be sufficient to enable us to meet our anticipated expenditures and operating requirements for at least the next 24 months. However, changes in our business may occur that would consume available capital resources sooner than we expect. We may seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements and public or private equity financings. We do not know whether additional capital will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. If we are unable to raise additional funds should we need them, we may be required to delay, reduce or eliminate some of our development programs, which may adversely affect our business and operations.

 

Subsequent Events

 

In February 2005, CuraGen Corporation paid a $1.0 million fee to exercise its option to designate a second antigen target under its existing ADC collaboration with us. Under the terms of the agreement, CuraGen has rights to use our ADC technology with antibodies against up to two targets selected by CuraGen. CuraGen also pays ongoing technology access and material supply fees and has agreed to make progress-dependent milestone

 

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payments and pay royalties on net sales of ADC products. CuraGen is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration.

 

In February 2005, we entered into an agreement with Abbott Laboratories for manufacturing of our SGN-40 monoclonal antibody product candidate. Under the terms of the agreement, Abbott has agreed to perform scale-up and GMP manufacturing of SGN-40 to support clinical trials. In the future, Abbott has also agreed to manufacture commercial-grade material to support potential regulatory approval and commercial launch of SGN-40 if required. Our total costs through the end of 2005 of manufacturing SGN-40 with Abbott could be up to $3.2 million.

 

In March 2005, we achieved a milestone under our ADC collaboration agreement with Genentech, triggering a payment to us. The milestone is based on Genentech’s continued progress in preclinical development with an ADC utilizing our technology.

 

Important Factors That May Affect Our Business, Results of Operations and Stock Price

 

You should carefully consider the risks described below, together with all of the other information included in this annual report on Form 10-K and the information incorporated by reference herein. If we do not effectively address the risks we face, our business will suffer and we may never achieve or sustain profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this annual report on Form 10-K.

 

Our product candidates are at early stages of development and, if we are not able to successfully develop and commercialize them, we may not generate sufficient revenues to continue our business operations.

 

All of our product candidates are in early stages of development. Significant further research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. Currently, SGN-30, SGN-15 and SGN-40 are in clinical trials and SGN-35, SGN-70, SGN-75 and SGN-17/19 are in preclinical development. We expect that much of our efforts and expenditures over the next few years will be devoted to these clinical and preclinical product candidates. We have no products that have received regulatory approval for commercial sale.

 

Our ability to commercialize our product candidates depends on first receiving FDA approval. Thereafter, the commercial success of these product candidates will depend upon their acceptance by physicians, patients, third party payors and other key decision-makers as therapeutic and cost-effective alternatives to currently available products. If we fail to gain approval from the FDA or to produce a commercially successful product, we may not be able to earn sufficient revenues to continue as a going concern.

 

We will continue to need significant amounts of additional capital that may not be available to us.

 

We expect to make additional capital outlays and to increase operating expenditures over the next several years as we hire additional employees and support our preclinical development, manufacturing and clinical trial activities. We will need to seek additional funding through public or private financings, including equity financings, and through other means, including collaborations and license agreements. However, changes in our business may occur that would consume available capital resources sooner than we expect. If adequate funds are not available to us, we will be required to delay, reduce the scope of or eliminate one or more of our development programs. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. Our future capital requirements will depend upon a number of factors, including:

 

    the size, complexity and timing of our clinical programs;

 

    our receipt of milestone-based payments or other revenue from our collaborations or license arrangements;

 

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    the ability to manufacture sufficient drug supply to complete clinical trials;

 

    progress with clinical trials;

 

    the time and costs involved in obtaining regulatory approvals;

 

    the costs associated with acquisitions or licenses of additional products, including licenses we may need to commercialize our products;

 

    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

 

    competing technological and market developments; and

 

    product commercialization activities.

 

To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

 

Clinical trials for our product candidates are expensive, time consuming and their outcome is uncertain.

 

Before we can obtain regulatory approval for the commercial sale of any product candidate that we wish to develop, we are required to complete preclinical development and extensive clinical trials in humans to demonstrate its safety and efficacy. Each of these trials requires the investment of substantial expense and time. We are currently conducting phase II clinical trials of our two most advanced product candidates and phase I clinical trials of a third product candidate. We expect to commence additional trials of these and other product candidates in the future. There are numerous factors that could delay each of these clinical trials or prevent us from completing these trials successfully.

 

Commercialization of our product candidates will ultimately depend upon successful completion of additional research and development and testing in both clinical trials and preclinical models. At the present time, SGN-30, SGN-15 and SGN-40 are our only product candidates in clinical development and SGN-35, SGN-70, SGN-75 and SGN-17/19 are our only product candidates in preclinical development. As a result, any delays or difficulties we encounter with these product candidates may impact our ability to generate revenue and cause our stock price to decline significantly.

 

Ongoing and future clinical trials of our product candidates may not show sufficient safety or efficacy to obtain requisite regulatory approvals. We still only have limited efficacy data from our phase I and phase II clinical trials of SGN-30 and SGN-15 and our phase I clinical trials of SGN-40. Phase I and phase II clinical trials are not primarily designed to test the efficacy of a drug candidate but rather to test safety, to study pharmacokinetics and pharmacodynamics and to understand the drug candidate’s side effects at various doses and schedules. For example, we are currently conducting two phase II biomarker studies of SGN-15 in an effort to optimize the dosing schedules of SGN-15 in combination with Taxotere. Furthermore, success in preclinical and early clinical trials does not ensure that later large-scale trials will be successful nor does it predict final results. Acceptable results in early trials may not be repeated in later trials. We believe that any clinical trial designed to test the efficacy of SGN-30, SGN-15 or SGN-40, whether phase II or phase III, will likely involve a large number of patients to achieve statistical significance and will be expensive. We may conduct lengthy and expensive clinical trials of SGN-30, SGN-15 or SGN-40, only to learn that the drug candidate is not an effective treatment. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. In addition, clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse medical events during a clinical trial could cause it to be redone or terminated. In addition, failure to construct appropriate clinical trial protocols could result in the test or control group experiencing a disproportionate number of adverse events and could cause a clinical trial to be redone or terminated. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by the FDA or another regulatory authority may also vary significantly based on the type, complexity and novelty of the product involved, as well as other factors.

 

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Our clinical trials may take longer to complete than we project or they may not be completed at all.

 

The timing of the commencement, continuation and completion of clinical trials may be subject to significant delays relating to various causes, including scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, and shortages of available drug supply. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. We depend on medical institutions to conduct our clinical trials and to the extent they fail to enroll patients for our clinical trials or are delayed for a significant time in achieving full enrollment, we may be affected by increased costs, program delays or both, which may harm our business. In addition, we may conduct clinical trials in foreign countries in the future which may subject us to further delays and expenses as a result of increased drug shipment costs, additional regulatory requirements and the engagement of foreign clinical research organizations, as well as expose us to risks associated with foreign currency transactions insofar as we might desire to use U.S. dollars to make contract payments denominated in the foreign currency where the trial is being conducted.

 

Clinical trials must be conducted in accordance with the FDA’s or other applicable foreign government guidelines and are subject to oversight by the FDA, other foreign governmental agencies and institutional review boards at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our product candidates produced under the FDA’s current Good Manufacturing Practices and other requirements in foreign countries, and may require large numbers of test patients. We, the FDA or other foreign governmental agencies might delay or halt our clinical trials of a product candidate for various reasons, including:

 

    deficiencies in the conduct of the clinical trials;

 

    the product candidate may have unforeseen adverse side effects;

 

    the time required to determine whether the product candidate is effective may be longer than expected;

 

    fatalities or other adverse events arising during a clinical trial due to medical problems that may not be related to clinical trial treatments;

 

    the product candidate may not appear to be more effective than current therapies;

 

    quality or stability of the product candidate may fall below acceptable standards; or

 

    we may not be able to produce sufficient quantities of the product candidate to complete the trials.

 

Due to these and other factors, our current product candidates or any of our other future product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval, which could reduce or eliminate our revenue by delaying or terminating the potential commercialization of our product candidates.

 

We currently rely on third-party manufacturers and other third parties for production of our drug products and our dependence on these manufacturers may impair the development of our product candidates.

 

We do not currently have the ability to manufacture ourselves the drug products that we need to conduct our clinical trials and rely upon a limited number of manufacturers to supply our drug products. We received clinical-grade SGN-15 from Bristol-Myers Squibb for our previous clinical trials, and have entered into agreements with contract manufacturers including ICOS Corporation, Albany Molecular Research and Sicor Inc., now a wholly-owned subsidiary of Teva Pharmaceutical Industries Ltd, to supplement our supplies of SGN-15 as necessary for future studies. For SGN-30, we have contracted with ICOS to manufacture preclinical and early-stage clinical supplies and with Abbott Laboratories for late-stage clinical and commercial supplies. For SGN-40, Genentech manufactured substantial quantities of clinical grade material that have been transferred to us, and we have contracted with Abbott Laboratories for late-stage clinical and commercial supplies. In addition, we rely on other third parties to perform additional steps in the manufacturing process, including synthesis of our next generation drug-linker systems, conjugation, vialing and storage of our product candidates.

 

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For the foreseeable future, we expect to continue to rely on contract manufacturers and other third parties to produce, vial and store sufficient quantities of our product candidates for use in our clinical trials. If our contract manufacturers or other third parties fail to deliver our product candidates for clinical use on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend clinical trials or otherwise discontinue development and production of our product candidates. In addition, we depend on outside vendors for the supply of raw materials used to produce our product candidates. If the third party suppliers were to cease production or otherwise fail to supply us with quality raw materials and we were unable to contract on acceptable terms for these raw materials with alternative suppliers, our ability to have our product candidates manufactured and to conduct preclinical testing and clinical trials of our product candidates would be adversely affected.

 

Securing phase III and commercial quantities of our product candidates from contract manufacturers will require us to commit significant capital and resources. We may also be required to enter into long-term manufacturing agreements that contain exclusivity provisions and/or substantial termination penalties. In addition, contract manufacturers have a limited number of facilities in which our product candidates can be produced and any interruption of the operation of those facilities due to events such as equipment malfunction or failure or damage to the facility by natural disasters could result in the cancellation of shipments, loss of product in the manufacturing process or a shortfall in available product candidates.

 

Our contract manufacturers are required to produce our clinical product candidates under FDA current Good Manufacturing Practices in order to meet acceptable standards for our clinical trials. If such standards change, the ability of contract manufacturers to produce our product candidates on the schedule we require for our clinical trials may be affected. In addition, contract manufacturers may not perform their obligations under their agreements with us or may discontinue their business before the time required by us to successfully produce and market our product candidates. Any difficulties or delays in our contractors’ manufacturing and supply of product candidates could increase our costs, cause us to lose revenue or make us postpone or cancel clinical trials.

 

The FDA requires that we demonstrate structural and functional comparability between the same drug product manufactured by different organizations. Because we have used or intend to use multiple sources to manufacture SGN-30, SGN-15 and SGN-40, we will need to conduct comparability studies to assess whether manufacturing changes have affected the product safety, identity, purity or potency of any commercial drug candidate compared to the drug candidate used in clinical trials. If we are unable to demonstrate comparability, the FDA could require us to conduct additional clinical trials, which would be expensive and significantly delay any commercialization.

 

Our second generation ADC technology and our ADEPT technology are still at an early-stage of development and have not yet entered human clinical trials.

 

Our second generation ADC technology, utilizing proprietary stable linkers and highly potent cell-killing drugs, and our ADEPT technology are still at relatively early stages of development. The ADC technology is used in our SGN-35 and SGN-75 product candidates and is the basis of our collaborations with Genentech, UCB Celltech, Protein Design Labs, CuraGen and Bayer. The ADEPT technology is used in our SGN-17/19 product candidate and is the basis of our collaboration with Genencor. We and our corporate collaborators are still conducting toxicology, pharmacology, pharmacokinetics and other preclinical studies, and significant additional studies will be required before any of these ADC or ADEPT product candidates enter human clinical trials. For example, we have observed evidence of toxicity in some preclinical models with certain drug-linker forms and are focusing our efforts on forms with the lowest toxicity in order to maximize the therapeutic window of our ADC technology. In addition, preclinical models to study anti-cancer activity of compounds are not necessarily predictive of toxicity or efficacy of these compounds in the treatment of human cancer and there is no assurance that we will be able to use these technologies in the treatment of humans. Any failures or setbacks in our ADC or ADEPT programs could have a detrimental impact on our internal product candidate pipeline and our ability to maintain and/or enter into new corporate collaborations regarding this technology, which would negatively affect our business and financial position.

 

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We have a history of net losses. We expect to continue to incur net losses and may not achieve or maintain profitability for some time, if at all. Our limited operating history may make it difficult to evaluate our business and an investment in our common stock.

 

We have incurred net losses in each of our years of operation and, as of December 31, 2004, we had an accumulated deficit of approximately $114.1 million. We expect to make substantial expenditures to further develop and commercialize our product candidates and anticipate that our rate of spending will accelerate as the result of the increased costs and expenses associated with research, development, clinical trials, manufacturing, regulatory approvals and commercialization of our potential products. In the near term, we expect our revenues to be derived from technology licensing fees, sponsored research fees and milestone payments under existing and future collaborative arrangements and from government grants. In the longer term, our revenues may also include royalties from collaborations with current and future strategic partners and commercial product sales. However, our revenue and profit potential is unproven and our limited operating history makes our future operating results difficult to predict.

 

In some circumstances we rely on collaborators to assist in the research and development activities necessary for the commercialization of our product candidates. If we are not able to locate suitable collaborators or if our collaborators do not perform as expected, we may not be able to commercialize our product candidates.

 

We have established and intend to continue to establish alliances with third-party collaborators to develop and market some of our current and future product candidates and to license our ADC and ADEPT technologies. We have licensed our ADC technology to Genentech, UCB Celltech, Protein Design Labs, CuraGen and Bayer, and have licensed our ADEPT technology to Genencor. These collaborations provide us with cash and revenues through technology access and license fees, sponsored research fees, equity sales and potential milestone and royalty payments. We use these funds to partially fund the development costs of our internal pipeline of product candidates. Collaborations can also create and strengthen our relationships with leading biotechnology and pharmaceutical companies and may provide synergistic benefits by combining our technologies with the technologies of our collaborators. For example, in July 2004, we formed a collaboration with Celera Genomics to jointly discover and develop antibody-based therapies for cancer.

 

Under certain conditions, our collaborators may terminate their agreements with us and discontinue use of our technologies. We cannot control the amount and timing of resources our collaborators may devote to products incorporating our technology. Additionally, our relationships with our collaborators divert significant time and effort of our scientific staff and management team and require effective allocation of our resources to multiple internal and collaborative projects. Our collaborators may separately pursue competing products, therapeutic approaches or technologies to develop treatments for the diseases targeted by us or our collaborators. Even if our collaborators continue their contributions to the collaborative arrangements, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Our collaborators may fail to perform their obligations under the collaboration agreements or may be slow in performing their obligations. If any of our collaborators terminate or breach our agreements with them, or otherwise fail to complete their obligations in a timely manner, it may have a detrimental effect on our financial position by reducing or eliminating the potential for us to receive technology access and license fees, milestones and royalties, as well as possibly requiring us to devote additional efforts and incur costs associated with pursuing internal development of product candidates. Furthermore, if our collaborators do not prioritize and commit substantial resources to programs associated with our product candidates, we may be unable to commercialize our product candidates, which would limit our ability to generate revenue and become profitable. In the future, we may not be able to locate third party collaborators to develop and market our product candidates and we may lack the capital and resources necessary to develop all our product candidates alone.

 

We depend on a small number of collaborators for most of our current revenue. The loss of any one of these collaborators could result in a substantial decline in our revenue.

 

We have collaborations with a limited number of companies. To date, almost all of our revenue has resulted from payments made under agreements with our corporate collaborators, and we expect that most of our future

 

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revenue will continue to come from corporate collaborations until the approval and commercialization of one or more of our product candidates. The failure of our collaborators to perform their obligations under their agreements with us, including paying license or technology fees, milestone payments or royalties, could have a material adverse effect on our financial performance. In addition, a significant portion of revenue received from our corporate collaborators is derived from research and material supply fees, and a decision by any of our corporate collaborators to conduct more research and development activities themselves could significantly reduce the revenue received from these collaborations. Payments under our existing and future collaboration agreements are also subject to significant fluctuations in both timing and amount, which could cause our revenue to fall below the expectations of securities analysts and investors and cause a decrease in our stock price.

 

We rely on license agreements for certain aspects of our product candidates and technology. Failure to maintain these license agreements or to secure any required new licenses could prevent us from developing or commercializing our product candidates and technology.

 

We have entered into agreements with third-party commercial and academic institutions to license technology for use in our ADC technology and product candidates. Currently, we have license agreements with Bristol-Myers Squibb, Arizona State University, Genentech, Protein Design Labs, CLB Research and Development, ICOS Corporation, Mabtech AB, the University of Miami and Imperial College London, among others. Some of these license agreements contain diligence and milestone-based termination provisions, in which case our failure to meet any agreed upon diligence requirements or milestones may allow the licensor to terminate the agreement. Many of our license agreements grant us exclusive licenses to the underlying technologies. If our licensors terminate our license agreements or if we are unable to maintain the exclusivity of our exclusive license agreements, we may be unable to continue to develop and commercialize our product candidates. In addition, continued development and commercialization of our product candidates may require us to secure licenses to additional technologies. We may not be able to secure these licenses on commercially reasonable terms, if at all.

 

We rely on third parties to provide services in connection with our preclinical and clinical development programs. The inadequate performance by or loss of any of these service providers could affect our product candidate development.

 

Several third parties provide services in connection with our preclinical and clinical development programs, including in vitro and in vivo studies, assay and reagent development, immunohistochemistry, toxicology, pharmacokinetics and other outsourced activities. If these service providers do not adequately perform the services for which we have contracted or cease to continue operations and we are not able to quickly find a replacement provider or we lose information or items associated with our product candidates, our development programs may be delayed.

 

If we are unable to enforce our intellectual property rights, we may not be able to operate our business profitably. Similarly, if we fail to sustain and further build our intellectual property rights, competitors may be able to develop competing therapies.

 

Our success depends, in part, on obtaining and maintaining patent protection and successfully defending these patents against third party challenges in the United States, Canada, France, Germany, Japan, United Kingdom and Italy, as well as other countries. We own multiple U.S. and foreign patents and pending patent applications for our technologies. We also have rights to issued U.S. patents, patent applications, and their foreign counterparts, relating to our monoclonal antibody and drug-based technologies. Our rights to these patents and patent applications are derived from worldwide licenses from Bristol-Myers Squibb, Arizona State University, Genentech and Protein Design Labs, among others. In addition, we have licensed our U.S. and foreign patents and patent applications to third parties.

 

The standards that the U.S. Patent and Trademark Office and foreign patent offices use to grant patents are not always applied predictably or uniformly and can change. Consequently, our pending patent applications may not be allowed and, if allowed, may not contain the type and extent of patent claims that will be adequate to

 

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conduct our business as planned. Additionally, any issued patents may not contain claims that will permit us to stop competitors from using similar technology. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. As a result, the protection, if any, given by our patents if we attempt to enforce them or if they are challenged in court is uncertain.

 

We rely on trade secrets and other proprietary information where we believe patent protection is not appropriate or obtainable. However, trade secrets and other proprietary information are difficult to protect. We have taken measures to protect our unpatented trade secrets and know-how, including the use of confidentiality and assignment of inventions agreements with our employees, consultants and certain contractors. It is possible, however, that these persons may breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets or other proprietary information.

 

Our research collaborators may publish data and information to which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information may be impaired.

 

We may incur substantial costs and lose important rights as a result of litigation or other proceedings relating to patent and other intellectual property rights.

 

The defense and prosecution of intellectual property rights, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings in the United States and elsewhere involve complex legal and factual questions. These proceedings are costly and time-consuming. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and it will divert the efforts of our technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially reasonable terms, if at all. We may be restricted or prevented from developing and commercializing our product candidates in the event of an adverse determination in a judicial or administrative proceeding, or if we fail to obtain necessary licenses.

 

If we lose our key personnel or are unable to attract and retain additional qualified personnel, our future growth and ability to compete would suffer.

 

We are highly dependent on the efforts and abilities of the principal members of our senior management. Additionally, we have several scientific personnel with significant and unique expertise in monoclonal antibodies and related technologies. The loss of the services of any one of the principal members of our managerial or scientific staff may prevent us from achieving our business objectives.

 

The competition for qualified personnel in the biotechnology field is intense, and our future success depends upon our ability to attract, retain and motivate highly skilled scientific, technical and managerial employees. In order to commercialize our products successfully, we will be required to expand our workforce, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are not able to attract and retain these individuals on favorable terms, our business may be harmed.

 

We face intense competition and rapid technological change, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

 

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of many pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. Some of these competitors have

 

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successfully commercialized antibody products or are developing or testing product candidates that do or may in the future compete directly with our product candidates. For example, we believe that companies including Genentech, Amgen, ImmunoGen, Biogen IDEC, Medarex, Chiron and Wyeth are developing and/or marketing products that may compete with ours. Other potential competitors include large, fully integrated pharmaceutical companies and more established biotechnology companies, which have significant resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Also, academic institutions, government agencies and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and marketing. It is possible that these competitors will succeed in developing technologies that are more effective than our product candidates or that would render our technology obsolete or noncompetitive.

 

If our competitors develop superior products, manufacturing capability or marketing expertise, our business may fail.

 

Our business may fail because we face intense competition from major pharmaceutical companies and specialized biotechnology companies engaged in the development of other products directed at cancer. Many of our competitors have greater financial and human resources expertise and more experience in the commercialization of product candidates. Our competitors may, among other things:

 

    develop safer or more effective products;

 

    implement more effective approaches to sales and marketing;

 

    develop less costly products;

 

    obtain quicker regulatory approval;

 

    have access to more manufacturing capacity;

 

    form more advantageous strategic alliances; or

 

    establish superior proprietary positions.

 

In addition, if we receive regulatory approvals, we may compete with well-established, FDA-approved therapies that have generated substantial sales over a number of years. We anticipate that we will face increased competition in the future as new companies enter our market and scientific developments surrounding other cancer therapies continue to accelerate.

 

We have no experience in commercializing products on our own and, to the extent we do not develop this ability or contract with a third party to assist us, we may not be able to successfully sell our product candidates.

 

We do not have a sales and marketing force and may not be able to develop this capacity. If we are unable to establish sales and marketing capabilities, we will need to enter into sales and marketing agreements to market our products in the United States. For sales outside the United States, we plan to enter into third-party arrangements. In these foreign markets, if we are unable to establish successful distribution relationships with pharmaceutical companies, we may fail to realize the full sales potential of our product candidates.

 

Additionally, our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved product candidate will depend on a number of factors, including: establishment and demonstration of clinical efficacy and safety; cost-effectiveness of a product; its potential advantage over alternative treatment methods; and marketing and distribution support for the product.

 

Moreover, government health administrative authorities, private health insurers and other organizations are increasingly challenging both the need for and the price of new medical products and services. Consequently, uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics. For these and

 

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other reasons, physicians, patients, third-party payors and the medical community may not accept and utilize any product candidates that we develop and even if they do, reimbursement may not be available for our products to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. Similarly, even if we do receive reimbursement, the target market for our products may be small or the focus of intense competition and we may not realize an appropriate return on our investment in research and product development.

 

The holders of our Series A convertible preferred stock have voting and other rights that they could exercise against your best interests.

 

The holders of our Series A convertible preferred stock have rights to designate two members of our Board of Directors and to vote as a separate class on certain significant corporate transactions, including the issuance of securities that would rank on a par with or senior to the Series A convertible preferred stock or the incurrence of debt in excess of $20 million. The holders of Series A convertible preferred stock are not entitled to receive any cumulative or non-cumulative dividends, and may only receive a dividend when and as declared by our Board of Directors or if any dividends are paid on any other shares of our capital stock based on the number of shares of common stock into which such holder’s shares of Series A convertible preferred stock would then convert. In addition, upon our liquidation or dissolution (including a merger or acquisition), the holders of our Series A convertible preferred stock are entitled to receive a liquidation preference in an amount equal to the greater of $25.00 per share of Series A convertible preferred stock or the amount that would have been paid had each such share of Series A convertible preferred stock been converted to common stock. The holders of Series A convertible preferred stock also have the right under certain circumstances in the event of our merger or acquisition approved by our Board of Directors to receive their liquidation preference in cash or a combination of cash and new preferred securities of the acquiring or surviving corporation. This requirement to pay cash or issue new preferred securities does not apply if the consideration to be received by the Series A holders has an aggregate value of more than $6.25 per share (calculated on an as-if-converted to common stock basis) determined on the date definitive documentation for such sale transaction is signed or if holders of 2/3rds of the outstanding shares of Series A convertible preferred stock waive this requirement. The holders of Series A convertible preferred stock may exercise these rights to the detriment of our common stockholders.

 

The holders of our Series A convertible preferred stock also have the right at any time to request that we register for resale the shares of our common stock that they acquire upon conversion of their Series A convertible preferred stock or upon exercise of their warrants to purchase our common stock, subject to certain limitations. In addition, the holders of our Series A convertible preferred stock may convert their Series A convertible preferred stock into common stock at any time and sell shares of the common stock acquired upon such conversion in the public market in reliance upon Rule 144. Future sales in the public market of such common stock, or the perception that such sales might occur, could adversely affect the prevailing market price of our common stock and could make it more difficult for us to raise funds through a public offering or private placement of our equity securities.

 

We face product liability risks and may not be able to obtain adequate insurance to protect us against losses.

 

We currently have no products that have been approved for commercial sale. However, the current and future use of our product candidates by us and our corporate collaborators in clinical trials, and the sale of any approved products in the future, may expose us to liability claims. These claims might be made directly by consumers or healthcare providers or indirectly by pharmaceutical companies, our corporate collaborators or others selling such products. We may experience financial losses in the future due to product liability claims. We have obtained limited general commercial liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of our product candidates. However, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business operations could be impaired.

 

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Our operations involve hazardous materials and are subject to environmental, health and safety controls and regulations.

 

We are subject to environmental, health and safety laws and regulations, including those governing the use of hazardous materials. The cost of compliance with environmental, health and safety regulations is substantial. Our business activities involve the controlled use of hazardous materials and we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may materially harm our business, financial condition and results of operations.

 

We may engage in future acquisitions that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

 

We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses. Any potential acquisitions may entail numerous risks, including increased operating expenses and cash requirements, assimilation of operations and products, retention of key employees, diversion of our management’s attention and uncertainties in our ability to maintain key business relationships of the acquired entities. In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

 

Legislative actions, potential new accounting pronouncements and higher insurance costs are likely to impact our future financial position or results of operations.

 

Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency in the past and may occur again in the future and as a result we may be required to make changes in our accounting policies. Compliance with new regulations regarding corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules and the recent accounting changes to expense stock options, are creating uncertainty for companies such as ours and insurance costs are increasing as a result of this uncertainty and other factors. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from science and business activities to compliance activities. For example, we have incurred and expect to continue to incur substantial costs and expend significant resources to comply with the regulations promulgated under Section 404 of the Sarbanes-Oxley Act of 2002.

 

Our stock price may be volatile and our shares may suffer a decline in value.

 

The market prices for securities of biotechnology companies have in the past been, and are likely to continue in the future to be, very volatile. During the fourth quarter of 2004, our stock price fluctuated between $5.63 and $7.85 per share. As a result of fluctuations in the price of our common stock, you may be unable to sell your shares at or above the price you paid for them. The market price of our common stock may be subject to substantial volatility in response to many risk factors listed in this section, and others beyond our control, including:

 

    announcements regarding the results of discovery efforts and preclinical and clinical activities by us or our competitors;

 

    changes in our existing corporate partnerships or licensing arrangements;

 

    establishment of new corporate partnering or licensing arrangements by us or our competitors;

 

    our ability to raise capital;

 

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    developments or disputes concerning our proprietary rights;

 

    issuance of new or changed analysts’ reports and recommendations regarding us or our competitors;

 

    share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

    changes in government regulations; and

 

    economic or other external factors.

 

Our existing stockholders have significant control of our management and affairs.

 

Our executive officers and directors and holders of greater than five percent of our outstanding voting stock, together with entities that may be deemed affiliates of, or related to, such persons or entities, beneficially owned approximately 43.2 percent of our voting power as of March 9, 2005. As a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control, including a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, which might affect the market price of our common stock.

 

Anti-takeover provisions could make it more difficult for a third party to acquire us.

 

In addition to the 1,500,000 shares of Series A convertible preferred stock that are currently outstanding as of March 9, 2005, our Board of Directors has the authority to issue up to an additional 3,360,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Seattle Genetics without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Seattle Genetics, which could have an adverse effect on the market price of our stock. In addition, our charter documents provide for a classified board, which may make it more difficult for a third party to gain control of our Board of Directors. Similarly, state anti-takeover laws in Delaware and Washington related to corporate takeovers may prevent or delay a change of control of Seattle Genetics.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

In accordance with our policy, we do not have any derivative financial instruments in our investment portfolio. We invest in high quality interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, adjustable mortgage-backed securities, commercial paper and money market accounts. Such securities are subject to interest rate risk and will rise and fall in value if market interest rates change; however, we do not expect any material loss from such interest rate changes.

 

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Item 8. Financial Statements and Supplementary Data.

 

Seattle Genetics, Inc.

 

Index to Financial Statements

 

     Page

Report of Independent Registered Public Accounting Firm

   40

Balance Sheets

   42

Statements of Operations

   43

Statements of Stockholders’ Equity

   44

Statements of Cash Flows

   45

Notes to Financial Statements

   46

 

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Table of Contents

Seattle Genetics, Inc.

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

of Seattle Genetics, Inc.

 

We have completed an integrated audit of Seattle Genetics, Inc.’s 2004 financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Financial statements

 

In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Seattle Genetics, Inc. (the Company) at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

 

40


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includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PricewaterhouseCoopers LLP

 

Seattle, Washington

March 11, 2005

 

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Table of Contents

Seattle Genetics, Inc.

 

Balance Sheets

(In thousands, except share amounts)

 

     December 31,

 
     2004

    2003

 

Assets

                

Current assets

                

Cash and cash equivalents

   $ 9,645     $ 9,625  

Short-term investments

     27,492       31,205  

Interest receivable

     818       670  

Accounts receivable

     1,477       826  

Prepaid expenses and other

     476       345  
    


 


Total current assets

     39,908       42,671  

Property and equipment, net

     9,463       5,500  

Restricted investments

     977       976  

Long-term investments

     68,761       32,852  
    


 


Total assets

   $ 119,109     $ 81,999  
    


 


Liabilities and Stockholders’ Equity

                

Current liabilities

                

Accounts payable and accrued liabilities

   $ 4,815     $ 1,726  

Current portion of deferred revenue

     4,860       2,106  
    


 


Total current liabilities

     9,675       3,832  
    


 


Long-term liabilities

                

Deferred rent

     472       390  

Deferred revenue, less current portion

     5,129       2,899  
    


 


Total long-term liabilities

     5,601       3,289  
    


 


Commitments and contingencies

                

Stockholders’ equity

                

Preferred stock, $0.001 par value, 5,000,000 shares authorized:

                

Series A convertible preferred stock, 1,500,000 and 1,640,000 shares issued and outstanding, respectively

     2       2  

Common stock, $0.001 par value, 100,000,000 shares authorized, 41,984,003 and 32,031,148 issued and outstanding, respectively

     42       32  

Additional paid-in capital

     217,995       154,497  

Deferred stock compensation

           (990 )

Accumulated other comprehensive income (loss)

     (65 )     39  

Accumulated deficit

     (114,141 )     (78,702 )
    


 


Total stockholders’ equity

     103,833       74,878  
    


 


Total liabilities and stockholders’ equity

   $ 119,109     $ 81,999  
    


 


 

 

The accompanying notes are an integral part of these financial statements.

 

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Seattle Genetics, Inc.

 

Statements of Operations

(In thousands, except per share amounts)

 

     Years Ended December 31,

 
     2004

    2003

    2002

 

Revenues

                        

Collaboration and license agreements

   $ 6,701     $ 4,989     $ 1,543  

Government grants

           81       141  
    


 


 


Total revenues

     6,701       5,070       1,684  
    


 


 


Operating expenses

                        

Research and development (excludes non-cash stock-based compensation expense of $206, $538 and $912, respectively)

     37,002       21,390       19,362  

General and administrative (excludes non-cash stock-based compensation expense of $663, $977 and $1,909, respectively)

     6,498       5,428       4,696  

Non-cash stock-based compensation expense

     869       1,515       2,821  
    


 


 


Total operating expenses

     44,369       28,333       26,879  
    


 


 


Loss from operations

     (37,668 )     (23,263 )     (25,195 )

Investment income, net

     2,229       1,177       2,035  
    


 


 


Net loss

     (35,439 )     (22,086 )     (23,160 )

Non-cash accretion of preferred stock deemed dividend

     (36,558 )     (201 )      
    


 


 


Net loss attributable to common stockholders

   $ (71,997 )   $ (22,287 )   $ (23,160 )
    


 


 


Net loss per share—basic and diluted

   $ (1.80 )   $ (0.73 )   $ (0.77 )
    


 


 


Weighted-average shares—basic and diluted

     39,985       30,722       30,138  
    


 


 


 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Seattle Genetics, Inc.

 

Statements of Stockholders’ Equity

(In thousands)

 

    Preferred stock

  Common stock

  Additional
paid-in
capital


    Notes
receivable
from
stockholders


    Deferred
stock
compensation


    Accumulated
Other
Comprehensive
Income


    Accumulated
deficit


    Total
Stockholders’
Equity
(Deficit)


 
    Shares  

    Amount  

  Shares  

  Amount  

           

Balances, December 31, 2001

          29,323   $ 29   $ 98,485     $ (271 )   $ (4,689 )   $ 573     $ (33,456 )   $ 60,671  

Issuance of common stock for employee stock purchase plan

          32         136                               136  

Stock option exercises

          66         12                               12  

Issuance of common stock to Genencor

          574     1     2,999                               3,000  

Issuance of common stock to Genentech.

          698     1     3,499                               3,500  

Deferred stock compensation

                  98             (98 )                  

Amortization of deferred stock compensation

                              2,821                   2,821  

Unrealized loss on investments

                                    (275 )           (275 )

Reclassification adjustment for gains included in net loss

                                    (3 )           (3 )

Net loss

                                          (23,160 )     (23,160 )
                                                                 


Comprehensive loss

                                                (23,438 )
   

 

 
 

 


 


 


 


 


 


Balances, December 31, 2002

          30,693     31     105,229       (271 )     (1,966 )     295       (56,616 )     46,702  

Issuance of common stock for employee stock purchase plan

          43         120                               120  

Stock option exercises

          205         567                               567  

Issuance of Series A preferred stock

  1,640       2           36,760                               36,762  

Issuance of common stock warrants

                  3,614                               3,614  

Collection of notes receivable from stockholders

                        271                         271  

Issuance of common stock to Genentech.

          1,090     1     7,668                               7,669  

Deferred stock compensation

                  539             (539 )                  

Amortization of deferred stock compensation

                              1,515                   1,515  

Unrealized loss on investments

                                    (254 )           (254 )

Reclassification adjustment for gains included in net loss

                                    (2 )           (2 )

Net loss

                                          (22,086 )     (22,086 )
                                                                 


Comprehensive loss

                                                (22,342 )
   

 

 
 

 


 


 


 


 


 


Balances at December 31, 2003

  1,640       2   32,031     32     154,497             (990 )     39       (78,702 )     74,878  

Issuance of common stock for employee stock purchase plan

          78     1     235                               236  

Stock option exercises

          425         1,290                               1,290  

Follow-on public offering (net of issuance costs of $4,310)

          8,050     9     62,094                               62,103  

Redemption of Series A preferred stock

  (140 )       1,400                                        

Deferred stock compensation

                  (605 )           605                    

Amortization of deferred stock compensation

                              385                   385  

Accelerated vesting of stock options on employee severance

                  348                               348  

Remeasurement and issuance of stock options in exchange for consulting services.

                  136                               136  

Unrealized loss on investments

                                    (94 )           (94 )

Reclassification adjustment for gains included in net loss

                                    (10 )           (10 )

Net loss

                                          (35,439 )     (35,439 )
                                                                 


Comprehensive loss

                                                (35,543 )
   

 

 
 

 


 


 


 


 


 


Balances at December 31, 2004

  1,500     $ 2   41,984   $ 42   $ 217,995           $     $ (65 )   $ (114,141 )   $ 103,833  
   

 

 
 

 


 


 


 


 


 


 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Seattle Genetics, Inc.

 

Statement of Cash Flows

(In thousands)

 

     Years Ended December 31,

 
     2004

    2003

    2002

 

Operating activities

                        

Net loss

   $ (35,439 )   $ (22,086 )   $ (23,160 )

Adjustments to reconcile net loss to net cash used in operating activities

                        

Stock-based compensation expense

     869       1,515       2,821  

Depreciation and amortization

     1,744       1,326       1,231  

Loss on disposal of property and equipment

     16              

Realized gain on sale of investments

     (10 )     (2 )     (3 )

Amortization on investments

     2,316       978       686  

Deferred rent

     82       122       161  

Changes in operating assets and liabilities

                        

Interest receivable

     (148 )     (299 )     354  

Accounts receivable

     (651 )     (454 )     (290 )

Prepaid expenses and other

     (131 )     12       157  

Accounts payable and accrued liabilities

     3,089       (465 )     870  

Deferred revenue

     4,984       1,630       3,033  
    


 


 


Net cash used in operating activities

     (23,279 )     (17,723 )     (14,140 )
    


 


 


Investing activities

                        

Purchases of investments

     (125,817 )     (66,497 )     (22,335 )

Proceeds from sale and maturities of investments

     91,210       36,250       32,419  

Purchases of property and equipment

     (5,723 )     (589 )     (1,705 )
    


 


 


Net cash (used in) provided by investing activities

     (40,330 )     (30,836 )     8,379  
    


 


 


Financing activities

                        

Net proceeds from issuance of common stock

     63,629       8,356       6,648  

Net proceeds from issuance of preferred stock and warrants

           40,376        

Collection of notes receivable from stockholders

           271        
    


 


 


Net cash provided by financing activities

     63,629       49,003       6,648  
    


 


 


Net increase in cash and cash equivalents

     20       444       887  

Cash and cash equivalents, at beginning of period

     9,625       9,181       8,294  
    


 


 


Cash and cash equivalents, at end of period

   $ 9,645     $ 9,625     $ 9,181  
    


 


 


Supplemental disclosures

                        

Non-cash investing and financing activities

                        

Increase (decrease) in deferred stock compensation

   $ (605 )   $ (539 )   $ 98  
    


 


 


Property and equipment purchase costs accrued

   $     $     $ (587 )
    


 


 


 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Seattle Genetics, Inc.

 

Notes to Financial Statements

 

1. Organization and summary of significant accounting policies

 

Nature of business

 

Seattle Genetics, Inc., the Company, was incorporated in the State of Delaware on July 15, 1997 for the purpose of discovering and developing monoclonal antibody-based drugs to treat cancer and other human diseases. The Company’s monoclonal antibody-based technologies include: genetically engineered monoclonal antibodies, antibody-drug conjugates (ADCs) and antibody-directed enzyme prodrug therapy (ADEPT).

 

Capital Requirements

 

Over the next several years, the Company will need to seek additional funding through public or private financings, including equity financings, and through other means, including collaborations and license agreements. However, changes in the Company’s business may occur that would consume available capital resources sooner than expected. If the Company does not have adequate funds, the Company will be required to delay, reduce the scope of or eliminate one or more development programs. Additional financing may not be available when needed, or if available, the Company may not be able to obtain financing on favorable terms.

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. The Company invests its cash and cash equivalents with major financial institutions, which, at times, exceed federally insured limits. The Company has not experienced any losses on its cash and cash equivalents.

 

Investments

 

Investments in securities with maturities of less than one year at the date of acquisition or where management’s intent is to use the investments to fund current operations are classified as short-term investments. Management’s classification of its marketable securities is in accordance with the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company classifies its securities as available-for-sale, which are reported at fair value with the related unrealized gains and losses included as a component of stockholders’ equity. Realized gains and losses and declines in value of securities judged to be other than temporary are included in other income (expense). The Company has determined that unrealized losses are temporary as the duration of the decline in the value of the investments has been short, the extent of the decline, in both dollars and percentage of cost is not significant, and the Company has the ability and intent to hold the investments until it recovers at least substantially all of the cost of the investment. Cost of investments for purposes of computing realized and unrealized gains and losses are based on the specific identification method.

 

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income, net. Interest and dividends on all securities are included in investment income.

 

Restricted investments

 

Restricted investments consist of a money market account and government bonds backed by U.S. government agencies. These investments are carried at fair value, and are restricted as to withdrawal in

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

accordance with the lease of the Company’s office and laboratory facility. Restricted investments are held in the Company’s name with a major financial institution. The lease terms provide for changes in the amounts pledged as restricted securities based upon the Company’s market capitalization, stockholders’ equity or cash and investments balance until the lease expiration date of May 31, 2011. In the event that the Company’s market capitalization, stockholders’ equity or cash and investments balance fall below specific thresholds, the Company will be obligated to increase its restricted investment balance to approximately $3.4 million. As of December 31, 2004, the Company was in compliance with these thresholds.

 

Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

 

     Years

Laboratory equipment

   5

Furniture and fixtures

   5

Computers and office equipment

   3

Vehicles

   5

 

Leasehold improvements are amortized over the shorter of the term of the applicable lease or the estimated useful life of the asset, generally 6 to 10 years. Gains and losses from the disposal of property and equipment are reflected in the statement of operations at the time of disposition. Expenditures for additions and improvements are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.

 

Impairment of long-lived assets

 

The Company assesses the impairment of long-lived assets, primarily property and equipment, whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been an impairment by comparing the anticipated undiscounted net cash flows to the related asset’s carrying value. The amount of a recognized impairment loss is the excess of an asset’s carrying value over its fair value. If an impairment exists, the asset is written down to its estimated fair value. The Company has not recognized any impairment losses through December 31, 2004.

 

Revenue recognition

 

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB No. 101), as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB No. 104), and Emerging Issues Task Force Issue No. 00-21, “Revenue Agreements with Multiple Deliverables” (EITF No. 00-21). EITF No. 00-21 applies to arrangements entered into after June 30, 2003.

 

Revenues from the sale of products and services are recognized when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the fees are fixed and determinable and collectibility is assured.

 

Revenues from multiple element arrangements involving upfront payments, license fees and milestone payments received for the delivery of rights or services representing the culmination of a separate earnings process are recognized when due and the amounts are considered collectible. Revenues from upfront payments, license fees and milestone payments received in connection with other rights or services which represent continuing obligations of the Company are deferred until all of the elements have been delivered or the Company

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

has verifiable and objective evidence of the fair value of the undelivered elements. Upfront payments and license fees are recognized ratably over the collaboration research period. Under EITF No. 00-21, payments for the achievement of substantive milestones are recognized when the milestone is achieved and payments for milestones which are not substantive are recognized ratably over the research period.

 

Deferred revenue arises from payments received in advance of the culmination of the earnings process. Deferred revenue expected to be recognized within the next twelve months is classified as a current liability. Deferred revenue will be recognized as revenue in future periods when the applicable revenue recognition criteria have been met.

 

Government grants represent income earned, on a cost reimbursement basis, under the Small Business Innovation Research Program, or SBIR, of the National Institutes of Health. The Company recognizes revenue from government grants based upon the level of services performed during the term of the grants.

 

The Company performs certain research and development activities on behalf of collaborative partners. The Company is generally reimbursed at pre-determined billing rates. The Company recognizes revenue as the activities are performed, but bills the collaborator monthly, quarterly or upon the completion of the effort, based on the terms of each agreement. Amounts earned, but not billed to the collaborator, are included in accounts receivable in the accompanying balance sheets. Amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided and are recognized as revenue when the goods are delivered. Shipping and handling costs associated with amounts billed to a customer are recorded as operating expenses of the Company.

 

Research and development expenses

 

Research and development expenses consist of direct, third-party and overhead expenses for drug discovery and research, development activities, preclinical studies and for costs associated with clinical trial activities and are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred. Research and development expenses under government grants approximate the revenue recognized under such agreements. Reimbursements for shared expenses received from collaborative partners are recorded as reductions of research and development expenses. In-licensing fees are expensed ratably over the period covered by the license agreement.

 

Fair value of financial instruments

 

The recorded amounts of certain financial instruments, including cash and cash equivalents, interest receivable, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. Short-term and long-term investments are recorded at fair value as the underlying securities are classified as available for sale and marked-to-market at each reporting period.

 

Concentration of credit risk

 

Cash and cash equivalents are invested in deposits with major banking and brokerage firms. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company invests its excess cash in accordance with its investment policy, which has been approved by the Board of Directors and is reviewed periodically by management and with the Company’s Audit Committee to minimize credit risk.

 

Income taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that the net deferred tax asset will not be realized.

 

Stock-based compensation

 

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” (APB No. 25) as interpreted by Financial Accounting Standards Board Interpretation No. 44 (FIN 44) and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). Under APB No. 25 and related interpretations, compensation expense is based on the difference, if any, of the fair value of the Company’s stock and the exercise price of the option as of the date of grant. These differences are deferred and amortized in accordance with Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” (FIN No. 28) on an accelerated basis over the vesting period of the individual options.

 

The Company accounts for equity instruments issued to nonemployees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services,” and related interpretations.

 

The following table illustrates the effect on net loss and loss per share as if the fair value method, using the assumptions described in Note 10 “Stock Option Plan,” had been applied to all outstanding and unvested awards and shares issued under the Company’s Employee Stock Purchase Plan in each year (in thousands, except per share amounts):

 

     Years Ended December 31,

 
     2004

    2003

    2002

 

Net loss attributable to common stockholders as reported

   $ (71,997 )   $ (22,287 )   $ (23,160 )

Add: stock-based compensation for employees under APB No. 25 included in reported net loss

     733       1,277       2,821  

Deduct: total stock-based compensation expense for employees determined under the fair value method

     (5,218 )     (5,383 )     (8,507 )
    


 


 


Pro forma net loss attributable to common stockholders

   $ (76,482 )   $ (26,393 )   $ (28,846 )
    


 


 


Basic and diluted net loss per share

                        

As reported

   $ (1.80 )   $ (0.73 )   $ (0.77 )
    


 


 


Pro forma

   $ (1.91 )   $ (0.86 )   $ (0.96 )
    


 


 


 

Comprehensive income/loss

 

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS No. 130). SFAS No. 130 requires the disclosure of comprehensive income and its components in the financial statements. Comprehensive income/loss is the change in stockholders’ equity from transactions and other events and circumstances other than those resulting from investments by owners and distributions to owners. The Company’s other comprehensive income/loss is comprised of other unrealized gains and losses on investments.

 

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Segments

 

The Company adopted Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas, and major customers. Management has determined that the Company operates in one segment.

 

Certain risks and uncertainties

 

The Company’s products and services are concentrated in a highly competitive market that is characterized by rapid technological advances, frequent changes in customer requirements and evolving regulatory requirements and industry standards. Failure to anticipate or respond adequately to technological advances, changes in customer requirements, changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of planned products or services, could have a material adverse effect on the Company’s business and operating results.

 

Guarantees

 

In the normal course of business, the Company indemnifies other parties, including collaboration partners, lessors and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential amount under these indemnification agreements since the Company has not had any prior indemnification claims to base a maximum amount on and each claim would be based on the unique facts and circumstances of the claim and the particular provisions of each agreement.

 

Recent accounting pronouncements

 

In December 2003, the FASB issued SFAS Interpretation No. 46R, Consolidation of Variable Interest Entities (amended). This interpretation clarifies rules relating to consolidation where entities are controlled by means other than a majority voting interest and instances in which equity investors do not bear the residual economic risks. This interpretation was originally effective immediately for variable interest entities created after January 31, 2003 and for interim periods beginning after June 15, 2003 for interests acquired prior to February 1, 2003. However, the FASB is reviewing certain provisions of the standard and has deferred the effective date of application to periods ending after December 15, 2003. The adoption of this interpretation will not have a material impact on the Company’s financial position or results of operations.

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held for Not-for-Profit Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. We do not expect the adoption of EITF 03-1 to have a material effect on our results of operations or financial condition.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29.” APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the

 

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Notes to Financial Statements (Continued)

 

opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153 is not expected to have any impact on our financial position or results of operations.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment,” or SFAS 123R, which replaces SFAS No. 123 “Accounting for Stock-Based Compensation,” or SFAS 123, and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees.” Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123.

 

The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to Employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS 123R.

 

The Company currently expects to adopt SFAS 123R effective July 1, 2005. If the Company adopts the modified prospective method and continues to use the standard option pricing model, it estimates share-based compensation expense to be approximately $1.0 million for the quarter ended September 30, 2005 and approximately $850,000 for the quarter ended December 31, 2005 based on stock options outstanding as of February 28, 2005. These estimates may increase as additional awards of equity instruments are granted. The Company currently does not anticipate any changes in compensation strategies due to the adoption of FAS 123R.

 

Reclassifications

 

Certain expense reclassifications have been made in prior period’s financial statements to conform to classifications used in the current year. These reclassifications have no impact on net loss, stockholders’ equity or cash flows as previously reported.

 

Net loss per share attributable to common stockholders

 

Basic and diluted net loss per share attributable to common stockholders has been computed using the weighted-average number of shares of common stock outstanding during the period, less the weighted-average number of unvested shares of common stock issued that are subject to repurchase. The Company has excluded all convertible preferred stock, warrants, options to purchase common stock and restricted shares of common stock subject to repurchase from the calculation of diluted net loss per share attributable to common stockholders, as such securities are antidilutive for all periods presented.

 

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The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share amounts):

 

     Years Ended December 31,

 
     2004

    2003

    2002

 

Net loss attributable to common stockholders

   $ (71,997 )   $ (22,287 )   $ (23,160 )
    


 


 


Weighted-average shares basic and diluted

     39,985       30,722       30,138  
    


 


 


Basic and diluted net loss per share attributable to common stockholders

   $ (1.80 )   $ (0.73 )   $ (0.77 )
    


 


 


Antidilutive securities not included in net loss per share attributable to common stockholders calculation

                        

Convertible preferred stock

     15,811       16,400        

Warrants to purchase common stock

     2,050       2,050        

Options to purchase common stock

     5,089       4,871       3,840  

Restricted shares of common stock subject to repurchase

     23       74       222  
    


 


 


Total

     22,973       23,395       4,062  
    


 


 


 

2. Investments

 

Investments consist of available-for-sale securities as follows (in thousands):

 

     Amortized
Cost


   Gross
Unrealized
Gains


   Gross
Unrealized
Losses


    Fair
Value


December 31, 2004

                            

Mortgage-backed securities

   $ 61,174    $ 201    $ (164 )   $ 61,211

U.S. corporate obligations

     21,087           (79 )     21,008

U.S. government and agencies

     14,565      2      (25 )     14,542

Taxable municipal bonds

     469                 469
    

  

  


 

Total

   $ 97,295    $ 203    $ (268 )   $ 97,230
    

  

  


 

Reported as:

                            

Short-term investments

                         $ 27,492

Long-term investments

                           68,761

Restricted investments

                           977
                          

Total

                         $ 97,230
                          

December 31, 2003

                            

Mortgage-backed securities

   $ 32,790    $ 162    $ (99 )   $ 32,853

U.S. corporate obligations

     29,989      1      (23 )     29,967

Taxable municipal bonds

     1,191           (4 )     1,187

U.S. government and agencies

     1,024      2            1,026
    

  

  


 

Total

   $ 64,994    $ 165    $ (126 )   $ 65,033
    

  

  


 

Reported as:

                            

Short-term investments

                         $ 31,205

Long-term investments

                           32,852

Restricted investments

                           976
                          

Total

                         $ 65,033
                          

 

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Notes to Financial Statements (Continued)

 

The gross realized gains or losses on sales of available-for-sale securities for 2004, 2003 and 2002 were immaterial and are therefore not shown.

 

The contractual maturities of our available-for-sale securities are shown below (in thousands):

 

     Amortized
Cost


   Fair
Value


December 31, 2004

             

Due in one year or less

   $ 28,029    $ 27,996

Due in one year through two years

     8,092      8,023

Mortgage-backed securities

     61,174      61,211
    

  

Total

   $ 97,295    $ 97,230
    

  

December 31, 2003

             

Due in one year or less

   $ 32,204    $ 32,180

Mortgage-backed securities

     32,790      32,853
    

  

Total

   $ 64,994    $ 65,033
    

  

 

The Company has determined that unrealized losses are temporary as the duration of the decline in the value of the investments has been short, the extent of the decline, in both dollars and percentage of cost is not significant, and the Company has the ability and intent to hold the investments until it recovers at least substantially all of the cost of the investment.

 

At December 31, 2004 the aggregate fair value of investments with unrealized losses was as follows:

 

Mortgage-backed securities

   $ 29,448

U.S. corporate obligations

     14,040

U.S. government and agencies

     8,583

Taxable municipal bonds

     470
    

Total

   $ 52,541
    

 

3. Prepaid expenses and other

 

Prepaid expenses and other consists of the following at December 31 (in thousands):

 

     2004

   2003

Service contracts

   $ 192    $ 139

Insurance

     156      124

License fees paid in advance

     103      56

Other

     25      26
    

  

Total

   $ 476    $ 345
    

  

 

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4. Property and equipment

 

Property and equipment consists of the following at December 31 (in thousands):

 

     2004

    2003

 

Leasehold improvements

   $ 7,466     $ 3,863  

Laboratory equipment

     4,729       3,189  

Furniture and fixtures

     1,168       872  

Computers, office equipment and vehicle

     1,127       931  

Construction in progress

           91  
    


 


       14,490       8,946  

Less: accumulated depreciation and amortization

     (5,027 )     (3,446 )
    


 


Total

   $ 9,463     $ 5,500  
    


 


 

The Company has collateralized the majority of its property and equipment against certain obligations under its office and laboratory lease agreement.

 

5. Accounts payable and accrued liabilities

 

Accounts payable and accrued liabilities consists of the following at December 31 (in thousands):

 

     2004

   2003

Contract manufacturing

   $ 1,843    $

Trade accounts payable

     1,170      939

Compensation and benefits

     830      655

Clinical trial costs

     756      6

Franchise and local taxes

     216      126
    

  

Total

   $ 4,815    $ 1,726
    

  

 

Contract manufacturing represents amounts due to a third party manufacturer pursuant to an agreement entered into during the year ended December 31, 2004.

 

6. Income taxes

 

At December 31, 2004, the Company had net operating loss carryforwards of approximately $50.3 million, which may be used to offset future taxable income. These carryforwards expire beginning in 2018 through 2024. The Internal Revenue Code places certain limitations on the annual amount of net operating loss carryforwards that can be utilized if certain changes in the Company’s ownership occur.

 

At December 31, 2004 the Company had research and experimentation credit carryforwards of approximately $3.9 million, which will expire beginning in 2019 through 2024.

 

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The Company’s net deferred tax assets consist of the following at December 31 (in thousands):

 

     2004

    2003

 

Deferred tax assets

                

Net operating loss carryforwards

   $ 17,092     $ 13,697  

Capitalized research and development

     13,524       6,523  

Research and development credit carryforwards

     3,924       2,275  

Deferred revenue

     3,012       1,484  

Stock-based compensation

     1,501       1,801  

Depreciation and amortization

     419       318  

Other

     545       305  
    


 


Total deferred tax assets

     40,017       26,403  

Less: Valuation allowance

     (40,017 )     (26,403 )
    


 


Net deferred tax assets

   $     $  
    


 


 

Changes in the valuation allowance were $13.6 million, $7.9 million and $8.1 million for the years ended 2004, 2003 and 2002, respectively.

 

7. Collaboration and license agreements

 

Genentech

 

In March 2003, the Company entered into license agreements with Genentech providing the Company with rights relating to the Company’s SGN-40 product candidate, including a license under Genentech’s Cabilly patents. The Company has paid and will pay Genentech license fees, a progress-dependent milestone payment and royalties on net sales of anti-CD40 products that use Genentech’s technology.

 

In April 2002, the Company entered into an ADC collaboration with Genentech. Upon entering into the collaboration, Genentech paid a $2.5 million up front fee and purchased $3.5 million of the Company’s common stock in a private placement. Under the collaboration, Genentech pays the Company research fees for assistance with development of ADCs. Genentech also pays technology access fees and has agreed to pay progress-dependent milestone payments and royalties on net sales of any resulting products. Genentech is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration.

 

In December 2003, Genentech designated additional targets under the collaboration agreement, triggering the payment of an additional $3.0 million fee and the purchase of $7.0 million of the Company’s common stock in a private placement. The $3.0 million fee has been deferred and will be recognized ratably over 40 months, the remaining term of the research period in the original Genentech collaboration agreement. The number of shares issued to Genentech was based upon the average closing price of the Company’s common stock for the 30 trading days ending on December 9, 2003, the date Genentech designated the additional targets. The private placement transaction closed on December 18, 2003. Due to an increase in the price of the Company’s common stock between the designation date and the closing date, the excess of the fair value of the shares of common stock issued to Genentech over the purchase price, which excess totaled to $669,000, was recorded as a discount to deferred revenue. The discount will be recognized ratably over the remaining term of the Genentech agreement and, under the requirements of EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” will be recorded as contra revenue. The Company recorded approximately $199,000 and $13,000 of non-cash contra revenue during the years ended December 31, 2004 and 2003, respectively. The Company anticipates that it will record future non-cash contra revenue of approximately $199,000 in each of 2005 and 2006, and approximately $59,000 in 2007.

 

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In November 2004, Genentech designated additional targets under the collaboration agreement, triggering the payment of an additional $1.6 million fee. Under the terms of the agreement, Genentech has rights to use the Company’s ADC technology with antibodies against certain targets selected by Genentech. The $1.6 million fee has been deferred and will be recognized ratably over 30 months, the remaining term of the research period in the original Genentech collaboration agreement.

 

The Company is currently assisting Genentech with process development and manufacturing of a HER2-targeted ADC. Material supply and service fees billed under these process development and manufacturing activities will be deferred and recognized to revenue ratably over a two year development period.

 

Bayer Pharmaceuticals

 

In September 2004, the Company entered into an ADC collaboration with Bayer Corporation. Under the terms of the multi-year agreement, Bayer paid the Company an upfront fee of $2.0 million for an exclusive license to the Company’s ADC technology for a single antigen. The upfront fee is being recognized as revenue ratably over the three year research period. Bayer will pay material supply and research support fees for any assistance provided by the Company in developing ADC products, as well as annual maintenance fees. The material supply and research support fees will be recognized as the activities are performed and the maintenance fees will be recognized to revenue ratably over the annual maintenance period. Bayer is responsible for research, product development, manufacturing and commercialization of all products under the collaboration and may make progress-dependent milestone payments and pay royalties on net sales of resulting ADC products. Progress dependent milestones will be recognized to revenue as the milestones are achieved.

 

CuraGen.

 

In June 2004, the Company entered into an ADC collaboration with CuraGen Corporation. Under the terms of the multi-year agreement, CuraGen paid the Company an upfront fee of $2.0 million for an exclusive license to the Company’s ADC technology for a single antigen. The upfront fee will be recognized as revenue ratably over the two year research period. CuraGen will also pay material supply and research support fees for any assistance provided by the Company in developing ADC products, as well as annual maintenance fees. The material supply and research support fees will be recognized as the activities are performed and the maintenance fees will be recognized to revenue ratably over the annual maintenance period. CuraGen is responsible for research, product development, manufacturing and commercialization of all products under the collaboration and may make progress-dependent milestone payments and pay royalties on net sales of resulting ADC products. Progress dependent milestones will be recognized to revenue as the milestones are achieved.

 

UCB Celltech

 

In March 2002, the Company entered into an ADC collaboration with Celltech Group. The collaboration was assumed by UCB Celltech in 2004 upon UCB S.A.’s acquisition of Celltech. Under the terms of the multi-year agreement, UCB Celltech paid the Company an upfront technology access fee, is paying service and reagent fees and has agreed to make milestone payments and pay royalties on net sales of any resulting products. UCB Celltech is responsible for all costs associated with the development, manufacturing and marketing of any ADC products generated as a result of this agreement. During 2003 and 2004, the Company achieved several preclinical milestones under the Company’s ADC collaboration with UCB Celltech, which triggered payments to the Company.

 

Protein Design Labs

 

In June 2001, the Company entered into an ADC collaboration with Eos Biotechnology, which was assumed by Protein Design Labs upon its acquisition of Eos Biotechnology in 2003. In January 2004, the Company and Protein Design Labs agreed to expand their ongoing ADC collaboration. The Company has agreed to provide

 

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additional support to Protein Design Labs in their development of ADC product candidates in exchange for receipt of increased fees, milestones and royalties on net sales of any ADC products resulting from the collaboration. Protein Design Labs is responsible for all costs associated with the development, manufacturing and marketing of any ADC products generated as a result of this collaboration. Additionally, Protein Design Labs and the Company entered into a license agreement that granted the Company a license and options for two additional licenses under Protein Design Lab’s antibody humanization patents. Under the terms of the license agreement, the Company is required to pay Protein Design Labs annual maintenance fees and royalties on net sales of products using Protein Design Labs’ antibody humanization technology.

 

Genencor International

 

In January 2002, the Company formed a strategic alliance with Genencor International to discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. As part of the collaboration, Genencor purchased $3.0 million of the Company’s common stock in a private placement. In July 2003, the Company and Genencor agreed to amend and extend the collaboration for an additional two years in exchange for a payment from Genencor. Under the terms of the amended agreement, Genencor has non-exclusive rights to use the Company’s ADEPT technology with Genencor’s own antibodies and antigen targets. In exchange, Genencor will pay the Company technology access and research fees and has agreed to pay milestones and royalties on sales of any products that utilize the Company’s ADEPT or prodrug technologies. The Company and Genencor may also elect to co-develop ADEPT products under the collaboration.

 

Celera Genomics Group

 

In July 2004, the Company and Celera Genomics Group, an Applera Corporation business, formed a strategic collaboration to jointly discover and develop antibody-based therapies for cancer. Products developed under the collaboration may include either monoclonal antibodies or ADCs. Under the terms of the multi-year agreement, Celera Genomics and the Company will jointly designate a number of cell-surface proteins discovered and validated through Celera Genomics’ proprietary proteomic platform as antigen targets. The Company will carry out initial screening to generate and select the appropriate corresponding antibodies or ADCs for joint development and commercialization. Celera Genomics and the Company will co-fund preclinical and clinical product development and will share any profits resulting from collaboration products. Either party may opt out of co-development of a particular product and receive royalties on net sales. Celera Genomics will also pay progress-dependent commercialization milestones to the Company for any co-developed ADCs.

 

Bristol-Myers Squibb.

 

In March 1998, the Company obtained rights to some of the Company’s technologies and product candidates, portions of which are exclusive, through a license agreement with Bristol-Myers Squibb. Through this license, the Company secured rights to monoclonal antibody-based cancer targeting technologies, including 26 different patents, eight monoclonal antibodies, chemical linkers, a ribosome-inactivating protein and enabling technologies. The Company also received a substantial supply of vialed, clinical-grade SGN-15, which has been used in the Company’s clinical trials. Under the terms of the license agreement, the Company is required to pay royalties on net sales of future products incorporating technology licensed from Bristol-Myers Squibb.

 

ICOS Corporation

 

In October 2000, the Company entered into a license agreement with ICOS Corporation for nonexclusive rights to use ICOS’ CHEF expression system. The Company has used this system to manufacture clinical supplies of SGN-30. Under the terms of this agreement, the Company is required to make progress-dependent milestone payments and pay royalties on net sales of products manufactured using the CHEF expression system.

 

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University of Miami

 

In September 1999, the Company entered into an exclusive license agreement with the University of Miami, Florida, covering an anti-CD30 monoclonal antibody that is the basis of SGN-30 and the antibody component of SGN-35. Under the terms of this license, the Company made an up front payment and is required to pay annual maintenance fees, progress-dependent milestone payments and royalties on net sales of products incorporating technology licensed from the University of Miami.

 

Mabtech AB

 

In June 1998, the Company obtained exclusive, worldwide rights to a monoclonal antibody targeting the CD40 antigen, which is the basis for the Company’s SGN-40 product candidate, from Mabtech AB, located in Sweden. Under the terms of this license, the Company is required to make a progress-dependent milestone payment and pay royalties on net sales of products incorporating technology licensed from Mabtech.

 

CLB-Research and Development

 

Pursuant to a license agreement the Company entered into in July 2001, the Company obtained an exclusive license to specific monoclonal antibodies that target cancer and immunologic disease targets from CLB-Research and Development, located in the Netherlands. One of these antibodies is the basis for SGN-70 and the antibody component of SGN-75. Under the terms of this agreement, the Company has made upfront and option exercise payments and is required to make progress-dependent milestone payments and pay royalties on net sales of products incorporating technology licensed from CLB-Research and Development.

 

Arizona State University

 

In February 2000, the Company entered into a license agreement with Arizona State University for a worldwide, exclusive license to the cell-killing agent Auristatin E. The Company subsequently amended this agreement in August 2004. Under the terms of the amended agreement, the Company is required to pay annual maintenance fees to Arizona State University until expiration of their patents covering Auristatin E. The Company is not, however, required to pay any progress-dependent milestone payments or royalties on net sales of products utilizing the Auristatin derivatives currently used in the Company’s ADC technology, and thus the Company does not expect to pay any milestones or royalties to Arizona State University with respect to products employing its current ADC technology.

 

Imperial College London

 

In May 2004, the Company entered into a license agreement with Imperial College London for rights to a novel antigen target, several monoclonal antibodies and two associated U.S. patents from Imperial College London. Under the terms of this agreement, the Company made an up front payment and is required to make progress-dependent milestone payments and pay royalties on net sales of products incorporating the licensed technology.

 

Development and supply agreement

 

Abbott Laboratories

 

In February 2004, the Company entered into an agreement with Abbott Laboratories for manufacturing of its SGN-30 monoclonal antibody product candidate. This antibody is also used in the Company’s SGN-35 antibody-drug conjugate (ADC) product candidate. Under the terms of the agreement, Abbott has performed scale-up and GMP manufacturing for clinical trials, and has agreed to supply commercial-grade material to support potential regulatory approval and commercial launch.

 

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Other agreements

 

The Company has also entered into additional license agreements, development and supply agreements, and contract manufacturing agreements. These agreements obligate the Company to pay certain fees which vary by agreement. In some cases, the Company has also agreed to pay progress-dependent milestone payments and royalties on commercial sales of resulting products for specified periods.

 

The minimum contractual payments to be made by the Company under its existing license, collaboration and contract manufacturing agreements are expected to aggregate to approximately $7.6 million in 2005, $205,000 in 2006, $210,000 in 2007, $215,000 in 2008 and $220,000 in 2009. Furthermore, some of those agreements also provide for payments upon the achievement of certain milestones and the payment of royalties based on net sales of commercial products. The Company does not expect to pay any royalties on net sales of products under any of these agreements for at least the next several years. The milestone payments could be substantially higher and the royalties could be payable earlier if the Company more rapidly advances product candidates through clinical trials, files or receives regulatory approvals or achieves commercial sales sooner than expected.

 

8. Commitments and contingencies

 

In December 2000, the Company entered into an operating lease for office and laboratory space. The lease provides for monthly lease payments that began in June 2001. The initial lease term is ten years with two, seven-year renewal options, subject to certain conditions. In March 2003, the lease was amended and the Company agreed to secure the majority of its property and equipment and maintain restricted investments as collateral for certain obligations under its office and laboratory lease.

 

As of December 31, 2004, the Company has restricted investments totaling $977,000 as collateral for certain obligations of the lease. These investment securities are restricted as to withdrawal and are managed by a third party. The lease terms provide for changes in the amounts pledged based upon the Company’s market capitalization, stockholders’ equity or cash and investments balance, and decreases beginning in June 2005 by approximately $385,000 per year provided that the total amount pledged does not fall below approximately $478,000. In the event that the Company’s market capitalization, stockholders’ equity or cash and investments balance fall below specific thresholds, the Company will be obligated to increase its restricted investment balance to approximately $3.4 million. As of December 31, 2004, the Company was in compliance with these thresholds.

 

The lease agreement contains scheduled rent increases. Accordingly, the Company has recorded a deferred rent liability of $472,000 at December 31, 2004.

 

Additionally, the Company has entered into lease obligations through May 2006 for office equipment.

 

Future minimum lease payments under all noncancelable operating leases are as follows (in thousands):

 

Years ending December 31,

      

2005

   $ 2,118

2006

     2,139

2007

     2,163

2008

     2,201

2009

     2,246

Thereafter

     3,253
    

     $ 14,120
    

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

Rent expense attributable to noncancelable operating leases totaled $2.2 million, $2.1 million and $2.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

9. Stockholders’ equity

 

Series A convertible preferred stock and warrants financing

 

The Company’s certificate of incorporation authorizes the issuance of up to 5,000,000 undesignated shares of preferred stock. These shares may be issued from time to time in one or more series. The Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of unissued preferred stock and to increase or decrease the number of shares of any unissued series.

 

On July 8, 2003 the Company received approximately $40.4 million of net proceeds from the private placement of 1,640,000 shares of newly designated Series A convertible preferred stock at a purchase price of $25.00 per share. Each share of Series A convertible preferred stock is convertible into 10 shares of common stock at a conversion price of $2.50 per share. In addition, the purchasers of the Series A convertible preferred stock received warrants to purchase 2,050,000 shares of common stock with an exercise price of $6.25 per share and an expiration date of December 31, 2011.

 

The Series A convertible preferred stock ranks senior to the Company’s common stock and will rank senior to future classes of capital stock, unless consented to by the holders of the Series A convertible preferred stock. The Series A convertible preferred stock is entitled to receive a liquidation preference in an amount equal to the greater of: (a) $25.00 per share of Series A convertible preferred stock; or (b) the amount that would have been paid had such shares of Series A convertible preferred stock been converted into common stock. The Series A convertible preferred stock is not redeemable by the holders thereof and does not bear any dividends, except to the extent any dividends are paid on any other shares of the Company’s capital stock, in which case, the holders thereof are entitled to receive dividends based on the number of shares of common stock into which such holder’s shares of Series A convertible preferred stock would then convert. If the Company proposes to grant rights to acquire the Company’s securities pro rata to all holders of two percent or more of the Company’s outstanding common stock, the holders of Series A convertible preferred stock have the right to acquire the number of such offered securities they would have acquired had they converted their Series A convertible preferred stock into common stock at the time of such grant. In addition, if the Company offers rights to purchase its preferred stock to any stockholders, the holders of Series A convertible preferred stock have the right to acquire up to the number of securities necessary to maintain their percentage interest in the Company. The holders of Series A convertible preferred stock have certain registration rights with respect to their shares of common stock issuable upon conversion of their Series A convertible preferred stock and the common stock issuable upon exercise of their common stock warrants.

 

The Company received approximately $40.4 million, net of $625,000 of issuance costs and estimated future registration costs, from the sale and issuance of Series A convertible preferred stock and warrants. The Company allocated $36.8 million of the net proceeds to the Series A convertible preferred stock and $3.6 million to the warrants to purchase common stock based on their relative fair values on the date of issuance pursuant to Accounting Principles Board Opinion No. 14 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The fair value used to allocate proceeds to the Series A convertible preferred stock was based upon a valuation that considered, among other things, the closing price of the common stock on the date of closing, the impact of the preferred stock on market capitalization on an as converted basis and liquidation preferences. The fair value of the warrants to purchase common stock was estimated using the Black-Scholes option pricing model using the following assumptions: exercise price of $6.25; no dividends; term of approximately 8.5 years; risk free interest rate of 3.81%; and volatility of 86.7%.

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

In accordance with the provisions of EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” the Company separately assigned a $36.8 million value to the embedded beneficial conversion feature of the Series A convertible preferred stock. The beneficial conversion feature was recorded as a discount to paid-in capital associated with the Series A convertible preferred stock and a corresponding increase to additional paid-in capital. The beneficial conversion feature represents the difference between the as-converted accounting value of the Series A convertible preferred stock as of the original agreement date of May 12, 2003 and the fair value of the common stock as of the closing date of the transaction on July 8, 2003. The May 12, 2003 as converted value of the Series A convertible preferred stock was based on the weighted-average price of the common stock for the 30 trading days preceding May 12, 2003, as adjusted for the fair value allocation described above.

 

The Company has recorded the non-cash accretion of preferred stock deemed dividend using the effective interest method through the date of earliest conversion, which was July 8, 2004. Accordingly, the Company recorded non-cash accretion of preferred stock deemed dividend totaling approximately $36.6 million in 2004 and $201,000 in 2003, which represents an increase to reported net loss in arriving at net loss attributable to common stockholders and reduced paid-in-capital and increased paid-in-capital by the same amounts. The non-cash accretion of the preferred stock deemed dividend did not have an effect on net loss or cash flows for the applicable reporting periods or have an impact on total stockholders’ equity as of the applicable reporting dates.

 

Common stock

 

In February 2004, the Company completed a follow-on public offering of 7,000,000 shares of common stock. In addition, the underwriters of the public offering exercised their over-allotment option in full and purchased an additional 1,050,000 shares of common stock. Total gross proceeds from this offering were approximately $66.4 million, with total net proceeds to the Company of approximately $62.1 million after the deduction of the discount paid to the underwriters and other actual and estimated offering expenses payable by the Company.

 

During the third quarter of 2004, 140,000 shares of Series A convertible preferred stock were redeemed and converted into 1,400,000 shares of common stock.

 

The Company is authorized to issue up to 100,000,000 shares of common stock. At December 31, 2004, shares of common stock reserved for future issuance are as follows (in thousands):

 

Series A convertible preferred stock

   15,000

Stock options outstanding

   5,050

Warrants outstanding

   2,050

Stock options available for grant

   1,690

Employee stock purchase plan shares available for issuance

   930
    
     24,720

 

Restricted common stock

 

In 2000, the Company issued 667,500 shares of common stock to certain of its employees and consultants pursuant to the exercise of options in exchange for full recourse notes receivable carrying annual interest rates of approximately 6%. In the event of a termination of employment or consulting relationship with the Company for any reason, the Company has the exclusive option, for a period of 60 days following the termination of the relationship, to repurchase all or any portion of the shares held by such employee or consultant which have not

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

been released from the repurchase option, at the original purchase price. The shares are released from the repurchase option over a four-year period. At December 31, 2004 and 2003, there were no shares and 74,481 shares of common stock subject to the Company’s repurchase option, respectively.

 

Employee Stock Purchase Plan

 

The Company has a 2000 Employee Stock Purchase Plan (Purchase Plan) with a total of 1,093,227 shares of common stock reserved for issuance under the Purchase Plan as of December 31, 2004. The number of shares reserved for issuance under the Purchase Plan is subject to an automatic annual increase on the first day of each of the fiscal years ending in 2010 that is equal to the lesser of (1) 300,000 shares; (2) 1% of the Company’s outstanding common stock on the last day of the immediately preceding fiscal year; or (3) such lesser number of shares as the Board of Directors determines. A total of 77,750 shares were sold to employees during the year ended December 31, 2004 at an average purchase price of $3.04 per share, 42,954 shares were sold to employees during the year ended December 31, 2003 at an average purchase price of $2.79 per share and 32,478 shares were sold to employees during the year ended December 31, 2002 at an average purchase price of $4.18 per share. Under the terms of the Purchase Plan, shares are purchased at 85 percent of the fair market value of our common stock on either the first day of an offering period or the last day of a purchase period, whichever is lower.

 

10. Stock option plan

 

1998 Stock Option Plan

 

The Company has a 1998 Stock Option Plan (Option Plan) whereby 7,972,910 shares of the Company’s common stock were reserved for issuance to employees, officers, consultants and advisors of the Company as of December 31, 2004. The Option Plan provides for an annual increase in the number of reserved shares on the first day of each of the Company’s fiscal years ending in 2008 that is equal to the lesser of (1) 1,200,000 shares; (2) 4% of the Company’s outstanding common stock on the last day of the immediately preceding fiscal year; or (3) such lesser number of shares as the Board of Directors determines. Options granted under the Option Plan may be either incentive stock options or nonstatutory stock options as determined by the Board of Directors. The term of the Option Plan is ten years.

 

Incentive stock options may be issued only to employees of the Company and have a maximum term of ten years from the date of grant. The exercise price for incentive stock options may not be less than 100% of the estimated fair market value of the common stock at the time of the grant. In the case of options granted to holders of more than 10% of the voting power of the Company, the exercise price may not be less than 110% of the estimated fair market value of the common stock at the time of grant, and the term of the option may not exceed five years. Options become exercisable in whole or in part from time to time as determined by the Board of Directors, which administers the Option Plan.

 

In 2004, the Company recorded a non-cash, stock-based compensation charge of approximately $348,000 for accelerated vesting of stock options for employee severance pay.

 

Generally, options granted under the Option Plan vest 25% one year after the beginning of the vesting period and thereafter ratably each month over the following three years.

 

2000 Directors’ Stock Option Plan

 

The Company has a 2000 Directors’ Stock Option Plan (Directors’ Plan). Under the terms of the Directors’ Plan, each existing nonemployee director who had not previously been granted a stock option by the Company, was granted a nonstatutory stock option to purchase 25,000 shares of common stock on the effective date of this

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

plan, March 6, 2001. Each new nonemployee director who becomes a director after the effective date of the plan will also be granted a nonstatutory stock option to purchase 25,000 shares of common stock on the date on which such individual first becomes a member of the Board of Directors. Each initial option shall vest at the rate of 25% of the total number of shares subject to such option twelve months after the date of grant, with the remaining shares vesting thereafter in equal monthly installments over three years. Thereafter, on the dates of each annual stockholder meeting, each nonemployee director who has been a member of the Board of Directors for at least six months will be granted a nonstatutory stock option to purchase 10,000 shares of common stock. Each annual option shall vest at the rate of 100% of the total number of shares subject to such option on the day before the one-year anniversary of the grant date.

 

All options granted under the Directors’ Plan have a term of 10 years and an exercise price equal to the fair value of the underlying shares on the date of grant. A total of 400,000 shares of common stock have been reserved for issuance and at December 31, 2004, stock options to acquire a total of 250,000 shares of common stock are outstanding under the Director’s Plan.

 

For purposes of the computation of the pro forma effects on net loss, the fair value of each employee option is estimated using the Black-Scholes option pricing model and using the following weighted-average assumptions:

 

     Years ended December 31,

     2004

  2003

  2002

Risk-free interest rate

   3.67%   3.72%   3.92%

Expected lives

   4.25 years   4.00 years   4.00 years

Expected dividends

   None   None   None

Expected volatility

   78%   82%   89%

 

For purposes of estimating the fair value of options granted to nonemployees, the same assumptions were used and the contractual lives of the options were used for expected lives.

 

The weighted-average exercise prices and grant date fair values of options granted were as follows:

 

    Years ended December 31,

    2004

  2003

  2002

   

Weighted-

average
exercise price


  Weighted-
average
fair value


  Weighted-
average
exercise price


  Weighted-
average
fair value


  Weighted-
average
exercise price


  Weighted-
average
fair value


Exercise prices equal to the fair value of the stock at the date of grant

  $ 7.46   $ 5.37   $ 5.15   $ 3.83   $ 5.23   $ 3.95
   

 

 

 

 

 

Exercise prices greater than the fair value of the stock at the date of grant

  $ 10.33   $ 6.49   $   $   $   $
   

 

 

 

 

 

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

A summary of stock option activity for both the Option Plan and Director’s Plan is as follows:

 

           Options outstanding

    

Shares
available

for grant


   

Number

of shares


    Weighted-
average
exercise
price per share


Balance, December 31, 2001

   1,091,064     2,772,411     $ 5.16

Additional shares reserved

   1,172,910          

Options granted

   (1,193,350 )   1,193,350     $ 5.23

Options exercised

       (67,100 )   $ 0.18

Options forfeited

   58,532     (58,532 )   $ 4.10
    

 

 

Balance, December 31, 2002

   1,129,156     3,840,129     $ 5.28
    

 

 

Additional shares reserved

   1,200,000          

Options granted

   (1,474,625 )   1,474,625     $ 5.15

Options exercised

       (204,375 )   $ 2.77

Options forfeited

   239,022     (239,022 )   $ 5.08
    

 

 

Balance, December 31, 2003

   1,093,553     4,871,357     $ 5.36
    

 

 

Additional shares reserved

   1,200,000          

Options granted

   (1,204,875 )   1,204,875     $ 7.72

Options exercised

       (425,105 )   $ 3.04

Options forfeited

   600,947     (600,947 )   $ 6.23
    

 

 

Balance, December 31, 2004

   1,689,625     5,050,180     $ 6.02
    

 

 

Options exercisable at:

                  

December 31, 2002

         1,258,974     $ 4.63

December 31, 2003

         2,125,601     $ 5.23

December 31, 2004

         2,938,451     $ 5.63

 

The following table summarizes information about options outstanding for both the Option Plan and Director’s Plan at December 31, 2004:

 

     Options outstanding

   Options exercisable

Range of exercise price


   Number of
shares


  

Weighted-

average

remaining

contractual

life (in years)


  

Weighted-
average
exercise
price

per share


  

Number

of shares


  

Weighted-
average
exercise
price

per share


$0.10 - $  0.29

   173,799    4.55    $ 0.20    173,799    $ 0.20

$2.33 - $  3.50

   1,059,593    7.13    $ 3.07    766,670    $ 3.08

$3.97 - $  6.31

   1,156,594    8.41    $ 5.75    454,947    $ 5.41

$6.34 - $  7.03

   1,343,094    7.87    $ 6.59    705,246    $ 6.52

$7.26 - $10.33

   1,317,100    7.33    $ 8.81    837,789    $ 8.47
    
  
  

  
  

$0.10 - $10.33

   5,050,180    7.58    $ 6.02    2,938,451    $ 5.63
    
  
  

  
  

 

11. Employee benefit plan

 

The Company has a 401(k) Plan for all of its employees. The Plan allows eligible employees to defer up to 15%, but no greater than $13,000 (or $16,000 for employees greater than 50 years old) in calendar year 2004, of their pretax compensation at the discretion of the employee. Effective February 1, 2003, the Company implemented a 401(k) matching program whereby the Company contributes fifty cents for each dollar an

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

employee contributes, with a maximum contribution of 50% of the first 4% of a participant’s earnings not to exceed 50% of the prescribed annual limit. The Company contributed under its matching program to the plan a total of approximately $167,000 and $104,000 during the years ended December 31, 2004 and 2003, respectively.

 

12. Subsequent Events

 

In February 2005, CuraGen paid the Company an additional $1.0 million fee to exercise an option for an exclusive license to the Company’s ADC technology for a second antigen under the collaboration agreement. The fee will be recognized as revenue ratably over the remaining 16 months of the research period of the collaboration. Under the terms of the agreement, CuraGen has rights to use the Company’s ADC technology with antibodies against up to two targets selected by CuraGen. CuraGen also pays ongoing technology access and material supply fees and has agreed to make progress-dependent milestone payments and pay royalties on net sales of ADC products. CuraGen is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration.

 

In February 2005, the Company entered into an agreement with Abbott Laboratories for manufacturing of the Company’s SGN-40 monoclonal antibody product candidate. Under the terms of the agreement, Abbott has agreed to perform scale-up and GMP manufacturing of SGN-40 to support clinical trials. In the future, Abbott has also agreed to manufacture commercial-grade material to support potential regulatory approval and commercial launch of SGN-40 if required. The Company’s total costs through the end of 2005 of manufacturing SGN-40 with Abbott could be up to $3.24 million.

 

13. Quarterly Financial Data (unaudited)

 

The following table contains selected unaudited statement of operations information for each quarter of 2004 and 2003. The unaudited information should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results of any future period.

 

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Seattle Genetics, Inc.

 

Notes to Financial Statements (Continued)

 

Quarterly Financial Data (in thousands, except per share data):

 

     Three Months Ended

 
     March 31

    June 30

    September 30

    December 31

 

2004

                                

Revenues

   $ 1,972     $ 1,542     $ 1,491     $ 1,696  

Expenses

                                

Research and development (1)

     7,507       8,924       9,578       10,993  

General and administrative (1)

     1,520       1,477       1,692       1,809  

Non-cash stock-based compensation expense

     153       533       103       80  
    


 


 


 


Total operating expenses

     9,180       10,934       11,373       12,882  
    


 


 


 


Loss from operations

     (7,208 )     (9,392 )     (9,882 )     (11,186 )

Investment income, net

     543       556       514       616  
    


 


 


 


Net loss

     (6,665 )     (8,836 )     (9,368 )     (10,570 )

Non-cash preferred stock deemed dividend

     (2,244 )     (27,085 )     (7,229 )      

Net loss attributable to common stockholders

   $ (8,909 )   $ (35,921 )   $ (16,597 )   $ (10,570 )
    


 


 


 


Net loss per share—basic and diluted

   $ (0.24 )   $ (0.89 )   $ (0.40 )   $ (0.25 )
    


 


 


 


Weighted-average shares—basic and diluted

     36,548       40,192       41,221       41,943  
    


 


 


 


2003

                                

Revenues

   $ 710     $ 1,505     $ 1,525     $ 1,330  

Expenses

                                

Research and development (1)

     5,461       5,548       5,347       5,034  

General and administrative (1)

     1,205       1,211       1,324       1,688  

Non-cash stock-based compensation expense

     344       491       339       341  
    


 


 


 


Total operating expenses

     7,010       7,250       7,010       7,063  
    


 


 


 


Loss from operations

     (6,300 )     (5,745 )     (5,485 )     (5,733 )

Investment income, net

     338       241       301       297  
    


 


 


 


Net loss

     (5,962 )     (5,504 )     (5,184 )     (5,436 )

Non-cash preferred stock deemed dividend

                 (15 )     (186 )

Net loss attributable to common stockholders

   $ (5,962 )   $ (5,504 )   $ (5,199 )   $ (5,622 )
    


 


 


 


Net loss per share—basic and diluted

   $ (0.20 )   $ (0.18 )   $ (0.17 )   $ (0.18 )
    


 


 


 


Weighted-average shares—basic and diluted

     30,550       30,619       30,709       31,003  
    


 


 


 



(1)   Certain expense reclassifications have been made in prior period’s financial statements for the first two quarters of the year ended December 31, 2004 and all four quarters of the year ended December 31, 2003 to conform to classifications used in the beginning of the third quarter of the current year. These reclassifications have no impact on net loss, stockholders’ equity or cash flows as previously reported.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures

 

(a)    Evaluation of disclosure controls and procedures.    The Chief Executive Officer and the Chief Financial Officer have reviewed our disclosure controls and procedures prior to the filing of this annual report. Based on that review, they have concluded that, as of the end of the period covered by this annual report, these disclosure controls and procedures were, in design and operation, effective to assure that the required information has been properly recorded, processed, summarized and reported to those responsible in order that it may be included in this annual report.

 

(b)    Changes in internal control over financial reporting.    There have not been any changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2004 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(c)    Management’s Report on Internal Control Over Financial Reporting.    Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

 

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere in this Annual Report on Form 10-K.

 

Item 9B. Other Information

 

None.

 

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Table of Contents

PART III

 

The information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A for its annual meeting of stockholders to be held on May 13, 2005, and the information to be included in the proxy statement is incorporated herein by reference.

 

Item 10. Directors and Executive Officers of the Registrant.

 

The information required by this item is incorporated herein by reference from the Company’s definitive proxy statement which will be filed within 120 days after the end of the Company’s 2004 fiscal year pursuant to Regulation 14A for its annual meeting of stockholders to be held May 13, 2005.

 

Item 11. Executive Compensation.

 

The information required by this item is incorporated herein by reference from the Company’s definitive proxy statement which will be filed within 120 days after the end of the Company’s 2004 fiscal year pursuant to Regulation 14A for its annual meeting of stockholders to be held May 13, 2005.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management.

 

The information required by this item is incorporated herein by reference from the Company’s definitive proxy statement which will be filed within 120 days after the end of the Company’s 2004 fiscal year pursuant to Regulation 14A for its annual meeting of stockholders to be held May 13, 2005.

 

Item 13. Certain Relationships and Related Transactions.

 

The information required by this item is incorporated herein by reference from the Company’s definitive proxy statement which will be filed within 120 days after the end of the Company’s 2004 fiscal year pursuant to Regulation 14A for its annual meeting of stockholders to be held May 13, 2005.

 

Item 14. Principal Accounting Fees and Services.

 

The information required by this item is incorporated herein by reference from the Company’s definitive proxy statement which will be filed within 120 days after the end of the Company’s 2004 fiscal year pursuant to Regulation 14A for its annual meeting of stockholders to be held May 13, 2005.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(a)   The following documents are filed as part of this report:

 

  (1)   Financial Statements and Report of Independent Auditors

 

  (2)   Financial Statement Schedules

 

Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

 

  (3)   Exhibits are incorporated herein by reference or are filed with this report as indicated below (numbered in accordance with Item 601 of Regulation S-K).

 

(b)   Exhibits

 

Number


  

Description


  3.1(1)    Amended and Restated Certificate of Incorporation of Seattle Genetics, Inc.
  3.2(10)    Certificate of Designations of Series A Convertible Preferred Stock.
  3.3(11)    Amended and Restated Bylaws of Seattle Genetics, Inc.
  4.1(1)    Specimen Stock Certificate.
  4.2(1)    Amended and Restated Investors’ Rights Agreement dated December 22, 1999 between Seattle Genetics, Inc. and certain of its stockholders.
  4.3(9)    Form of Common Stock Warrant.
  4.4(9)    Investor Rights Agreement dated July 8, 2003 among Seattle Genetics, Inc. and certain of its stockholders.
  4.5(11)    Amendment to Amended and Restated Investors’ Rights Agreement dated July 8, 2003 among Seattle Genetics, Inc. and certain of its stockholders.
10.1†(1)    License Agreement dated March 30, 1998 between Seattle Genetics, Inc. and Bristol-Myers Squibb Company.
10.2†(1)    Amendment Letter to the Bristol-Myers Squibb Company License Agreement dated August 10, 1999 between Seattle Genetics, Inc. and Bristol-Myers Squibb Company.
10.3(1)    Amendment Agreement to the Bristol-Myers Squibb Company License Agreement dated July 26, 2000 between Seattle Genetics, Inc. and Bristol-Myers Squibb Company.
10.4†(1)    License Agreement dated June 14, 1998 between Seattle Genetics, Inc. and Mabtech AB.
10.5†(1)    First Amendment to the Mabtech License Agreement dated January 31, 2000 between Seattle Genetics, Inc. and Mabtech AB.
10.6†(1)    License Agreement dated September 20, 1999 between Seattle Genetics, Inc. and the University of Miami.
10.7†(1)    Amendment No. 1 to the University of Miami License Agreement dated August 4, 2000 between Seattle Genetics, Inc. and the University of Miami.
10.8†(1)    License Agreement dated February 3, 2000 between Seattle Genetics, Inc. and the Arizona Board of Regents.
10.9†(1)    Lease Agreement dated December 1, 2000 between Seattle Genetics, Inc. and WCM132-302, LLC.

 

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Description


10.10(1)    Amended and Restated 1998 Stock Option Plan.
10.11    Form Notice of Grant and Stock Option Agreement under Amended and Restated 1998 Stock Option Plan.
10.12    Form Notice of Grant and Stock Option Agreement under 2000 Directors’ Stock Option Plan.
10.13(1)    2000 Directors’ Stock Option Plan.
10.14(1)    2000 Employee Stock Purchase Plan.
10.15(1)    Form of Indemnification Agreement between Seattle Genetics, Inc. and each of its officers and directors.
10.16†(2)    Collaboration Agreement dated June 4, 2001 between Seattle Genetics, Inc. and Eos Biotechnology, Inc.
10.17†(3)    Contract Manufacturing Agreement dated August 1, 2001 between Seattle Genetics, Inc. and ICOS Corporation.
10.18(4)    Executive Employment Agreement dated October 26, 2001 between Seattle Genetics, Inc. and Clay B. Siegall.
10.19†(5)    Collaboration Agreement dated January 4, 2002 between Seattle Genetics, Inc. and Genencor International, Inc.
10.20†(5)    Collaboration Agreement dated March 27, 2002 between Seattle Genetics, Inc. and Celltech R&D Limited.
10.21†(6)    Collaboration Agreement dated April 19, 2002 between Seattle Genetics, Inc. and Genentech, Inc.
10.22†(6)    2002 Common Stock Purchase Agreement dated April 19, 2002 between Seattle Genetics, Inc. and Genentech, Inc.
10.23†(7)    Agreement for Clinical Supply dated October 9, 2002 among Seattle Genetics, Inc., Gensia-Sicor Pharmaceuticals, Inc. and Gensia-Sicor Pharmaceutical Sales, Inc.
10.24†(7)    Contract Manufacturing Agreement dated January 3, 2003 between Seattle Genetics, Inc. and ICOS Corporation.
10.25†(8)    License Agreement dated March 6, 2003 between Seattle Genetics, Inc. and Genentech, Inc.
10.26†(8)    Non-Exclusive Cabilly Patent License Agreement dated March 6, 2003 between Seattle Genetics, Inc. and Genentech, Inc.
10.27(9)    Securities Purchase Agreement dated May 12, 2003 among Seattle Genetics, Inc. and the purchasers of Series A Convertible Preferred Stock and Warrants named therein.
10.28(9)    Amendment No. 1 dated May 14, 2003 to Securities Purchase Agreement dated May 12, 2003 among Seattle Genetics, Inc. and the purchasers of Series A Convertible Preferred Stock and Warrants named therein.
10.29(9)    Joinder Agreement dated May 14, 2003 between Seattle Genetics, Inc. and T. Rowe Price Health Sciences Fund, Inc.
10.30(10)    Amendment No. 2 dated June 2, 2003 to Securities Purchase Agreement dated May 12, 2003 among Seattle Genetics, Inc. and the purchasers of Series A Convertible Preferred Stock and Warrants named therein.
10.31†(11)    First Amendment to Lease dated May 28, 2003 between Seattle Genetics, Inc. and B&N 141-302, LLC.

 

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Number


  

Description


10.32†(12)    Amendment No. 1 to Collaboration Agreement dated July 28, 2003 between Seattle Genetics, Inc. and Genencor International, Inc.
10.33(12)    Change of Control Agreement dated March 29, 2002 between Seattle Genetics, Inc. and Eric L. Dobmeier.
10.34(13)    Consulting and Severance Agreement dated December 18, 2003 between Seattle Genetics, Inc. and H. Perry Fell.
10.35(13)    Change of Control Agreement dated November 25, 2003 between Seattle Genetics, Inc. and Michael McDonald.
10.36†(14)    Amendment to Collaboration Agreement dated January 9, 2004 between Seattle Genetics, Inc. and Protein Design Labs, Inc.
10.37†(14)    Patent Rights Master Agreement and Research License Agreement dated January 9, 2004 between Seattle Genetics, Inc. and Protein Design Labs, Inc.
10.38†(14)    Patent License Agreement dated January 9, 2004 between Seattle Genetics, Inc. and Protein Design Labs, Inc.
10.39†(14)    Development and Supply Agreement dated February 23, 2004 between Seattle Genetics, Inc. and Abbott Laboratories.
10.40†(15)    Collaboration Agreement dated June 22, 2004 between Seattle Genetics, Inc. and CuraGen Corporation.
10.41†(16)    Collaboration Agreement dated July 20, 2004 between Seattle Genetics, Inc. and Applera Corporation through its Celera Genomics Group.
10.42†(16)    Amendment No. 2 to Collaboration Agreement dated August 16, 2004 between Seattle Genetics, Inc. and Genencor International, Inc.
10.43†(16)    Amendment No. 3 to License Agreement dated August 17, 2004 between Seattle Genetics, Inc., and Arizona Science & Technology Enterprises d/b/a Arizona Technology Enterprises.
10.44†(16)    Collaboration and License Agreement dated September 27, 2004 between Seattle Genetics, Inc. and Bayer Pharmaceuticals Corporation.
23.1    Consent of Independent Registered Public Accounting Firm.
24.1    Power of Attorney (included in signature page to this Annual Report on Form 10-K).
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

(1)   Previously filed as an exhibit to Registrant’s registration statement on Form S-1, File No. 333-50266, originally filed with the Commission on November 20, 2000, as subsequently amended, and incorporated herein by reference.

 

(2)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference.

 

(3)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.

 

(4)   Previously filed as an exhibit to Registrant’s annual report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

 

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(5)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.

 

(6)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference.

 

(7)   Previously filed as an exhibit to Registrant’s annual report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

 

(8)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

 

(9)   Previously filed as an exhibit to the Registrant’s current report on Form 8-K filed with the Commission on May 15, 2003.

 

(10)   Previously filed as an exhibit to the Registrant’s current report on Form 8-K filed with the Commission on June 5, 2003.

 

(11)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

 

(12)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.

 

(13)   Previously filed as an exhibit to Registrant’s annual report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.

 

(14)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference.

 

(15)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.

 

(16)   Previously filed as an exhibit to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.

 

 †   Confidential treatment requested as to certain portions of this Exhibit.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

SEATTLE GENETICS, INC.

Date: March 15, 2005

 

By:

 

/s/    CLAY B. SIEGALL        


       

Clay B. Siegall

President & Chief Executive Officer

(Principal Executive Officer)

Date: March 15, 2005

 

By:

 

/s/    TIM J. CARROLL        


       

Tim J. Carroll

Chief Financial Officer

(Principal Finance and Accounting Officer)

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Clay B. Siegall his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature


  

Title


 

Date


/s/    CLAY B. SIEGALL        


Clay B. Siegall

  

President, Chief Executive Officer and Interim Chairman of the Board

  March 15, 2005

/s/    FRANKLIN M. BERGER        


Franklin M. Berger

  

Director

  March 15, 2005

/s/    DOUGLAS E. WILLIAMS        


Douglas E. Williams

  

Director

  March 15, 2005

/s/    MICHAEL F. POWELL        


Michael F. Powell

  

Director

  March 15, 2005

/s/    DOUGLAS G. SOUTHERN        


Douglas G. Southern

  

Director

  March 15, 2005

/s/    MARC E. LIPPMAN        


Marc E. Lippman

  

Director

  March 15, 2005

/s/    KARL ERIK HELLSTROM        


Karl Erik Hellstrom

  

Director

  March 15, 2005

 

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Signature


  

Title


 

Date


/s/    SRINIVAS AKKARAJU        


Srinivas Akkaraju

  

Director

  March 15, 2005

/s/    FELIX BAKER        


Felix Baker

  

Director

  March 15, 2005

 

74