<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-31580
1,500,000 Shares
[MAXYGEN LOGO]
Common Stock
----------------
This is an offering of 1,500,000 shares of common stock of Maxygen, Inc.
Maxygen is selling all of the 1,500,000 shares of common stock in this
offering.
The common stock is quoted on the Nasdaq National Market under the symbol
"MAXY". The last reported sale price of the common stock on March 20, 2000 was
$99.00 per share.
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed on the accuracy
or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial price to public................................. $97.00 $145,500,000
Underwriting discount................................... $ 5.09 $ 7,635,000
Proceeds, before expenses, to Maxygen................... $91.91 $137,865,000
</TABLE>
To the extent that the underwriters sell more than 1,500,000 shares of
common stock, the underwriters have the option to purchase up to an additional
225,000 shares from Maxygen at the initial price to public less the
underwriting discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on March 24, 2000.
Goldman, Sachs & Co.
Robertson Stephens
Credit Suisse First Boston
Invemed Associates
----------------
Prospectus dated March 20, 2000.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us, the sale of our common stock in this offering, and
our financial statements and notes to those financial statements that appear
elsewhere in this prospectus.
Our Business
Overview
We believe that we are the leader in the emerging field of directed
molecular evolution, the process by which genes are modified for specific
commercial uses. Our proprietary technologies, known as MolecularBreeding(TM)
technologies, mimic the natural process of evolution and bring together
advances in molecular biology and classical breeding, while capitalizing on the
large amount of genetic information generated by government, academic and
commercial laboratories. Unlike conventional technologies, MolecularBreeding
technologies are efficient, in part because they require minimal understanding
of complex underlying biological systems. We have designed our technologies to
rapidly develop new genes for commercial applications, where such genes would
be difficult or impossible to develop through other processes. We believe our
MolecularBreeding technologies are commercially applicable to a broad range of
industries. We are currently conducting research on more than 40 product
candidates for the chemical, agricultural and pharmaceutical industries,
enabling us to potentially generate short-term as well as long-term revenues.
We have established collaborations with Novo Nordisk, DuPont/Pioneer Hi-
Bred, AstraZeneca, DSM and Rio Tinto, all leaders in their respective markets,
as well as with United States government agencies. Our commercial collaborators
and U.S. government agencies have committed funding of over $102 million. While
we will continue to establish strategic collaborations with leading companies
and pursue additional grants from U.S. government agencies, we will also invest
our own funds in certain areas. To that end, we have retained significant
product commercialization rights to future applications of our technologies.
Our Target Markets
Our technologies address a number of multi-billion dollar industries. Our
target markets include chemicals, agriculture, protein pharmaceuticals, and
preventative and therapeutic vaccines. Within these markets, we are focusing
our efforts on specific high-value opportunities. In chemicals, we are
developing new processes using enzymes as catalysts that could increase yields
and decrease manufacturing costs for multiple product classes, such as
vitamins, pharmaceuticals, paints and plastics. In addition, we believe that
processes using enzymes as catalysts may have utility for generating new useful
materials such as fibers for industrial and consumer product applications. In
agriculture, we are applying our technologies to potentially increase crop
yield and qualities, including enhanced nutritional value in human food and
animal feed. In pharmaceuticals and vaccines, we are focusing our efforts on
developing products for a number of indications, including multiple forms of
cancer, infectious diseases such as HIV and hepatitis, and diseases in which
the body generates an improper immune response, such as rheumatoid arthritis
and multiple sclerosis.
Our Technologies
Our MolecularBreeding technologies consist of two components:
DNAShuffling(TM) recombination technologies and MaxyScan(TM) screening systems.
DNAShuffling is the process of recombining single genes or gene families to
generate a library of new modified genes. MaxyScan is a series of specialized
screening systems that efficiently and rapidly select those gene products and
enzymes best suited for specific commercial purposes. We have an extensive
patent portfolio, including 16 issued U.S. patents, of which six are owned by
us and 10 have been licensed to us by others. Furthermore, we have over 55
families of patent applications relating to our MolecularBreeding technologies,
the application of our technologies to diverse industries and specific proteins
improved by our technologies.
3
<PAGE>
Our Accomplishments
We have attracted a multi-disciplinary team comprised of leading experts in
the field of directed molecular evolution. We have consistently been able to
generate significant enhancements in many different genes that have relevance
to multiple commercial applications. We have demonstrated improvements in 13
product candidates and have an additional 32 product candidates in earlier
stages of development. For example, we have increased the anti-viral activity
of a protein and developed new modified enzymes which have the potential to
streamline chemical and pharmaceutical manufacturing processes. In addition, we
have significantly improved the performance of multiple commercially relevant
properties of the industrial enzyme subtilisin, one of the most studied and
extensively modified commercial enzymes. Subtilisin, which is widely used in
laundry detergents, had annual sales of $500 million in 1998. We believe that
this example demonstrates the ability of our MolecularBreeding technologies to
achieve significant improvements beyond the limits of other approaches in
biotechnology.
To date, we have established strategic alliances with Novo Nordisk in the
area of industrial enzymes, DuPont/Pioneer Hi-Bred and AstraZeneca in
agriculture, DSM in antibiotic manufacturing and Rio Tinto in chemical
processing. Since 1997, our collaborators have committed funding of over $75
million, assuming we perform research for the full term of the existing
collaborations. Of this amount, we have received approximately $33 million,
including $15 million in equity investments. In addition, we could receive over
$145 million in milestone payments based on the accomplishment of specific
performance criteria, as well as royalties on product sales. We have received
six grants from the U.S. National Institute of Standards and Technology-
Advanced Technology Program and the Defense Advanced Research Projects Agency
with total committed grant funding of over $27 million, of which we have
expended approximately $7 million. These grants are primarily for the
development of vaccines and the advancement of our MolecularBreeding
technologies.
Our Strategy
Our strategy has four major components:
. We will continue to develop our core MolecularBreeding technologies to
extend our proprietary technology leadership by investing significantly
in research and development programs. We will acquire and license
technologies from third parties that complement our capabilities.
. We will continue to establish strategic collaborations with leading
companies in targeted industries and will pursue additional grants from
U.S. government agencies. We have retained, and intend to retain,
significant rights to develop and market certain applications of
products arising from our strategic collaborations.
. We plan to develop multiple products in the chemicals, agriculture and
pharmaceutical industries to generate revenues in the short-, medium-
and long-term. We expect to receive a diversified royalty stream from
the sale of commercial products and processes that may be developed and
commercialized by our existing collaborators as well as revenues from
any products that result from our grant-funded programs and self-funded
programs.
. We plan to retain rights to use our technologies in multiple
applications. We will invest our own funds in selected areas and product
opportunities with the aim of capturing a high percentage of profits on
product sales.
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<PAGE>
Our History
We began operations in 1997 to commercialize technologies originally
conceived by Dr. Willem P.C. Stemmer while at Affymax Research Institute, a
subsidiary of Glaxo Wellcome plc. We now have over 145 employees and occupy our
own facilities and executive offices, totaling 47,880 square feet, located at
515 Galveston Drive, Redwood City, California 94063. Our telephone number is
(650) 298-5300. We were incorporated under the laws of Delaware on May 7, 1996.
Maxygen(TM), MaxyScan(TM), MolecularBreeding(TM), DNAShuffling(TM), and the
Maxygen logo are some of our trademarks. Other service marks, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
The Offering
<TABLE>
<S> <C>
Shares offered by Maxygen.................... 1,500,000 shares
Shares to be outstanding after this
offering.................................... 32,269,644 shares
Nasdaq National Market symbol................ MAXY
Use of proceeds.............................. For research and development activities, for
capital expenditures, to finance possible
acquisitions and investments in technology,
and for working capital and other general
corporate purposes.
</TABLE>
---------------
The above information is based on shares outstanding as of February 15,
2000. This information excludes 2,111,602 shares of common stock issuable upon
the exercise of options outstanding as of February 15, 2000 at a weighted
average exercise price of $5.74 per share and 1,943,385 shares of common stock
reserved for future issuance under our benefit plans.
5
<PAGE>
Summary Financial Data
See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing per share data
below. See Note 8 to Notes to Financial Statements for information concerning
the deemed dividend upon issuance of convertible preferred stock in August
1999.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands, except
per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Collaborative research and development revenue.... $ 341 $ 1,077 $ 8,895
Grant revenue..................................... -- 1,646 5,122
------- ------- --------
Total revenues.................................... 341 2,723 14,017
Operating expenses:
Research and development........................ 3,074 7,858 19,250
General and administrative...................... 1,461 3,920 7,498
------- ------- --------
Total operating expenses.......................... 4,535 11,778 26,748
------- ------- --------
Loss from operations.............................. (4,194) (9,055) (12,731)
Net interest income............................... 161 229 1,413
------- ------- --------
Net loss.......................................... (4,033) (8,826) (11,318)
Deemed dividend upon issuance of convertible
preferred stock.................................. -- -- (2,200)
------- ------- --------
Net loss attributable to common stockholders...... $(4,033) $(8,826) $(13,518)
Basic and diluted net loss per share.............. $ (0.82) $ (1.31) $ (1.53)
======= ======= ========
Shares used in computing basic and diluted net
loss per share................................... 4,917 6,748 8,854
Pro forma basic and diluted net loss per share.... $ (0.75) $ (0.74)
======= ========
Shares used in computing pro forma basic and
diluted net loss per share....................... 11,762 18,249
</TABLE>
In the "as adjusted" column below, we have adjusted the actual balance
sheet data to give effect to receipt of the net proceeds from the sale in this
offering of 1,500,000 shares of common stock at a public offering price of
$97.00 per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
December 31, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $136,343 $273,708
Working capital............................................. 132,510 269,875
Total assets................................................ 145,578 282,943
Non-current portion of equipment financing.................. 1,644 1,644
Accumulated deficit......................................... (24,177) (24,177)
Total stockholders' equity.................................. 133,716 271,081
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before deciding whether
to invest in our common stock. The risks and uncertainties described below are
not the only ones facing Maxygen. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. The occurrence of any of the following risks could harm
our business, financial condition or results of operations. In such case, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
We Have a History of Net Losses. We Expect to Continue to Incur Net Losses and
We May Not Achieve or Maintain Profitability.
We have incurred net losses since our inception, including a net loss of
approximately $11.3 million for the year ended December 31, 1999. As of
December 31, 1999, we had an accumulated deficit of approximately $24.2
million. We expect to have increasing net losses and negative cash flow in the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth, if any, in our contract revenues and on the level of our
expenses. To date, we have derived all of our revenues from collaborations and
grants and will continue to do so in the foreseeable future. Revenues from
collaborations and grants are uncertain because our existing agreements have
fixed terms and because our ability to secure future agreements will depend
upon our ability to address the needs of our potential future collaborators. We
expect to spend significant amounts to fund research and development and
enhance our core technologies. As a result, we expect that our operating
expenses will increase significantly in the near term and, consequently, we
will need to generate significant additional revenues to achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not
Develop Commercially Successful Products, We May Be Forced to Cease Operations.
You must evaluate us in light of the uncertainties and complexities
affecting an early stage biotechnology company. Our MolecularBreeding
technologies are new and in the early stage of development. We may not develop
products that prove to be safe and efficacious in any market, meet applicable
regulatory standards, are capable of being manufactured at reasonable costs, or
can be marketed successfully.
We may not be successful in the commercial development of products.
Successful products will require significant development and investment,
including testing, to demonstrate their cost-effectiveness prior to their
commercialization. To date, companies in the biotechnology industry have
developed and commercialized only a limited number of gene-based products. We
have not proven our ability to develop and commercialize products. Further,
none of our potential vaccine or protein therapeutic products are expected to
enter clinical trials within the next year. We must conduct a substantial
amount of additional research and development before any regulatory authority
will approve any of our products. Our research and development may not indicate
that our products are safe and effective, in which case regulatory authorities
may not approve them. Problems frequently encountered in connection with the
development and utilization of new and unproven technologies and the
competitive environment in which we operate might limit our ability to develop
commercially successful products.
7
<PAGE>
Commercialization of Our Technologies Depends On Collaborations With Other
Companies. If We Are Not Able to Find Collaborators in the Future, We May Not
Be Able to Develop Our Technologies or Products.
Since we do not currently possess the resources necessary to develop and
commercialize potential products that may result from our MolecularBreeding
technologies, or the resources to complete any approval processes which may be
required for these products, we must enter into collaborative arrangements to
develop and commercialize products. We have entered into collaborative
agreements with other companies to fund the development of certain new products
for specific purposes. These contracts expire after a fixed period of time. If
they are not renewed or if we do not enter into new collaborative agreements,
our revenues will be reduced and our products may not be commercialized.
We have limited or no control over the resources that any collaborator may
devote to our products. Any of our present or future collaborators may not
perform their obligations as expected. These collaborators may breach or
terminate their agreement with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Further, our
collaborators may elect not to develop products arising out of our
collaborative arrangements or devote sufficient resources to the development,
manufacture, market or sale of these products. If any of these events occur, we
may not be able to develop our technologies or commercialize our products.
We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our
Collaborators or Any Inability to Commercialize Products Resulting from This
Research Could Harm Our Business.
An important part of our strategy involves conducting proprietary research
programs. We may pursue opportunities in fields that could conflict with those
of our collaborators. Moreover, disagreements with our collaborators could
develop over rights to our intellectual property. Any conflict with our
collaborators could reduce our ability to obtain future collaboration
agreements and negatively impact our relationship with existing collaborators,
which could reduce our revenues.
Certain of our collaborators could also become competitors in the future.
Our collaborators could develop competing products, preclude us from entering
into collaborations with their competitors, fail to obtain timely regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of products. Any
of these developments could harm our product development efforts.
We will either commercialize products resulting from our proprietary
programs directly or through licensing to other companies. We have no
experience in manufacturing and marketing, and we currently do not have the
resources or capability to manufacture products on a commercial scale. In order
for us to commercialize these products directly, we would need to develop, or
obtain through outsourcing arrangements, the capability to manufacture, market
and sell products. We do not have these capabilities, and we may not be able to
develop or otherwise obtain the requisite manufacturing, marketing and sales
capabilities. If we are unable to successfully commercialize products resulting
from our proprietary research efforts, we will continue to incur losses.
We May Encounter Difficulties in Managing Our Growth. These Difficulties Could
Increase Our Losses.
We have experienced a period of rapid and substantial growth that has
placed and, if this growth continues, will place a strain on our human and
capital resources. If we are unable to manage this growth effectively, our
losses could increase. The number of our employees increased from 20 to 74 to
143 at December 31, 1997, 1998 and 1999, respectively. Our revenues increased
from $341,000 in 1997 to
8
<PAGE>
$2.7 million in 1998 and $14.0 million in 1999. Our ability to manage our
operations and growth effectively requires us to continue to expend funds to
improve our operational, financial and management controls, reporting systems
and procedures and to attract and retain sufficient numbers of talented
employees. If we are unable to successfully implement improvements to our
management information and control systems in an efficient or timely manner, or
if we encounter deficiencies in existing systems and controls, then management
may receive inadequate information to manage the day-to-day operations of the
Company.
Since Our Technologies Can Be Applied to Many Different Industries, If We Focus
Our Efforts on Industries Which Fail to Produce Viable Product Candidates, We
May Fail to Capitalize on More Profitable Areas.
We have limited financial and managerial resources. In light of the fact
that our technologies may be applicable to numerous, diverse industries, we
will be required to prioritize our application of resources to discrete
efforts. This requires us to focus on product candidates in selected industries
and forego efforts with regard to other products and industries. Our decisions
may not produce viable commercial products and may divert our resources from
more profitable market opportunities.
Public Perception of Ethical and Social Issues May Limit the Use of Our
Technologies, Which Could Reduce Our Revenues.
Our success will depend in part upon our ability to develop products
discovered through our MolecularBreeding technologies. Governmental authorities
could, for social or other purposes, limit the use of genetic processes or
prohibit the practice of our MolecularBreeding technologies. Ethical and other
concerns about our MolecularBreeding technologies, particularly the use of
genes from nature for commercial purposes, and products resulting therefrom
could adversely affect their market acceptance.
If the Public Does Not Accept Genetically Engineered Products, We Will Have
Less Demand for Our Products.
The commercial success of our potential products will depend in part on
public acceptance of the use of genetically engineered products including
drugs, plants and plant products. Claims that genetically engineered products
are unsafe for consumption or pose a danger to the environment may influence
public attitudes. Our genetically engineered products may not gain public
acceptance. Negative public reaction to genetically modified organisms and
products could result in greater government regulation of genetic research and
resultant products, including stricter labeling laws or regulations, and could
cause a decrease in the demand for our products.
The subject of genetically modified organisms has received negative
publicity in Europe, which has aroused public debate. The adverse publicity in
Europe could lead to greater regulation and trade restrictions on imports of
genetically altered products. If similar adverse public reaction occurs in the
United States, genetic research and resultant products could be subject to
greater domestic regulation and could cause a decrease in the demand for our
products.
Many Potential Competitors Who Have Greater Resources and Experience Than We Do
May Develop Products and Technologies That Make Ours Obsolete.
The biotechnology industry is characterized by rapid technological change,
and the area of gene research is a rapidly evolving field. Our future success
will depend on our ability to maintain a competitive position with respect to
technological advances. Rapid technological development by others may result in
our products and technologies becoming obsolete.
9
<PAGE>
We face, and will continue to face, intense competition from organizations
such as large biotechnology companies, as well as academic and research
institutions and government agencies that are pursuing competing technologies
for modifying DNA. These organizations may develop technologies that are
superior alternatives to our technologies. Further, our competitors in the
directed molecular evolution field may be more effective at implementing their
technologies to develop commercial products. Some of these competitors have
entered into collaborations with leading companies within our target markets to
produce enzymes for commercial purposes.
Any products that we develop through our MolecularBreeding technologies
will compete in multiple, highly competitive markets. Most of the organizations
competing with us in the markets for such products have greater capital
resources, research and development and marketing staffs and facilities and
capabilities, and greater experience in modifying DNA, obtaining regulatory
approvals, manufacturing products and marketing.
Accordingly, our competitors may be able to develop technologies and
products more easily which would render our technologies and products and those
of our collaborators obsolete and noncompetitive.
Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our
Competitive Position.
Our success will depend in part on our ability to obtain patents and
maintain adequate protection of our other intellectual property for our
technologies and products in the U.S. and other countries. If we do not
adequately protect our intellectual property, competitors may be able to
practice our technologies and erode our competitive advantage. The laws of some
foreign countries do not protect proprietary rights to the same extent as the
laws of the U.S., and many companies have encountered significant problems in
protecting their proprietary rights in these foreign countries. These problems
can be caused by, for example, a lack of rules and methods for defending
intellectual property rights.
The patent positions of biopharmaceutical and biotechnology companies,
including our patent position, are generally uncertain and involve complex
legal and factual questions. We will be able to protect our proprietary rights
from unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. We will apply for patents covering both our
technologies and products as we deem appropriate. However, these applications
may be challenged and may not result in issued patents. Our existing patents
and any future patents we obtain may not be sufficiently broad to prevent
others from practicing our technologies or from developing competing products.
Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others
may challenge or invalidate our patents, or our patents may fail to provide us
with any competitive advantages.
We rely upon trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. We seek to protect our proprietary
information by entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose our proprietary information, and we may not be
able to meaningfully protect our trade secrets. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.
Litigation or Other Proceedings or Third Party Claims of Intellectual Property
Infringement Could Require Us to Spend Time and Money and Could Shut Down Some
of Our Operations.
Our commercial success depends in part on neither infringing patents and
proprietary rights of third parties, nor breaching any licenses that we have
entered into with regard to our technologies and products. Others have filed,
and in the future are likely to file, patent applications covering genes or
gene
10
<PAGE>
fragments which we may wish to utilize with our MolecularBreeding technologies,
or products that are similar to products developed with the use of our
MolecularBreeding technologies. If these patent applications result in issued
patents and we wish to use the claimed technology, we would need to obtain a
license from the third party.
Third parties may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain patents in the
future and claim that use of our technologies infringes these patents. We could
incur substantial costs and diversion of management and technical personnel in
defending ourselves against any of these claims or enforcing our patents or
other intellectual property rights against others. Furthermore, parties making
claims against us may be able to obtain injunctive or other equitable relief
which could effectively block our ability to further develop, commercialize and
sell products, and could result in the award of substantial damages against us.
In the event of a successful claim of infringement against us, we may be
required to pay damages and obtain one or more licenses from third parties. We
may not be able to obtain these licenses at a reasonable cost, if at all. In
that event, we could encounter delays in product introductions while we attempt
to develop alternative methods or products. Defense of any lawsuit or failure
to obtain any of these licenses could prevent us from commercializing available
products.
We routinely monitor the public disclosures of other companies operating in
our industry regarding their technological development efforts. If we determine
that these efforts violate our intellectual property or other rights, we intend
to take appropriate action, which could include litigation. Any action we take
could result in substantial costs and diversion of management and technical
personnel. Furthermore, the outcome of any action we take to protect our rights
may not be resolved in our favor.
If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional
Personnel We May Be Unable to Pursue Collaborations or Develop Our Own
Products.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to our success. We do not currently have sufficient executive
management personnel to fully execute our business plan. There is currently a
shortage of skilled executives, which is likely to continue. As a result,
competition for skilled personnel is intense, and the turnover rate can be
high. Although we believe we will be successful in attracting and retaining
qualified personnel, competition for experienced scientists from numerous
companies and academic and other research institutions may limit our ability to
do so on acceptable terms. Failure to attract and retain personnel would
prevent us from pursuing collaborations or developing our products or core
technologies.
Our planned activities will require additional expertise in specific
industries and areas applicable to the products developed through our
technologies. These activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel. The inability to acquire these services or to develop
this expertise could impair the growth, if any, of our business.
We Will Need Additional Capital in the Future. If Additional Capital is Not
Available, We Will Have to Curtail or Cease Operations.
Our future capital requirements will be substantial and will depend on many
factors including payments received under collaborative agreements and
government grants, the progress and scope of our collaborative and independent
research and development projects, the effect of any acquisitions, and the
filing, prosecution and enforcement of patent claims.
11
<PAGE>
Changes may also occur that would consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital. If we fail to raise sufficient funds, we will have to
curtail or cease operations. We anticipate that the net proceeds of this
offering and interest earned thereon, together with existing cash and cash
equivalents and anticipated cash flows from operations, will enable us to
maintain our currently planned operations for at least the next three years. If
our capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds to continue the development of our
technologies and complete the commercialization of products, if any, resulting
from our technologies.
Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The
Government Has License Rights to Technology Developed With Its Funds.
We have received and expect to continue to receive significant funds under
various U.S. government research and technology development programs. The
government may significantly reduce funding in the future for a number of
reasons. For example, some programs are subject to a yearly appropriations
process in Congress. Additionally, we may not receive funds under existing or
future grants because of budgeting constraints of the agency administering the
program. There can be no assurance that we will receive the entire funding
under our existing or future grants.
Our grants provide the U.S. government a non-exclusive, non-transferable
paid up license to practice for or on behalf of the U.S. inventions made with
federal funds. If the government exercises these rights, the U.S. government
could use these inventions and Maxygen's potential market could be reduced.
Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain
Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be
Able to Commercialize Those Products.
The Food and Drug Administration must approve any vaccine or therapeutic
product before it can be marketed in the U.S. Before we can file a new drug
application or biologic license application with the FDA, the product candidate
must undergo extensive testing, including animal and human clinical trials,
which can take many years and require substantial expenditures. Data obtained
from such testing are susceptible to varying interpretations which could delay,
limit or prevent regulatory approval. In addition, changes in regulatory policy
for product approval during the period of product development and regulatory
agency review of each submitted new application or product license application
may cause delays or rejections. The regulatory process is expensive and time
consuming.
Because our products involve the application of new technologies and may be
based upon new therapeutic approaches, they may be subject to substantial
review by government regulatory authorities and, government regulatory
authorities may grant regulatory approvals more slowly for our products than
for products using more conventional technologies. We have not submitted an
application with the FDA or any other regulatory authority for any product
candidate, and neither the FDA nor any other regulatory authority has approved
any therapeutic product candidate developed with our MolecularBreeding
technologies for commercialization in the U.S. or elsewhere. We or any of our
collaborators may not be able to conduct clinical testing or obtain the
necessary approvals from the FDA or other regulatory authorities for our
products. The regulatory agencies of foreign governments must also approve our
therapeutic products before the products can be sold in those other countries.
Even after investing significant time and expenditures, we may not obtain
regulatory approval for our products. Even if we receive regulatory approval,
this approval may entail limitations on the indicated uses for which we can
market a product. Further, once regulatory approval is obtained, a marketed
product and its manufacturer are subject to continual review, and discovery of
previously unknown problems with a product or manufacturer may result in
restrictions on the product, manufacturer and manufacturing facility, including
withdrawal of the product from the market. In certain countries, regulatory
agencies also set or approve prices.
12
<PAGE>
Laws May Limit Our Provision of Genetically Engineered Agricultural Products in
the Future. These Laws Could Reduce Our Ability to Sell These Products.
We may develop genetically engineered agricultural products. The field
testing, production and marketing of genetically engineered plants and plant
products are subject to federal, state, local and foreign governmental
regulation. Regulatory agencies administering existing or future regulations or
legislation may not allow us to produce and market our genetically engineered
products in a timely manner or under technically or commercially feasible
conditions. In addition, regulatory action or private litigation could result
in expenses, delays or other impediments to our product development programs or
the commercialization of resulting products.
The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as applied to foods developed through traditional
plant breeding. However, genetically engineered food products will be subject
to premarket review if these products raise safety questions or are deemed to
be food additives. Our products may be subject to lengthy FDA reviews and
unfavorable FDA determinations if they raise questions, are deemed to be food
additives, or if the FDA changes its policy.
The FDA has also announced in a policy statement that it will not require
that genetically engineered agricultural products be labeled as such, provided
that these products are as safe and have the same nutritional characteristics
as conventionally developed products. The FDA may reconsider or change its
labeling policies, or local or state authorities may enact labeling
requirements. Any such labeling requirements could reduce the demand for our
products.
The U.S. Department of Agriculture prohibits genetically engineered plants
from being grown and transported except pursuant to an exemption, or under
strict controls. If our future products are not exempted by the USDA, it may be
impossible to sell such products.
Adverse Events in the Field of Gene Therapy May Negatively Impact Regulatory
Approval or Public Perception of Any Gene Therapy Products We or Our
Collaborators May Develop.
Currently, we are not engaged in developing gene therapy products; however,
we may engage in these activities in the future either for our own account or
with collaborators. If we or our collaborators develop gene therapy products,
these products may encounter substantial delays in development and approval due
to the government regulation and approval process. A recent death and other
adverse events reported in gene therapy clinical trials may lead to more
government scrutiny of proposed clinical trials of gene therapy products,
stricter labeling requirements for these products and delays in the approval of
gene therapy products for commercial sale.
The commercial success of any potential gene therapy products made by us or
our collaborators will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapies are unsafe, and gene therapy
products may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy could result in a decrease in demand
for any gene therapy products we or our collaborators may develop.
Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on
Pharmaceutical Products.
Our future products are expected to include pharmaceutical products. Our
ability and that of our collaborators to commercialize pharmaceutical products
developed with our MolecularBreeding technologies may depend in part on the
extent to which reimbursement for the cost of these products will be available
from government health administration authorities, private health insurers and
other organizations. Third-party payors are increasingly challenging the price
of medical products and services. Significant uncertainty
13
<PAGE>
exists as to the reimbursement status of newly approved health care products,
and there can be no assurance that adequate third party coverage will be
available for any product to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in research and product
development.
Our Collaborations With Outside Scientists May Be Subject to Change Which Could
Limit Our Access to Their Expertise.
We work with scientific advisors and collaborators at academic and other
institutions. These scientists are not our employees and may have other
commitments that would limit their availability to us. Although our scientific
advisors generally agree not to do competing work, if a conflict of interest
between their work for us and their work for another entity arises, we may lose
their services. Although our scientific advisors and collaborators sign
agreements not to disclose our confidential information, it is possible that
certain of our valuable proprietary knowledge may become publicly known through
them.
We May Be Sued for Product Liability.
We may be held liable if any product we develop, or any product which is
made with the use or incorporation of, any of our technologies, causes injury
or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. These risks are inherent in the development of chemical,
agricultural and pharmaceutical products. Although we intend to obtain product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential
product liability claims could prevent or inhibit the commercialization of
products developed by us or our collaborators. If we are sued for any injury
caused by our products, our liability could exceed our total assets.
We Use Hazardous Chemicals and Radioactive and Biological Materials in Our
Business. Any Claims Relating to Improper Handling, Storage or Disposal of
These Materials Could Be Time Consuming and Costly.
Our research and development processes involve the controlled use of
hazardous materials, including chemicals, radioactive and biological materials.
Some of these materials may be novel, including viruses with novel properties
and animal models for the study of viruses. Our operations also produce
hazardous waste products. Some of our work also involves the development of
novel viruses and viral animal models. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We believe that
our current operations comply in all material respects with these laws and
regulations. We could be subject to civil damages 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 impair our
research, development, or production efforts. We believe that our current
operations comply in all material respects with applicable Environmental
Protection Agency regulations.
In addition, certain of our collaborators are working with these types of
hazardous materials in connection with our collaborations. To our knowledge,
the work is performed in accordance with biosafety regulations. In the event of
a lawsuit or investigation, we could be held responsible for any injury caused
to persons or property by exposure to, or release of, these viruses and
hazardous materials. Further, under certain circumstances, we have agreed to
indemnify our collaborators against all damages and other liabilities arising
out of development activities or products produced in connection with these
collaborations.
14
<PAGE>
Management May Invest or Spend the Proceeds of This Offering in Ways With
Which You May Not Agree and in Ways That May Not Yield a Return.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering for research and
development, working capital and other general corporate purposes and to
finance potential acquisitions or investments. Because of the number and
variability of factors that determine our use of the net proceeds from this
offering, we cannot assure you that these uses will not vary substantially
from our currently planned uses. Pending these uses of the net proceeds from
this offering, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment grade and U.S. government securities.
Our Stock Price Has Been, and May Continue to Be, Extremely Volatile and You
May Not Be Able to Resell Your Shares at or Above the Offering Price.
The trading prices of life science company stocks in general, and ours in
particular, have experienced extreme price fluctuations in recent months. The
valuations of many life science companies without consistent product revenues
and earnings, including ours, are extraordinarily high based on conventional
valuation standards such as price to earnings and price to sales ratios. These
trading prices and valuations may not be sustained. Any negative change in the
public's perception of the prospects of biotechnology or life science
companies could depress our stock price regardless of our results of
operations. Other broad market and industry factors may decrease the trading
price of our common stock, regardless of our performance. Market fluctuations,
as well as general political and economic conditions such as recession or
interest rate or currency rate fluctuations, also may decrease the trading
price of our common stock. In addition, our stock price could be subject to
wide fluctuations in response to factors including the following:
. announcements of new technological innovations or new products by us or
our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the biotechnology and life science industries;
. changes in the market valuations of other biotechnology or life science
companies;
. developments in domestic and international governmental policy or
regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. developments in patent or other proprietary rights;
. period-to-period fluctuations in our operating results;
. future royalties from product sales, if any, by our strategic partners;
and
. sales of our common stock or other securities in the open market.
In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us,
we would incur substantial legal fees and our management's attention and
resources would be diverted from operating our business in order to respond to
the litigation.
15
<PAGE>
We Expect that Our Quarterly Results of Operations Will Fluctuate, and This
Fluctuation Could Cause Our Stock Price to Decline, Causing Investor Losses.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. Some of the factors which could cause our
operating results to fluctuate include:
. expiration of research contracts with collaborators or government
research grants, which may not be renewed or replaced;
. the success rate of our discovery efforts leading to milestones and
royalties;
. the timing and willingness of collaborators to commercialize our products
which would result in royalties; and
. general and industry specific economic conditions, which may affect our
collaborators' research and development expenditures.
A large portion of our expenses are relatively fixed, including expenses
for facilities, equipment and personnel. Accordingly, if revenues decline or
do not grow as anticipated due to expiration of research contracts or
government research grants, failure to obtain new contracts or other factors,
we may not be able to correspondingly reduce our operating expenses. In
addition, we plan to significantly increase operating expenses in 2000.
Failure to achieve anticipated levels of revenues could therefore
significantly harm our operating results for a particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would probably decline.
Future Sales of Our Common Stock May Depress Our Stock Price.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through
future offerings of common stock. There will be approximately 32,269,644
shares of common stock outstanding immediately after this offering, or
approximately 32,494,644 shares if the underwriters exercise their over-
allotment option in full. Of these shares, 7,081,834 shares will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares held by our "affiliates," as defined in Rule 144 of
the Securities Act, 1,218,366 shares will be subject to lock-up agreements
providing that the stockholders will not offer, sell or otherwise dispose of
any of the shares of common stock owned by them which expire on June 18, 2000
and 99,800 shares will be subject to lock-up agreements which expire on June
12, 2000. The remaining 23,852,394 shares of common stock outstanding will be
"restricted securities" as defined in Rule 144 and may be sold without
registration under the Securities Act to the extent permitted by Rule 144 or
other exemptions under the Securities Act. Our directors, officers and certain
stockholders, including greater than 5% stockholders, who hold approximately
17,004,809 of these remaining shares have agreed not to sell any of these
shares until June 19, 2000. Other stockholders holding approximately
6,847,585 shares have agreed in connection with our initial public offering
not to sell any of these shares until June 13, 2000. See "Shares Eligible for
Future Sale."
16
<PAGE>
Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make
Decisions that Are in the Best Interests of All Stockholders.
After this offering, our officers, directors and principal stockholders
(greater than 5% stockholders) will together control approximately 46% of our
outstanding common stock, and Glaxo Wellcome International B.V. will own
approximately 21% of our outstanding common stock. As a result, these
stockholders, if they act together, and Glaxo Wellcome International B.V. by
itself, will be able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change in control of Maxygen and might affect the market price of our common
stock, even when a change may be in the best interests of all stockholders. In
addition, the interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders and
accordingly, they could cause us to enter into transactions or agreements which
we would not otherwise consider.
If We Engage in Any Acquisition, We Will Incur a Variety of Costs, and We May
Never Realize the Anticipated Benefits of the Acquisition.
We are actively evaluating opportunities to acquire businesses,
technologies, services or products that we believe are complementary with our
business activities. If we do undertake any transaction of this sort, the
process of integrating an acquired business, technology, service or product may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may fail to realize the anticipated
benefits of any acquisition. Future acquisitions could reduce your ownership in
Maxygen and could cause us to incur debt, expose us to future liabilities and
result in amortization expenses related to goodwill and other intangible
assets.
In addition, recent proposed changes in the Financial Accounting Standards
Board rules for merger accounting may affect the cost of making acquisitions or
of being acquired. For example, if these proposed changes become effective we
would likely have to record goodwill or other intangible assets that we would
amortize to earnings if we merge with another company. Such amortization would
adversely impact our future operating results. Further, accounting rule changes
that reduce the availability of write-offs of the value of in-process research
and development in connection with an acquisition could result in the
capitalization and amortization of these amounts which would negatively impact
results of operations in future periods.
Our Facilities Are Located Near Known Earthquake Fault Zones, and the
Occurrence of an Earthquake or Other Catastrophic Disaster Could Cause Damage
to Our Facilities and Equipment, Which Could Require Us to Cease or Curtail
Operations.
Our facilities are located in the San Francisco Bay Area near known
earthquake fault zones and are vulnerable to damage from earthquakes. In
October 1989 a major earthquake that caused significant property damage and a
number of fatalities struck this area. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
and of much of our equipment could make it difficult for us to recover from a
disaster. The insurance we maintain may not be adequate to cover our losses
resulting from disasters or other business interruptions.
As a New Investor, You Will Experience Immediate and Substantial Dilution.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution of $88.62 per share in pro forma net
tangible book value based on a price to the public of $97.00 per share. If the
holders of outstanding options or warrants exercise those options or warrants,
you will incur further dilution. See "Dilution."
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Examples of these forward-looking statements include, but are not limited to,
statements regarding the following: (1) our MolecularBreeding technologies and
processes, (2) our ability to realize commercially valuable discoveries in our
programs, (3) our intellectual property portfolio, (4) our business strategies
and plans and (5) our ability to develop products suitable for
commercialization. These statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus or to conform these statements to
actual results.
USE OF PROCEEDS
We will receive net proceeds from the sale of the 1,500,000 shares of
common stock of approximately $137,365,000 at a public offering price of $97.00
per share (approximately $158,044,750 if the underwriters' over-allotment
option is exercised in full), after deducting the estimated underwriting
discounts and offering expenses payable by us.
We intend to use the net proceeds of the offering for research and
development, working capital and other general corporate purposes and capital
expenditures. The amounts and timing of our actual expenditures will depend
upon numerous factors, including the status of our product development and
commercialization efforts, the amount of proceeds actually raised in this
offering, the amount of cash generated by our operations, competition, and
sales and marketing activities. We are actively evaluating opportunities to
acquire businesses, technologies, services or products that we believe are
complementary with our business activities. We have not determined the amounts
we plan to spend on any of the areas listed above or the timing of these
expenditures. As a result, our management will have broad discretion to
allocate the net proceeds from this offering. Pending application of the net
proceeds as described above, we will invest the net proceeds in short-term,
interest-bearing investment-grade and U.S. government securities.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market since our
initial public offering on December 16, 1999 under the symbol "MAXY." Prior to
such time, there was no public market for our common stock. Through March 20,
2000, the high and low sale prices for the common stock, as reported on the
Nasdaq National Market, were as follows:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fourth Quarter 1999 (from December 16, 1999) ................ $ 82.00 $31.98
First Quarter 2000 (through March 20, 2000).................. 186.00 52.00
</TABLE>
On March 20, 2000, the last reported closing price of the common stock on
the Nasdaq National Market was $99.00 per share. As of February 15, 2000, we
had outstanding 30,769,644 shares of common stock held by approximately 313
holders of record.
DIVIDEND POLICY
We have never paid cash dividends on our common stock or any other
securities. We anticipate that we will retain all of our future earnings, if
any, for use in the expansion and operation of our business and do not
anticipate paying cash dividends in the foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis; and
. on an as adjusted basis to reflect the sale of 1,500,000 shares of common
stock offered by this prospectus at a public offering price of $97.00 per
share, after deducting the estimated underwriting discounts and offering
expenses payable by us.
The outstanding share information excludes 2,076,362 shares of common stock
issuable upon the exercise of outstanding options under our option plans with
a weighted average exercise price of $4.11 per share as of December 31, 1999.
In addition, the outstanding share information excludes 1,887,488 shares of
common stock reserved for issuance under our stock option and employee stock
purchase plans as of December 31, 1999.
This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1999
------------------
As
Actual adjusted
-------- --------
(in thousands,
except share and
per share data)
<S> <C> <C>
Long-term obligations...................................... $ 1,664 $ 1,664
-------- --------
Stockholders' equity:......................................
Preferred stock, $0.0001 par value; 5,000,000 shares
authorized; no shares issued and outstanding actual and
as adjusted............................................. -- --
Common stock, $0.0001 par value, 70,000,000 shares
authorized; 30,860,781 shares issued and outstanding,
actual; 32,360,781 shares issued and outstanding, as
adjusted................................................ 3 3
Additional paid-in capital............................... 176,517 313,882
Notes receivable from stockholders....................... (1,411) (1,411)
Deferred stock compensation.............................. (17,216) (17,216)
Accumulated deficit...................................... (24,177) (24,177)
-------- --------
Total stockholders' equity............................... 133,716 271,081
-------- --------
Total capitalization....................................... $135,380 $272,745
======== ========
</TABLE>
20
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the as adjusted net tangible book value per share of our
common stock after this offering.
The net tangible book value of Maxygen at December 31, 1999, was $133.7
million, or $4.33 per share of common stock. Net tangible book value per share
represents total tangible assets less total liabilities, divided by the number
of outstanding shares of common stock on December 31, 1999. Our net tangible
book value at December 31, 1999, after giving effect to the sale of the
1,500,000 shares of common stock at a public offering price of $97.00 per
share, and after deducting estimated underwriting discounts and commissions and
estimated offering expenses would be $271.1 million or $8.38 per share. This
represents an immediate increase in the net tangible book value of $4.05 per
share to existing stockholders and an immediate dilution of $88.62 per share to
new investors, or approximately 91% of the offering price of $97.00 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share.................................... $97.00
Net tangible book value per share at December 31, 1999........... $4.33
Increase in per share attributable to this offering ............. 4.05
-----
Net tangible book value per share after this offering ............. 8.38
------
Dilution per share to new investors................................ $88.62
======
</TABLE>
The following table shows as of December 31, 1999, the number of shares of
common stock purchased from us, the total consideration paid and the average
price paid per share by existing stockholders and by new investors purchasing
common stock in this offering at a public offering price of $97.00 per share,
before deducting estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ------------------------- Price
Number Percentage Amount Percentage Per Share
---------- ---------- -------------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Existing stockholders... 30,860,781 95.4% $159,462 52.3% $ 5.17
New investors........... 1,500,000 4.6 145,500 47.7 97.00
---------- ----- -------- -----
Total................. 32,360,781 100.0% $304,962 100.0%
========== ===== ======== =====
</TABLE>
The computations in the table above assume no exercise of any stock options
outstanding after December 31, 1999. As of December 31, 1999, there were
options outstanding to purchase a total of 2,076,362 shares of common stock at
a weighted average exercise price of $4.11 per share. If any of these options
are exercised, there will be further dilution to new public investors.
21
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are
derived from our financial statements, which have been audited by Ernst & Young
LLP, Independent Auditors, and are included elsewhere in this prospectus. The
balance sheet data as of December 31, 1997 was derived from our financial
statements audited by Ernst & Young LLP not included in this prospectus. When
you read this selected financial data, it is important that you also read the
historical financial statements and related notes included in this prospectus,
as well as the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Historical results
are not necessarily indicative of future results. See Note 1 of Notes to
Financial Statements for an explanation of the method used to determine the
number of shares used in computing pro forma net loss per share. See Note 8 of
Notes to Financial Statements for information concerning the deemed dividend
upon issuance of convertible preferred stock in August 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands, except
per share data)
<S> <C> <C> <C>
Statement Of Operations Data:
Collaborative research and development revenue.... $ 341 $ 1,077 $ 8,895
Grant revenue..................................... -- 1,646 5,122
------- ------- --------
Total revenues.................................... 341 2,723 14,017
Operating expenses:
Research and development........................ 3,074 7,858 19,250
General and administrative...................... 1,461 3,920 7,498
------- ------- --------
Total operating expenses.......................... 4,535 11,778 26,748
------- ------- --------
Loss from operations.............................. (4,194) (9,055) (12,731)
Net interest income............................... 161 229 1,413
------- ------- --------
Net loss.......................................... (4,033) (8,826) (11,318)
Deemed dividend upon issuance of convertible
preferred stock.................................. -- -- (2,200)
------- ------- --------
Net loss attributable to common stockholders...... $(4,033) $(8,826) $(13,518)
======= ======= ========
Basic and diluted net loss per share.............. $ (0.82) $ (1.31) $ (1.53)
======= ======= ========
Shares used in computing basic and diluted net
loss per share................................... 4,917 6,748 8,854
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.75) $ (0.74)
======= ========
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 11,762 18,249
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998 1999
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $ 2,693 $ 15,306 $136,343
Working capital.................................. 2,152 12,264 132,510
Total assets..................................... 3,154 17,600 145,578
Non-current portion of equipment financing
obligations..................................... -- -- 1,664
Accumulated deficit.............................. (4,033) (12,859) (24,177)
Total stockholders' equity....................... 2,571 11,700 133,716
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that are based
upon current expectations. These forward-looking statements fall within the
meaning of the federal securities laws that relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Forward-looking statements involve risks and uncertainties. Our actual results
and the timing of events could differ materially from those anticipated in our
forward-looking statements as a result of many factors, including those set
forth under "Risk Factors" and elsewhere in this prospectus.
Overview
Maxygen was founded in May 1996 and began operations in March 1997. To
date, we have generated revenues from research collaborations with large
agriculture and chemical companies and from government grants. Our current
collaborators are Novo Nordisk, DuPont/Pioneer Hi-Bred, AstraZeneca, DSM and
Rio Tinto. Our government grants are from the Defense Advanced Research
Projects Agency and the National Institute of Standards and Technology-Advanced
Technology Program.
We have invested heavily in establishing our MolecularBreeding
technologies. These investments contributed to revenue increases from $341,000
in 1997 to $2.7 million in 1998 and $14.0 million in 1999. Our total headcount
increased from 20 employees at the end of fiscal 1997 to 74 employees at the
end of fiscal 1998 and to 143 employees at the end of fiscal 1999 of whom 80%
were engaged in research and development. Research and development consisted of
work for collaborators, government grant agencies and work advancing our core
technologies.
We have incurred significant losses since our inception. As of December 31,
1999, our accumulated deficit was $24.2 million and total stockholders' equity
was $133.7 million. Operating expenses increased from $4.5 million in fiscal
1997, to $11.8 million in fiscal 1998 and to $26.7 million in fiscal 1999. We
expect to incur additional operating losses over at least the next several
years as we continue to expand our research and development efforts and
infrastructure.
Source of Revenue and Revenue Recognition Policy
We recognize revenues from research collaboration agreements as earned upon
achievement of the performance requirements of the agreements. Revenue related
to grant agreements is recognized as related research and development expenses
are incurred. Our existing corporate collaboration agreements with
DuPont/Pioneer Hi-Bred and AstraZeneca provide for research funding for a
specified number of full time researchers working in defined research programs.
Revenue related to these payments is earned as the related research work is
performed. In addition, our collaborators make technology advancement payments
which are intended to fund development of our core technology, as opposed to a
defined research program. These payments are recognized ratably over the
applicable funding period. Payments received that are related to future
performance are deferred and recognized as revenue as the performance
requirements are achieved. As of December 31, 1999, we have deferred revenues
of approximately $7.5 million. Our sources of potential revenue for the next
several years are likely to be research, technology advancement and milestone
payments under existing and possible future collaborative arrangements,
government research grants, and royalties from our collaborators based on
revenues received from any products commercialized under those agreements. See
Note 2 of Notes to Financial Statements.
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<PAGE>
Deferred Compensation
Deferred compensation for options granted to employees has been determined
as the difference between the deemed fair market value for financial reporting
purposes of our common stock on the date options were granted and the exercise
price. Deferred compensation for options granted to consultants has been
determined in accordance with Statement of Financial Accounting Standards No.
123 as the fair value of the equity instruments issued. Deferred compensation
for options granted to consultants is periodically remeasured as the underlying
options vest.
In connection with the grant of stock options to employees, we recorded
deferred stock compensation of approximately $2.6 million, $2.4 million and
$19.5 million in the fiscal years ended December 31, 1997, 1998 and 1999,
respectively. These amounts were initially recorded as a component of
stockholders' equity and are being amortized as charges to operations over the
vesting period of the options using a graded vesting method. We recorded
amortization of deferred compensation of approximately $863,000, $1.6 million
and $4.9 million for the fiscal years ended December 31, 1997, 1998 and 1999,
respectively. The amortization expense relates to options awarded to employees
in all operating expense categories. See Note 8 of Notes to Financial
Statements.
Results of Operations
Comparison of Years Ended December 31, 1998 and 1999
Revenues
Our total revenues for fiscal 1998 and 1999 were $2.7 million and $14.0
million, respectively. The increase of $11.3 million was due primarily to the
addition of new research collaborations with AstraZeneca and DuPont/Pioneer Hi-
Bred, new government grants and the expansion of existing government grants.
Collaboration research and development revenue and grant revenue accounted for
40% and 60%, respectively, of total revenues in fiscal 1998, and 63% and 37%,
respectively, of total revenues in fiscal 1999.
Research and Development Expenses
Our research and development expenses consist primarily of salaries and
other personnel-related expenses, facility costs, supplies and depreciation of
facilities and laboratory equipment. Research and development expenses
increased 144% from $7.9 million in fiscal 1998 to $19.3 million in fiscal
1999. The increase was due primarily to increased staffing and other personnel-
related costs to support our additional collaborative and internal research
efforts. Also included in research and development expenses is $783,000 related
to the acquisition of certain technology licenses from research institutions.
The technology is being used in research and development and has no alternative
future uses.
Research and development expenses represented 289% of total revenues in
fiscal 1998 and 137% of total revenues in fiscal 1999. The decrease as a
percentage of total revenues was due primarily to the growth in our total
revenues. We expect to continue to devote substantial resources to research and
development, and we expect that research and development expenses will continue
to increase in absolute dollars.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel
costs for finance, human resources, business development, legal and general
management, as well as professional expenses, such as legal and accounting.
General and administrative expenses increased 92% from $3.9 million in fiscal
1998 to $7.5 million in fiscal 1999. Expenses increased primarily due to
increased staffing necessary to manage and support our growth.
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General and administrative expenses represented 144% of total revenues for
fiscal 1998 and 53% of total revenues for fiscal 1999. The decrease as a
percentage of our total revenues was due primarily to the growth in our total
revenues. We expect that our general and administrative expenses will increase
in absolute dollar amounts as we expand our legal and accounting staff, add
infrastructure and incur additional costs related to being a public company,
including directors' and officers' insurance, investor relations programs and
increased professional fees.
Net Interest Income
Net interest income represents income earned on our cash and cash
equivalents net of interest expense. Net interest income increased from
$229,000 in fiscal 1998 to $1.4 million in fiscal 1999. This increase was due
to higher average cash balances.
Deemed Dividend Upon Issuance of Convertible Preferred Stock
We recorded a deemed dividend of $2.2 million in August 1999 upon the
issuance of Series E convertible preferred stock. At the date of issuance, we
believed the per share price of $6.25 represented the fair value of the
preferred stock and was in excess of the deemed fair value of our common stock.
Subsequent to the commencement of our initial public offering process, we re-
evaluated the deemed fair market value of our common stock as of August 1999
and determined it to be $9.00 per share. Accordingly, the incremental fair
value is deemed to be the equivalent of a preferred stock dividend. We recorded
the deemed dividend at the date of issuance by offsetting charges and credits
to additional paid in capital of $2.2 million, without any effect on total
stockholders' equity. The amount increased the loss allocable to common
stockholders, in the calculation of basic net loss per share for fiscal 1999.
Provision for Income Taxes
We incurred net operating losses in fiscal 1998 and 1999, and consequently
we did not pay any federal, state or foreign income taxes. As of December 31,
1999, we had a federal net operating loss carryforwards of approximately
$10.4 million. We also had federal research and development tax credit
carryforwards of approximately $400,000. If not utilized, the net operating
losses and credit carryforwards will expire at various dates beginning in 2011
through 2019. Utilization of the net operating losses and credits may be
subject to a substantial annual limitation due to the change in the ownership
provisions of the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization. See Note 9 of Notes to Financial
Statements.
Comparison of Years Ended December 31, 1997 and 1998
Revenues
Our total revenues for fiscal 1997 and 1998 were $341,000 and $2.7 million,
respectively. The increase of $2.4 million was due primarily to the addition of
new research collaborations and government grants. Collaborative research and
development revenue accounted for 100% of total revenues in fiscal 1997.
Collaborative research and development revenue and grant revenue accounted for
40% and 60%, respectively, of total revenues in fiscal 1998.
Research and Development Expenses
Research and development expenses increased from $3.1 million in fiscal
1997 to $7.9 million in fiscal 1998. The increase was due primarily to
increased staffing and other personnel-related costs. Research and development
expenses represented 901% and 289% of total revenues in fiscal 1997 and 1998,
respectively. The decreases as a percentage of total revenues was due primarily
to the growth in our total revenues.
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General and Administrative Expenses
General and administrative expenses increased from $1.5 million in fiscal
1997 to $3.9 million in fiscal 1998. Expenses increased in each period due
primarily to increased staffing and personnel-related costs resulting from
additional staffing necessary to manage and support our growth. General and
administrative expenses represented 428% of total revenues for fiscal 1997 and
144% of total revenues for fiscal 1998. The decrease as a percentage of our
total revenues was due primarily to the growth in our total revenues.
Net Interest Income
Net interest income was $161,000 in fiscal 1997 and $229,000 in fiscal
1998. Changes in interest income were due primarily to changes in our average
cash balances during these periods.
Provision for Income Taxes
We incurred net operating losses in fiscal 1997 and 1998 and consequently
we did not pay any federal, state or foreign income taxes.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
placements and a public offering of equity securities, receiving aggregate
consideration from such sales totaling $157.0 million and research and
development funding from collaborators and government grants totaling $22.0
million. As of December 31, 1999, we had $136.3 million in cash and cash
equivalents and $166,000 available under an equipment financing line of credit.
Our operating activities used cash of $2.6 million, $2.7 million and $3.0
million in fiscal 1997, 1998 and 1999, respectively. Uses of cash in operating
activities were primarily to fund net operating losses offset by receipt of
funding from collaborators that had been deferred.
Additions of property and equipment were $459,000, $760,000 and $4.5
million in fiscal 1997, 1998 and 1999, respectively. We expect to continue to
make significant investments in the purchase of property and equipment to
support our expanding operations. We may use a portion of our cash to acquire
or invest in complementary businesses, products or technologies, or to obtain
the right to use such complementary technologies.
Financing activities provided cash of $5.7 million, $16.1 million and
$128.6 million in fiscal 1997, 1998 and 1999, respectively. These amounts are
the proceeds we received from the sale of preferred stock, net of issuance
costs, and proceeds from the sale of common stock including our initial public
offering in December 1999.
We expect cash flows from our corporate collaborators for the funding of
research and technology advancement to total approximately $12 million in both
2000 and 2001 and up to this amount in 2002 and 2003 if our collaboration with
DuPont/Pioneer Hi-Bred extends to a fourth and fifth year. DuPont/Pioneer Hi-
Bred may terminate the agreement after three years, upon six months notice if a
specified milestone has not been met. The above amounts include $1 million
annually of technology advancement funding from AstraZeneca. In lieu of making
this payment, AstraZeneca can elect to purchase $3 million of our equity
securities at a 50% premium to the fair value of the securities on the date of
issuance. Cash flows from government grants are determined by the expenses
incurred by Maxygen. Total remaining committed grant funding amounts to $20
million through fiscal 2002; however some grant programs are subject to a
yearly appropriations process in Congress and we may not receive funds under
existing grants because of budgeting constraints of the agency administering
the program.
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We believe that the net proceeds from this offering and interest earned
thereon, together with our current cash and cash equivalents and funding
received from collaborators and government grants will be sufficient to satisfy
our anticipated cash needs for working capital and capital expenditures for at
least the next three years. However, it is possible that we will seek
additional financing within this timeframe. We may raise additional funds
through public or private financing, collaborative relationships or other
arrangements. We cannot assure you that additional funding, if sought, will be
available on terms favorable to us. Further, any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Our failure to raise capital when needed may harm our
business and operating results.
Disclosure about Market Risk
Our exposure to market risk is confined to our cash and cash equivalents
which have maturities of less than three months. We maintain an investment
portfolio of depository accounts, master notes and liquidity optimized
investment contracts. The securities in our investment portfolio are not
leveraged, are classified as available-for-sale and are, due to their very
short-term nature, subject to minimal interest rate risk. We currently do not
hedge interest rate exposure. Because of the short-term maturities of our
investments, we do not believe that an increase in market rates would have any
negative impact on the realized value of our investment portfolio.
Impact of Year 2000
In 1999, we completed our remediation and testing of hardware and software
systems to assess their Year 2000 readiness. We expensed less than $25,000
during 1999 relating to Year 2000 compliance.
To date, we have not experienced any material adverse effect on our
business or operating results as a result of any Year 2000 problems. In
addition, we have not deferred any material information technology projects or
equipment purchases as a result of our Year 2000 problem activities. However,
we believe that it is not possible to determine with complete certainty that
all Year 2000 problems affecting us have been identified or corrected. If we,
our customers, our providers of hardware and software or our third-party
computer network providers fail to remedy any Year 2000 issues, the reasonably
likely worst case scenario would be the interruption of our research programs,
which could have a material adverse affect on our business, financial
conditions and results of operations. Presently we are unable to quantitatively
estimate the duration and extent of any such interruption, or estimate the
effect such interruption may have on our future revenue. However, we believe
that the impact of any Year 2000 issue on our research operations will be
limited to the ongoing execution of new experiments. We do not expect that any
historical data will be affected.
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BUSINESS
Overview
We believe that we are the leader in the emerging field of directed
molecular evolution, the process by which new, modified genes are generated for
specific commercial uses. Our MolecularBreeding technologies bring together
advances in molecular biology and classical breeding, while capitalizing on the
large amount of genetic information being generated by government, academic and
commercial laboratories. Our principal objective is to maximize the value of
our MolecularBreeding technologies through the development of multiple products
in a broad range of industries including agriculture, chemicals and human
therapeutics.
We have established strategic alliances with recognized leaders in our
target industries and with U.S. government agencies. To date, our corporate
collaborators include Novo Nordisk in the area of industrial enzymes,
DuPont/Pioneer Hi-Bred and AstraZeneca in agriculture, DSM in antibiotic
manufacturing and Rio Tinto in chemical processing. Our government grants are
from the Defense Advanced Research Projects Agency (DARPA) and the National
Institute of Standards and Technology-Advanced Technology Program (NIST-ATP)
primarily for the development of vaccines and the advancement of our
MolecularBreeding technologies. Committed funding from our commercial
collaborators and grant agencies totals over $102 million. We may additionally
receive over $145 million in milestone payments based on the accomplishment of
specific performance criteria, as well as royalties on product sales.
We will continue to establish strategic collaborations with recognized
leaders in several of our target industries and with U.S. government agencies.
We plan to retain significant rights to develop and market products arising
from our funded strategic collaborations. In addition, we will identify and
invest our own funds in certain specific areas and product opportunities with
the aim of capturing a high percentage of profits on product sales. We intend
to fully develop and exploit the breadth of opportunity which we believe can be
addressed by our MolecularBreeding technologies.
Background
Evolution and DNA
Evolution is the process by which living organisms adapt to their
environment. The first step of this process is sexual reproduction, which
creates a variety of physical characteristics that increase the diversity of a
population. Second, nature exerts a selective force on the individuals,
dictating which characteristics will be favored and be passed to the next
generation. As a result of changing environmental and competitive pressures,
diversity may increase, leading to variation in the physical characteristics of
individuals and species adapted for specific environments.
The physical characteristics of an organism are determined by genetic
information inherited from the previous generation. This genetic information is
coded for by DNA, a molecule found in the cells of living organisms. DNA is
comprised of four different chemical bases called nucleotides. Human cells have
several billion nucleotides, the precise sequence of which determines the
content of the genetic information. DNA is organized into discrete units called
genes. Genes act alone or in combination to produce proteins, that not only
form the fabric of cells but also direct them to perform biological functions
which may in turn influence physical characteristics. Generally, the inherited
biological properties or physical characteristics of an organism change only
when the DNA in a gene is altered.
In summary, variations in genes provide the basis for inherited diversity
in a population, thus maximizing the opportunity for developing characteristics
optimally suited for a specific environment.
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Mutation and Recombination
There are two predominant methods by which nature is able to change the
genetic information encoded by DNA to create diversity: mutation and
recombination.
All organisms incur a certain number of mutations in their DNA as a result
of normal cellular processes or interactions with external environmental
factors such as radiation from sunlight. Mutation typically involves changes in
individual nucleotides and is essentially random. Almost all mutations are
harmful to the function of genes, but a very small percentage are beneficial
and may pass more broadly into the population.
Sexually reproducing organisms use recombination, a process that involves
the organized exchange and reassortment of large sections of DNA from their
parents. This process allows for new combinations of genes without disrupting
the function of the newly created genes. This has a significant impact on
physical characteristics and is the primary cause of diversity in a sexually
reproducing population.
Classical Breeding and Its Limitations
Without any knowledge of the genetic basis of evolution, humans have been
breeding crops and animals for over 4,000 years in the search for better
physical characteristics. All of the domestic breeds of farm animals and
horses, cereal crops, fruits, vegetables, crops for fiber, household pets, most
ornamental flowers and many other species represent the results of many
generations of selective breeding by humans. In all these cases, humans have
cross-bred crops or animals with the most desired physical characteristics to
produce improvements in the next generation. For example, modern corn now has a
dramatically higher yield than the wild strain of corn which produced very
small amounts of grain. This improvement probably began with ancient Inca
farmers continually selecting, breeding and propagating the most robust seed
corn. This is known as classical breeding.
In the 19th century, advances in biology led to a better understanding of
the basis of heredity. The discovery of the structure of DNA in 1953
subsequently led to the realization that genetic information was responsible
for physical characteristics and that its manipulation could further improve
the breeding process. In modern breeding, the DNA of offspring is often
sequenced to determine whether or not they are carrying undesirable genes. This
reduces the probability of breeding poor quality stock and increases the pace
of improvement.
Despite the improvements in classical breeding, this technique still has a
number of significant limitations. First, the process is extremely time
consuming, since the offspring must mature in order to determine if they carry
the desired characteristic. For example, this cycle takes several years in
cattle. Second, classical breeding can only be used to breed entire organisms
and cannot readily use genetic information to modify or select for specific
genes and the traits they represent. This limitation is compounded when
multiple genes encode the selected trait or when the simultaneous breeding of
multiple traits is desired. Thus, the scope of potential improvements
accessible by classical breeding is limited.
Modern Biotechnology and Its Current Limitations
The modern biotechnology industry was founded on the ability to isolate
genes from natural sources, and to make proteins from these genes for use in
production systems. Despite some notable exceptions, the majority of proteins
discovered by scientists and developed by the modern biotechnology industry
have not been commercially successful. Similarly, in the chemical industry,
most naturally occurring enzymes are not efficient or stable enough to be used
for manufacturing chemicals. The lack of product success is due in part to the
fact that the relevant proteins have not been evolved for commercial purposes.
In recent years, significant research efforts in biotechnology have focused
on identifying genes and elucidating their function. These efforts, which are
known as genomics, have been highly successful in
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identifying tens of thousands of genes, but are limited in their ability to
rapidly develop products. This results from two primary causes. First, the
genes identified by genomics have not been evolved for commercial purposes.
Second, once a gene has been identified, a number of steps need to be completed
before the genetic information can be used for the development of products.
Typical deficiencies of naturally occurring genes and proteins which limit
their commercial utility as therapeutic products include inappropriate
availability in the body, stability, difficulty and cost of manufacture, lack
of specificity, toxicity and other side effects. Similarly, in applications
such as agricultural biotechnology and chemical processes using enzymes as
catalysts, problems include the levels at which proteins can be made,
specificity, stability, efficiency of enzyme function under industrial
manufacturing conditions and purity. In addition, potential products with the
highest commercial value often result from the action of multiple genes or
multiple biological reactions and are difficult to optimize with modern
biotechnology techniques. Many biotechnology companies have abandoned or never
pursued development efforts with potential product candidates as a result of
the unsuitability of the native proteins for commercial uses.
One approach used by the traditional biotechnology industry to attempt to
improve genes for commercial purposes is random mutagenesis. This technique,
involving the random mutation of genes, usually results in harmful changes. In
addition, the low probability of randomly improving a gene or sequence of
complex biological reactions makes screening for positive changes prohibitively
expensive and time consuming.
A second approach, rational design, seeks to modify a gene to improve its
properties based on knowledge regarding how the structure of the gene
determines the function of its resultant protein. Fundamental research on the
mechanism of action of the relevant protein is pursued until the knowledge
gained allows a rational prediction of how to change the gene for desired
effect. This process requires many simplifying assumptions, is costly and time
intensive, and has been generally unsuccessful.
As such, genes and gene products are generally too complex to commercialize
using genomics, rational design, random mutagenesis or other current
technologies.
The Maxygen Solution
We have developed proprietary MolecularBreeding technologies that address
the limitations of classical breeding and traditional biotechnology by
maximizing DNA variation, which is known as genetic diversity, through directed
evolution at the molecular level. Maximizing genetic diversity increases the
opportunity for developing characteristics optimally suited for a specific
commercial purpose. Our MolecularBreeding technologies bring together advances
in molecular biology and classical breeding, while capitalizing on the wealth
of genetic information being developed by genomics. Our technologies are fast,
inexpensive, commercially focused and results oriented. Our approach, unlike
conventional approaches, requires minimal understanding of complex underlying
biological systems.
There are two components of our MolecularBreeding technologies. The first
is DNAShuffling, our proprietary process for recombining genes into a diverse
library of novel DNA sequences known as gene variants. The second is MaxyScan,
a series of proprietary screening capabilities for the selection of desired
commercial properties from the library of DNA sequences. The combination of
DNAShuffling and MaxyScan specialized screening enables us to identify new
products in a rapid, cost-effective manner.
Virtually any product or process that utilizes or could utilize DNA or
proteins can potentially be improved for optimal function using our
MolecularBreeding technologies. We are therefore applying our technologies to
evolve genes and proteins for use in fields as diverse as chemicals,
agriculture, vaccines and protein pharmaceuticals.
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We believe that our MolecularBreeding technologies provide distinctive
advantages over traditional biotechnology, as summarized in the following
table.
Advantages of Maxygen's MolecularBreeding Technologies
<TABLE>
<CAPTION>
Maxygen's
Modern MolecularBreeding
Characteristic Biotechnology Technologies
- ------------------------------------------------------------------------------
<S> <C> <C>
Time to generate lead product candidates several years weeks to months
- ------------------------------------------------------------------------------
Necessary understanding of the biological
processes underlying lead product
candidates yes no
- ------------------------------------------------------------------------------
Ability to optimally improve properties
for commercial applications no yes
- ------------------------------------------------------------------------------
Cost to generate lead product candidates high low
- ------------------------------------------------------------------------------
Amount of resulting genetic diversity limited virtually unlimited
</TABLE>
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Maxygen's MolecularBreeding Technologies
Our technologies mimic the natural events of evolution. First, genes are
subjected to DNAShuffling, generating a diverse library of gene variants.
Second, our proprietary MaxyScan screening systems select individual proteins
from the gene variants in the library. The proteins that show improvements in
the desired characteristics become the initial lead candidates. After
confirmation of activity, the initial lead candidates are then used as the
genetic starting material for additional rounds of shuffling. Once the level of
improvement needed for the particular commercial application is achieved, the
group of lead candidates is moved forward to the product or process development
stage.
[Graphic of MolecularBreeding(TM) Process]
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Step One: DNAShuffling Recombination Technologies
Our DNAShuffling recombination technologies work as follows: a single gene
or multiple genes are cleaved into fragments and recombined, creating a
population of new gene variants. The new genes created by DNAShuffling are then
selected for one or more desired characteristics. This selection process yields
a population of genes which becomes the starting point for the next cycle of
recombination. As with classical breeding, this process is repeated until genes
expressing the desired properties are identified.
DNAShuffling recombination technologies can be used to evolve properties
which are coded for by single genes, multiple genes and entire genomes. By
repeating the process, DNAShuffling recombination technologies ultimately
generate libraries with a high percentage of genes which have the desired
function. Due to the high quality of these libraries, a relatively small number
of screening tests need to be performed in order to identify gene variants with
the desired commercial qualities. This process significantly reduces the cost
and time associated with identifying multiple potential products.
Step Two: MaxyScan Screening
The ability to screen or select for a desired improvement in function is
essential to the effective development of a newer improved gene or protein. As
a result, we have invested significant resources in developing automated, rapid
screens and selection formats.
We have developed screening tests which can measure the production of
proteins or small molecules in culture without significant purification steps
or specific test reagents, thereby eliminating time-consuming steps required
for traditional screening tests. We are also focusing on the development of
reliable, cell-based screening tests that are predictive of specific functions
relevant to our human therapeutics programs. Accordingly, we continue to
develop new screening approaches and technologies. Our approach is to create
multitiered screening systems whereby we use a less sensitive screening test as
a first screen to quickly select proteins with the desired characteristics,
followed by a more sensitive screening test to confirm value in these variants
and to select for final lead product candidates. Unlike approaches that create
random diversity, MolecularBreeding produces potentially valuable libraries of
gene variants with a predominance of active genes with the desired function.
This allows us to use complex biological screens and formats as a final
screening test, as relatively few proteins must be screened to detect an
improvement in the starting gene activity.
We have access to multiple sources of genetic starting material. In
addition to the wealth of publicly available genetic sequence information, we
are able to access our collaborators' proprietary genes. Furthermore, we are
able to inexpensively obtain our own genetic starting material which, when
coupled with the DNAShuffling process, provides a virtually infinite amount of
new, proprietary gene variants with potential commercial value.
We use certain equipment and vendor software in conjunction with our
DNAShuffling recombination technologies and MaxyScan screening systems, but to
date, have not used internally developed software. We also use other software
purchased from third party vendors to a limited extent in our research and
development activities.
Demonstrated Successes of Our MolecularBreeding Technologies in Multiple
Applications
We have consistently achieved improvement in gene function using our
MolecularBreeding technologies. Impressive results have been demonstrated in
many different systems that have relevance to multiple commercial applications.
Our technologies have the ability to generate improvements that would be
difficult, costly, time intensive and, in many cases, impossible to achieve
using other methods. We have shown that we can achieve improved gene function
without a detailed understanding of the underlying complex biological
processes.
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For example, we have demonstrated our ability to improve genes that
increase the anti-viral activity of a protein and develop new enzymes which
have the potential to streamline chemical and pharmaceutical manufacturing
processes. In addition, we have improved the performance of subtilisin, one of
the most commercially valuable laundry detergent enzymes. Subtilisin is one of
the most highly studied enzymes which has been extensively modified to improve
its commercial properties. This example demonstrates the ability of
MolecularBreeding to achieve further improvements beyond the limits of modern
biotechnology. A summary of representative experiments published by our
scientists is set forth below.
<TABLE>
<CAPTION>
Example Property Activity Increase Publication
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Beta)-lactamase Increased antibiotic 32,000-fold Nature (1994)
resistance/enzyme activity
Antibody Increased expression level 100-fold Nature Medicine (1996)
Antibody Increased antibody/receptor >440-fold Nature Medicine (1996)
binding
Green fluorescent Increased fluorescence 45-fold Nature Biotechnology (1996)
protein
(Beta)-galactosidase to Increase in activity 66-fold activity Proceedings of the
fucosidase National Academy of
Sciences (1997)
Increase in specificity 1,000-fold specificity
Arsenate pathway (3 Increased bacterial resistance 40-fold Nature Biotechnology (1997)
genes) to arsenate
Cephalosporinase family Increased antibiotic resistance 270-540-fold Nature (1998)
Subtilisin protease Simultaneous improvement 2 to 4 fold in Nature Biotechnology (1999)
in 3 properties 3 properties
Human (alpha)- Increased activity as 285,000-fold Nature Biotechnology (1999)
interferon measured by antiviral activity
family on mouse cells
HSV thymidine kinase Increased sensitivity to 32-fold Nature Biotechnology (1999)
family prodrug (AZT)
</TABLE>
The Maxygen Strategy
Our goal is to be the world leader in the commercialization of products and
processes developed using directed molecular evolution. There are four basic
elements to our business strategy:
Expand Our Proprietary Technology Leadership. In order to expand our
technology leadership, we will continue to develop our core MolecularBreeding
technologies by investing significantly in research and development. We will
acquire and license technologies from third parties that complement our
capabilities. We will protect and build on our existing patent portfolio and
also rely on trade secrets to protect our proprietary technologies. We will
continue to recruit and collaborate with leaders in the field of directed
molecular evolution.
Expand Our Strategic Collaborations and Grants. We will continue to
establish strategic collaborations with leading companies in different
industries. We will also pursue additional grants from major U.S. government
agencies. Our goal is to benefit from the combined expertise of Maxygen and our
collaborators. Additionally, we seek to receive financial support from our
collaborators for research and development of products and for our core
technologies, as well as potential milestone and royalty payments on any
products commercialized.
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Maximize Commercial Applications of Our Technologies. We plan to develop
multiple products for multiple industries. We believe we have short-, medium-
and long-term commercial opportunities in the chemicals, agriculture and
pharmaceutical industries. We believe our technologies have broad commercial
applications, including the development of new and improved pharmaceuticals and
vaccines, better agricultural products and more efficient chemical
manufacturing systems.
Retain Our Commercialization Rights. We have invested and plan to invest
our own funds in certain areas and product opportunities with the aim of
capturing a high percentage of profits on product sales.
Potential Fields of Application
We believe that our MolecularBreeding technologies can be applied to many
different industries. We can potentially improve virtually any product or
process that utilizes or could utilize DNA or proteins using our
MolecularBreeding technologies. Potential applications of MolecularBreeding
technologies include the development of new high-value products and the
improvement of existing products and manufacturing processes. We can
potentially use multiple approaches to develop products to solve complex
problems, including the following:
In Medicine
. New and improved treatments for major diseases such as cancer,
cardiovascular disease, diabetes and obesity.
. New vaccines to treat and prevent viral diseases such as hepatitis, AIDS
and emerging viral diseases and parasitic diseases such as malaria which
affect millions of people each year.
. Therapeutic vaccines and gene therapies to treat and prevent diseases
such as multiple sclerosis, allergies and cancer.
. New natural products for the development of better and cheaper
antibiotics to counter the spread of infectious organisms that have
developed a resistance to conventional antibiotics.
. New natural products as improved therapies for cancer.
. New gene therapies for treatments for hereditary diseases such as
hemophilia and cystic fibrosis.
In Agriculture and Food Production
. Crops with increased yields which require less fertilizers, herbicides or
insecticides.
. Plants which can thrive on land where they could not otherwise survive,
for example because of lack of water, high salt level or extreme
temperatures.
. Vaccines to treat and prevent diseases of farm animals.
. Nutritionally improved forms of food and animal feed.
. Food with increased health benefits.
In the Chemical Industry
. New, more cost-effective and more environmentally friendly production
systems for plastics, vitamins, pharmaceuticals, fibers and adhesives.
. New materials such as fibers and plastics.
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. Plants as factories for the cheaper and more environmentally friendly
production of substances such as plastics and pharmaceuticals.
In the Environmental and Energy Industries
. New systems for controlling pollution, such as novel processes for
reduction of carbon emissions and polluting effluents.
. Preparation of non-polluting and cleaner-burning energy sources.
. Removal of pollutants, such as sulphur, from oil and other fossil fuels.
Current Fields of Application
We are currently applying our MolecularBreeding technologies to high-value
opportunities in the fields of chemicals, agriculture, preventative and
therapeutic vaccines and protein pharmaceuticals.
Chemicals
The chemicals industry is comprised of three major segments: commodity,
specialty and fine chemicals. Together, 1998 sales in these segments exceeded
$800 billion. Within these segments, approximately $50 billion is readily
addressable by biological processing, for example, either by fermentation or
through the use of enzyme catalysts. An additional $200 billion has been
identified as potentially addressable by biological approaches within the next
10-20 years. Included in the potential market is the manufacturing of major
chemicals, plastics, vitamins, compounds used in the manufacture of
pharmaceuticals, enzymes for use as catalysts, the pigments and additives in
paint and the polymers and fibers in our clothing. Enzymes occurring in nature
are generally not able to meet the stringent activity requirements that would
allow for the broad commercial use of enzymes as catalysts.
We have demonstrated that MolecularBreeding technologies allow for the
creation of new modified enzymes for use as catalysts, and metabolic pathways
that overcome the limitations of naturally occurring enzymes. We are currently
generating libraries of proprietary enzymes for use as catalysts, which we
believe will offer a significant competitive advantage over existing chemical
catalysts. These enzymes could provide increased yields and decreased
manufacturing costs by a reduction in requirements for raw materials, capital
equipment and energy. In addition, we believe these enzyme catalysts will have
applicability in generating new useful materials.
We have established multiple collaborations in the chemical industry, one
with Novo Nordisk, the world's leading manufacturer of industrial enzymes, one
with DSM, a leader in the production of bulk antibiotic products and
intermediates and one with Rio Tinto, one of the world's largest mining
companies. Our collaboration with Novo Nordisk was established in September
1997. Novo Nordisk had a market share of 45% of the industrial enzymes market
in 1998. The total industrial enzymes market (a segment of the chemicals
market) is estimated at $1.4 billion today, growing to over $3 billion by 2008.
Together with Novo Nordisk, we are applying our MolecularBreeding technologies
to the potential production of improved industrial enzymes. For example, we
have significantly improved multiple commercially relevant properties in
subtilisin, one of the most studied and highly modified industrial enzyme
products. Under the five-year agreement, Novo Nordisk will pay us royalties on
any sales of industrial enzyme products that are developed through our
MolecularBreeding technologies.
In March 1999, we commenced a three-year strategic collaboration with DSM
to evolve new enzymes for use in the manufacture of certain classes of
penicillin antibiotics. We are receiving research funding over the three year
collaboration, and we will receive royalties from the implementation of any
evolved enzymes developed through our MolecularBreeding technologies.
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<PAGE>
In January 2000, we entered into a three-year strategic collaboration with
Rio Tinto to develop enzymatic systems for use in carbon dioxide fixation in
connection with the combustion of fossil fuels and for other purposes more
generally, for use in chemical bioprocessing and other applications. We are
receiving research funding over the three year collaboration, and will share
revenues with Rio Tinto obtained from the use or sale of certain products or
processes developed through our MolecularBreeding technologies.
In addition to the existing collaborations, we expect to pursue independent
development of high-value chemical products, as well as to enter into
additional strategic alliances with leading chemical companies.
Agriculture
Today's agricultural biotechnology market is estimated at approximately $1
billion. It is expected to grow to approximately $6 billion by 2005. Over the
past decade, companies have used biotechnology to provide protection from
herbicides, diseases and pests, resulting in impressive increases in crop
yield.
The need for increased crop yield, the desire to move away from chemical
pesticides, and the determination of the DNA sequence have combined to provide
significant growth in agricultural biotechnology.
In addition to yield improvement, the agricultural industry is investing
heavily in biotechnology to develop crops with improved qualities such as
higher oil content and enhanced nutritional value for human food or animal
feed.
A third area of great market potential is the use of plants as "factories"
where the plant produces a substance that has commercial value, generally when
processed and separated from the plant and sold as a pure preparation. Plants
potentially can be used to manufacture pharmaceutical products and specialty or
fine chemicals.
We believe our MolecularBreeding technologies can be used to create
numerous commercial opportunities in crop protection and plant quality traits.
We are developing multiple commercial products for the agriculture industry
through commercial collaborations with two of the world's leading agriculture
companies, AstraZeneca and DuPont/Pioneer Hi-Bred. From these collaborations we
have committed funding of over $66 million and may receive milestone payments
of over $145 million based on the accomplishment of specific performance
criteria, as well as royalties on product sales. The AstraZeneca and
DuPont/Pioneer Hi-Bred collaborations fully fund our research and development
efforts under these collaborations, and provide us with a large portfolio of
potentially high-value gene products for the agricultural markets.
Together with our collaborators, we are currently working on a broad
portfolio of 12 potential products in areas of yield improvement and quality
traits. We have retained significant rights to develop and market certain
applications of the products resulting from the collaborations. In addition to
the existing collaborations, we are pursuing and expect to pursue independent
development of high-value agricultural products, and intend to enter into
additional strategic alliances with leading agriculture companies.
Preventative and Therapeutic Vaccines
Worldwide sales of vaccines in 1998 exceeded $4 billion and are expected to
exceed approximately $10 billion by 2005. Vaccines have been used for decades
to prevent the onset of infectious disease in humans and animals. The vaccine
market has the potential to increase dramatically for the following reasons:
. Many physicians recognize vaccines as the preferred therapy for numerous
infectious diseases given the increasing drug resistance of pathogens and
the inability to prevent or effectively treat traditional and newly
emerging viral infections.
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. Researchers are investigating vaccines as treatments for cancer,
autoimmune diseases, allergy and other non-infectious diseases.
. Adults are increasingly using vaccines.
. Travelers from developed countries are increasingly using vaccines.
Vaccines are typically comprised of two elements: antigens, which are
components of the invading pathogen that are recognized by cells of the immune
system and trigger the body's defenses; and adjuvants, which are immune system
boosters. The limited ability of existing antigens and adjuvants to generate
the required immune responses has hindered the development of vaccines. We
believe that we can generate new modified vaccines that have the potential to
overcome the limitations of traditional vaccine development.
We are building our research and development capabilities in the vaccine
area with the support of government grant funding and have retained full
commercialization rights, subject only to a license to the U.S. government as
required by applicable statutes and regulations. Total committed government
grant funding in the vaccine area is over $22 million.
We believe our MolecularBreeding technologies have the potential ability to
transform the design and development of vaccines through the identification of
new genes and proteins that allow for the generation of broad and strong immune
response. This would enable us to address both the treatment and prevention of
a wide variety of diseases including cancer, allergy, diseases in which the
body generates an improper immune response and infectious diseases such as AIDS
and hepatitis. We are developing a portfolio of products in the vaccine area,
including, for example, proprietary new improved antigens and adjuvants for
stimulating the immune system.
Protein Pharmaceuticals
In 1998, the worldwide sales of therapeutic proteins made using recombinant
DNA technology were approximately $17 billion, and are projected to reach
approximately $19 billion in 2000. Protein pharmaceutical products, such as
erythropoietin (1998 worldwide sales of $4 billion) and granulocyte colony
stimulating factor (1998 worldwide sales of over $1.6 billion) represent some
of the world's highest revenue pharmaceutical products. While some protein
pharmaceuticals containing naturally occurring proteins can address large
markets, many naturally occurring proteins are not well suited for
commercialization without modification. We believe that our MolecularBreeding
technologies provide the capabilities necessary to attain the improvements
suitable for commercial use.
Our MolecularBreeding technologies potentially can be applied to improve
existing pharmaceutical proteins, create superior second generation high-value
proteins with, for instance, improved stability, and create new proteins and
pioneer new therapies. Our MolecularBreeding technologies potentially can also
be applied to protein pharmaceuticals to improve desirable biological
activities, alter binding activity, and reduce harmful side effects and
toxicities.
The area of human therapeutics presents significant opportunity for us as
the rapid cloning and sequencing of the human genome is leading to the
identification of hundreds of new genes and proteins that potentially could be
optimized and developed as new protein pharmaceuticals. We are currently
working on a number of protein pharmaceuticals at the research stage. We are
pursuing a two-fold strategy to develop protein pharmaceuticals. First, we
intend to collaborate with leading pharmaceutical and biotechnology companies
and second, we are internally developing our own pharmaceutical product
pipeline for future collaboration opportunities, licensing to others or
independent commercialization.
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Areas of Exploration
In addition to those areas described above, we will continue to evaluate
opportunities in fields such as antibody engineering, food and feed with
enhanced nutritional benefits, natural products, gene therapy, liquid fuels and
environmental applications. We are assessing these and other commercialization
opportunities through discussions with potential corporate and academic
collaborators and U.S. government agencies. In many instances, we have already
established initial technology development and proof of principle models.
Additional development may be funded through federal grants, corporate
collaborators or our own funds.
Antibodies
Our MolecularBreeding technologies potentially allow for the generation of
new antibodies with improved binding specificity for their targets and other
improved therapeutic properties for multiple diseases. In particular,
monoclonal antibodies, which originate from a single cell and that have
specificity for particular disease targets, are an important sector of the
biotechnology industry representing over 20% of all biopharmaceutical products
in development. The FDA has recently approved for commercial sale several
antibodies, including Genentech's Herceptin(R) and Novartis' Simulect(R), which
have potential utility in a broad range of diseases.
Nutritional Compounds
We believe that our technologies may be applied to individual genes, gene
families and entire complex biological pathways to develop foods, nutritional
supplements and animal feed with improved health benefits. Specific
applications include vitamins, sweeteners, preservatives and cholesterol
lowering agents. These are potentially high-value products that are currently
receiving significant attention in both the food and pharmaceutical industries.
Natural Product Drug Discovery
Natural products and natural product derivatives represent approximately
80% of 1998 product sales in the areas of antibiotics and cancer therapies. We
may enter into collaborations with biotechnology and pharmaceutical companies
to generate new libraries of lead natural product compounds by modifying
enzymes and metabolic pathways through MolecularBreeding. We believe that new
enzymes and pathways created through MolecularBreeding may allow for the
generation of natural product variants in ways that are not feasible using
existing chemical synthesis methodologies. Our efforts could potentially create
new natural products with increased activity, stability, availability in the
body or specificity.
Gene Therapy
Gene therapy is an approach to treat or prevent certain diseases by
introducing therapeutic genes into target cells to produce specific proteins
that will elicit a desired therapeutic response. We believe that our
MolecularBreeding technologies are potentially well suited to the development
of gene delivery and cell-targeting systems that could improve current modes of
disease treatment and prevention. We have completed two internal programs that
demonstrate the technical feasibility of MolecularBreeding to improve the
properties of viral and non-viral gene therapy delivery methodologies.
Liquid Fuels and Environmental Uses
The depletion of fossil fuels and the effects of carbon dioxide emissions
on the environment have raised awareness of the need to develop alternative
fuels. Companies may employ our MolecularBreeding technologies to develop
biological systems that produce cleaner burning fuels, such as methanol and
ethanol, from alternative carbon sources, such as plant biomass and animal
waste rather than petroleum. Additionally, companies potentially could use our
MolecularBreeding technologies to develop systems containing enzymes for use as
catalysts that could capture carbon dioxide which would otherwise be released
into the environment, and potentially use the cabon dioxide to produce value-
added products, such as fetilizers, polymers and plastics and cleaner burning
fuels.
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Corporate Collaborations
Since inception, we have entered into strategic collaborations and several
additional proof of principle collaborations with commercial entities and have
received six grants from U.S. government agencies. Assuming our research
efforts for existing collaborations are expended for the full research term, we
have total committed funding of over $102 million, of which approximately $75
million is from our collaborators and $27 million from government funding. Of
these committed funds, we have earned approximately $17 million; additionally,
we have received $15 million in consideration of purchase of our equity. In
addition, potential milestone payments from our existing collaborations could
exceed $145 million based on the accomplishment of specific performance
criteria, in addition to earned royalties on product sales. We expect that
strategic collaborations and government grants will continue to be an important
element of our business strategy.
Our strategy in entering into strategic collaborations is to work with
leaders in their respective industries on specific research projects. Our
agreements grant to our strategic collaborators exclusive licenses under
intellectual property developed by us in the collaboration for specific
products for specific uses. Generally, we retain the right to work ourselves or
with others on projects outside the scope of the areas and projects which are
the subject of our collaborations.
In the chemicals area, we have entered into research agreements with Novo
Nordisk for industrial enzymes, DSM for enzymes for use in the manufacture of
penicillin and Rio Tinto for chemical process validation. We retain the right
to conduct other projects ourselves or with third parties.
Even in those areas, such as agriculture, where we have entered into
research agreements with DuPont/Pioneer Hi-Bred and AstraZeneca for multiple
research projects relating to multiple crops and traits, we have the right to
use these same crops to conduct other projects and develop other products, as
well as the right to conduct projects using other crops.
In our strategic collaborations, in exchange for commercial licenses to the
products developed during the program in specified fields, we typically seek
initial license fees, collaborative research funding, technology advancement
funding, milestone payments for significant developments and royalties on
product sales.
We have entered into the following significant collaborations:
Novo Nordisk
In September 1997, we entered into a five year strategic collaboration with
Novo Nordisk A/S, the world's largest producer of industrial enzymes, for the
development and bulk production of specific industrial enzymes in fields such
as laundry detergents, leather processing and pulp and paper manufacturing.
Industrial enzymes are used for a broad spectrum of activities ranging from
food preparation, to detergents, to pulp and paper manufacturing. Industrial
enzymes today represent over a $1.4 billion market.
Novo Nordisk will use our MolecularBreeding technologies to generate new
industrial enzymes. In addition, Novo Nordisk has made a five year commitment
to contribute funding for the research and development of new directed
evolution technologies. Under the agreement, Novo Nordisk has an exclusive
royalty-bearing license to use our MolecularBreeding technologies to develop
proteins and enzymes for use in certain industrial enzyme fields. We have
received an exclusive royalty-free license to certain Novo Nordisk technologies
useful for the practice of MolecularBreeding in all fields outside the scope of
the collaboration, except the field of human and veterinary diagnostic and
therapeutic products, for which we received a co-exclusive license from Novo
Nordisk. Under this agreement, Novo Nordisk will pay us a royalty on the sales
of industrial enzyme products developed using our MolecularBreeding
technologies.
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DuPont/Pioneer Hi-Bred
In December 1998, we entered into a five year strategic collaboration with
Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. duPont
de Nemours and Company, to utilize our MolecularBreeding technologies to
generate new gene variants for use in the development of specific crop
protection and quality grain traits in corn, soybeans and certain other crops.
Under the terms of the agreement, in exchange for global commercialization
rights, DuPont/Pioneer Hi-Bred purchased $5 million of our preferred stock, $5
million of our common stock at our initial public offering and paid $2.5
million in initial license fees. In addition, DuPont/Pioneer Hi-Bred has
committed to pay us up to $27.5 million over five years for research and
technology development, as well as possible milestone payments of up to
$45 million based on the accomplishment of specific performance criteria and
royalties on future product sales, if any. The agreement may be terminated by
DuPont/Pioneer Hi-Bred after three years, upon six months notice, if a
specified milestone has not been met.
DSM
In March 1999, we entered into a three year collaboration with Gist-Brocades
N.V., a subsidiary of DSM N.V., to utilize our proprietary MolecularBreeding
technologies to develop certain new enzymes for use in the manufacture of
certain classes of penicillin antibiotics. Under the terms of the agreement, in
exchange for global commercialization rights, we will receive research funding
over three years and will receive royalties from the commercialization of any
enzymes developed through our MolecularBreeding technologies.
AstraZeneca
In June 1999, we entered into a five year strategic collaboration with
Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc, to utilize our
MolecularBreeding technologies to improve the yield and quality of several of
AstraZeneca's strategic crops. AstraZeneca is one of the world's leading
agricultural companies. We have received $5 million in a preferred stock equity
investment and could receive up to $21.5 million for research and development
funding and technology advancement funding. We may receive over $100 million in
potential milestone payments based on the accomplishment of specific
performance criteria, in addition to royalties on product sales. In addition,
each year of the collaboration AstraZeneca has the right to substitute their
obligation to pay us $1 million in annual technology advancement funding with a
$3 million equity investment at a 50% premium to the current market value.
Rio Tinto
In January 2000, we entered into a three year collaboration with
Technological Resources Pty Limited, a wholly-owned subsidiary of Rio Tinto
Corporation plc, to utilize our Molecular Breeding technologies to develop
enzymatic systems to increase the efficiency of carbon dioxide fixation in
connection with the combustion of fossil fuels and for other purposes more
generally for use in chemical bioprocessing and other applications. Rio Tinto
is one of the world's leading mining companies with extensive worldwide
operations in the mining of minerals and metals. In connection with the
collaboration, we will receive research and funding payments and technology
advancement fees from Rio Tinto of up to $2.7 million. Rio Tinto and Maxygen
each have exclusive rights to commercialize technology developed in the
collaboration in specific fields, and Maxygen and Rio Tinto each will share
revenues with the other from certain products or processes that are
commercialized by the other. The collaboration provides that the parties may
create a new entity to commercialize the technology arising from the
collaboration.
In addition to the above collaborations, we have entered into several proof
of principle collaborations with parties such as Abbott, Pfizer and Novartis.
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U.S. Government Grants and Collaborations
Government grants allow us to focus on key internal scientific programs. In
addition, we retain ownership of all intellectual property and commercial
rights generated during the project, subject to a non-exclusive, non-
transferable, paid-up license to practice for or on behalf of the U.S.
inventions made with federal funds which is retained by the U.S. government as
provided by the applicable statutes and regulations. We have obtained grant
funding of over $27 million, primarily for the development of vaccines and the
advancement of core technology, as outlined below.
Summary of Grants
<TABLE>
<CAPTION>
Granting Dollar
Area of Grant Agency Description Grant Date Amount
- -----------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
Improved Drug NIST-ATP Use of MolecularBreeding Sept. 1997 $2.0 million
Testing technologies to develop
new screening systems
for use in accelerated
discovery and
development of new AIDS
therapies and vaccines.
Evolution of DARPA Use of MolecularBreeding Feb. 1998 $5.6 million
Vectors technologies to evolve a
new generation of DNA
vectors for rapid and
efficient delivery of
antigens for
immunization.
Whole Genome NIST-ATP Use of MolecularBreeding Oct. 1998 $1.2 million
Shuffling technologies to develop
new or improved
manufacturing processes.
Decontamination DARPA Use of MolecularBreeding Dec. 1998 $3.8 million
technologies to create
enzyme-based
decontamination
compounds effective
against pathogens.
New Therapeutic and DARPA Use of MolecularBreeding April 1999 $7.7 million
Preventative DNA technologies to generate
Vaccines new vaccines with a
broad spectrum of
activity against
multiple strains of
several different
pathogens.
Aerosol-Based DARPA Use of MolecularBreeding Sept. 1999 $6.8 million
Vaccines technologies to deliver
aerosol-based
preventative and
therapeutic agents.
</TABLE>
In February 2000, we entered into a cooperative research and development
agreement (CRADA) with the National Cancer Institute, National Institute of
Health. The CRADA is a three year research agreement under which we will work
with the National Cancer Institute to develop with our MolecularBreeding
technologies, specific therapeutic proteins for the treatment of certain types
of cancer. We will have the option to acquire an exclusive, royalty-bearing
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license to any inventions owned by the National Cancer Institute that are
developed in the CRADA, on terms to be later established. The CRADA can be
terminated by either the National Institute of Health or Maxygen at any time by
advance notice to the other party.
Intellectual Property and Technology Licenses
Pursuant to the technology transfer agreement we entered into with Affymax
Technologies N.V. and Glaxo Group Limited, each a wholly-owned subsidiary of
Glaxo Wellcome plc, we were assigned all rights to the patents, applications
and know-how related to MolecularBreeding technologies. Affymetrix, Inc.
retains an exclusive, royalty-free license under the patents and patent
applications previously owned by Affymax for use in the diagnostics and
research supply markets for specific applications. In addition, Affymax
assigned jointly to us and to Affymetrix a family of patent applications
relating to circular PCR techniques.
We have an extensive patent portfolio including six issued U.S. patents
relating to our proprietary MolecularBreeding technologies. Counterpart
applications of these U.S. patents are pending in other major industrialized
countries. We have an additional 86 pending U.S. patent applications and 70
pending foreign and international counterpart applications relating to our
MolecularBreeding technologies and specialized screening technologies, and the
application of these technologies to diverse industries including agriculture,
protein pharmaceuticals, vaccines, gene therapy, chemicals and therapeutic
drugs.
We have exclusively licensed patent rights and technology for specific uses
from Novo Nordisk, the California Institute of Technology, Stanford University
and the University of Washington. These licenses give us rights to an issued
U.S. patent, 16 U.S. patent applications, and 81 additional international or
foreign counterpart applications.
In addition, we received from Affymax a worldwide, non-exclusive license to
certain Affymax patent applications and patents related to technology for
displaying multiple diverse proteins on the surface of bacterial viruses.
Competition
We believe we are the leader in the field of directed molecular evolution.
We are aware that companies such as Diversa Corporation and Ixsys have
alternative methods for obtaining genetic diversity. Academic institutions such
as Caltech and the University of Washington are working in this field, and we
have licensed certain technology from Caltech and the University of Washington.
In the future, we expect the field to become highly competitive and that
companies and academic and research institutions will seek to develop
technologies that could be competitive with our MolecularBreeding technologies.
Any products that we may develop through our MolecularBreeding technologies
will compete in highly competitive markets. Many of our potential competitors
in these markets have substantially greater financial, technical and personnel
resources than we do, and we cannot assure you that they will not succeed in
developing technologies and products that would render our technologies and
products or those of our collaborators obsolete or noncompetitive. In addition,
many of those competitors have significantly greater experience than we do in
their respective fields.
We are aware that Energy Biosystems Corporation and Diversa have described
technologies that appear to have some similarities to our patented proprietary
technologies. We monitor publications and patents that relate to directed
molecular evolution to be aware of developments in the field and evaluate
appropriate courses of action in relation to these developments.
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Employees
As of February 15, 2000 we had 149 full-time employees, 64 of whom hold
Ph.D. or M.D. degrees and 119 of whom were engaged in full-time research
activities. We plan to expand our corporate development programs and hire
additional staff as corporate collaborations and government grants are
established. We continue to search for qualified individuals with
interdisciplinary training and flexibility to address the various aspects and
applications of our technologies. None of our employees is represented by a
labor union, and we consider our employee relations to be good.
Facilities
We lease an aggregate of 47,880 square feet of office and laboratory
facilities in Redwood City, California. The lease expires on February 24, 2005
with respect to 31,166 square feet and on March 31, 2002 with respect to 16,714
square feet. We have an option to extend the term of the lease for three years
with respect to the 16,714 square feet. We believe that the facilities we
currently lease are sufficient for approximately the next three months and that
anticipated future growth for the next six months can be accommodated by
leasing additional space near our current facilities.
Legal Proceedings
We are not currently a party to any material pending legal proceedings.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers as of February 15, 2000, are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Russell J. Howard, Ph.D....... 49 Director, President and Chief Executive
Officer
Simba Gill, Ph.D.............. 35 Chief Financial Officer and Senior Vice
President of Business Development
Michael Rabson, Ph.D.......... 46 General Counsel and Senior Vice President
of Legal Affairs
Willem P.C. Stemmer, Ph.D. ... 42 Vice President of Research
John Bedbrook, Ph.D........... 50 President of Agriculture
Howard A. Simon............... 40 Vice President of Human Resources
Norman Kruse, Ph.D............ 50 Director of Intellectual Property, Chief
Patent Counsel
Isaac Stein (1)(2)............ 53 Chairman of the Board and Director
Robert J. Glaser, M.D. (2).... 81 Director
M.R.C. Greenwood, Ph.D........ 56 Director
Adrian Hennah (1)............. 42 Director
Gordon Ringold, Ph.D. (1)(2).. 49 Director
George Poste, D.V.M., Ph.D.... 55 Director
Julian N. Stern............... 75 Secretary
</TABLE>
- --------
(1) Member of the audit and finance committee
(2) Member of the compensation committee
Russell J. Howard, Ph.D., has served as our President, Chief Executive
Officer and Director since June 1998 and is one of our co-founders. Dr. Howard
was elected our President and Chief Operating Officer in May 1997. Originally
trained in biochemistry and chemistry, Dr. Howard has spent over 20 years
studying infectious diseases, primarily malaria, and currently serves on the
National Institutes of Health and USAID advisory panels for malaria vaccine
development. Prior to joining Maxygen, Dr. Howard was from August 1994 to June
1996 the President and Scientific Director of Affymax Research Institute.
Simba Gill, Ph.D., joined us in July 1998 as the Chief Financial Officer
and Senior Vice President of Business Development. Prior to joining us, from
November 1996 to July 1998, Dr. Gill was at Megabios Corp. where he was Vice
President of Business Development. Prior to this from November 1995 to November
1996, Dr. Gill was Director of Business Development at Systemix. Prior to
joining Systemix, Dr. Gill worked at Boehringer Mannheim in a variety of
corporate functions including Global Product Manager for erythropoietin,
Manager of Corporate Business Development and Director of New Diagnostics
Program Management. Dr. Gill received his Ph.D. in immunology at King's
College, London University in collaboration with the U.K. biotechnology company
CellTech, and his M.B.A. from INSEAD in Fontainbleau, France.
Michael Rabson, Ph.D., joined us in September 1999 as Senior Vice President
of Legal Affairs and General Counsel. Prior to joining us from February 1996 to
September 1999, Dr. Rabson was a member of Wilson Sonsini Goodrich & Rosati,
P.C. Prior to becoming a member, Dr. Rabson was an associate at Wilson Sonsini
Goodrich & Rosati, P.C. Dr. Rabson received his Ph.D. in infectious disease
epidemiology from Yale University and did a post-doctoral fellowship at the
National Cancer Institute, National Institutes of Health. He was a patent
examiner at the U.S. Patent and Trademark Office before he received his J.D.
from Yale Law School.
Willem P.C. Stemmer, Ph.D., is one of our co-founders and the inventor of
MolecularBreeding. He has served as our Vice President of Research since March
1997. Dr. Stemmer's background is in medical genetics, where he originally
worked on antibody engineering for immunotherapy of cancer. Prior to the
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organization of Maxygen, he was a distinguished scientist at Affymax Research
Institute from 1992 to 1996. He is a co-founder and board member of the
Diversity Biotechnology Consortium, a joint academic and business effort
focused on theoretical issues in molecular diversity and evolution. Dr. Stemmer
has pioneered our MolecularBreeding technologies and has authored more than 14
papers on the subject and is the named inventor on more than 20 patent
applications covering the technologies and, to date, five issued patents.
John Bedbrook, Ph.D., joined us in November 1999 as President of
Agriculture. Prior to this Dr. Bedbrook was Chief Executive Officer of Plant
Science Ventures from the beginning of 1999 until he joined us and Chief
Technology Officer at SAVIA from February 1998 to October 1999. Prior to
joining SAVIA, Dr. Bedbrook held several senior management positions including
Executive Vice President of Research and Development and Co-President at DNA
Plant Technology Corp. from 1988 to 1997. Dr. Bedbrook also served as a
Scientific Board Member and Director for many organizations. Dr. Bedbrook
received his Ph.D. in Molecular Biology from the University of Auckland in New
Zealand.
Howard A. Simon joined us in November 1999 as Vice President of Human
Resources. Prior to joining us, from 1993 to November 1999 Mr. Simon was a
partner in the Labor, Employment and Benefits Law Group of Landels Ripley &
Diamond, LLP. Mr. Simon is a 1985 graduate of the Boalt Hall School of Law at
the University of California, Berkeley. Also in 1985, Mr. Simon received his
Master of Arts Degree with highest honors from the Graduate Theological Union
of Berkeley.
Norman Kruse, Ph.D., joined us in March 1998 as the Director of
Intellectual Property, Chief Patent Counsel. Prior to joining us, from December
1995 to February 1998, Dr. Kruse was a patent attorney at Chiron Corporation.
Dr. Kruse was a patent attorney at Townsend and Townsend and Crew from January
1993 to December 1995. Dr. Kruse received his Ph.D. in molecular biology from
the University of Washington and worked initially as a scientist and manager in
the diagnostics industry. Subsequently, he managed technology assessment and
acquisition for Triton Biosciences, during which time he obtained his J.D. from
Golden Gate University of Law in San Francisco.
Isaac Stein has served as our Chairman of the Board since June 1998 and a
director since May 1996 and is one of our co-founders. Since November 1982, Mr.
Stein has been president of Waverley Associates, Inc. a private investment
firm. Mr. Stein is also a Managing Member of Technogen Enterprises, L.L.C. and
Technogen Managers, L.L.C., which is the general partner of Technogen
Associates, L.P. and a director of ALZA Corporation, the Benham Group of mutual
funds and CV Therapeutics, Inc. He is also a trustee of Stanford University and
the Chairman of the Board of UCSF Stanford Health Care.
Robert J. Glaser, M.D., has served as our Director since September 1997.
Dr. Glaser was Director for Medical Science at the Lucille P. Markey Charitable
Trust from 1984 to June 1997, and a trustee from 1988 to June 1997. In
accordance with the donor's will, the Trust ceased operations in June 1997. Dr.
Glaser is also a director of ALZA Corporation and Hanger Orthopedic Group, Inc.
Dr. Glaser has held faculty appointments at several universities, including
Dean of the School of Medicine at Stanford University and Professor of Social
Medicine at Harvard University. Originally trained as an internist, Dr. Glaser
has 124 publications on streptococcal infections, rheumatic fever, medical
education and health care, as well as being a contributor to numerous
scientific treatises.
M.R.C. Greenwood, Ph.D., has served as our Director since February 1999.
Dr. Greenwood has been Chancellor of the University of California ("UC") at
Santa Cruz since July 1996. Prior to being named Chancellor of UC Santa Cruz,
Dr. Greenwood was Dean of Graduate Studies and Vice President at UC Davis from
July 1989 to July 1996. In addition, from November 1993 to May 1995, Dr.
Greenwood took a leave from UC Davis to serve as Associate Director for Science
in the White House Office of Science and Technology Policy. Dr. Greenwood
received her doctorate in physiology, developmental biology and neurosciences
from Rockefeller University.
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<PAGE>
Adrian Hennah has served as our Director since September 1997. Mr. Hennah
has held several key positions in the Glaxo Wellcome organization. He is
currently leading a coordination team planning for the integration of Glaxo
Wellcome with Smithkline Beecham. He was previously Senior Vice President and
Chief Financial Officer of Glaxo Wellcome Inc. Prior to that, Mr. Hennah had a
range of responsibilities within research and development including finance,
business redesign and strategy process, human resources and engineering at
Glaxo Wellcome plc since 1984, and he led the team coordinating the
integration of Glaxo and Wellcome. Mr. Hennah is also a Director of
Affymetrix. Mr. Hennah has a degree in law from Cambridge University and is a
Sloan Fellow of the London Business School.
Gordon Ringold, Ph.D., has served as our Director since September 1997. Dr.
Ringold has served as Chairman and Chief Executive Officer of SurroMed, a
biotechnology company focused on novel clinical databases since 1997. From
March 1995 to February 2000, Dr. Ringold was Chief Executive Officer and
Scientific Director of Affymax Research Institute where he managed the
development of novel technologies to accelerate the pace of drug discovery.
Prior to serving as Chief Executive Officer, Dr. Ringold was the President and
Scientific Director of Affymax Research Institute. Dr. Ringold received his
Ph.D. in the laboratory of Dr. Harold Varmus, prior to joining the Stanford
University School of Medicine, Department of Pharmacology, and serving as the
Vice President and Director of the Institute for Cancer and Development
Biology of Syntex Research. Dr. Ringold is a Managing Member of Technogen
Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general
partner of Technogen Associates, L.P.
George Poste, D.V.M., Ph.D., has served as our Director since October 1999.
Dr. Poste has been Chief Science and Technology Officer at SmithKline Beecham
since January 1997 and is a member of the Board of Directors of SmithKline
Beecham. Prior to being appointed to Chief Science and Technology Officer, Dr.
Poste was President of Research and Development at SmithKline Beecham since
1989. Dr. Poste is also a Research Professor at the University of Pennsylvania
and holds the William Pitt Fellowship at Pembroke College, Cambridge
University. He is a Board-certified pathologist and was awarded a D.Sc. for
meritorious research contributions by the University of Bristol in 1987. Dr.
Poste received his Doctorate in Veterinary Medicine in 1966 and his Ph.D. in
Virology in 1969 from the University of Bristol.
Julian N. Stern has served as our Secretary since March 1997. He has been
an attorney with the law firm of Heller Ehrman White & McAuliffe since 1956.
He is currently the sole employee of a professional corporation that is a
partner of Heller Ehrman. He is also a director of ALZA Corporation.
Scientific Advisory Board
The following individuals are members of our Scientific Advisory Board:
Baruch S. Blumberg, M.D., Ph.D., is a Distinguished Scientist at Fox Chase
Cancer Center, Philadelphia, and University Professor of Medicine and
Anthropology at the University of Pennsylvania. Dr. Blumberg's research has
covered many areas including clinical research, epidemiology, virology,
genetics and anthropology. Dr. Blumberg was awarded the Nobel Prize in 1976
for his work on infectious diseases and specifically for the discovery of the
hepatitis B virus and has also been elected to the National Inventors Hall of
Fame for similar work. Dr. Blumberg's research and insight into infectious
diseases are valuable to Maxygen programs related to vaccines and hepatitis B
in particular.
Arthur Kornberg, M.D., is an active Professor Emeritus at the Stanford
University School of Medicine, Department of Biochemistry. Dr. Kornberg has
received numerous accolades including several honorary degrees and awards, the
National Medal of Science, and the Nobel Prize in Medicine in 1959. He is a
member of several prestigious scientific societies and serves as a member of
several scientific advisory boards. Dr. Kornberg's years of research in
enzymes and metabolism is a valuable contribution to directing the internal
research programs of Maxygen.
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<PAGE>
Joshua Lederberg, Ph.D., a research geneticist, is Professor Emeritus at
the Rockefeller University, in New York. Formerly, Dr. Lederberg was a
professor of genetics at the University of Wisconsin and at Stanford University
School of Medicine. Dr. Lederberg is a pioneer in the field of bacterial
genetics with the discovery of genetic recombination in bacteria, work for
which he received the Nobel Prize in Physiology and Medicine in 1958. Maxygen
is funding work in Dr. Lederberg's laboratory pertaining to the study of cell
fusion and the generation of genetically diverse recombinants. His work and
guidance in genetic recombination is important to our MolecularBreeding
technologies.
Alejandro C. Zaffaroni, Ph.D., is one of our co-founders. Dr. Zaffaroni is
a biochemist by training and a highly successful biotechnology entrepreneur,
who has co-founded and built several companies including ALZA Corporation, DNAX
Institute of Molecular and Cellular Biology, Affymax N.V. and Affymetrix, Inc.
Dr. Zaffaroni has repeatedly recognized the commercial value of leading-edge
technologies and has turned those visions into highly successful companies. In
1995, Dr. Zaffaroni was awarded the National Medal of Technology by President
Clinton in recognition of his contributions to the pharmaceutical and
biotechnology industries. Dr. Zaffaroni is a Managing Member of Technogen
Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general
partner of Technogen Associates, L.P.
Frances Arnold, Ph.D., is a Professor of Chemical Engineering and
Biochemistry at the California Institute of Technology. She received her Ph.D.
in Chemical Engineering from the University of California, Berkeley. She has
authored or co-authored more than 120 publications and has 18 patents issued or
pending. Dr. Arnold's research focuses on engineering new enzymes and pathways
by directing their evolution in the laboratory. Her awards include an Office of
Naval Research Young Investigator Award, a Presidential Young Investigator
Award and a David and Lucille Packard Fellowship in Science and Engineering.
Maxygen is funding work at Dr. Arnold's laboratory pertaining to directed
molecular evolution. Dr. Arnold provides on-going guidance in the field of
directed molecular evolution and its applications in the chemical industry.
Board Composition and Committees
We currently have seven directors who each serve until the next meeting of
stockholders and until their successors are duly qualified.
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Adrian Hennah, Gordon Ringold and
Isaac Stein. The audit committee makes recommendations to the board of
directors regarding the selection of independent auditors, reviews the scope of
audit and other services by our independent auditors, reviews the accounting
principles and auditing practices and procedures to be used for our financial
statements and reviews the results of those audits. The compensation committee
consists of Robert J. Glaser, Gordon Ringold and Issac Stein. The compensation
committee makes recommendations to the board of directors regarding our stock
and compensation plans, approves compensation of certain officers and grants
stock options.
Compensation Committee Interlocks and Insider Participation Interlocks
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees, nor has
served as a member of the board of directors or compensation committee of any
entity that has one or more officers serving as a member of our board of
directors or compensation committee.
In March 1997, Mr. Stein issued a full recourse promissory note in the
amount of $120,000 in favor of Maxygen in connection with the purchase of
600,000 shares of our common stock, which he repaid in full in January 2000.
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<PAGE>
Director Compensation
We reimburse our nonemployee directors for expenses incurred in connection
with attending board and committee meetings but do not compensate them for
their services as board or committee members. We have in the past granted
nonemployee directors options to purchase our common stock pursuant to the
terms of our stock plans, and our board continues to have the discretion to
grant options to new nonemployee directors. Beginning after our stockholders
meeting in 2000, our nonemployee directors will each receive nondiscretionary,
automatic grants of options to purchase 20,000 shares of our common stock upon
joining the board of directors and nondiscretionary, automatic grants of
options to purchase 5,000 shares of our common stock each year pursuant to the
1999 Nonemployee Directors Stock Option Plan.
Executive Compensation
The following table sets forth the compensation paid by us during 1997,
1998 and 1999 to our Chief Executive Officer and to our four other most highly
compensated executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- ------------
Awards
------------
Number of
Securities
Other Annual Underlying All Other
Name and Position Year Salary Bonus Compensation Options Compensation(1)
----------------- ---- ------ ----- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Russell J. Howard........... 1999 $225,000 $ -- $ -- 172,500 $832
President, Chief Executive 1998 218,333 -- -- 200,000 833
Officer and Director 1997 153,750 -- -- 150,000 666
Simba Gill(2)............... 1999 192,850 -- 1,500(3) 126,738 686
Chief Financial Officer and 1998 99,750 10,000 55,414(4) 330,000 275
Senior Vice President of 1997 -- -- -- -- --
Business Development
Michael Rabson(5)........... 1999 57,539 -- -- 350,000 145
Senior Vice President of 1998 -- -- -- -- --
Legal Affairs and 1997 -- -- -- -- --
General Counsel
Willem P.C. Stemmer......... 1999 154,500 -- -- 122,500 786
Vice President of Research 1998 136,667 -- -- -- 502
1997 81,667 -- -- 300,000 345
John Bedbrook(6)............ 1999 34,599 -- -- 200,000 310
President of Agriculture 1998 -- -- -- -- --
1997 -- -- -- -- --
Norman Kruse................ 1999 147,791 -- 32,209(7) 66,543 575
Director of Intellectual 1998 118,767 10,000 114,809(8) 87,500 464
Property, Chief Patent 1997 -- -- -- -- --
Counsel
Joseph Affholter(10)........ 1999 139,019 -- 62,321(9) 65,700 541
Former Vice President of 1998 84,480 10,000 85,264(10) 110,000 393
Biocatalysis and Chemicals 1997 -- -- -- -- --
</TABLE>
- --------
(1) Consists of term life insurance premiums paid by Maxygen on behalf of the
listed individual.
(2) Dr. Gill joined Maxygen in July 1998. His annualized salary for 1998 was
$190,000.
(3) Consists of $1,500 for reimbursement of relocation expenses.
(4) Consists of $19,550 in the form of a housing allowance and $35,864 for
reimbursement of relocation expenses.
(5) Dr. Rabson joined Maxygen in September 1999. Dr. Rabson's annualized
salary for 1999 was $220,000.
(6) Dr. Bedbrook joined Maxygen in November 1999. Dr. Bedbrook's annualized
salary for 1999 was $212,500.
(7) Consists of $32,209 in the form of a housing allowance.
(8) Consists of $31,233 in the form of a housing allowance and $83,575 for
reimbursement of relocation expenses.
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<PAGE>
(9) Consists of $55,381 in the form of a housing allowance and $6,946 as
interest forgiven on a promissory note.
(10) Consists of $39,953 in the form of a housing allowance, $42,444 for
reimbursement of relocation expenses and $2,867 as interest forgiven on a
promissory note.
(11) Dr. Affholter joined Maxygen in May 1998. In January 2000, Dr. Affholter
resigned as our Vice President of Biocatalysis and Chemicals and is no
longer an employee.
Stock Options Granted in the Fiscal Year Ended December 31, 1999
The following table sets forth information with respect to stock options
granted during the fiscal year ended December 31, 1999 to each of the named
executive officers. All options were granted under Maxygen's 1997 Stock Option
Plan. The following options are immediately exercisable in full at the date of
grant, but shares purchased on exercise of unvested options are subject to a
repurchase right in our favor that entitles us to repurchase unvested shares at
their original exercise price on termination of the employee's services with
us. The repurchase right lapses as to 25% of the shares on the first
anniversary of the grant date and the balance, ratably by year, over the next
three years. Under certain circumstances the vesting of options, and
consequently the lapse of the repurchase right, may be accelerated. See "--
Employee Benefit Plans--1997 Stock Option Plan".
The percentage of options granted is based on an aggregate of 2,986,830
options granted by Maxygen during the fiscal year ended December 31, 1999 to
our employees, including the named executive officers. The potential realizable
value amounts in the last two columns of the following chart represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term assuming an initial price equal to
$16.00, the initial public offering price. The assumed 5% and 10% annual rates
of stock price appreciation from the date of grant to the end of the option
term are provided in accordance with rules of the SEC and do not represent our
estimate or projection of the future common stock price. Actual gains, if any,
on stock option exercises are dependent on the future performance of the common
stock, overall market conditions and the option holder's continued employment
through the vesting period.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------
% of
Total Potential Realizable
Options Value at Assumed
Number of Granted Annual Rates of Stock
Securities to Exercise Price Appreciation
Underlying Employees Price for Option Terms
Options in Fiscal Per Expiration ---------------------
Name Granted Year Share Date 5% 10%
---- ---------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Russell J. Howard....... 172,500 5.8% $0.75 9/08/09 $4,366,374 $7,029,354
President, Chief
Executive Officer and
Director
Simba Gill.............. 120,138 4.0 0.75 9/08/09 3,040,971 4,895,609
Chief Financial Officer 6,600 0.2 0.50 3/24/09 168,711 270,599
and Senior Vice
President of Business
Development
Michael Rabson.......... 350,000 11.7 0.75 9/08/09 8,859,310 14,262,458
Senior Vice President
of Legal Affairs and
General Counsel
Willem P.C. Stemmer..... 122,500 4.1 0.75 9/08/09 3,100,758 4,991,860
Vice President of
Research
John Bedbrook........... 200,000 6.7 7.50 11/10/09 3,712,463 6,799,976
President of
Agriculture
Norman Kruse............ 46,543 1.6 0.75 9/8/09 1,178,111 1,896,622
Director of 20,000 0.7 0.75 9/27/09 506,246 814,998
Intellectual Property
and Chief Patent
Counsel
Joseph Affholter........ 45,700 1.5 0.75 9/8/09 1,156,772 1,862,269
Former Vice President 20,000 0.7 0.75 9/27/09 506,246 814,998
of Biocatalysis
and Chemicals
</TABLE>
50
<PAGE>
Aggregated Option Exercises in Fiscal Year 1999 and Fiscal-Year End Option
Values
The following table sets forth certain information regarding exercised
stock options during the fiscal year ended December 31, 1999 and unexercised
options held as of December 31, 1999 by each of the named executive officers.
We granted all options under our 1997 Stock Option Plan. These options are
immediately exercisable in full at the date of grant, but shares purchased on
exercise of unvested options are subject to a repurchase right in our favor
that entitles us to repurchase unvested shares at their original exercise price
on termination of the employee's services with us. Generally, the repurchase
right lapses as to 25% of the shares on the first anniversary of the grant date
and the balance, ratably by year, over the next three years. Under certain
circumstances the vesting of options, and consequently the lapse of the
repurchase right, may be accelerated. See "--Employee Benefit Plans--1997 Stock
Option Plan". The value realized is based on the fair market value of the
underlying securities as of the date of exercise, minus the per share exercise
price, multiplied by the number of shares underlying the option. The value of
unexercised in-the-money options are based on a value of $71.00 per share, the
last reported sale price of our common stock on the Nasdaq National Market on
December 31, 1999, minus the per share exercise price, multiplied by the number
of shares underlying the option. Each of the people below who exercised options
paid 10% of the exercise price by cash and the remaining amount with a full
recourse promissory note.
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised In-The Money
Number of Underlying Unexercised Options at Fiscal Year-
Shares Options at Fiscal Year-End End
Acquired on Value -------------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Russell J. Howard
President, Chief
Executive Officer and
Director............... 75,000 $33,750 297,500 -- $20,955,625 $ --
Simba Gill
Chief Financial Officer
and Senior Vice
President of Business
Development(1) ........ 126,738 1,650 -- -- -- --
Michael Rabson
Senior Vice President
of Legal Affairs and
General Counsel........ 350,000 -- -- -- -- --
Willem P.C. Stemmer
Vice President of
Research............... 122,500 -- -- -- -- --
John Bedbrook
President of
Agriculture............ -- -- 200,000 -- 12,700,000 --
Norman Kruse
Director of
Intellectual Property,
Chief Patent Counsel... 154,043 45,391 -- -- -- --
Joseph Affholter
Former Vice President
of Biocatalysis and
Chemicals.............. 175,700 49,500 -- -- -- --
</TABLE>
- --------
(1) Our right of repurchase lapses over a four-year period with respect to 25%
of the underlying shares at the first anniversary of the grant date and in
equal monthly installments over the next three years.
51
<PAGE>
Employee Benefit Plans
1997 Stock Option Plan
Our board of directors adopted our 1997 Stock Option Plan on March 1, 1997.
This plan provides for the grant of incentive stock options to our employees
and nonstatutory stock options to our employees, directors and consultants. As
of February 15, 2000, 7,500,000 shares of common stock were reserved for
issuance under this plan. Of these shares, 2,111,602 shares were subject to
outstanding options and 1,243,385 shares were available for future grant. The
stock option plan provides for annual increases in the number of shares
available for issuance on the first day of each year, beginning January 1,
2001, equal to the lesser of 1,500,000 shares, 4% of the outstanding shares on
the date of the annual increase or an amount determined by our board of
directors.
Our board of directors or a committee appointed by the board administers
the stock option plan and determines the terms of options granted, including
the exercise price, the number of shares subject to individual option awards
and the vesting period of options. The exercise price of nonstatutory options
must generally be at least 85% of the fair market value of the common stock on
the date of grant. The exercise price of incentive stock options cannot be
lower than 100% of the fair market value of the common stock on the date of
grant and, in the case of incentive stock options granted to holders of more
than 10% of our voting power, not less than 110% of the fair market value. The
term of an incentive stock option cannot exceed ten years, and the term of an
incentive stock option granted to a holder of more than 10% of our voting power
cannot exceed five years.
A participant may not transfer rights granted under our stock option plan
other than by will, the laws of descent and distribution or as otherwise
provided under the stock option plan.
Options granted under our stock option plan will accelerate and become
fully exercisable for a period of 30 days in the event we are acquired, unless
the successor corporation assumes or substitutes other equivalent options in
their place. Our board of directors may not, without the adversely affected
optionee's prior written consent, amend, modify or terminate the stock plan if
the amendment, modification or termination would impair the rights of
optionees. Our stock option plan will terminate in 2007 unless terminated
earlier by the board of directors.
On September 8, 1999, the board of directors granted options to purchase an
aggregate of 187,387 shares of our common stock to our employees. These options
were granted under the 1997 Stock Option Plan and vest according to individual
schedules set by the board. The board of directors also retained the right to
accelerate vesting of these options based upon company-wide performance and the
performance of individual option holders. To date, the board has accelerated
portions of such options based on 1999 performance.
1999 Employee Stock Purchase Plan
Our board of directors adopted our 1999 Employee Stock Purchase Plan on
September 29, 1999. This plan provides our employees with an opportunity to
purchase our common stock through accumulated payroll deductions.
A total of 400,000 shares of common stock has been reserved for issuance
under the purchase plan through March 2001. In addition, the purchase plan
provides for annual increases in the number of shares available for issuance
under the purchase plan on the first day of each year, beginning January 1,
2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on
the date of the annual increase or such amount as may be determined by the
board.
The board of directors or a committee appointed by the board administers
the purchase plan. The board or its committee has full and exclusive authority
to interpret the terms of the purchase plan and determine eligibility.
52
<PAGE>
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week. However, an
employee may not be granted an option to purchase stock under the purchase
plan:
. if such an employee immediately after grant owns stock possessing
five percent or more of the total combined voting power or value
of all classes of our capital stock, or
. if, and to the extent that, such an employee has rights to
purchase stock under all of our employee stock purchase plans in
excess of $25,000 worth of stock for each calendar year.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, allows for favorable tax treatment
of participants, offering periods of up to 24 months, as determined by the plan
administrator, although it is anticipated that offering periods will generally
be 12 months, each including two six-month purchase periods. The offering
periods will generally start on the first trading day on or after April 1 of
each year, except for the first offering period which will commence on the
first trading day before the effective date of this offering, will end on the
last trading day on or before March 31, 2001, and will have two purchase
periods ending on the last trading days of September 2000 and March 2001.
The purchase plan permits participants to purchase common stock though
payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation.
Amounts deducted and accumulated for the participant's account are used to
purchase shares of common stock on the last trading day of each purchase period
at a price of 85% of the lower of the fair market values of the common stock at
the beginning of the offering period and the end of the purchase period.
Participants may reduce their withholding percentage to zero at any time during
an offering period and may increase their withholding percentage or decrease
it, but to more than zero, on the first day of each purchase period.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
The purchase plan provides that, if we merge with or into another
corporation or a sale of substantially all of our assets, a successor
corporation may assume or substitute for each outstanding purchase right. If
the successor corporation refuses to assume or substitute for the outstanding
purchase rights, the offering period then in progress will be shortened, and a
new exercise date will be set.
The purchase plan will terminate in 2009. However, the board of directors
has the authority to amend or terminate the purchase plan at any time and may
apply any action to affect their outstanding rights to purchase stock under the
purchase plan.
1999 Nonemployee Directors Stock Option Plan
We have adopted the 1999 Nonemployee Directors Stock Option Plan and have
reserved a total of 300,000 shares of common stock for issuance thereunder.
Maxygen will automatically grant each nonemployee director who becomes a
Maxygen director after our stockholder meeting in 2000 a nonstatutory stock
option to purchase 20,000 shares of common stock on the date on which such
person first becomes a director. At the first board of directors meeting
immediately following each annual stockholders meeting beginning with the 1999
Annual Stockholders Meeting, Maxygen will automatically
53
<PAGE>
grant each nonemployee director a nonstatutory option to purchase 5,000 shares
of common stock. The exercise price of options under the director plan will be
equal to the fair market value of the common stock on the date of grant. The
maximum term of the options granted under the director plan is ten years.
Options will become exercisable at the rate determined by the plan
administrator. Shares underlying options granted to a director upon joining our
board are subject to a right of repurchase in our favor which lapses with
respect to 25% of the shares one year after the date of grant and at a rate of
25% of the shares at the end of each year thereafter. Each subsequent grant is
subject to a right of repurchase for one year after the date of grant. The
director plan will terminate in September 2009, unless terminated earlier in
accordance with the provisions of the director plan.
401(k) Plan
In May 1997, our board of directors adopted a Retirement Savings and
Investment Plan covering our full-time employees located in the United States.
This plan is intended to qualify under Section 401(k) of the Internal Revenue
Code of 1986, as amended, so that contributions to this plan by employees, and
the investment earnings thereon, are not taxable to employees until withdrawn.
Pursuant to the plan, employees may elect to reduce their current compensation
by up to the lesser of 25% of their annual compensation or the statutory
prescribed annual limit ($10,500 in 2000) and to have the amount of the
reduction contributed to the plan. We do not currently make additional matching
contributions on behalf of plan participants.
Separation Arrangements
In January 2000, Dr. Affholter resigned his position as Vice President of
Biocatalysis and Chemicals. In connection with his resignation, Dr. Affholter
entered into a separation agreement with Maxygen whereby Dr. Affholter received
acceleration of the vesting of options to purchase 20,675 shares of Maxygen's
common stock. He also retained his right to receive acceleration of options to
purchase up to 16,875 shares of Maxygen common stock under certain specified
circumstances. The agreement also provided for the restructuring of Dr.
Affholter's loan arrangements with Maxygen as described in "Related Party
Transactions". In connection with his resignation, Dr. Affholter entered into a
consulting agreement with Maxygen whereby he would remain as a consultant to
Maxygen through June 30, 2001. The agreement provides for consulting fees at an
hourly rate with minimum monthly hour requirements for each month of the
agreement. The agreement also provides for the vesting of 6,875 unvested
options on June 30, 2001 that were held by Dr. Affholter prior to his
resignation.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws limit the liability of
directors, officers, employees and other agents to the fullest extent permitted
by Delaware law; provided however that we indemnify any such person in
connection with a proceeding initiated by such person only if such proceeding
was authorized by our board. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability for: (1) breach of
their duty of loyalty to the corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (4) any transaction from which the director
derived an improper personal benefit. This limitation of liability does not
apply to liabilities arising under the federal or state securities laws and
does not affect the availability of equitable remedies such as injunctive
relief or rescission.
We believe that indemnification under our bylaws and certificate of
incorporation covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in this capacity, regardless of whether the bylaws permit
indemnification. We have obtained directors' and officers' liability insurance
to cover certain liabilities described above.
54
<PAGE>
We intend to enter into agreements to indemnify our officers and directors,
in addition to the indemnification provided for in our bylaws. These
agreements, among other things, will indemnify our officers and directors for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by or in the right of Maxygen arising out of such person's services as
one of our directors or such person's services to any of our subsidiaries or
any other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors.
There is no pending litigation or proceeding involving a director or
officer of Maxygen in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
55
<PAGE>
RELATED PARTY TRANSACTIONS
Since inception (May 1996), there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we were or
are to be a party in which the amount involved exceeds $60,000 and in which any
current director, executive officer or holder of more that 5% of our common
stock had or will have a direct or indirect interest other than (1)
compensation arrangements, which are described where required under
"Management" and (2) the transactions described below.
In February 1997, we entered into a services agreement with Affymax
Research Institute. Pursuant to the services agreement, Affymax provided
certain accounting, administrative and facilities management services to us and
allowed us to occupy certain facilities leased by Affymax in exchange for
specified annual fees. The services agreement terminated on April 1, 1999.
At the time of our formation, we entered into a technology transfer
agreement with Affymax Technologies N.V. and Glaxo Group Limited, each a
wholly-owned subsidiary of Glaxo Wellcome plc, pursuant to which we were
assigned all right, title and interest in the patents, patent applications and
confidential information relating to our MolecularBreeding technologies,
subject to an exclusive royalty-free license under the patents and patent
applications for use in the diagnostics and research supply markets for
specific applications. In exchange for the intellectual property transferred we
issued 5,460,000 shares of our common stock to Affymax.
In March 1997, in connection with our formation, we made loans to certain
officers and directors to purchase our common stock, which are evidenced by
full recourse promissory notes and secured by the common stock underlying this
stock purchase. The promissory notes bear interest at 6.42% per year, and
interest payments on the notes are due and payable on June 30 and December 31
of each year. Unpaid principal and interest on the notes are due and payable on
the earlier of 30 days after termination of the participant's employment,
directorship or consultancy with us, or three years after the date of the
promissory note. As of February 15, 2000, the original and outstanding
principal amounts of each promissory note by a director or executive officer
are set forth below.
<TABLE>
<CAPTION>
Original
Note Outstanding
Director or Executive Officer Amount Note Amount
----------------------------- -------- -----------
<S> <C> <C>
Russell J. Howard ...................................... $ 60,000 $ 60,000
Isaac Stein............................................. 120,000 --
Willem P.C. Stemmer..................................... 120,000 120,000
</TABLE>
56
<PAGE>
Options granted to our directors, executive officers and key employees are
immediately exercisable as to both vested and unvested shares, with unvested
shares being subject to a right of repurchase in our favor in the event of
termination of employment prior to vesting of all shares. These individuals pay
the exercise price for their outstanding options pursuant to full recourse
promissory notes secured by the common stock underlying the options. The notes
bear interest at 5.59% per year, and interest payments on the notes are due and
payable on June 30 and December 31 of each year. Unpaid principal and interest
on the notes are due and payable on the earlier of 30 days after termination of
the participant's employment, directorship or consultancy with us, or three
years after the date of the promissory note. As of February 15, 2000, the
original and outstanding principal amounts of each promissory note by a
director or executive officer are set forth below.
<TABLE>
<CAPTION>
Original
and
Outstanding
Director or Executive Officer Note Amount
----------------------------- -----------
<S> <C>
Joseph Affholter(1).............................................. $ 23,141
Simba Gill....................................................... 173,163
Russell J. Howard................................................ 47,250
Norman Kruse..................................................... 56,728
Michael S. Rabson................................................ 236,250
Gordon Ringold................................................... 99,000
Howard Simon..................................................... 259,875
Willem P.C. Stemmer.............................................. 136,688
</TABLE>
- --------
(1) Unpaid principal and interest under Dr. Affholter's notes are due and
payable on June 30, 2002.
In April 1998, we loaned $72,500 to Dr. Joseph Affholter, which is
evidenced by a full recourse promissory note. In April 1999, we loaned an
additional $77,500 to Dr. Affholter and received from Dr. Affholter a full
recourse promissory note covering all amounts due from Dr. Affholter, which
note was secured by a deed of trust on Dr. Affholter's principal residence and
bore interest at 5.70% per year with respect to $72,500 of the principal and
4.83% with respect to $77,500 of the principal. Under the terms of the
promissory note, interest was generally forgiven. The promissory note was due
with respect to $72,500 of the principal on April 1, 2003 and with respect to
$77,500 of the principal on March 30, 2004. In connection with Dr. Affholter's
resignation in January 2000, the loans were converted into a personal loan of
$150,000, with interest calculated semi-annually from February 1, 2001 at
5.59%. The arrangements also defer payment of such loan until April 1, 2003
with respect to $72,500 of the principal and until March 30, 2004 with respect
to $77,500 of the principal. The loan is secured by a pledge of vested shares
of Maxygen common stock valued at $300,000 as of the date of the loan
conversion.
In March 1997, December 1997 and April 1998, we sold to various investors a
total of 2,795,000 shares of Series A preferred stock at a purchase price of
$2.00 per share. In August 1998, we sold to various investors a total of
3,666,667 shares of Series B preferred stock at a purchase price of $3.00 per
share. In December 1998, we sold to a collaborator a total 1,000,000 shares of
Series C preferred stock at a purchase price of $5.00 per share. In June 1999,
we sold to various investors a total of 3,636,364 shares of Series D preferred
stock at a purchase price of $5.50 per share. In August 1999, we sold to a
collaborator a total of 800,000 shares of Series E preferred stock at a
purchase price of $6.25. Upon the initial public offering, each share of
preferred stock was converted into one share of common stock. Holders of the
converted common stock are entitled to registration rights. See "Description of
Capital Stock--Registration Rights."
57
<PAGE>
The table below sets forth our current officers, directors, immediate
family members of officers and directors and holders of more than 5% of our
outstanding stock who since January 1, 1997 invested in, or became beneficial
owners of our common stock issued upon conversion of our preferred stock.
<TABLE>
<CAPTION>
Stockholder Common Stock
----------- ------------
<S> <C>
Holders of More than 5%:
Glaxo Wellcome International B.V.............................. 1,250,000
Technogen Associates, L.P. (1)................................ 3,274,772
Technogen Enterprises, L.L.C. (2)............................. 3,274,772
Directors:
Gordon Ringold (3)............................................ 3,291,439
Isaac Stein (4)............................................... 3,348,106
Officers:
Russell Howard (5)............................................ 55,136
Willem Stemmer................................................ 125,000
Michael Rabson................................................ 9,100
Immediate Family Members of Officers and Directors:
Bhagwant Gill and Krishna Gill (6)............................ 128,787
Joseph Glaser, II (7)......................................... 8,712
Robert Glaser, Jr. (8)........................................ 10,991
Sally Glaser (9).............................................. 9,718
</TABLE>
- --------
(1) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C.
and Technogen Associates, L.P. are under common control.
(2) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C.
and Technogen Associates, L.P. are under common control.
(3) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is
the general partner of Technogen Associates, L.P. Dr. Ringold is a Managing
Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in the limited liability companies.
(4) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is
the general partner of Technogen Associates, L.P. Mr. Stein is a Managing
Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in the limited liability companies. Also includes
525,667 shares held by the Stein 1995 Revocable Trust, of which Mr. Stein
is a trustee and 41,667 shares held by Stein Partners, of which Mr. Stein
is a general partner.
(5) Includes 53,636 shares held by the Russell and Maureen Howard Trust, of
which Dr. Howard is a trustee.
(6) Drs. Gill are the parents of Simba Gill.
(7) Mr. Glaser is the son of Robert J. Glaser.
(8) Mr. Glaser is the son of Robert J. Glaser.
(9) Ms. Glaser is the daughter of Robert J. Glaser.
We believe that all transactions between us and our officers, directors,
principal stockholders and other affiliates have been and will be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of February 15, 2000 by:
. each person who is known by us to beneficially own more than 5% of our
common stock;
. each of the named executive officers and each of our directors; and
. all of our executive officers and directors as a group.
Percentage of ownership is based on 30,769,644 shares outstanding as of
February 15, 2000, and 32,269,644 shares outstanding after this offering,
assuming no exercise of the underwriters' over-allotment options. Beneficial
ownership is calculated based on SEC requirements. All shares of the common
stock subject to options currently exercisable or exercisable within 60 days
after February 15, 2000 are deemed to be outstanding for the purpose of
computing the percentage of ownership of the person holding such options, but
are not deemed to be outstanding for computing the percentage of ownership of
any other person. Unless otherwise indicated below, each stockholder named in
the table has sole or shared voting and investment power with respect to all
shares beneficially owned, subject to applicable community property laws.
Unless otherwise indicated in the table, the address of each individual listed
in the table is Maxygen, Inc., 515 Galveston Drive, Redwood City, California
94063.
<TABLE>
<CAPTION>
Number of Percentage of Shares
Shares Beneficially Owned
Beneficially ------------------------
Owned Prior to Before After
Beneficial Owner the Offering Offering Offering
---------------- -------------- ---------- ----------
<S> <C> <C> <C>
Glaxo Wellcome International BV 6,785,000 22.1% 21.0%
(1)...............................
Huis ter Heideweg 62 3705 LZ Zeist
The Netherlands
Technogen Associates, L.P. (2)..... 3,274,772 10.6 10.1
525 University Avenue, Suite 700
Palo Alto, California 94301
Technogen Enterprises, L.L.C. (3).. 3,274,772 10.6 10.1
525 University Avenue, Suite 700
Palo Alto, California 94301
Russell J. Howard, Ph.D. (4)....... 877,636 2.8 2.7
Willem P.C. Stemmer, Ph.D. (5)..... 1,147,500 3.7 3.6
Simba Gill, Ph.D. (6).............. 456,738 1.5 1.4
John Bedbrook, Ph.D. (7)........... 203,000 * *
Norman Kruse, Ph.D. (8)............ 154,043 * *
Michael Rabson, Ph.D. (9) ......... 361,100 1.2 1.1
Isaac Stein (10)................... 3,862,106 12.6 12.0
Robert J. Glaser, M.D.............. -- * *
M.R.C. Greenwood, Ph.D. (11)....... 75,000 * *
Adrian Hennah (12)................. 75,000 * *
George Poste, Ph.D. (13)........... 75,000 * *
Gordon Ringold, Ph.D. (14)......... 3,821,439 12.4 11.8
Joseph Affholter, Ph.D. (15)....... 67,313 * *
All directors and executive
officers as a group (14 persons)
(16).............................. 8,076,303 25.5 24.4
</TABLE>
- --------
* Less than 1% of Maxygen's outstanding common stock.
(1) Includes 75,000 shares subject to immediately exercisable options held by
Adrian Hennah and which Mr. Hennah has assigned to Glaxo Wellcome plc
which is the parent of Glaxo Wellcome International BV.
(2) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C.
and Technogen Associates, L.P. are under common control.
(3) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C.
and Technogen Associates, L.P. are under common control.
59
<PAGE>
(4) Includes 53,636 shares held by the Russell and Maureen Howard Trust, of
which Dr. Howard is a trustee. Also includes 297,500 shares that are
subject to immediately exercisable options. As of February 15, 2000, we
have the right to repurchase 444,375 shares including shares issuable
upon exercise of options held by Dr. Howard if Dr. Howard ceases his
employment, directorship or consultancy with us.
(5) Includes 352,187 shares that are subject to our right of repurchase as of
February 15, 2000 if Dr. Stemmer ceases his employment, directorship or
consultancy with us.
(6) Includes 307,537 shares that are subject to our right of repurchase as of
February 15, 2000 if Dr. Gill ceases his employment, directorship or
consultancy with us.
(7) Includes 200,000 shares that are subject to immediately exercisable
options. As of February 15, 2000, we have the right to repurchase all of
the shares issuable upon exercise of these options if Dr. Bedbrook ceases
his employment, directorship or consultancy with us.
(8) Includes 127,500 shares that are subject to our right of repurchase as of
February 15, 2000 if Dr. Kruse ceases his employment, directorship or
consultancy with us.
(9) As of February 15, 2000, we have the right to repurchase 350,000 of these
shares if Dr. Rabson ceases his employment, directorship or consultancy
with us.
(10) Includes 3,211,574 shares that are held by Technogen Associates, L.P. and
63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers,
L.L.C. is the general partner of Technogen Associates, L.P. Mr. Stein is
a Managing Member of Technogen Enterprises, L.L.C. and Technogen
Managers, L.L.C. and disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in the limited liability
companies. Includes 525,667 shares held by the Stein 1995 Revocable
Trust, of which Mr. Stein is a trustee and 41,667 shares held by Stein
Partners, of which Mr. Stein is a general partner. As of February 15,
2000, we have the right to repurchase 162,500 shares held by Mr. Stein if
he ceases his employment, directorship or consultancy with us.
(11) Includes 75,000 shares that are subject to immediately exercisable
options. As of February 15, 2000, we have the right to repurchase 56,250
shares issuable upon exercise of these options if Dr. Greenwood ceases
her employment, directorship or consultancy with us.
(12) Includes 75,000 shares that are subject to immediately exercisable
options. As of February 15, 2000, we have the right to repurchase 37,500
shares issuable upon exercise of these options if Mr. Hennah ceases his
employment, directorship or consultancy with us. Mr. Hennah has assigned
beneficial ownership of these shares to Glaxo Wellcome plc and disclaims
beneficial ownership of the shares.
(13) Includes 75,000 shares that are subject to immediately exercisable
options. As of February 15, 2000, we have the right to repurchase all of
the shares issuable upon exercise of these options if Dr. Poste ceases
his employment, directorship or consultancy with us.
(14) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198
shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C.
is the general partner of Technogen Associates, L.P. Dr. Ringold is a
Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers,
L.L.C. and disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in the limited liability companies. Also
includes 20,000 shares held by the Gregory Zarucki Ringold 1998 Trust,
20,000 shares held by the Alexander Zarucki Ringold 1998 Trust and 20,000
shares held by the Melanie Gault-Ringold 1998 Trust. As of February 15,
2000, we have the right to repurchase 137,500 shares held by Dr. Ringold
if he ceases his employment, directorship or consultancy with us.
(15) Includes 6,875 shares that are subject to our right of repurchase as of
February 15, 2000 if Dr. Affholter ceases his employment, directorship or
consultancy with us.
(16) Includes shares included pursuant to notes (2), (3), (4), (5), (6), (7),
(8), (9), (10), (11), (12), (13), (14) and (15), 175,200 shares
beneficially owned by Howard Simon, of which 136,500 shares are subject
to immediately exercisable options and 38,500 shares are subject to our
right of repurchase as of February 15, 2000.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our amended and restated certificate of incorporation authorizes the
issuance of up to 70,000,000 shares of common stock, par value $0.0001 per
share, and 5,000,000 shares of preferred stock, par value $0.0001 per share,
the rights and preferences of which may be established from time to time by our
board of directors. As of February 15, 2000, we had outstanding 30,769,644
shares of common stock held by approximately 313 holders of record.
Common Stock
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock issued after
the sale of the common stock offered hereby may be entitled, holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available therefor. In the event of our liquidation, dissolution or winding up,
holders of common stock will be entitled to share in our assets remaining after
the payment of liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of preferred stock. Holders of
common stock have no preemptive or conversion rights or other subscription
rights, and there are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are, and the shares of
common stock offered by us in this offering, when issued and paid for, will be,
fully paid and nonassessable. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock, which we may
designate in the future.
Preferred Stock
Our board of directors is authorized, subject to any limitations prescribed
by law, without stockholder approval, from time to time to issue up to an
aggregate of five million shares of preferred stock, $0.0001 par value per
share, in one or more series, each of such series to have such rights and
preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by
the board of directors. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. Issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of our outstanding voting stock. We have no present
plans to issue any shares of preferred stock.
Registration Rights
Pursuant to a registration rights agreement entered into between us and
holders of 19,458,031 shares of common stock issued upon conversion of our
Series A, Series B, Series C, Series D and Series E preferred stock, we are
obligated, under limited circumstances and subject to specified conditions and
limitations, to use our reasonable best efforts to register the registrable
shares.
We must use our reasonable best efforts to register shares of the
registrable shares:
- if we receive written notice from holders of 50% or more of the
registrable shares requesting that we effect a registration with respect
to at least 20% of the registrable shares then held by the holders
requesting registration;
- if we decide to register our own securities; or
- if (1) we receive written notice from any holder or holders of the
registrable shares requesting that we effect a registration on Form S-3
(a shortened form of registration statement) with respect to the
registrable shares and (2) we are then eligible to use Form S-3 (which
at the earliest could occur in December 2000).
61
<PAGE>
However, in addition to certain other conditions and limitations, if we are
proposing to issue registered shares and the underwriters request to decrease
the number of shares registered, we can limit the number of registerable
shares included in the registration statement. The underwriters have requested
that no registerable shares be registered in this offering.
Anti-Takeover Provisions
Charter and Bylaw Provisions
Certain provisions of our certificate of incorporation and bylaws may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. Such
provisions could limit the price that certain investors might be willing to
pay in the future for shares of our common stock. Certain of these provisions
allow us to issue preferred stock without any vote or further action by the
stockholders, require advance notification of stockholder proposals and
nominations of candidates for election as directors, and eliminate cumulative
voting in the election of directors. In addition, our bylaws provide that
special meetings of the stockholders may be called only by the board of
directors and that the authorized number of directors may be changed only by
resolution of the board of directors. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of Maxygen.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law. This
law prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder, unless any of the following conditions are
met. First, this law does not apply if prior to the date of the transaction,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder. Second, the law does not apply if upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by persons who are directors and also officers and by employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer. Third, the law does not apply if at or after the
date of the transaction, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding an aggregate of
32,269,644 shares of common stock, assuming the issuance of 1,500,000 shares
of common stock offered hereby and no exercise of options after February 15,
2000. All of the shares sold in this offering and 5,581,834 shares of the
6,900,000 shares sold in our initial public offering will be freely tradable
without restriction or further registration under the Securities Act, except
for any shares held by "affiliates" of Maxygen as that term is defined in Rule
144 under the Securities Act. Of the remaining 1,318,166 shares that were sold
in our initial public offering, 1,218,366 shares will be subject to lock-up
agreements providing that the stockholders will not offer, sell or otherwise
dispose of any of the shares of common stock owned by them which expire on
June 18, 2000 and 99,800 shares will be subject to lock-up agreements which
expire on June 12, 2000. Shares purchased by affiliates may generally only be
sold pursuant to an effective registration statement under the Securities Act
or in compliance with limitations of Rule 144 as described below.
The remaining 23,852,394 shares of common stock were issued and sold by us
in reliance on exemptions from the registration requirements of the Securities
Act. All of these shares are subject to "lock-up" agreements entered into in
connection with our initial public offering providing that the stockholder
will not offer, sell or otherwise dispose of any of the shares of common stock
which expire on June 12, 2000. Additionally, our directors, officers and
certain stockholders, including greater than 5% stockholders, who collectively
hold 17,004,809 shares of our common stock have entered into lock-up
agreements in connection with this offering. These lock-up agreements expire
on June 18, 2000. Goldman, Sachs & Co., however, may in its sole discretion,
at any time without notice, release all or any portion of the shares subject
to lock-up agreements. Upon expiration of the lock-up agreements, these shares
will become eligible for sale pursuant to Rule 144(k), Rule 144 and Rule 701
as discussed below.
We have in effect a registration statement under the Securities Act
registering the shares to be issued under our stock option plans. As a result,
any options exercised under the stock option plans or issued under any other
benefit plan since the filing of the registration statement governing our
benefit plans will be freely tradeable in the public market after the
expiration the 180 day lock-ups entered into in connection with our initial
public offering, except that shares held by affiliates will still be subject
to the limitations of Rule 144.
Also beginning three months after the date of this offering, holders of
19,458,031 shares of our common stock will be entitled to certain rights with
respect to registration of these shares for sale in the public market. See
"Description of Capital Stock -- Registration Rights". Registration of these
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act immediately upon
effectiveness of the registration.
Rule 144
In general, under Rule 144 as currently in effect, subject to the
provisions of any lock-up agreements, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell in
"broker's transactions" or to market makers, within any three-month period, a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding (which will
equal approximately 322,696 shares immediately after this offering); or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
63
<PAGE>
Sales under Rule 144 are generally subject to the availability of current
public information about Maxygen.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice filing provisions of Rule 144. Therefore, "144(k)
shares" may be sold immediately upon expiration of the lock-up agreements.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of our initial public offering is entitled to sell such shares
in reliance on Rule 144, in the case of affiliates, without having to comply
with the holding period and notice filing requirements of Rule 144 and, in the
case of non-affiliates, without having to comply with the public information,
volume limitation or notice filing requirements of Rule 144.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Maxygen by Heller Ehrman White & McAuliffe, Palo Alto, California. Certain
legal matters will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation. An investment partnership composed
of current and former members of and persons associated with Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially own 4,546 shares of
our common stock. Heller Ehrman White & McAuliffe, certain of its employees and
HEWM Investors, an entity affiliated with Heller Ehrman White & McAuliffe,
beneficially own 35,000 shares of our common stock. Julian N. Stern, the sole
shareholder of a professional corporation that is a partner of Heller Ehrman
White & McAuliffe and Secretary of Maxygen beneficially owns 66,000 shares of
our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999, and for the each of the three years
in the period ended December 31, 1999 as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given upon
the authority of such firm as experts in accounting and auditing.
64
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits and schedules) under the Securities Act, with respect to the shares to
be sold in this offering. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to us and the common stock offered in this prospectus, reference
is made to the registration statement, including the exhibits, financial
statements and notes to the financial statements filed as a part of the
registration statement. You should read the documents filed with the SEC as
exhibits to the registration statement for a more complete description of the
matter involved.
We will be filing quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at
the public reference facilities of the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's web site at http://www.sec.gov.
65
<PAGE>
MAXYGEN, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP Independent Auditors.......................... F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Stockholders' Equity......................................... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Maxygen, Inc.
We have audited the accompanying balance sheets of Maxygen, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Maxygen, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 18, 2000
F-2
<PAGE>
MAXYGEN, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 15,306 $136,343
Grant and other receivables.............................. 600 3,038
Prepaid expenses and other current assets................ 271 800
-------- --------
Total current assets.................................... 16,177 140,181
Property and equipment, net.............................. 1,001 4,764
Deposits and other assets................................ 422 633
-------- --------
Total assets............................................ $ 17,600 $145,578
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 466 $ 370
Accrued compensation..................................... 153 393
Other accrued liabilities................................ 286 1,803
Deferred revenue......................................... 2,903 4,935
Related party payables................................... 105 --
Current portion of equipment financing obligations....... -- 170
-------- --------
Total current liabilities.................................. 3,913 7,671
Deferred revenue........................................... 1,987 2,527
Non-current portion of equipment financing obligations .... -- 1,664
Commitments
Stockholders' equity:
Convertible preferred stock, $0.0001 par value,
25,000,000 shares and 5,000,000 shares authorized at
December 31, 1998 and 1999, respectively, 7,461,667 and
no shares issued and outstanding at December 31, 1998
and 1999, respectively ................................ 1 --
Common stock, $0.0001 par value: 70,000,000 shares
authorized, 9,230,500, and 30,860,781 shares issued and
outstanding at December 31, 1998 and 1999, respectively
........................................................ 1 3
Additional paid-in capital............................... 27,706 176,517
Notes receivable from stockholders....................... (548) (1,411)
Deferred stock compensation.............................. (2,601) (17,216)
Accumulated deficit...................................... (12,859) (24,177)
-------- --------
Total stockholders' equity.............................. 11,700 133,716
-------- --------
Total liabilities and stockholders' equity.............. $ 17,600 $145,578
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MAXYGEN, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Collaborative research and development revenue..... $ 341 $ 1,077 $ 8,895
Grant revenue...................................... -- 1,646 5,122
------- ------- --------
Total revenues..................................... 341 2,723 14,017
Operating expenses:
Research and development (Including charges for
stock compensation of $317, $651 and $3,998 in
1997, 1998 and 1999, respectively).............. 3,074 7,858 19,250
General and administrative (Including charges for
stock compensation of $546, $910 and $2,501 in
1997, 1998 and 1999, respectively).............. 1,461 3,920 7,498
------- ------- --------
Total operating expenses........................... 4,535 11,778 26,748
------- ------- --------
Loss from operations............................... (4,194) (9,055) (12,731)
Interest income (expense), net..................... 161 229 1,413
------- ------- --------
Net loss........................................... (4,033) (8,826) (11,318)
Deemed dividend upon issuance of convertible
preferred stock (Note 8).......................... -- -- (2,200)
------- ------- --------
Net loss attributable to common stockholders....... $(4,033) $(8,826) $(13,518)
======= ======= ========
Basic and diluted net loss per share............... $ (0.82) $ (1.31) $ (1.53)
======= ======= ========
Shares used in computing basic and diluted net loss
per share......................................... 4,917 6,748 8,854
</TABLE>
See accompanying notes.
F-4
<PAGE>
MAXYGEN, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable Deferred Total
------------------- ----------------- Paid-In from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
----------- ------ ---------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to Affymax
Technologies N.V.
and Glaxo Group
Limited for
technology in
March 1997........ -- $ -- 5,460,000 $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock to founders
for promissory
notes at $0.20 per
share............. -- -- 2,100,000 1 419 (420) -- -- --
Issuance of Series
A convertible
preferred stock to
investors at $2.00
per share for
cash.............. 2,790,000 -- -- -- 5,580 -- -- -- 5,580
Issuance of common
stock to employees
upon exercise of
stock options for
$0.20 per share... -- -- 100,000 -- 20 -- -- -- 20
Payments received
on promissory
notes............. -- -- -- -- -- 141 -- -- 141
Deferred stock
compensation...... -- -- -- -- 2,639 -- (2,639) -- --
Amortization of
deferred stock
compensation...... -- -- -- -- -- -- 863 -- 863
Net loss from
inception to
December 31,
1997.............. -- -- -- -- -- -- -- (4,033) (4,033)
----------- ---- ---------- ----- -------- ------- -------- -------- --------
Balance at
December 31,
1997.............. 2,790,000 -- 7,660,000 1 8,658 (279) (1,776) (4,033) 2,571
Issuance of Series
A convertible
preferred stock to
investors at $2.00
per share for
cash.............. 5,000 -- -- -- 10 -- -- -- 10
Issuance of Series
B convertible
preferred stock to
investors at $3.00
per share for
cash, less
issuance cost of
$36............... 3,666,667 1 -- -- 10,966 -- -- -- 10,967
Issuance of Series
C convertible
preferred stock to
a collaborator for
cash at $5.00 per
share............. 1,000,000 -- -- -- 5,000 -- -- -- 5,000
Options granted to
consultants for
services
rendered.......... -- -- -- -- 209 -- -- -- 209
Issuance of common
stock to
consultants for
cash and services
at $2.25 and $4.00
per share, and to
employees upon
exercise of stock
options for cash
and promissory
notes at $0.20 and
$0.30 per share... -- -- 1,570,500 -- 477 (269) -- -- 208
Deferred stock
compensation...... -- -- -- -- 2,386 -- (2,386) -- --
Amortization of
deferred stock
compensation...... -- -- -- -- -- -- 1,561 -- 1,561
Net loss.......... -- -- -- -- -- -- -- (8,826) (8,826)
----------- ---- ---------- ----- -------- ------- -------- -------- --------
Balance at
December 31,
1998.............. 7,461,667 1 9,230,500 1 27,706 (548) (2,601) (12,859) 11,700
Issuance of common
stock to employees
upon exercise of
options for cash
and promissory
notes at $0.20,
$0.30, $0.75 and
$7.50 per share... -- -- 2,640,650 -- 1,645 (863) -- -- 782
Options granted to
consultants for
services
rendered.......... -- -- -- -- 875 -- -- -- 875
Issuance of common
stock for services
rendered and
certain technology
rights at $4.00,
$5.16 and $6.25
per share......... -- -- 191,600 -- 845 -- -- -- 845
Issuance of Series
D convertible
preferred stock to
investors at $5.50
per share for
cash, less
issuance costs of
$37............... 3,636,364 -- -- -- 19,963 -- -- -- 19,963
Issuance of Series
E convertible
preferred stock to
a collaborator at
$6.25 per share... 800,000 -- -- -- 5,000 -- -- -- 5,000
Issuance of common
stock for initial
public offering at
$16.00 per share
less issuance
costs of $9,403... -- -- 6,900,000 1 100,996 -- -- -- 100,997
Conversion of
convertible
preferred stock to
common stock...... (11,898,031) (1) 11,898,031 1 -- -- -- -- --
Deferred stock
compensation...... -- -- -- -- 19,487 -- (19,487) -- --
Amortization of
deferred stock
compensation...... -- -- -- -- -- -- 4,872 -- 4,872
Net loss.......... -- -- -- -- -- -- -- (11,318) (11,318)
----------- ---- ---------- ----- -------- ------- -------- -------- --------
Balance at
December 31,1999.. -- $ -- 30,860,781 $ 3 $176,517 $(1,411) $(17,216) $(24,177) $133,716
=========== ==== ========== ===== ======== ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
MAXYGEN, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss........................................... $(4,033) $(8,826) $(11,318)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 40 178 729
Deferred stock compensation amortization......... 863 1,561 4,862
Common stock issued and stock options granted to
consultants for services rendered and for
certain technology rights....................... -- 332 1,730
Changes in operating assets and liabilities:
Grant and other receivables.................... (10) (590) (2,438)
Prepaid expenses and other current assets...... (32) (239) (529)
Deposits and other assets...................... -- (422) (211)
Accounts payable............................... 101 365 (96)
Accrued liabilities............................ 231 208 1,757
Deferred revenue............................... 199 4,691 2,572
Related party payables......................... 52 53 (105)
------- ------- --------
Net cash used in operating activities.............. (2,589) (2,689) (3,047)
------- ------- --------
Investing activities
Acquisition of property and equipment.............. (459) (760) (4,492)
------- ------- --------
Financing activities
Proceeds from issuance of convertible preferred
stock, net of issuance costs...................... 5,580 14,477 24,963
Proceeds from notes payable........................ -- 1,500 --
Borrowings under equipment financing obligations... -- -- 1,834
Payments received on promissory notes.............. 141 -- --
Proceeds from issuance of common stock, net of
issuance costs.................................... 20 85 101,779
------- ------- --------
Net cash provided by financing activities.......... 5,741 16,062 128,576
------- ------- --------
Net increase in cash and cash equivalents.......... 2,693 12,613 121,037
Cash and cash equivalents at beginning of period... -- 2,693 15,306
------- ------- --------
Cash and cash equivalents at end of period......... $ 2,693 $15,306 $136,343
======= ======= ========
Schedule of noncash transactions
Issuance of common stock in exchange for note
receivable........................................ $ 420 $ 269 $ 863
Conversion of note payable to preferred stock...... $ -- $ 1,500 $ --
</TABLE>
See accompanying notes.
F-6
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Maxygen, Inc. (the "Company") was incorporated in Delaware on May 7, 1996
to develop and apply proprietary directed molecular evolution technologies,
also known as "MolecularBreeding," to evolve new or improved properties into
single genes, multigene pathways, vectors, and genomes. Since the technology
can be applied to a wide range of genetic targets, the Company will explore
commercial opportunities for the directed evolution of novel enzymes and
metabolic processes, novel products for agriculture, as well as opportunities
in the fields of human medicine, such as gene therapy, vaccines, and protein
pharmaceuticals.
The MolecularBreeding technologies were conceived at Affymax Research
Institute ("Affymax"), a subsidiary of Glaxo Group Ltd. In March 1997, as a
result of the determination that a substantial future investment in the further
research and development of the technology was merited, all rights to the
MolecularBreeding technologies were transferred by Affymax to the Company in
exchange for the issuance of 5,460,000 shares of common stock. This transaction
represented the formation of the Company and thus the common shares issued were
not assigned any value for accounting purposes. The technology rights
transferred to the Company represented research and development stage
technology with no immediate commercial application or alternative future use,
and were recorded at the historic carrying value of Glaxo Group Ltd. as
determined in accordance with generally accepted accounting principles in the
United States. The total amount of costs incurred by Glaxo Group Ltd. to
develop the MolecularBreeding technologies are not determinable but were not
significant to Affymax or Glaxo Group Ltd.
Operations commenced in March 1997 and have consisted primarily of
technology and product development. Operational activity and expenses incurred
for the period from inception (May 7, 1996) through March 1997 were immaterial.
Through December 31, 1998, the Company was in the development stage. During
fiscal 1999, the Company entered into its second corporate research
collaboration and recognized significant revenues associated with collaborative
research agreements and expects to receive significant revenues under these
agreements in the future. Consequently, the Company is no longer considered to
be in the development stage. The Company will require additional financial
resources to complete the development and commercialization of its products.
Management plans to continue to finance the Company primarily through issuances
of equity securities, collaborative research and development arrangements,
government grants, and debt financing. If the financing arrangements
contemplated by management are not consummated, the Company may have to seek
other sources of capital or reevaluate its operating plans.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company's cash
and cash equivalents are maintained with one financial institution and consist
of depository accounts, master notes, and liquidity optimized general
investment contracts.
The Company has classified its marketable securities as "available-for-
sale" and recorded these securities at fair value. At December 31, 1998 and
1999, these instruments are classified as cash
F-7
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
equivalents. Unrealized gains and losses, which are considered to be temporary,
are recorded as a separate component of stockholders' equity until realized. At
December 31, 1998 and 1999, the fair value of all of the Company's marketable
securities approximated cost.
Property and Equipment
Property and equipment, including the cost of purchased software, are
stated at cost, less accumulated depreciation. Depreciation is provided using
the straight-line method over the estimated useful life of the assets
(generally three to five years). Leasehold improvements are amortized over the
shorter of six years or the estimated useful life of the assets.
Revenue Recognition
Non-refundable up-front payments received in connection with research and
development collaboration agreements, including technology advancement funding
that is intended for the development of the Company's core technology, are
deferred and recognized on a straight-line basis over the relevant periods
specified in the agreement, generally the research term.
Revenue related to collaborative research with the Company's corporate
collaborators is recognized as research services are performed over the related
funding periods for each contract. Under these agreements, the Company is
required to perform research and development activities as specified in each
respective agreement. The payments received under each respective agreement are
not refundable and are generally based on a contractual cost per full-time
equivalent employee working on the project. Research and development expenses
under the collaborative research agreements approximate or exceed the revenue
recognized under such agreements over the term of the respective agreements.
Deferred revenue may result when the Company does not incur the required level
of effort during a specific period in comparison to funds received under the
respective contracts. Milestone and royalty payments, if any, will be
recognized pursuant to collaborative agreements upon the achievement of
specified milestones.
The Company was awarded Defense Advanced Research Projects Agency grants
and National Institute of Standards and Technology-Advanced Technology Program
grants totaling approximately $10.6 million in 1998 and $14.5 million in 1999,
for various research and development projects. The terms of these grant
agreements are three years. Revenue related to grant agreements is recognized
as related research and development expenses are incurred.
Research and Development Expenses
Research and development expenses consist of costs incurred for Company-
sponsored as well as collaborative research and development activities. These
costs include direct and research-related overhead expenses as well as the cost
of funding research at universities and other research institutions, and are
expensed as incurred. Costs to acquire technologies that are utilized in
research and development and that have no alternative future use are expensed
when incurred (see Note 3).
Stock-Based Compensation
The Company accounts for common stock options granted to employees using
the intrinsic value method and, thus, recognizes no compensation expense for
options granted with exercise
F-8
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
prices equal to or greater than the fair value of the Company's common stock on
the date of the grant. In 1998 and 1999, the Company recognized deferred stock
compensation related to certain stock option grants (see Note 8). Pro forma
information required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") is also included in Note
8.
Stock compensation expense for options granted to nonemployees has been
determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The fair value of options granted to
nonemployees is periodically remeasured as the underlying options vest.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity
with the Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), for all periods presented. Following the guidance given by
the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock that has been issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if these shares had been outstanding for all periods
presented. To date, the Company has not issued or granted shares for nominal
consideration.
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the years ended December 31, 1998 and 1999 as
described above, and also gives effect to the conversion of the convertible
preferred stock that automatically converted to common stock immediately prior
to the completion of the Company's initial public offering (using the if-
converted method) from the original date of issuance.
The following table presents the calculation of basic, diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders....... $(4,033) $(8,826) $(13,518)
======= ======= ========
Basic and diluted:
Weighted-average shares of common stock
outstanding..................................... 6,329 8,789 10,879
Less: weighted-average shares subject to
repurchase...................................... (1,412) (2,041) (2,025)
------- ------- --------
Weighted-average shares used in computing basic
and diluted net loss per share.................. 4,917 6,748 8,854
======= ======= ========
Basic and diluted net loss per share............... $ (0.82) $ (1.31) $ (1.53)
======= ======= ========
Pro forma:
Shares used above................................ 6,748 8,854
Pro forma adjustment to reflect weighted effect
of conversion of convertible preferred stock
(unaudited)..................................... 5,014 9,395
------- --------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited).......... 11,762 18,249
======= ========
Pro forma basic and diluted net loss per share
(unaudited)..................................... $ (0.75) $ (0.74)
======= ========
</TABLE>
F-9
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has excluded all convertible preferred stock, outstanding stock
options, and shares subject to repurchase from the calculation of diluted loss
per common share because all such securities are antidilutive for all
applicable periods presented. The total number of shares excluded from the
calculations of diluted net loss per share, prior to application of the
treasury stock method for options, was 6,232,000, 11,305,000 and 2,601,000 at
December 31, 1997, 1998 and 1999, respectively. Such securities, had they been
dilutive, would have been included in the computations of diluted net loss per
share along with restricted common stock subject to the Company's right of
repurchase. See Note 8 for further information on these securities.
Segment Reporting
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major
customers. The Company has determined that it operates in only one segment.
Accordingly, the adoption of this statement had no impact on the Company's
financial statements.
Effect of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which will be effective for the year
ending 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company believes the
adoption of SFAS 133 will not have a material effect on the financial
statements, since it currently does not hold derivative instruments or engage
in hedging activities.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). "SOP 98-1"
requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The adoption of SOP 98-1, as
required in 1999, had no impact on the Company's financial statements for the
year ended December 31, 1999. The Company expenses as incurred the costs
associated with developing software for use in research and development
activities in accordance with Statement of Financial Accounting Standards No.
2, "Accounting for Research and Development Costs" and related interpretations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the Company's
revenue recognition policy is in compliance with the provisions of SAB 101 and
that the impact of SAB 101 will have no material effect on the financial
position or results of operations of the Company.
F-10
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Collaborative Agreements
AstraZeneca
In June 1999, the Company entered into a noncancelable (other than for
material breach), five-year collaborative research agreement with Zeneca
Limited, a wholly-owned subsidiary of AstraZeneca plc ("AstraZeneca") to
improve the yield and quality of several of AstraZeneca's strategic crops.
Pursuant to the agreement, AstraZeneca paid $2.5 million in technology
advancement funding. AstraZeneca will also provide research funding of $15
million over the research term for defined research programs covering specified
crops, potential milestone payments that could exceed $100 million as well as
royalties on future product sales, as defined in the agreement. On an annual
basis beginning in the second year of the agreement, AstraZeneca must either
pay $1 million in annual technology advancement funding or purchase $3 million
shares of the Company's stock at a 50% premium to the current fair value. If
AstraZeneca elects this option, then the resulting $1 million premium will be
accounted for as technology advancement funding. The technology advancement
funding is intended to fund the Company's continuing development of its core
MolecularBreeding technology. Because the agreement does not specify a required
level of effort or other specific performance criteria, the funding is being
recognized ratably over the five-year term of the agreement.
Revenue recognized under the collaborative research agreement with
AstraZeneca was $1.6 million (18% of total collaborative research and
development revenues) for the year ended December 31, 1999, consisting of
research funding earned of $896,000 technology advancement funding of $536,000
and licensing fees of $161,000.
In August 1999, in conjunction with the agreement, AstraZeneca purchased
800,000 shares of Series E convertible preferred stock at $6.25 per share. The
Company recorded a deemed dividend of $2.2 million at the date of issuance. The
deemed dividend is further described in Note 8.
DuPont/Pioneer Hi-Bred International, Inc.
In December 1998, the Company entered into a five-year collaborative
research and license agreement with Pioneer Hi-Bred International, Inc., a
subsidiary of E.I. duPont de Nemours and Company ("DuPont/Pioneer Hi-Bred") to
utilize MolecularBreeding technologies to generate novel gene products for use
in the development of specific crop protection and quantity grain traits in
corn, soybeans, and certain other crops. Pursuant to the agreement,
DuPont/Pioneer Hi-Bred paid an up-front, nonrefundable license fee of $2.5
million which is being recognized ratably over the research term and agreed to
provide nonrefundable research and development funding of up to $20 million,
potential milestone payments of up to $45 million and royalties on future
product sales, as defined in the agreement. The agreement also provides for
nonrefundable technology advancement payments of up to $7.5 million which are
being recognized ratably over the applicable research term. The agreement may
be terminated by DuPont/Pioneer Hi-Bred after three years upon six-months
notice, if a specified technological milestone has not been met.
Revenue recognized under the collaborative research agreement with
DuPont/Pioneer Hi-Bred was $62,000 and $6.0 million for the years ended
December 31, 1998 and 1999, respectively (6% and 67%, respectively, of total
collaborative research and development revenues).
F-11
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In December 1998, in conjunction with the agreement, DuPont/Pioneer Hi-Bred
purchased 1,000,000 shares of Series C convertible preferred stock at $5.00 per
share which was the fair value of the preferred stock on the date of issuance.
Furthermore, in December 1999, DuPont/Pioneer Hi-Bred purchased 312,500 shares
of the Company's common stock at the initial public offering price of $16.00.
DSM
In March 1999, the Company entered into a three-year collaborative research
and license agreement with Gist-brocades N.V., a subsidiary of DSM N.V. ("DSM")
to utilize the Company's proprietary MolecularBreeding technologies to develop
certain novel enzymes involved in the manufacture of certain classes of
antibiotics. Under the terms of the agreement, DSM will receive worldwide
commercialization rights and the Company will receive research payments of
approximately $2.3 million over the three-year term and may receive royalty
payments in the future. Total revenue of $596,000 was recognized for the year
ended December 31, 1999 (7% of total collaborative research and development
revenue).
Novo Nordisk A/S
In September 1997, the Company entered into a five-year License and
Collaboration Agreement with Novo Nordisk A/S ("Novo Nordisk") to use
MolecularBreeding technologies to develop products. The agreement provides for
research and development funding as well as royalty payments on future products
to the Company upon the occurrence of specified events as defined in the
agreement.
As set forth in the agreement, Novo Nordisk will fund up to $500,000 of
research funding under the development program on an annual basis. Total
revenue of $544,000 and $454,000 was recognized for the years ended December
31, 1998 and 1999, respectively (51% and 5%, respectively, of total
collaborative research and development revenue).
Other Collaborations
The Company has entered into corporate collaborations under which it has
completed all of its research obligations. Revenue recognized pursuant to these
agreements was $341,000, $461,000, and $252,000 for the years ended December
31, 1997, 1998 and 1999, respectively (100%, 43%, and 3%, respectively, of
total collaborative research and development revenue).
3. Sponsored License and Research Agreements
The Company has entered into several research agreements to fund research
at universities and other organizations. These agreements are generally
cancelable by either party upon written notice and may be extended by mutual
consent of both parties. Research and development expenses are recognized as
the related services are performed, generally ratably over the period of the
service. Expenses under these agreements were approximately $254,000, $702,000,
and $1,122,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
In addition, in 1999 the Company issued 175,000 shares of common stock with
a fair value of $783,000 to research institutions in exchange for technology
licenses. This amount is included in
F-12
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
research and development expense for year ended December 31, 1999 as the
related technology is in research and development and has no alternative future
uses.
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Leasehold improvements................................. $-- $ -- $1,352
Machinery and laboratory equipment..................... 406 1,123 3,719
Computer equipment and software........................ 36 68 266
Furniture and fixtures................................. 16 28 374
---- ------ ------
458 1,219 5,711
Less accumulated depreciation and amortization......... (39) (218) (947)
---- ------ ------
Property and equipment, net............................ $419 $1,001 $4,764
==== ====== ======
</TABLE>
5. Equipment Financing
In June 1999, the Company entered into an equipment financing agreement for
up to $2.0 million with a financing company. In July through December 1999, the
Company financed $1.8 million in equipment purchases structured as loans. The
equipment loans are to be repaid over 48 months at interest rates of 11.73% to
12.13% and are secured by the related equipment. During the first 6 months of
the loan terms, the payments consist of interest only. Accumulated amortization
of assets acquired pursuant to these obligations was approximately $226,000 at
December 31, 1999.
At December 31, 1999, the Company's future minimum principal payments under
the equipment financing arrangements are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
------------
<S> <C>
2000.................................................................. $ 173
2001.................................................................. 511
2002.................................................................. 575
2003.................................................................. 564
2004.................................................................. 11
------
$1,834
======
</TABLE>
6. Commitments
Services and Facility Agreement
In February 1997, the Company entered into a services and facility
agreement, which was amended in September 1998 and February 1999, with Affymax
Research Institute ("ARI"), a related party. Under the agreement, ARI provided
certain accounting, human resources, materials management, facility, safety,
library, and information technology services, as well as the use of designated
space in the ARI facility for specified periods. In exchange, the Company
agreed to pay ARI $417,000 for the period from February 1,
F-13
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1997 to December 31, 1997, $667,000 for the period from January 1, 1998 to
December 31, 1998, and $135,000 for the period from January 1, 1999 to April 1,
1999. These expenses were determined by ARI based upon the relative percentage
of effort expended by ARI personnel on the Company's affairs and the relative
use of facilities and fixed assets of ARI. Management believes that the charges
from ARI were reasonable and would not have been materially different on a
stand-alone basis. In addition, ARI agreed to transfer title of fixed assets
with a carrying value of approximately $55,000 to the Company. At December 31,
1998, the Company paid ARI approximately $105,000 under this agreement. The
agreement expired in April 1999.
Consulting Agreement
In September 1998, the Company entered into a consulting arrangement
whereby the Company is committed to pay to a consulting firm up to a specified
percentage, as outlined in the agreement, of funds received in connection with
certain of the Company's agricultural collaborative agreements. The term of the
payments owed pursuant to this agreement is five years, ending in fiscal year
2004. For the fiscal years ended December 31, 1998 and 1999, the Company
expensed $199,000 and $292,000, respectively, related to this agreement.
Facility Leases
The Company leases facilities under an operating lease which commenced in
1999. The lease expires for specified facilities in 2002 and 2005. The lease
contains a renewal option on the facilities under the portion of the lease that
expires in 2002. This lease also includes scheduled rent increases. The
scheduled rent increases are recognized on a straight-line basis over the term
of the lease. Minimum annual rental commitments under operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
------------
<S> <C>
2000.................................................................. $1,528
2001.................................................................. 1,451
2002.................................................................. 1,113
2003.................................................................. 1,019
2004.................................................................. 1,043
Thereafter............................................................ 173
------
$6,327
======
</TABLE>
Rent expense allocated from the services and facility agreement for the
years ended December 31, 1997, 1998 and 1999 was approximately $122,000,
$147,000 and $1,269,000, respectively.
7. Related Party Notes Receivable
The Company issued full recourse loans to certain employees, of which
$620,000 and $1,561,000 was outstanding at December 31, 1998 and 1999,
respectively. These loans bear interest at rates ranging from 4.83% to 6.42%
with terms ranging from three to five years. One loan totaling $150,000 was for
the purchase of the employee's residence and is secured by a deed of trust on
the employee's residence and is classified on the balance sheet as other
assets. The remaining loans were for the purchase of the Company's common stock
and are classified in stockholders' equity.
F-14
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Stockholders' Equity
Convertible Preferred Stock
In connection with the terms of the collaboration agreement with
AstraZeneca, the Company issued Series E convertible preferred stock in August
1999 at $6.25 per share. At the date of issuance, the Company believed the per
share price of $6.25 represented the fair value of the preferred stock and was
in excess of the deemed fair value of its common stock. Subsequent to the
commencement of the Company's initial public offering process, the Company re-
evaluated the deemed fair market value of its common stock as of August 1999
and determined it to be $9.00 per share. Accordingly, the incremental fair
value is deemed to be the equivalent of a preferred stock dividend. The Company
recorded the deemed dividend at the date of issuance by offsetting charges and
credits to additional paid in capital of $2,200,000, without any effect on
total stockholders' equity. The amount increased the loss allocable to common
stockholders in the calculation of basic net loss per share for the year ended
December 31, 1999.
In December 1999, the Company completed its initial public offering of
common stock under the Securities Act of 1933, in which $101.0 million in net
proceeds was realized (including net proceeds from a simultaneous private
placement and the exercise of the underwriter's over-allotment option). Upon
the completion of the initial public offering, all of the Series A, B, C, D,
and E preferred stock outstanding converted into 11,898,031 shares of common
stock.
Also, concurrent with the close of the Company's initial public offering,
the Company's articles of incorporation were amended to authorize 5,000,000
shares of undesignated preferred stock, none of which are issued or
outstanding. The Company's board of directors is authorized to fix the
designation, powers, preferences, and rights of any such series. The Company's
articles of incorporation was also amended to increase the authorized number of
shares of common stock to 70,000,000 shares.
1997 Stock Option Plan
In 1997, the Company authorized the 1997 Stock Option Plan (the "Plan")
under which the board of directors may issue incentive stock options to
employees, including officers and members of the board of directors who are
also employees, and nonqualified stock options to employees, officers,
directors, consultants, and advisors of the Company. Under the Plan, incentive
options to purchase the Company's common shares may be granted to employees at
prices not lower than fair value at the date of grant, as determined by the
board of directors. Nonstatutory options (options which do not qualify as
incentive options) may be granted to key employees, including directors and
consultants, at prices not lower than 85% of fair value at the date of grant
(110% in certain cases), as determined by the board of directors. Options have
a term of ten years. Certain options are immediately exercisable, at the
discretion of the board of directors. Shares issued pursuant to the exercise of
an unvested option are subject to the Company's right of repurchase which lapse
over periods specified by the board of directors, generally four years from the
date of grant. If not immediately exercisable, options generally vest over four
years (vesting at a rate of 25% at the end of each year). The stock option plan
provides for annual increases in the number of shares available for issuance on
the first day of each year, beginning January 1, 2001, equal to the lesser of
1,500,000 shares, 4% of the outstanding shares on the date of the annual
increase or an amount determined by the board of directors.
F-15
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Weighted-
Average
Shares Number of Exercise Price
Available Shares Per Share
---------- ---------- --------------
<S> <C> <C> <C>
Shares authorized..................... 2,140,000 -- --
Options granted....................... (1,891,550) 1,891,550 $0.20
Options exercised..................... -- (100,000) $0.20
---------- ----------
Balance at December 31, 1997.......... 248,450 1,791,550 $0.20
Shares authorized..................... 3,860,000 -- --
Options granted....................... (1,537,120) 1,537,120 $0.30
Options exercised..................... -- (1,495,500) $0.22
Options canceled...................... 38,500 (38,500) $0.24
---------- ----------
Balance at December 31, 1998.......... 2,609,830 1,794,670 $0.27
Shares Authorized..................... 1,500,000 -- --
Options granted....................... (2,986,830) 2,986,830 $3.25
Options exercised..................... -- (2,640,650) $0.62
Options canceled...................... 64,488 (64,488) $0.35
---------- ----------
Balance at December 31, 1999.......... 1,187,488 2,076,362 $4.11
========== ==========
</TABLE>
The options outstanding and exercisable at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------- Weighted-Average
Exercise Remaining
Price Number Outstanding Contractual Life Vested Options
-------- ------------------ ---------------- --------------
(In years)
<S> <C> <C> <C>
$ 0.20 336,825 7.6 177,374
$ 0.30 345,000 8.7 58,750
$ 0.50 73,750 9.1 22,750
$ 0.63 18,500 9.4 --
$ 0.75 398,162 9.7 8,229
$ 7.50 683,125 9.9 17,500
$10.80 2,500 9.9 2,500
$11.00 127,250 9.9 --
$16.00 91,250 10.0 --
--------- -------
2,076,362 287,103
========= =======
</TABLE>
The weighted-average fair value of options granted in fiscal 1997, 1998 and
1999 was $1.80, $2.13, and $10.02 respectively. At December 31, 1997, 1998 and
1999, 75,000, 1,064,250, and 2,692,718 shares of common stock issued upon the
exercise of options were subject to repurchase at a weighted-average price of
$0.20, $0.23, and $0.61, respectively.
F-16
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma net loss information is required to be disclosed by SFAS 123 and
has been determined as if the Company has accounted for its employee stock
options under the fair market value method of that statement. The fair value
for these options was estimated at the date of grant using the minimum value
method with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Expected dividend yield............... 0% 0% 0%
Risk-free interest rate range......... 5.9% to 6.6% 4.4% to 5.6% 5.1% to 6.2%
Expected life......................... 5 years 5 years 5 years
</TABLE>
For periods following the Company's initial public offering, the Black
Scholes method will be used to calculate the fair value of options granted.
This method includes the above assumptions as well as the estimated volatility
of the Company's common stock.
The full effect of SFAS 123 will not be fully reflected until fiscal 2002.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma net loss information is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders--
as reported.................................. $(4,033) $(8,826) $(13,518)
======= ======= ========
Net loss attributable to common stockholders--
pro forma.................................... $(4,054) $(8,871) $(13,669)
======= ======= ========
Basic and diluted net loss per share--as
reported..................................... $ (0.82) $ (1.31) $ (1.53)
======= ======= ========
Basic and diluted net loss per share--pro
forma........................................ $ (0.82) $ (1.31) $ (1.54)
======= ======= ========
</TABLE>
In March through December 1998, the Company granted 173,000 common stock
options, of which 86,500 were fully vested, to consultants for services
rendered. In addition, in September 1998, 75,000 shares of common stock were
issued to consultants for services at a deemed fair value of $2.25 per share.
Expense of $364,000 was recognized in 1998 related to these transactions.
During the year ended December 31, 1999, the Company issued 15,000 shares of
common stock for services rendered at a deemed fair market value of $4.00 per
share. Also during the year ended December 31, 1999, the Company granted 87,000
common stock options to consultants for services rendered. Expense of $928,000
was recognized in 1999 related to these transactions. Options granted to
consultants are periodically re-valued as they vest in accordance with SFAS 123
and EITF 96-18 using a Black-Scholes model and the following weighted-average
assumptions for 1999: estimated volatility of 0.7, risk-free interest rates of
4.4% to 6.2%, no dividend yield, and an expected life of the option equal to
the full term, generally ten years from the date of grant.
During the years ended December 31, 1997, 1998 and 1999, in connection with
the grant of certain share options to employees, the Company recorded deferred
stock compensation of $2.6 million, $2.4 million and $19.5 million,
respectively, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for financial reporting
purposes on the date such stock options were granted. Deferred compensation is
included as a reduction of stockholders' equity and is being amortized to
expense on a graded vesting method. During the years ended December 31, 1997,
1998 and 1999, the Company recorded amortization of deferred stock compensation
expense of approximately $863,000, $1.6 million and $4.9 million, respectively.
F-17
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1999 Employee Stock Purchase Plan
In September 1999, the Company's board of directors adopted the 1999
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 400,000 shares
of the Company's common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase common
stock at a discount, but only through payroll deductions, during defined
offering periods. The price at which stock is purchased under the Purchase Plan
is equal to 85% of the fair market value of the common stock on the first or
last day of the offering period, whichever is lower. The initial offering
period commenced on December 16, 1999. In addition, the Purchase Plan provides
for annual increases in the number of shares available for issuance under the
purchase plan on the first day of each year, beginning January 1, 2001, equal
to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of
the annual increase or such amount as may be determined by the board. No shares
have been issued to date under the Puchase Plan.
Nonemployee Directors Stock Option Plan
In September 1999, the Company adopted the 1999 Nonemployee Directors Stock
Option Plan and reserved a total of 300,000 shares of common stock for issuance
thereunder. Each nonemployee director who becomes a director of the Company
will be automatically granted a nonstatutory stock option to purchase 20,000
shares of common stock on the date on which such person first becomes a
director. At each board meeting immediately following each annual stockholders
meeting beginning with the first board meeting after the 1999 Annual
Stockholders Meeting, each nonemployee director will automatically be granted a
nonstatutory option to purchase 5,000 shares of common stock. The exercise
price of options under the director plan will be equal to the fair market value
of the common stock on the date of grant. The maximum term of the options
granted under the director plan is ten years. Each initial grant under the
director plan will vest as to 25% of the shares subject to the option one year
after the date of grant and at a rate of 25% of the shares at the end of each
year. Each subsequent grant will vest in full one year after the date of grant.
The director plan will terminate in September 2009, unless terminated earlier
in accordance with the provisions of the director plan.
Common Stock
The founders' shares issued in March 1997 are also subject to repurchase.
The repurchase right for these shares lapses at a rate of 25% on an annual
basis in four years. The holders of unvested shares have voting and other
rights identical to other common stockholders. At December 31, 1997, 1998 and
1999, 1,575,000, 1,050,000, and 525,000 shares, respectively, of common stock
at a weighted-average price of $0.20 per share were subject to repurchase.
At December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
1999 Stock Purchase Plan........................................... 400,000
1999 Nonemployee Directors Stock Option Plan....................... 300,000
1997 Stock Option Plan............................................. 3,263,850
---------
3,963,850
=========
</TABLE>
F-18
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $10.4 million and $7.3 million, respectively.
The Company also had federal and California research and development tax credit
carryforwards of approximately $400,000 and $300,000, respectively. The net
operating loss and credit carryforwards will expire at various dates beginning
in the year 2011 through 2019, if not utilized. The state of California net
operating losses will begin to expire in the year 2006.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets for federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 1,800 $ 4,000
Research credits........................................... 400 700
Capitalized research and development....................... 100 300
Deferred revenue........................................... 900 1,000
Other...................................................... 200 100
------- -------
Total deferred tax assets.................................. 3,400 6,100
Valuation allowance........................................ (3,400) (6,100)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $1.2 million and $2.2 million during the years ended December 31,
1997 and 1998, respectively.
10. Subsequent Event (unaudited)
Technological Resources PTY Limited
In January 2000, the Company entered into a three year collaborative
research and development agreement with Technological Resources PTY Limited, a
wholly owned subsidiary of Rio Tinto Limited ("TRPL"), to develop novel
enzymatic systems to increase the efficiency of carbon dioxide fixation in
connection with the combustion of fossil fuels and for other purposes more
generally for use in chemical bioprocessing and other applications. Pursuant to
the agreement, TRPL agreed to provide nonrefundable research and development
funding and technology advancement payments of up to $2.7 million, as well as
revenue sharing on certain commercialized products and processes.
F-19
<PAGE>
UNDERWRITING
Maxygen and the underwriters for the offering named below have entered into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co....................................... 750,000
FleetBoston Robertson Stephens Inc........................ 345,000
Credit Suisse First Boston Corporation.................... 255,000
Invemed Associates LLC.................................... 150,000
---------
Total................................................... 1,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 225,000
shares from Maxygen to cover such sales. They may exercise that option for 30
days. If any shares are purchased under this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Maxygen. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase 225,000 additional shares.
<TABLE>
<CAPTION>
Paid by Maxygen
---------------
No Full
Exercise Exercise
---------- ----------
<S> <C> <C>
Per Share............................................ $ 5.09 $ 5.09
Total................................................ $7,635,000 $8,780,250
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $3.05 per share from the initial price to public. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $0.10 per share from the
initial price to public. If all the shares are not sold at the initial price to
public, the underwriters may change the offering price and the other selling
terms.
Maxygen has agreed with the underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This restriction does not apply
to any existing employee benefit plans or securities issued in connection with
acquisition transactions, provided that the recipients of such securities agree
not to dispose of or hedge any of such securities for the same 90 day period.
See "Shares Eligible for Future Sale" for a discussion of transfer
restrictions.
Certain persons associated with Invemed Associates LLC, one of the
underwriters, hold an aggregate of 114,497 shares of common stock, of which
73,590 shares were purchased in August 1998 for $3.00 per share and 40,907
shares were purchased in June 1999 for $5.50 per share. These associated
persons also hold a pecuniary interest in a small portion of the shares of
common stock held by Technogen Associates, L.P. by virtue of limited
partnership interests held by such associated persons in Technogen Associates.
In addition, Invemed Fund L.P., a fund for which Invemed Associates is the sole
general partner, purchased 363,636 shares of common stock in June 1999 for
$5.50 per share. By virtue of Invemed Associates' partnership interest in
Invemed Fund, together with its entitlement to a percentage
U-1
<PAGE>
return on investments made by Invemed Fund once the investment has generated a
return of 20 percent, Invemed Associates received 200,477 shares of common
stock on December 29, 1999, the date Invemed Fund declared a distribution of
the common stock held by Invemed Fund. In addition, three entities affiliated
with Credit Suisse First Boston Corporation, one of the underwriters, are the
limited partners of the Invemed Fund. At the time of the December 29, 1999
distribution of the common stock from the Invemed Fund, these entities received
an aggregate of 163,159 shares of common stock.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or affect the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on The Nasdaq National Market, in
the over-the-counter market or otherwise.
Maxygen will pay the expenses of the offering, excluding underwriting
discounts and commissions. The expenses of the offering are estimated to be
approximately $500,000.
Maxygen has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 18
Use of Proceeds.......................................................... 18
Price Range of Common Stock.............................................. 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 28
Management............................................................... 45
Related Party Transactions............................................... 56
Principal Stockholders................................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 63
Legal Matters............................................................ 64
Experts.................................................................. 64
Where You Can Find Additional Information................................ 65
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,500,000 Shares
Maxygen, Inc.
Common Stock
---------------
[MAXYGEN LOGO]
---------------
Goldman, Sachs & Co.
Robertson Stephens
Credit Suisse First Boston
Invemed Associates
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
