Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "will," "should," "expect," "plan," "anticipate," "project," "believe," "estimate," "predict," "potential," "intend" or "continue," the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption "Risk Factors" set forth in Item 1A. of Part I of our Form 10-K for the fiscal year ended December 31, 2008, as well as 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 are a clinical stage biotechnology company focused on the development and commercialization of monoclonal antibody-based therapies for the treatment of cancer and autoimmune disease. We initiated a pivotal trial of our lead product candidate, SGN-35, during the first quarter of 2009 for patients with relapsed or refractory Hodgkin lymphoma under a special protocol assessment (SPA) with the U.S. Food and Drug Administration (FDA). SGN-35 is empowered by our proprietary ADC technology comprising highly potent synthetic drugs and stable linkers for attaching the drugs to monoclonal antibodies. In addition, we have three other product candidates in ongoing clinical trials: dacetuzumab, lintuzumab and SGN-70. Dacetuzumab is being developed under a worldwide collaboration with Genentech, Inc., a wholly-owned member of the Roche Group.

We have collaborations for our ADC technology with a number of leading biotechnology and pharmaceutical companies, including Genentech, Inc., Bayer Pharmaceuticals Corporation, CuraGen Corporation, Progenics Pharmaceuticals, Inc., Daiichi Sankyo Co., Ltd., Millennium: The Takeda Oncology Company, a subsidiary of the Takeda Pharmaceutical Company Limited, and MedImmune, Inc., a subsidiary of AstraZeneca Inc. In addition, we have an ADC co-development agreement with Agensys Inc., a subsidiary of Astellas Pharma, Inc.

We do not currently have any commercial products for sale. While certain of our product candidates are advancing into later stages of development, such as SGN-35, significant further research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. As of March 31, 2009, we had an accumulated deficit of $341.3 million. Over the next several years, we expect that we will incur substantial expenses, primarily as a result of activities related to the potential regulatory approval and commercialization of SGN-35, including preparation for commercial manufacturing. We will also continue to invest in research, development and manufacturing and move towards potential commercialization of our other product candidates. Our commitment of resources to the approval and commercialization activities for

SGN-35 and the research and continued development and potential commercialization of our other product candidates will require substantial additional funds and resources and our operating expenses will also likely increase as a result of such activities. In addition, we may incur significant milestone payment obligations as our product candidates progress through clinical trials towards potential commercialization. We expect that a substantial portion of our revenues for the next several years will be the result of amortization of payments already received and that are expected to be received from Genentech under our dacetuzumab collaboration agreement. Until such time as we have commercialized a product candidate, our revenues will also depend on the achievement of development and clinical milestones under our existing collaboration and license agreements, particularly our dacetuzumab collaboration agreement with Genentech, as well as entering into new collaboration and license agreements. Our results of operations may vary substantially from year to year and from quarter to quarter and, as a result, we believe that period to period comparisons of our operating results may not be meaningful and you should not rely on them as indicative of our future performance.

Financial summary

To date, we have generated revenues principally from our collaboration and license agreements. These revenues reflect upfront technology access fees, milestone payments and reimbursement for support and materials supplied to our collaborators. For the three months ended March 31, 2009, revenues increased 29% to $9.1 million, compared to $7.1 million for the same period in 2008. Operating expenses increased 43% to $37.4 million, compared to $26.1 million for the same period in 2008. Our net loss for the three month period ended March 31, 2009 was $27.3 million, or $0.33 per share, compared to $17.1 million, or $0.22 per share, for the same period in 2008. As of March 31, 2009, we had $192.4 million in cash, cash equivalents and short-term and long-term investments, and $107.5 million in total stockholders' equity.

Results of Operations

Three months ended March 31, 2009 and 2008

Revenues.

Total revenues increased 29% to $9.1 million in the first quarter of 2009 from the comparable period in 2008. Revenues by collaborator are summarized as follows:

                                                                                    Three months ended
                                                                                        March 31,
Collaboration and license agreement revenue by collaborator ($ in thousands)    2009      2008     % change
Genentech                                                                      $ 8,480   $ 6,367         33 %
Daiichi Sankyo                                                                     412        -         N/A (1)
Bayer                                                                              142        31        358 %
CuraGen                                                                             50        25        100 %
Progenics                                                                            9       164        (95 )%
MedImmune                                                                           -        418        N/A (1)
Other                                                                               49        80        (39 )%

Total                                                                          $ 9,142   $ 7,085         29 %

(1) No amount in comparable period.

Genentech revenues increased 33% to $8.5 million in the first quarter of 2009 compared to the first quarter of 2008. The increase primarily resulted from revenues earned under the dacetuzumab collaboration agreement with Genentech entered into in January 2007. Under the terms of this agreement, we perform research and development activities over the six-year development period of the agreement, the costs of which are reimbursed by Genentech. We are also entitled to receive milestones as dacetuzumab progresses through development and royalties on future product sales. The $60 million upfront payment received in 2007 and all reimbursement and milestone payments received are deferred and recognized as revenue over the development period of the agreement using a time-based method. Genentech revenues also reflect the earned portion of payments received under our ADC collaboration agreement. Daiichi Sankyo revenue reflects the earned portion of a $4.0 million upfront payment received by us in the third quarter of 2008, and reimbursable support and research materials provided to Daiichi Sankyo by us under the ADC collaboration agreement we entered into with Daiichi Sankyo in July 2008. Revenues attributable to reimbursable support and research materials increased under our Bayer collaboration during the first quarter of 2009 compared to the first quarter of 2008. Revenues decreased under both our MedImmune and Progenics collaborations from the first quarter of 2008. The research term has been completed for both of these agreements.

Our revenue is impacted by progress-dependent milestones, annual maintenance fees and reimbursement and support fees as our collaborators advance product candidates through the development process. We expect that our collaboration and license agreement revenue will increase in 2009 compared to 2008. However, revenue may vary substantially from quarter to quarter depending on the progress made by our collaborators with their product candidates, the level of support we provide to our collaborators, the timing of

milestones achieved and our ability to enter into additional collaboration agreements. In addition, we have a significant balance in deferred revenue representing prior payments from collaborators. This deferred revenue will be recognized as revenue in the future using a time-based approach.

Research and development.

Research and development expenses increased 50% to $33.2 million in the first quarter of 2009 compared to the first quarter of 2008. Our research and development expenses are summarized as follows:

                                                        Three months ended
                                                            March 31,
      Research and development ($ in thousands)     2009       2008     % change
      Research                                    $  3,638   $  3,951         (8 )%
      Development and contract manufacturing        13,628      8,141         67 %
      Clinical                                      14,282      8,658         65 %
      Stock compensation expense                     1,698      1,402         21 %

      Total research and development expenses     $ 33,246   $ 22,152         50 %

Research expenses decreased 8% during the first quarter of 2009 from the comparable period in 2008, primarily reflecting lower personnel and related costs in 2009. Development and contract manufacturing costs increased 67% to $13.6 million in the first quarter of 2009 from the comparable period in 2008. The increase reflects increased manufacturing costs associated with supplying SGN-35 for our clinical trials, including the pivotal Hodgkin lymphoma trial, higher compensation related to increased staffing levels and increased laboratory supply expenses. Clinical costs increased 65% to $14.3 million in the first quarter of 2009 from the comparable period in 2008. This increase resulted from expanded clinical trial activities for SGN-35, dacetuzumab and lintuzumab, as well as higher compensation costs related to an increase in staffing levels to support ongoing clinical trials. Share-based compensation expense increased 21% during the first quarter of 2009 compared to the first quarter of 2008. The increase was due to a larger number of optioned shares subject to expense recognition during the 2009 period as a result of increased staffing levels.

The following table shows expenses incurred for preclinical study support, contract manufacturing for clinical supplies and clinical trial services provided by third parties as well as milestone payments for in-licensed technology for each of our product candidates. The table also presents unallocated costs consisting of personnel, facilities and other costs not directly allocable to development programs:

                                              Three months ended
                                                  March 31,          Five years ended
  Product Candidates ($ in thousands)          2009         2008      March 31, 2009
  SGN-35                                    $     8,589   $  1,648   $          35,121
  Dacetuzumab (SGN-40)                            4,628      4,936              38,880
  Lintuzumab (SGN-33)                             3,607      2,141              29,891
  SGN-75                                            552        489               4,215
  SGN-70                                            373        230               9,836

  Total third party costs                        17,749      9,444             117,943
  Unallocated costs and overhead                 13,799     11,306             178,864
  Stock compensation expense                      1,698      1,402              16,690

  Total research and development expenses   $    33,246   $ 22,152   $         313,497

Our third party costs for SGN-35 increased significantly in the three months ended March 31, 2009 as a result of increased contract manufacturing to provide clinical supplies of SGN-35 drug product and expanded clinical trial activities, including the initiation of our pivotal trial in Hodgkin lymphoma. Our third party costs for dacetuzumab decreased during the three months ended March 31, 2009 reflecting lower contract manufacturing costs and completion of a dacetuzumab resupply campaign. These decreases were partially offset by increased third party costs associated with our phase I and II dacetuzumab clinical trials. Under our dacetuzumab collaboration agreement, Genentech reimburses us for development activities that we perform under the agreement. Expenses that we incur under the dacetuzumab collaboration are included in our research and development expense, while reimbursements of those expenses by Genentech are recognized as revenue over the six year development period of the agreement. Our third party costs for lintuzumab increased during the three months ended March 31, 2009, and reflect costs associated with our phase I and II clinical studies, particularly our randomized phase IIb trial of lintuzumab in combination with low-dose cytarabine which completed patient enrollment during the quarter. This was partially offset by lower contract manufacturing costs due to completion of our drug product resupply campaign.

Unallocated costs and overhead included costs associated with personnel and facilities. These costs increased 22% in the first quarter of 2009 from the comparable period in 2008, primarily reflecting an increase in staffing levels in our development and clinical groups.

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 commercialization, the product candidates are tested in numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical trials for those product candidates that 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 and location of sites included in the trials;

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

• the safety and efficacy 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 total research, development, contract manufacturing and clinical expenses will increase in the foreseeable future as we prepare to seek regulatory approval and commercialization of SGN-35. However, we expect third party costs for dacetuzumab, lintuzumab, SGN-70 and SGN-75 to decrease in 2009 compared to 2008, reflecting lower manufacturing and pharmacology/toxicology activities for these programs in 2009. 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 entitled "Risk Factors" that appears in our periodic reports filed with the SEC, including in our annual report on Form 10-K for the year ended December 31, 2008. 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.

                                                                   Three months ended
                                                                       March 31,
General and administrative ($ in thousands)                   2009       2008      % change
General and administrative, excluding share-based
compensation expense                                         $ 3,140    $ 3,110           1 %
Share-based compensation expense                               1,016        825          23 %

Total general and administrative expenses                    $ 4,156    $ 3,935           6 %

General and administrative expenses increased 6% to $4.2 million in the first quarter of 2009 from the comparable period in 2008. Share-based compensation expense included in general and administrative expenses increased 23% to $1.0 million during the first quarter of 2009 from the comparable period in 2008. The increase was due to a larger number of optioned shares subject to expense recognition during the 2009 period as a result of increased staffing levels. We anticipate that general and administrative expenses will continue to increase in 2009 as a result of increased costs related to adding personnel in support of the anticipated growth of our operations.

Investment income, net.

Investment income, net decreased 48% to $1.0 million in the first quarter of 2009 from $1.9 million in the first quarter of 2008. The decrease resulted from lower average yields on investments.

Liquidity and capital resources.

                                                      March 31,         December 31,
 Liquidity and capital resources ($ in thousands)       2009                2008
 Cash, cash equivalents and investments             $     192,413      $      160,708
 Working capital                                          102,779              70,496
 Stockholders' equity                                     107,491              79,018

                                                      Three months ended March 31,
                                                        2009                2008
 Cash provided by (used in):
 Operating activities                               $     (18,554 )    $      (11,299 )
 Investing activities                                     (34,730 )           (31,997 )
 Financing activities                                      53,225              98,775

We have financed the majority of our operations through the issuance of equity securities and by amounts received pursuant to our dacetuzumab collaboration agreement with Genentech. We have supplemented this funding by amounts received from our ADC collaboration and license agreements. To a lesser degree, we have also financed our operations through interest earned on cash, cash equivalents and investment securities. These financing sources have historically allowed us to maintain adequate levels of cash and investments.

Our combined cash, cash equivalents and investment securities increased to $192.4 million at March 31, 2009, compared to $160.7 million at December 31, 2008. This increase reflects cash provided by financing activities, which included net proceeds of $52.5 million from our public offering of common stock which closed in February 2009. We used $18.6 million during the first quarter of 2009 and $11.3 million during the first quarter of 2008 to fund our operating activities. Our working capital was $102.8 million at March 31, 2009, compared to $70.5 million at December 31, 2008. We have structured our investment portfolio to align scheduled maturities of investment securities with our working capital needs. Our cash, cash equivalents and investments are held in a variety of interest-bearing instruments and subject to investment guidelines allowing for investments in U.S. government and agency securities, high-grade corporate bonds, taxable municipal bonds, mortgage-backed securities, auction-rate securities, or ARS, commercial paper and money market accounts. As of March 31, 2009 we held ARS valued at $12.9 million that have failed at auction and are currently illiquid. Liquidity of these investments is subject to either a successful auction process, redemption of the investment, or a sale of the security in a secondary market. As of the date of this filing, the failed ARS carried ratings ranging from "BBB" to "BB". Each of the securities continues to pay interest according to the stated terms on a monthly basis. The interest rates on these ARS is no longer established based on an auction process but as of the date of this filing is set at the 30-day London Interbank Offering rate plus 225 basis points, according to the terms of the issue. Based on our available cash, expected operating cash requirements and our belief that the holdings in ARS can be liquidated in approximately one to three years at par, we believe it is more likely than not that we have the ability to hold, and intend to hold, these investments until they recover substantially all of their cost basis. This belief is based on our current assessment of our future operating plans and assessment of the individual securities and general market conditions. We periodically reassess this conclusion based on several factors, including the continued failure of future auctions, failure of the investment to be redeemed, further deterioration of the credit rating of the investment, market risk and other factors. Any such future reassessment that results in a conclusion that the unrealized losses on these investments are other than temporary would result in a write down in the fair value of these investments. Such a write down would be recognized in our operating results. These securities are valued based on significant unobservable inputs (Level 3) as further discussed in Note 6 to the condensed consolidated financial statements.

The global credit and financial markets have recently experienced a period of unusual volatility and illiquidity. Our investment portfolio is structured to provide for investment maturities and access to cash that aligns with our anticipated working capital needs. However, if our liquidity needs should be accelerated for any reason in the near term, or investments do not pay at maturity, we may be required to sell investment securities in our portfolio prior to their scheduled maturities, which may result in a loss. As of March 31, 2009, our cash, cash equivalents and investment securities are presented net of a cumulative $1.6 million unrealized loss. This amount represents the difference between our amortized cost and the fair market value of the investments and is included in accumulated other comprehensive gain (loss). As of March 31, 2009, we had $131.6 million held in cash reserves or debt securities scheduled to mature within the next twelve months. In addition, we may receive an additional $11.5 million in gross proceeds from the sale of our common stock to Baker Brothers Life Sciences, L.P., or BBLS, and its affiliated investment funds if the sale is approved by our stockholders at our annual meeting of stockholders to be held on May 15, 2009 and the transaction is thereafter consummated.

At our currently planned spending rate, we believe that our financial resources, in addition to the expected fees and milestone payments earned under the dacetuzumab collaboration agreement with Genentech and other existing collaboration and license agreements will be sufficient to fund our operations into 2011. However, changes in our spending rate may occur that would consume available capital resources sooner, such as increased manufacturing and clinical trial expenses and the expansion of our sales and marketing organization preceding commercialization of a product candidate. Additionally, we may not receive the fees and milestone payments we currently expect under our collaboration and license agreements, including the dacetuzumab collaboration agreement with Genentech, which may shorten the timeframe through which we are able to sufficiently fund operations. We may seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements, public or private debt or equity financings. However, the global credit markets and the financial services industry have recently been experiencing a period of unusual volatility and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the U.S. government. These events have generally made equity and debt financing more difficult to obtain. As a result of these recent events and other factors, we do not know whether additional capital will be available when needed, or that, if available, we will obtain financing on terms favorable to us or our stockholders. If we are unable to raise additional funds when we need them, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs, which may adversely affect our business and operations.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) released FASB Staff Position FAS 157-4 (FSP 157-4) which amends SFAS No. 157 to provide . . .