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 II of this quarterly report on Form 10-Q, 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, brentuximab vedotin (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). Brentuximab vedotin is empowered by our proprietary antibody-drug conjugate (ADC) technology comprising highly potent synthetic drugs and stable linkers for attaching the drugs to monoclonal antibodies. Patient enrollment on this clinical trial was completed in August 2009. In addition, we have three other product candidates in ongoing clinical trials: lintuzumab (SGN-33), dacetuzumab (SGN-40) and SGN-70. We completed patient enrollment in an ongoing phase IIb clinical trial of lintuzumab in February 2009 and expect data from this trial in the first half of 2010. Dacetuzumab is being developed under a worldwide collaboration with Genentech, Inc., a wholly-owned member of the Roche Group. In October 2009, we announced the discontinuation of our phase IIb clinical trial of dacetuzumab in combination with Rituxan (rituximab) plus ifosfamide, carboplatin and etoposide (R-ICE) chemotherapy for patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) based on a determination that the trial would be unlikely to meet its primary endpoint of superior complete response rate in the dacetuzumab combination arm as compared to the placebo combination arm. The trial was closed based upon a recommendation by the Independent Data Monitoring Committee following a pre-specified interim analysis. Under our dacetuzumab collaboration with Genentech, dacetuzumab is being evaluated in combination with other agents in four ongoing phase Ib clinical trials for the treatment of lymphoma and multiple myeloma.

We have collaborations for our ADC technology with a number of leading biotechnology and pharmaceutical companies, including Genentech, Inc., Bayer Pharmaceuticals Corporation, CuraGen Corporation, a subsidiary of CellDex, 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 brentuximab vedotin, 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, 2009, we had an accumulated deficit of $383.6 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 brentuximab vedotin, including preparation for commercial manufacturing. We also expect to continue to invest in research, development and manufacturing as we move towards potential commercialization of our other product candidates. Our commitment of resources to the potential regulatory approval and commercialization activities for brentuximab vedotin 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 the amortization of payments already received and that are expected to be received from Genentech under our dacetuzumab collaboration agreement. Until such time as we may commercialize 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 nine months ended September 30, 2009, revenues increased 20% to $30.2 million, compared to $25.2 million for the same period in 2008. For the nine months ended September 30, 2009, total operating expenses increased 20% to $102.4 million, compared to $85.1 million for the same period in 2008. Our net loss for the nine-month period ended September 30, 2009 was $69.6 million, or $0.79 per share, compared to $54.9 million, or $0.70 per share, for the same period in 2008. As of September 30, 2009, we had $306.0 million in cash, cash equivalents and short-term and long-term investments, and $215.5 million in total stockholders' equity.

Results of Operations

Three months and nine months ended September 30, 2009 and 2008

Revenues.

Revenues by collaborator are summarized as follows:



                                                                    Three months ended                    Nine months ended
                                                                       September 30,                        September 30,
Collaboration and license agreement revenue ($ in thousands)     2009      2008     % change          2009       2008     % change
Genentech                                                      $  8,512   $ 6,850         24 %      $ 25,343   $ 20,488         24 %
Daiichi Sankyo                                                      481       354         36 %         1,296        354        266 %
Bayer                                                             1,000        63      1,487 %         1,221        981         24 %
MedImmune                                                         1,000       436        129 %         1,100      1,316        (16 )%
Millennium                                                          357        -         N/A (1)         695         -         N/A (1)
CuraGen                                                              -         50       (100 )%          134      1,137        (88 )%

Other                                                               296       326         (9 )%          407        892        (54 )%

Total                                                          $ 11,646   $ 8,079         44 %      $ 30,196   $ 25,168         20 %

(1) No amount in comparable period.

Genentech revenues increased 24% to $8.5 million in the third quarter of 2009 and 24% to $25.3 million for the first nine months of 2009 compared to the comparable periods in 2008. The increases 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 potential future product sales. The $60 million upfront payment received in 2007 and all reimbursement and milestone payments received by us 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 with Genentech. Revenues attributable to our ADC collaboration agreement with Daiichi Sankyo increased during both the three- and nine-month periods of 2009 and reflect both the earned portion of a $4.0 million upfront payment received by us under our ADC collaboration that began in July 2008 and reimbursable support and research materials provided to Daiichi Sankyo by us. Revenues attributable to our ADC collaboration agreement with Bayer increased during both the three- and nine-month periods of 2009 reflecting revenue earned from a milestone payment received in the third quarter of 2009 related to an Investigational New Drug (IND) filing with the FDA for Bayer's ADC product candidate. Revenues attributable to our ADC collaboration agreement with MedImmune increased for the three-month period of 2009, reflecting a milestone payment received by us triggered by MedImmune's initiation of a phase I clinical trial of its ADC product candidate in the third quarter of 2009. MedImmune revenues decreased for the first nine months of 2009 compared to the comparable period in 2008 due to the completion of the research term of the agreement in late 2008. Revenues attributable to our ADC collaboration agreement with Millennium reflect both the earned portion of a $4.0 million upfront payment received by us under our ADC collaboration that began in March 2009 and reimbursable support and research materials provided to Millennium by us. Revenues attributable to our ADC collaboration agreement with CuraGen decreased during both the three- and nine-month periods of 2009 compared to the comparable periods in 2008 reflecting revenue earned from a milestone payment triggered by CuraGen's initiation of a phase II clinical trial of its ADC product candidate in the second quarter of 2008. There have been no milestone payments during the first nine months of 2009 under this collaboration agreement.

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 and the level of activity we perform under our dacetuzumab collaboration with Genentech. 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. We expect the level of future support we will provide under the dacetuzumab collaboration with Genentech to decrease as a result of the discontinuation of our phase IIb clinical trial of dacetuzumab in combination with R-ICE chemotherapy for patients with DLBCL. A significant portion of our deferred revenue balance relates to our dacetuzumab collaboration with Genentech that is being recognized as revenue using a time-based approach through early 2013 as we fulfill our performance obligations under the dacetuzumab collaboration agreement.

Research and development.

Our research and development expenses are summarized as follows:

                                                  Three months ended                   Nine months ended
                                                    September 30,                        September 30,
Research and Development ($ in thousands)     2009       2008     % change         2009       2008     % change
Research                                    $  3,052   $  3,431        (11 )%    $  9,353   $ 11,252        (17 )%
Development and contract manufacturing         9,896      9,370          6 %       33,525     22,078         52 %
Clinical                                      13,433     13,410          0 %       42,042     35,465         19 %
Share-based compensation expense               1,882      1,500         25 %        5,301      4,567         16 %

Total research and development expenses     $ 28,263   $ 27,711          2 %     $ 90,221   $ 73,362         23 %

Research expenses decreased 11% to $3.1 million in the third quarter of 2009 and decreased 17% to $9.4 million in the first nine months of 2009 from the comparable periods in 2008. Research expenses have decreased in 2009, primarily reflecting lower personnel, lab supply and services costs in 2009. Development and contract manufacturing costs increased 6% to $9.9 million in the third quarter of 2009 and increased 52% to $33.5 million for the first nine months of 2009 from the comparable periods in 2008. The increases reflect increased manufacturing costs associated with supplying brentuximab vedotin for our clinical trials, including our pivotal trial in relapsed or refractory Hodgkin lymphoma initiated in the first quarter of 2009, and higher employee costs related to increased staffing levels. Clinical costs increased 19% to $42.0 million for the first nine months of 2009 from the comparable period in 2008. The increase resulted primarily from expanded clinical trial activities for brentuximab vedotin, as well as higher compensation costs related to an increase in staffing levels to support ongoing clinical trials. Share-based compensation expense increased 25% during the third quarter of 2009 and 16% during the first nine months of 2009 compared to the comparable periods in 2008. The increases were due to a larger number of optioned shares subject to expense recognition during the 2009 periods as a result of increased staffing levels and a higher average value per optioned share primarily attributable to increases in the weighted average stock price.

Certain amounts reported in comparable prior periods in the table above have been reclassified to conform with the current period presentation as it relates to the categorization of certain expenses.

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 other costs and overhead consisting of personnel, facilities and other costs not directly allocable to development programs:

                                                  Three months ended       Nine months ended     Five years ended
                                                    September 30,            September 30,         September 30,
Product Candidates ($ in thousands)                2009         2008        2009        2008           2009
Brentuximab vedotin (SGN-35)                    $     7,315   $  3,862   $   23,605   $  7,835   $          49,030
Dacetuzumab (SGN-40)                                  2,781      4,002       11,094     12,021              45,078
Lintuzumab (SGN-33)                                   1,535      4,620        7,302     10,215              33,586
SGN-70                                                   77        511          665      1,136              10,128
SGN-75                                                  408        924        1,822      1,889               5,485

Total third-party costs                              12,116     13,919       44,488     33,096             143,307
Other costs and overhead                             14,265     12,292       40,432     35,699             188,370
Share-based compensation expense                      1,882      1,500        5,301      4,567              20,202

Total research and development expenses         $    28,263   $ 27,711   $   90,221   $ 73,362   $         351,879

Our third-party costs for brentuximab vedotin increased during both the three months and nine months ended September 30, 2009 from the comparable periods in 2008 as a result of increased contract manufacturing to provide clinical drug product and expanded clinical trial activities, including our pivotal trial in relapsed or refractory Hodgkin lymphoma. We initiated our pivotal trial of brentuximab vedotin in the first quarter of 2009 and completed patient enrollment on this trial in the third quarter of 2009. We expect to complete patient treatment and follow up in the second half of 2010. Our third-party costs for dacetuzumab decreased during the three months and nine months ended September 30, 2009 from the comparable periods in 2008 reflecting lower contract manufacturing costs due to the completion of a dacetuzumab drug product resupply campaign. This was partially offset in the nine-month period ended September 30, 2009 by higher third-party clinical trial expenses. Genentech reimburses us for development activities that we perform under the dacetuzumab collaboration 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 decreased during the three and nine months ended September 30, 2009 from the comparable periods in 2008. The decreases reflect lower contract manufacturing costs due to the completion of our drug resupply campaign and lower clinical trial costs. Patient enrollment on the phase IIb trial of lintuzumab in combination with low-dose cytarabine was completed during the first quarter of 2009, and we expect to complete patient treatment and follow up in the first half of 2010. SGN-70 costs decreased during both the three months and nine months ended September 30, 2009 from the comparable periods in 2008. We are currently conducting a phase I clinical trial of SGN-70 in the treatment of autoimmune disease. SGN-75 costs decreased during both the three months and nine months ended September 30, 2009 from the comparable periods in 2008 reflecting higher costs for IND-enabling studies in 2008 partially offset by higher contract manufacturing activities in 2009.

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 for and potentially commercialize brentuximab vedotin. In October 2009, we announced the discontinuation of our phase IIb clinical trial of dacetuzumab in combination with R-ICE chemotherapy for patients with DLBCL, and we expect that our four ongoing phase Ib clinical trials of dacetuzumab will be completed by the end of 2010. As a result, we expect program costs for dacetuzumab to decrease in 2010 compared to 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. For example, we currently anticipate that data will be available for the phase IIb trial of lintuzumab in combination with low-dose cytarabine in the first half of 2010. If the results of this trial are positive, we expect that third-party costs associated with the lintuzumab program will increase.

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 Item 1A of Part II of this quarterly report on Form 10-Q. 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                 Nine months ended
                                                            September 30,                      September 30,
General and administrative ($ in thousands)           2009      2008     % change        2009       2008     % change
General and administrative, excluding share-based
compensation expense                                 $ 2,792   $ 2,761          1 %    $  8,943   $  8,883          1 %
Share-based compensation expense                       1,164       926         26 %       3,188      2,833         13 %

Total general and administrative expenses            $ 3,956   $ 3,687          7 %    $ 12,131   $ 11,716          4 %

General and administrative expenses increased slightly during the three- and nine-month periods ended September 30, 2009 from the comparable periods in 2008. The increases resulted primarily from an increase in share-based compensation expense included in general and administrative expenses. This resulted from a larger number of optioned shares subject to expense recognition during the 2009 periods as a result of increased staffing levels and a higher average value per optioned share primarily attributable to increases in the weighted average stock price.

Investment income, net.

Investment income, net decreased 52% to $0.7 million in the third quarter of 2009 and decreased 48% to $2.6 million in the first nine months of 2009 from the comparable periods in 2008. The decreases resulted from lower yields on investments during the 2009 periods.

Liquidity and capital resources.

                                               September 30,        December 31,
   Selected Financial Data ($ in thousands)        2009                 2008
   Cash, cash equivalents and investments     $       306,016      $      160,708
   Working capital                                    224,074              70,496
   Stockholders' equity                               215,547              79,018

                                                       Nine months ended
                                                         September 30,
                                                   2009                 2008
   Cash provided by (used in):
   Operating activities                       $       (45,564 )    $      (36,993 )
   Investing activities                              (109,877 )           (99,782 )
   Financing activities                               196,701             101,544

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 investments increased to $306.0 million at September 30, 2009, compared to $160.7 million at December 31, 2008. This increase primarily reflects net proceeds from public and private offerings of our common stock during the first nine months of 2009 totaling $192.1 million. We used $45.6 million during the first nine months of 2009 and $37.0 million during the first nine months of 2008 to fund our operating activities. Our working capital was $224.1 million at September 30, 2009, compared to $70.5 million at December 31, 2008, primarily reflecting the net proceeds from our common stock offerings and our emphasis on reinvesting proceeds resulting from the maturity of long term investment securities in short term investment securities. We have structured our investment portfolio to provide working capital as needed. 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 . . .