Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

¨	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

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 30^th Drive SE

Bothell, Washington 98021

(Address of principal executive offices, including zip code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of November 4, 2005, there were 42,379,395 shares of the registrant’s common stock outstanding.

Seattle Genetics, Inc.

For the quarter ended September 30, 2005

INDEX


		Page
PART I. FINANCIAL INFORMATION (Unaudited)

Item 1.	Financial Statements	3

	Condensed Balance Sheets	3

	Condensed Statements of Operations	4

	Condensed Statements of Cash Flows	5

	Notes to Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II. OTHER INFORMATION

Item 6.	Exhibits	26

SIGNATURES		28

EXHIBIT INDEX		29

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Seattle Genetics, Inc.

Condensed Balance Sheets

(Unaudited)

(In thousands, except share amounts)


	September 30, 2005			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	10,906		$	9,645
Short-term investments		30,527			27,492
Interest receivable		748			818
Accounts receivable		872			1,477
Prepaid expenses and other		535			476

Total current assets		43,588			39,908
Property and equipment, net		8,915			9,463
Restricted investments		600			977
Long-term investments		45,354			68,761

Total assets	$	98,457		$	119,109

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	4,781		$	4,815
Current portion of deferred revenue		6,308			4,860

Total current liabilities		11,089			9,675

Long-term liabilities
Deferred rent		507			472
Deferred revenue, less current portion		4,113			5,129

Total long-term liabilities:		4,620			5,601

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized:
Series A convertible preferred stock, 1,500,000 shares issued and outstanding		2			2
Common stock, $0.001 par value, 100,000,000 shares authorized, 42,371,295 and 41,984,003 issued and outstanding, respectively		42			42
Additional paid-in capital		219,128			217,995
Accumulated other comprehensive loss		(199	)		(65	)
Accumulated deficit		(136,225	)		(114,141	)

Total stockholders’ equity		82,748			103,833

Total liabilities and stockholders’ equity	$	98,457		$	119,109

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

Seattle Genetics, Inc.

Condensed Statements of Operations

(Unaudited)

(In thousands, except per share amounts)


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Revenue under collaboration and license agreements	$	2,632		$	1,491		$	7,438		$	5,005

Operating expenses:
Research and development		7,806			9,611			26,146			26,141
General and administrative		1,664			1,762			5,366			5,346

Total operating expenses		9,470			11,373			31,512			31,487

Loss from operations		(6,838	)		(9,882	)		(24,074	)		(26,482	)
Investment income, net		667			514			1,990			1,613

Net loss		(6,171	)		(9,368	)		(22,084	)		(24,869	)
Non-cash accretion of preferred stock deemed dividend		—			(7,229	)		—			(36,558	)

Net loss attributable to common stockholders	$	(6,171	)	$	(16,597	)	$	(22,084	)	$	(61,427	)

Net loss per share – basic and diluted	$	(0.15	)	$	(0.40	)	$	(0.52	)	$	(1.56	)

Weighted-average shares – basic and diluted		42,317			41,221			42,191			39,327

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

Seattle Genetics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine months ended September 30,
	2005			2004
Operating activities
Net loss	$	(22,084	)	$	(24,869	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		10			789
Depreciation and amortization		1,733			1,175
Realized loss (gain) on sale of investments		1			(10	)
Amortization on investments		950			1,895
Deferred rent		35			66
Changes in operating assets and liabilities:
Interest receivable		70			(115	)
Accounts receivable		605			179
Prepaid expenses and other		(54	)		(1,252	)
Accounts payable and accrued liabilities		(34	)		1,951
Deferred revenue		432			3,401

Net cash used in operating activities		(18,336	)		(16,790	)

Investing activities
Purchases of investments		(34,529	)		(103,090	)
Proceeds from sale and maturities of investments		54,193			67,804
Purchases of property and equipment		(1,190	)		(5,361	)

Net cash provided by (used in) investing activities		18,474			(40,647	)

Financing activities
Net proceeds from issuance of common stock		1,123			62,772

Net cash provided by financing activities		1,123			62,772

Net increase in cash and cash equivalents		1,261			5,335
Cash and cash equivalents, at beginning of period		9,645			9,625

Cash and cash equivalents, at end of period	$	10,906		$	14,960

Supplemental disclosures
Non-cash investing and financing activities:
Decrease in deferred stock compensation	$	—		$	(605	)

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

Seattle Genetics, Inc.

Notes to Condensed Financial Statements

(Unaudited)

1. Basis of presentation

The accompanying unaudited condensed financial statements of Seattle Genetics, Inc. (“Seattle Genetics” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full calendar year or for any future period. Management has determined that the Company operates in one segment. Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for per share amounts.

These unaudited condensed financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission.

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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain expense reclassifications have been made in prior periods’ financial statements to conform to classifications used in the current periods. These reclassifications have no impact on net loss, stockholders’ equity or cash flows as previously reported. Amounts previously reported as non-cash stock-based compensation expense on the Statement of Operations are now included within research and development and general and administrative expenses.

2. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, or FASB issued Statement of Financial Accounting Standards, or SFAS No. 123 (revised 2004) “Share-Based Payment,” or SFAS 123R. SFAS 123R eliminates, among other items, the use of the intrinsic value method of accounting contained in Accounting Principles Bulletin No. 25, or APB No. 25, 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 Company expects to apply the “modified prospective” method and the “graded-vesting attribution” method and will begin expensing amounts related to employee stock options and stock issued under its employee stock purchase plan utilizing a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees effective January 1, 2006. The adoption of SFAS 123R will have a material impact on the Company’s results of operations but will not impact the Company’s financial position. Assuming levels of equity awards similar to 2004 and 2005 in 2006, the estimated stock-based compensation expense for 2006 will range from approximately $4.0 to $5.0 million. However, the calculation of compensation cost for share-based payment transactions may be significantly different because of the uncertainty of additional equity awards which may be granted, the unpredictability of the fair value of stock options granted and the estimated expected forfeiture rates.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 is a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

3. Stock compensation expense

The Company accounts for employee stock compensation arrangements in accordance with the provisions of APB No. 25 “Accounting for Stock Issued to Employees,” 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 attributable to common stockholders and loss per share attributable to common stockholders under SFAS No. 123 if applied to all outstanding and unvested awards under the Company’s 1998 Stock Option Plan and shares issued under the Company’s Employee Stock Purchase Plan in each period:


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net loss attributable to common stockholders as reported	$	(6,171	)	$	(16,597	)	$	(22,084	)	$	(61,427	)
Add: stock-based compensation for employees under APB No. 25 included in reported net loss		—			64			—			704
Deduct: total stock-based compensation expense for employees determined under the fair value method		(802	)		(719	)		(3,224	)		(3,969	)

Pro forma net loss attributable to common stockholders	$	(6,973	)	$	(17,252	)	$	(25,308	)	$	(64,692	)

Basic and diluted net loss per share
As reported	$	(0.15	)	$	(0.40	)	$	(0.52	)	$	(1.56	)

Pro forma	$	(0.16	)	$	(0.42	)	$	(0.60	)	$	(1.64	)

4. 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 and 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.

The following table presents antidilutive securities that are not included in the calculation of basic and diluted net loss per share attributable to common stockholders. The amounts shown reflect the weighted-average number of shares outstanding during the period:


	Three months ended September 30,		Nine months ended September 30,
	2005	2004	2005	2004
Convertible preferred stock	15,000	15,459	15,000	16,084
Warrants to purchase common stock	2,050	2,050	2,050	2,050
Options to purchase common stock	4,750	5,238	5,015	5,149
Restricted shares of common stock subject to repurchase	—	5	—	30

Total	21,800	22,752	22,065	23,313

5. Comprehensive loss

Comprehensive loss includes certain changes in equity that are excluded from net loss. Specifically, unrealized gains or losses in available for sale investments are included in accumulated other comprehensive loss. Comprehensive loss and its components were as follows:


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net loss	$	(6,171	)	$	(9,368	)	$	(22,084	)	$	(24,869	)
Unrealized (loss)/ gain on securities available for sale		(52	)		596			(135	)		(46	)
Reclassification adjustment for losses (gains) included in net loss		—			—			1			(10	)

Comprehensive loss	$	(6,223	)	$	(8,772	)	$	(22,218	)	$	(24,925	)

6. Investments

Investments are classified as available-for-sale and consist of the following:


	Fair Value September 30, 2005		Fair Value December 31, 2004
Adjustable mortgage-backed securities	$	42,904	$	61,211
U.S. corporate obligations		27,342		21,008
U.S. government and agencies		6,235		14,542
Taxable municipal bonds		—		469

Total	$	76,481	$	97,230

Reported as:
Short-term investments	$	30,527	$	27,492
Long-term investments		45,354		68,761
Restricted investments		600		977

Total	$	76,481	$	97,230

The estimated fair value of investments, by contractual maturity, consists of the following:


	Fair Value September 30, 2005		Fair Value December 31, 2004
Due in one year or less	$	30,659	$	27,996
Due in one year through two years		2,918		8,023
Adjustable mortgage-backed securities		42,904		61,211

Total	$	76,481	$	97,230

To date, 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 September 30, 2005 the aggregate fair value of investments with unrealized losses was as follows:


	Fair Value		Gross unrealized losses
Adjustable mortgage-backed securities	$	28,196	$	155
U.S. corporate obligations		27,342		133
U.S. government and agencies		5,184		25

Total	$	60,722	$	313

7. Property and equipment

Property and equipment consists of the following:


	September 30, 2005			December 31, 2004
Leasehold improvements	$	7,488		$	7,466
Laboratory equipment		5,454			4,729
Computers and office equipment		1,309			1,127
Furniture and fixtures		1,207			1,168

Subtotal		15,458			14,490
Less accumulated depreciation and amortization		(6,543	)		(5,027	)

Total	$	8,915		$	9,463

The Company has pledged a majority of its property and equipment as collateral for certain obligations under its office and laboratory lease agreement.

8. Restricted Investments

As of September 30, 2005, the Company had restricted investments totaling $600,000, which collateralize certain obligations under the Company’s office and laboratory lease agreement. 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. Commencing in June 2006, the Company can reduce its restricted investments to 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 may be obligated to increase the level of the Company’s restricted investment balance to approximately $3.4 million. As of September 30, 2005, the Company was in compliance with these thresholds.

9. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consist of the following:


	September 30, 2005		December 31, 2004
Trade accounts payable	$	1,436	$	1,170
Compensation and benefits		1,371		830
Clinical trial costs		893		756
Contract manufacturing		855		1,843
Franchise and local taxes		226		216

Total	$	4,781	$	4,815

Item 2.

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, however the absence of these words does not mean that the statement is not forward-looking. 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 2 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.

Overview

We focus on the development of monoclonal antibody-based products for the treatment of cancer and immunologic diseases. We currently have two product candidates in clinical trials, SGN-30 and SGN-40 and four lead preclinical product candidates, SGN-33, SGN-35, SGN-70 and SGN-75. Our pipeline of product candidates is based primarily upon two technologies: genetically engineered monoclonal antibodies and antibody-drug conjugates (ADCs). 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.

Our business strategy is to develop a broad portfolio of product candidates and to license our antibody-based technologies to leading biotechnology and pharmaceutical companies to further expand our product opportunities. We have licensed our ADC technology to Bayer Pharmaceuticals, CuraGen, Genentech, MedImmune, Protein Design Labs, PSMA Development Company and UCB Celltech. We also have active discovery programs to identify novel antigens and new monoclonal antibodies. To date, we have generated revenues principally from our collaboration and license agreements. These revenues include upfront technology access fees, milestone payments and reimbursement for support and materials supplied to our collaborators. For the nine months ended September 30, 2005, revenues increased to $7.4 million compared to $5.0 million for the same period in 2004. As of September 30, 2005, we had approximately $86.8 million in cash, cash equivalents, short-term and long-term investments and total stockholders’ equity of $83.0 million.

We do not currently have any commercial products for sale. All of our product candidates are in early stages of development and significant further research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. As of September 30, 2005, we had an accumulated deficit of approximately $136.2 million. Over the next several years, we expect to incur substantial expenses as we continue to identify, develop and manufacture our product candidates, invest in research, and move forward towards commercialization of our product candidates. Our commitment of resources to research and the continued development and potential commercialization of our product candidates will require substantial additional funds and resources. Our operating expenses will likely increase as we invest in research or acquire additional technologies, as additional product candidates are selected for clinical development and as some of our earlier stage product candidates move into later stage clinical development. In addition, we may incur significant milestone payment obligations as our product candidates progress through clinical trials towards commercialization. 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

Three months and nine months ended September 30, 2005 and September 30, 2004

Revenues.


	Three months ended September 30,						Nine months ended September 30,
Revenues	2005		2004		% change		2005		2004		% change
Earned portion of technology access fees and milestone payments	$	2,121	$	856	148	%	$	5,716	$	2,209	159	%
Funded research and material supply fees		511		635	(20	%)		1,722		2,796	(38	%)

Total collaborations and license agreements	$	2,632	$	1,491	77	%	$	7,438	$	5,005	49	%

Total revenues increased 77% to $2.6 million in the third quarter and increased 49% to $7.4 million in the first nine months of 2005 from the comparable periods in 2004. Increases in 2005 revenues primarily reflect increases in the earned portion of technology access fees and milestone payments which increased 148% to $2.1 million in the third quarter and increased 159% to $5.7 million in the first nine months of 2005 from the comparable periods in 2004. These revenues represent earned portions of upfront technology access fees or milestone payments received during the course of our ADC collaborations with Bayer, CuraGen, Genentech, MedImmune, Protein Design Labs, PSMA Development Company and UCB Celltech and our antibody-directed enzyme-prodrug therapy (ADEPT) collaboration with Genencor. The upfront technology access fees are deferred and recognized ratably over each collaborative research period. Payments for milestones are recognized when the milestone is achieved. During the third quarter of 2005, the earned portion of technology access fees and milestone payments included the first full quarter of revenues recognized under our new ADC collaborations with MedImmune and PSMA Development Company and reflects milestone payments that were achieved by us and paid by Genentech for services we provided to support Genentech’s process development and manufacturing of ADCs using our technology.

Funded research and material supply fees decreased 20% to $511,000 in the third quarter of 2005 and decreased 38% to $1.7 million in the first nine months of 2005 from the comparable periods in 2004. The decreases in the third quarter and the first nine months of 2005 were due to an overall decrease in the level of activities performed for our partners in 2005 compared to the same periods in 2004.

We expect that future revenues will vary from quarter to quarter and from year to year depending on the level of revenues earned and milestone payments received for ongoing ADC collaborations and our ability to enter into additional collaboration agreements and obtain additional government grants.

Research and development expenses.


	Three months ended September 30,						Nine months ended September 30,
Research and Development	2005		2004		% change		2005		2004		% change
Research	$	2,991	$	2,551	17	%	$	9,102	$	8,057	13	%
Development and contract manufacturing		3,655		5,300	(31	%)		12,301		13,625	(10	%)
Clinical		1,160		1,727	(33	%)		4,733		4,327	9	%
Stock compensation expense		—		33	(100	%)		10		132	(92	%)

Total	$	7,806	$	9,611	(19	%)	$	26,146	$	26,141	0	%

Research and development expenses decreased 19% to $7.8 million in the third quarter of 2005 compared to the same period in 2004, but remained relatively consistent at approximately $26.1 million in the first nine months of 2004 and 2005. Certain expense reclassifications have been made in prior period’s research and development expense categories to conform to classifications used in the current year.

Research expenses in the third quarter of 2005 increased primarily due to higher personnel expenses associated with increased staffing levels, in-license expenses and depreciation related to new lab equipment purchases. In the first nine months of 2005, research expenses increased due to higher personnel expenses, related general lab supplies and costs related to our expanded laboratory and office facility. Offsetting these increases were lower licensing agreement expenses in 2005 due to a SGN-40 phase I clinical trial milestone payment made during the first quarter of 2004.

Development and contract manufacturing expenses in the third quarter of 2005 decreased by approximately $1.6 million compared to the same period in 2004 due primarily to lower costs related to the manufacturing of clinical grade materials.

This decrease reflects a reduced cost of manufacturing SGN-30 of approximately $2.7 million, offset by an increase of approximately $1.1 million related to the manufacturing of SGN-40. During the first nine months of 2005, development and contract manufacturing expenses were approximately $1.3 million less than the comparable period in 2004. This decrease was caused primarily by a reduced cost of manufacturing SGN-30 of approximately $6.9 million, which was partially offset by an increase of approximately $3.5 million related to the manufacturing of SGN-40. Offsetting these decreases were higher costs related to personnel expenses and costs related to our expanded laboratory and office facility, and quality control and assurance activities, including storage and shipment services of our drug product candidates.

Clinical expenses in the third quarter of 2005 decreased primarily due to lower third party costs caused by the discontinuation of our SGN-15 program announced in July 2005. In the first nine months of 2005, clinical expenses increased compared to the first nine months of 2004 due primarily to higher personnel expenses.

We utilize our employee and infrastructure resources across multiple 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 do not 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:


	Three months ended September 30,				Nine months ended September 30,				Five years ended September 30, 2005
Product Candidates	2005		2004		2005		2004		Five years ended September 30, 2005
SGN-40	$	1,289	$	103	$	3,944	$	385	$	4,535
SGN-35		450		704		2,047		1,463		6,116
SGN-30		424		3,282		1,365		8,580		22,562
SGN-70 and SGN-75		135		—		297		—		320
SGN-33		44		—		52		—		52

Total third party costs		2,342		4,089		7,705		10,428		33,585
Unallocated costs and overhead		5,464		5,489		18,431		15,581		87,265
Stock compensation expense		—		33		10		132		3,944

Total research and development	$	7,806	$	9,611	$	26,146	$	26,141	$	124,794

Our third party manufacturing costs for SGN-40 in the third quarter and first nine months of 2005 included payments made to Abbott Laboratories to perform scale-up and current Good Manufacturing Practices (GMP) manufacturing of SGN-40 to support clinical trials. We expect the third party costs associated with SGN-40 to increase as we continue to enroll patients and to expand our SGN-40 phase I clinical trials and as we continue contract manufacturing for later-stage clinical and commercial supplies. SGN-35 third party costs in the third quarter and the first nine months of 2005 are attributable to contract manufacturing in anticipation of clinical trials. We expect third party costs for SGN-35 to increase as we contract for additional clinical grade manufacturing and initiate clinical trials. SGN-30 third party costs in the third quarter and first nine months of 2005 are attributable to increased patient enrollments in our phase II clinical trials in the United States and Europe. The higher third party costs of SGN-30 in the third quarter and first nine months of 2004 were attributable to the costs of manufacturing SGN-30 for use in clinical trials. We expect third party costs for SGN-30 to increase from the amounts incurred in the third quarter and first nine months of 2005 as we continue to enroll patients in our phase II clinical trials. In July 2005, we announced our discontinuance of the development of SGN-15 to focus on advancing our other pipeline programs and second-generation ADC technology. Although we are not accruing new patients to our SGN-15 phase II clinical trials, we anticipate some nominal costs in the last three months of 2005 due to committed payments for currently enrolled patients. We do not anticipate incurring additional costs to terminate existing contracts associated with SGN-15 before the end of their respective terms and will recognize any remaining SGN-15 clinical trial costs in the periods the services are provided.

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 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;

•

The use of clinical research organizations to assist with the management of the trials; 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.

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 to new clinical sites in North America and Europe. 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.

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.

General and administrative expenses.


	Three months ended September 30,						Nine months ended September 30,
General and administrative	2005		2004		% change		2005		2004		% change
General and administrative	$	1,664	$	1,692	(2	%)	$	5,366	$	4,689	14	%
Stock compensation expense		—		70	(100	%)		—		657	(100	%)

Total general and administrative expense	$	1,664	$	1,762	(6	%)	$	5,366	$	5,346	0	%

Total general and administrative expenses decreased by 6% for the third quarter of 2005 to $1.7 million compared to the same period in 2004, but remained relatively constant at approximately $5.4 million for the nine months ended September 30, 2004 and 2005. Certain expense reclassifications have been made in prior periods’ general and administrative expense categories to conform to classifications used in the current year. General and administrative expenses, excluding stock compensation expense, increased 14% in the first nine months of 2005 primarily due to additional administrative personnel, professional service fees and recruiting fees. Stock compensation expense included in general and administrative expense is primarily attributable to scheduled accelerated amortization of deferred stock 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 and to accelerated vesting of stock options for employee severance pay. We anticipate that general and administrative expenses will increase as our costs related to adding personnel in support of our operations increase.

Investment income, net.

Investment income increased 30% to $667,000 in the third quarter and 23% to $2.0 million in the first nine months of 2005 from the comparable periods in 2004 due primarily to increasing average interest yields.

Non-cash accretion of preferred stock deemed dividend.

We recorded a non-cash accretion of preferred stock deemed dividend of $7.2 million in the third quarter of 2004 and $36.6 million in the first nine months of 2004. As a result of the July 2003 issuance of Series A convertible preferred stock, we recorded an aggregate non-cash charge of $36.8 million representing accretion of preferred stock deemed dividend. This amount represented the embedded net beneficial conversion based on the difference between the conversion price of the preferred stock and the market value of the common stock at the time of issuance of the preferred stock. This accretion of preferred stock deemed dividend was reflected as an additional charge in determining net loss attributable to common stockholders over the one year period following issuance of the preferred stock. 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 ($ in thousands)	September 30, 2005		December 31, 2004
Cash, cash equivalents and investments (excluding restricted investments)	$	86,786	$	105,898
Working capital	$	32,499	$	30,233

We have financed our operations primarily through the issuance of equity securities and funding from our collaboration and license agreements. For the nine months ended September 30, 2005, we received approximately $8.5 million in cash through fees and milestone payments under our collaboration and license agreements. To a lesser degree, we have also financed our operations through interest earned on cash and cash equivalents. These financing sources have historically allowed us to maintain adequate levels of cash and investments.

Our combined cash and cash equivalents decreased to $86.8 million at September 30, 2005, compared to $105.9 million at December 31, 2004 and our net working capital increased to $32.5 million at September 30, 2005, compared to $30.2 million at December 31, 2004. 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, adjustable mortgage-backed securities, commercial paper and money market accounts. We maintain our working capital through scheduled maturities of our investment securities.

We expect to use approximately $30.0 million of our cash, cash equivalents and investments to fund our 2005 business activities. At our current spending rate, we believe our remaining financial resources in addition to the expected fees and milestone payments earned under new and existing collaboration and license agreements will be sufficient to fund our operations into 2008. However, changes in our spending rate may occur that would consume available capital resources sooner, such as, increased manufacturing and clinical trial expenses preceding commercialization of a product candidate. We may seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements, or 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.

Net cash used in operating activities was $18.3 million for the nine months ended September 30, 2005 as compared to $16.8 million for the same period in 2004. Our stockholders’ equity decreased to $82.7 million at September 30, 2005, compared to $103.8 million at December 31, 2004 and reflects our net loss of $22.1 million for the year-to-date. This loss was partially offset by the receipt of approximately $1.1 million in cash received from stock option exercises and from common stock issued pursuant to our employee stock purchase plan.

Capital expenditures during the first nine months of 2005 were $1.2 million, which consisted primarily of lab equipment and computers and related information systems in support of our research and development activities and in support of employee growth. We expect that our remaining capital expenditures in 2005 will be lower than 2004 when we completed our lab and office expansion to our existing headquarters and operations facility.

We expect to incur substantial costs as we continue to develop and commercialize our product candidates. We anticipate that our rate of overall spending will accelerate as a result of the increased costs and expenses associated with adding personnel, clinical trials, regulatory filings, manufacturing, and research and development activities. 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 the cost of filing and enforcing patent claims and other intellectual property rights, competing technological and market developments and the progress of our collaborators.

Some of our manufacturing, license and collaboration agreements 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 below could be substantially higher if we are required to make milestone payments or if we receive regulatory approvals or achieve commercial sales and are required to pay royalties earlier than anticipated.

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.


	Total		Remainder of 2005		2006		2007		2008		2009		Thereafter
Operating leases	$	12,570	$	537	$	2,152	$	2,175	$	2,208	$	2,245	$	3,253
Manufacturing, license and collaboration agreements		2,791		1,701		190		295		300		305		—

Total	$	15,361	$	2,238	$	2,342	$	2,470	$	2,508	$	2,550	$	3,253

As part of the terms of our office and laboratory lease, we have collateralized certain obligations under the lease with approximately $600,000 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. Commencing in June 2006, we expect that our restricted investments will be reduced to approximately $478,000. In the event that we fail to meet specific thresholds of market capitalization, stockholders’ equity or cash and investment balances, we may be obligated to increase our restricted investment balance. At September 30, 2005, we were in compliance with these thresholds.

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 or determinable and collectibility is reasonably 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. Revenues from royalties based on third-party sales of licensed technologies are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. 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 generally bill at contractual 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). To date, 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 because such declines are 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.

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-overestimate 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, including milestones and maintenance fees, to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred. 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.

Stock 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 stock options granted to members of our Scientific Advisory Board, 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 under Recent Accounting Pronouncements below.

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.

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, accrued expenses, research and development, stock 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.

Recent Accounting Pronouncements.

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. In April 2005 the SEC delayed the implementation of SFAS 123R for public companies until the first annual period beginning after June 15, 2005. We expect to adopt SFAS 123R using the modified prospective method and will begin expensing amounts related to employee stock options and stock issued under its employee stock purchase plan utilizing a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees effective January 1, 2006.

The adoption of SFAS 123R will have a material impact on our results of operations. Assuming levels of equity awards similar to 2004 and 2005 in 2006 and using a weighted-average fair value of $4.00 per share, the estimated stock-based compensation expense for 2006 will range from approximately $4.0 to $5.0 million. However, the calculation of compensation cost for share-based payment transactions may be significantly different because of the uncertainty of additional equity awards which may be granted, the unpredictability of the fair value of stock options granted and the estimated expected forfeiture rates.

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 quarterly report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 quarterly report on Form 10-Q.

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 and SGN-40 are in clinical trials and SGN-33, SGN-35, SGN-70 and SGN-75 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;

•

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;

•

the timing and cost of milestone payment obligations as our product candidates progress towards commercialization;

•

competing technological and market developments; and

•

preparation for product commercialization.

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 most advanced product candidate and phase I clinical trials of two additional product candidates. 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 and SGN-40 are our only product candidates in clinical development and SGN-33, SGN-35, SGN-70 and SGN-75 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 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 dosing schedules. 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 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 and 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. For example, although we generated data showing an encouraging trend in our phase II clinical trials of SGN-15, we decided to discontinue development of SGN-15 to prioritize our other programs. 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.

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 and clinical research organizations 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 FDA 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. For SGN-30, we 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. For SGN-33, we received clinical-grade material from Protein Design Labs to support currently planned phase I/II trials and plan to enter into contract manufacturing arrangements to supplement these supplies as necessary. For SGN-35, we are utilizing antibody manufactured by Abbott, have contracted with Albany Molecular Research for cGMP manufacturing of our proprietary drug-linker system and are working with a contract manufacturing organization for conjugation. In addition, we rely on other third parties to perform additional steps in the manufacturing process, including vialing and storage of our product candidates.

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-40 and SGN-33, 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, Bayer, MedImmune and PSMA Development Company. Our ADEPT technology 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 best efficacy and 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 program could have a detrimental impact on our internal product candidate pipeline and our ability to maintain and/or enter into new corporate collaborations regarding these technologies, which would negatively affect our business and financial position.

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.

We have incurred net losses in each of our years of operation and, as of September 30, 2005, we had an accumulated deficit of approximately $136.2 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. We have never been profitable and may never achieve profitability and if we do achieve profitability, it may not be sustainable.

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, Bayer, MedImmune and PSMA Development Company, 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 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, and the University of Miami, 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 commercialize our product candidates. 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 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 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 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.

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 third quarter of 2005, our stock price fluctuated between $4.86 and $6.52 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:

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

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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;

•

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 41.7 percent of our voting power as of November 4, 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 November 4, 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 3.

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.

Item 4.

Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer have reviewed the Company’s disclosure controls and procedures prior to the filing of this quarterly report. Based on that review, they have concluded that, as of the end of the period covered by this quarterly 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 quarterly 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 September 30, 2005 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 6.

Exhibits


Number		Description
3.1(1)		Amended and Restated Certificate of Incorporation of Seattle Genetics, Inc.

3.2(2)		Certificate of Designations of Series A Convertible Preferred Stock of Seattle Genetics, Inc.

3.3(4)		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 among Seattle Genetics, Inc. and certain of its stockholders.

4.3(3)		Form of Common Stock Warrant.

4.4(3)		Investor Rights Agreement dated July 8, 2003 among Seattle Genetics, Inc. and certain of its stockholders.

4.5(4)		Amendment to Amended and Restated Investors’ Rights Agreement dated July 8, 2003 among Seattle Genetics, Inc. and certain of its stockholders.

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 the Registrant’s current report on Form 8-K filed with the Commission on June 5, 2003.

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

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

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.

By:		/s/ Todd E. Simpson
		Todd E. Simpson
		Chief Financial Officer

Date: November 8, 2005

EXHIBIT INDEX


Number		Description
3.1(1)		Amended and Restated Certificate of Incorporation of Seattle Genetics, Inc.

3.2(2)		Certificate of Designations of Series A Convertible Preferred Stock of Seattle Genetics, Inc.

3.3(4)		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 among Seattle Genetics, Inc. and certain of its stockholders.

4.3(3)		Form of Common Stock Warrant.

4.4(3)		Investor Rights Agreement dated July 8, 2003 among Seattle Genetics, Inc. and certain of its stockholders.

4.5(4)		Amendment to Amended and Restated Investors’ Rights Agreement dated July 8, 2003 among Seattle Genetics, Inc. and certain of its stockholders.

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 the Registrant’s current report on Form 8-K filed with the Commission on June 5, 2003.

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

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

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