Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Item 1A—Risk Factors.” We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

Seattle Genetics is a biotechnology company focused on the development and commercialization of targeted therapies for the treatment of cancer. Our marketed product ADCETRIS ^® , or brentuximab vedotin, received accelerated approval in the United States in August 2011 and approval with conditions in Canada in February 2013 for patients with relapsed Hodgkin lymphoma or relapsed systemic anaplastic large cell lymphoma, or sALCL. ADCETRIS is an antibody-drug conjugate, or ADC, comprising an anti-CD30 monoclonal antibody attached by a protease-cleavable linker to a microtubule disrupting agent, monomethyl auristatin E (MMAE), utilizing our proprietary technology. We have a broad development strategy for ADCETRIS evaluating its potential application in earlier lines of therapy for patients with Hodgkin lymphoma or mature T-cell lymphoma, including sALCL, or MTCL, and in other CD30-positive malignancies.

We are collaborating with Takeda Pharmaceutical Company Limited, or Takeda, to develop and commercialize ADCETRIS on a global basis. Under this collaboration, Seattle Genetics has retained commercial rights for ADCETRIS in the United States and its territories and in Canada, and Takeda has commercial rights in the rest of the world. ADCETRIS was granted conditional marketing authorization in the European Union in October 2012 for patients with relapsed Hodgkin lymphoma or relapsed sALCL. ADCETRIS is now approved in over 40 countries, including those described above, as well as in Japan, Australia, Switzerland, South Korea, Singapore and Mexico, and Takeda continues to pursue marketing authorizations in multiple other countries.

Our pipeline includes clinical-stage ADC programs consisting of SGN-CD19A, SGN-CD33A, SGN-LIV1A, ASG-22ME and ASG-15ME, and preclinical programs including SGN-CD70A, a novel ADC that targets CD70 that we plan to advance into phase 1 clinical development during the third quarter of 2014. We also have collaborations for our ADC technology with a number of biotechnology and pharmaceutical companies, including AbbVie Biotechnology Ltd. (formerly part of Abbott Laboratories), or AbbVie; Bayer Pharma AG, or Bayer; Celldex Therapeutics, Inc., or Celldex; Daiichi Sankyo Co., Ltd., or Daiichi Sankyo; Genentech, Inc., a member of the Roche Group, or Genentech; GlaxoSmithKline LLC, or GSK; Pfizer, Inc., or Pfizer; PSMA Development Company LLC, a subsidiary of Progenics Pharmaceuticals Inc., or Progenics; and Takeda; as well as ADC co-development agreements with Agensys, Inc., an affiliate of Astellas Pharma, Inc., or Agensys; Genmab A/S, or Genmab; and Oxford BioTherapeutics Ltd., or OBT.

The commercial potential of ADCETRIS and the ability to realize that potential by us and Takeda remains uncertain. Our future success in effectively commercializing ADCETRIS will continue to require, among other things, effective sales, marketing, manufacturing, distribution, information systems and pricing strategies, our ability to demonstrate in the medical community the safety and efficacy of ADCETRIS and its potential advantages, and our ability to comply with applicable laws and regulations. Our future success could be unfavorably impacted by adverse events or competition. The U.S. Food and Drug Administration, or FDA, granted accelerated approval of ADCETRIS which means that we are, among other things, obligated to conduct specific post-approval clinical studies to confirm patient benefit as a condition of that approval. Similarly, Takeda is required to conduct post-approval confirmatory studies as a condition to the conditional marketing authorization of ADCETRIS by the European Commission and regulatory authorities in other countries.

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We and Takeda are conducting four phase 3 clinical trials of ADCETRIS, one in Hodgkin lymphoma patients at high risk of relapse following autologous stem cell transplant, or ASCT, called the AETHERA trial, one in relapsed cutaneous T-cell lymphoma, or CTCL, called the ALCANZA trial, one in front-line advanced classical Hodgkin lymphoma, called the ECHELON-1 trial, and one in front-line MTCL, including sALCL, called the ECHELON-2 trial. All patients in the AETHERA trial completed treatment during 2013, and the trial has been amended to enable a time point-driven progression-free survival analysis after patients have completed all required scans, which is anticipated to occur by October 2014. The AETHERA trial is not being conducted under a Special Protocol Assessment, or SPA, agreement from the FDA and has not been designated as a confirmatory trial to convert either accelerated approval or conditional marketing authorization to regular approval; however, this trial will provide drug safety data analyses that fulfills one of our post-approval requirements with both the FDA and the European Medicines Agency, or EMA. We have entered into SPA agreements with the FDA for the ALCANZA, ECHELON-1 and ECHELON-2 clinical trials and we also received scientific advice from the EMA with respect to these trials. An SPA is an agreement with the FDA regarding the design of the clinical trial, including size and clinical endpoints, to support an efficacy claim in a Biologics License Application, or BLA, submission to the FDA if the trial achieves its primary endpoints. The ECHELON-1 and ECHELON-2 trials fulfill post-approval commitment obligations for ADCETRIS regarding drug efficacy and positive results from either trial would form the basis for a submission to potentially convert the approval of ADCETRIS in the United States from conditional approval to full approval in the currently approved indications. The primary endpoint in the ECHELON-1 and ECHELON-2 trials is progression-free survival, or PFS, per independent review facility assessment in patients treated with ADCETRIS compared to that achieved with therapy in the control arm. Given encouraging PFS trends in our phase 1 data combining ADCETRIS with standard chemotherapy regimens and the slower-than-anticipated events in the AETHERA trial, we and Takeda are evaluating the potential that event rates may be slower than expected in both the ECHELON-1 and ECHELON-2 trials and plan to work with appropriate regulatory agencies on any proposed trial modifications. The primary endpoint in the ALCANZA trial is overall response rate, lasting at least four months, in patients treated with ADCETRIS compared to that achieved with therapy in the control arm.

All of these activities will require substantial amounts of capital and may not ultimately prove successful. Our product candidates are in relatively early stages of development. These product candidates will require significant further development, financial resources and personnel to obtain regulatory approval and develop into commercially viable products, if at all. Accordingly, over the next several years, we expect that we will incur substantial expenses, primarily as a result of activities related to the commercialization and continued development of ADCETRIS. We will also continue to invest in research, development and manufacturing of our product candidates. Our commitment of resources to the continuing development, regulatory and commercialization activities for ADCETRIS and the research, continued development and manufacturing of our product candidates may require us to raise substantial amounts of additional capital and our operating expenses will fluctuate as a result of such activities. In addition, we may incur significant milestone payment obligations as our product candidates progress through clinical trials towards potential commercialization.

Although we recognize revenue from ADCETRIS product sales in the United States and Canada, we have only been commercializing ADCETRIS since August 2011 and our future ADCETRIS product sales will be difficult to accurately predict from period to period. In this regard, our product sales have varied, and may continue to vary, significantly from period to period and may be affected by a variety of factors, including the incidence rate of new patients in ADCETRIS’ approved indications, customer ordering patterns, the overall level of demand for ADCETRIS, the duration of therapy for patients receiving ADCETRIS, and the extent to which coverage and reimbursement for ADCETRIS is available from government and other third-party payers, particularly in an increasingly challenging environment due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide. We believe that the level of our ongoing ADCETRIS sales in the United States is largely attributable to the incidence flow of patients eligible for treatment with ADCETRIS, which could vary significantly from period to period. Moreover, we believe that the incidence rate in ADCETRIS’ approved indications is relatively low. For these and other reasons, we expect that meaningful future ADCETRIS sales growth, if any, will depend primarily on our ability to expand the labeled indications of use and to a lesser extent, on potential future price increases. Our efforts to expand ADCETRIS’ labeled indications of use will continue to require additional time and investment in clinical trials to complete and we may not be successful. Our ability to successfully commercialize ADCETRIS and to expand its labeled indications of use are subject to a number of risks and uncertainties, including those discussed in Part I, Item 1A of this Quarterly Report on Form 10-Q. We also expect that amounts earned from our collaboration agreements will continue to be an important source of our revenues and cash flows. These revenues will be impacted by future development funding and the achievement of development, clinical and commercial milestones by our collaborators under our existing collaboration and license agreements, including, in particular, our ADCETRIS collaboration with Takeda, as well as entering into new collaboration and license agreements. Our results of operations may vary substantially from year to year and from quarter to quarter and, as a result, we believe that period to period comparisons of our operating results may not be meaningful and should not be relied upon as being indicative of our future performance.

Financial summary

For the six months ended June 30, 2014, total revenues increased to $136.6 million, compared to $130.9 million for the same period in 2013. This increase was primarily due to increased ADCETRIS net product sales and royalty revenues. Net product sales of

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ADCETRIS were $83.5 million for the six months ended June 30, 2014 compared to $69.7 million for the six months ended June 30, 2013. For the six months ended June 30, 2014, total costs and expenses increased to $170.6 million, compared to $154.3 million for the same period in 2013. This primarily reflects increases in clinical development efforts to explore additional potential applications of ADCETRIS, as well as investment in our ADC pipeline programs. As of June 30, 2014, we had $349.2 million in cash and short-term investments, and $225.8 million in total stockholders’ equity.

Results of operations

Three and six months ended June 30, 2014 and 2013

Net product sales

We sell ADCETRIS in the U.S. and Canada. Our net product sales were as follows:

The increase in net product sales for the three and six months ended June 30, 2014 over the comparable periods in 2013 primarily resulted from an increase in sales volume in the 2014 periods and, to a lesser extent, from the effect of price increases instituted since the 2013 periods. The increases in sales volume in the 2014 periods were primarily driven by increased use of ADCETRIS across multiple lines of therapy for the treatment of Hodgkin lymphoma and sALCL and for treatment of other CD30-positive malignancies. The current approved label indications are (1) the treatment of patients with Hodgkin lymphoma after ASCT, or after failure of at least two prior multi-agent chemotherapy regimens in patients who are not ASCT candidates, and (2) the treatment of patients with sALCL, after failure of at least one prior multi-agent chemotherapy regimen. Variation in customer order timing between periods and increased unit sales in Canada during the 2014 periods also contributed to the increase in sales volume. Unit sales in Canada were augmented by the commencement of provincial reimbursement in most of the key provinces during the first and second quarters of 2014.

We record product sales net of estimated government-mandated rebates and chargebacks, distribution fees, product returns and other deductions. These are generally referred to as gross-to-net deductions. Gross-to-net deductions, net of related payments and credits, are summarized as follows (in thousands):

Our gross-to-net deductions include government-mandated rebates and chargebacks, distribution fees, product returns and commercial co-insurance assistance. Mandatory government discounts are the most significant component of our total gross-to-net deductions. The mandatory government discount percentage increased, on average, approximately 5.9% from the three months ended June 30, 2013 to the three months ended June 30, 2014 and by approximately 5.7% from the six months ended June 30, 2013 to the six months ended June 30, 2014. This is the primary factor that led to increased gross-to-net deductions in 2014. These discount percentages increased as a result of two price increases we instituted in July 2013 and January 2014 that exceeded the rate of inflation. Generally, the change in government prices is limited to the rate of inflation. We expect future gross-to-net deductions to fluctuate based on the volume of purchases eligible for government mandated discounts and rebates as well as changes in the discount percentage which is impacted by potential future price increases, the rate of inflation, and other factors. We expect gross-to-net deductions, as a percentage of gross product sales, to be in the mid to upper teens for the remainder of 2014.

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Collaboration and license agreement revenues

Collaboration and license agreement revenues by collaborator are summarized as follows:

Takeda

Revenues earned under our ADCETRIS and ADC collaborations with Takeda represented 58% and 25% of our collaboration and license agreement revenues during the three month periods ended June 30, 2014 and 2013, respectively, and 51% and 34% during the six month periods ended June 30, 2014 and 2013, respectively. The increase in revenues from Takeda for the three month period ended June 30, 2014 from the comparable period in 2013 was driven by regulatory milestones achieved, offset partially by a reduction in the earned amount of development cost reimbursement funding under the ADCETRIS collaboration. The decrease in revenues from Takeda for the six month period ended June 30, 2014 from the comparable period in 2013 was driven by reduced reimbursements earned under the ADCETRIS collaboration, offset partially by the earned amount of regulatory milestones achieved. The lower reimbursements in both the three and six month periods ended June 30, 2014 reflect a decrease in drug product supply activities as compared to the prior year periods and an increase in clinical trial activity performed by Takeda.

The ADCETRIS collaboration includes the global development of ADCETRIS and the commercialization of ADCETRIS by Takeda in its territory. We are entitled to receive progress-dependent milestone payments based on Takeda’s achievement of certain events related to ADCETRIS development, and development funding equal to 50% of joint development costs. Takeda also bears a portion of third-party royalty costs owed on sales of ADCETRIS in its territory. As of June 30, 2014, total future potential milestone payments to us under the ADCETRIS collaboration could total approximately $185 million. Of the remaining amount, up to approximately $7 million relates to the achievement of development milestones, up to approximately $118 million relates to the achievement of regulatory milestones and up to approximately $60 million relates to the achievement of commercial milestones. To date, $50 million in milestones have been achieved as a result of regulatory and commercial progress by Takeda.

We recognize as collaboration revenue the $60 million upfront collaboration payment, progress-dependent development and regulatory milestone payments, and net development cost reimbursement payments to us over the ten-year development period of the collaboration. Royalties and commercial sales-based milestones are classified as royalty revenues. We receive reimbursement funding from Takeda equal to one-half of the cost of joint development activities that are performed by us under the collaboration. We also receive reimbursement for the cost of drug product supplied to Takeda for its use at our cost, plus a markup. To the extent that Takeda performs development activities under the collaboration, our development cost reimbursement payments from Takeda are reduced by an amount equal to half of the costs incurred by Takeda. We expect that development activities performed by Takeda will continue to increase, including with respect to the conduct of clinical trials of ADCETRIS, which will lead to a reduction in the level of net reimbursement funding that we receive from Takeda and, when their costs exceed our own, will lead to reimbursement payments by us to Takeda. We recognize sales-based milestones as a component of royalty revenue upon the achievement of the milestone, as reported to us, by Takeda.

Other ADC collaboration agreements

We have other active ADC collaborations with a number of companies to allow them to use our proprietary ADC technology. Under our ADC collaborations, which we enter into in the ordinary course of business, we typically receive or are entitled to receive upfront cash payments, progress-dependent milestones and royalties on net sales of products incorporating our ADC technology, as well as annual maintenance fees and support fees for research and development services and materials provided under the agreements. These amounts are recognized as revenue as they are achieved, or over the performance obligation period of the agreements during which we provide limited support to the collaborator, if any. As of June 30, 2014, our ADC collaborations had generated more than $275 million, primarily in the form of upfront payments. Total milestone payments provided for under our ADC collaborations as of June 30, 2014 could total up to approximately $4.5 billion if all potential product candidates achieved all of the milestone events under all of our current ADC collaborations. Of this amount, approximately $0.8 billion relates to the achievement of development milestones, approximately $1.8 billion relates to the achievement of regulatory milestones and approximately $1.9 billion relates to the achievement of commercial milestones.

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Revenues from our agreements with AbbVie increased during the three month period ended June 30, 2014 from the comparable period in 2013 as a result of a milestone payment received due to AbbVie’s commencement of a phase 1 clinical trial during the three months ended June 30, 2014. Revenues were relatively consistent for the six month periods ended June 30, 2014 and 2013.

Revenues from our agreement with Genentech decreased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013 as a result of payments made by Genentech for exclusive licenses to certain product candidates and to extend the research term of the collaboration in April 2013.

Revenues from our agreement with Bayer decreased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013. Bayer revenues during the three and six month periods ended June 30, 2013 reflect the earned portion of an upfront payment received from Bayer under the collaboration which began in June 2013.

Revenues from our agreement with Agensys decreased during both the three and six month periods ended June 30, 2014 from the comparable periods in 2013. Agensys completed the research term of the agreement earlier than expected, during the second quarter of 2013, which accelerated revenue recognition. Also, at that time, we earned an exclusive license fee for an ADC product candidate.

Revenues from our other ADC collaboration agreements decreased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013. This primarily resulted from a modification to our collaboration agreement with GSK that extended the performance obligation period and therefore increased the time period over which we recognize the related revenues.

Our ADC collaborators are responsible for development, manufacturing and commercialization of any ADC product candidates that result from the collaborations and are solely responsible for the achievement of any of the potential milestones under these collaborations. Since we do not control the research, development or commercialization of any products generated by our ADC collaborators, we are not able to reasonably estimate when, if at all, any milestone payments or royalties may be payable by our ADC collaborators. In addition, most of our current ADC collaborations are at early stages of development. Successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing it is a significantly lengthy and highly uncertain process which entails a significant risk of failure. In addition, business combinations, changes in an ADC collaborator’s business strategy and financial difficulties or other factors could result in an ADC collaborator abandoning or delaying development of its ADC product candidates. As such, the milestone payments associated with our ADC collaborations involve a substantial degree of risk to achieve and may never be received. Accordingly, we do not expect, and investors should not assume, that we will receive all of the potential milestone payments provided for under our ADC collaborations and it is possible that we may never receive any significant milestone payments under our ADC collaborations.

Our collaboration and license agreement revenues are impacted by the term and duration of our collaboration and co-development agreements and by progress-dependent milestones, annual maintenance fees and reimbursement of materials and support services as our collaborators advance their ADC product candidates through the development process. Collaboration and license agreement revenues may vary substantially from year to year and quarter to quarter depending on the progress made by our collaborators with their product candidates, the level of support we provide to our collaborators, specifically to Takeda under our ADCETRIS collaboration, the timing of milestones achieved, our ability to enter into additional collaboration and co-development agreements, and the level of co-development funding received by us under the ADCETRIS collaboration with Takeda which is a component of collaboration revenue. We expect our collaboration and license agreement revenues to decrease in 2014 compared to 2013, primarily as a result of a decrease in development funding from Takeda as the level of development activities performed by Takeda under the collaboration expands, as well as lower expected revenue from our ADC collaborations. We have a significant balance of deferred revenue, representing prior payments from our collaborators that have not yet been recognized as revenue. This deferred revenue will be recognized as revenue in future periods using a time-based approach as the period during which we fulfill our performance obligations expires.

Royalty revenues primarily reflect amounts earned under the ADCETRIS collaboration with Takeda. These royalties include commercial sales-based milestones and sales royalties, which are based on a percentage of Takeda’s net sales at rates that range from

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the mid-teens to the mid-twenties based on sales volume. Takeda bears a portion of third-party royalty costs owed on sales of ADCETRIS in its territory. This amount is included in our royalty revenues. In October 2012, Takeda began its commercial launch of ADCETRIS in the European Union upon receiving conditional marketing authorization from the European Commission for ADCETRIS in two indications. Takeda has since received regulatory approval in additional countries and, where applicable, Takeda also made ADCETRIS available under its international named patient program. Increases in royalty revenues for the three and six month periods ended June 30, 2014 from the comparable periods in 2013 reflect increased sales in Takeda’s territory. Royalties in the first quarter of 2014 included a $5 million sales milestone triggered by Takeda surpassing $100 million in ADCETRIS net sales during 2013. Exceeding $100 million in annual sales also resulted in an increase in the royalty rate we received from Takeda from the mid-teens to the high-teens for the remainder of 2013. We report royalty revenues one quarter in arrears, and the royalty rate resets annually. Cost of royalty revenues reflect amounts owed to our third-party licensors related to the sale of ADCETRIS in Takeda’s territory.

Cost of Sales

ADCETRIS cost of sales includes manufacturing costs of product sold, third-party royalty costs, amortization of technology license costs and distribution and other costs. We began capitalizing ADCETRIS manufacturing costs as inventory following the accelerated approval of ADCETRIS by the FDA. The cost of product manufactured prior to FDA approval was expensed as research and development expense as incurred and was combined with other research and development expenses. While we track the quantities of individual ADCETRIS product lots, we did not track pre-FDA approval manufacturing costs in our inventory system and therefore the manufacturing cost of ADCETRIS produced prior to FDA approval is not reasonably determinable. Most of the product produced prior to FDA approval became available for us to use commercially as well as for use in research and development. We expect that our cost of sales as a percentage of sales will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed previously, is consumed. This cost benefit is expected to continue to a lesser extent for at least the next twelve months, but is expected to decline based on when the components of the specific drug lots sold were produced and when they are consumed. The time period over which this reduced-cost inventory is consumed will depend on a number of factors, including the amount of future ADCETRIS sales, the ultimate use of this inventory in commercial sales, clinical development or other research activities, and the ability to utilize inventory prior to its expiration date. We expect, as this reduced-cost inventory is used, the percentage of total cost of sales for sales of ADCETRIS will increase into the low-to-mid teens. Cost of sales increased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013 primarily due to an increase in sales volume and a higher average cost of product sold.

Research and development

Our research and development expenses are summarized as follows:

Research expenses include, among other things, personnel, occupancy and laboratory expenses and technology access fees associated with the discovery and identification of new monoclonal antibodies and related technologies and the development of novel classes of stable linkers and cell-killing agents for our ADC technology. Research expenses also include research activities associated with our product candidates, such as preclinical translational biology and in vitro and in vivo studies. The decrease in research expenses during the three and six month periods ended June 30, 2014 as compared to the same periods in 2013 reflects the opt-in fee to Agensys to co-develop ASG-15ME paid in 2013, partially offset by increased discovery activities in support of our growing pipeline of product candidates.

Development and contract manufacturing expenses include personnel and occupancy expenses and external contract manufacturing costs for the scale up and pre-approval manufacturing of drug product used in research and our clinical trials and for drug product supplied to our collaborators. Development and contract manufacturing expenses also include quality control and assurance activities, and storage and shipment of our product candidates. These expenses increased during the three and six month periods ended June 30, 2014 as compared to the prior year periods due to increased activities in support of growing our pipeline of product candidates, partially offset by a decrease in activities related to product supplied to Takeda.

Clinical expenses include personnel expenses, travel, occupancy costs and external clinical trial costs including clinical site expenses, clinical research organization charges, contractors and regulatory activities associated with conducting human clinical trials, including investigational new drug, or IND, enabling pharmacology and toxicology studies. The increase during the three and six month periods ended June 30, 2014 as compared to the prior year periods reflects increased clinical trial activity related to ADCETRIS and our product candidates.

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We utilize our employee and infrastructure resources across multiple development projects as well as our discovery and research programs directed towards identifying monoclonal antibodies and new classes of stable linkers and cell-killing agents for our ADC program. We track human resource efforts expended on many of our programs for purposes of billing our collaborators for time incurred at agreed upon rates and for resource planning. We do not account for actual costs on a project-by-project basis as it relates to our infrastructure, facility, employee and other indirect costs. We do, however, separately track significant third-party costs including clinical trial costs, manufacturing costs and other contracted service costs on a project-by-project basis.

The following table shows expenses incurred for research, contract manufacturing of our product candidates and clinical and regulatory services provided by third parties as well as pre-commercial milestone payments for in-licensed technology for ADCETRIS and each of our clinical-stage product candidates. The table also presents other third-party costs and overhead consisting of personnel, facilities and other indirect costs not directly charged to these development programs.

Third-party costs for ADCETRIS decreased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013, primarily due to a decrease in activities related to drug product supplied to Takeda during the three and six month periods ended June 30, 2014 as compared to the comparable periods in 2013, partially offset by increased clinical trial costs.

Third-party costs for SGN-CD19A increased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013 due to increased clinical trial costs for ongoing studies and additional drug supply activities.

Third-party costs for SGN-CD33A increased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013 due to increased clinical trial costs for ongoing studies.

The development costs for product candidates generally accelerate in preparation for an IND submission to the FDA and then decrease until subsequent clinical trials commence. The decrease in costs for SGN-LIV1A during the three and six month periods ended June 30, 2014 from the comparable periods in 2013 reflects preparation in 2013 for the related IND, offset partially in 2014 by clinical trial costs now that studies are underway.

Our ASG-15ME and ASG-22ME product candidates are being co-developed with Agensys. The costs for these programs include an opt-in fee and our share of the related development costs subsequent to our opt-in. The decrease in costs for ASG-15ME for the three and six month periods ended June 30, 2014 is due to the opt-in fee for ASG-15ME incurred during the second quarter of 2013.

Other costs and overhead include third-party costs of our other programs which are primarily in the pre-clinical phase and costs associated with personnel and facilities. These costs increased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013, primarily due to increases in our investment in our ADC pipeline programs.

Our expenditures on our ADCETRIS clinical development program and on our current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. In order to advance our product candidates toward commercialization, the product candidates are tested in numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical trials for those product candidates that take several years or more to complete. The length of time varies substantially based upon the type, complexity, novelty and intended use of a product candidate. Likewise, in order to expand ADCETRIS’ labeled indications of use, we are required to conduct additional extensive clinical studies. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

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Reports of adverse events or safety concerns involving ADCETRIS and our product candidates could interrupt, delay or halt clinical trials of ADCETRIS and our product candidates, including the ADCETRIS post-approval confirmatory studies that are required as a condition to our regulatory approvals.

Our strategy has included entering into collaborations with third parties. In these situations, the pre-clinical development or clinical trial process for a product candidate and the estimated completion date are largely under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

We anticipate that our total research and development expenses in 2014 will increase compared to 2013 due to increased clinical trial expenses for ADCETRIS related to additional studies to evaluate other potential uses of ADCETRIS, some of which are required post-approval confirmatory studies, and as a result of amounts incurred to continue the development of our ADC product candidates. Certain ADCETRIS development activities, including some clinical studies, will be conducted by Takeda, the costs of which are not reflected in our research and development expenses. Because of these and other factors, expenses will fluctuate based upon many factors, including the degree of collaborative activities, timing of manufacturing campaigns, numbers of patients enrolled in our clinical trials and the outcome of each clinical trial event.

The risks and uncertainties associated with our research and development projects are discussed more fully in Item 1A—Risk Factors. As a result of the uncertainties discussed above, we are unable to determine, with any degree of certainty, the duration and completion costs of our research and development projects, anticipated completion dates or when and to what extent we will receive cash inflows from the commercialization and sale of ADCETRIS in any additional indications or of any of our product candidates.

Selling, general and administrative

Selling, general and administrative expenses increased during the three and six month periods ended June 30, 2014 from the comparable periods in 2013 primarily due to higher compensation costs driven by increased staffing levels.

We anticipate that selling, general and administrative expenses will increase in 2014 compared to 2013 as we continue our commercial activities in support of the commercialization of ADCETRIS, as well as our support of general operations.

Investment and other income, net

Investment and other income, net reflects amounts earned on our short-term investments in U.S. Treasury securities.

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Liquidity and capital resources

Our combined cash, cash equivalents and investment securities decreased during the six months ended June 30, 2014 primarily reflecting our net loss for the period.

Net cash used in operating activities decreased during the six months ended June 30, 2014 from the comparable period in 2013, despite an increase in our net loss, as a result of more favorable changes in working capital and higher amounts of non-cash expenses in the 2014 period.

Net cash used in investing activities decreased during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflecting lower costs incurred in the 2014 period for tenant improvements and laboratory equipment purchases.

Net cash provided by financing activities for both the six months ended June 30, 2014 and June 30, 2013 resulted from the proceeds of stock option exercises and our employee stock purchase plan.

We have financed the majority of our operations through the issuance of equity securities, by amounts received pursuant to product collaborations, our ADC collaborations and, more recently, through collections from commercial sales of ADCETRIS. To a lesser degree, we have also financed our operations through royalty revenues and interest earned on cash, cash equivalents and investment securities. These financing and revenue sources have historically allowed us to maintain adequate levels of cash and investments.

Our cash, cash equivalents, and investments are held in a variety of non-interest bearing bank accounts and interest-bearing instruments subject to investment guidelines allowing for holdings in U.S. government and agency securities, corporate securities, taxable municipal bonds, commercial paper and money market accounts. Our investment portfolio is structured to provide for investment maturities and access to cash to fund our anticipated working capital needs. However, if our liquidity needs should be accelerated for any reason in the near term, or investments do not pay at maturity, we may be required to sell investment securities in our portfolio prior to their scheduled maturities, which may result in a loss. As of June 30, 2014, we had $349.2 million held in cash reserves or investments scheduled to mature within the next twelve months.

At our currently planned spending rate we believe that our financial resources, together with product and royalty revenues from sales of ADCETRIS and the fees, milestone payments and reimbursements we expect to receive under our existing collaboration and license agreements, will be sufficient to fund our operations for at least the next twelve months. Changes in our spending rate may occur that would consume available capital resources sooner, such as increased development, manufacturing and clinical trial expenses in connection with required post-approval studies and additional studies to potentially expand ADCETRIS’ labeled indications of use or to advance our other ADC pipeline programs. Further, in the event of a termination of the ADCETRIS collaboration agreement with Takeda, we would not receive development cost sharing payments or milestone payments or royalties for the development or sale of ADCETRIS in Takeda’s territory, and we would be required to fund all ADCETRIS development and commercial activities. Any of these factors could lead to a need for us to raise additional capital.

We are required to conduct additional confirmatory and safety phase 3 post-approval studies of ADCETRIS as part of our regulatory approvals. These are large studies that are being conducted over a lengthy period of time and although we have commenced these studies, based on the expected length of these studies and the inherent uncertainty of clinical trial costs, we may be required to raise additional capital in order to complete the studies. In this regard, whether we have sufficient funding to complete these studies will be partially dependent upon cash received from sales of ADCETRIS, which may not be sufficient to complete these studies. Our inability to obtain funds sufficient to complete these studies and establish confirmatory evidence of efficacy for ADCETRIS would have material adverse consequences to us, including the loss of marketing approval for ADCETRIS. These required post-approval studies will also continue to significantly increase our clinical trial expenses, which could increase our losses and/or negatively impact our ability to achieve or maintain profitability.

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We expect to make additional capital outlays and to increase operating expenditures over the next several years as we hire additional employees and support our preclinical development, manufacturing and clinical trial activities, including the post-approval studies we are required to and are currently conducting for ADCETRIS, as well as position ADCETRIS for potential additional regulatory approvals, and we may therefore need to raise significant amounts of additional capital. We may seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements and public or private debt or equity financings. We do not know whether additional capital will be available when needed, or that, if available, we will obtain financing on terms favorable to us or our stockholders. If we are unable to raise additional funds when we need them, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs, which may adversely affect our business and operations.

Commitments

Our future minimum contractual commitments were reported in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

In March 2014, the Company entered into an operating lease for approximately 60,000 square feet of a facility to be used for general office purposes. The lease term commenced on April 1, 2014. The lease includes an abated rent period at the end of the lease. The approximate aggregate base rent due over the initial term of the lease is $7.5 million. The lease includes an early termination option, subject to payment of a termination fee. The lease expires in December 2024 with two extension options of five years each.

There have been no other material changes from the contractual commitments previously disclosed in that Annual Report on Form 10-K.

Critical accounting policies

The preparation of our condensed consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to our critical accounting policies during the six months ended June 30, 2014.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued an accounting standards update entitled “ASU 2014-09, Revenue from Contracts with Customers.” The standard requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. The standard will become effective for us beginning January 1, 2017. We are currently evaluating the guidance to determine the potential impact on our financial condition, results of operations and cash flows, and financial statement disclosures.