Crucell NV (CRXL)

FORM 20-F/A

(Mark One)

o            Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

OR

x           Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

OR

o            Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring this shell company report

OR

o            Shell Company Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring this Shell Company Report

For the transition period from N/A to N/A

Commission file number: 0-30962

Crucell N.V.

(Exact name of Registrant as Specified in its Charter)

Crucell N.V.

(Translation of Registrant’s Name into English)

The Netherlands

(Jurisdiction of Incorporation or Organization)

Archimedesweg 4, 2333 CN Leiden, The Netherlands

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Securities for which there is a reporting obligation pursuant to Section 12(g) of the Act.

None

(Title of Class)

 

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Shares, par value 41,440,613

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes   x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   o Yes   x No

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark which financial statement item the registrant has elected to follow.   o Item 17   x Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or l5(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   o Yes   o No

EXPLANATORY NOTE TO FORM 20-F/A

This note is to certify that in the previously filed 20-F and 20-F/A, 3 documents, being the Exhibits 12.1, 12.2. and 13.1, were inadvertently filed incorrectly. The omission has been corrected in this filing 20-F/A. This filing contains all documents, whereas the previous filings of  June 29 and June 30, 2006 contained separately the text and the Exhibits to the 20-F.

We certify that no other amendments have been made to the contents of the 20-F file and that this Amendment is solely meant to correct the above mentioned omission.

TABLE OF CONTENTS

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

We publish our financial statements in euro. In this document, references to (1) “€”, “EUR” and “euro” are to the currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant to the Treaty establishing the European Economic Community as amended by the Treaty on European Union, and (2) “$”, “USD” and “dollars” are to the currency of the United States.

All amounts set forth in this annual report, unless otherwise noted, are in thousands of euro, except share and option data.

On February 22, 2006, we acquired, via a share exchange, the majority of the outstanding shares of Berna Biotech AG, a Swiss stock corporation. This annual report describes the business now conducted by the combined company, including the manufacture, sales and marketing of the Berna vaccine portfolio. However, as this acquisition took place after the end of the financial year which is the subject of this annual report, the financial information and the historical financial statements included elsewhere in this annual report do no reflect this acquisition.

For more information on Berna Biotech AG, including their historical financial statements, you can visit their website at http://www.bernabiotech.com The contents of this website are not incorporated by reference into this annual report.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. All statements regarding our future financial condition, results of operations and business strategy, plans and objectives are forward-looking. Statements containing the words “believes”, “intends”, “expects”, and words of similar meaning are also forward-looking. In particular, the following are forward-looking in nature: statements with regard to strategy and management objectives; technology and product development efforts; our ability to realize commercially valuable discoveries; our intellectual property portfolio; our ability to develop potential products and technologies suitable for commercialization; the effects of changes or prospective changes in regulation; and trends in results, operations and overall market trends.

These forward-looking statements involve risks, uncertainties and other factors, some of which are beyond our control, that may cause our results, performance or achievements or conditions in the markets in which we operate to differ from those expressed or implied in these forward-looking statements. We describe certain of these risks and uncertainties in Item 3, “Key Information—Risk Factors.” We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this document.

OTHER

We are the owner of over 150 registered trademarks. The most important of these are: Crucell® , Berna®, the Berna and Crucell logos, ChromaGenics®, Aerugen®, Te Anatoxal Berna®, Di Anatoxal Berna®, Di Te Anatoxal Berna®, Epaxal®, Epaxal Berna®, Inflexal®, Inflexal Berna®, Vivotif®, Vivotif Berna®, Hepimmune® and Flavimun®, PER.C6®, AdVac®, MAbstract® and STAR®. In addition we hold rights to use certain trademarks owned by our partners, such as Quinvaxem from Chiron. All other trademarks, service marks, trade names and registered marks used in this report are trademarks, trade names or registered marks of their respective owners. Crucell N.V. and its subsidiaries own a number of additional trademarks, including registered trademarks, that are not referenced in this report.

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PART I

Item 1.                        Identity of Directors, Senior Management and Advisors

This item is not applicable.

Item 2.                      Offer Statistics and Expected Timetable

This item is not applicable.

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Item 3.                        Key Information

Selected Financial Data

The selected financial data presented below as at and for each of the five years in the period ended December 31, 2005 has been derived from:

·        in respect of the three years ended December 31, 2005, our audited financial statements included elsewhere in this annual report, which have been audited by Ernst & Young Accountants, Independent Registered Public Accounting Firm; and

·        in respect of the two years ended December 31, 2002, our audited financial statements, which have not been included elsewhere in this annual report, and which have been audited by Ernst & Young Accountants, Independent Registered Public Accounting Firm.

We have prepared our financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The selected financial data should be read in conjunction with Item 5, “Operating and Financial Review and Prospects”, our audited historical financial statements and accompanying notes that are included elsewhere in this annual report.

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		Years ended December 31,
		2001			2002			2003			2004			2005
		(in thousands, except share/ADS and per share/ADS data)
Consolidated Statements of Operations Data:
Revenues:
License fees		€	7,972		€	6,664		€	4,800		€	12,429		€	20,848
Service fees		—			—			404			5,712			11,881
Government grants and other		1,209			2,911			2,220			4,481			4,840
Total revenues		€	9,181		€	9,575		€	7,424		€	22,622		€	37,569
Costs and expenses:
Cost of service fees		—			—			399			5,644			7,156
Research and development		17,764			24,880			22,858			21,412			32,751
Selling, general and administrative		9,391			11,129			9,329			16,326			13,918
Developed technology amortization		1,330			1,331			1,330			1,966			1,470
Goodwill amortization		8,826			—			—			—			—
Goodwill impairment		—			30,891			—			—			—
Total costs and expenses		€	37,311		€	68,231		€	33,916		€	45,348		€	55,295
Loss from operations		(28,130		)	(58,656		)	(26,492		)	(22,726		)	(17,726		)
Interest income, net		6,205			3,547			2,143			1,503			1,966
Foreign currency gain/(loss)		463			(54		)	(19		)	(108		)	235
Equity in losses of unconsolidated investments		(2,524		)	(507		)	—			—			—
Gain on sale of securities available for sale		—			—			982			—			—
Net loss		€	(23,986	)	€	(55,670	)	€	(23,386	)	€	(21,331	)	€	(15,525	)
Net loss per share/ADS—basic and diluted(1)		€	(0.68	)	€	(1.57	)	€	(0.65	)	€	(0.59	)	€	(0.39	)
Weighted average shares/ADSs outstanding—basic and diluted		35,268,457			35,547,635			35,920,626			36,382,662			39,852,064

(1)          The effects of potential ordinary share equivalents related to stock options and stock plans are excluded from the calculation of diluted net loss per share as including such share equivalents would result in a lower net loss per share.

		As of December 31,
		2001			2002			2003			2004			2005
		(in thousands)
Consolidated Balance Sheet Data:
Assets:
Cash and cash equivalents		€	120,243		€	110,645		€	87,210		€	76,711		€	111,734
Total current assets		€	123,622		€	113,576		€	99,753		€	84,155		€	131,038
Total assets		€	174,020		€	128,956		€	113,744		€	98,667		€	169,543
Liabilities and shareholders’ equity:
Total current liabilities		€	10,546		€	12,799		€	11,716		€	14,773		€	15,977
Total long term liabilities		—			€	5,649		€	11,045		€	5,583		€	16,151
Total shareholders’ equity		€	163,474		€	110,508		€	90,983		€	78,311		€	137,415
Total liabilities and shareholders’ equity		€	174,020		€	128,956		€	113,744		€	98,667		€	169,543

 

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Exchange Rate Information

The following table sets forth, for the years indicated, the high, low, average and year-end noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York (“Noon Buying Rates”) expressed in euros per USD 1.00.

(1)          The average of the Noon Buying Rates on the last business day of each month during the period indicated.

The following table sets forth, for the previous six months, the high and low Noon Buying Rates expressed in euros per USD 1.00.

 

On June 19, 2006, the Noon Buying Rate was USD 1.00 = EUR 0.79. These rates may differ from the actual rates used in the preparation of our financial statements and other financial information appearing in this annual report.

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

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Risk Factors

You should carefully consider all the information in this annual report, including these material risk factors. The risks we face are not limited to the risks listed here. Some risks are not yet known to us and some of the risks that we currently do not believe to be material to our operations could prove to be material at a later date. All of these risks can materially affect our business, financial condition and results of operations.

We have a history of net losses and we may not achieve or maintain profitability.

We have incurred net losses since our incorporation. At December 31, 2005, we had an accumulated deficit of €290,049. We expect to have net losses and negative cash flow in the foreseeable future. Achieving profitability will depend, in part, on:

·       the rate of growth, if any, in our product sales and licensing revenues;

·       our ability to obtain approval for current pipeline products and to develop potential products either on our own or through partnerships, collaborations or strategic alliances; and

·       the level of our expenses.

We may never generate sufficient revenues to achieve profitability. Growth of our revenues is dependent on expanding current product sales, obtaining approval of the products in our pipeline, the success of our technologies—in particular, PER.C6—and on our success and that of our licensees in developing commercially successful products based on our technologies. Revenue growth related to our existing products may be dependent on factors beyond our control as discussed below under “—Our results fluctuate as a result of seasonality in our business, particularly with respect to our flu vaccine product” and “—Our products may fail at any stage of development or after market introduction due to factors beyond our control.”  Further, we do not have control over the ability of our licensees to develop commercially successful products based on our technologies. We expect to continue to invest in research and development to enhance our technologies and develop potential products. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We may need additional capital in the future. If we do not raise this additional capital, we may have to curtail operations and/or scale back our research and development activities.

We expect that our future capital requirements will be substantial. Changes may occur that would consume available capital resources significantly sooner than we currently expect. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the research and development of our technologies and potential products. In this regard, on May 10, 2005, we raised net proceeds of €50.1 million in a private equity offering of our ordinary shares priced at €14.50 per share. The capital raised from this private offering of shares supports the acceleration of our product development with new opportunities especially in the field of antibodies and therapeutic proteins. We also may need to raise additional capital if we make any acquisitions involving cash consideration or the issuance of new shares. In this regard, on February 22, 2006, we issued 16.7 million ordinary shares in connection with our acquisition of shares of Berna Biotech.

We may seek additional funding through public or private financing, strategic alliances or other arrangements. We may not have access to additional financing and, if we do, it may not be on favorable terms. If we fail to raise sufficient funds, we will have to curtail or cease operations, reduce our capital expenditures, scale back our development of new potential products, reduce our workforce and license potential products or technologies to others that we otherwise would seek to commercialize ourselves.

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We expect that our interim results of operations will fluctuate, and this fluctuation could cause the price of our ordinary shares and American Depositary Shares (ADSs) to decline, causing investor losses.

Our interim operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause the price of our ordinary shares and ADSs to fluctuate significantly or decline. Some of the factors that could cause our operating results to fluctuate include:

·       upon our acquisition of Berna Biotech in February 2006, the timing of sales and shipments of our existing products;

·       the timing and recognition of payments related to license agreements and collaboration arrangements; and

·       general and industry specific economic conditions, which may affect product sales and may also affect our own and our licensees’ research and development expenditures.

A large portion of our expenses is relatively fixed, including expenses for personnel, facilities and equipment. If revenues decline or do not grow as anticipated, we may not be able to correspondingly reduce our operating expenses and will suffer losses accordingly. In addition, we may increase our research costs in 2006, which may increase our operating expenses in the foreseeable future. Due to the possibility of fluctuations in our revenues and expenses, we believe that period-to-period comparisons of our operating results may not always be a good indication of our future performance. Our operating results in some periods may not meet the expectations of stock market analysts and investors. In that case, the price of our ordinary shares and ADSs would probably decline.

Our results fluctuate as a result of seasonality in our business, particularly with respect to our flu vaccine product.

Upon our acquisition of Berna Biotech in February 2006, our influenza vaccine, Inflexal V, accounts for a significant proportion of net sales from our vaccines business. The market for flu vaccines is extremely seasonal. There is a narrow window of time for production, regulatory approval and marketing of flu vaccines. Possible delays in stock availability or marketing of the vaccines could have a significant negative effect on us, since a majority of the distribution and sales occurs during only a few weeks in the third and/or fourth quarter of every year. Potential delays in any step of the regulatory approval, production and marketing process could result in a significant sales reduction for us . In addition, the antigen necessary to produce influenza vaccine is in limited supply, and we generally rely on a single source for our supply of this antigen. Any interruption or delay in our antigen supply could have a materially adverse effect on our sales of Inflexal V and negatively impact our earnings and financial position.

Expected benefits from the Crucell-Berna combination may not be realized.

We expect the acquisition of Berna Biotech in February 2006 to result in future growth benefits, cost savings and other benefits. However, our ability to successfully realize these benefits and the timing of their realization may be affected by a variety of factors, including:

·       the challenges of integrating the businesses, management teams and workforce of the two companies;

·       unexpected events including major changes in the vaccine industry; and

·       aligning new priorities.

Given these and other risks related to the combination of Crucell and Berna Biotech, there can be no assurance that the benefits we expect from the combination will be realized. If the expected benefits of the combination are not or only partially realized, the market price of our ordinary shares and ADSs may decrease.

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Our products may fail at any stage of development or after market introduction due to factors beyond our control.

There are inherent risks in the business of biotechnological development and production in connection with the development of vaccines. Pre-clinical testing, clinical research and regulatory approval of a pharmaceutical or medical product is a very lengthy and costly process, and there is a significant risk of failure at each stage of the process, should issues arise with respect to the efficacy or safety of a product. In particular, pre-clinical and early clinical studies cannot ensure efficacy for humans, and human studies are thus required for vaccine development. Such studies may, however, fail to prove the efficacy of the product candidates and are at constant risk of suspension for posing unreasonable health risks. There can be no assurance that any product candidate in our pipeline will either reach or successfully complete the clinical research process. Although a number of our products have reached late stage of development and offer a reasonably high probability of success relative to earlier stage products, the chances of failure remain significant. We have had products fail at this stage of development in the past. Any or all of our current late-stage products could fail to be proved sufficiently safe or effective to be brought to market or could fail to receive necessary regulatory approvals. Such failures could have a material adverse effect on our business and prospects.

Even if the products currently in late-stage development are introduced, there can be no assurance that a market for such products will develop or be sustained. If a market does develop, there can be no assurance that our existing facilities and resources will be sufficient to meet demand. Accordingly, there can be no assurance that we will realize any potential benefits that may be associated with our late-stage development product portfolio.

If we or our licensees do not develop commercially successful products we may fail to realize significant sales and royalty revenues in future years.

Very little data exists regarding the safety and effectiveness of the type of potential products that we and our licensees are developing. All of our potential products, and those of our licensees, including those based on our PER.C6 technology are either in research or in pre-clinical or clinical development. We and our licensees may not succeed in developing commercial products based on PER.C6 technology that are safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable cost, or can be marketed successfully.

Development of products requires significant investment, including pre-clinical and clinical testing, to demonstrate their effectiveness prior to their commercial distribution. To a certain extent, we are dependent on the research and performance of third parties to bring potential products to market. We expect certain potential products to enter clinical trials during 2006. We and our licensees must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our or their potential products. Our research and development or that of our licensees may not establish that our technologies or our or their potential products are safe and effective, in which case regulatory authorities may not approve them. Further, our government and university licensees and collaborators may have goals, such as academic publication or data collection, that are not solely focused on producing marketable products. Problems frequently encountered in connection with the development and use of new and unproven technologies and the competitive environment in which we and our licensees operate may further limit our and their ability to develop commercially successful products.

If our licensees or partners do not continue to use our potential products, PER.C6 technology or our other technologies, or if they terminate their agreements with us, we will earn less or no revenue from our agreements with them.

License, service and manufacturing revenues and government grants from our potential products, PER.C6 and other technologies have accounted for a substantial portion of our revenues to date and we

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expect that they will continue to comprise a significant portion of our revenues for the foreseeable future. If our current or prospective partners or licensees do not develop and eventually distribute products based on our technologies, or if they terminate the relationship with us, we may not be able to realize the revenues and growth we anticipate. We also may not be able to successfully develop and derive license or other revenues from new technologies. Our current or prospective licensees or partners may use or develop alternative technologies or develop competing products or potential products independently or in collaboration with others, including our competitors. The dollar/euro exchange rate may make our technology less competitive or reduce our revenues. If any of our licensees or partners become involved in a business combination or other major corporate transaction, this could cause a strategic shift in their business focus and the technologies they use. Our agreements with our licensees do not require them to dedicate resources to developing and distributing commercial products based on our technologies. Furthermore, our licensees or partners may generally terminate their agreements with us on short notice. If they do terminate their agreements with us, we may not be able to enter into new arrangements with other parties to replace those agreements. During 2005, existing licenses with eight licensees were not renewed.

We face competition in discovering, commercializing and licensing new technologies from biotechnology firms in Europe, the United States and elsewhere. This competition may limit our ability to derive revenues from our technologies and achieve profitability.

The field of biotechnology is new and rapidly evolving, and we expect that it will continue to undergo significant and rapid technological change. We operate in highly competitive markets and we may experience competition from companies that have similar or other technologies, or other products or forms of treatment for the diseases we are targeting. We are aware of a number of commercial initiatives in the fields in which we operate that may result in marketable products with which we would compete. We also may experience competition from companies that have acquired or may acquire technology from companies, universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions in the areas of our core technologies or obtain regulatory approval for alternative technologies or commercial products earlier than we or our licensees do. Other companies are developing products to address the same diseases and conditions that we and our licensees target and may have or develop products or potential products that are more effective than those based on our technologies. We also compete with our licensees in developing new potential products. It is possible that we will not be able to effectively compete with these or other entities, and such competition could hamper our ability to bring products to market or license and derive revenue from our technology. Such an inability to compete could have a material adverse effect on our business, results of operations and ability to achieve profitability. For more information on our competitive position, see Item 4, “Information on the Company—Competition”.

We may be unable to obtain regulatory approval to manufacture and market our new products and may have regulatory approval of the manufacture and marketing of our existing products revoked.

Regulatory bodies such as the U.S. Food and Drug Administration (FDA) in the United States of America and comparable authorities elsewhere, such as the European Medicines Agency (EMEA) and the European Commission, regulate the market introduction of biopharmaceutical products. In the approval process, a product candidate must undergo extensive testing, which can take many years and require substantial expenditures. The costs of pursuing and securing regulatory approval are increasing, necessitating additional regulatory compliance expenditure on our part. Required testing and trials include a review of the underlying technologies (including the cell line on which companies produce biopharmaceuticals) and are particularly rigorous with respect to vaccines. Product development involving new technologies is highly uncertain. In addition, different regulatory authorities may impose different conditions upon the marketing of a given product or may refuse to grant, or require additional data before granting, an approval to market a product even though the product may have been approved by another

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regulatory authority. There can be no assurance that regulatory approvals will ultimately be obtained to manufacture and market any such product candidates in which we are, or may in the future be, interested.

Although the FDA allows PER.C6 cells to be used to produce clinical materials that are being used in clinical trials at this time, the FDA has in the past raised concerns over the history and some of the properties of PER.C6 cells. If we or our licensees are unable to satisfy regulatory authorities as to the history and properties of PER.C6 or its appropriateness as a system from which companies can produce biopharmaceuticals, new regulations could be adopted that would preclude use of PER.C6 cells in the future. If this were to occur, our licensing and other revenues from PER.C6 will suffer. Our other technologies have not yet been used in clinical trials, and may face significant hurdles in obtaining regulatory approval if and when such trials begin.

Once a product is approved, the manufacture and marketing of the product remains subject to periodic review. Changes in applicable regulations, breaches of regulatory requirements or the discovery of problems related to the manufacture, safety, quality or efficacy of a product may result in the imposition of fines or restrictions upon the manufacture and sale of such product, including in the worst case withdrawal of the product from the market and/or the revocation of the relevant regulatory approvals. If the relevant regulatory authorities do not approve products developed using our technologies, or revokes approval of our existing products, we may not receive any licensing or royalty revenues, which may have a material adverse impact on our business, financial condition, results of operations and prospects.

Any potential health risks associated with our products may lead to significant adverse regulatory and market consequences.

The possibility of product failure or adverse side effects poses a variety of risks for manufacturers of pharmaceutical and medical products. These risks may be more pronounced in the case of the prophylactic vaccines that constitute our core products than with respect to other pharmaceutical and medical products generally. Because such vaccines are administered to healthy subjects, any adverse health consequences associated with such administration may be perceived as less tolerable than side effects associated with the treatment of disease. Accordingly, there can be no assurance that even relatively minor potential health risks associated with our products will not give rise to adverse regulatory action, and/or negative market perception of us and our products, resulting in a material adverse effect on our business, financial condition, results of operations and prospects.

We may have significant product liability exposure, and our product liability insurance may be inadequate to cover product liability or other claims against us.

Like other manufacturers active in the biopharmaceutical industry, we may be exposed to product liability and other claims if third parties allege that our technologies, potential products or future products have caused harm. If a third party successfully sues us for an injury caused by our products, potential products or products developed using our technologies, our liability could exceed our total assets. This risk may be more pronounced in the case of the prophylactic vaccines, which constitute our marketed products, than with respect to other pharmaceutical and medicinal products generally. Suits against us arising out of clinical trials may increase as more licensees utilize our technologies or potential products, thereby lessening our control over the manner of use of such technologies and potential products. We maintain product liability insurance in respect of all marketed products. We may seek to obtain additional product liability insurance in the future, though such additional insurance may be prohibitively expensive, or may not cover all of our potential liabilities. If we are unable to obtain sufficient insurance coverage at an acceptable cost or if we are otherwise unable to protect ourselves against potential product liability claims, this could prevent or inhibit the commercialization of products that we or our licensees develop.

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In the past, we have been dependent on a small number of licensees and partners for a majority of our license revenues and expect to depend on a small number of licensees for a portion of our revenues in the future.

We have been dependent on a small number of licensees and partners that have, in the past, accounted for  the majority of our revenues. For the year ended December 31, 2005, three licensees and partners accounted for 60% of our revenues. For the years ended December 31, 2004, and December 31, 2003 three licensees and partners accounted for 56% and 38% of our revenues, respectively. We currently are reliant on a limited number of contracts for revenues and commercialization of our products and PER.C6 technology, and any termination or alteration to these agreements would have a substantial adverse effect on our licensing revenues and financial results.

We are particularly reliant on our agreements with sanofi pasteur (“sanofi”), DSM Biologics (“DSM”) and the National Institute of Health (“NIH”) to generate licensing. revenues and we expect that a high level of licensee and partner concentration will continue in the foreseeable future. In the event that one or more of our major licensees or partners were to terminate or substantially alter their licenses with us for any reason, we could experience a significant decrease in revenues and an adverse effect on our financial results.

We may have conflicts with our licensees that could make collecting payments due to us more difficult or that could negatively affect our relationship with our current and potential licensees.

We may have disagreements with our licensees over royalty payments due to us and may have difficulty in collecting these payments. Our existing license arrangements generally entitle us to receive royalty payments for any potential products developed using our technology. We depend on our licensees to inform us when they develop products using our technology. If our licensees fail to inform us of their progress in these developments, we may not know of payments to which we would be entitled. In addition, our licensees may have difficulties making payments to us given the current economic climate or other factors. We may also incur significant expenses in collecting payments or, in some instances, we may not succeed in collecting these payments at all.

Our licensees may dispute the scope of the licenses that we have granted them, which could negatively affect our relationships with them and other licensees and our ability to grant additional licenses to other companies. A number of our license agreements provide that if more favorable royalty terms are granted to another licensee pursuant to a license of substantially the same scope, the initial licensee will also be entitled to the more favorable terms. A licensee may claim that other license agreements contain more favorable terms and that we should extend these terms to it. This may lead to a licensee disputing the amounts payable to us.

If ethical, legal and social issues related to the use of genetic technology, human-based materials and animal testing negatively affect regulatory approval, patentability or market acceptance of our core technologies and of the products developed using these technologies, we would not be able to generate revenues from those products or our technologies.

The use of genetic technology and materials derived from human fetal tissue, such as PER.C6 technology, raises many ethical, legal and social issues that could hinder regulatory approval, patentability or market acceptance of our technologies and products developed using them. Further, public expressions of concern and adverse events involving new biopharmaceutical technologies or products (such as stem cells or genetically modified foods or organisms) could result in greater governmental regulation of our technologies and potential regulatory delays relating to the testing or approval of our own or our licensees’ potential products. Advocacy groups have taken issue in the past and may take issue in the future with the use of genetic technology or materials derived from human fetal tissue, which may hinder or adversely affect regulatory approval or market acceptance of our technologies and products developed using them. Concerns over the safety of new biopharmaceutical technologies or products could result in limited

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acceptance by patients and the medical community. In addition, we rely on animal testing in some of our research and development and adverse public reaction to our use of animal testing could also cause us to encounter negative publicity. Any of these factors could generate negative publicity or other adverse consequences regarding our business or industry, and could reduce or eliminate the potential markets for our own or our licensees’ potential products.

Our efforts to protect our intellectual property rights or to defend ourselves against any claims of infringement may be costly and, if unsuccessful, we may be barred from using or licensing our technologies.

Our commercial success depends in part on our ability to obtain and maintain adequate protection of our intellectual property rights, including patents, in our technologies and potential products in Europe, the United States and elsewhere. However, the patent positions of technology-based enterprises like us are subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and priority of a particular patent. There can be no assurance that we will develop products that are patentable, that patents will be granted under pending or future applications or that patents granted to us or our collaborators will be of sufficient breadth to provide adequate protection against competitors with similar technologies or products or will not be successfully challenged. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and any potential products we develop and erode our competitive advantage and/or erode the value of our technologies.

Our commercial success also depends in part on not infringing patents and proprietary rights of third parties. Our work is in areas of technology where a large number of patent rights exist. As our activities in the biotechnology and biopharmaceutical markets expand and more patents are issued, the risk that our technologies and potential products may give rise to claims of alleged infringement increases. In addition, we may in the future wish to undertake activities, which raise patent infringement issues.

We routinely monitor the public disclosures of other companies operating in our industry regarding their technological development efforts to ensure that we do not undertake activities that infringe their intellectual property rights and to monitor whether those companies’ activities may infringe our intellectual property rights. Due to the inherent imperfections of patent searching, we can never be certain that our monitoring will be exhaustive, and it is possible there may be third-party intellectual property rights of which we are not yet aware. If we determine that other companies’ technological development efforts violate our intellectual property rights, we intend to take appropriate action. We are aware of a few patents which are potentially relevant to our past, current or anticipated activities. We believe that our current activities do not infringe any valid claims of these patents. Third parties, however, may seek to enforce patents against us and a court may find against us. Enforcing intellectual property rights against others or defending ourselves against claims of infringement can be very expensive, and any action in which we are involved could result in substantial costs and diversion of management and technical personnel and resources.

Other companies are and may become involved in proceedings regarding patents that cover technologies related to ours. The outcome of any intellectual property proceedings in which we or they are involved could effectively block our ability to further use or license our technologies or enter into co-development arrangements. It could also impair our or our licensees’ ability to develop and commercialize potential products or products, and could result in the award of substantial damages against us. In the event of an unfavorable outcome in litigation, we may need to obtain licenses or redesign our technologies or potential products to avoid infringement. In the event that we must cease using a technology, we could encounter delays in license revenue generation, milestone or royalty payments or product introductions while we attempt to develop alternative technologies or potential products. If we do not succeed in such attempts, we may be forced to cease operations. In addition, if litigation results in a successful challenge to one of our patents, then competitors could be free to use the subject matter covered by the patent, or we may need to license the technology to others in settlement of such litigation.

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Oppositions are relatively straightforward proceedings where any third party can seek to have a patent revoked. The proceedings typically have a stage where the patent’s opponents and proprietor may each file observations in writing, followed by oral proceedings.  The decision, which may be a dismissal of the opposition, a revocation of the patent or a maintenance of the patent in more limited form, usually takes between two to three years from the start of the proceedings. In most jurisdictions the decision is subject to appeal by the adversely affected party or parties. If the oppositions against our PER.C6 and AdVac patents are successful we may lose some or all patent protection in Europe.

Potential patent disputes with GlaxoSmithKline, if decided adversely to us, could cause us to lose a significant share of our future revenues.

Berna’s subsidiary Green Cross Vaccine Corporation, currently operating under the name Berna Biotech Korea Corporation, and our partner Chiron, lodged oppositions against a patent of GlaxoSmithKline (GSK) in Korea. The patent is concerned with multivalent vaccine formulations, such as our pentavalent vaccine registered in Korea, to be marketed under the trademark Quinvaxem. In response to the opposition, the patent has been revoked by the Korean Intellectual Property Office in December 2004 on the grounds that the subject-matter claimed in the patent lacks novelty. GSK has appealed that decision before the Korean Patent Court. After a hearing which took place on April 27 2006, the Korean Patent court dismissed the appeal on June 8, 2006. The decision could be further appealed by the adversely affected party. If the Korean Supreme Court were to reverse the decision of the Patent Court and if GSK were to decide to enforce its patent, Berna Biotech Korea Corp. could be found to have infringed or be infringing the patent. If we are found to be infringing, we may be forced to delay, or even cancel, our commercial activities with this vaccine. As a consequence we might lose revenues and our business would be adversely affected.

In addition, production of our pentavalent vaccine requires a particular vaccine component that may become the subject of a patent dispute between GSK and us or our supplier of that component. The patent on that particular component, held by GSK, is currently under opposition before the patent office and a definitive outcome on the validity of the patent is expected to take a number of years. A negative outcome of this opposition proceeding could lead to infringement proceedings between GSK and us or our supplier, although we believe that neither we nor our supplier would be held to have infringed or be infringing that patent. The outcome of legal disputes is invariably difficult to predict with accuracy, but in the event GSK were to prevail in infringement proceedings against us, this would adversely affect our business.

If we or our licensees are unable to obtain any necessary licenses from third parties for use of their intellectual property on acceptable terms, we or our licensees may be unable to develop or market products based on our technologies.

Before we can market some of our products or technologies, we may need to obtain licenses from third parties who have patents or other intellectual property rights. We may be unable to earn revenues from products based on our technologies or from our own potential products if a third party does not grant us or our licensees a necessary license or offers a license only on unacceptable terms. For example, in the patent context, others have filed, and in the future are likely to file, patent applications covering technologies that we may wish to use or products that are similar to products that may be developed using our technologies. If these patent applications result in issued patents, we may need to obtain a license from the proprietors to use their patented technology. These licenses may not be available, or may not be available on acceptable or commercially reasonable terms. Without these licenses, we may be required to alter our technologies or potential products, or to avoid or stop certain activities. Our licensees may face similar problems.

If we lose the services of key personnel or are unable to attract and retain qualified personnel, we may be unable to develop our own technologies and potential products and to execute our business plan.

We are dependent on the principal members of our management and scientific personnel. Because of the experience our senior management has with our scientific research and development, our financial

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position and our business and the industry in which we operate, the loss of the services of any of them might adversely affect our results or the ongoing development of our technologies which is necessary to remain competitive and our ability to execute our business plan. The employment contracts of each of our management board members contain non-compete provisions that would apply for a period of one year after the end of their employment with us. We also may not be able to recruit and retain the qualified personnel necessary to develop our core technologies and potential products and execute our business plan. There is currently a shortage of skilled executives, scientific personnel and intellectual property and regulatory experts in our industry, particularly in the markets in which we operate. We believe this shortage is likely to continue. As a result, competition for skilled personnel is intense, and the turnover rate can be high. Competition for experienced executives, scientists, developers and manufacturers of pharmaceutical products, and other experts from numerous companies and academic and other research institutions may limit our ability to attract and retain qualified personnel on acceptable terms or may significantly increase our labor costs. The loss of any key personnel and/or the inability to attract and retain highly skilled personnel on acceptable terms could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may encounter difficulties in managing our growth. These difficulties could increase our losses.

We have experienced rapid and substantial growth and may continue to experience such growth in the future. This growth may be organic or through the acquisition of other companies or entities, and such growth will continue to place a strain on our human and capital resources. The aggregate number of full-time equivalent employees increased from 182 at December 31, 2003 to 282 at December 31, 2005. The acquisition of Berna Biotech AG brought our total head count in June 2006 to approximately 900 full time equivalents. In addition, we will need to continue to expend funds to manage our operations and growth effectively. We will also need to continue to expend funds to attract and retain sufficient numbers of talented employees. If we do not have sufficient revenues to address these issues and otherwise make adequate expenditures, we may not be able to manage our growth effectively. If we are unable to manage our growth effectively, our losses could increase.

A number of our research and product development programs depend on access to biological materials without which we would be unable to conduct this research and development.

To continue to develop our core technologies and potential products, we will need access to biological materials, such as virus and tissue samples, which may be in limited supply. If we lose or do not obtain access to appropriate biological materials, or if tighter restrictions are imposed on their use or on information generated from them, we could be restricted or prevented from conducting our research and product development. In addition, government regulations could result in restricted access to, or use of, human and other biological material samples.

We rely on a limited number of third-party suppliers for the supply of crucial materials for the production of our products and for our serum-free medium. Any interruption in this supply would interrupt our production and ability to conduct research and product development.

We and some of our licensees rely on third parties for the supply of the serum-free medium in which we grow our PER.C6 cells. We cannot guarantee this medium will be available in the future on an industrial or bulk scale. If supply problems force us to use a new medium, we would need to spend time and resources to adapt our technology and processes to that medium, and during this period of adaptation, our use of PER.C6 would be interrupted. Any such interruption or other failure of the serum-free medium upon which we currently rely could decrease the potential viability and profitability of our PER.C6 technology.

In addition, we rely on third-party supplies including CSL, Chiron and Bio Farma for the supply of crucial materials for the production of some of our marketed products or those under development, including starting materials as well as antigens present in the final product. This includes, but is not limited to, the supply of A-Singapore flu antigen for the production of the currently marketed hepatitis A vaccine

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Epaxal, flu antigen for the production of the currently marketed flu vaccine Inflexal V, DiTePHiB antigen for the pentavalent vaccine currently in Phase III clinical development and DTP antigen for the tetravalent vaccine currently in Phase III clinical development. In particular, a significant shortfall of the supply of A-Singapore flu antigen for the production of our hepatitis A vaccine Epaxal before December 31, 2007, when our agreement with Chiron for the supply of this antigen terminates, may have a material adverse effect on our ability to produce Epaxal. In addition, our agreement with CSL for the supply of flu antigen for the production of our flu vaccine Inflexal will terminate as of December 31, 2009. Due to the shortage of antigen production capacity worldwide, we anticipate that it may be difficult to establish a new contract for the supply of flu antigen on the terms and conditions we currently have. If we are unable to establish a new supply agreement, or are only able to establish a new agreement on less favorable terms and conditions, it could increase our costs, and there is no guarantee that we would be able to pass on these increased costs to our customers. Any interruption or termination of these supply relationships may have adverse effects on our ability to produce and supply these products as well as on our ability to launch new products in development and thus on our overall results.

We cannot be certain that we will be successful in public tenders to provide national governments and supranational organizations with our vaccine products.

For the sale of our pediatric vaccines, such as the pentavalent vaccine Quinvaxem, we rely to a considerable extent on the public markets, which typically operate via a tender system. In a tender system, national governments or supranational organizations request proposals for the terms under which a vaccine manufacturer will provide a large quantity of one or more vaccines. The award of the tender is typically based on a number of factors, including price, quality and often other non-financial attributes. Often, the tender is for a period of one or more years, meaning that only the chosen manufacturer will be permitted to supply the subject vaccine for that length of time. Failure to win a tender therefore, may cause us to be ineligible to supply the relevant national government or supranational organization for one or more years, and in turn, have a material adverse effect on our business, results of operations and financial condition.

Third parties may bring claims relating to improper handling, storage or disposal of the hazardous materials we use in our business, which may require us to spend significant time and financial resources to defend and to pay damages.

Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our BioSafety Level III (BSL-III) laboratory facilities allow us to work on-site with hazardous materials like West Nile virus. Our operations also produce hazardous waste products. Given the inherently dangerous nature of certain of the materials we may work with in our BSL-III laboratory facilities and other hazardous materials incident to our work, we cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Various laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages and significant adverse publicity in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may make us adopt more labor-intensive, time-consuming or complicated practices or procedures in connection with our research, development or production activities.

We cannot be certain that our licensing or other agreements are not in breach of applicable competition laws and will not be considered void.

We have not notified the European Commission competition authorities of any of our licensing or other agreements or sought clearance from any other competition authority. We take the view that these agreements are unlikely to be found to infringe European Union or other applicable competition regulations. It is possible, however, that our current or future similar agreements could be found to

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infringe applicable competition regulations. In this event, among other things, we may be subject to fines, claims of damages and our licensing or other agreements may be considered void and unenforceable. The Technology Transfer Block Exemption Regulation in the European Union may require us to review and possibly amend existing license and technology transfer agreements in the future to comply with this regulation. This review process may be costly and time consuming and may require renegotiation of certain portions of our licenses and other agreements but we do not expect this process to have a material adverse effect on our license portfolio or results.

Compliance with the internal controls and evaluations and attestation requirements under the Sarbanes-Oxley Act may be expensive and time-consuming.

Pursuant to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, we will be required, as a foreign private issuer, beginning in fiscal year 2006, to perform an evaluation of our internal controls over financial reporting and have our auditor publicly attest to such evaluation. We have prepared an internal plan of action for compliance, which includes a timeline and scheduled activities, although as of the date of this filing we have not yet finalized it completely. Compliance with these requirements is expected to be expensive and time-consuming. If we fail to complete this evaluation in a timely manner, or if our independent auditor cannot attest to our evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls, with a corresponding adverse effect on our share price.

The anti-takeover provisions in our articles of association and the laws of The Netherlands may prevent a change in control that may be in the best interests of our shareholders.

Our articles of association and the laws of The Netherlands have anti-takeover effects. Among other things, our articles of association provide that our supervisory board may make binding nominations for the election of its board members, and only a shareholders’ resolution approved by an absolute majority of the votes cast, representing more than one-third of our outstanding shares, can set the nominations aside. Furthermore under Dutch law, we may issue preference shares to a foundation, “Stichting Preferente Aandelen Crucell”, or the Preferred Foundation, giving it preferred dividend rights and diluting the voting rights held by the holders of the other classes of shares. The chairman of our supervisory board, Pieter Strijkert, our chief executive officer, Ronald H.P. Brus and four independent members comprise the board of the Preferred Foundation. These and other provisions in our articles of association may have the effect of delaying, deterring or preventing a change in control that might otherwise be in the best interest of our shareholders or offer them the opportunity to sell their ordinary shares or ADSs at a premium over the market price. See Item 10, “Additional Information” for additional information regarding the preference shares and our articles of association.

U.S. and other non-Dutch holders of our ordinary shares may not be able to exercise pre-emption rights.

In the event of an increase in our share capital, holders of our ordinary shares are generally entitled to certain pre-emption rights unless these rights are excluded by a resolution of the general meeting of shareholders or of our board of directors, if so designated by the general meeting of shareholders or pursuant to our articles of association. However, U.S. holders of our ordinary shares may not be able to exercise pre-emption rights unless a registration statement under the Securities Act is declared effective with respect to the shares issuable upon exercise of such rights or an exemption from the registration requirements is available. No assurance can be given that any registration statement will be filed or, that if filed, will be declared effective, or that any exemption from registration would be available to enable the exercise of a U.S. holder’s pre-emption rights.

Our shareholders may have difficulty protecting their rights as a shareholder and in enforcing civil liabilities because we are a Dutch limited liability company.

Dutch law and our articles of association govern issues regarding the legal organization, internal constitution, corporate authority and the liability of members of our management board and supervisory

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board. Our offices and all of our assets are located outside the United States. In addition, a majority of the members of our supervisory board, all of the members of our management board and management team are residents of, and most of their assets are located in, jurisdictions outside the United States. As a result, it may be difficult to serve process on us or these persons within the United States. It may also be difficult to enforce a U.S. court judgment against them in a U.S. court or in a Dutch court or to enforce a Dutch court’s judgment against them in a U.S. court. This can include actions under the U.S. securities laws. In addition, it may be difficult to enforce, in original actions brought in courts in jurisdictions located outside the United States, liabilities under the U.S. securities laws. For a more complete discussion of potential difficulties in protecting your rights, see Item 10, “Additional Information—Enforcement of Civil Liabilities.”

Our ordinary shares and ADSs may have a highly volatile trading price. You may not be able to resell your ordinary shares or ADSs at or above the price you pay for them, the ADSs may vary in value, and our share price may render us vulnerable to a takeover bid.

Our ordinary shares are listed on Euronext Amsterdam’s Eurolist by Euronext, also called the Amsterdam Stock Exchange. Our ADSs are quoted on the Nasdaq National Market. An active trading market for our ordinary shares or ADSs may not continue to develop or be sustained. The ADSs’ low closing price during 2003, 2004 and 2005 has been $3.81, $6.38 and $12.30 respectively, and the closing price as of June 19, 2006 was $18.24. The trading prices of ordinary shares of biotechnology companies in general have experienced significant volatility in the past and are likely to continue to be volatile. In addition, any negative change in the public’s perception of the prospects of biotechnology companies could depress our ordinary share or ADS price regardless of our results of operations. Other broad market and industry factors may affect the trading price of our ordinary shares and ADSs, regardless of our performance.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our ordinary shares or ADSs adversely, our share or ADS price and trading volume could decline.

The trading market for our ordinary shares and ADSs will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us or our industry downgrade our ordinary shares or our ADSs, the market price of the shares or ADSs would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the market price of our shares or ADSs or trading volume to decline.

We believe that we were or may have been a passive foreign investment company before 2005, causing certain adverse U.S. tax rules to apply to U.S. holders that held our ordinary shares or ADSs before 2005.

Although we believe that we were not a “passive foreign investment company” or “PFIC” for U.S. tax purposes with respect to the year 2005 and also do not anticipate becoming a PFIC with respect to the year 2006 or thereafter, we believe that we were or may have been a PFIC with respect to the years before 2005. If we were a PFIC in the past, U.S. holders that held our ordinary shares or ADSs at any time during the years when we were treated as a PFIC and did not make a mark-to-market election or a qualified electing fund (“QEF”) election will generally continue to be subject to certain adverse U.S. federal tax rules (the “PFIC rules”), even though we later ceased to qualify as a PFIC. In order to avoid being subject to these rules in the future, affected U.S. investors may wish to make a deemed sale election with respect to our ordinary shares or ADSs. The PFIC rules are extremely complex, and U.S. investors are urged to consult their own tax advisers regarding the potential consequences to them of making the deemed sale election. See Item 10, “Taxation—Taxation of U.S. Investors—Passive Foreign Investment Company Rules.”

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Item 4.                        Information on the Company

History and Development of Crucell

We are a limited liability company incorporated in The Netherlands with the legal and commercial name Crucell N.V., registered under number 28087740. We were incorporated  on October 9, 2000, as the holding company for Crucell Holland B.V., formerly called IntroGene B.V., following the combination of IntroGene B.V. and U-BiSys B.V. Our principal executive office is located at Archimedesweg 4, 2333 CN Leiden, The Netherlands and our telephone number is +31 (0)71 524 8701. Our agent in the United States is CT Corporation, 111 Eighth Avenue, New York, New York 10011.

On December 31, 2005 we owned three Dutch subsidiaries, Crucell Holland B.V., U-BiSys B.V. and ChromaGenics B.V., all limited liability companies incorporated in The Netherlands. Via a share exchange offer concluded on February 22, 2006, as of April 12, 2006 we own slightly more than 98% of Berna Biotech A.G. (“Berna”) a stock corporation (Aktiengesellschaft) under Swiss law. Berna was founded in 1898 when many disease causing bacteria were being identified for the first time. Then calling itself the Swiss Serum and Vaccine Institute, the company focused on methods to harness the human immune system against these pathogens. Berna changed its name to “Berna Biotech AG” in 2001. Its registered office is at Rehhagstrasse 79, 3018 Bern, Switzerland. and currently has reference number CH- 35.3.000.374-7.

Our common shares are listed on Euronext (Amsterdam) and quoted on NASDAQ (New York) in the form of American Depositary Shares (ADS). Since February 22, 2006, our shares are also listed on the SWX Swiss Exchange in Zürich, under the symbol CRX. On April 12, 2006 we announced that we hold more than 98% of all Berna’s issued shares and we have filed for the cancellation of the remaining shares held by minorities. This step is in line with goal of fully integrating the business of the two companies. The Berna Biotech shares will be delisted from the SWX upon completion of the cancellation procedure.

As of February 22, 2006 the following companies were subsidiaries of Berna:

R: Research; DEV: Development; P: Production; DIS: Distribution

On March 27, 2006 we announced plans to divest biopharmaceutical and vaccine manufacturer Rhein Biotech GmbH in a cash transaction. It will be acquired by Dynavax Technologies Corporation, a U.S. based biotech company. On April 5, 2006 we reached agreement on the sale of all our shares in the veterinary pharmaceuticals production company Dr. E. Gräub AG. The company will become a subsidiary of Vetinvest GmbH, a German company active in the field of veterinary medicines. Both divestments are steps towards aligning our portfolio of activities with our strategic priorities.

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Business overview

Profile

We are a fully integrated biopharmaceutical company, focusing on the development, production and marketing of vaccines and antibodies against infectious diseases for private and public markets worldwide. With the acquisition of Berna Biotech in February 2006, we have a portfolio of well known vaccines and a broad pipeline of new potential vaccines and antibodies. We combine the use of established and new technologies such as the PER.C6, MAbstract, AdVac and our virosomal technology as well as our proprietary Hansenula polymorpha expression system. We believe our proprietary PER.C6 human cell line technology is well suited for the development and large-scale manufacturing of a wide range of biopharmaceuticals including vaccines, antibodies, therapeutic proteins and gene therapy products. Our research and development facilities are located in the Netherlands and Switzerland, Korea and Germany. We also have manufacturing facilities in Switzerland, Korea and Spain, and a sales and marketing infrastructure in our core markets of Switzerland, Italy, Spain and Korea. Through our portfolio of core marketed vaccines, we have established markets in hepatitis B, paediatric, respiratory and travel vaccines. We have approximately 900 employees. As of March 1, 2006 our research and development facilities employed approximately 325 employees of which one third are outside the Netherlands, primarily in Switzerland.

Strategy

We aim to increase revenue growth by manufacturing and marketing vaccines and antibodies that address currently unmet medical needs and to leverage our proprietary technologies to develop monoclonal antibodies and therapeutic protein products to combat infectious and other diseaeses. We do this by discovering, researching and developing technologies, vaccines and antibodies, using our own fully integrated infrastructure for in-house development, production and marketing, and, where useful or necessary, by forging partnerships with other companies and organizations. We may alter or expand our product pipeline to include products that, in some instances, we may co-develop and market through collaborations or strategic alliances with third parties to share risks and costs. We also will continue licensing our core technologies to other companies in biotech industry.

Business drivers

Our business strategy is based on the following business drivers:

·       Leveraging presence of our marketed vaccines in public and private markets.   The combined company has established products in hepatitis B, paediatric, respiratory and travel vaccines. We intend to enhance our position in these markets by highlighting the unique features of these products and by providing outstanding customer service in terms of delivery, reliability and quality and by leveraging our worldwide presence in both public and private markets.

·       Product pipeline with competitive advantage.   We believe that each of our selected products either targets unmet medical needs, improves current medications, or is perceived as a marketable product due to predictive study models and/or due to perceived favorable regulatory conditions. We currently have five vaccine programs in clinical trials of which three are in Phase III or registration, and five vaccine programs and one antibody program in various stages of pre-clinical development, which are based on our PER.C6 production technology. In addition, we have various discovery programs to find new vaccine antibody and therapeutic protein leads.

·       Ongoing technology licensing program.   We have a broad base of excellent technologies with applicability for vaccines, antibodies, other recombinant proteins and gene therapy. In areas where we are not developing our own products, we offer our technologies to the biopharmaceutical

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industry for the development and production of diverse biopharmaceutical products. The ongoing and extensive PER.C6 technology licensing program and as of yet more limited licensing programs for our other technologies support and accelerate our in-house  product development. Our licensing program provides a source of revenue as well as the potential for future, additional revenue in the form of royalties from products developed by our licensees. We believe that our licensing program results in increased awareness in, and acceptance by, the biopharmaceutical industry and the regulatory authorities of our technology as a production technology for biopharmaceutical products.

Our Core Products and Technologies

Our current product portfolio upon completion of the acquisition of Berna Biotech in February 2006 contains hepatitis B, paediatric, respiratory and travel vaccines. Our core product portfolio currently consists of four marketed vaccines: Hepavax-Gene, Inflexal V, Epaxal, and Vivotif. Recently our portfolio has been strengthened with the addition of the Quinvaxem vaccine.

Hepavax-Gene

Hepavax-Gene is a Hansenula polymorpha-based recombinant hepatitis B vaccine. Since its launch in 1996, more than 350 million doses of Hepavax-Gene have been commercially distributed in more than 90 countries, making it the third most used hepatitis B vaccine in the world. A key competitive advantage for Hepavax-Gene is that its immunogenic component, HBsAg, is produced in modified yeast using our proprietary Hansenula polymorpha expression system, which allows for stable and efficient production. We launched a thiomersal-free formulation in 2004 in Korea. In addition, Hepavax-Gene forms the foundation of two combination paediatric vaccines, one of which has already received its marketing authorization from the Korea Food and Drug Administration (KFDA).

Inflexal V

Inflexal V is a virosome-adjuvanted influenza vaccine administered by injection. It is the first vaccine in our portfolio to use our patented virosome technology. Due to the absence of aluminium and thiomersal, which in consequence reduces adverse effects on patients compared to alternative influenza vaccines, the vaccine has a high tolerability. In addition, it has a good immunogenicity profile, making it particularly effective with high-risk patients, such as the elderly, in whom the immune response is generally weaker. Inflexal V was originally introduced in 1997 and was successfully registered through the Mutual Recognition procedure in most European markets in October 2001. The vaccine is currently registered in 38 countries.

Epaxal

Epaxal is the first virosome-adjuvanted vaccine for hepatitis A. The vaccine has a high tolerability due to the absence of aluminum and thiomersal and is highly effective, offering protective immunity within a few days following the first dose and, following the second (booster) dose, providing immunity for up to 20 years. The product is currently licensed in more than 40 countries world-wide under the brand names Epaxal and HAVpur and in most of these countries is licensed for adults and children over the age of one year.

Vivotif

Vivotif is a live attenuated typhoid fever vaccine administered orally. It is the only live oral vaccine indicated for use against Salmonella typhi, the most prevalent of the typhoid fever-causing bacteria. Vivotif consists of a live strain of Salmonella typhi that has been altered so that it stimulates an immune response, but not the disease. The bacteria are enclosed in coated capsules that dissolve in the intestines, releasing

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the live organism. Vivotif exhibits high tolerability and efficacy. Vivotif has an established track-record for safety, having been on the market for over twenty years. The vaccine is indicated for adults and children over the age of five. Vivotif is currently licensed in 44 countries, including the United States.

Quinvaxem™

On March 27, 2006 the Korea Food and Drug Administration (KFDA) has awarded licence to Quinvaxem™, a fully liquid pentavalent (five-component) vaccine we will produce in Korea. Quinvaxem™ combines antigens for protection against five important childhood diseases: diphtheria, tetanus, pertussis (whooping cough), hepatitis B and Haemophilus influenzae type b, one of the leading causes of bacterial meningitis in children. It is the first internationally available fully liquid vaccine containing all five of the above antigens to reach the market, offering a clear advantage in terms of convenience of use. Quinvaxem™ was co-developed with Chiron Corporation, which provides four of the five components as bulk. The production of this combination vaccine has started immediately. First sales are expected in the second half of 2006. Supranational organizations are major customers for combination vaccines, which are used in mass vaccination programs in developing countries.

Complementary vaccines

Our core vaccines business also includes a range of paediatric and booster vaccines and vaccines for special indications which we offer in our key markets and, through regional sales partners, world-wide. We currently offer, through our partnership with Chiron, Di Te Anatoxal™ for diphtheria and tetanus, Encepur™ for tick-borne encephalitis, Menjugate for meningitis C, Te Anatoxal™ for tetanus and MoRuviraten for measles/rubella.

Seasonality

Our sales of respiratory vaccines are exposed to seasonal variations. The sales are primarily made in the second half of the business year. In other respects, our business is not significantly seasonal.

Product development programs

Our early-stage product development programs comprise vaccines against influenza, West Nile virus, Ebola, malaria, and tuberculosis as well as antibody products against rabies and preclinical research on the blood clotting Factor V. This coagulation factor is a central regulator in the early phases of blood clot formation.

In late-stage development, our pipeline of vaccines consist of four products, two of which are in Phase III clinical trials: Pseudomonas aeruginosa vaccine Aerugen and a paediatric combination vaccine (DTPw-HepB) against diphteria, tetanus, pertussis (whooping cough) and hepatitis B. The Aerugen vaccine is intended to prevent Pseudomonas aeruginosa infections in patients with cystic fibrosis. The two other vaccines which are in the process of finalizing their registration are  a yellow fever vaccine and a two-dose hepatitis B vaccine. We also have programs in various stages of pre-clinical development, including programs  focused on improved flu/respiratory syncytial virus (RSV), therapeutic hepatitis B vaccines and Recombinant Live Paramyxovirus vaccines intended to combat HIV.

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Proprietary technologies

Our product portfolio is supported through a range of proprietary technology platforms. Besides revenues generated from product sales upon the completion of our acquisition of Berna Biotech in February 2006, we also generate revenues from licensing our proprietary technologies to pharmaceutical and biotechnology companies, from grants and government subsidies obtained to support the development of our technologies and potential products, and from service fees earned under development contracts with our partners. We intend to add revenues in the future from initial license fees, license maintenance fees and milestone and royalty payments from products that our licensees develop using our technologies.

Our core proprietary technologies are as follows:

·       PER.C6 technology.   Our PER.C6 technology encompasses a human cell line production system that we and our licensees use to develop biopharmaceutical products. The PER.C6 technology is currently being applied in four areas for the research, development and/or manufacture of:

(a)           vaccines;

(b)          antibodies and other therapeutic proteins;

(c)           gene therapy products; and

(d)          functional genomics, which is the study of how individual genes function.

·       AdVac technology.   Our AdVac technology is a recombinant vector technology that we use to develop novel adenoviral-based products. The AdVac technology is being developed to:

(a)           improve upon existing vectors for vaccines and gene therapy; and

(b)          overcome the problems related to the presence of pre-existing immunity in target populations against the vector, which will potentially allow for more efficacious vaccines.

·       MAbstract phage antibody-display technology.   The phage antibody-display technology, which we use to display antibody fragments on the surface of a bacteria-infecting virus called a phage, can be used in the following ways:

(a)           to discover disease-associated molecules, which are molecules appearing on the surface of pathogens such as viruses, bacteria and parasites, or on diseased tissue; and

(b)          to develop human antibodies, which are antibodies that are derived from human DNA, as therapeutics against infectious disease, or in other disease areas.

·       STAR technology.   STAR technology is a gene expression technology based on epigenetic control mechanisms that block repression of gene expression. It has a potentially broad application for production of proteins on mammalian cell lines such as our PER.C6 human cell technology and the widely used Chinese hamster ovary (CHO) cell line. In an evaluation program, Genentech, Genzyme, Medarex, Millenium and Xoma are currently investigating whether STAR technology can increase production yields of biologicals. We acquired STAR technology in 2004 through the purchase of ChromaGenics B.V., a privately held biotechnology company based in Amsterdam. In connection with the purchase, we also entered into a contingent payment agreement that could result in an additional payment of €7.0 million upon receipt of revenues generated from the STAR technology and royalties. Neither our licensees nor we currently market any human products based on the above mentioned core technologies.

Our virosomal technology provides flexibility with respect to the development of modern prophylactic and therapeutic vaccines. In addition, the yeast expression technology Hansenula polymorpha provides a highly efficient process production technology which, in addition to its use in the production of

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Hepavax-Gene, may be used as a basis for developing and manufacturing new vaccines. Besides these, we have access to a number of other useful technology platforms from third parties supporting our marketed products or products in development.

Industry and Scientific Overview

Manufacturing systems for biopharmaceutical products

Biopharmaceutical products are therapeutics produced by means of biological production systems. Modified bacteria and yeast initially were used to produce the first generation of human biopharmaceutical products. The first available human cell-based production systems employed human cells that spontaneously acquired the ability to divide indefinitely. These include the MRC-5 and WI-38 cell lines, which were both divided from human lung tissue. These cell lines have been successfully used to produce a number of human vaccines including those for rubella, mumps, measles, rabies and hepatitis A. More recent and better defined human cell lines were created by extracting a small and well defined part of the genome (E1) from the adenovirus type 5 and inserting this into healthy primary human cells where it subsequently causes stable, indefinite cell growth. The immortalized cell and its progeny are called a ‘‘cell line.’’ A number of examples of cell lines that were made by E1 immortalization including 293, 911, N52.E6 and the PER.C6 cell line.

Vaccines

Vaccines are designed to protect people against potentially life-threatening diseases, including those caused by parasites, viruses and bacteria.

Scientific progress in vaccines.   Vaccines have contributed significantly to the improvement of global public health in the twentieth century. Smallpox was eradicated through the use of vaccines, and polio is well on its way to eradication. Significant developments include the introduction of combination vaccines and the development of new vaccine technologies that may advance vaccine development. Today, research is underway to develop efficacious and safe vaccines against viruses such as HIV; against parasites causing malaria; against bacteria such as those causing tuberculosis and also against inherited or acquired diseases such as cancer.

Vaccine formats.   A variety of vaccine formats are in use today and others are evolving through ongoing research and development efforts. Some of the most common vaccine formats include live-attenuated virus vaccines, inactivated whole-killed virus vaccines, subunit vaccines, DNA vaccines, recombinant vector-based vaccines, synthetic vaccines and peptide-based vaccines.

Vaccine technology development.   A large variety of vaccine technologies are under development in an attempt to improve safety and overall vaccine efficacy. The key objectives of current vaccine technology research and development are to make safer vaccines without compromising efficacy, to generate new vaccines with stronger and broader immunogenicity, to make vaccines using more efficient manufacturing processes and to make vaccines easier to administer.

Antibodies

Antibodies are proteins made naturally by cells of the body’s immune system. They function as one of the body’s principal defense mechanisms against pathogens, which are disease causing agents such as parasites, viruses or bacteria. Antibodies recognize and bind to invading pathogens, ultimately eliminating them. Thus, antibodies play a crucial role in protecting humans against disease. Because of their binding characteristics, antibodies can distinguish subtle cell differences between healthy and diseased cells. Antibodies are used to develop therapeutic products that can trigger the death of a target cell, such as a cancer cell, or bind to and block a key interaction of a disease-related cell, such as an inflammatory cell, to develop therapeutic products that block infectious agents; bind and neutralize toxic products; as tools in

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scientific research such as genomics and proteomics; and to develop diagnostic products to detect viruses or bacteria.

Scientific progress in antibodies.   Methods for generating monoclonal antibodies have evolved considerably over the last 25 years. The technology originally involved immunizing mice with a target molecule and isolating relevant antibody-producing cells from the mice. Because monoclonal antibodies of rodent origin are recognized as foreign proteins and are rapidly eliminated when applied in humans, methods were developed to produce therapeutic antibodies that are of human origin. These antibodies can be developed either using transgenic mice or by means of phage antibody-display technology. Transgenic mice are genetically engineered mice that carry human antibody genes. This allows the immune systems of mice to generate human antibodies in response to any administered antigenic material. Phage antibody-display technology allows human antibody genes to be cloned into bacteriophages, which are viruses that only infect bacteria. Phages displaying antibody fragments that attach to specific molecules can be selected, enabling isolation of antibodies against targets and/or enabling the identification of target molecules. Phage antibody-display libraries are large collections of antibody-phages for use in identifying the targets and related antibodies.

Therapeutic proteins

Proteins are main constituents of the human body. They consist of amino acid peptide chains folded in a specific conformation, and often contain a number of so-called posttranslational modifications (one of the later steps in protein biosynthesis) which include glycosylation, sulphation, phosphorylation, gamma-carboxylation, and others. Since the 1950s, proteins have been increasingly used as therapeutic drugs, especially diseases caused by a deficiency of certain proteins. According to various market research reports  the total market size (based on sales) of therapeutic proteins was in 2005 over US$38 billion. Hematology, endocrinology and oncology are the main disease areas in which therapeutic proteins are applied.

Scientific progress in recombinant therapeutic proteins.   Initially therapeutic proteins were isolated from natural sources such as blood, urine and tissues from humans, or in some instances from animals. Clinical experience with these proteins in the 1960s, and afterwards, revealed a significant risk of transmission of infectious pathogens, in particularly viruses, from the source material to the recipient. Hence, production of proteins in vitro was investigated. Since the 1970s, developments in molecular biology have made it possible to produce proteins in the laboratory. In addition, transgenic animals were developed that secrete the protein of interest in milk. Today, there are a number of production platforms for non-mammalian cells such as yeast, as well as mammalian cells.

Mammalian cell-based protein production systems mostly use non-human cell lines such as CHO, BHK and others. The type of post-translational modifications carried out by the platform is often determined by the cell-type used. Current thought holds that recombinant proteins should be produced by cell lines in culture media that are completely devoid of human serum components.

Vaccine markets

Important segments of the vaccine market are influenza vaccines, paediatric vaccine combinations that include protection against hepatitis B as well as travel vaccines.

Influenza

Influenza, commonly known as “flu”, affects large sections of the world’s population each year. The disease is characterized by annual winter outbreaks, which often reach epidemic, and sometimes pandemic, proportions due to the fact that the virus can mutate quickly, often producing new strains against which human beings do not have immunity. Typical symptoms of flu include fever and respiratory symptoms, such as a cough, sore throat, runny or stuffy nose, as well as headaches, muscle aches, and, often, extreme

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fatigue. These symptoms are usually relatively mild but can become life threatening in vulnerable patient groups, such as the elderly and immunodeficient individuals. Transmission of the flu virus occurs via droplets of respiratory secretions and, following infection, the incubation period ranges from one to three days.

The influenza vaccine market is the fastest growing vaccine market. Global sales of influenza vaccine are, according to a market research report  (Datamonitor) and and to Crucell’s own estimates, expected to grow from an estimated US$1.4 billion in 2004 to US$3.7 billion in 2010.

Several factors contribute to the rapid growth of the influenza market. National governments are strongly in favor of influenza vaccination and tend to continually increase their target vaccination coverage. Influenza vaccinations save millions of dollars each year in reduced hospitalizations and fewer lost workdays. The past few years have seen significant growth in the use of influenza vaccines in China, Taiwan, Mexico, Japan and Eastern Europe.

It is expected that the threat of a pandemic of avian flu and ongoing activities to increase the preparedness for a flu pandemic will lead to further growth in the interpandemic flu markets due to higher awareness of the public at large as well as due to specific production contracts for vaccines that combat strains of pandemic flu.

Sanofi pasteur dominates the influenza vaccine market with approximately a 50% share of the world market. GlaxoSmithKline (GSK) is also well established, with an approximate market share of 15%. Following the ID Biomedical acquisition, GSK is expected to increase its market share and become a significant participant in the U.S. market. Following Chiron’s acquisition of PowderJect, Chiron is also one of the main producers of the influenza vaccine for the U.S., and commands a leading position in Europe. Fluad, Chiron’s adjuvant flu vaccine, is the main direct competitor of Inflexal V, our influenza product. Fluad has been particularly successful in Germany and Italy. In October 2005 Novartis entered into a definitive merger agreement with Chiron to acquire all of the remaining publicly held shares of Chiron it did not currently own.

Paediatric vaccines including hepatitis B

Hepatitis B (HBV) is a viral infection of the liver which causes various complications if left untreated. Infection with HBV leads to one of three outcomes. An infected individual may die of fulminant hepatitis within days or weeks after the onset of the disease, recover after symptomatic or asymptomatic infection and develop lifelong immunity against the disease, or develop chronic infection for which no specific treatment is available and which may ultimately cause death from cirrhosis of the liver and liver cancer.

Transmission of HBV occurs as a result of the exchange of blood, the exchange of fluids during sexual intercourse, and the exchange of body fluids between an infected mother and a new-born baby during birth (perinatal transmission). Groups of persons at risk for HBV infection include sexually active men and women, healthcare workers, infants born to infected mothers, injection drug users, hemodialysis patients, hemophiliacs and travelers to endemic areas. According to the WHO, approximately 350 million people are chronically infected.

The market for HBV monovalent vaccine was close to US$0.5 billion in 2004 according to  a market research report (Frost & Sullivan) and our own recent estimates, split between the United States (50%), Europe (30%) and the rest of the world (20%). However, the market is in steady decline. This is due to the increasing number of people being vaccinated at birth with a combination vaccine in the United States and Europe, the largest markets. The same trend is seen in the developing countries in the rest of the world, where there is a strong demand for hepatitis B combination vaccines.

The key participants in the HBV market are GSK, Merck & Co. and Chiron. In addition to our monovalent hepatitis B vaccine, Hepavax-Gene, we have collaborated with Chiron to develop a

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combination vaccine against hepatitis B, diphtheria, tetanus, pertussis, and Haemophilus influenzae type b. The Korea Food and Drug Administration (KFDA) awarded a license to this product (Quinvaxem™), which is being produced in Korea.

Travel vaccines

Travel vaccines include all vaccine products that protect against diseases which are not endemic to specific countries. Generally, the target population groups for these vaccine products are individuals traveling to endemic regions, although in regions where certain diseases combated by travel vaccines are prevalent, widespread immunization programs are sometimes undertaken.

According to the World Tourism Organization, the number of travelers from developed countries to regions with endemic diseases is set to grow each year. This growth in the number of travelers is driven by decreasing relative costs and journey times of travel, increased accessibility to travel and a social trend to travel abroad. Vaccines for hepatitis A, yellow fever, typhoid and cholera can all be classified as travel vaccines.

Hepatitis A.   Hepatitis A (HAV) is a highly contagious infection that causes acute inflammation of the liver. HAV is generally contracted orally through fecal contamination of food or water, and is considered the least dangerous form of hepatitis because it does not lead to chronic inflammation of the liver. HAV commonly spreads through improper handling of food, contact with household members, sharing toys at day-care centers, and eating raw shellfish taken from polluted waters.

The HAV market is estimated to be worth approximately US$340 million in 2004 according to a market research report (Frost & Sullivan) and our own recent estimates.

GSK, Merck and sanofi pasteur dominate the monovalent HAV market. In addition, GSK markets a combination vaccine for HAV and hepatitis B (Twinrix), and sanofi pasteur and GSK have recently introduced combination vaccines for HAV and typhoid fever. We currently market Epaxal for HAV in Europe, Latin America and Asia.

Typhoid fever.   Typhoid fever is a debilitating and life-threatening illness caused by the bacteria Salmonella typhi. Symptoms of typhoid fever include fever, stomach pains, weight loss, loss of appetite, delirium, severe diarrhea (in children) and constipation (in adults).

Typhoid fever is transmitted by fecal contamination of food or water, or by person to person contact. Approximately 17 million people worldwide develop typhoid fever each year and approximately 4% of patients with typhoid fever die. The disease is endemic to Africa, Asia (except Japan) and Latin America.

The key participants in the typhoid market are sanofi pasteur and GSK, with their injected vaccine products TyphimVi and Typherix. We market Vivotif, the only oral vaccine for active immunization against typhoid fever.

Our Core Technologies

PER.C6 technology

Overview

Our PER.C6 technology provides a manufacturing system that consists of a human cell line, which can be used to produce a variety of biopharmaceutical products. We developed the PER.C6 technology from a single source of healthy, human retina cells. To obtain the PER.C6 cell line, we inserted an exactly defined fragment of the E1 region of the genome of the adenovirus type 5 into a healthy human retina cell so that the cell can grow indefinitely. The PER.C6 cell line has been successfully adapted to grow without the need for serum components or materials that allow cell attachment (microcarriers) and demonstrates excellent

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cell densities in bioreactors. These features of our cell line are important to produce safe biopharmaceutical products in sufficient quantities.

There are four areas in which our PER.C6 technology is currently being applied:

Vaccine production.   PER.C6 technology can be used as a production system for developing and manufacturing both classical and recombinant vaccines.

·       For classical vaccine production, PER.C6 cells are infected with the virus against which the vaccine is meant to protect. The virus is subsequently multiplied on PER.C6 cells to high virus titer, yielding a potent starting material that can be processed and purified to produce a final formulation of a whole-killed, split or subunit vaccine.

·       For recombinant vaccine production, the PER.C6 technology produces delivery agents called adenoviral vectors. These vectors have been made replication incompetent and thus are only capable of delivering into the human body a portion of DNA encoding for a protein from the pathogen against which the vaccine is meant to protect. The DNA inserted into the vector can be derived from a virus, a parasite or even bacteria, providing a versatile vaccine vector platform.

Protein production.   PER.C6 technology can be used as a production system for developing and manufacturing both antibodies and other proteins. For both antibody and protein production, DNA encoding for a particular protein of interest is inserted into PER.C6 cells. These modified PER.C6 cells will secrete the desired antibody or protein.

Gene therapy.   The primary function of PER.C6 technology in the field of gene therapy is the production of adenoviral vectors—a gene delivery mechanism based on a common human virus—that carries therapeutic genes and facilitates the delivery of the gene into the cells. Since the PER.C6 cell line is the only available cell line that does not allow any formation of classical replication competent adenoviruses during the production of replication deficient vectors, the cell line may be applied across the entire adenovirus gene therapy field.

Functional genomics.   Our PER.C6 technology can be used to produce libraries of adenoviruses into which individual human genes can be inserted to perform studies of gene functions. The adenovirus libraries carry many genes with unknown functions, which can be used to determine the function of individual genes in a disease process. We believe that our PER.C6 technology, therefore, represents a key analytical tool in the discovery of new genes and their role in biological pathways and human disease. Galapagos N.V., a functional genomics company in which we hold a 9.8% ownership share, executes these activities exclusively using the PER.C6 technology. Please refer to ‘‘—Other collaborations and agreements—Galapagos N.V.’’ for additional information about this company.

Key features and advantages

We believe that our PER.C6 technology has the following key advantages over alternative manufacturing systems:

High yields.   PER.C6 technology potentially offers a system for high yield, large-scale biopharmaceutical product production. PER.C6 can be cultured at high densities and engineered to produce large quantities of biopharmaceuticals and may reduce production expense.

Scalability in serum-free conditions.   PER.C6 cells can be cultured in a serum-free medium, without micro-carriers, using a variety of scaling systems, including bioreactors. This simplifies the expansion from laboratory- to industrial-scale production, potentially leading to the production of cost-efficient biopharmaceuticals in large quantities. The use of a serum-free medium also offers the potential to significantly improve the purification of biopharmaceuticals produced using the PER.C6 technology and may facilitate regulatory approval.

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Biologics Master File at the FDA.   We have filed a Cell Substrate Biologics Master File (BMF) with the U.S. Food and Drug Administration (FDA) describing the PER.C6 technology, including its establishment, development and potential use in production processes. The FDA will only evaluate the PER.C6 technology in the context of  Investigational New Drug (IND) applications. We believe that the information in the BMF will facilitate the FDA’s appraisal of any biopharmaceutical product that our licensees or we produce using the PER.C6 technology.

Broad industry endorsement.   The PER.C6 technology can now claim to have achieved a broad endorsement within the industry, with more than 45 licensees and partners. For a list of licensees, see “—Licensing and Collaborations”.

Human-based.   We believe that antibody and other protein products based on the human based PER.C6 technology will demonstrate enhanced biological properties, rendering them potentially more efficacious. In addition, PER.C6 technology efficiently supports the growth of certain human viruses for vaccine development.

AdVac technology

Overview

We use our AdVac technology, in combination with its PER.C6 production technology, to develop recombinant vaccines.

While no adenovirus-based recombinant vaccines are currently licensed for human use, the scientific community is testing the ability of these vaccines to counter viruses such as HIV and Ebola, parasites such as malaria and bacteria such as Mycobacterium tuberculosis. Recombinant vaccines are necessary for these diseases because inactivated whole virus vaccine approaches are either ineffective against these particular pathogens, or are too difficult or dangerous to produce. Within the field of vaccination and gene therapy, adenovirus serotype 5 (Ad5) is the most commonly used vector.

The portion of the human population that has been exposed to Ad5 is high, and early clinical trial data demonstrates a clear correlation between the level of pre-existing immunity against Ad5 and the frequency of non-response against Ad5-based vaccines. Moreover, immunity and resistance to Ad5 has been proven to vary from person-to-person, creating difficulties with respect to vaccine dosing issues.

We designed the AdVac technology to manage the problem of pre-existing immunity in humans against the recombinant adenovirus serotype 5 (rAd5) vaccine vector, without compromising large-scale production capabilities or the immunogenic properties of rAd5.

AdVac technology is based on adenovirus vectors that do not regularly occur in the human population, such as Ad35 and Ad11. The technology supports the practice of inserting DNA coding for pathogen-derived proteins into a vector. AdVac technology may also be used to develop gene therapy products.

Key features and advantages

We believe our AdVac technology has the following key advantages over the commonly used vector system:

·       Safety and efficacy. Because AdVac technology is based on adenovirus vectors not commonly found in the human population, pre-existing immunity to the vector is rare. This may allow for lower dosage schedules.

·       Scale and manufacturing. The cell cultures that complement AdVac technology are based on PER.C6 technology, and we expect technology to help make large-scale manufacturing of recombinant vaccines possible. We believe that the biopharmaceutical industry requires this capability to meet the global demand for vaccines required to eradicate existing and emerging infectious diseases.

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MAbstract technology

Overview

Our MAbstract technology can be applied for the discovery of novel drug targets and the identification of human antibodies against those drug targets. MAbstract technology employs a bacteria-infecting virus called a bacteriophage, or phage, which expresses part of a human antibody on its surface. The technology employs a library of phages that carry many different human antibodies. To identify and subsequently isolate relevant antibodies, the library is contacted with pathogens, or cells suspected of carrying the drug target, or if the target is already known in advance, the library may be contacted with the target directly. Subsequently, phage antibodies binding to the diseased cells or the known target are separated from phage-antibodies that do not bind at all, or bind to healthy cells added to subtract irrelevant phage-antibodies present in the library. Since irrelevant phage antibodies for the target in question are often present in great abundance, the subtraction step aids in enriching the phage-antibody population for potentially relevant, selectively binding phage antibodies.

Once such phage antibodies have been isolated, they can either be used to subsequently identify the target or a specific binding place on the target (referred to as epitope), or be used to subsequently isolate the DNA coding for the binding part of the antibody. This part may genetically be combined with other parts of the antibody that have no function in binding but have assessory functions in the human immune system. Thus, different formats of antibodies with different modes of action or functions can be made, but with the same specificity for the target.

We use our MAbstract technology to identify antibodies reactive with whole pathogens, or antibodies against protein elements from pathogens, or antibodies directed against targets already known to be associated with disease. In addition MAbstract can be used to identify targets or epitopes on disease-causing agents that were previously unknown and may make suitable candidates for antibody-based diagnosis, prevention or therapy of the associated disease.

Key features and advantages

MAbstract employs a human-based antibody-display technology. We believe that MAbstract allows for the discovery of therapeutic antibodies with several potential advantages over current technologies using transgenic mice. These advantages include the following:

Subtraction method of selection.   MAbstract technology selects antibodies for possible therapeutic use and discovers novel drug targets using whole cells, tissues or infectious agents. The subtraction method of selection is not available when generating human antibodies in transgenic mice.

No inherent limitation on antibody specificity.   MAbstract technology does not have the inherent limitation on antibody specificity that is seen in transgenic mice.

Production using PER.C6 technology.   MAbstract technology has been used to isolate antibodies for numerous disease applications. Selected antibody specificities can be directly reformatted into antibodies for production using PER.C6 technology.

Other Core Technologies

STAR technology.   STAR technology is a production technology that is particularly useful for the production of recombinant human antibodies and proteins. It has a potentially broad application and is effective for production of antibodies and proteins on mammalian cell lines such as our PER.C6 human cell technology and the widely used Chinese hamster ovary (CHO) cell line. The technology has the potential to increase production yields, thereby reducing production costs. We license our STAR technology to the biopharmaceutical industry.

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Virosomal technology.   One of the challenges in vaccine development is the creation of products that contain defined antigens of high purity that efficiently induce a protective immune response. Many antigen preparations are therefore supplemented with adjuvants to enhance the body’s immune response to the specific antigens. The most commonly used and approved adjuvants for human use are aluminum salt derivatives, which are known to cause adverse reactions such as irritation and inflammation at the injection site. Virosome-based vaccines appear not to require additional adjuvants to enhance immune response. The virosomal technology offers a broadly applicable delivery system for antigens, DNA/RNA or therapeutic drugs. As a result, virosomal based vaccines have superior immunogenicity and tolerability.

Hansenula polymorpha.   Gene technology has invaded the production of industrial proteins, in particular that of pharmaceuticals. The demand for suitable expression systems is increasing as developing science results in an increasing number of targets for the various industrial branches. The production of recombinant proteins has to follow an economic and qualitative rationale which is dictated by the characteristics and the anticipated application of the produced compound. The  yeast Hansenula polymorpha production system provides superior characteristics for a wide range of industrial applications. Particularly the lack of pyrogens, pathogens or viral inclusions, its ease of genetic manipulation and its robustness in industrial scale fermentations add to its attractiveness for the synthesis of pharmaceutical compounds. Our  hepatitis B vaccine Hepavax-Gene is based on recombinant production in this yeast.

Other Technology Platforms

We, through either our own resources or through our research collaborations, have in addition to our core proprietary technologies, access to the following technology platforms.

Polysaccharide-protein conjugates

The causative agents of many common bacterial infections contain surface structures made of polysaccharides, against which protective antibodies are directed. However, vaccines based on polysaccharide antigens alone do not induce a T-cell response and therefore are not able to elicit immunological memory (memory immune responses). By linking the specific antibody-inducing polysaccharides with T-cell activating carrier proteins it is possible to induce the desired immune response and enhance long term protection against the corresponding pathogen.

A conjugate vaccine in the final clinical phase is Aerugen, the first and only vaccine for the prophylaxis of fatal Pseudomonas aeruginosa infections in cystic fibrosis patients. The polyvalent conjugate vaccine combines 8 prevalent P. aeruginosa serotypes and the bacterial exotoxin A. It is the first conjugate vaccine based on a lipopolysaccharide component.

Recombinant live bacteria

Recombinant live bacteria are harmless but highly immunogenic bacteria that elicit immunity against specific pathogens. The technology can also be applied for therapeutic vaccines against cancer.

The ideal way to induce a complete immune response, at the systemic and the mucosal level, is to administer vaccines in a manner that mimics the natural route of infection as closely as possible. Thus immunity to an intestinal disease such as typhoid fever, is best induced by giving the vaccine orally, so that the antigens are presented directly to the lining of the gut. An added advantage of oral vaccines is the better safety profile, ease of administration and the corresponding reduction in delivery costs. The diligent use of vaccines containing live, attenuated forms (i.e. forms with reduced pathogenicity) of various disease agents achieves the goal of bolstering the T-cell response by mimicking the pathogen’s natural route of antigen-presentation without causing the actual disease. One of the safest means of attenuating a pathogen is to alter specific genes so that it loses its virulence while retaining antigenicity. In addition to providing immunity against the corresponding virulent pathogen live attenuated bacteria may also serve as carriers

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for foreign antigens derived from unrelated pathogens. Such a vaccine may serve a dual purpose because it would induce immunity against both, the foreign antigen and the carrier bacterium itself.

Recombinant live paramyxoviruses

The use of live attenuated viruses in vaccines is a well established method of conferring immunity against a number of diseases. But these viruses can also be used to introduce genes encoding foreign antigens into their genomes, thus creating a recombinant vaccine that would simultaneously confer immunity against more than one disease, e.g. measles and malaria. Because the attenuated viruses retain their high immunogenic properties, they induce a strong cellular response against both their own and the foreign proteins. This last property makes recombinant viruses (alone or in combination with virosomes) very useful tools for a number of different therapeutic vaccines targeting a broad spectrum of human diseases, including cancer.

Therapeutic human monoclonal antibodies

We develop and produce fully human monoclonal antibodies (MAb). A monoclonal antibody is a special class of antibody that originates from a single clone of lymphocyte. A single MAb is highly specific for a unique antigen and can be isolated at a high level of purity. The purity of the product combined with the uniqueness of source and specificity, as well as high consistency makes MAbs attractive both as research tools and as potential products.

Particle presentation technology

The immune system is activated by antigens, or more precisely, by domains on these antigens called epitopes. For each immune cell, there is only one corresponding antigen/epitope which activates it. Our Particle Presentation Technology combines the desired antigens or epitopes on a carrier (e.g. 20 nm HbsAg particles) in a form that elicits an efficient immune response. Our therapeutic hepatitis B vaccine, currently in pre-clinical development, uses this technology. This technology can potentially be applied to the development of other therapeutic vaccines.

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Licensing and Collaborations

Licensees and partners

Our current licensees and partners are as follows:

VACCINES

PARTNER/LICENSEE				STARTING DATE		TECHNOLOGY		DISEASE TARGET		DEVELOPMENT STAGE
Aeras Global TB Vaccine Foundation				Mar. 2004		PER.C6 and		Tuberculosis		Pre-clinical
						AdVac
Bestewil Holding BV				Jan. 2006		Co-micelles		Influenza		—
Chiron Corp.				Dec. 2004		PER.C6		Alphavirus vectors		Pre-clinical
Harvard School of Medicine				Oct. 2002		PER.C6 and		SIV		Pre-clinical
						AdVac
International AIDS Vaccine Initiative (IAVI)				Sep. 2004		AdVac		HIV		Pre-clinical
Kimron Veterinary Institute				Jul. 2003		PER.C6		West Nile virus—		Market
								Veterinary vaccine (avian)		authorization in Israel
Merck & Co. Inc.				Oct. 2000		PER.C6		Hepatitis C		Pre-clinical
Merck & Co. Inc.				Oct. 2000		PER.C6		HIV		Phase II
Merial LLC				Oct. 2004		PER.C6		Foot and mouth disease		Pre-clinical
National Institutes of Health (NIH)				Mar. 2002		PER.C6 and		Ebola, Lassa and		Pre-clinical
						AdVac		Marburg
National Institutes of Health (NIH)				Mar. 2004		PER.C6 and		Malaria		Pre-clinical
						AdVac
New York University				Aug. 2002		PER.C6 and		Malaria		Pre-clinical
						AdVac
Sanofi Pasteur				Dec. 2003		PER.C6		Influenza		Pre-clinical
Singvax				Mar. 2005		PER.C6		Japanese Encephalitis		Pre-clinical
Tibotec Pharmaceuticals Limited				Nov. 2005		PER.C6		Undisclosed vaccine		Pre-clinical
Vakzine Project Management				Dec. 2005		PER.C6		Undisclosed vaccine		Pre-clinical
Vaxin, Inc.				Sep. 2004		PER.C6		Respiratory viruses		Pre-clinical
Walter Reed Army Institute of Research & GlaxoSmithKline Biologicals				Mar. 2003		PER.C6 and		Malaria		Pre-clinical
						AdVac

 

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ANTIBODIES AND THERAPEUTIC PROTEINS

PARTNER/LICENSEE				STARTING DATE		TECHNOLOGY		DISEASE TARGET		DEVELOPMENT STAGE
Applied Molecular Evolution, Inc. (Lilly)				Oct. 2002		PER.C6		Portfolio antibodies		Phase I
Chiron Corp.				Aug. 2004		PER.C6		HCV protein		Pre-clinical
Ferring International Research Center SA				May 2005		PER.C6		Women’s healthcare		Pre-clinical
Ferring International Research Center SA				Dec. 2005		PER.C6		Women’s healthcare		Pre-clinical
Genentech				Feb. 2004		STAR		—		Evaluation
Genzyme Corporation				Dec. 2005		STAR		Portfolio proteins		Pre-clinical
Innogenetics				Jan. 2002		PER.C6		Portfolio antibodies		Pre-clinical
IQ Corporation				Oct. 2005		PER.C6		Anti-anthrax antibody		Pre-clinical
JCR Pharmaceuticals Co. Ltd				Mar. 2005		PER.C6		Undisclosed proteins		Pre-clinical
Merck & Co., Inc.				May 2003		PER.C6		Portfolio antibodies		Pre-clinical
Merus B.V.				Jun. 2004		PER.C6		Portfolio oligoclonics		Pre-clinical
Micromet AG				Nov. 2004		PER.C6		Portfolio antibodies		Pre-clinical
Millennium Pharmaceuticals				Apr. 2006		STAR		Portfolio antibodies		Pre-clinical
Mitsubishi Pharma Corporation				Mar. 2005		PER.C6		Undisclosed proteins		Pre-clinical
MorphoSys AG				Sep. 2004		PER.C6		Portfolio antibodies		Pre-clinical
Roche				Jan. 2005		PER.C6		Undisclosed proteins		Pre-clinical
Symphogen				Apr. 2005		PER.C6		Portfolio antibodies		Pre-clinical
Synergenics/Synco Biopartners Investments B.V.				Aug. 2004		PER.C6		Portfolio antibodies		Pre-clinical
UCB S.A.				Mar. 2006		PER.C6		Portfolio antibodies		Pre-clinical
UMN Pharma				Mar. 2006		PER.C6		Undisclosed protein		Pre-clinical
XOMA Ltd				Jan. 2006		STAR		Portfolio antibodies,		—
								proteins
Zystor Therapeutics				Dec. 2005		PER.C6		Undisclosed protein		Pre-clinical

 

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GENE THERAPY

PARTNER/LICENSEE				STARTING DATE		TECHNOLOGY		DISEASE TARGET		DEVELOPMENT STAGE
Ark Therapeutics				Nov. 2000		PER.C6		Portfolio		Phase II
BIOA&D Co. Ltd				May 2006		PER.C6 and		Cardiovascular disease		Pre-clinical
						ceNOS
Edwards Life Sciences Corp.				Nov. 2004		PER.C6		Portfolio		Pre-clinical
EMD Lexigen Pharmaceuticals Corp. (Merck KgaA)				Dec. 2001		PER.C6		Portfolio		Pre-clinical
GeneMax Corp.				Aug. 2003		PER.C6		Portfolio		Pre-clinical
GenVec Inc.				Jul. 2002		PER.C6		Cardiovascular		Phase II
GlaxoSmithKline Ltd.				Feb. 1999		PER.C6		Portfolio		Pre-clinical
Merck & Co., Inc.				Nov. 1998		PER.C6		Portfolio		Pre-clinical
Merial Ltd.				Dec. 2005		PER.C6		Veterinary		Pre-clinical
NeoTropix				Mar. 2004		PER.C6		Oncology		Pre-clinical
Selective Genetics Inc.				Jun. 2001		PER.C6		Portfolio		Phase I/II
Transgene SA				Apr. 2001		PER.C6		Portfolio		Phase I/II
Vascular Biogenics Ltd				Mar. 2005		PER.C6		Portfolio		Pre-clinical

 

ALLIANCES WITH CONTRACT MANUFACTURERS FOR PRODUCTION

PARTNER/LICENSEE				STARTING DATE		TECHNOLOGY		AREA
Cambrex				Aug. 2004		PER.C6		Medium development
DSM Biologics				Dec. 2002		PER.C6		Therapeutic proteins (including antibodies)
Gene Medicine Japan, Inc.				Oct. 2003		PER.C6		Recombinant vaccines & gene therapy products Asia)
Hyclone, Inc.				Dec. 2003		PER.C6		Medium development
Invitrogen Corp.				Jun. 2003		PER.C6		Medium development
JRH Biosciences Inc.				May 2004		PER.C6		Medium development
Molecular Medicine BioServices, Inc.				Dec. 2001		PER.C6		Recombinant vaccines & gene therapy products (USA)
Saskatchewan Research Council				Dec. 2005		PER.C6		Recombinant vaccine & gene therapy products
Sigma-Aldrich Corp.				Dec. 2003		PER.C6		Medium development

 

FUNCTIONAL GENOMICS

PARTNER/LICENSEE				STARTING DATE		TECHNOLOGY		AREA
Galapagos Genomics N.V.				Jun. 1999		PER.C6		Genomics

 

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License agreement structure and payments

Our licensees can elect to take either a license for commercial development or a license for research only. In addition, we have issued exclusive licenses to certain licensees. Our research licenses granted in the areas of antibodies and gene therapy typically cover the entire portfolio of antibodies and genes, respectively, that the customer may wish to use in the future.

The general payment structure under the terms of our commercial licenses is as follows:

·       one-time issuance fee: We usually charge our licensees a one-time issuance fee, the amount of which is determined by the nature of the license, e.g., whether the license is for commercial development or research use, whether the license is exclusive or non-exclusive, and the area of use of the license.

·       license maintenance: our licensees usually pay annual fixed payments to maintain their licenses. The license maintenance fee is generally offset against any royalty payments accruing from the time of initial commercial sales.

·       milestone payments: certain licenses provide for additional fees to be paid if the applicable licensee achieves certain agreed upon targets, or milestones. Milestone payments are typically not offset against future royalty payments.

·       royalty payments: with the exception of a limited number of licenses (including Transgene SA, MedImmune, Millipore and Galapagos N.V.), and the majority of our contract manufacturers and service providers, we will receive a percentage of the value of any net sales that the licensee may generate related to the eventual product. Royalty payments are typically only payable once they exceed the license maintenance fees. Our license agreements generally do not contain stacking provisions, meaning that royalty payments are not reduced in the event that total payments by the licensee to all licensors go above a certain percentage. We have received minor royalty payments from one licensee, Molecular Medicine BioServices, Inc., a contract manufacturing organization that licensed the PER.C6 technology to offer manufacturing of recombinant vaccines and gene therapy products.

·       service fees: as part of various collaboration agreements, we receive service fees for work performed under such agreements. Revenues and costs associated with completed contract services are recognized when the service is completed and the collectibility of the receivable is deemed probable. Revenues associated with time and material service contracts are recognized when costs are incurred and the collectibility of the receivable is deemed probable.

Research only licenses provide for lower issuance and license maintenance fees and do not provide for royalty payments. Generally our research only licenses permit the license to be converted into a commercial development license, but typically do not allow (late) clinical development and commercial distribution of any product using the licensed technology.

Our commercial development license agreements generally provide that the applicable commercial license will expire after the expiration of the last applicable patent or 10 to 15 years after the first commercial sale of a product developed under the agreement with that licensee. Our research only licenses generally expire two to five years after their effective date. Most of our licenses may be  terminated on 90 days’ notice from the licensee. Under our license agreements, because the technology that we transfer is fully developed, we are not required to deliver any updated technology to any of our licensees, though we update our know-how with respect to our technology from time- to- time through Biologics Master Files to which our licensees have access.

Exclusive Licenses.   We have issued certain licenses on an exclusive basis. These licenses generally state that we will not provide the licensed technology to a party other than the exclusive licensee for use in the area covered by the exclusive license. These licenses also generally provide for higher payments. In

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December 2003 we granted Aventis Pasteur (now sanofi pasteur) an exclusive license for the development and commercialization of PER.C6-based influenza vaccines. The agreement includes provision for milestone payments, annual payments and research and development funding, as well as high single-to double-digit royalties on future PER.C6-based influenza vaccine sales. The agreement also includes financial diligence provisions designed to encourage sanofi pasteur to obtain successful regulatory approval in the United States and countries of the European Union  for the PER.C6-based influenza vaccine as promptly as possible.

In 2004, we granted an exclusive license to the International AIDS Vaccine Initiative (IAVI) for the development of an AIDS vaccine based on our AdVac technology. Other exclusive licenses include our agreements with DSM Biologics for the licensing of PER.C6 technology for proteins and antibodies, and for contract manufacturing of recombinant proteins and monoclonal antibodies under PER.C6 licenses, Merck & Co. for a PER.C6-cell produced HIV/AIDS vaccine and HCV vaccine, which latter license is
co-exclusive, and Ferring for certain female health proteins. An extension to our agreement with Merck relates to our PER.C6 Cell Substrate Biologics Master File (BMF), BB-MF 8453 in the U.S., and equivalents in other jurisdictions. We will work with Merck on matters relevant to maintaining the BMF, including the provision of technical assistance and guidance from Merck as appropriate. We believe that this agreement broadens our relationship with Merck and helps to ensure that our BMF will be upgraded in line with evolving regulatory guidelines.

Manufacturing Service Arrangements

We have signed manufacturing service agreements with a number of our licensees and partners. Under these agreements, we have produced and may produce in the future clinical batches of adenoviral materials, antibodies, or other materials using our PER.C6 cell line for the applicable licensee. We have received and may receive in the future initial fees upon signing and subsequent payments upon delivery of the batches we produce in accordance with the specifications of the agreement.

We follow good manufacturing practice level (GMP) manufacturing services for our customers. We have built a small-scale production facility in Leiden, The Netherlands, and in 2000 we obtained the license required for the manufacture of clinical trial materials at this facility from the Dutch regulatory authorities. To date we have used the facility to manufacture clinical grade adenoviral vectors. The production facility consists of classified clean rooms suitable for manufacturing purified bulk drug products. We continuously explore additional or alternative uses for our GMP production facility. Production and testing is done under quality assurance control. Full batch documentation is generated and reviewed for product release according to EU and U.S. regulations.

Research and development

Overview of our late-stage pipeline

Yellow fever vaccine

An infectious disease transmitted by mosquitoes, yellow fever is prevalent in tropical regions of Africa and South and Central America. Approximately 200,000 cases and 30,000 fatalities occur each year. Endemic areas have increased over the past twenty years, and because the yellow fever virus circulates in nature independently of humans, it has not been possible to eradicate it. Also there is a worldwide shortage in the supply of yellow fever vaccines. Since 1963, one of the most reliable vaccines for yellow fever has been produced by the Robert Koch Institute in Berlin. Over 2.5 million doses of the vaccine have been distributed. Based on attenuated viruses grown on chick embryos, the vaccine is safe, highly immunogenic and well tolerated. Protection starts from ten days after a single dose and persists for ten years. In 1999 we acquired the rights and know-how for this vaccine from the Robert Koch Institute. Technology transfer has been successfully completed and we are in the process of finalizing the registration process.

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Pseudomonas aeruginosa vaccine Aerugen

Cystic fibrosis is a genetically induced abnormality of the mucus-producing glands in the lungs, affecting some 40,000 people across Europe. The disease is frequently complicated by Pseudomonas aeruginosa infections, which are very difficult to treat and severely impair the quality of life and life-expectancy of the patients. Aerugen is the first and only vaccine for the active prophylaxis of Pseudomonas aeruginosa infections in cystic fibrosis patients. It is a polyvalent conjugate vaccine, combining eight prevalent serotypes from Pseudomonas aeruginosa and exotoxin A. Aerugen specifically targets the progressive destruction of lungs caused by Pseudomonas infections. Immunization with this vaccine has been shown to preserve lung function in cystic fibrosis patients by preventing infection and progressive colonization by P. aeruginosa. The clinical results build on ten years experience with the use of the vaccine in patients with cystic fibrosis.

The final clinical phase involved some 470 patients in 46 centers located in four European countries. Aerugen was also the first vaccine to be acknowledged as an “Orphan Drug” in Europe. “Orphan Drugs” are pharmaceuticals or biologicals specially developed to combat rare diseases. The European directive on Orphan Drugs, which has been in force since April 2000, offers special incentives for companies developing drugs against rare diseases, including market exclusivity for up to ten years. For the registration and marketing of the vaccine in Europe, we have formed an alliance with Orphan Europe, a pharmaceutical company which specializes in the development and marketing of “Orphan Drugs” in Europe. An exclusive commercialization and license agreement with CSL Limited for the marketing of Aerugen in Australia and New Zealand was signed in June 2005. A collaboration with Solvay Pharmaceuticals regarding an exclusive commercialization and license agreement for Aerugen in the United States of America, Canada, Latina America and other international markets was signed in 2005.

Paediatric combination vaccines (DTPw-HepB-Hib, DTPw-HepB)

Forty years ago a baby received only one injection during its first year of life. Today in the United States of America babies receive up to 15 shots against different diseases during their first year.

Paediatric combination vaccines, which address several diseases in one injection, clearly simplify the immunization process, reduce discomfort during vaccination and lower the risk of infection associated with multiple injections. Combination vaccines also mean considerable cost savings. Supranational organizations such as United Nation’s Children’s Fund (UNICEF) and the Global Alliance for Vaccines and Immunization (GAVI) strongly recommend the development and further improvement of combination vaccines for use in mass vaccination programs in developing countries. We currently have one program on paediatric combination vaccines. Recently we received marketing authorization from the Korean authorities for the marketing of a combination vaccine against diphtheria, tetanus, pertussis (whooping cough) hepatitis B and Haemophilus influenzae type b, which we believe is the first fully liquid pentavalent DTPw-HepB-Hib vaccine available anywhere in the world.

Overview of our early-stage pipeline

Our PER.C6 technology, complemented by our AdVac and Mabstract technologies, drives the development of our early-stage product pipeline. We continue to develop our technologies while selecting product leads for further development based on careful product selection criteria that support our long-term business objectives. We currently have several potential products in various stages of pre-clinical development. We may enter into collaborative and/or strategic alliance arrangements with third parties to co-develop and market products that we may develop.

Our primary focus is the development of a range of novel vaccine and antibody products in the area of infectious diseases. We currently have a number of core programs:

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PER.C6.   Our influenza vaccine, developed in collaboration with sanofi pasteur, and our West Nile virus vaccine are both being developed using our PER.C6 technology. Phase 1 testing of our West Nile vaccine has recently started in Belgium. PER.C6-based influenza vaccines are preparing to enter clinical development. A Phase I trial in healthy adults is expected to start in the third quarter of 2006, with a Phase I trial in the elderly following in the fourth quarter. A Phase I pediatric trial is scheduled to begin in 2007. Trials in healthy adults are expected to enter Phase II next year.

PER.C6 and AdVac.   Our Ebola and malaria vaccines are recombinant vaccines based on PER.C6 that also use AdVac technologies. In addition to these core programs, a collaboration with the Aeras Global TB Vaccine Foundation is ongoing for the pre-clinical and clinical development of candidate tuberculosis (TB) vaccines based on PER.C6 and AdVac. Phase I clinical testing of our TB vaccine is scheduled to begin in the second quarter of 2006, while malaria  and Ebola vaccine  Phase I testing is scheduled to begin in the third quarter of 2006.

PER.C6 and MAbstract.   In 2003 our Antibody Discovery Group also turned its attention towards infectious diseases, and in 2004 the discovery of its first two human monoclonal antibody products was announced. The first, for protection against SARS, is currently on hold, while our rabies antibodies announced in November 2004 became an additional core product program.

To maintain our competitive position we continually research improvements to and potential new versions of the above mentioned core technologies. In addition to testing for additional applications of our existing PER.C6 technology, we are researching the creation of new cell lines from a variety of cell sources.

A short description of each of our main potential products in the early-stage pipeline, and the diseases those products target, follows.

Influenza

Each year approximately 10-20% of the world’s population contracts influenza, and an estimated 250,000 to 500,000 people die annually from influenza-associated complications according to the World Health Organization. As well as these annual epidemics, a major genetic shift in the influenza virus can occasionally lead to a deadly new virus strain to which the human population does not have immunity, resulting in a global pandemic. Concerns currently exist that a new avian influenza strain (H5N1) endemic among birds in Asia, and showing high pathogenicity for humans, could present a genuine pandemic threat.

Influenza vaccines are classically produced on embryonated chicken eggs. However, various challenges have led the biopharmaceutical industry and the scientific community to explore other ways of producing influenza vaccines. Currently, cell culture systems are being developed for influenza vaccine production based on African Green Monkey Kidney (VERO) cells and Madin Darby Canine Kidney (MDCK) cells. These cell systems often need to be grown on  micro-carriers, which makes the production process expensive and difficult to scale. In contrast, PER.C6 cells grow well in suspension and are easily scalable, potentially permitting the production of cost-efficient vaccines in large quantities. Virus yields on VERO cells have been shown to be significantly lower than the yields grown on PER.C6 cells. PER.C6 cells can produce all influenza strains that we have tested, possessing the different receptors required for the production of both human strains and the avian strains that may present a pandemic threat.

In December 2003, we entered into a strategic agreement with sanofi pasteur to further develop and commercialize novel influenza vaccines using our PER.C6 production technology. Sanofi pasteur is the world leader in vaccines, and has been the largest supplier of influenza vaccines for more than 50 years, providing more than 100 million doses worldwide during the 2003-04 season. Since the inception of the collaboration, production processes have been under development, with the production of a GMP master cell bank already completed. sanofi pasteur, with us as a subcontractor, was awarded a US$97 million

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contract  by the U.S. Department of Health and Human Services (HHS) in April 2005 for clinical development of PER.C6-based influenza vaccine and other related activities. Phase I clinical trials for the pandemic flu vaccine are scheduled to begin in September 2006. Phase I clinical trials for the interpandemic, or seasonal, flu vaccine in healthy adults are scheduled to begin in the third quarter of 2006 and in the elderly in the fourth quarter of 2006, followed by pediatric trials scheduled to begin in 2007.

West Nile virus

Named after the West Nile district of Uganda where the disease was discovered in 1937, West Nile virus infection can lead to mortality in humans and animals by causing a fatal form of encephalitis, or inflammation of the brain, according to U.S. Geological Survey. It is estimated that 20% of the people who become infected with West Nile virus will develop West Nile fever. Persons over 50 years of age have the highest risk of developing a severe disease, such as meningitis, an inflammation of the membrane around the brain and the spinal cord, or encephalitis. Since 1999, West Nile virus has caused disease in more than 16,000 U.S. citizens, leading to 650 deaths.

Continued efforts are being made to find suitable treatments and vaccines to stop this virus. The virus may become a recurring threat in the United States. In 2003 and 2004, a number of West Nile virus cases were reported in Europe.

In June 2003, we announced our decision to develop a vaccine against the West Nile virus based on our PER.C6 technology. Our vaccine uses an inactivated whole virus concept, which is different from vaccines currently under development by our competitors. Currently there is no vaccine or antiviral therapy available to protect humans against West Nile virus.

In a separate but related program, we entered collaboration with Kimron Veterinary Institute of Israel in June 2003, granting Kimron a commercial license to our PER.C6 technology to develop a West Nile veterinary vaccine for use in geese and other birds susceptible to the virus in Israel. This veterinary vaccine achieved market authorization in Israel on June 3, 2004. Production has started for the 2005 West Nile season. Kimron has announced that it intends to replace its existing West Nile veterinary vaccine, which is produced using mouse brain cells, with the PER.C6-based vaccine.

The significance to our human vaccine program is that a PER.C6-based vaccine protects against the Israel 1998 Goose strain of West Nile virus. The fact that this strain is closely related to the New York 1999 strain, which caused the West Nile outbreaks in the U.S., supported our decision to develop a West Nile vaccine for humans. Our dossier for clinical trial was submitted in Belgium in November 2005 and  approved in December 2005. An agreement with The Netherlands Vaccine Institute (NVI) was announced in November 2004 for the manufacture of the vaccine at NVI’s new BioSafety Level 3 plant for use in the human clinical trials.

Ebola

Ebola fever is one of the most lethal viral diseases, with a mortality ranging from 50% to 90% according to the World Health Organization. Ebola outbreaks occur regularly in tropical Africa, affecting both human and great ape populations. To date, approximately 2,000 cases have been reported since the virus was first discovered in 1976. The Ebola virus belongs to the group of ‘hemorrhagic fever viruses’, which also includes the highly pathogenic Marburg and Lassa viruses. Ebola virus causes a disease characterized by high fever and massive internal bleeding. Because no vaccine or therapy is presently available, Ebola virus is on the Centers for Disease Control (CDC), National Institutes of Allergy and Infectious Diseases (NIAID), and U.S. Department of Defense Category “A” list of bioterror agents. In 2003 the U.S. government announced that once available, an Ebola vaccine may be stockpiled as part of its preparedness for bio-terror attacks under Project BioShield, a comprehensive effort to develop and make available modern, effective drugs and vaccines to protect against attack by biological and chemical

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weapons. The BioShield Act was enacted in July 2004, with a total appropriation of US$5.6 billion across all programs.

Numerous attempts to vaccinate against Ebola virus using inactivated virus or protein-based vaccine modalities have failed, and developing a live attenuated vaccine is considered too dangerous. However, it has been shown in experiments conducted by the Vaccine Research Centre (VRC) of the U.S. National Institutes of Health (NIH) in 2005 that a single-dose immunization with a recombinant adenovirus (expressing Ebola virus proteins) vaccine protects monkeys against an otherwise lethal challenge with wild-type Ebola virus. Based on these results, we decided to develop an Ebola vaccine. The vaccine could provide protection from the lethal virus in the event of biological warfare.

In May 2002 we entered into a Collaborative Research and Development Agreement (CRADA) with the VRC of the NIH to develop jointly, test and manufacture an adenovirus-based Ebola vaccine. Under the terms of the agreement, we have an option for exclusive worldwide commercialization rights to the Ebola vaccine resulting from this collaboration. In August 2002, the CRADA was extended to cover vaccines against Marburg and Lassa infections. The recombinant vaccine will encompass the glycoproteins and the nucleoprotein of Ebola virus, but cannot replicate in humans. This method thus provides a very important safety advantage, while ensuring that a strong humoral and cellular immune response is elicited against the Ebola virus.

Under a separate production contract with NIH, we are manufacturing adenovirus Ebola vaccine vectors according to current good manufacturing practice (cGMP) requirements. In March 2005 we extended the CRADA with NIH and continue to develop this vaccine and will use the Ebola vaccine results in the development of Marburg and Lassa vaccines. In addition, we obtained an exclusive license to certain NIH patents to develop and commercialize recombinant vaccines against Ebola. The patents cover valuable vaccine components, such as Ebola antigens and vectors. In addition, the license covers “one-shot” emergency vaccination strategies that have proven to be effective in relevant animal models.

In experiments conducted by the VRC together with the U.S. Army Medical Research Institute of Infectious Diseases (USAMRIID) during the first half of 2004, our vaccine candidate confirmed single-dose protection of monkeys against Ebola. What set the results of this trial apart from the earlier successful trial, which established a proof-of-concept, was that the vaccine in this instance was produced on PER.C6 cells. All preclinical material was produced at our FDA-compliant production facilities in Leiden. For potential safety reasons, VRC switched the development of the vaccine from the use of the wild-type Ebola glycoprotein sequences to mutant sequences, after a single dose of this new candidate vaccine showed protection of monkeys against Ebola. We expect to initiate clinical trials of this vaccine in the third quarter of 2006.

In 2002 the FDA issued the so-called ‘‘two animal’’ or animal efficacy rule, which states that efficacy studies in man may not be required to obtain a product license for special categories of products as long as efficacy is established in two independent animal models and safety in man. We believe our Ebola vaccine may be a candidate for regulatory approval under this rule, and the use of the two animal rule could potentially speed up the approval process for our Ebola vaccine.

Malaria

Malaria is a life-threatening infectious disease caused by the plasmodium parasite and transmitted from person-to-person through the bite of a female Anopheles mosquito. It is one of today’s top three killers among communicable diseases. The disease currently represents one of the most prevalent infections in tropical and subtropical areas causing severe illness in 300 to 500 million individuals worldwide according  to the World Health Organization and causing one to three million deaths every year. Most of these deaths occur among children and pregnant women in the developing world, especially in sub-Saharan Africa. Unfortunately, mortality associated with severe or complicated malaria still exceeds

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10-30%. The widespread occurrence and elevated incidence of malaria are a consequence of discontinued malaria control programs and increasing numbers of drug-resistant parasites and insecticide-resistant parasite vectors. Other factors include environmental and climatic changes, civil disturbances and increased mobility of populations. Although the overwhelming majority of morbidity and mortality associated with malaria occur in the developing world, this disease also affects travelers.

Currently there is no commercially available vaccine to protect against malaria. Our candidate malaria vaccine is based on our AdVac technology and produced using our PER.C6 technology. In a study carried out by the Department of Medical Molecular Parasitology at New York University, the efficacy of our malaria vaccine candidate was tested in NYU’s mouse malaria model. The study showed that a single administration of a prototype AdVac vaccine, a recombinant adenovirus 35 (rAd35) vector expressing the malaria parasite-derived immunogenic circumsporozoite antigen, protects mice upon challenge with the mouse specific parasite.

In March 2003, we entered into collaboration with the Walter Reed Army Institute of Research (WRAIR) and GlaxoSmithKline Biologicals (GSK) under a Cooperative Research and Development Agreement (CRADA). Pursuant to this agreement, we have completed work with WRAIR and GSK to evaluate our AdVac malaria vaccine candidate directed against the human malaria parasite Plasmodium falciparum. Our vaccine candidate was tested as a stand-alone vaccine and in combination with GSK’s RTS,S malaria vaccine candidate. The GSK malaria vaccine candidate RTS,S has, as a stand-alone vaccine, been shown to confer partial protection to human volunteers in both a laboratory challenge model conducted at WRAIR and under natural challenge conditions in a field study conducted in the Gambia.

Phase IIb pediatric trials conducted with RTS,S in Mozambique and reported in The Lancet medical journal in October 2004 demonstrated further promising results, with the vaccine protecting some infants against infection and making the course of the disease less serious and life threatening in others.

Studies in monkeys conducted during 2004 as part of the CRADA resulted in excellent immune responses for our AdVac-based malaria vaccine. Further, in March 2004 it was announced that the National Institute of Allergy and Infectious Diseases (NIAID), part of the U.S. National Institutes of Health (NIH), will support the development of our candidate malaria vaccine. The agreement has an estimated value of up to US$3.5 million and covers process development of the candidate AdVac-based malaria vaccine including the production of clinical trial material and Investigational New Drug (IND) filing. The work is being done under a subcontract agreement with Science Applications International Corporation (SAIC). We expect the vaccine to enter clinical trials in the third quarter of 2006.

In December 2004 we received a grant up to a maximum of €2 million from the Dutch Ministry of Economic Affairs in support of our malaria research and AdVac technology development. Research carried out under this grant will aim to expand the number of antigens able to be carried by an rAd35-vectored vaccine, such as our AdVac-based malaria candidate.

Tuberculosis

Mycobacterium tuberculosis (TB) represents one of the most prevalent infectious diseases throughout the world. It is estimated that 2 billion people are infected with TB, representing a third of the world’s population. Each year sees 8 million new cases and 2 million deaths as a result of the disease according to the World Health Organization.

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TB is spread when people who have the active form of the disease cough or sneeze and people nearby breath in these bacteria and become infected. Only 5-10% of infected but otherwise healthy people develop an active TB disease. Most people who carry the bacteria suffer no obvious symptoms and cannot pass on the disease to others during this latent phase of the infection. But if the immune system is weakened, active TB disease can occur. This occurs most in people infected with HIV/AIDS, which severely weakens the immune system.

The increased incidence of TB is a consequence of the spread of HIV/AIDS, the emergence of multi-drug resistant strains of TB and variability in protective efficacy of the only currently available vaccine, Bacillus Calmette-Guérin (BCG). Although the BCG vaccine offers protection against the most serious forms of TB in childhood, its efficacy wanes over a period of 10-15 years after the vaccination. A need for an alternative vaccination approach has emerged in the last two decades.

In March 2004 we announced a new collaboration with the Aeras Global TB Vaccine Foundation on the pre-clinical and clinical development of candidate TB vaccines. The Crucell-Aeras TB vaccine program is focusing on improvement of BCG, using our PER.C6 and AdVac technologies. Aeras has agreed to pay us up to US$2.9 million, contingent upon meeting certain development milestones, for process development and production of clinical material of TB vaccine candidates. We expect that the vaccine will enter Phase 1 clinical trial in Europe in the third quarter of 2006.

Rabies

Rabies is a viral disease of mammals most often transmitted through the bite of a rabid animal. The virus infects the central nervous system, causing encephalopathy and ultimately death if medical treatment is not sought before symptoms appear. Rabies is prevalent in all the continental regions of Europe, Asia, America and Africa. Greenland and countries in Eastern Europe also have rabies in their animal populations. Globally, approximately 10 million people a year are treated after exposure to rabies. Some 40,000 to 70,000 people are thought to die of the disease each year, mainly in China and India according to various medical publications.

Post-exposure treatment for rabies is 100% effective and involves the use of a vaccine plus antibodies. Neither vaccine nor antibodies are effective independent of one another.

Current supply and quality of rabies vaccine is sufficient, but anti-rabies antibodies (Human Rabies Immune Globulin (HRIG) and Equine Rabies Immune Globulin (ERIG)) are widely recognized as being insufficient in quality and supply, as well as posing safety concerns because they originate from human or equine serum. Market opportunities for rabies treatments are projected to grow significantly as affected countries such as India and China grow in affluence.

We have developed a human monoclonal antibody product in collaboration with two leaders in the rabies antibody field, the Thomas Jefferson University (TJU) based in Philadelphia and the U.S. Centers for Disease Control and Prevention (CDC) in Atlanta, using MAbstract and PER.C6 technology.

In experiments conducted during 2004 in collaboration with TJU under a Collaborative Research and Development Agreement (CRADA) with the CDC, the antibody product demonstrated protection in the industry standard hamster model at least equivalent to HRIG.

We are currently producing clinical trial materials and we expect to submit a dossier to the FDA for clinical trials in the third quarter of 2006. Multiple Phase I studies are planned in the U.S. starting in the fourth quarter of 2006 and in the Philippines in the first quarter of 2007.

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Other Collaborations and Agreements

Galapagos N.V.

Galapagos N.V. (“Galapagos”) is a discovery company focused on the rapid identification of disease-modifying drug targets through the functional screening of human disease models, and the subsequent progression of these targets into drug discovery. The company is listed on the Euronext Brussels and Euronext Amsterdam stock exchanges (ticker symbol: GLPG).

Founded in Belgium in 1999 as a joint venture between IntroGene (our predecessor) and Tibotec-Virco (acquired by Jansen Pharmaceutica, a Johnson & Johnson company), it was established to put PER.C6 technology to use in the field of functional genomics, a set of biological techniques which are used to identify or confirm the biochemical role of a newly discovered gene within cells and to understand how this role might be related to disease pathways.

Research activities at Galapagos encompass internal programs in osteoporosis, rheumatoid arthritis, osteoarthritis and Alzheimer’s disease, as well as numerous partnerships with pharmaceutical, nutraceutical and biotechnology companies. A newly established services unit, Galadeno, provides reagents and functional screens to such companies for the rapid identification and validation of novel drug targets. Partners of Galapagos include Bayer, Boehringer Ingelheim, Celgene, Johnson & Johnson, Organon, Pfizer, Procter & Gamble, Vertex and Wyeth.

Galapagos holds an exclusive license to our PER.C6 technology for conducting activities in the field of functional genomics research. Under the license, Galapagos uses PER.C6 technology in conjunction with Tibotec’s bioinformatics technology to generate adenoviral gene libraries. Tibotec and we have agreed not to compete with the activities of Galapagos, which holds the rights to the products and technology that it develops.

In May 2005, Galapagos completed an initial public offering reducing our ownership interest to 11.7%. Due to the reduction in our ownership interest, we re-evaluated our position in Galapagos and designated the investment in Galapagos as common stock as securities available for sale. As securities available for sale, the investment is carried at market value and unrealized holding gains are excluded from earnings and reported as other comprehensive income in shareholders’ equity until realized. Galapagos represents a financial investment for us, and we expect that we may sell our interest at some point in the future. As of December 31, 2005 our ownership decreased to 9.8%, which we currently still own.

Etnavax Holding AG

In June 2005 Etnavax Holding AG was founded. Etnavax is active in the field of immunoprophylaxis and immunotherapy. Berna Biotech contributed in cash up to an amount which represents 13.4% of the share capital. As we are able to exercise a significant influence through board representation and special shareholder agreements, Etnavax Holding AG is treated as an investment in an associate subsequent to our acquisition of Berna in February 2006.

Pevion Biotech AG

In 2002 Pevion Biotech was founded by Berna as joint venture with Bachem AG. The company is dedicated to creating novel virosomal formulated vaccines and bringing them from research into clinical development. We indirectly own 50% of the share capital subsequent to our acquisition of Berna in February 2006.

Chiron

In 2001, subsidiaries of Berna entered into a worldwide collaboration agreement with Chiron, to develop and commercialize a liquid pentavalent pediatric combination vaccine to prevent Hepatitis B,

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Diphteria, Tetanus, Pertussis and Haemofilus influenzae b. This agreement was amended in 2004. Under the agreements, the parties agreed to jointly develop, manufacture, register and market the product, which is now registered as Quinvaxem. In addition to the right to manufacture the product on behalf of the parties, Berna has the commercial rights to market the product worldwide, with the exception of two undisclosed countries, in the public markets via supranational institutions such as PAHO, WHO, GAVI and UNICEF. Chiron has the worldwide rights, with the exception of the two countries, to market the vaccine in private markets. In addition, the agreements provide for Chiron to supply Berna with the DTP and Hib components required to manufacture the vaccine. The parties agreed not to compete outside the collaboration in the pediatric markets.

CSL Pharmaceuticals

In November 2001 Berna entered into an agreement with CSL Pharmaceuticals, pursuant to which CSL supplies flu antigen to Berna for the manufacture and sale of virosome-based flu vaccines, such as Inflexal. Under the agreement, Berna is entitled to a minimum quantity of seasonal flu antigens, which is adjusted upward each year. However, due to external factors, such as slower growth rates of certain seasonal flu strains, even the minimum quantities may be difficult to obtain in time for a particular year’s flu season, or at all. This may affect revenues in any given year in which this occurs. The agreement terminates after 2009. Due to the shortage of antigen production capacity worldwide, it may be difficult to renew the contract against the same terms and conditions, or at all. If this risk materializes it will adversely affect Berna’s results.

University collaborations

We collaborate with a number of universities worldwide in the areas of vaccines, antibodies, cell lines, gene therapy, cancer and cardiovascular disease. Some of our collaborations provide for royalty payments to be made to the universities in the event of product sales arising out of the collaborations. Generally, these collaborations specify that Crucell provides the applicable university with a specific amount of funding, and in consideration of such, Crucell receives certain intellectual property rights and access to the results of the university research.

Consulting arrangements

We hire people with high-level experience in our fields of interest to provide advice and consulting services. We generally pay consultants on a per project basis and their term generally runs year-to-year. We require consultants, among other things, to adhere to confidentiality undertakings, and generally we have the right to all intellectual property created during the term of the consulting agreement.

Intellectual property

Our success and ability to compete depends in large part on our ability to protect our proprietary technology and information, and to operate without infringing the intellectual property rights of others. We rely on a combination of patent, trademark and trade secret laws, as well as confidentiality, assignment and licensing agreements, to establish and protect our proprietary and intellectual property rights. Our policy is to actively seek patent protection of our intellectual property in the United States and Europe, as well as in other jurisdictions as appropriate.

In addition to retaining outside patent counsel, we also employ European and Dutch patent attorneys that file, prosecute, defend and enforce patent rights as well as manage our patent portfolio. Our patent portfolio comprises 780 active cases (i.e. granted patents in force or pending patent applications) as of December 31, 2005 ((i.e. excluding Berna Biotech patent positions). We aggressively protect our inventions and employ a proactive filing strategy with respect to patent applications. Our portfolio management involves active commercialization and enforcement strategies combined with disposal of cases that we no longer consider commercially attractive.

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The following table reflects the total number of active cases (pending or granted) through December 31, 2005, organized according to our different fields of operation before the acquisition of Berna. All figures include acquired and jointly owned patent cases, but exclude patent positions licensed-in from third parties. Patent filings classified under vaccines relate to AdVac-based and classical vaccines. Patent filings classified under antibodies relate to antibodies and/or drug targets, excluding the enabling technologies. Patent filings classified under technology primarily relate to cell-based production technology, adenoviral vector technology, STAR-technology and related technology, functional genomics and target and antibody discovery technology.

 

Patent filings

In 2005 we filed patent applications for 12 new inventions, in the fields of vaccines (5), antibodies (4) and technology (4). Our new filings in the vaccine field in 2005 reflect our efforts to further strengthen our patent portfolio in support of product development programs in that area. The new filings in the area of antibodies reflect our continuing research and development in the field of infectious diseases. The new filings in the technology area relate to our continuing effort to protect and commercialize the PER.C6 technology and related uses of the PER.C6 cell lines, as well as the STAR technology. Since we are not actively involved in gene therapy research and development, no new filings were made in that area during 2005.

We maintain a geographically diversified filing strategy, depending on our technological and business needs, as well as its view of long-term economic trends and developments in legal systems in various parts of the world. As of December 31, 2005, we have 109 pending applications in the EU(1), 138 pending applications in the U.S.(2), 24 international patent applications (so-called ‘‘PCT(3) applications’’) and 211 applications in the rest of the world(4).

A significant number of our pending patent applications are filed under the Patent Cooperation Treaty (PCT), which offers a cost-effective method to seek provisional worldwide protection in more than 100 countries and territories for the duration of 30 or 31 months from the filing date. The decision to divide the PCT application into territories in which a granted patent is desired may be postponed until the obtainable scope of protection and the technical and commercial usefulness of the invention becomes clearer. During the pendency of a European patent application, a single application may designate 30 countries but is counted as one pending application. As soon as the European patent application is granted it may be validated for each of the designated countries by filing a translation into the official language of that designated state. Once such a translation has been filed, we count each such patent as a separate patent.

(1)            EU refers to filings made under the European patent convention. The EU figures do not include European patent applications designated in Patent Cooperation Treaty (PCT) applications while still in the international phase.

(2)            U.S. figures do not include U.S. patent applications designated in PCT applications while still in the international phase.

(3)            Figures reflect PCT applications still in the international phase. Our PCT applications routinely designate all territories and contracting states that are party to the Patent Cooperation Treaty per the international filing date.

(4)            Rest of world consists of Australia, Brazil, Canada, China, India, Israel, Japan, Hong Kong, Mexico, New Zealand, Norway, Russia, Singapore, South Africa and South Korea. Rest of world figures do not include PCT applications designating these countries while still in the international phase.

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Patents

At December 31, 2005 we owned or co-owned 198 granted patents in the EU territory, 38 patents in the U.S. and 62 patents in the rest of the world excluding patents owned by Berna Biotech.

On February 22, 2006, Berna Biotech owned or co-owned 15 pending patent applications and 133 granted patents, of which 115 in the EU territory, 6 in the United States of America and 12 in the rest of the world.

The following is a summary of the intellectual property rights related to our major products and product developments.

Aerugen.   Aerugen is protected by our patent ‘‘Conjugate vaccine against infections by gram-negative bacteria’’ which will expire in 2006. However, because of its designation as an orphan drug in Europe and the United States, Aerugen is eligible to benefit from a period of marketing exclusivity (7 years in the United States and up to 10 years in Europe) following expiration of its patent protection in 2006. This period of exclusivity will apply only if Aerugen becomes licensed. We intend to apply for and expect to receive a license for Aerugen following completion of Phase III testing.

Epaxal and Inflexal V.   Epaxal and Inflexal V are the two virosomal products which are protected by the patent family ‘‘Immunostimulating and immunopotentiating reconstituted influenza virosomes and vaccines containing them’’, which will expire in 2012. In addition, the hepatitis A strain used to produce Epaxal is claimed in a patent family which will expire in 2012.

Hepavax-Gene .   The active substance of this monovalent recombinant hepatitis B vaccine is HbsAg which is no longer protected by patent in Europe and most countries in the rest of the world. The Supplementary Protection Certificates with respect to Hepavax-Gene are still valid in Sweden, Italy, and France. However, we are not currently considering western European countries for product registration and marketing. The production technology is based on our proprietary Hansenula polymorpha expression technology.

Two-dose hepatitis.   The two-dose hepatitis B is enabled by formulating HbsAg with a special adjuvant, for which we have obtained a worldwide co-exclusive license from Corixa Corporation for both prophylactic and therapeutic application. The patents of Corixa Corporation will expire in 2017 in the U.S. and in 2018 in Europe.

We seek patent protection, whenever possible, commercially feasible and appropriate, in respect of any technology or product development that is important to our business. Together with our affiliates in Germany, Italy and Korea, we have several platform technologies and consequently our intellectual property activities concentrate on protecting their technologies and any improvements thereof in the main worldwide vaccine markets of Europe, the United States, Canada, Japan and Australia. However, because some vaccine markets are outside these countries, we have also sought protection in other countries, such as Korea. The IP portfolio is constantly reviewed to decide on maintenance of individual patents or patent families considering parameters such as actual product performance, product development, patent term, options for commercialization/outlicensing of non-core IP. Our IP tasks are coordinated, patents are filed on a worldwide basis by specialized patent attorneys.

Our patent-related activities do not afford complete protection to our intellectual property rights. Patents in the biotechnology and biopharmaceutical fields involve complex factual and legal questions. Patents may not be issued in respect of our pending applications or in respect of future applications that we file. In addition, a patent that is issued to us may be narrower than our application or found to be invalid. Others may make attempts to copy, reverse engineer or design around aspects of our technology, or to obtain and use information that we regard as proprietary. Our patent filings may be subject to challenges.

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Patent enforcement and proceedings

We may need to litigate or institute administrative proceedings such as oppositions to a patent to enforce or uphold our intellectual property rights or determine the validity and scope of the proprietary rights of others. Likewise, from time to time it may be necessary to defend our patents in litigation or administrative patent proceedings such as opposition proceedings. We believe that litigation can play a significant role in defining and protecting our intellectual property rights. We are aware, however, that legal and administrative proceedings can be costly and time-consuming, and result in a diversion of resources. As an alternative to litigation, we may enter into licensing, including cross-licensing, arrangements as a means of clarifying the status of our intellectual property rights.

In October 2004 we commenced patent infringement proceedings against CEVEC Pharmaceuticals in the District Court of Düsseldorf, Germany, arguing that CEVEC’s cell line infringes a recently granted European patent for our PER.C6 technology. In December 2004 CEVEC Pharmaceuticals acknowledged three out of four of our claims, but chose to defend the remaining claim. In May 2006 we withdrew the one remaining claim following submission of a written statement by CEVEC that it abandoned all rights over the cell bank and that it will not use the cell bank in future in any way that infringes our PER.C6 patent.

In 2005 Serono, Probiogen and CEVEC Pharmaceuticals have each individually filed oppositions before the European Patent Office against one or more of our PER.C6 patents.

Cell Genesys has filed opposition against our European patent related to our AdVAc technology.

In 2005 Crucell lodged opposition against a European patent held by Chiron related to certain aspects of the production of influenza viruses in cell culture.

Berna’s subsidiary Green Cross Vaccine Corporation, currently operating under the name Berna Biotech Korea Corporation, and our partner Chiron, lodged oppositions against a patent of GlaxoSmithKline (GSK) in Korea. The patent is concerned with multivalent vaccine formulations, such as our pentavalent vaccine registered in Korea, to be marketed under the trademark Quinvaxem. In response to the opposition, the patent has been revoked by the Korean Intellectual Property Office in December 2004 on the grounds that the subject-matter claimed in the patent lacks novelty. GSK has appealed that decision before the Korean Patent Court. After a hearing which took place on April 27 2006, the Korean Patent court dismissed the appeal on June 8, 2006. The decision could be further appealed by the adversely affected party. If the Korean Supreme Court were to reverse the decision of the Patent Court and if GSK were to enforce its patent, Berna Biotech Korea Corp. could be found to have infringed or be infringing the patent. If we are found to be infringing, we may be forced to delay, or even cancel, our commercial activities with this vaccine. As a consequence we might lose revenues and our business would be adversely affected.

In addition, production of our pentavalent vaccine requires a particular vaccine component that may become the subject of a patent dispute between GSK and us or our supplier of that component. The patent on that particular component, held by GSK, is currently under opposition before the patent office and a definitive outcome on the validity of the patent is expected to take a number of years. A negative outcome of this opposition proceeding could lead to infringement proceedings between GSK and us or our supplier, although we believe that neither we nor our supplier would be held to have infringed or be infringing that patent. The outcome of legal disputes is invariably difficult to predict with accuracy, but in the event GSK were to prevail in infringement proceedings against us, this would adversely affect our business.

In addition to protecting our intellectual property rights, our commercial success also depends on our ability to operate without infringing the intellectual property rights of others. We monitor patent applications to the extent available, patents issued and publications of discoveries in scientific or patent literature to keep abreast of the activities of others in our field and, with the assistance of our internal and external patent counsel and other external advisors, assess whether our activities or products infringe the patents or proprietary rights of third parties. A number of third parties have been granted patents that

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cover technologies related to ours and similar patents may be granted in the future. We believe that our current activities do not infringe any valid claims of patents or any other proprietary rights of third parties. We will consider the intellectual property rights of others as we continue to identify and develop potential products and may have to enter into licensing or other agreements or use alternative technologies.

Research has been conducted for many years in the fields of biotechnology and biopharmaceuticals. This has resulted in a substantial number of issued patents and an even larger number of patent applications. The U.S. Patent Office maintains patent applications that are filed only in the United States in secrecy until patents issue, and publication of patent applications elsewhere and of discoveries in the scientific or patent literature frequently occurs substantially later than the date of the underlying discoveries. Moreover, patents that appear not to affect our activities may be construed broadly. As such, we or our licensees may be found to infringe the patents or violate other proprietary rights of third parties and may be enjoined from pursuing research, development or commercialization of our or their products or be required to pay damages. In these circumstances, licensing or other arrangements for addressing these infringements or violations may not be available, or may not be available on commercially acceptable terms.

Technology licenses from third parties

We license technology and patents for specific use as part of our technology platforms from a number of third parties. We entered into a technology license agreement with Xoma in the field of bacterial expression technology. This license allows us to develop diagnostic and therapeutic antibodies in the field of infectious disease using phage-display technology. The agreement provides us with options to expand the license to cover additional disease fields. Under the terms of the agreement, we pay Xoma milestone payments and royalties on products as and when developed and marketed using the licensed technology.

We also hold a license under the phage antibody display patent portfolio owned or controlled by Cambridge Antibody Technology and MRC, a cross-license with Transgene S.A. under which we granted to Transgene a non-exclusive PER.C6 license for the manufacture and sale of certain types of vectors for use in gene therapy, and a license to phage antibody-display technology and part human, or chimeric, binding proteins and molecules from Enzon Corporation’s subsidiary, SCA Ventures, Inc.

We also have exclusive licenses or an option for an exclusive license to a number of genes, which we may use in the development of products in the area of gene therapy. In some cases we will be required to make royalty payments in the event of product sales based on these genes.

In the field of vaccines, we have concluded an agreement with the Rockefeller University in New York. According to the agreement, we have the exclusive rights to use and exploit the Rockefeller patents related to ex vivo and in vivo targeting of dendritic cells with the use of viral vectors.

When licensing our technology to third parties we seek to obtain access to any improvement patents via so-called grant-back provisions to reduce the risk of being exempted from using such improvements for our own benefit, or that of our licensees.

Trademarks

New trademarks for our products are registered on a worldwide basis. Distribution and agency agreements normally include a clause specifying that, at the termination of the agreement, trademark and product registration rights return to us. We are the owner of over 150 registered trademarks. The most important in the largest sales markets are: Crucell, Berna, the Berna and Crucell Logo, ChromaGenics, Aerugen, Te Anatoxal Berna, Di Anatoxal Berna, Di Te Anatoxal Berna, Epaxal, Epaxal Berna, Inflexal, Inflexal Berna, Vivotif, Vivotif Berna, Hepimmune and Flavimun, PER.C6, AdVac, MAbstract and  STAR. In addition we hold rights to use trademarks held by our partners, such as Quinvaxem from Chiron.

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Legal Proceedings

In addition to the matters discussed under “Intellectual Property—Patent Enforcement and Proceedings’’ we have been notified of the following matter:

In January 2006, Menarini Ricerche S.p.A. notified Berna that it believes it is entitled to compensation for damages allegedly incurred as a consequence of Berna’s termination of contract negotiations in 2005. These contract negotiations concern contract manufacturing activities by Berna on behalf of Menarini. We are not aware of any misconduct on Berna’s part that could lead to a successful claim for compensation of the alleged damages, nor do we believe the damages, if incurred, will be found to be attributable to Berna’s behavior. In February 2006, Menarini requested Berna to waive the statute of limitations in respect of this claim, which Berna refused.

Competition Law

The Technology Transfer Block Exemption Regulation (EC 772/2004) that entered into force on May 1, 2004 may require us to review and possibly amend existing license and technology transfer agreements to comply with this regulation. This review process may be costly and time consuming and may require renegotiation of certain portions of our licenses and other agreements. Based on Crucell’s market position, such evaluation is not foreseen in the coming year.

Regulation

We operate in a highly regulated industry. Our activities involve the use of hazardous materials, including chemicals and radioactive and biological materials, and animal testing, all of which are subject to regulation. Environmental laws and regulations and laws and regulations relating to safe working conditions, laboratory conditions, and laboratory and manufacturing practices also apply to our operations. We conduct our operations in a manner designed to comply with applicable regulations and we believe that we have all the licenses and permits required to carry out our current activities.

Our ability and that of our licensees to commercially distribute biopharmaceuticals depends in part on the extent to which governmental health administration authorities, health insurance companies, government health policies, health maintenance organizations, or HMOs, and other organizations are willing to pay for the costs of these products. The willingness of governments and HMOs to pay for the costs of newly developed health care products is uncertain. There are efforts by governmental payers and HMOs to contain or reduce the costs of health care and we expect that there will continue to be a number of legislative proposals to do so.

Obtaining product approval is a costly and time-consuming process. All of our potential products, and those of our licensees, are either in research or development. Any products our licensees or we develop will require regulatory clearances prior to clinical trials and additional regulatory clearances prior to being produced and distributed commercially. These regulatory processes are generally stringent and time-consuming. We expect the European Medicines Agency (EMEA) in the European Union, the Food & Drug Administration (FDA) in the United States, the College ter Beoordeling van Geneesmiddelen (CBG) in The Netherlands and comparable agencies in other countries to subject new biopharmaceutical products to extensive regulation. These regulatory requirements with which we and our licensees will have to comply will evolve over time due to the novelty of the biopharmaceutical products and therapies currently under development. Fortunately, the harmonization of these requirements is promoted at an international level (International Conferences on Harmonization (ICH)) to avoid unnecessary repetition of studies when seeking approval in various countries. Under the current definitions, we believe that products developed using our technologies will be regulated either as biological products or as drugs.

Before marketing a (bio)pharmaceutical product, companies require regulatory approval from the relevant authorities. To obtain this approval, pre-clinical animal studies and human clinical trials must be

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conducted to demonstrate the safety and efficacy of the product candidates. Clinical trials are the means by which experimental drugs or treatments are tested in human volunteers. New therapies typically advance from laboratory research testing through animal pre-clinical testing and finally through several phases of clinical human testing. On successful completion of the clinical trials and demonstration that the product can be manufactured in a safe and consistent manner, approval to market the biopharmaceutical may be requested from the EMEA in Europe, the FDA in the United States or their counterparts in other countries.

Clinical trials are normally done in three phases:

·       Phase I: First clinical trial of a new compound, generally performed in a small number of healthy human volunteers, to assess clinical safety, tolerability as well as metabolic and pharmacologic properties.

·       Phase II: Clinical studies that test the safety and efficacy of the compound in patients with targeted disease with the goal of determining the appropriate doses for further testing and evaluating study design as well as identifying common side effects and risks.

·       Phase III: Large-scale clinical studies with several hundred or several thousand patients to establish safety and effectiveness for regulatory approval for indicated uses and to evaluate the overall benefit-risk relationship.

Our research and development and production activities are undertaken in a number of countries around the world. These activities are subject to strict regulatory requirements of national and supranational authorities in the countries in which they are undertaken such as requirements governing the testing, manufacturing and marketing of pharmaceutical products. In most countries, it is necessary to obtain an approval to market a pharmaceutical or medical product. The grant of such an approval is subject to a detailed evaluation of data submitted by the applicant related to the quality, safety and efficacy of the product. Many countries, including member states of the EU and the United States, impose extensive testing and data submission requirements and conduct rigorous technical appraisals of product candidates. In addition, different regulatory authorities may impose different conditions upon the marketing of a given product or may refuse to grant or require additional data before granting an approval to market a product even though the product may have been approved by another regulatory authority. Pre-clinical testing, clinical research and regulatory approval of a pharmaceutical or medical product is a very lengthy and costly process.

Once a product is approved, the manufacturing and marketing of the product remains subject to periodic review. Changes in applicable regulations, breaches of regulatory requirements or the discovery of problems related to the manufacturing, safety, quality or efficacy of a product may result in the imposition of restrictions upon the manufacturing and sale of such product, including at worst withdrawal of the product from the market and/ or the revocation of the relevant regulatory approvals.

The European Union

There is a broad range of legislation in force in member states of the European Union governing testing, manufacturing and marketing biopharmaceutical products, both at an individual state level as well as on a Union-wide level (European Union Directives). These laws impose specific requirements on various topics including pre-clinical and clinical testing and the operation of laboratories and manufacturing sites. Furthermore, there are specific directives and other legislation on, among other things, pricing, distribution, labeling and advertising of medicinal products.

At the Union-wide level, legislation on medicinal products was first enacted in Directive 65/65/EEC: “on the approximation of provisions laid down by law, regulation or administrative action relating to medicinal products”. Subsequent Directives (75/318/EEC, 75/319/EEC and 93/39/EEC) further amended and expanded the original provisions, resulting in a system for the regulation of drugs, or medicinal products as they are called in the EU, based on the principle of mutual recognition. Under this mutual

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recognition procedure, the applicant first submits its product for review to one or more EU member states. The first member state that decides to evaluate the product is called the reference member state.

After the reference member state has assessed the medicinal product for quality, safety, and efficacy and has granted a national marketing authorization, other member states that have received copies of the application have 90 days for evaluation before they must grant authorization as well. In case of refusal, the application will be sent to the Committee for Human Medicinal Products (CHMP) for arbitration.

An alternative, centralized, approach for registration was provided by Directive 93/41/EEC and Council Regulation No 2309/93, which established EU procedures for the authorization and supervision of medicinal products for human and veterinary use and established a European Medicines Agency (EMEA). Under this centralized procedure, which has been implemented for so-called high technology medicinal products, and especially for those those derived from biotechnological processes, applicants submit their dossier for authorization to the EMEA. The EMEA coordinates the assessment process by appointing two EU member states as a rapporteur and co-rapporteur, respectively, who will assess the application and prepare draft reports for review by the CHMP. The CHMP issues an opinion on the product’s quality, safety and efficacy and sends its opinion to the European Commission, which drafts a decision based on that opinion. After consulting with its standing committee, the European Commission may grant a marketing authorization, subject to adequate evidence of quality, safety and efficacy. The marketing authorization granted is valid in all EU member states. For biopharmaceuticals the centralized procedure is mandatory.

Since May 1, 2004, the Clinical Trial Directive (2001/20/EC) has been in effect. The aim of this directive is to harmonize the process for authorization and conduct of clinical trials as it is implemented in the individual EU member states. As a result of the Clinical Trial Directive, the Good Manufacturing Practice (GMP) requirements for the manufacture of investigational drugs have been changed, and a specific requirement for product release by a Qualified Person has been included in the requirements. Also, regulatory inspections of manufacturing facilities for investigated drugs have been made obligatory, where in the past this was on a voluntary basis in most European countries. Manufacturers of pharmaceutical products operating within the EU must hold a manufacturer’s authorization and must comply with the requirements of GMP incorporated into EU legislation (2003/94/EC). These requirements are intended to set minimum standards with respect to manufacturing facilities and the way of operating these facilities. Failure to comply with these requirements may result in the suspension or revocation of the manufacturer’s manufacturing authorization. In the Netherlands we have a license to manufacture clinical trial material under GMP conditions. To maintain this license we are inspected every two years by the Dutch regulatory authorities. The most recent inspections were in July 2005 for our temporary BSL-3 manufacturing facilities at NVI in Bilthoven, and in November 2005 for our facilities in Leiden. Both inspections were satisfactory. Additionally we employ two Qualified Persons in Leiden for product release according to the European Clinical Trial Directive.

Manufacturers of pharmaceutical products operating within the EU must hold a manufacturer’s authorization and must comply with the requirements of ‘‘Good Manufacturing Practice’’ incorporated into EU legislation. These requirements are intended to set minimum standards with respect to manufacturing facilities. Failure to comply with these requirements may result in the suspension or revocation of the manufacturer’s manufacturing authorization. EU legislation provides for a centralized procedure for authorizations to market certain specific pharmaceutical products. The procedure is initiated with the submission of an application for a marketing authorization to the European Agency for the Evaluation of Medicinal Products. This agency processes the application and co-ordinates an evaluation of the product candidate. EU legislation provides for mutual recognition, whereby an authorization for a product granted in one member state is recognized by and forms the basis for granting an authorization in other member states. The wholesale distribution of pharmaceutical products within the EU is regulated by ‘‘Good Distribution Practice’’ guidelines.

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Switzerland

Marketing a new pharmaceutical product requires a product marketing authorization. In Switzerland this is granted by Swissmedic if rigorous pre-clinical and clinical trials have shown that the product fulfils the legal criteria of quality, safety and efficacy. Marketing authorizations and maintenance of approved products in our home markets are of major importance.

In addition to the requirements of pre-marketing authorization, production licenses for the manufacture of pharmaceuticals in Switzerland is an important requirement. Obtaining and maintaining this license requires a production standard according to Good Manufacturing Practice (GMP). We believe rules and regulations in Switzerland set standards comparable with those of the EU. Crucell has at its disposal all  necessary licenses to manufacture pharmaceuticals in Switzerland.

United States

The Federal Food, Drug and Cosmetic Act regulates both drugs and biological products, and the Public Health Service Act also regulates biological products. The areas that these two Acts and related regulations govern include testing, manufacturing, safety, efficacy, labeling, storage, record keeping and advertising and other promotional practices. The FDA must approve a product or provide alternative clearances before clinical testing or manufacturing and marketing of biologics or drugs may begin.

To gain FDA approval to conduct clinical trials, pre-clinical studies must generally be conducted in the laboratory and in animal model systems to gain preliminary information on an agent’s efficacy and to identify any major safety concerns. Applicants submit the results of these studies, in addition to information regarding the manufacture of the medicinal product, as a part of an application for an Investigational New Drug, or IND. Furthermore, the IND application includes a detailed description of the clinical investigations.

The clinical studies are designed to demonstrate the safety and efficacy of the new drug. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients. In 2002, the FDA issued the so-called ‘‘two animal rule.’’

According to this rule, extensive clinical trials in humans intended to demonstrate efficacy may not be necessary when it is unpractical or unethical to perform efficacy trials. Instead, the efficacy must be demonstrated in relevant animal models, while safety trials in human volunteers will continue to be required.

After all studies and trials of a new product have been completed, applicants must submit all data to the FDA for review in order to obtain marketing approval. If the product is regulated as a biologic, applicants must submit a Biologic License Application, or BLA. If the product is classified as a new drug, a New Drug Application, or NDA is required. The NDA or BLA must include results of product development activities, pre-clinical studies and clinical trials in addition to detailed manufacturing information.

The FDA subjects NDAs or BLAs to a detailed and potentially time-consuming approval process. The FDA may ultimately decide that the application does not satisfy its criteria for approval or may require additional pre-clinical or clinical studies. Before marketing clearance is secured, the manufacturing facility will be inspected for compliance with current Good Manufacturing Practices requirements by FDA inspectors and will be inspected periodically for continuing compliance by FDA inspectors. After applicants obtain FDA regulatory clearances, the FDA subjects a marketed product to continual review, and subsequent discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or mandated withdrawal of the product from the market as well as possible civil or criminal sanctions.

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