Note 1. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited consolidated financial statements of Human Genome Sciences, Inc. (the "Company" or "HGS") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. In the opinion of the Company's management, the consolidated financial statements reflect all adjustments necessary to present fairly the results of operations for the three and nine months ended September 30, 2011 and 2010, the Company's financial position as of September 30, 2011, and the cash flows for the nine months ended September 30, 2011 and 2010. These adjustments are of a normal recurring nature.

Certain notes and other information have been condensed or omitted from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 2010 Annual Report on Form 10-K.

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of future financial results.

Accounts receivable. Trade accounts receivable are recorded net of allowances for prompt payment discounts and doubtful accounts.

Non-current inventory. Inventory that is not expected to be utilized until more than 12 months from the balance sheet date is classified as non-current. Estimating the level of inventory utilization for the upcoming 12 months requires management to exercise significant judgment. The Company maintains inventory levels in excess of 12 months to mitigate risks such as product shortage due to higher than anticipated product demand, long lead times for manufacturing finished goods, supply interruptions for raw materials and risks of production disruptions at its sole U.S. Food and Drug Administration ("FDA") approved manufacturing site due to contamination, equipment failure or other facility-related issues. Carrying such levels of inventory impacts the Company's liquidity and cash flows since the inventory will not be converted to cash for more than one year from the balance sheet date.

Inventory is evaluated for impairment by consideration of factors such as lower of cost or market, net realizable value, obsolescence or expiry. Inventories have carrying values that do not exceed cost nor do they exceed net realizable value. The Company believes BENLYSTA^® has limited risk of obsolescence at this time based on market research, which is used to estimate future demand.

The Company evaluates expiry risk by evaluating current and future product demand relative to product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Currently, the shelf life of raw materials and work in process is approximately one to five years and three years, respectively. The shelf life for finished goods is three years. The product shelf life resets as inventory moves through each stage of completion.

The Company does not expect any material changes to current demand estimates at this time that would result in any excess or obsolete inventory.

Deferred revenue. Deferred revenue consists primarily of amounts related to raxibacumab and certain BENLYSTA shipments. The Company recognizes raxibacumab revenue based on the average contracted price as shipments occur and records the difference between the invoiced price and the average contracted price in deferred revenue. Revenue relating to BENLYSTA shipments to specialty distributors is deferred and recognized as revenue once product has been sold-through to healthcare providers.

Product sales. Product sales consist of U.S. sales of BENLYSTA and raxibacumab. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title to product and associated risk of loss have passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, all performance obligations have been met and returns can be reasonably estimated. Product sales are recorded net of accruals for estimated rebates, chargebacks, discounts and other deductions (collectively, "sales deductions") and returns. Amounts accrued for sales deductions and returns are adjusted when trends, significant events, or actual results indicate that adjustment is appropriate. With the exception of allowances for prompt payment, allowances for sales deductions and returns are included in accounts payable and accrued expenses in the accompanying consolidated balance sheet as of September 30, 2011.

The Company does not record sales deductions and returns for sales of raxibacumab due to the absence of discounts and rebates and no right of return under the contract with the United States Government ("USG"). Aside from product recall, once delivery has occurred, product may not be returned to the Company for any reason, including failure to obtain FDA approval. Furthermore, the Company has no obligation to replace existing Strategic National Stockpile ("SNS") doses if the formulation changes during the FDA approval process.

The Company estimates BENLYSTA sales deductions and returns utilizing actual sales data, contracts with distributors and wholesalers and third-party market research. Company estimates and assumptions are subject to inherent limitations and may need to be adjusted accordingly on a prospective basis. Specific considerations for BENLYSTA sold in the U.S. are as follows:

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With respect to BENLYSTA, the Company has determined that it qualifies as the principal based on various elements of the Company's agreement with GlaxoSmithKline ("GSK"), including responsibility for manufacturing product for sale in the U.S., inventory risk and primary responsibility for changes to the product, including product specifications. The Company has an agreement with GSK whereby GSK provides distribution services.

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BENLYSTA is distributed in the U.S. using specialty distributors and wholesalers. Under this model, exclusive distributors purchase and take physical delivery of product, and then sell to physicians or their clinics. Because the Company received FDA approval in the first quarter of 2011, the Company currently cannot make a reasonable estimate of future product returns when product is delivered to distributors. Therefore, the Company currently does not recognize revenue upon product shipment to specialty distributors, even though the distributor is invoiced upon product shipment. Instead, the Company recognizes revenue through the specialty distributor channel at the time of shipment to the physicians or their clinics. Wholesalers supply product to all other healthcare providers (e.g. hospitals, pharmacies), however they do not take physical delivery of product. All wholesaler orders are drop-shipped directly to the healthcare providers. For wholesaler purchases, the Company currently recognizes revenue upon shipment to the healthcare provider.

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Product returns. BENLYSTA customers are not offered a general right of return. However, the Company will accept product that is damaged or defective when shipped directly from GSK or for expired product up to 12 months subsequent to its expiration date. Due to the price of BENLYSTA and limited contractual rights of return, healthcare providers generally only carry inventory quantities estimated to meet projected short-term demand. Once product has been delivered to healthcare providers, the risk of material returns is significantly mitigated, and the Company is able to make a reasonable estimate of future returns at that point. In developing estimates for sales returns, the Company considers shelf life of the product, expected demand based on market data and publicly available return rates used for other biologic drugs. In addition, the Company considers the price of the product, the nature of healthcare providers, the ability of healthcare providers to obtain product on a just-in-time basis, the predictability of patient infusion and dosing and the absence of financial incentives that would promote bulk or advance purchasing.

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Rebates. Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company estimates for expected utilization of rebates are based in part on third party market research data. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarters' unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

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Chargebacks. Chargebacks are discounts that occur when contracted customers purchase directly from an intermediary distributor or wholesaler. Contracted customers, which currently consist primarily of Public Health Service institutions and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The distributor or wholesaler, in turn, charges back the difference between the price initially paid by the distributor or wholesaler and the discounted price paid to the distributor or wholesaler by the customer. The allowance for distributor/wholesaler chargebacks is based on known sales to contracted customers.

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Distributor / Wholesaler deductions. U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a fixed rate per vial purchased. Wholesale customers are offered a prompt pay discount for payment within a specified period. Distributor allowances and service fees and wholesaler prompt payment discounts recorded in the Company's 2011 statements of operations are based on actual product sales and are not estimates.

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Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The Company accrues a liability for co-pay assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

The Company is not the principal with respect to BENLYSTA sold in the rest of world ("ROW"). Therefore, the Company does not record product sales with respect to this activity.

Cost of product sales. The Company capitalizes inventories produced in preparation for product launches when the related product candidates are considered likely to receive regulatory approval and it is probable that the related costs will be recoverable through the commercialization of the product. Prior to capitalization, the cost of manufacturing drug product is recognized as research and development expense in the period that the cost is incurred. Therefore, manufacturing costs incurred prior to capitalization are not included in cost of product sales when revenue is recognized from the sale of that drug product.

Prior to receiving a follow-on order for raxibacumab from the USG in July 2009, the Company did not capitalize inventory costs related to this product. Although authorization to ship to the SNS was received in January 2009, there continued to be uncertainty around future product orders. Beginning in July 2009, the cost of manufacturing raxibacumab is recognized as a cost of product sales (capitalized and then expensed when revenue is recognized), rather than research and development expenses in the period that the cost is incurred.

Prior to the BENLSYTA Advisory Committee meeting in November 2010, the Company did not capitalize inventory costs related to this product. Following the positive outcome of the Advisory Committee, the cost of manufacturing BENLYSTA is being capitalized and will be expensed as cost of product sales as revenue is recognized, rather than being recorded as research and development expenses in the period that the cost is incurred.

Cost of product sales also includes royalties paid or payable to third parties based on the sales levels of certain products and distribution services costs.

Commercial collaboration expenses. Commercial collaboration expenses include GSK's share of the collaboration profit with respect to BENLYSTA in the United States. At this time, it also includes HGS' share of the ROW collaboration expense incurred by GSK. In the period when ROW results become profitable, the Company will begin to reflect such results as commercial collaboration income. Commercial collaboration expenses/income does not include any research and development expenses shared with GSK.

Major customers and concentration of credit risk

The Company sells BENLYSTA to a limited number of specialty distributors and wholesalers in the U.S. and sells raxibacumab only to the USG. The Company periodically assesses the financial strength of its customers and establishes allowances for anticipated losses, if necessary. The following table includes those customers that represent more than 10% of total revenue of $85,452 for the nine months ended September 30, 2011:


Customer A	48.1	%
Customer B	11.0	%
Customer C	10.9	%

The two customers having a balance of more than 10% of the Accounts receivable balance on the consolidated balance sheet as of September 30, 2011 represent an aggregate of 92% of Accounts receivable.

Reclassifications

Within the December 31, 2010 consolidated balance sheet, long-term equity investments of $3,241 have been reclassified and are included in Other assets, and a lease termination liability that had been classified in Accrued exit expenses has been reclassified to Other current liabilities. Also within the December 31, 2010 consolidated balance sheet, deferred rent of $10,358, deferred revenue, non-current of $2,517 and accrued exit expenses, non-current of $700 have been reclassified and are included in Other liabilities. All of these reclassifications have been made to conform to the current year presentation.

Recent accounting pronouncements

In October 2009, the Financial Accounting Standards Board ("FASB") issued new revenue recognition standards for arrangements with multiple deliverables. The new standards require entities to use management's best estimate of selling price to value individual deliverables when those deliverables do not have objective and reliable evidence of fair value. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables. These new standards were effective for the Company as of January 1, 2011 and have been implemented on a prospective basis. The adoption of these standards did not have a material effect on the Company's consolidated results of operations, financial position or liquidity.

In January 2010, the FASB issued Accounting Standards Update ("ASU") 2010-06, Improving Disclosures about Fair Value Measurements ("ASU 2010-06"). ASU 2010-06 requires disclosing the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures were effective for the Company beginning January 1, 2010, and had no material impact on the Company's financial statements. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements were required beginning January 1, 2011. The additional provisions of ASU 2010-06 did not have any effect on the Company's consolidated results of operations, financial position or liquidity.

In April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition ("ASU 2010-17"), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17 was effective for the Company on January 1, 2011. The adoption of ASU 2010-17 did not have a material effect on the Company's consolidated results of operations, financial position or liquidity.

In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufacturers ("ASU 2010-27"), which specifies that the liability for the new fee mandated by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act, should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. This ASU was effective for the Company beginning January 1, 2011. The adoption of ASU 2010-27 did not have a material effect on the Company's consolidated results of operations, financial position or liquidity.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"). This guidance is intended to increase the prominence of other comprehensive income in financial statements by presenting it in either a single statement or two-statement approach. This ASU is effective for the Company beginning January 1, 2012. The adoption of ASU 2011-05 will not have a material effect on the Company's consolidated results of operations, financial position or liquidity.