•

Milestones: Incentive milestone payments are recognized as revenue when the milestone is achieved. Incentive milestone payments are triggered either bymaterial impact on the results of operations and the Company's research efforts or by events external to Abgenix, such as regulatory approval to market a product. Incentive milestone payments are substantially at risk at the inceptionfinancial position of the contract,Company.  Significant intercompany accounts and the values assigned thereto are commensurate with the type of milestone achieved. The Company has no future performance obligations related to an incentive milestone that hastransactions have been achieved.

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

6

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted averageweighted-average assumptions for the three and nine months ended September 30, 2003March 31, 2004 and 2002:2003:

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

 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option

7

valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the Black-Scholes model and other existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

        The weighted-average fair values of options granted during the three and nine months ended September 30, 2003 were $9.68 and $7.49 per share, respectively, and were $15.34 per share for both the three-month and nine-month periods ended September 30, 2002. All options granted were at exercise prices at the current fair market value of the stock on the date of grant.

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

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

2.                                      Comprehensive Income (Loss)

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

3.    Goodwill and Identified Intangible Assetsfollows:

 During the quarter ended March 31, 2003, the Company decided to discontinue the development of therapeutic antibodies to the complement protein properdin. Accordingly, the Company recorded an impairment charge of approximately $1.4 million related to the license to develop and commercialize antibodies to properdin. The impairment charge was included in research and development expenses on the Company's statement of operations.

87

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

        Amortization of acquisition-related intangibles was approximately $1.8 million and $5.3 million, respectively, for each of the three and nine month periods ended September 30, 2003 and 2002. Amortization of other intangible assets was $22,000 and $90,000, respectively, for the three and nine months ended September 30, 2003 and $46,000 and $139,000, respectively, for the three and nine months ended September 30, 2002. All of the Company's acquired identified intangibles other than goodwill are subject to amortization.3.                                      Segment Information

 Expected amortization expense related to identified intangible assets for the three-month period from October 1, 2003, to December 31, 2003, and each of the fiscal years thereafter is as follows (in thousands):

4.    Segment Information

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

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

5.    Restructuring Charges4.                                      Convertible Subordinated Note

 In October 2002, the Company announced a restructuring plan, which consisted primarily of a 15% reduction in employees. A restructuring charge of $1.8 million was recorded in 2002 to account for severance, medical and other benefits associated with this restructuring. As of December 31, 2002, approximately $1.1 million of severance benefits were accrued. During the three and nine months ended September 30, 2003, the Company made cash payments for severance benefits of approximately

9

$80,000 and $1.1 million, respectively. As of September 30, 2003, approximately $22,000 of severance benefits was accrued and is expected to be paid to terminated employees over the next quarter.

6.    Contract Cancellation Obligation

        Effective June 30, 2003, the Company canceled its November 2000 agreement with Lonza Biologics plc ("Lonza") for the exclusive use of a cell culture production suite, because the Company determined that with the opening of its own manufacturing plant, it no longer needed access to the Lonza facility. Upon canceling the agreement, the Company became obligated to pay Lonza four equal installments of 4,250,000 British pounds on October 1, 2003, February 1, 2004, May 1, 2004 and August 1, 2004, which eliminated the Company's commitment to pay approximately $46.0 million in total monthly fees through August 2006. The value of this obligation on the effective date of June 30, 2003 was approximately $28.0 million and was recorded as a component of manufacturing start-up costs in the Company's statements of operations in the second quarter of 2003. In September 2003, the Company made the first of four installment payments to Lonza. The balance of the obligation as of September 30, 2003 was approximately $21.2 million.

7.    Customer Indemnification

        The Company has certain agreements with customers and collaborators that contain indemnification provisions. In such provisions, the Company typically agrees to indemnify the customer or collaborator against certain types of third-party claims. The Company would accrue for known indemnification issues if a loss were probable and could be reasonably estimated. The Company would also accrue for estimated incurred but unidentified issues based on historical activity. There was no accrual for or expense related to indemnification issues as of September 30, 2003 and 2002 and, in each case, for the three and nine months then ended.

8.    Recent Accounting Pronouncements

        In November 2002, the FASB issued Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into after June 30, 2003. The Company adopted EITF Issue No 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21 did not result in a material change to the Company's existing revenue recognition policy for existing and prospective revenue arrangements. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company's consolidated financial statements.

        In January 2003, the FASB issued Interpretation No. 46 (the "Interpretation"), Consolidation of Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has controlling financial interest through ownership of a majority voting interest in the entity. The Company will implement the Interpretation in the quarter ending December 31, 2003. The Company has performed a preliminary analysis of the Interpretation and does not believe that the adoption will result in a material impact on the Company's results of operations or financial position. During the quarter ending December 31, 2003, the Company will complete its evaluation of the implications of the Interpretation with respect to all variable interest entities with which it has involvement.

10

9.    Subsequent Events

Agreements with AstraZeneca

        In October 2003, Abgenix entered into a collaboration and license agreement with AstraZeneca UK Limited ("AstraZeneca") to provide for the joint discovery and development of therapeutic antibodies against up to 36 oncology targets to be commercialized exclusively worldwide by AstraZeneca. The agreement provides that Abgenix will conduct early stage preclinical research on behalf of AstraZeneca with respect to these targets. Under the agreement, Abgenix also may conduct clinical, process development and manufacturing activities for which AstraZeneca is to compensate Abgenix at competitive market rates. Abgenix may also receive milestone payments at various stages of development and royalties on commercial sales. The collaboration agreement also includes a co-development component under which Abgenix will be able to generate additional antibody product candidates against up to 18 targets that AstraZeneca will have the option to co-develop with Abgenix. The companies will share development costs and responsibilities for any co-development candidates selected by AstraZeneca. During the three-year period of selection of targets for development the Company will work exclusively with AstraZeneca to generate and develop antibodies for therapeutic use in oncology subject to various exceptions, including among others for generation and development of antigens in accordance with existing collaborations, for antigens that the Company and AstraZeneca decide not to pursue in the collaboration, and for certain process development and manufacturing services.

In October 2003, in connection with thea collaboration agreement, the Company entered into a securities purchase agreement with AstraZeneca. Pursuant to the agreement, the Company issued to AstraZeneca $50.0 million of Series A-1 convertible preferred stock with a seven-year maturity and $50.0 million of Series A-2 convertible preferred stock with a 10-year maturity.stock.  The net proceeds from the securities were $99.7 million.  Pursuant to its terms, the Series A-2 preferred stock after the 60-day anniversary of the closing date, is redeemable at the option of Abgenix or exchangeablewas redeemed at the option of AstraZeneca foron February 19, 2004 and the Company issued AstraZeneca a convertible subordinated note with a principal amount of $50.0 million, convertible subordinated note. Subject to various terms and conditions, ifwhich matures on October 29, 2013.  No interest is payable on the note except in the event of a certain milestone event is reached,payment default by the Company will have the option to issue to AstraZeneca up to $30.0 million of Series A-3 preferred stock and if a further milestone event is reached, the Company will have the option to issue to AstraZeneca up to $30.0 million of Series A-4 preferred stock. Each of the Series A-3 preferred stock and the Series A-4 preferred stock will have a maturity date that is five years from issuance. Due to the redeemable feature, the Company expects the preferred stock to be classified as a liability on its consolidated balance sheet.Company.

 Subject

Conversion rights

The Company, subject to certain conditions, can convert the Company can force conversion of each series of preferred stockconvertible subordinated note into shares of common stock at a conversion price equal to the lower of (A)(a) the average market price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be higher than 101% of the market price on the trading day immediately preceding the conversion date) or (B)(b) $30.00 per share. At any time prior to the earlier of (A) the redemption or repurchase of the preferred stock or (B) the relevant maturity date,

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

Redemption rights and maturity

The convertible subordinated note matures on October 29, 2013, if issued bystill outstanding.  The Company can, upon 15 days notice to the Company,holder repay the principal amount of the convertible subordinated note will have the same conversion terms as the preferred stock.in cash.

 Upon

AstraZeneca has the right to require Abgenix to repay the convertible subordinated note at its face amount, upon the occurrence of a "Type I Redemption Event," consisting of a change in control of Abgenix after the completion of a defined research period, AstraZeneca has the right to require Abgenix to redeem all outstanding shares of the preferred stock at their liquidation preference.period.  At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon a Type I Redemption Event.such an event.

 Upon

AstraZeneca has the right to require Abgenix to repay a specified portion of the convertible subordinated note upon the occurrence of a "Type II Redemption Event," consisting of either (i) (a) a material breach by Abgenix of a material obligation under the Collaboration Agreement between the Company and AstraZeneca or (ii)(b) a change in control of Abgenix or an acquisition of

11

by Abgenix byin which the other party to the change in control or acquisition, as the case may be, is a competitor of AstraZeneca, in each case that occurs during a defined research period and results in AstraZeneca'sAstraZeneca’s termination of all research programs and its ability to designate additional antigens, AstraZeneca hasfuture programs under the right to require Abgenix to redeem a specified portion of the outstanding shares of Preferred Stock.

8

collaboration agreement. The amount that AstraZeneca may require Abgenix to redeem will be based upon the extent of completion of the research programs for the 36 oncology targets that are the subject of the collaboration.collaboration between the Company and AstraZeneca.  At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon a Type II Redemption Event.such events.

 Each series

Upon the occurrence of preferred stock has a liquidation preference equal tocertain events of default, (1) the purchase price paid forholders of the relevant series. The preferred stock will receive dividends or distributions if and when declared on the common stock on an as-converted basis, butconvertible subordinated note shall have no other rightsthe right to dividends, except upon anmake the entire outstanding principal amount of the note due and payable and (2) if the event of default that is a payment default. Upon an event of default that is a payment default, quarterly interest payments shall begin to accrue on the preferred stock shall receive a quarterly, cumulative cash dividendconvertible subordinated note at a default rate equal to the 10-year U.S. treasury rate plus 3%three percent (3%) compounded annually.

        At any time prior  Events of default for purposes of this provision include, but are not limited to, maturity,the following (i) a failure to make a required payment, or a breach by the Company can, upon at least 15 days' notice toof any of the holder, redeem each series ofCompany’s other obligations under, the Series A-1 preferred stock, for cashthe convertible subordinated note or any subordinated promissory note that may be issued by the Company in the circumstances described below under “Aggregate ownership limitation”; (ii) a breach of the Company of specified obligations under the securities purchase agreement with AstraZeneca; (iii) the securities purchase agreement, or any other agreement or instrument contemplated by the securities purchase agreement, is asserted by the Company not to be a legal, valid and binding instrument; (iv) certain bankruptcy and insolvency events involving the Company; and (v) a cross-acceleration of $25 million or more of other indebtedness of the Company.

Liquidation and Voting rights

The convertible subordinated note has an aggregate principal amount equal to its liquidation preference. Holders of preferred stock will have the right to vote with the common stock on an as-converted basis. In addition, the preferred stock has a class vote on certain matters. $50 million.  The convertible note when and if issued, willdoes not have any voting rights untilunless it is converted into common stock and will not bear any interest until theunless there is an occurrence of a default that is a payment default.  Upon an event of default that is a payment default, the convertible note will bear interest at a rate equal to the 10-year U.S. treasury rate plus 3% compounded annually.

The preferred stock will be subordinate and junior to all indebtedness andconvertible subordinated note is senior to the Company's common stock. The convertible note, when and if issued, will be senior to the preferred stock and the common stock and is junior to all senior indebtedness and to the Company'sCompany’s 3.5% convertible subordinated notes due in 2007.

AmendmentAggregate ownership limitation

At no time may any holder of Joint Development and Commercialization Agreementthe convertible subordinated note beneficially own, following the conversion of the convertible subordinated note, more than 19.9% of the Company’s common stock then outstanding.  If any shares of common stock are issuable to a holder upon conversion of the convertible subordinated note that would result in any holder (together with Immunexits affiliates) owning common stock in excess of the ownership threshold described above, then the Company will be required to redeem the shares in excess of the ownership threshold for a price equal to (1) the number of such excess shares times (2) the average market price of the common stock for the 30 consecutive days ending on the 15^th trading day prior to the conversion date (such price, the “Excess Shares Redemption Price”).  Upon such a redemption of the shares issuable upon conversion of the convertible subordinated note, the Company will have the right, upon delivery of notice to the holder, to receive a loan from the holder in the form of interest-free subordinated promissory note.  The face amount of the promissory note shall be the Excess Shares Redemption Price.

 In October 2003, the Company entered into an amendment

5.Inventories

Inventories consist of its joint development and commercialization agreementmaterials related to a production service contract with Immunex Corporation, a wholly owned subsidiary of Amgen, Inc., for the development and commercialization of Abgenix's proprietary antibody therapeutic product candidate, ABX-EGF. Under the amendment, Immunex has decision-making authority for development and commercialization activities. As under the original agreement, the Companycollaborator.  Inventory cost is obligated to pay 50% of the development and commercialization costs and is entitled to receive 50% of any profits from sales of ABX-EGF. However, Immunex will make available up to $60.0 million in advances that the Company may use to fund its share of development and commercialization costs after it has contributed $20.0 million toward development costs in 2004. The amount of any such advances, plus interest, may be repaid out of profits resulting from future product sales. However, the Company is not obligated to repay any portion of the loan if ABX-EGF is not commercialized. Undercomputed on a separate agreement with Immunex, the Company has responsibility for manufacturing clinical supplies for the collaboration, and, for the first five years after, commercial launch, for manufacturing commercial supplies.weighted-average cost basis.  Inventories at period end were as follows:

12

9

Item 2. Management's2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations contains forward--looking statements based upon current expectations that involve risks and uncertainties. In this Quarterly Reportquarterly report on Form 10--Q, the words "intend," "anticipate," "believe," "estimate," "plan"“intend,” “anticipate,” “believe,” “estimate,” “plan” and "expect"“expect” and similar expressions as they relate to Abgenix are included to identify forward--looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward--looking statements as a result of certain factors, including those set forth below and under the heading "Additional“Additional Factors that Might Affect Future Results"Results”.  In this Quarterly Reportquarterly report on Form 10-Q, references to "Abgenix," "we," "us,"“Abgenix,” we,” “us,” and "our"“our” are to Abgenix, Inc. and its subsidiaries.

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our company.

Our Business

Overview

We are a biopharmaceutical company that is focused on the discovery, development and manufacture of antibodyhuman therapeutic productsantibodies for the treatment of a variety of disease conditions, including cancer, inflammation, metabolic disease, transplant-related diseases, cardiovascular diseasediseases.   We intend to use our proprietary technologies to build a large and infectious diseases.diversified product portfolio that we expect to develop and commercialize largely through joint development and commercialization arrangements with pharmaceutical companies and others.

We are co-developing our most advanced proprietary product candidate, panitumumab (formerly known as ABX-EGF), with Immunex.  Panitumumab is in pivotal trials, and we have two product candidates in early stage clinical trials.  In addition, we have entered into a variety of contractual arrangements with pharmaceutical, biotechnology and genomics companies involving our technologies. We use our closely integrated process sciences and manufacturing capabilities for the manufacture of our own proprietary product candidates and also offer these services to our collaborators and others.

We intend to enter into co-development agreements in addition to our agreement for panitumumab.  We generally expect to self-fund preclinical and clinical activities to determine preliminary safety and efficacy before entering into joint development and commercialization agreements.  In some cases we may conduct product development entirely on our own.  We have proprietary technologies that facilitate rapid generation of highly specific, antibody therapeutic product candidates that contain fully human protein sequencesbegun to implement our collaboration strategy through co-development arrangements with companies such as Chugai Pharmaceuticals Co., Ltd., U3 Pharma AG and that bindDendreon Corporation, and through a broad collaboration in oncology with AstraZeneca UK Limited.  Our strategy is designed to disease targets appropriate for antibody therapy. In this Quarterly Reportdiversify the risks associated with our research and development spending and to continue to focus our activities on Form 10-Q we refer to these candidates as fully human antibody therapeutic product candidates. We developed our XenoMouse® technology, a technology using genetically modified mice to generate fully human antibodies. We also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as SLAM™ technology. In our XenoMax™ technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells generated by XenoMouse animals. We believe XenoMax technology enhances our capabilities in product development and flexibilitycommercialization.

Under our collaboration with AstraZeneca, we are obligated to provide preclinical and clinical research support for the development of up to 36 product candidates by AstraZeneca and have an opportunity to co-develop products with AstraZeneca.

Our Financial Position and Liquidity

We derive our revenues from our technology out-licensing contracts, our proprietary product development agreements, our target sourcing contracts and our production services contracts. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and similar arrangements and that payments we receive under these arrangements will continue to be subject to significant fluctuation in manufacturing. both timing and amount.

We have incurred and expect to continue to incur substantial expenses in connection with our product development activities, both under contractual arrangements with third parties and related to our

10