Cambridge Antibody Technology Group plc

Annual Report 2000

The foundation of CAT’s business is its unique antibody technologies, which it continues to develop and exploit. Based on this, CAT has established a position as a world leader in the development of human monoclonal antibodies as novel therapeutics and is applying its technology platform in the functional genomics world to assist the discovery of new drug targets.

Highlights of the Year

Financial

• Successful follow-on equity financing, raising £93 million before expenses and providing future financial security and flexibility.

Alliances

• Wide ranging strategic alliance signed with Pharmacia.

• Major alliance with HGS including co-development rights to develop human antibody therapeutics against genomics targets.

• Exclusive product licence granted to Wyeth-Ayerst to develop human monoclonal antibody products specific for the amyloid b peptide – widely implicated in Alzheimer’s disease.

• Wide ranging strategic partnership with Genzyme for the co-development of anti-TGFb monoclonal antibodies for non-ophthalmic uses.

• Option exercised by HGS to an exclusive development partnership on antibodies against BLyS, the B-Lymphocyte Stimulator implicated in several autoimmune diseases and certain cancers.

Products

• Phase III clinical trials initiated by BASF Pharma for D2E7, the human anti-TNFa monoclonal antibody for rheumatoid arthritis isolated and optimised by CAT in collaboration with BASF Pharma.

• J695, a human monoclonal antibody against IL12, isolated and optimised in a collaboration between CAT, BASF Pharma and Genetics Institute, entered Phase II clinical trials with BASF Pharma and Genetics Institute for the treatment of autoimmune diseases including rheumatoid arthritis.

• Good phase I/IIa one-year results for Trabio™, a human monoclonal antibody against TGFb2 as a potential treatment to prevent post-operative scarring in patients undergoing surgery for glaucoma. A multicentre phase II trial is ongoing.

• CAT-192, a human anti-TGFb1 monoclonal antibody being developed by CAT as a potential treatment in a range of scarring and fibrotic conditions, completed Phase I clinical trials.

• A new programme, CAT-213, an anti-eotaxin1 human monoclonal antibody, which is a potential treatment for allergic disorders, has entered pre-clinical development.

Chairman’s Statement

During the past year CAT has made excellent progress and reinforced its position as a world leader in the field of human monoclonal antibody therapeutics. CAT’s technologies are now well established and are being used by both the Company and its partners to develop a pipeline of novel medicines.

The Company’s business is driven from a proprietary platform of phage display technologies, which includes highly powerful functional genomics applications underpinned by strong informatics and efficient process industrialisation. As understanding of the human genome unfolds, we expect that CAT’s technologies will play a vital role in new drug target discovery, validation and the development of antibody drugs.

To maximise the commercial opportunities offered by our platform technologies, CAT has secured a number of high value strategic collaborations with leading pharmaceutical and biotechnology companies worldwide. During the year we signed new alliances with Pharmacia, Human Genome Sciences (HGS) and Genzyme. We are now able to negotiate deals with our partners that allow us to retain more potential value and, as an indication of partner confidence, all three of the collaborations signed during the year included an element of equity investment in CAT. Our alliance with Genzyme is particularly significant since it is the first of CAT’s alliances to include product candidates that CAT has itself discovered and taken through the pre-clinical stage into clinical trials.

In addition to product collaborations, CAT has formed research collaborations. In the year we entered into a partnership with the UK-based proteomics company Oxford GlycoSciences, for the development of antibody micro-arrays. Such collaborations, together with the advances we continue to make in house, will assist our efforts to remain at the forefront of technological advancement.

During the year we raised £93 million in a follow-on equity financing. In a volatile sector, we are now in a position to develop our future business strategies from a base of financial security, giving us improved operational flexibility.

The four CAT-derived products in clinical trials continue to make progress and, at the year end, there were more human monoclonal antibody drugs in clinical development derived by CAT than by any other company. The most advanced of these is D2E7, a human antibody for rheumatoid arthritis initially isolated and optimised by CAT in collaboration with BASF Pharma. D2E7 entered Phase III clinical trials in February and is the first fully human monoclonal antibody therapeutic product to do so. Phase II clinical trials have been initiated on Trabio™, a potential treatment to reduce scarring following glaucoma surgery. J695, isolated and optimised in collaboration with BASF Pharma and Genetics Institute, has now entered Phase II clinical trials for certain autoimmune diseases, including rheumatoid arthritis. Finally, CAT-192, a potential treatment for fibrosis and scarring, completed a Phase I clinical trial during the year.

In addition, CAT-213, a potential treatment for allergic disorders, moved into pre-clinical development, and is expected to progress to Phase I clinical trials in 2001. CAT’s initial collaboration with HGS has resulted in the identification of clinical candidate antibodies against
B-Lymphocyte Stimulator (BLyS) (a protein implicated in several autoimmune and neoplastic disorders) and it is expected that clinical trials will start in 2001.

We are pleased to report progress with two of our major strategic alliances. Within the collaboration with Wyeth-Ayerst, initiated in 1999, CAT has granted Wyeth-Ayerst an exclusive product licence to develop antibody therapeutics for the amyloid b peptide that has been widely implicated in Alzheimer’s disease. Additionally, HGS exercised an option to enter an exclusive development partnership on the target BLyS.

CAT also continued to strengthen and defend its patent portfolio, covering both technologies and product candidates, during the year.

As our business grows and matures, the Company must continue to invest in its people and its facilities. With our staff numbers increasing from 146 to 189 in the last year, and a plan to expand further within the next 12 months, we have reviewed our needs and have announced plans to move to larger purpose-designed facilities at Granta Park, South Cambridgeshire, UK. This move will be phased over two years, commencing in 2001 and will allow us to consolidate our operations, invest in new systems, further industrialise our processes and, most importantly, provide an environment in which the innovation and productivity of our staff can flourish.

We are grateful to all who have contributed to our success this year – our staff, our Board, our scientific advisory board and other expert advisors, our partners and our shareholders, and we look forward to further productive times ahead.

Peter Garland

The Technology to Unlock Potential

The power of our technology platform to discover and develop new therapeutic candidates is central to the Company’s value. We have continued to invest in our technology in order to maximise potential returns from the anticipated medical impact of the completion of the sequencing of the human genome. We have further developed our ribosome display technology. We also entered into our first collaborative agreement in the protein micro-array area, a technology which it is believed will have a role in detecting proteins in the future. Monoclonal antibodies are clearly established as one of the most exciting classes of novel therapeutics. Our clinical product development pipeline demonstrates that phage display is succeeding as the basis for isolating human monoclonal antibody drugs. Through our agreements with others we are working in the vanguard of monoclonal antibody drug discovery for a range of diseases and are exploring the newest opportunities in drug delivery systems. Our investment in developing technology, and our ability to deliver on the potential that our robust technology provides, has been fundamental to our maintaining a leadership position in the human antibody therapeutic field.

Speed through Automation

Investment in automation and process industrialisation is central to our strategy to overcome some of the drug discovery bottlenecks generated by the vast quantity of information emerging from genomics and functional genomic approaches. Antibodies as a class have a broad application in this field and, in addition, are amenable to generic processes. We are able to harness the critical competitive advantage of phage display to identify and create clinical candidates more rapidly than other competing technologies. Our screening capability now exceeds over 20,000 antibodies per month, and is growing rapidly.

The speed of CAT’s technology has been demonstrated within our first collaboration with Human Genome Sciences (HGS). We isolated over 10,000 antibody clones specific to the target protein identified by HGS and characterised in detail over 1,000 distinct monoclonal antibodies, identifying clinical candidates in less than six months. This should enable HGS to move at unprecedented speed into clinical development with a new antibody product candidate.

Developing Business Alliances

The three strategic alliances we secured during the year further validate our technology. The size and nature of these alliances also reflect the maturity of CAT’s position, with more value potentially retained through co-development or profit sharing. In each case our partners have demonstrated their confidence in the Company by making equity investments.

Our collaboration with Pharmacia links the companies’ capabilities in an initiative that is focusing initially on cancer. Our agreement with HGS is an expansion of our initial agreement and is dedicated to developing antibody therapeutics against genomics targets. Our partnership with Genzyme for the co-development of anti-TGFb monoclonal antibodies for non-ophthalmic indications is particularly significant as it is the first deal we have signed for clinical candidates developed in-house, further validating our discovery and development capabilities.

In addition, we have formed a strategic research collaboration with the UK-based proteomics company, Oxford GlycoSciences, for the development of protein chip technology.

Protecting Our Intellectual Property

CAT has a strong patent estate, giving it the commercial freedom to operate in its chosen area.

We continue to develop our patent portfolio and, where it is commercially prudent, we seek to defend our patents and contest infringements by others. Our core patents in the area of phage display (Winter II and McCafferty families) have been granted in Europe and were upheld in European opposition proceedings. A key patent in the McCafferty family has also been granted in the US.

In the US, new patents were granted on our chemisynthetic libraries and on our ProxiMol® technology. And we have also added patents relating to therapeutic applications.

The industry in which CAT operates is highly litigious, and CAT is currently engaged in litigation with companies in both Europe and the US. However, whatever the outcome of current litigation activity, CAT believes that its ability to operate its own technology will not be materially and adversely affected.

Maintaining Financial Security

Investing in our technologies and our clinical product development programmes requires financial resources. During the year, as the market sentiment towards biotechnology entered a more positive phase, we raised £93 million through a secondary equity financing.

The fundraising was structured to allow CAT to diversify its investor base, particularly overseas. Since that time there has been further internationalisation of our investor base and we now believe that over half of our shares are held by overseas investors.

Including investments made by our alliance partners and other sources, the total capital raised from equity during the year was £132 million. This has given us the operational flexibility and financial security needed to plan and build for the future.

Expanding for Future Demand

Investment in our technologies and process industrialisation will continue. The expansion into new purpose-designed facilities that will commence next year will enable us, in due course, to consolidate our operations and further invest in state-of-the-art equipment and systems.

We are committed to expanding our in-house clinical product development programmes as we build value through our drug pipeline. The skilled people necessary to meet the demands of our expanded in-house programmes and the resources committed to partnered programmes will mean an overall expansion to approximately 250 employees – this expansion has already begun.

Review of the Year

During the year, CAT’s business strategy and phage display antibody technologies have been further validated. The Company and its partners have continued to make progress in clinical trials with human monoclonal antibody therapeutic candidates. Investment in the technology base and continued process industrialisation continue to deliver results in drug discovery, both for in-house and partnered programmes. A number of significant alliances have been entered into during the year.

Technology platforms

The genomics revolution will provide thousands of new potential targets against which to make drugs. Exciting though this development is, gene sequence information alone cannot provide a cure for disease; rather it is the study of the function of the genes and the proteins they code for – or functional genomics – that can offer the answers.

Functional genomics is now one of the most powerful approaches being applied to new drug discovery, and CAT is at the forefront of this technological revolution. Antibodies can play a pivotal role in understanding the genome and exploring it for molecules with potential medical value: for example, as disease markers for diagnostic tests or as targets against which new drugs can be developed. CAT’s antibody approach to drug discovery is doubly powerful – not only does it use antibodies to help validate a potential molecular target in a disease process, but it also has the expertise to develop human monoclonal antibodies as potential therapeutic drugs.

CAT has pioneered the use of antibodies in functional genomics for the rapid analysis of certain proteins potentially associated with disease. The Company has created an extensive human monoclonal antibody library, containing over 100 billion distinct antibodies, using its phage display platform technology. Being fully human in nature, CAT’s monoclonal antibody therapeutics offer a significant improvement in potential safety and tolerability profile compared to monoclonal antibodies that contain mouse protein sequences.

During the year, CAT has invested in process industrialisation with the development and further automation of its systems that significantly increases the capacity for rapid target identification using antibody phage display technology.

Powerful, advanced integrated information systems are essential to maximise the application of the wealth of information emerging from modern drug discovery programmes. CONT1NUITY™, CAT’s integrated internet-enabled bioinformatics framework at the cutting edge of software engineering, has been enhanced during the year in response to the new technical demands and bottlenecks in genomics, proteomics and high throughput screening. This integrated knowledge-based drug discovery project management system is used both in-house and with our partners for the effective communication and analysis of complex proprietary data.

CAT continues to innovate, maintaining its technology leadership in the antibody field. CAT has made significant progress in the initial process development of its ribosome display system and has introduced this technology into its antibody discovery programmes. In the future, ribosome display will be used alongside phage display to provide a complementary route to lead antibody identification,  with the potential to increase the speed and efficiency of the process.

In September 2000, CAT announced the formation of a strategic research collaboration with the UK-based proteomics company, Oxford GlycoSciences (OGS), for the development of protein chip technology.  CAT and OGS will combine their respective world-leading technologies to develop new protein detection and screening technology based on antibody micro-arrays. The goal is to create a new generation of protein detection technology with the speed, throughput and sensitivity to serve the development of research tools, diagnostics and other applications. This is CAT’s first collaboration designed to help solve the technological and commercial challenges in developing protein chips and unlock the potential value in this new market.

At the other end of the drug development process, CAT published the results of a pre-clinical collaboration with Weston Medical, to evaluate a novel delivery system that could offer advantages in both product differentiation and patient compliance. Initial research results demonstrated that CAT-192, as a prototype human monoclonal antibody therapeutic, can be successfully delivered through the skin using Weston Medical’s Intraject® needle-free drug delivery system without compromising molecular integrity and biological activity. This collaboration opens new opportunities and potential applications for monoclonal antibody therapeutics where delivery using conventional needle injection would be inappropriate or inconvenient for patients.

Intellectual property

CAT protects its technology and product candidates through timely patent filings and appropriate defence. CAT has a strong patent estate, giving it the commercial freedom to operate within its chosen field.  Where necessary, CAT has sought to defend its position and protect its interests.

CAT’s position as a world leader in phage display technology is reflected in the breadth of the Company’s patent portfolio. CAT’s key patents fall into three main families: Winter II covers the production of large expression libraries of human antibody genes; McCafferty covers the method (phage display) developed by CAT to obtain the desired antibodies from these libraries; and the Griffiths patent covers the isolation of antibodies from these libraries which specifically recognise human ‘self’ antigens.

Last year CAT and Scripps settled a US infringement action between Winter II and the Scripps’ Huse Lerner patent family from which CAT gained worldwide commercial rights to the Huse Lerner patents. In Europe the first patents from the Huse Lerner family have been granted, the main patents are pending and CAT expects the first US patent to be granted in 2001.

Patents from both the Winter II and McCafferty families have been granted in Europe and upheld after opposition proceedings in the European Patent Office. Both CAT and MorphoSys have appealed against a modification of part of the Winter II patent that was requested by the Opposition Division at the European Patent Office. CAT has been advised that MorphoSys’ HuCAL Library is covered by the Winter II patent as modified by the Opposition Division. The independent claims of the McCafferty patent were upheld without amendment by the Opposition Division. This decision is appealable.

CAT is pursuing a patent infringement action against MorphoSys under the Winter II and McCafferty patents in the Munich District Court. This action was commenced in 1998 and was stayed by the German Court pending proceedings by the Opposition Division.

In April 1999, MorphoSys commenced an action against CAT in the US District Court of Washington DC concerning the Griffiths patent. The MorphoSys action asked the court to revoke CAT’s Griffiths patent and/or declare that MorphoSys does not infringe the patent. Following preliminary ‘Markman’ hearings in the second half of the year, a trial date has now been set for March 2001. In September 1999, MorphoSys commenced a similar action in respect of CAT’s US McCafferty patent. A trial date has been set for April 2002. CAT is vigorously defending both lawsuits and does not believe there is merit in the claims.

In July 2000, Crucell issued a writ against the Medical Research Council (MRC) in a Dutch national court, seeking a declaration that the Winter II patent was invalid or that Crucell did not infringe the claims of the patent. Subsequently, in September 2000, Crucell issued a second writ seeking an identical declaration in respect of the McCafferty patent. Pursuant to the terms of its agreement with the MRC, CAT is responsible for the defence of these proceedings. CAT intends to defend both these proceedings vigorously and does not believe that there is merit in these claims.

Whatever the outcome of current litigation activity, CAT believes that its ability to operate its own technology will not be materially and adversely affected.

In the US, patents were granted on chemisynthetic libraries, use of self-splicing introns with the loxP dual combinatorial system, and on CAT’s ProxiMol® technology.

During the year, CAT significantly strengthened its patent portfolio relating to TGFb antagonists. A European patent covering Trabio™ was granted, whilst notice of allowance was received for a patent on TGFb1-specific antibodies. In June, CAT purchased a US patent, covering use of TGFb antagonists in the central nervous system, from the Whittier Institute for Diabetes and Endocrinology. CAT’s recent deal with Genzyme includes rights to the ‘Dasch’ patents covering monoclonal antibodies which bind to TGFb1 and TGFb2. In addition, CAT has expanded the scope of its licence from the Burnham Institute to cover use of TGFb antagonists in dermal applications.

Partnerships and alliances

During the year, CAT has been successful in securing further major strategic alliances. The commercial potential of human monoclonal antibody drugs is being increasingly recognised by the pharmaceutical industry. Through its strategic alliances, CAT is in a position to access novel drug targets, thereby helping it to build a pipeline of human monoclonal antibody drugs.

In December 1999, CAT announced a multidisciplinary strategic alliance with Pharmacia (previously Searle), the pharmaceutical business of Monsanto Company, for the development of fully human monoclonal antibody-based therapeutic drugs across multiple disease areas, focusing particularly on the field of cancer. This was CAT’s largest alliance at the time with a headline potential deal size in excess of $200 million. Pharmacia made an equity investment of $12.5 million in CAT; $14.5 million was committed over three years in research funding; and CAT can receive up to a further $35 million in license fees, research funding and technical performance milestones over the potential five-year term of the research collaboration. If the expected number of human monoclonal antibody-based drugs are successfully developed and receive regulatory approval, the scale of the collaboration offers CAT the potential to receive an additional $150 million in clinical development and regulatory approval milestones. CAT will also receive royalties on sales of both antibody-based drugs and small molecule drugs developed by Pharmacia where CAT’s technology is used to validate a target.

This was followed in March 2000 by the announcement of a major alliance with Human Genome Sciences (HGS), dedicated to developing human antibody therapeutics against genomics-derived disease targets. This represented a significant broadening of CAT’s existing relationship with HGS, coming just six months after the initial collaboration. It included the equivalent of $67 million in up-front funding for CAT – $55 million in equity, and $12 million in licensing and research support fees.

HGS and CAT are combining their resources with the aim of developing a significant number of therapeutic antibody products. The agreement provides HGS with rights to use CAT technology to develop and sell human antibodies for therapeutic and diagnostic purposes. Also under the agreement, CAT will have access to selected HGS-derived sequence and biological information, and has the right to select up to 24 proprietary HGS antigens for pre-clinical development. CAT has rights to develop six such products on its own. HGS is entitled to clinical development milestones and royalty payments on these products. In addition, HGS has the option to share clinical development costs and to share the profits equally with CAT on up to 18 other products. Already progress is being made with this second CAT/HGS alliance and antibody drug candidates have already been identified for HGS against several therapeutic targets.

The rapid progress being made under the first CAT/HGS alliance was demonstrated immediately post-year end, when HGS exercised an option to enter into an exclusive development partnership on human antibodies against the target BLyS. BLyS, a B‑Lymphocyte Stimulator discovered by HGS, is a protein made by the human immune system, which stimulates the production of antibodies; its overproduction is anticipated to be a central component of several autoimmune and certain neoplastic (cancerous) disorders. The companies have worked in close collaboration to isolate over 10,000 antibody clones specific to BLyS and to characterise over 1,000 distinct human antibodies in detail. By focusing on high throughput functional screening of these antibody leads, clinical candidate antibodies have been demonstrated in record time. HGS plans to start clinical trials in 2001. Under the terms of this exclusive agreement, CAT will receive a product licence fee with the upside potential for future clinical milestones and royalties on product sales.

In September 2000 CAT announced that it has granted Wyeth-Ayerst an exclusive product licence to develop human monoclonal antibody products specific for the amyloid b peptide that has been widely implicated in Alzheimer’s disease. CAT received a licensing fee, with upside potential for future clinical milestone payments and royalties on product sales. CAT started its collaboration with Wyeth-Ayerst in March 1999 to apply CAT’s functional genomics and antibody engineering expertise to the discovery of new therapeutics based on targets identified by Wyeth-Ayerst.

Wyeth-Ayerst had previously announced an alliance with Elan Corporation to develop immunotherapeutic agents that may be used for the treatment of mild to moderate Alzheimer’s disease and possibly prevent the onset of the disease. Elan researchers have recently shown for the first time that certain monoclonal antibodies can cross the blood-brain barrier. Previously this had limited the prospect of using antibody-based therapy for neurodegenerative disorders. The agreement between CAT and Wyeth-Ayerst allows Wyeth-Ayerst and Elan to use CAT’s technology to explore further both preventative and potential therapeutic treatments for Alzheimer’s disease.

Also in September 2000, CAT announced a broad strategic alliance with Genzyme to develop and commercialise human monoclonal antibodies directed against TGFb for the treatment of scarring-related and other serious medical disorders. Both Genzyme and CAT had separately invested in anti-TGFb programmes – CAT in isoform-specific and Genzyme in pan-specific antibodies – and the collaboration offers the potential to strengthen and accelerate these anti-TGFb programmes. This agreement is of particular note as it is the first agreement that CAT has signed for product candidates it has developed through pre-clinical and into clinical trials and, as such, is a strong endorsement of CAT’s drug development capabilities.

As part of the deal, Genzyme has received an exclusive worldwide licence to CAT’s human antibodies directed against TGFb for all uses except ophthalmology. Additionally, Genzyme has received a non-exclusive worldwide licence from CAT for non-antibody antagonists of TGFb in exchange for milestones and royalties. In connection with the agreement, Genzyme made a $20 million equity investment in CAT.

The agreement is based on sharing costs and profits. CAT and Genzyme will focus initially on developing a fully human monoclonal antibody-based treatment for diffuse scleroderma, a chronic and life-threatening disorder in which the production of excess collagen leads to scarring of the skin and vital internal organs. Other potential clinical indications of anti-TGFb treatment include post-surgical scarring, fibrosis of all major organs such as the lungs, liver and kidneys, and certain forms of cancer. CAT has retained full rights for ophthalmology indications of its anti-TGFb monoclonal antibodies Trabio™ and CAT-192 and will continue the clinical development of Trabio™, currently in Phase II clinical trials.

Progress in clinical trials

Human monoclonal antibodies are now emerging as the preferred format for monoclonal antibody therapeutics – and in this CAT has been a pioneer. The Company can demonstrate solid progress in clinical development during the year, both in partnered and in-house programmes.

D2E7, the human monoclonal antibody that neutralises TNFa, made positive progress in the period as a potential treatment for rheumatoid arthritis. In November 1999, data presented at the American College of Rheumatology Conference (ACR) showed that, in a randomised, double-blind placebo-controlled study with 283 patients, D2E7 was significantly superior to placebo when given by self-injection at a dose of 20mg to 80mg once weekly over a three month period. In February 2000, CAT’s partner, BASF Pharma, announced that it had initiated Phase III trials of D2E7.

Further Phase I and II clinical data was presented at the European League Against Rheumatology meeting (EULAR) in June 2000 and at the ACR conference in October 2000. It is anticipated that further Phase II clinical data will be presented during 2001.

D2E7 is the first fully human monoclonal antibody to enter Phase III clinical trials – over 1,900 patients have been treated worldwide with D2E7 and over 1,500 patient years of treatment experience have been documented by BASF Pharma. Taken together with the three other human monoclonal antibodies developed with CAT’s technology that are also in clinical trials, this positions CAT’s technology as the leading technology platform in the development of human monoclonal antibodies as drugs.

Trabio™, a human monoclonal antibody against TGFb2, is being developed by CAT as a treatment to prevent post-operative scarring in patients undergoing surgery for glaucoma.

In May 2000, one-year results from the Phase I/IIa clinical trial of Trabio™ were presented at the annual meeting of the Association for Research in Vision and Ophthalmology (ARVO). Treatment with Trabio™ was associated with encouraging trends for a lower intraocular pressure together with a reduced need for subsequent intervention and topical anti-glaucoma treatment. These outcomes could represent evidence of clinically relevant anti-scarring activity, albeit based on low patient numbers.

A multicentre Phase II study commenced in October 1999. Recruitment of patients has been slower than expected and the trial is now scheduled for conclusion in early 2001. Further trials are expected to commence in mid 2001. It is CAT’s intention to develop Trabio™ further, thus enhancing its value as a candidate for partnering at a later stage.

Also in the ophthalmology area, encouraging pre-clinical studies of Trabio™ in the possible prevention of secondary cataracts have recently been presented at a major European ophthalmology research conference. Trabio™ also has the potential to be developed for other indications outside of the ophthalmic field, and these would form part of the collaboration with Genzyme.

J695 is a human monoclonal antibody that neutralises Interleukin 12, a pro-inflammatory molecule associated with many severe autoimmune disorders. J695 continues to progress in clinical development, having recently entered Phase II clinical trials, conducted by BASF Pharma and Genetics Institute, in autoimmune diseases including rheumatoid arthritis.

CAT-192 is a human anti-TGFb1 monoclonal antibody that has been developed by CAT as a potential treatment in a range of scarring and fibrotic conditions and is currently under investigation. CAT-192 entered Phase I clinical trials in November 1999. Results to be presented at the British Pharmacological Society in December 2000 show that CAT-192 appears to be well tolerated, with a prolonged half-life of around 40 days in healthy volunteers.

Under the agreement with Genzyme, the immediate focus is on systemic sclerosis/scleroderma. Phase II clinical trials, which are Genzyme’s responsibility, are anticipated to start in 2001. CAT-192 has the potential to be developed for a number of indications other than scleroderma.

CAT-213, a human anti-eotaxin1 monoclonal antibody with potential in the treatment of allergic disorders, moved into pre-clinical development during the year. Satisfactory progress is being made with toxicology and other pre-clinical studies and the programme is on target to enter Phase I trials during 2001.

CAT is working with HGS on a programme to develop anti-BLyS antibodies (ie: antibodies against B-Lymphocyte Stimulator, a protein which may play a crucial role in several autoimmune and neoplastic disorders). Following the isolation of over 10,000 antibody clones and the characterisation of over 1,000 antibodies in detail, clinical candidate antibodies have been demonstrated. HGS plans to start clinical trials in 2001.

Financial Review

CAT made a loss for the financial year ended 30 September 2000 of £5.2 million (1999 – £12.7 million). Net cash outflow for the financial year was £0.3 million (1999 – £11.8 million) and CAT raised £132.3 million (net of expenses) from the issue of equity (1999 – £0.5 million). Net cash and liquid resources at the year end were £155.6 million (1999 – £23.6 million).

Financing

CAT announced an equity fundraising in March 2000 aimed at raising £100 million. The offering was structured to allow the marketing of shares to international investors in the United States and continental Europe. In difficult market conditions the offering was successfully concluded in April, albeit that the amount raised was reduced from the original target of £100 million to £93 million (before expenses).

During the financial year and immediately following its end, CAT has issued equity to three corporate partners for cash in connection with collaboration agreements. These were to Monsanto Europe SA in January 2000 for £7.8 million, to Human Genome Sciences Inc. in April 2000 for £34.7 million and to Genzyme Corporation in October 2000 for £13.7 million (all before expenses). The Company also received £2.4 million in cash from the exercise of share options. The Company has progressed with preparations for a NASDAQ listing and hopes to announce the conclusion to this process in the near future. CAT does not currently anticipate the NASDAQ listing to be accompanied by an offering of its securities.

Results of operations

Revenues in the year totalled £10.1 million (1999 – £1.8 million). CAT’s historical profile of revenues has been irregular due to the nature of CAT’s business although latterly some collaborations are providing a more regular source of income. During the year CAT received a milestone payment from BASF following the entry of D2E7 into Phase III clinical trials and a licence exclusivity fee from Wyeth-Ayerst related to antibodies to amyloid b. Additionally, income was generated from fees receivable under ongoing collaborations with Wyeth-Ayerst, Pharmacia and Human Genome Sciences. Of monies received for such services, a proportion relates to services to be provided in future periods: such income has been deferred and will be recognised as the services are provided.

Operating expenses of £20.6 million (1999 – £16.3 million) reflect the increasing scale and complexity of CAT’s activities. Staff numbers have risen over the year from 146 to 189 at year end (the average over the year was 161) with a resulting impact on staff and associated costs. Further recruitment is ongoing and staff numbers are anticipated to build to approximately 250, with the greater part of that increase in the current year. There was a charge during the year of £0.5 million (1999 – £nil) for employer’s National Insurance payable on the exercise of certain options granted in December 1999 and a provision for the cost of shares to be allocated under an employee share scheme of £0.5 million (1999 – £0.2 million). External development costs were lower than in the comparative period due to the incidence of expenditure but significant increases are anticipated in future periods as CAT’s product pipeline matures. Expenditure during the year included payments for access to intellectual property totalling £1.1 million, principally to Burnham Institute and Integra Lifesciences (for rights relating to TGFb), Stratagene and The Whittier Institute for Diabetes and Endocrinology. Such payments in the comparative period amounted to £0.6 million of which the majority was to The Scripps Research Institute and Stratagene. Operating costs were also impacted by fees connected with current patent litigation, the total spend in the year on such litigation and patent oppositions being £1.7 million (1999 – £0.3 million). This level of expenditure on litigation is expected to continue in the current year.

The increase in investment income for the financial year reflects the increase in cash balances over the year, particularly from April 2000 onwards.

The high level of deferred income, the provision for employer’s National Insurance on certain options and the provisions for legal costs and share scheme allocations have all contributed to a substantial increase in creditors during the year.

Capital expenditure during the year was £1.0 million (1999 – £2.7 million), chiefly on laboratory equipment. The comparative year included £1.1 million for the purchase of the freehold interest in Cambridge House and residual fitting out costs. Capital expenditure is expected to increase significantly for the next two years as CAT’s new facilities at Granta Park are fitted out and equipped and further investment is made in process automation. CAT’s total expenditure on the planned facilities at Granta Park is expected to be of the order of £7 million.

As CAT continues to expand its operations and incurs associated capital expenditures, the Group anticipates significant net cash outflows during the next financial year. It is anticipated that CAT’s net cash burn rate for the current year, taking account of expected revenues, will be approximately £1.8 million per month.

Board of Directors

Professor Peter Garland MA MB PhD FRSE CBE (66) lu

Non-Executive Chairman

Appointed to the Board of CAT in 1990 and became Chairman in September 1995. Until 1999 he was CEO of the Institute of Cancer Research, where he continues as a Leverhulme Emeritus Fellow. During his career he has held a number of senior posts within academia and industry including Professor of Biochemistry at the University of Dundee, Principal Scientist and Head of Biosciences at Unilever Research Colworth Laboratory and Director of Research at Amersham International plc. In 1999 he was awarded the CBE for his services to cancer research and biotechnology.

David Chiswell BSc PhD (47)

Chief Executive Officer

A founder of CAT, Dr Chiswell has been responsible for the operational management of CAT from its inception. He joined the Board in December 1995 and took on the role of Chief Executive Officer in 1996. Prior to CAT he spent nine years at Amersham International plc where his main responsibilities included product development and research management. David’s research experience was gained at the MRC Institute of Virology in Glasgow, the department of Immunology and Microbiology at UCLA, California and in the department of Tumour Virology at the Imperial Cancer Research Fund in London.

John Aston MA ACA (46)

Finance Director

Joined the Board as Finance Director in September 1996 and saw CAT through a successful flotation in March 1997. Prior to CAT he was a Director in corporate finance with J Henry Schroder & Co. Ltd. John qualified as a chartered accountant with Price Waterhouse and also worked at the British Technology Group.

David Glover MA MB BChir MRCP FFPM (48)

Medical Director

Joined the Company in June 1994 as Vice President Medical Development and was promoted to the Board in July 1997. Since 1984 David’s experience has been gained at Schering Plough Ltd., where he was Medical Director, and at Merck Sharp & Dohme Ltd. where he was initially clinical research physician, then Director of Medical Affairs. He has broad experience in drug development, regulatory affairs, clinical research and medical marketing. Prior to 1984 he held a series of hospital positions in general medicine and cardiology including a clinical research fellowship at the University of Birmingham.

Kevin Johnson BSc PhD FRSA (40)

Research Director

Dr Johnson has been with CAT for ten years. Before being appointed to the Board in July 1997, he held the position of Vice President Research and prior to that Head of Research. He is responsible for CAT’s research programmes and has managed the discovery of all of CAT’s drugs in clinical trial, as well as the CAT Library and functional genomics platforms. He also serves on the Association of the British Pharmaceutical Industry’s Research and Development Committee. Prior to 1990 Kevin was a fellow of the University of Melbourne, Australia, and John Lucas Walker Senior Student at the University of Cambridge.

Professor Uwe Bicker MD PhD (55) u

Non-Executive Director

Joined the Board of CAT in February 1999. He is Executive Chairman of Dade Behring Inc. and a member of the board of management of Aventis Research & Technologies AG. Previously he was a board member of Boehringer Mannheim GmbH. He is a qualified physician, holds doctorates in medicine and chemistry, and has a teaching chair at the University of Heidelberg Medical School.

James Foght PhD MS BS (64) u

Non-Executive Director

Has been on the Board of CAT since 1996. He is currently a Managing Director of Prudential Vector Healthcare Group. He was President and co-founder of  Vector Securities International Inc. which was acquired by Prudential Insurance Company of America in 1999. Jim has considerable experience of the pharmaceutical and diagnostic industries having spent 23 years with El du Pont de Nemours in management and research, latterly as Managing Director of DuPont (UK). Jim also serves on the Board of Directors of Avocet Medical Inc.

Professor Sir Aaron Klug OM PRS ScD HonFRCP HonFRCPath Nobel Laureate (1982)(74) l

Non-Executive Director

Has been on the Board of CAT since the Company was founded in 1990. Prior to his retirement in 1996, he was Honorary Professor of Molecular Biology at the University of Cambridge and Director of the MRC Laboratory of Molecular Biology. Sir Aaron continues to lead an MRC research group on the regulation of gene expression. He is a Foreign Associate of the US National Academy of Science and is currently President of the Royal Society.

Paul Nicholson MB BS FFPM (63) l

\Non-Executive Director

Appointed to the Board of CAT in February 1999. He is a qualified physician and has extensive experience of the pharmaceutical industry, most recently as Senior Vice President of Worldwide Development at SmithKline Beecham. He retired from SmithKline Beecham at the end of 1998. He previously held senior positions at Monsanto, Hoechst and Sterling Winthrop.

John Stocker AO MB BS BMedSc PhD FRACP (55)

Non-Executive Director

Appointed to the Board of CAT in March 1995. He is Chairman of Sigma Company Ltd. and a Director of Telstra Corporation Ltd., Nufarm Ltd. and Circadian Technologies Pty. Ltd., companies listed on the Australian Stock Exchange. He was formerly Chief Scientist of Australia, Chief Executive of CSIRO Australia and Director of Pharmaceutical Research at Hoffmann-La Roche and Co in Basel. John is also Chairman of CAT’s Scientific Advisory Board.

l Remuneration Committee

u Audit Committee

Senior Executives

Day-to-day management of the Group is the responsibility of the Executive Group which comprises the Executive Directors and the following members of the senior management team.

Jason Avery BSc
Vice President Business Development
Joined CAT in September 1996 from Ernst & Young in Palo Alto, California where he advised and assisted companies with corporate finance and business development. He had previously established and developed Ernst & Young’s UK Life Sciences Corporate Finance and Advisory practice.

Nigel Burns BSc PhD
Vice President Pre-Clinical Development
Joined from British Biotech in October 1997, where he headed the Process Technology Division and played a significant role in developing their biotechnology-based products. Before joining British Biotech Nigel held scholarships in India and California.

Diane Mellett LLB JD
Vice President Legal Affairs and Company Secretary
Joined CAT in October 1997 from a USlaw firm, Sonnenschein. Diane qualified as a solicitor in London in 1986 before moving to Sonnenschein in Chicago and latterly as a founder member of their London office. She is also qualified as a US attorney admitted to the
Illinois Bar.

Scientific Advisory Board

Members of the Scientific Advisory Board during the year were:

Dr John Stocker AO MB BS BMedSc PhD FRACP
Chairman and Non-Executive Director of CAT.

Dr David Clough BSc PhD
Director of Research, Roche Discovery Welwyn.

Professor Jon Cohen FRCP FRCPath FRCPE
Professor of Infectious Diseases, Imperial College School of Medicine, Hammersmith Hospital, London.

Professor Douglas Fearon MD FRCP
Wellcome Trust Professor of Medicine, University of Cambridge.

Professor Sir Aaron Klug OM PRS ScD Hon FRCP
Hon FRCPath Nobel Laureate (1982)
Non-Executive Director of CAT.

Dr César Milstein CH FRS HonFRCP HonFRCPath
Nobel Laureate (1984)
Formerly Deputy Director of Laboratory of Molecular Biology, Cambridge.

Dr Michael Neuberger FRS
Senior staff member of Laboratory of Molecular Biology, Cambridge.

Professor Sir Keith Peters FRS FRCP FRCPath
Regius Professor of Physic, University of Cambridge.

Dr Terence H Rabbitts FRS
Joint Head of Division of Protein & Nucleic Acid Chemistry from the MRC’s Laboratory of Molecular Biology, Cambridge. Chairman of CAT’s Scientific Advisory Board from 1990 to 1997.

 
Directors’ Report

The Directors present their annual report on the affairs of the Group, together with the financial statements and auditors’ reports, for the year ended 30 September 2000.

Principal activities

The principal activity of the Group continues to be research, development and exploitation of products in the field of molecular engineering. A review of current operations and expected future developments is given on pages 1 to 27.

Results and dividends

The Group’s retained loss for the year amounted to £5,161,000 (1999 – loss £12,731,000) and will be transferred to the profit and loss reserve. The Directors do not recommend the payment of a dividend.

As the Group is involved in the early stages of developing biopharmaceutical products, it is unlikely that dividends will be paid for a number of years.

Supplier payment policy

The Group’s policy is to settle terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of the terms of payment and abide by the terms of payment. The Group’s trade creditors at the year end were equivalent to 32 days of purchases (1999 – 37), based on an average over the year.

Directors

The Directors, all of whom served throughout the year, are as follows:

Executive:     Non-Executive:

J C Aston     U Bicker

D J Chiswell     J L Foght

D R Glover     P B Garland

K S Johnson     Sir Aaron Klug

          P A Nicholson

          J W Stocker

Details of Directors’ interests in, and options over, the share capital of the Company and a description of the share schemes operated by the Company are given in the Remuneration Report on pages 37 to 40.

Substantial shareholdings

On 27 November 2000 the Company had been notified,
in accordance with Section 198 to 208 of the Companies Act 1985, of the following interests in the ordinary share capital of the Company:

(i) Includes interests of associated funds or funds managed.

Employees

The Group places considerable value on the involvement of its employees and continues to keep them informed on matters affecting them as employees and on the various factors affecting CAT’s performance. This is achieved through both formal and informal meetings. All employees are eligible for the grant of options and, after a qualifying period of service, participation in the All-Employee Share Ownership Plan. Details of these arrangements are given in the Remuneration Report.

Health, safety and environmental issues

The Group is committed to upholding the highest standards of health and safety and environmental protection for the benefit of its employees, the public at large and the environment.

Charitable donations

During the year the Group made charitable donations of £466 (1999 – £850). There were no political contributions (1999 – none).

Litigation

As previously reported, following certain share issues by Cambridge Antibody Technology Limited, Continental Venture Capital Limited (‘CVC’) issued proceedings in the State of New York claiming that it is entitled to anti-dilution shares (equivalent to 25,790 ordinary shares of 10p). If CVC succeeds then the Directors would be obliged to issue anti-dilution shares to all similarly situated participants (approximately 763,000 ordinary shares of 10p). Both parties issued cross motions for summary judgement in 1999, which were denied in May 2000. The proceedings are continuing and the Directors continue to believe, on the basis of legal advice they have received, that the proceedings have no merit.

As previously reported, in 1998 CAT commenced a patent infringement action in the Munich District Court against MorphoSys of Germany who it believes is infringing two of the Group’s key patents – Winter et al and McCafferty et al. The action was stayed by the German Court pending proceedings by the Opposition Division of the European Patent Office. The Opposition Division upheld the Winter II and McCafferty patents. Both CAT and MorphoSys have appealed the decision with respect to Winter II and CAT expects proceedings to continue on appeal with respect to McCafferty. CAT is currently considering whether to request the Munich District Court to hear its action prior to the conclusion of the appeals of the Winter II and McCafferty actions.

In April 1999, MorphoSys commenced an action against CAT in the US District Court of Washington DC concerning the Griffiths patent. The MorphoSys action asked the court to revoke CAT’s Griffiths patent and/or declare that MorphoSys does not infringe the patent. Following preliminary ‘Markman’ hearings in the second half of the year, a trial date has now been set for March 2001. In September 1999, MorphoSys commenced a similar action in respect of CAT’s US McCafferty patent. A trial date has been set for April 2002. CAT is vigorously defending both lawsuits and does not believe there is merit in the claims.

In July 2000, Crucell issued a writ against the Medical Research Council (MRC) in a Dutch national court, seeking a declaration that the Winter II patent was invalid or that Crucell did not infringe the claims of the patent. Subsequently, in September 2000, Crucell issued a second writ seeking an identical declaration in respect of the McCafferty patent. Pursuant to the terms of its agreement with the MRC, CAT is responsible for the defence of these proceedings. CAT intends to defend both these proceedings vigorously and does not believe that there is merit in these claims.

CAT believes that its ability to operate its own technology will not be materially and adversely affected by the outcome of the German, US and Dutch actions.

Annual General Meeting

Notice of the Annual General Meeting and explanatory notes on the proposed resolutions are given in the notice to shareholders on pages 62 and 63.

Auditors

The Directors will place a resolution before the Annual General Meeting to reappoint Arthur Andersen as auditors for the ensuing year.

By order of the Board

Diane Mellett

Secretary

27 November 2000

Corporate Governance

The Combined Code

The Board is committed to the highest standards of corporate governance and is accountable to shareholders for the good governance of the affairs of the Group. In accordance with the Combined Code on Principles of Good Governance and Code of Best Practice (‘the Combined Code’) the Board must report to shareholders:

• how the principles of good governance set out in the Combined Code are applied; and

• that the Group complies with the best practice provisions set out in the Combined Code, or where it does not, provide an explanation.

The Board of Directors

The Board of Directors currently consists of four Executive Directors and six independent Non-Executive Directors. Their biographies are set out on pages 28 and 29. The Board meets formally six times a year and there is frequent contact between meetings as is required to further the Group’s business. The Board’s duties are to (inter alia):

• determine and monitor group strategy (business, commercial and scientific) and its implementation;

• maintain and review a sound system of internal control to safeguard shareholders’ investments and the Group’s assets;

• consider and approve annual and interim financial statements, including the associated review of the position and prospects of the Group;

• approve and monitor progress against annual budgets and working capital forecasts; and

• consider and approve major projects or other commitments of resources and any substantial transactions.

The roles of Chairman and Chief Executive Officer are respectively to run the Board and to take executive responsibility for running the Group’s business. Accordingly these offices are separate.

All Directors bring independent judgement to bear on matters of strategy, resources, performance and standards of conduct and appropriate training is made available to Directors to assist them in the discharge of their duties as required. To enable them to fulfil their duties all Directors receive detailed monthly reports on the current and prospective activities of the Group and have full and timely access to any other relevant information they may require.

All Directors also have direct access to the services and advice of the Company Secretary who is responsible for ensuring that relevant procedures, rules and regulations are complied with. The appointment and removal of the Company Secretary is determined by the Board as a whole. Non-Executive Directors may, at the Group’s expense, seek independent legal advice on any matter relating to the discharge of their duties.

Although all Directors are equally accountable legally, the Non-Executive Directors have a particular responsibility to ensure that actions proposed by the Executive Directors are critically examined and thoroughly discussed. The Non-Executive Directors therefore fulfil a vital role in corporate accountability. The Board considers that all of the Non-Executive Directors are independent of management and free from any business or other relationship which could materially interfere with the exercise of independent judgement.

J W Stocker is the Senior Independent Non-Executive Director other than the Chairman, to whom any relevant concerns may be addressed.

The remits and memberships of all Board Committees are set out below.

The Audit Committee

The Audit Committee consists of three Non-Executive Directors, currently J L Foght (Chairman), U Bicker and P B Garland. The Committee meets as appropriate (but not less than twice a year) to:

• monitor and make recommendations on the relationship with the external auditors including the nature and scope of the audit and any matters arising;

• review the annual report and interim financial statement before submission to the Board, including a consideration of the accounting policies adopted and any significant areas of judgement;

• monitor compliance with statutory and Financial Services Authority requirements for financial reporting; and

• monitor the system of internal control maintained by the Group to safeguard shareholders’ investments and the Group’s assets.

Provision is made for the Committee to meet at least once a year with the external auditors in the absence of the Group’s executive management.

The Audit Committee will also give periodic consideration to the establishment of an internal audit function. Given the nature and scale of the activities of the Group, such a function is not currently considered necessary.

The Remuneration Committee

The Remuneration Committee consists of three Non-Executive Directors, currently P A Nicholson (Chairman), P B Garland and Sir Aaron Klug. The Committee meets when required (as determined by its members) to:

• make recommendations to the Board on the framework of executive remuneration in accordance with current best practice;

• determine the remuneration of the Group’s Executive Directors on behalf of the Board;

• maintain an overview of the policy in relation to the remuneration and conditions of service of other senior staff; and

• determine policy and practice in relation to equity participation schemes.

The remuneration of the Non-Executive Directors is determined by the Board as a whole. No Director votes on his own remuneration. The Committee submits an annual report to the Board which in turn reports to the shareholders. The Remuneration Report is included on pages 37 to 40 and includes further explanation as to how relevant principles of the Combined Code are applied and the extent to which relevant provisions are complied with.

The Nominations Committee

When necessary a Nominations Committee will be formed to consider candidates of suitable knowledge, experience and calibre for consideration by the Board as potential Directors of the Company. The Committee would consist of three Directors although any Director would be able to attend meetings. Candidates would be considered by the full Board before appointment.

The Scientific Advisory Board

The role of the Scientific Advisory Board is to assist the Group with the assessment of its existing and potential technologies and research and development programmes and to provide scientific advice to executive management and the Board. The composition of the Scientific Advisory Board, which includes two Non-Executive Directors, is given on page 30.

The Executive Group

Operational decision making is delegated to the Executive Group, which is a committee consisting of the Executive Directors and Vice Presidents.

Business strategy

The Group’s objective is to build a diverse development pipeline of human monoclonal antibody-based drugs. It aims to do this in partnership with other companies and to build a range of early and late stage partnerships to balance risk and reward.

The Group’s own development activity focuses on the ‘value-adding’ stages from target identification through to clinical demonstration of efficacy for an antibody-based drug. In general, the Group will seek partners for further clinical trials and to gain marketing approval.

Internal control

The Board of Directors is responsible for identifying, evaluating and managing the significant risks faced by the Group. The Board is also responsible for ensuring that the Group maintains a sound system of internal controls to address those risks and, therefore, to safeguard shareholders’ investments and the Group’s assets.

The Board has established a formal and continuous process for identifying and evaluating the significant risks faced by the Group. Identification and evaluation of risks is an integral part of the Board’s business planning process. The Board regularly reviews the effectiveness of the process of risk identification and evaluation.

The Board continuously reviews the effectiveness of the Group’s system of internal controls to manage risk. Monitoring internal controls includes scrutiny of reports prepared by management and in-depth review and follow up of any weaknesses identified. As part of this process the Audit Committee considers and reports to the Board on any matters arising from the work undertaken by the external auditors and undertakes a periodic review to consider the need to establish an internal audit function.

In addition, the Board has undertaken a specific annual review to evaluate the effectiveness of the process of identifying and evaluating the effectiveness of internal controls to support a statement on compliance. The review covered all controls including financial, operational and risk management controls and risk management.

There are inherent limitations in any system of internal control. Internal controls can only manage and not eliminate the risk of a failure to achieve business objectives or of other losses. Internal controls can therefore provide only reasonable, and not absolute, assurance against material misstatement or loss.

The key features of the internal financial control system that operated throughout the period covered by the financial statements are as follows:

• Control environment
The Group has developed an organisational structure with clearly established responsibilities and lines of accountability. The management of the Group actively promotes the values of integrity and professionalism and the maintenance of high
ethical standards.

• Identification and evaluation of risks
The composition of the Board and of senior management is aimed at providing an appropriate range of knowledge, skill and experience in scientific, medical and commercial matters. Key risk areas are reviewed regularly by executive management and the Board.

• Financial information
The Group prepares detailed budgets and working capital projections annually for a three year period based on an evaluation of group strategy and plans. Detailed management accounts are prepared monthly which include a comparison to budget and analysis of variances.

• Control procedures
Detailed policies and accounting and administrative procedures have been established covering all significant areas. They feature documented approval subject to limits of authority. Any major expenditure or commitment of resources must be approved by the Board.

• Management of liquid resources
The Group’s liquid resources are managed on a discretionary basis by a third party. Funds are placed with a variety of deposit-taking institutions and invested in money market instruments. The third party operates within strict limits set by the Board as to maturity and credit exposure to any single institution.

• Monitoring
The Board monitors the activities of the Group at a strategic level through the management accounts and other reports on current activities and plans. Executive management regularly monitor financial and operational performance in detail and take any necessary corrective action.

The Audit Committee reviews the operation and effectiveness of this framework on a regular basis.

Communication with shareholders

The Board attaches a high priority to effective communication with all shareholders. The Annual Report and half year Interim Report are sent to all shareholders. The Company meets regularly with institutional shareholders and there is an opportunity for individual shareholders to question the Chairman at the AGM.  In addition the Company has established a web site (www.cambridgeantibody.com) to provide additional background information and access to press releases issued by the Group.

Statement of compliance

Having considered the provisions of the Combined Code, the Board believes that the Company’s practices for the year complied with the best practice provisions of the Combined Code.

One Non-Executive Director holds options to subscribe for shares in the Company. Those options, particulars of which are given in the Remuneration Report, were granted prior to listing on the London Stock Exchange. Nevertheless, the Board is satisfied that the Non-Executive Director exercises independent judgement and is independent of management.

Going concern

The Group is engaged in the early stages of developing biopharmaceutical products and expects those activities to continue to absorb liquid resources until such products begin to be commercialised.

After having made relevant enquiries, the Directors have a reasonable expectation that the Company and the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Directors’ responsibilities

Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and Group and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for the presentation of a balanced and understandable assessment of the Group’s position and prospects. This includes the whole content of the Annual Report and extends to the Interim Report, press releases and all other price sensitive information.

Auditors’ responsibilities

Company law requires auditors to form an independent opinion on the financial statements presented by the Directors based on their audit and to report their opinion to the shareholders. The Companies Act 1985 also requires auditors to report to the shareholders if the following requirements are not met:

• that the companies in the Group have maintained proper accounting records;

• that the financial statements are in agreement with the accounting records;

• that the Directors’ emoluments and other transactions with Directors are properly disclosed in the financial statements; and

• that the auditors have obtained all the information and explanations which, to the best of their knowledge and belief, are necessary for the purpose of their audit.

The auditors’ opinion does not encompass the Directors’ report on pages 31 and 32. However, the Companies Act 1985 requires auditors to report to the shareholders if the matters contained in the Directors’ report are inconsistent with the financial statements.

Remuneration Report

The Board presents its annual report on the remuneration policies and practice of the Group.

Although the Remuneration Committee is delegated the responsibility of dealing with executive remuneration, its recommendations are presented to the full Board for approval. However, no Executive Director votes on any aspect of executive remuneration.

The members of the Remuneration Committee are P A Nicholson (Chairman), P B Garland and Sir Aaron Klug.

Best practice

The Group has complied during the year with Section 1B ‘Directors’ Remuneration’ of the provisions of the Combined Code and with Schedules A and B to the Combined Code.

Executive Directors

Objective The objective is to develop remuneration packages which enable the Group to attract and retain Executive Directors of the necessary calibre to run the Company successfully. Such packages include incentives designed to motivate individuals to perform at the highest level and to advance the interests of the shareholders both in the short and longer term by the achievement of the strategic objectives of the Group.

Remuneration policy

Basic salary
Salaries are reviewed annually with effect from 1 October. In determining the appropriate salary the Committee considers the abilities and experience of the individual, and the requirement to attract, retain and motivate persons of the required quality whilst avoiding paying more than is necessary for that purpose. The Committee also gives consideration to independent comparator information for companies in the same and similar industry sectors, taking account of relative performance.

The Committee also has regard to pay and conditions for all employees, particularly when considering salary increases.

Performance-related remuneration
Executive Directors are eligible for performance-related remuneration based on the attainment of specific performance criteria which are established annually at the commencement of the financial year. Those criteria are intended to be stretching and are structured to encourage and reward high levels of achievement consistent with the interests of shareholders. Performance-related remuneration was payable to a maximum of 30% of basic salary (except the Chief Executive, who was eligible to receive a maximum of £60,000). For the current financial year performance-related remuneration is payable to a maximum of 45% of basic salary.

Benefits
These principally comprise the provision of a car allowance and private medical insurance which is payable or reimbursed to a maximum of £1,550 per annum.

Options
Options may be granted if considered appropriate. During the year the Executive Directors received options as detailed in the table on page 39. These options were granted at the then prevailing market price. Exercise of the options is subject to the attainment of objective performance criteria.

Pensions
The Group contributes 10% of basic salary to a personal pension scheme in the name of each Director. The Director contributes 6% or such other amount as allowed by limits specified by the Inland Revenue. No benefit other than basic salary is pensionable, other than in exceptional circumstances.

Non-Executive Directors

Fees payable to Non-Executive Directors are determined by the Board. However, individual Non-Executive Directors do not determine their own fees. Non-Executive Directors have the option of taking part of their remuneration in Company shares. The Chairman’s fees were £40,000 (of which £10,000 may be taken in shares). Other Non-Executive Directors receive £20,000 (of which £5,000 may be taken in shares). All Non-Executive Directors have committed to take their maximum entitlement of shares. The shares are issued at market price immediately following the announcement of final results for the year. During the period J W Stocker received additional Directors’ fees of £12,000 for his services as Chairman of the Scientific Advisory Board. Sir Aaron Klug received additional consultancy fees of £5,000 for his services as a member of the Scientific Advisory Board.

J W Stocker currently holds options to subscribe for shares in the Company. The options were granted when the Group was privately owned and before the formation of the Remuneration Committee. The Board does not consider that the holding of the options affects his independence. None of the Company’s Non-Executive Directors participate in the Group’s current share option schemes.

Notice periods

The service contracts are terminable by either party with a notice period of one year for Executive Directors and six months for Non-Executive Directors.

In addition, Directors appointed by the Board must present themselves for re-election at the first General Meeting following their appointment and all Directors must submit themselves for re-election at least once every three years.

Directors’ emoluments

The emoluments of the Directors who served during the year were as follows:

Note
(i) Of the fees for the services of J L Foght £10,000 was paid to Prudential Vector
Healthcare Group.

Share participation schemes

Objectives
The Board believes that share participation schemes are an important element in attracting, rewarding and motivating the Group’s employees at all levels and aligning their interests with those of the shareholders. All employees of the Group participate in the Company Share Option Plan, all were eligible to join the Staff Share Scheme (after an initial period of service) and all will be eligible to join the All-Employee Share Ownership Plan (after an initial period of service).

Old share option schemes
Cambridge Antibody Technology Limited (‘CAT Limited’) previously operated two unapproved share option schemes and one Inland Revenue approved share option scheme. Options granted under the unapproved schemes included options to consultants and Non-Executive Directors. These schemes were closed prior to flotation. Options under these schemes have either been exchanged for equivalent options over the shares of the Company or the option holders have entered into share exchange option agreements whereby shares allotted in CAT Limited on exercise are immediately exchanged for shares in the Company. The tabulation of options in this report and in the notes to the financial statements reflect the effective numbers and exercise prices of options over shares in the Company. Certain options were granted in one scheme in parallel with options in a different scheme under arrangements whereby the exercise of options in one scheme would cause a corresponding number of options to lapse in the other scheme. The effect of these linked options is to provide a choice of two alternative schemes under which options can be exercised. Where relevant, pairs of linked options are counted as a single option.

Company Share Option Plan
In 1997 the Company established the Company Share Option Plan (‘CSOP’) which consists of two parts. The CSOP part A is Inland Revenue approved and the CSOP Part B is unapproved. All employees of the group, including Executive Directors, are eligible for the grant of options under these schemes. Options granted under part A are subject to limits set by the Inland Revenue and the balance is granted under part B. The total of shares under option to each participant is subject to limits and the exercise of options is subject to the attainment of objective performance criteria determined by the Remuneration Committee.

Directors’ share options

Notes
(i) Includes linked options.
(ii) Of these options 50,000 for J C Aston and 150,000 for D J Chiswell were subject to the condition that CAT’s average share price achieved certain values between
£8 and £9. During the year this condition was satisfied.
 (iii) These options are exercisable subject to the condition that the proportionate increase in the closing price of shares in the Company over a specified period must exceed the proportionate increase in the total return for the FTSE All Share Index. The specified period begins on the date of grant and ends between the third and fourth anniversary of the date of grant.

The closing market price of the ordinary shares in the Company at 30 September 2000 was £40.25 and the range during the year was £1.99 to £49.75.

Staff Share Scheme
In 1997 the Company established the Staff Share Scheme. The scheme provides for the purchase of, or subscription for, shares in the Company out of funds provided by participating group companies and is an Inland Revenue approved profit sharing scheme. The shares are appropriated to participating employees in accordance with objective formulae set out in the trust deed of the scheme. Participating employees are employees or full time Directors of the Group who have at least six months service in the preceding financial year. On 3 December 1999 500 shares were allocated to each of 132 eligible employees and full-time Directors in respect of the year ended 30 September 1999.

All-Employee Share Ownership Plan
The Company intends to establish an Inland Revenue approved All-Employee Share Ownership Plan (‘AESOP’) which will comply with the Finance Act 2000. All of CAT’s employees and full-time Directors employed on 1 April in the preceding financial year will be eligible to participate. The AESOP will be established with three elements: Free shares, partnership shares and matching shares. Free shares can be appropriated to employees with a market value of up to £3,000 per employee per year. The shares will be offered on similar terms to all eligible employees and may include a performance related element. Partnership shares can be purchasedby employees out of their pre-tax salary up to £1,500 (or 10% of salary if lower) per year. Where employees purchase partnership shares they can be awarded additional free shares on a matching basis. The free shares and matching shares will be forfeited if the employee leaves the Group within 12 months of the date of grant.

Highest paid Director

K S Johnson was the highest paid Director. His aggregate remuneration comprised a gain on exercise of share options of £2,251,200 and other emoluments of £159,300, giving a total of £2,410,500 (1999 – D J Chiswell £1,074,200, including a gain of £880,100).

Directors’ shareholdings

The Directors who held office during the year had the following beneficial interests in the shares of the Company at 30 September 2000:

The interests have remained unchanged since the year end.

By order of the Board

Diane Mellett
Secretary
27 November 2000       

Auditors’ Report

To the shareholders of Cambridge Antibody Technology Group plc

We have audited the financial statements on pages 42 to 61 which have been prepared under the historical cost convention and the accounting policies set out on pages 46 and 47. We have also examined the amounts disclosed relating to the emoluments, share options and pension benefits of the Directors which form part of the remuneration report on pages 37 to 40.

Respective responsibilities of directors and auditors

The Directors are responsible for preparing the Annual Report including, as described on page 36, preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority, and by our profession’s ethical guidance.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors’ remuneration and transactions with the Company and the Group is not disclosed.

We review whether the corporate governance statement on pages 33 to 36 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Financial Services Authority and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Company’s corporate governance procedures or its risk and control procedures.

We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

Basis of audit opinion

We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the Company and of the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group at 30 September 2000 and of the Group’s loss and cash flows for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

Arthur Andersen
Chartered Accountants and Registered Auditors
Betjeman House
104 Hills Road
Cambridge CB2 1LH

27 November 2000

Consolidated Profit and Loss Account

The losses for both years arise from continuing operations.

Consolidated Statement of Total Recognised Gains and Losses

The accompanying notes are an integral part of this consolidated profit and loss account and consolidated statement of total recognised gains and losses.

Consolidated Balance Sheet

The accompanying notes are an integral part of this consolidated balance sheet.

Company Balance Sheet

The accompanying notes are an integral part of this Company balance sheet.

Signed on behalf of the Board

John Aston
Director
27 November 2000

Consolidated Cash Flow Statement

The accompanying notes are an integral part of this consolidated cash flow statement.

1 – Accounting policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the periods covered by this report is set out below.

Basis of accounting
The financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards.

Basis of consolidation
The Group financial statements consolidate the financial statements of Cambridge Antibody Technology Group plc and its subsidiary undertakings, drawn up to 30 September each year.

The acquisition of Cambridge Antibody Technology Limited (‘CAT Limited’), by way of share for share exchange on 20 December 1996 was accounted for as a group reconstruction in accordance with Financial Reporting Standard Number 6. Consequently, consolidated financial information is presented as if the Company has always owned CAT Limited. Otherwise, the results of subsidiaries acquired are consolidated for the periods from the date on which control is passed. Such acquisitions are accounted for under the acquisition method.

The profit for the financial year dealt with in the accounts of Cambridge Antibody Technology Group plc was £4,454,000 (1999 – £1,110,000). As provided by S.230 of the Companies Act 1985, no company profit and loss account is presented in respect of Cambridge Antibody Technology Group plc.

Goodwill
Goodwill, representing the excess of fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised as an asset on the balance sheet. It is amortised over its useful economic life, subject to reviews for impairment where necessary. Goodwill previously written off directly against reserves remains so eliminated.

Turnover
Turnover principally consists of licence fees, milestone payments and fees for research and development services provided in the normal course of business, net of trade discounts, VAT and other sales-related taxes. Fees for research and development services are recognised as the services are provided. Licence fees and milestones are recognised when received, unless creditable against research and development services to be provided in the future, in which case an appropriate proportion of the amount received is deferred and recognised over the period during which the services are rendered.

Government grants
Grants of a revenue nature are credited to the profit and loss account as the related expenditure is incurred.

Taxation
Corporation tax payable is provided on taxable profits at the current rate.

Research and development
Research and development expenditure is written off as incurred.

Pension costs
The Group operates a group personal pension plan which is a defined contribution scheme. The amount charged to the profit and loss account in respect of pension costs is the Group’s contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet.

1 – Accounting policies continued

Intangible assets
Purchased intangible assets (excluding research and development costs and goodwill) are capitalised as assets on the balance sheet and amortised over their useful economic lives, subject to reviews for impairment where necessary. This applies to intangibles purchased separately from a business and also to intangibles acquired as part of the acquisition of a business, if their value can be measured reliably on initial recognition.

Tangible fixed assets
Tangible fixed assets are stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets other than freehold land at rates calculated to write off the cost, less estimated residual value, of each asset over its expected useful life as follows:

Freehold buildings: over 12 years.
Motor vehicles: 331⁄3% per annum.
Office and laboratory equipment: 25% per annum.
Fixtures and fittings: over five years (or the remaining lease term if less).

Investments
Fixed asset investments are shown at cost less provision for impairment.

Liquid resources
Liquid resources comprise negotiable securities and term deposits and are shown at cost with accrued interest included in debtors. Where relevant a provision is made such that cost plus accrued interest does not exceed market value.

Foreign currency
Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account.

The results of overseas operations and their balance sheets are translated at the rates ruling at the balance sheet date. Exchange differences arising on translation of the opening net assets and results of overseas operations are dealt with through reserves.

Leases
Assets held under finance leases, which confer rights and obligations similar to those attached to owned assets, are capitalised as tangible fixed assets and are depreciated over the shorter of the lease terms and their useful lives. The capital elements of future lease obligations are recorded as liabilities, while the interest elements are charged to the profit and loss account over the period of the leases to produce a constant rate of charge on the balance of capital repayments outstanding. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives.

Rentals under operating leases are charged on a straight-line basis over the lease term.

2 – Turnover and loss on ordinary activities before taxation

Turnover and loss on ordinary activities before taxation relates solely to the principal activity and are attributable to the continuing operations of the Group substantially all of which take place in the United Kingdom.

Turnover principally consists of licence fees, milestone payments and fees for research and development services provided under corporate agreements.

Turnover was generated from customers in the following geographical areas:

3 – Operating loss

In addition, during 2000 auditors’ remuneration of £45,000 for services rendered in connection with the open offer and international offering was charged to the share premium account.

4 – Interest receivable (net)

5 – Staff costs

The average monthly number of persons (including Executive Directors) employed by the Group during the year was:

The Group has made a provision for employer’s National Insurance payable on certain options granted under the CSOP Part ‘B’ scheme in December 1999. The liability will not crystallise until the options are exercised (they are exercisable from December 2002) and the ultimate liability will be determined by the difference between the exercise price paid by the employee and the market price on exercise and on the then prevailing rate for employer’s contributions.

The options are exercisable subject to the condition that the proportionate increase in the closing price of shares in the Company over a specified period must exceed the proportionate increase in the total return on the FTSE All Share Index. The specified period begins on the date of grant and ends between the third and fourth anniversary of the date of grant.

Guidance on the recognition of such costs was given in July 2000 by the Urgent Issues Task Force in their Abstract Number 25 – National Insurance contributions on share option gains.

The provision is therefore being made systematically by reference to the market value of the shares at the balance sheet dates over the period from the date of grant to the end of the performance period, and from that date to the date of actual exercise the provision will be adjusted by reference to changes in market value. For this purpose the performance period is assumed to be of minimum duration.

The provision and corresponding charges to the profit and loss account will be affected by: further grants under CSOP Part ‘B’; the elapse of performance periods; the remaining number and option price of shares under option; and, the market value of the shares.

The market price of shares at the year end was £40.25. If that price and the relevant number of shares under option remained unchanged, the charge for a further year would amount to £628,000. If the market value of the shares were to increase by 10% over that at the year end, the charge would increase by £68,000.

In the interim statement for the six months ended 31 March 2000 the provision was calculated in accordance with the draft UITF abstract which indicated that a full provision for the total potential liability be made at each period end.

6 – Taxation

At 30 September 2000 the Group had tax losses of approximately £36 million (1999 – £31 million) available for relief against future taxable profits. Due to the availability of tax losses there is no provision for deferred taxation.

7 – Loss per share

Potentially dilutive issuable shares are only included in the calculation of fully diluted earnings per share if their issue would decrease net profit per share or increase net loss per share. The Group’s basic and fully diluted earnings per share are therefore equal.

Loss per ordinary share (basic and fully diluted) is based on the loss for the financial year of £5,161,000 (1999 – £12,731,000) and a weighted average number of ordinary shares of 30,179,818 (1999 – 24,314,191).

8 – Intangible assets

The Company has no intangible assets.

9 – Tangible fixed assets    

Included in the above were motor vehicles held under hire purchase contracts with a net book value at 30 September 2000 of £nil (1999 – £9,000).

The Company has no tangible fixed assets.

10 – Fixed asset investments

The subsidiary undertakings of the Company are as follows:

(i) Held by CAT Limited.

11 – Debtors

12 – Investment in liquid resources

The Group holds cash which is surplus to current requirements, but which will be required to finance future operations, in sterling in interest bearing marketable securities. The management of such resources is undertaken by a third party on a discretionary basis within strict parameters as to maturity profile and the credit rating of the issuer.  The Board has determined those parameters to ensure a low level of credit risk, a liquidity profile appropriate to future requirements and an acceptable level of return.

13 – Creditors

The bank overdraft comprises payments to suppliers and other third parties which are in the course of presentation.

14 – Creditors

15 – Financial instruments

The financial instruments of the Group comprise cash, liquid resources and debtors and creditors arising in the normal course of business. Other than the investing activities referred to in note 12 the Group does not trade in financial instruments or derivatives.

The results of the Group have not, to date, been materially impacted by exchange rate fluctuations. However, a significant proportion of current and future income is likely to be receivable in United States Dollars which may give rise to transactional currency exposures due to fluctuations in the exchange rate between United States Dollars and Sterling, which is the Group’s functional currency.

Where possible, the Group seeks to match United States Dollar income with United States Dollar expenditure. To date the Group has not hedged any transactional currency exposure but will keep such exposures under review and where prudent and appropriate may enter into such transactions in future.

(i) Interest rates determined for more than one year.

15 – Financial instruments continued

(i) Interest rates determined for more than one year.
(ii) Interest rates determined at least once a year.

The weighted average return on the fixed rate financial assets was 6.4%, which was fixed over a weighted average term of 1.4 years. The returns achieved on fixed and floating rate financial assets are determined by money market rates prevailing at the date a transaction is entered into.

In this disclosure financial assets comprise liquid resources and cash at bank and in hand. Short-term debtors and creditors have been excluded. Fair value of marketable securities is determined by reference to market value.

Currency exposures At the year end the Group’s individual operations had the following net monetary assets and liabilities in currencies other than their functional currency.

Transactions in such monetary assets and liabilities give rise to currency gains and losses in the profit and loss account.

16 – Called-up share capital and share premium

During the year the Directors exercised their powers to allot ordinary shares as shown in the table below.

(i) Exercised over shares in CATLimited and exchanged. Issued at an aggregate premium of £112,000.
(ii) All Non-Executive Directors elected to take part of their fees in shares.
(iii) Net of expenses.
(iv) Shares were issued at a price of £4.15 per share, calculated as a 15% premium to the average share price over the 20 trading days prior to 24 December 1999.
(v) Shares were issued at a price of £20.75 per share, being a 20% premium to the average share price for the 10 days prior to 1 March 2000.

At 30 September 2000 options had been granted over ordinary shares of the Company. Options also exist over shares in CAT Limited which are matched with share exchange option agreements whereby shares allotted in CAT Limited on exercise are immediately exchanged for shares in the Company. The tabulation of options reflects the effective numbers and exercise prices of options over shares in the Company.

Certain options were granted in one scheme in parallel with options in a different scheme under arrangements whereby the exercise of options in one scheme would cause a corresponding number of options to lapse in the other scheme. Where relevant, pairs of linked options are counted as a single option.

16 – Called-up share capital and share premium continued

At 30 September 2000 share options and other rights were as follows:

1 Includes linked options.
2 Included options which were subject to the condition that CAT’s average share price achieved certain values between £8 and £9. During the year this condition was satisfied.
3 These options were subject to the condition as stated in note 4 below. During the year this condition was satisfied.
4 These options are exercisable subject to the condition that the proportionate increase in the closing price of shares in the Company over a specified period must exceed the proportionate increase in the total return for the FTSE All Share Index. The specified period begins on the date of grant and ends between the third and fourth anniversary of the date of grant.

Certain consultancy agreements contain the right to subscribe, subject to conditions, for up to 16,995 shares at £3 per share.

17 – Profit and loss account and other reserve

The Other reserve represents the share premium account of CAT Limited and arises on consolidation from the application of merger accounting principles to the acquisition of that company.

18 – Reconciliation of movements in Group shareholders’ funds

19 – Reconciliation of operating loss to operating cash flows

20 – Analysis of cash flows

Liquid resources comprise current asset investments in negotiable securities and cash deposits.

21 – Analysis and reconciliation of net funds

21 – Analysis and reconciliation of net funds continued

22 – Financial commitments

Capital commitments of the Group were as follows:

Annual commitments under operating leases are as follows: 

In September 2000 the Group agreed to lease a new 20,000 square foot building which is currently being constructed in South Cambridgeshire. The term of that lease is 15 years following CAT’s initial occupancy, which is planned for April 2001 at an anticipated annual rent of £540,000.

The Group also agreed to lease two further buildings in South Cambridgeshire which have yet to be designed or constructed to provide future accommodation.These will comprise approximately 66,000 square feet of office and laboratory space.

The Company had no capital or operating lease commitments.

23 – Pension arrangements

The Group operates a group personal pension plan. Group contributions payable for the year to 30 September 2000 were £432,000 (1999 – £373,000).

24 – Related party transactions

J L Foght is a managing director of Prudential Vector Healthcare Group (‘Prudential Vector’), a unit of Prudential Securities Incorporated and a Non-Executive Director of the Company. In relation to an arrangement (which has now been terminated) by which Prudential Vector agreed to provide certain financial advisory services, CAT Limited has paid to Prudential Vector a fee of US$1.3 million. Prudential Vector may, in certain circumstances, be entitled to a further fee in respect of further transactions entered into by CAT Limited in the period up to February 2001.

In accordance with Financial Reporting Standard Number 8 – Related Party Transactions, the Group does not disclose transactions or balances between group entities which are wholly eliminated on consolidation.

25 – Post balance sheet event

In October 2000 Genzyme Corporation subscribed for 307,982 ordinary shares in the Company for total consideration of £13,732,000 in cash. The subscription was part of a corporate agreement between Genzyme Corporation and the Group entered into in September 2000.

26 – Litigation

Following certain share issues by CATLimited, Continental Venture Capital Limited (‘CVC’) issued proceedings in the State of New York claiming that it is entitled to anti-dilution shares (equivalent to 25,790 ordinary shares of 10p). If CVC succeeds then the Directors would be obliged to issue anti-dilution shares to all similarly situated participants (approximately 763,000 ordinary shares of 10p). Both parties issued cross motions for summary judgement in 1999, which were denied in May 2000. The proceedings are continuing and the Directors continue to believe, on the basis of legal advice they have received, that the proceedings have no merit.

In 1998 the Group commenced a patent infringement action in the Munich District Court against MorphoSys of Germany who it believes is infringing two of the Group’s key patents – Winter et al and McCafferty et al. The action was stayed by the German Court pending proceedings by the Opposition Division of the European Patent Office. The Opposition Division upheld the Winter II and McCafferty patents. Both the Group and MorphoSys have appealed the decision with respect to Winter II and the Group expects proceedings to continue on appeal with respect to McCafferty. The Group is currently considering whether to request the Munich District Court to hear its action prior to the conclusion of the appeals of the Winter II and McCafferty actions.

In April 1999, MorphoSys commenced an action against the Group in the US District Court of Washington DC concerning the Griffiths patent. The MorphoSys action asked the court to revoke the Group’s Griffiths patent and/or declare that MorphoSys does not infringe the patent. Following preliminary ‘Markman’ hearings in the second half of the year, a trial date has now been set for March 2001. In September 1999, MorphoSys commenced a similar action in respect of the Group’s US McCafferty patent. A trial date has been set for April 2002. The Group is vigorously defending both lawsuits and does not believe there is merit in the claims.

In July 2000, Crucell issued a writ against the Medical Research Council (‘MRC’) in a Dutch national court, seeking a declaration that the Winter II patent was invalid or that Crucell did not infringe the claims of the patent. Subsequently, in September 2000, Crucell issued a second writ seeking an identical declaration in respect of the McCafferty patent. Pursuant to the terms of its agreement with the MRC, the Group is responsible for the defence of these proceedings. The Group intends to defend both these proceedings vigorously and does not believe that there is merit in these claims.

The Directors believe that the Group’s ability to operate its own technology will not be materially and adversely affected by the outcome of the German, US and Dutch actions.

Notice of Annual General Meeting

Notice is hereby given that the Annual General Meeting of the Company will be held at 12.30 pm on Friday, 2 February 2001 at Cambridge House, Back Lane, Melbourn, Cambridgeshire SG8 6DD for the following purposes:

1 – To receive the audited financial statements of the Company for the financial year ended 30 September 2000, the Directors’ report and the auditors’ report on those financial statements.

2 – To approve the remuneration policy contained in the report on Directors’ remuneration for the year ended 30 September 2000.

3 – To reappoint Dr David Chiswell, retiring by rotation in accordance with the Company’s Articles of Association, as a Director of the Company.

4 – To reappoint Dr David Glover, retiring by rotation in accordance with the Company’s Articles of Association, as a Director of the Company.

5 – To reappoint Dr Kevin Johnson, retiring in accordance with the Company’s Articles of Association, as a Director of the Company.

6 – To reappoint Messrs Arthur Andersen as the auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which audited accounts are laid and to authorise the Directors to fix their remuneration.

To consider and, if thought fit, pass the following resolutions of which resolution 7 will be proposed as an ordinary and resolution 8 as a special resolution:

7 – That the Directors be and they are hereby generally and unconditionally authorised, pursuant to Section 80 of the Companies Act 1985 (the ‘Act’), to exercise all the powers of the Company to allot relevant securities (as defined for the purposes of Section 80(2) of the Act) up to an aggregate nominal amount of £1,169,773 provided that this authority shall expire on the date being 15 months from the passing of this resolution or, if earlier, at the conclusion of the Annual General Meeting of the Company next following the passing of this resolution, save that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offer or agreement as if this authority had not expired and provided further that this authority shall supersede and revoke any other earlier such authority.

8 – That, in substitution for all existing authorities and subject to the passing of the resolution numbered 7 above, the Directors be and they are hereby empowered pursuant to Section 95 of the Act to allot equity securities (as defined in Section 94(2) of the Act) for cash pursuant to the general authority to allot relevant securities conferred by resolution 7 above as if the provisions of Section 89(1) of the Act did not apply to any such allotment, provided that this authority shall be limited to:

(a) the allotment of equity securities in connection with a rights or other pre-emptive issue in favour of holders of ordinary shares where the equity securities respectively attributable to the interests of such shareholders on a fixed record date are proportionate (as nearly as may be) to the respective numbers of shares held by them but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with any legal or practical problems under the laws of any overseas territory or the requirements of any regulatory body or any stock exchange in any territory or fractional entitlements; and

(b) the allotment (otherwise than pursuant to paragraph (a) above), of equity securities having, in the case of relevant shares, a nominal amount or, in the case of other equity securities, giving the right to subscribe for or convert into relevant shares having, a nominal sum not exceeding in aggregate the sum of £175,466.

and this authority shall (unless renewed, varied or revoked by the Company) expire on the date being 15 months from the passing of this resolution or, if earlier, at the conclusion of the Annual General Meeting of the Company next following the passing of this resolution, save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if this power had not expired.

Dated 4 December 2000

By order of the Board
Diane Mellett
Secretary

Registered Office:
The Science Park
Melbourn
Cambridgeshire SG8 6JJ

Notes

1 – A member entitled to attend and vote at the Annual General Meeting is entitled to appoint one or more proxies to attend and vote on his behalf. A proxy need not be a member of the Company.

2 – To be effective, the instrument appointing a proxy and any authority under which it is executed (or a notarially certified copy of such authority) must be deposited at the registered office of the Company not less than 48 hours before the time for holding the meeting. A form of proxy is enclosed with this notice. Completion and return of the form of proxy will not preclude shareholders from attending and voting in person at the meeting.

3 – Copies of all Directors’ service contracts will be available for inspection at the registered office of the Company during normal business hours on any weekday (Saturdays and public holidays excluded) from the date of this notice until the meeting closes.

4 – The register of Directors’ interests maintained by the Company under Section 325 Companies Act 1985 shall be produced at the commencement
of the meeting and remain open and accessible during the continuance of the meeting to any person attending the meeting.

5 – For the purpose of enabling the Company to determine which persons are entitled to attend or vote at the meeting, and how many votes such persons may cast, a person must be entered on the Company’s register of members not less than 48 hours before the time fixed for the meeting in order to have the right to attend or vote at the meeting.

Explanatory Notes

Resolution 1: Financial statements
For each financial year the Directors are required to present the audited financial statements, the Directors’ report and the auditor’s report to the shareholders at a general meeting.

Once the resolution to receive the financial statements has been proposed, and before a vote is taken, the Chairman will invite questions from shareholders on the financial statements and any other matters relating to the Company’s business.

Resolution 2: Directors’ remuneration policy
Shareholders are asked to vote on the remuneration policy for Directors. The policy is contained in the report on Directors’ remuneration on pages 37 to 40.

The Stock Exchange Combined Code asks boards to consider each year whether the circumstances are such that shareholders should be invited at the Annual General Meeting to vote to approve the remuneration policy for Directors. Your Directors consider that asking shareholders from time to time (but not necessarily each year) to vote on the policy facilitates accountability and transparency.

Resolutions 3, 4 and 5: Reappointment of Directors
Article 102 of the Company’s Articles of Association states that a proportion of the Directors will retire at each Annual General Meeting. At this year’s meeting, Dr David Chiswell, Dr David Glover and Dr Kevin Johnson will retire by rotation and resolutions 3, 4 and 5 propose their reappointment. Biographical details of the Directors and particulars of their service contracts with the Company are set out in this annual report.

Resolution 6: Reappointment of auditors
At each Annual General Meeting, the Company is required to appoint auditors to serve until such next meeting. The Company’s present auditors, Arthur Andersen, have said that they are willing to continue in office for a further year. Resolution 6 proposes their reappointment and that, in accordance with normal practice, the Directors should be authorised to agree their fees.

Resolutions 7 and 8: Allotment of shares
Under the Companies Act 1985, the Directors of a company may only allot un-issued shares if authorised to do so. The Companies Act 1985 also prevents allotments for cash, other than to existing shareholders in proportion to their existing holdings, unless the Directors are specifically authorised to do so. This gives existing shareholders what are known as ‘pre-emption rights’. Passing resolutions 7 and 8 will extend the Directors flexibility to act in the best interests of shareholders, when opportunities arise, to issue shares.

Under resolution 7, the Directors will be able to issue new shares up to a nominal value of £1,169,775, which is equal to approximately one‑third of the issued share capital at 4 December 2000.

Under resolution 8, the Directors will also be able either to issue shares for
cash, other than to existing shareholders in proportion to their existing holdings, up to a maximum amount of £175,466, representing about five per cent (5%) of the issued ordinary share capital at 4 December 2000, or in a rights or other pre-emptive issue.

These arrangements are intended to ensure that the interests of existing shareholders are protected so that, for example, in the event of an issue of new shares for cash to new shareholders, which is not a rights issue, the proportionate interest of existing shareholders could not, without their agreement, be reduced by more than five percent (5%).

The authorities sought by resolutions 7 and 8 will last for 15 months or until the conclusion of the next Annual General Meeting, whichever is the earlier.

Shareholder Information

The share price is obtainable from the following:

Financial Times, Daily Telegraph, The Independent, Cambridge Evening News.

London Stock Exchange mnemonic CAT

Market makers

Altuim Capital
Beeson Gregory
Cazenove Securities
CSFB Equities
Deutsche Morgan Grenfell
Goldman Sachs
Kleinwort Benson Securities
Lehman Brothers
Merrill Lynch
Nomura International
Winterflood Securities

Announcements

Interim – late May
Final – late November

Shareholders

There are approximately 1,900 registered shareholders.

Company Secretary and registered office

Diane Mellett llb jd
Cambridge Antibody Technology Group plc
The Science Park
Melbourn
Cambridgeshire SG8 6JJ, UK

Registered number 3234033

Registrars

Computershare Services plc
PO Box 82
The Pavilions
Bridgwater Road
Bristol BS99 7NH, UK

Corporate Advisors

Joint financial advisers and brokers

Cazenove & Co.
12 Tokenhouse Yard
London EC2R 7AN, UK

Deutsche Bank AGLondon
Winchester House
1 Great Winchester Street
London EC2N 2DB, UK

Solicitors

CMS Cameron McKenna
Mitre House
160 Aldersgate Street
London EC1A 4DD, UK

Patent Attorneys

MewburnEllis
122 Cambridge Science Park
Milton Road
Cambridge CB4 4GG, UK

Auditors

Arthur Andersen
Betjeman House
104 Hills Road
Cambridge CB2 1LH, UK

Bankers

Barclays Bank Plc
Cambridge Business Centre
PO Box 326
Cambridge CB4 3UT, UK

The following information applies to United States shareholders only. For the year ended 30 September 2000, we believe that the Company was not a Passive Foreign Investment Corporation (‘PFIC’) as defined by Section 1297 of the United States Code. This conclusion is a factual determination that is made annually and therefore may be subject to change in the future. As the Company was previously a PFIC we provide the following information.

PFIC Annual Information Statement
Cambridge Antibody Technology Group plc

Fiscal year ended 30 September 2000

1 – This information is being provided pursuant to Section 1.1295-1T of
the United States Treasury Regulations.

2 – This PFIC Annual Information Statement applies to the financial year of the Company beginning 1 October 1999 and ending 30 September 2000.

3 – The Company had negative ordinary earnings and no net capital gain for the taxable year indicated above.

4 – During the year no actual or deemed distributions were made.5 – The Company has given the information set forth in paragraphs 1–4 above to enable the shareholder to establish that the Company’s ordinary earnings and net capital gain are computed in accordance with US income tax principles and to determine the shareholders’ pro rata share thereof.

Glossary

Antagonist
A substance that interferes with the action or effect of a natural body chemical or drug.

Antibody
A protein produced by cells of the immune system which specifically recognises a target molecule known as an antigen. A key component of the body’s defence mechanisms.

Antigen
A molecule that is capable of stimulating production of an antibody in the body – usually a foreign or potentially toxic molecule.

Autoimmune disease/disorder
Disease arising when the immune system mistakenly recognises the body’s own tissue as foreign and attacks it.

Bioinformatics
Bioinformatics is the process of managing and analysing large amounts of biological information.

CONT1NUITY™
CONT1NUITY™ is CAT’s bioinformatics technology used for mining the vast amount of data generated from ProAb®.

Disease indication
The specific clinical condition for which a drug is intended to be used.

Double blind
A type of clinical trial study in which neither the doctor or the patient knows whether the patient is being administered a placebo or the test drug.

Efficacy
The measure of a drug’s effectiveness.

Eotaxin
A protein that attracts eosinophils (a type of white blood cell) into tissues, where they can cause tissue damage.

Fibrosis
This is the proliferation of a type of human tissue known as fibrous connective tissue. It normally occurs in the form of scar tissue.

Functional genomics (proteomics)
Science related to the discovery and definition of the function of genes.

Genes
Genes are the biological units of heredity. They contain the blueprint for synthesising every protein found in the body.

Genome
The total DNA content of an organism.

Glaucoma
Glaucoma is the name for a group of eye conditions in which the optic nerve is damaged at the point where it leaves the eye. The main cause of this damage is raised pressure inside the eye.

High-throughput screening
The process of using automated assays to search through large numbers of substances for desired activity, resulting in less costly and faster systematic processes.

Inflammation
The reaction of living tissue to injury or infection.

Interleukin 12
This is a biological molecule found in the human body and is responsible for triggering inflammation in a number of severe autoimmune and inflammatory disorders.

Interleukin 18
A potent pro-inflammatory cytokine involved in T-cell (T-lymphocyte) and macrophage activation.

Isoforms
Molecules that exist in slightly different structural forms, but that may have a similar function.

Micro-array
A surface onto which a high density of probes have been applied in an ordered manner.

Monoclonal antibody
An antibody derived from a single clone of cells, all molecules of which have identical target (antigen) binding sites.

Neoplastic
Relating to any new and abnormal growth.

Ocular
Of, or concerned with, the eye.

Phage
Abbreviation for bacteriophage, a virus that infects bacteria.

Phage display
CAT’s technology in which individual antibodies are displayed on the tip of a simple virus (the phage).

Placebo
A pharmacologically inactive treatment used as a yardstick for measuring drugs.

Phase I clinical trials
Study conducted in healthy subjects to determine the biological effects of a drug, especially safety and tolerability.

Phase I/II clinical trials
Studies carried out in patients with disease whereby the drug being tested would otherwise be inappropriate for testing in healthy subjects.

Phase IIa clinical trials
Studies in a limited number of patients with the aim of making a preliminary determination of the efficacy of a drug to provide proof of principle and/or to study drug dose ranges.

Phase IIb clinical trials
Studies in a limited number of patients to determine drug dose ranges to be used in Phase III clinical trials.

Phase III clinical trials
Full scale clinical trials to determine drug efficacy and safety prior to seeking marketing approval.

Protein
Large molecules made of smaller biological units known as ‘amino acids’. Proteins are responsible for most of the function and much of the structure of living things, including humans.

Rheumatoid arthritis
A condition associated with inflammation of the joints.

Ribosome
A particle that occurs in cells and is the site of protein synthesis in the cell.

Ribosome display technology
CAT’s technology in which individual antibodies are displayed on a ribosome.

Subcutaneous
Beneath the surface of skin.

TGF beta (TGFb)
A family of biological molecules that are associated with fibrosis and scarring.

TGFb1
The specific TGFb molecule associated with fibrosis and scarring in the skin and most internal organs and tissues.

TGFb2
The specific TGFb molecule associated with scarring in and around the eye.

TNF alpha (TNFa)
Belonging to the ‘cytokine’ family of biological molecules, TNF alpha is responsible for increasing tissue damage in inflammatory disorders such as rheumatoid arthritis.