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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0449487
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
515 Galveston Drive, Redwood City, California 94063
(Address of principal executive offices)
(650) 298-5300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [_]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 22, 2000 was approximately $1.9 billion, based on the
closing sale price for the registrant's common stock on the Nasdaq National
Market on that date. For purposes of determining this number, all executive
officers and directors of the registrant are considered to be affiliates of
the registrant, as well as individual stockholders holding more than 10% of
the registrant's outstanding common stock. This number is provided only for
the purpose of this report on Form 10-K and does not represent an admission by
either the registrant or any such person as to the status of such person.
As of March 22, 2000, there were 32,269,644 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the registrant's definitive proxy statement for its
2000 annual meeting of stockholders are incorporated by reference into Part
III hereof.
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Forward Looking Statements
This report 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. Risks and uncertainties and the occurrence of
other events could cause actual results to differ materially from these
predictions. The risk factors set forth below at pages 20 to 29 should be
considered carefully in evaluating Maxygen and its business.
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 report or to conform these statements to
actual results.
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 report are the property of their respective
owners.
PART I
Item 1 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 bioprocessing. 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
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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, which not
only form the fabric of cells but also direct them to perform biological
functions that 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.
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 that 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
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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 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 that 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.
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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.
We believe that our MolecularBreeding technologies provide distinctive
advantages over traditional biotechnology, as summarized in the following
table.
Advantages of Maxygen's MolecularBreeding Technologies
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Modern Maxygen's MolecularBreeding
Characteristic Biotechnology Technologies
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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>
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.
[DIAGRAM OF MOLECULAR BREEDING 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 that 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
that 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 that 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 that 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 that, 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.
For example, we have demonstrated our ability to improve genes that increase
the anti-viral activity of a protein and develop new enzymes that have the
potential to streamline chemical and pharmaceutical manufacturing processes.
In addition, we have improved the performance of subtilisin, one of the most
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commercially valuable laundry detergent enzymes. Subtilisin is one of the most
highly studied enzymes and 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
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<C> <S> <C> <C>
b-lactamase.......... Increased antibiotic 32,000-fold Nature (1994)
resistance/enzyme
activity
Antibody............. Increased expression 100-fold Nature Medicine
level (1996)
Antibody............. Increased >440-fold Nature Medicine
antibody/receptor (1996)
binding
Green fluorescent 45-fold Nature Biotechnology
protein............. Increased fluorescence (1996)
b-galactosidase to
fucosidase.......... Increase in activity 66-fold activity Proceedings of the
National Academy of
Sciences (1997)
Increase in specificity 1,000-fold specificity
Arsenate pathway
(3 genes)........... Increased bacterial 40-fold Nature Biotechnology
resistance to arsenate (1997)
Cephalosporinase Increased antibiotic 0-540-fold Nature (1998)
family.............. resistance
Subtilisin protease.. Simultaneous improvement 2 to 4 fold in 3 properties Nature Biotechnology
in 3 properties (1999)
Human b-interferon
family.............. Increased activity as 285,000-fold Nature Biotechnology
measured by antiviral (1999)
activity on mouse cells
HSV thymidine kinase
family.............. Increased sensitivity to 32-fold Nature Biotechnology
prodrug (AZT) (1999)
</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.
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.
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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 that
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 that 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.
. 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.
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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.
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.
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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.
. 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
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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.
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 Herceptinand Novartis' Simulect, 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
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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 that would otherwise be
released into the environment, and potentially use the carbon dioxide to
produce value-added products, such as fertilizers, polymers and plastics and
cleaner burning fuels.
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 that
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.
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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.
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
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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
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.
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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.
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.
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Directors and Executive Officers
Our directors and executive officers, and their ages, as of March 22, 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
organization of
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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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this report, in considering our business
and prospects. 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.
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.
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 that 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
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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 $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 our day-to-day operations.
Since Our Technologies Can Be Applied to Many Different Industries, If We
Focus Our Efforts on Industries That 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
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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.
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.
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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 fragments that 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 that 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
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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.
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 our current cash and
investments, and interest earned thereon, together with 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.
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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 that
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.
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.
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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 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 That 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 that 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.
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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.
Our Stock Price Has Been, and May Continue to Be, Extremely Volatile.
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.
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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.
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 that 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, 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 were approximately 32,269,644 shares of common stock outstanding as of
March 22, 2000. Of these shares, 7,081,834 shares are 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 are 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 that expire on June 18, 2000 and
99,800 shares are subject to lock-up agreements that expire on June 12, 2000.
The remaining 23,852,394 shares of common stock outstanding are "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.
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Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make
Decisions that Are in the Best Interests of All Stockholders.
Our officers, directors and principal stockholders (greater than 5%
stockholders) together control approximately 46% of our outstanding common
stock, and Glaxo Wellcome International B.V. owns approximately 21% of our
outstanding common stock. As a result, these stockholders, if they act
together, and Glaxo Wellcome International B.V. by itself, are 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 that 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 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.
29
<PAGE>
Item 2 PROPERTIES
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.
Item 3 LEGAL PROCEEDINGS
We are not currently a party to any material pending legal proceedings.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to an action by written consent, our stockholders approved the
following in November 1999:
1. Adoption of our Amended and Restated Certificate of Incorporation.
2. Adoption of our Amended and Restated Bylaws.
3. Approval of certain amendments to our 1997 Stock Option Plan.
4. Adoption of our 1999 Employee Stock Purchase Plan.
5. Adoption of our 1999 Nonemployee Directors Stock Option Plan.
Each of the foregoing was approved by the stockholders as follows:
<TABLE>
<CAPTION>
Shares Shares
Class or Series Approving Outstanding
--------------- ---------- -----------
<S> <C> <C>
Common Stock.......................................... 10,739,466 12,012,825
Series A Preferred Stock.............................. 1,507,500 2,790,000
Series B Preferred Stock.............................. 3,098,670 3,666,667
Series C Preferred Stock.............................. 1,000,000 1,000,000
Series D Preferred Stock.............................. 3,056,642 3,636,364
Series E Preferred Stock.............................. 800,000 800,000
</TABLE>
30
<PAGE>
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) 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 22,
2000, the high and low sale prices for our 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 22, 2000).................. 186.00 52.00
</TABLE>
On March 22, 2000 the last reported sale price of our common stock on the
Nasdaq National Market was $101.00 per share. On March 20, 2000, there were
approximately 313 holders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, for development of our
business and, therefore, do not anticipate that we will declare or pay cash
dividends on our capital stock in the foreseeable future.
We made the following unregistered sales of our securities during the year
ended December 31, 1999:
1. In March 1999, we issued 15,000 shares of common stock to Cahan &
Associates in consideration for consulting services. In April 1999, we
issued 50,000 shares of common stock to the University of Washington in
exchange for the license of intellectual property. In June 1999, we issued
125,000 shares of common stock to the California Institute of Technology in
exchange for the license of intellectual property. In December 1999, we
issued 1,600 shares of common stock to one of our consultants for aggregate
consideration of $10,000.
2. In June 1999, we sold 3,636,364 shares of Series D preferred stock to
62 investors for aggregate consideration of $19,963,000.
3. In August 1999, we sold 800,000 shares of Series E preferred stock to
AstraZeneca Holdings, B.V. for aggregate consideration of $5,000,000.
4. From January 1, 1999 until December 22, 1999, we granted options to
purchase an aggregate of 2,986,830 shares of common stock with exercise
prices ranging from $0.30 to $16.00 per share. From January 1, 1999 until
December 22, 1999, options to purchase 2,640,650 shares of common stock
were exercised for aggregate consideration of approximately $1.6 million.
There were no underwriters employed in connection with any of the
transactions set forth in Item 5.
The issuances of securities described in Items 5(a)(1), 5(a)(2) and 5(a)(3)
were deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and Regulation D promulgated
thereunder as transactions by an issuer not involving a public offering. With
respect to the grant of stock options described in Item 5(a)(4), an exemption
from registration was unnecessary in that none of the transactions involved a
"sale" of securities as this term is used in Section 2(3) of the Securities
Act. The sale and issuance of securities and the exercise of options described
in Item 5(a)(4) were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation, as provided in Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and other instruments issued in
such transactions. All recipients either received adequate information about
us or had access, through employment or other relationships, to such
information.
(b) The effective date of our first registration statement, filed on Form S-
1 under the Securities Act of 1933 (No. 333-89413) relating to our initial
public offering of common stock, was December 15, 1999. A total of 6,900,000
shares of our common stock were sold at a price of $16.00 per share to an
underwriting syndicate led by Goldman, Sachs & Co., FleetBoston Robertson
Stephens Inc. and Invemed Associates LLC. Of these 6,900,000 shares, 900,000
were issued upon exercise of the underwriters' over-allotment option. The
offering commenced on December 16, 1999 and closed on December 21, 1999. The
initial public offering resulted in gross proceeds of $110.4 million, $7.7
million of which was applied toward the underwriting discount. Expenses
related to the offering totaled approximately $1.7 million. Net proceeds to us
were approximately $101.0 million. From the time of receipt through December
31, 1999, the proceeds were applied toward temporary investments in depository
accounts, master notes and liquidity optimized general investment contracts
and are included within cash and cash equivalents.
31
<PAGE>
Item 6 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 report.
The balance sheet data as of December 31, 1997 was derived from our financial
statements audited by Ernst & Young LLP not included herein. When you read
this selected financial data, it is important that you also read the
historical financial statements and related notes included in this report, as
well as the section of this report 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 7,828 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.............................. 161 299 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...................... 11,762 18,249
<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 ...... -- -- 1,644
Accumulated deficit ............................. (4,033) (12,859) (24,177)
Total stockholders' equity ...................... 2,571 11,700 133,716
</TABLE>
32
<PAGE>
Item 7 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 report.
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 that 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.
33
<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.
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
34
<PAGE>
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.
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
35
<PAGE>
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.
We believe that our current cash and investments 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
36
<PAGE>
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.
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.
Item 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
Item 8 FINANCIAL STATEMENTS
37
<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
38
<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.
39
<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.
40
<PAGE>
MAXYGEN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Notes Total
------------------- ----------------- Paid-In Receivable from Deferred 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.
41
<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.
42
<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 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.
43
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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
44
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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
45
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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
46
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 referred 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).
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).
47
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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>
48
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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
49
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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,
50
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------
Weighted-
Average
Exercise
Shares Number of Price Per
Available Shares 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>
51
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The options outstanding and exercisable at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted-
Options Outstanding Average
------------------------------ Remaining
Exercise Number Contractual Vested
Price Outstanding Life 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.
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>
52
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 Purchase 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.
53
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
8. 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.
54
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
55
<PAGE>
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Proposal No. 1. Election of Directors, Board of Directors' Meetings and
Committees and Directors' Compensation; Severance Arrangements" and
disclosures pursuant to Item 405 of Regulation S-K contained in the proxy
statement for the 2000 annual meeting of stockholders are incorporated by
reference. Information required by Item 10 concerning executive officers of
the Company is set forth in Part I of this report.
Item 11 EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation" contained in the proxy statement
for the 2000 annual meeting of stockholders.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the proxy statement for the 2000 annual meeting of
stockholders.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section captioned "Related Party Transactions" contained in the proxy
statement for the 2000 annual meeting of stockholders.
56
<PAGE>
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The following documents are being filed as part of this report on Form 10-K:
(a) Financial Statements.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................... 38
Balance Sheets.......................................................... 39
Statements of Operations................................................ 40
Statement of Stockholders' Equity....................................... 41
Statements of Cash Flows................................................ 42
Notes to Financial Statements........................................... 43
</TABLE>
Other information is omitted because it is either presented elsewhere, is
inapplicable or is immaterial as defined in the instructions.
(b) No reports on Form 8-K were filed during the year ended December 31,
1999.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (Exhibit 3.8)(1)
3.2 Amended and Restated Bylaws (Exhibit 3.9)(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Registration Rights Agreement among Maxygen, Affymax Technologies
N.V., Alejandro Zaffaroni and Glaxo Wellcome plc dated March 14,
1997(1)
4.3 Amendment to Registration Rights Agreement and Consent dated as of
July 31, 1998, among Maxygen and certain holders of Series A
preferred stock(1)
4.4 Second Amendment to Registration Rights Agreement and Consent dated as
of December 23, 1998, among Maxygen and certain holders of Series A
preferred stock and Series B preferred stock(1)
4.5 Third Amendment to Registration Rights Agreement and Consent dated as
of June 15, 1999 among Maxygen, and certain holders of Series A
preferred stock, Series B preferred stock, Series C preferred stock
and Series D preferred stock(1)
4.6 Series E Preferred Stock Purchase Agreement among Maxygen, AstraZeneca
Holdings, B.V. and Zeneca Limited dated as of June 18, 1999(1)
4.7 Fourth Amendment to Registration Rights Agreement and Consent dated as
of August 6, 1999, among Maxygen, certain holders of Series A
preferred stock, Series B preferred stock, Series C preferred stock,
Series D preferred stock and Series E preferred stock(1)
*10.1 1997 Stock Option Plan, as amended(1)
*10.2 Form of Promissory Note dated March 14, 1997, executed by each of
Russell J. Howard, Isaac Stein and Willem P.C. Stemmer in favor of
Maxygen(1)
10.3+ Technology Transfer Agreement among Maxygen, Affymax Technologies N.V.
and Glaxo Wellcome plc dated March 14, 1997, as amended, effective
March 1, 1998(1)
10.4 Lease between Metropolitan Life Insurance Company and Maxygen dated
October 21, 1998(1)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.5 First Amendment to Lease dated as of February 26, 1999, by and between
Metropolitan Life Insurance Company and Maxygen(1)
*10.6 Promissory Note dated April 22, 1999, executed by Joseph Affholter and
Roxanne Affholter in favor of Maxygen(1)
*10.7 Form of Officer and Director Indemnification Agreement(1)
*10.8 1999 Nonemployee Directors Stock Option Plan(1)
*10.9 1999 Employee Stock Purchase Plan(1)
*10.10 Form of Promissory Note issued in connection with exercise of stock
options(1)
10.11+ License and Collaboration Agreement between Maxygen and Novo Nordisk
A/S effective as of September 17, 1997, as amended June 29, 1998,
July 29, 1998, and April 19, 1999(1)
10.12+ Collaborative Research and License Agreement entered into as of
December 23, 1998, by and between Pioneer Hi-Bred International, Inc.
and Maxygen(1)
10.13+ Agreement between Maxygen and Gist-Brocades B.V. entered into March
15, 1999(1)
10.14+ Collaboration Agreement effective as of June 18, 1999, by and between
Zeneca Limited and Maxygen(1)
10.15+ Collaborative Research and Development Agreement made as of January
19, 2000, between Technological Resources Pty Limited and Maxygen(2)
*10.16 Letter agreement dated January 28, 2000, between Maxygen and Joseph A.
Affholter(2)
*10.17 Exclusive Consulting Agreement dated January 28, 2000, between Maxygen
and Joseph A. Affholter(2)
*10.18 Promissory Note dated January 28, 2000, executed by Joseph A.
Affholter and Roxanne B. Affholter in favor of Maxygen(2)
*10.19 Pledge Agreement dated January 28, 2000, among Joseph A. Affholter,
Roxanne B. Affholter and Maxygen(2)
10.20+ Cooperative Research and Development Agreement between the National
Cancer Institute, National Institutes of Health dated February 24,
2000(2)
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 59)
27.1 Financial Data Schedule(2)
</TABLE>
- --------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment has been granted with respect to portions of the
exhibit. A complete copy of the agreement, including the redacted terms,
has been separately filed with the Securities and Exchange Commission.
(1) Incorporated by reference to the corresponding or indicated exhibit to
Maxygen's Registration Statement on Form S-1, as amended (File No. 333-
89413), initially filed with the Securities and Exchange Commission on
October 20, 2000.
(2) Incorporated by reference to the corresponding or indicated exhibit to
Maxygen's Registration Statement on Form S-1, as amended (File No. 333-
31580), initially filed with the Securities and Exchange Commission on
March 3, 2000.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MAXYGEN, INC.
March 28, 2000 /s/ Russell J. Howard
_____________________________________
Russell J. Howard
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Rabson and Simba Gill or either of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and re-substitution, for him or her and in his or her name,
place and stead, in any and all capacities to sign any and all amendments to
this Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto the attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that the attorneys-in-fact and agents, or either
of them, or their, his or her substitutes or substitute, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Russell J. Howard, Ph.D. President, Chief March 28, 2000
______________________________________ Executive Officer and
Russell J. Howard, Ph.D. Director (Principal
Executive Officer)
/s/ Simba Gill, Ph.D. Senior Vice President of March 28, 2000
______________________________________ Business Development
Simba Gill, Ph.D. and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ Isaac Stein Chairman of the Board March 28, 2000
______________________________________
Isaac Stein
/s/ Robert J. Glaser, M.D. Director March 28, 2000
______________________________________
Robert J. Glaser, M.D.
/s/ M.R.C. Greenwood, Ph.D. Director March 28, 2000
______________________________________
M.R.C. Greenwood, Ph.D.
/s/ Adrian Hennah Director March 28, 2000
______________________________________
Adrian Hennah
/s/ Gordon Ringold, Ph.D. Director March 28, 2000
______________________________________
Gordon Ringold, Ph.D.
/s/ George Poste, Ph.D. Director March 28, 2000
______________________________________
George Poste, Ph.D.
</TABLE>
59
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (File No. 333-93423) pertaining to the 1997 Stock Option Plan, the
1999 Employee Stock Purchase Plan, and the 1999 Nonemployee Directors Stock
Option Plan of Maxygen, Inc., of our report dated February 18, 2000, with
respect to the financial statements of Maxygen, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 23, 2000
