<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
___________________
Form 10-Q
QUARTERLY report pursuant to section 13 or 15(D) of
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0449487
(State of incorporation) (I.R.S. Employer Identification No.)
515 Galveston Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 298-5300
(Registrant's telephone number, including area code)
___________________
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 ____
-----
As of November 1, 2000, there were 33,564,476 shares of the registrant's common
stock outstanding.
<PAGE>
MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Part I FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements and Notes:
<TABLE>
<CAPTION>
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1999
and September 30, 2000.............................................. 3
Condensed Consolidated Statements of Operations for the three
and nine month periods ended September 30, 1999 and 2000............ 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1999 and 2000..................... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk.......... 24
Part II OTHER INFORMATION
Item 1: Legal Proceedings................................................... 25
Item 2: Changes in Securities and Use of Proceeds........................... 25
Item 3: Defaults Upon Senior Securities..................................... 26
Item 4: Submission of Matters to a Vote of Security Holders................. 26
Item 5: Other Information................................................... 26
Item 6: Exhibits and Reports on Form 8-K.................................... 26
SIGNATURES................................................................... 27
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1
FINANCIAL STATEMENTS
MAXYGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
<S> <C> <C>
1999 2000
-------- --------
ASSETS (Note 1) (unaudited)
Current assets:
Cash and cash equivalents................................................... $136,343 $183,131
Short-term investments...................................................... -- 59,585
Grant and other receivables................................................. 3,038 8,230
Prepaid expenses and other current assets................................... 800 1,096
-------- --------
Total current assets....................................................... 140,181 252,042
Property and equipment, net................................................. 4,764 7,644
Goodwill and other intangible assets, net................................... -- 37,479
Long-term investments....................................................... -- 22,953
Deposits and other assets................................................... 633 897
-------- --------
Total assets............................................................... $145,578 $321,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 370 $ 1,455
Accrued compensation........................................................ 393 2,945
Other accrued liabilities................................................... 1,803 3,670
Deferred revenue............................................................ 4,935 5,593
Current portion of equipment financing obligations.......................... 170 485
-------- --------
Total current liabilities.................................................... 7,671 14,148
Deferred revenue............................................................. 2,527 3,085
Non-current portion of equipment financing obligations....................... 1,664 1,439
Commitments
Stockholders' equity:
Convertible preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at December 31, 1999 and
September 30, 2000, respectively........................................... -- --
Common stock, $0.0001 par value: 70,000,000 shares and 100,000,000 shares 3 3
authorized at December 31, 1999 and September 30, 2000, respectively,
30,860,781, and 33,565,528 shares issued and outstanding at December 31,
1999 and September 30, 2000, respectively..................................
Additional paid-in capital.................................................. 176,517 385,757
Notes receivable from stockholders.......................................... (1,411) (807)
Deferred stock compensation................................................. (17,216) (11,629)
Accumulated other comprehensive loss........................................ -- (73)
Accumulated deficit......................................................... (24,177) (70,908)
-------- --------
Total stockholders' equity................................................. 133,716 302,343
-------- --------
Total liabilities and stockholders' equity................................. $145,578 $321,015
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine months ended
September 30, September 30,
--------------------------- -------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Collaborative research and development revenue...... $ 2,696 $ 3,178 $ 6,068 $ 9,419
Grant revenue....................................... 1,075 2,784 3,625 8,112
--------- --------- --------- ---------
Total revenues...................................... 3,771 5,962 9,693 17,531
Operating expenses:
Research and development (Including charges for
stock compensation of $1,053 and $1,652 in the
three months ended September 30, 1999 and 2000,
respectively, and $1,564 and $7,080 in the nine
months ended September 30, 1999 and 2000,
respectively)..................................... 5,360 13,234 12,897 32,736
General and administrative (Including charges for
stock compensation of $637 and $1,115 in the
three months ended September 30, 1999 and 2000,
respectively, and $1,218 and $3,790 in the nine
months ended September 30, 1999 and 2000,
respectively)..................................... 1,883 3,996 4,333 11,526
Acquired in-process research and development...... -- 28,047 -- 28,959
Amortization of intangible assets................. -- 1,847 -- 1,847
--------- --------- --------- ---------
Total operating expenses............................ 7,243 47,124 17,230 75,068
--------- --------- --------- ---------
Loss from operations................................ (3,472) (41,162) (7,537) (57,537)
Interest income (expense), net...................... 421 4,415 783 10,806
--------- --------- --------- ---------
Net loss............................................ (3,051) (36,747) (6,754) (46,731)
Deemed dividend upon issuance of convertible
preferred stock.................................... (2,200) -- (2,200) --
--------- --------- --------- ---------
Net loss attributable to common stockholders........ $(5,251) $(36,747) $(8,954) $(46,731)
--------- --------- --------- ---------
Basic and diluted net loss per share................ $(0.63) $(1.18) $(1.15) $(1.57)
Shares used in computing basic and diluted net loss
per share.......................................... 8,309 31,165 7,778 29,805
</TABLE>
See accompanying notes.
4
<PAGE>
MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1999 2000
-------- --------
<S> <C> <C>
Operating activities
Net loss..................................................................... $(6,754) $(46,731)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 442 1,020
Amortization of intangible assets.......................................... -- 1,848
Deferred stock compensation amortization - employees....................... 2,578 8,107
Common stock issued and stock options granted to
consultants for services rendered........................................ 1,039 2,763
Common stock issued for technology......................................... -- 958
Acquired in-process research and development............................... -- 28,959
Changes in operating assets and liabilities:
Grant and other receivables.............................................. (1,108) (4,942)
Prepaid expenses and other current assets................................ (153) (296)
Deposits and other assets................................................ (217) (264)
Accounts payable......................................................... 36 (4,402)
Accrued compensation..................................................... 151 2,552
Other accrued liabilities................................................ 679 1,867
Deferred revenue......................................................... 1,970 1,216
Related party payables................................................... (92) --
Other.................................................................... -- (90)
-------- --------
Net cash used in operating activities........................................ (1,429) (7,435)
Investing activities
Cash acquired in acquisition................................................. -- 349
Purchases of available-for-sale securities................................... -- (92,521)
Maturities of available-for-sale securities.................................. 10,000
Acquisition of property and equipment........................................ (4,008) (2,503)
-------- --------
Net cash used in investing activities........................................ (4,008) (84,675)
Financing activities
Borrowings under equipment financing obligation.............................. 1,225 166
Repayments under equipment financing obligation.............................. -- (76)
Proceeds from issuance of common stock - net of issuance costs............... 63 138,204
Proceeds from issuance of convertible preferred stock - net of
issuance cost.............................................................. 24,963 --
Payments received on promissory notes........................................ -- 604
-------- --------
Net cash provided by financing activities.................................... 26,251 138,898
-------- --------
Net increase in cash and cash equivalents.................................... 20,814 46,788
Cash and cash equivalents at beginning of period............................. 15,306 136,343
-------- --------
Cash and cash equivalents at end of period................................... $36,120 $183,131
======== ========
Schedule of non-cash financing transactions
Tangible and intangible assets acquired in acquisition transaction
for shares of common stock, net of cash acquired and liabilities assumed... $ -- $ 37,399
Shares issued for technology................................................. $ -- $ 958
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
MAXYGEN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The information as of September 30, 2000 and for the
three months and nine months ended September 30, 1999 and September 30, 2000,
respectively, includes all adjustments (consisting only of normal recurring
adjustments) that the management of Maxygen, Inc. ("Maxygen" or the "Company")
believes necessary for fair presentation of the results for the periods
presented.
Results for any interim period are not necessarily indicative of results for any
future interim period or for the entire year. The accompanying condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Report on Form
10-K for the year ended December 31, 1999, and the separate financial statements
of ProFound Pharma A/S included in the Company's Current Report on Form 8-K/A
filed October 24, 2000.
On August 10, 2000 the Company completed its acquisition of ProFound Pharma A/S
("ProFound," now known as Maxygen ApS). The acquisition was accounted for as a
purchase. See Note 6 of Notes to Condensed Consolidated Financial Statements.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
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 has also been awarded Defense Advanced Research Projects Agency
grants and National Institute of Standards and Technology-Advanced Technology
Program grants 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.
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. In accordance with
6
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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.
The following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1999 2000 1999 2000
------- ------ ------ -------
<S> <C> <C> <C> <C>
Net Loss.............................................. $(5,251) $(36,747) $(8,954) $(46,731)
------- -------- ------- --------
Basic and diluted:
Weighted-average shares of common stock outstanding.. 9,673 33,002 9,408 32,098
Less: weighted-average shares subject to repurchase.. (1,364) (1,837) (1,630) (2,293)
------- -------- ------- --------
Weighted-average shares used in computing basic
and diluted net loss per share.................... 8,309 31,165 7,778 29,805
------- -------- ------- --------
Basic and diluted net loss per share................ $ (0.63) $ (1.18) $ (1.15) $ (1.57)
------- -------- ------- --------
</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 5,715,000 at September 30, 2000. Such securities, had they
been dilutive, would have been included in the computations of diluted net loss
per share along with restricted common stock subject to the Company's right of
repurchase.
Comprehensive loss
Comprehensive loss is primarily comprised of net unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments.
There is no material difference between the reported net loss and the
comprehensive net loss for all the periods presented.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through net income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for the Company's fiscal year
beginning January 1, 2001. The Company does not currently hold any derivatives
and does not expect this pronouncement to materially impact results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") that
must be adopted in the quarter ended December 31, 2000. SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue in financial statements and specifically addresses revenue
recognition for non-refundable technology access fees. The Company believes
that its current revenue recognition principles comply with SAB 101 and thus the
adoption is not expected to have any effect on results of operations.
2. Investments
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company's debt securities are classified as available-for-sale and are
carried at estimated fair value in cash equivalents and short-term investments.
Unrealized gains and losses are reported as accumulated other comprehensive
income (loss) in stockholders' equity. The amortized cost
7
<PAGE>
of debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses on available-for-sale securities are included
in interest income and expense. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income. The Company's cash
equivalents and investments as of September 30, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Money market funds.................................. $ 75,413 $ -- $ -- $ 75,413
Commercial paper.................................... 125,579 16 -- 125,595
Corporate bonds..................................... 64,660 145 (144) 64,661
------------ ---------------- ------------ ----------
Total.............................................. 265,652 161 (144) 265,669
Less amounts classified as cash equivalents......... (183,131) -- -- (183,131)
------------ ---------------- ------------ ----------
Total investments................................... $ 82,521 $161 $(144) $ 82,538
============ ================ ============ ==========
</TABLE>
Realized gains or losses on the sale of available-for-sale securities for the
three and nine month periods ended September 30, 1999 and September 30, 2000
were insignificant.
At September 30, 2000, the contractual maturities of investments were as follows
(in thousands):
<TABLE>
<CAPTION>
Amortized Cost Estimated
Fair Value
---------------- -------------
<S> <C> <C>
Due within one year............................................................... $59,649 $59,585
Due after one year................................................................ 22,872 22,953
---------------- -------------
$82,521 $82,538
================ =============
</TABLE>
3. Collaborative Agreements
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, as well as revenue sharing on certain commercialized
products and processes.
Lundbeck A/S
In September 2000, Maxygen ApS, a wholly owned subsidiary of the Company,
entered into a 3 year collaborative research and development agreement with H.
Lundbeck A/S ("Lundbeck"), to develop a protein pharmaceutical product that
could be used for central nervous system diseases, including multiple sclerosis.
Lundbeck has licensed rights to this product for central nervous system
diseases. Maxygen has retained rights for neurological indications in key Asian
markets and global rights for all indications outside of central nervous system
diseases, including inflammatory disease and cancer. Under the terms of the
agreement, Maxygen will receive license fees and research and development
funding. Maxygen will also receive milestone payments and royalties on product
sales.
4. Stockholders Equity--Follow-on Offering
8
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On March 24, 2000, the Company completed a follow-on public offering of its
common stock. A total of 1,500,000 shares were sold by the Company at a price
of $97.00 per share. The offering resulted in net proceeds to the Company of
approximately $137.4 million.
5. Acquisition of Technology
On May 8, 2000, the Company acquired certain in-process technology through the
acquisition of a privately held California corporation. In connection with the
acquisition, the Company issued 39,600 shares of Company common stock. Pursuant
to the terms of the acquisition, 18,500 shares of Company common stock are being
held in escrow until such time contingencies regarding the patents related to
the acquired technology are resolved. Accordingly, the Company has recorded a
charge for acquired in-process research and development of $912,000 representing
the fair value of the 21,100 shares delivered to the sellers at closing, plus
certain transaction expenses. Shares in escrow will be valued and accounted for
when, and if, the contingencies are resolved and the shares are delivered to the
sellers. Had the acquisition occurred on January 1, 1999, pro forma revenue
would be unchanged from amounts reported in the consolidated financial
statements and the increase to pro forma net loss would be immaterial.
6. Acquisition of ProFound Pharma A/S
On August 10, 2000, the Company completed its acquisition of ProFound, a Danish
biotechnology company located in Copenhagen, Denmark. Prior to the acquisition,
ProFound was a privately-held, development-stage company that had minimal
revenues since its inception in April 1999. ProFound is focused on the
development of improved second-generation protein pharmaceutical products and
has developed broad preclinical development capabilities and proprietary
technologies and expertise that help to address traditional shortcomings of
protein pharmaceuticals such as half-life, stability and immunogenicity. The
Company acquired all of the equity securities of ProFound in exchange for
1,102,578 shares of its common stock and options to purchase an aggregate of
41,812 shares of its common stock. The transaction was accounted for as a
purchase; accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based upon their estimated fair values at the date of
acquisition as determined by an independent appraisal. The acquired in-process
research and development represents the estimated fair market value, using a
risk-adjusted income approach, of specifically identified technologies that had
not reached technological feasibility and had no alternative future uses. The
results of operations for ProFound are included in those of the Company
commencing from August 10, 2000, the date of acquisition. As of August 10,
2000, the purchase price, including liabilities assumed of $5.5 million and
estimated acquisition costs of $1.0 million, aggregated $70.4 million, of which
$3.0 million was allocated to tangible assets, $28.0 million to acquired in-
process research and development, $3.4 million to patents, $705,000 to assembled
workforce and $35.2 million to goodwill.
The following pro forma information reflects the results of operations for
the nine months ended September 30, 1999 and 2000 as if the acquisition of
ProFound had occurred as of the beginning of the periods presented, and after
giving effect to certain pro forma adjustments. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the
9
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acquisition actually taken place as of the beginning of such periods or what
operating results may occur in the future (in thousands, except per share data).
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
1999 2000
-------- --------
<S> <C> <C>
Total revenues...................................................... $ 9,693 $ 27,038
Total operating expenses............................................ (56,635) (63,788)
Net loss............................................................ (48,359) (25,882)
Basic and diluted net loss per share................................ (2.67) (0.84)
</TABLE>
7. Subsequent Event
Collaboration Agreement with Chevron Research and Technology Co.
In October 2000, the Company entered into a three-year collaborative research
and development agreement with Chevron Research and Technology Co. ("Chevron"),
to develop novel bioprocesses for specific petrochemical products. Pursuant to
the agreement, the Company will be responsible for performing certain research
and development and Chevron will have commercialization rights to the
technologies developed in exchange for license fees, technology access fees,
full research funding, milestones, annual fees and product royalties.
10
<PAGE>
Forward Looking Statements
This report contains forward-looking statements within the meaning of 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.
Risks and uncertainties and the occurrence of other events could cause actual
results to differ materially from these predictions. Factors that could cause
or contribute to such differences include those discussed below under "--Risk
Factors," as well as those discussed in our Annual Report on Form 10-K for the
year ended December 31, 1999.
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.
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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, Pfizer, AstraZeneca, DSM, Rio Tinto,
Lundbeck and Chevron. 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 proprietary technologies. These
investments contributed to revenue increases from $2.7 million in 1998 to $14.0
million in 1999 and $17.5 million in the nine months ended September 30, 2000.
Our total headcount increased from 74 employees at the end of 1998 to 143
employees at the end of 1999 and 236 employees as of September 30, 2000, of whom
78% were engaged in research and development. Research and development
consisted of work for collaborators, government grant agencies and work
advancing our technologies and internal projects.
We have incurred significant losses since our inception. As of September 30,
2000, our accumulated deficit was $70.9 million and total stockholders' equity
was $302.3 million. Operating expenses increased from $11.8 million in fiscal
1998, to $26.7 million in fiscal 1999 and to $75.1 million for the nine months
ended September 30, 2000. 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.
On August 10, 2000, we completed our acquisition of ProFound, a Danish
biotechnology company located in Copenhagen, Denmark. ProFound is focused on
the development of improved second-generation protein pharmaceutical products
and has developed broad preclinical development capabilities and proprietary
technologies and expertise that help to address traditional shortcomings of
protein pharmaceuticals such as half-life, stability and immunogenicity. The
transaction was accounted for as a purchase. We issued 1,102,578 shares of our
common stock and options to purchase an aggregate of 41,812 shares of our common
stock in connection with the acquisition of all the equity securities of
ProFound. As of August 10, 2000, the purchase price, including liabilities
assumed of $5.5 million and estimated acquisition costs of $1.0 million,
aggregated $70.4 million, of which $3.0 million was allocated to tangible
assets, $28.0 million to acquired in-process research and development, $3.4
million to patents, $705,000 to assembled workforce and $35.2 million to
goodwill.
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 generally provide
for
11
<PAGE>
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, these collaborators generally
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 September 30, 2000, we have
deferred revenues of approximately $8.7 million. Our sources of potential
revenue for the next several years are likely to be license, 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.
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 the applicable 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 ProFound acquisition in August 2000 stock options were
granted in exchange for outstanding warrants to purchase ProFound securities.
In connection with this exchange we recorded aggregate deferred compensation
totaling $1.5 million, which is being amortized over the remaining vesting
period of the options.
In connection with the grant of stock options to employees prior to our initial
public offering, we recorded deferred stock compensation of approximately $2.4
million in 1998 and $19.5 million in 1999. 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 recognized stock compensation expense of approximately $1.6
million in 1998, $4.9 million in 1999 and $8.1 million in the nine months ended
September 30, 2000. In connection with the grant of stock options to
consultants, we recorded stock compensation expense of $0.3 million in 1998,
$0.8 million in 1999 and $2.8 million in the nine months ended September 30,
2000.
Results of Operations
Revenues
Our total revenues increased from $3.8 million and $9.7 million in the three and
nine months ended September 30, 1999, to $6.0 million and $17.5 million in the
comparable periods of 2000. The increase was due primarily to the increased
activity related to our research collaborations with AstraZeneca, DuPont/Pioneer
Hi-Bred, DSM Anti-Infectives, Rio Tinto and Lundbeck, new government grants and
the expansion of existing government grants. We expect our revenue to increase
in 2001 as new projects are initiated under existing collaboration agreements
and as new collaboration arrangements are consummated.
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 from $5.4 million and $12.9 million in the three and nine months
ended September 30, 1999, to $13.2 million and $32.7 million in the comparable
periods of fiscal 2000. The increase was due primarily to increased staffing,
other personnel-related costs to support our additional collaborative and
internal research efforts and the acquisition of certain intellectual
property. Also included in research and development expenses is stock
compensation expense of $1.1 million and $1.6 million in the three and nine
months end September 30, 1999 and $1.7 million and $7.1 million in the
comparable periods of fiscal 2000. We expect research and development cost to
increase in 2001 as new projects are initiated under existing collaboration
agreements and as new collaboration arrangements are consummated.
Research and development expenses represented 142% and 133% of total revenues in
the three and nine months ended September 30, 1999 and 222% and 187% of total
revenues in the comparable periods of 2000. The increase as a percentage of
total revenues was due primarily to increased research and development activity
offset in part by the increase in our total revenue. 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.
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The acquisition of ProFound will significantly increase our research and
development expenses in absolute dollars. We expect that research and
development expense as a percentage of total revenue will increase as research
and development activities expand faster than general and administrative
activities.
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 from $1.9 million and $4.3 million in the
three and nine months ended September 30, 1999, to $4.0 million and $11.5
million in the comparable periods of 2000. Expenses increased primarily due to
increased staffing necessary to manage and support our growth plus increased
costs associated with being a public company. Also included in general and
administrative expenses is stock compensation expense of $637,000 and $1.2
million in the three and nine months ended September 30, 1999, and $1.1 million
and $3.8 million in the comparable periods of 2000. 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. We also
expect that general and administrative expenses will increase in absolute dollar
amounts due to the increased costs associated with integrating, operating and
coordinating our recently acquired operations in Denmark.
General and administrative expenses represented 50% and 45% of total revenues
for the three and nine months ended September 30, 1999, and 67% and 66% of total
revenues for the comparable periods of 2000. The increase as a percentage of
our total revenues was due primarily to increased staffing necessary to manage
and support our growth plus increased costs associated with being a public
company, offset in part by the growth in our total revenues. We expect that
general and administrative expenses as a percentage of total revenue will
decrease as our revenue grows and research and development activities expand.
In-Process Research and Development
On May 8, 2000, we acquired certain in-process technology through the
acquisition of a privately held California corporation. In connection with the
acquisition we issued 39,600 shares of our common stock. Pursuant to the terms
of the acquisition, 18,500 shares of our common stock are being held in escrow
until such time contingencies regarding the patents related to the acquired
technology are resolved. Accordingly, we have recorded a charge for acquired
in-process research and development of $912,000 representing the fair value of
the 21,100 shares delivered to the sellers at closing, plus certain transaction
expenses. Shares in escrow will be valued and accounted for when, and if, the
contingencies are resolved and the shares are delivered to the sellers. As
opportunities present themselves, we intend to continue to acquire new
technologies and companies; such acquisitions could lead to additional direct
and indirect expenses that could negatively affect our results of operations.
On August 10, 2000, we acquired ProFound for total consideration of
approximately $70.4 million, including $5.5 million for the assumption of
liabilities and $1.0 million for estimated acquisition costs. Prior to the
acquisition, ProFound was a privately-held, development-stage company that had
minimal revenues since its inception in April 1999. ProFound is focused on the
development of improved second-generation protein pharmaceutical products and
has developed broad preclinical development capabilities and proprietary
technologies and expertise that help to address traditional shortcomings of
protein pharmaceuticals such as half-life, stability and immunogenicity.
Approximately $28.0 million of the total purchase price represented the value of
in-process research and development that had not yet reached technological
feasibility, had no alternative future uses and was charged to the Company's
operations in the third quarter ended September 30, 2000. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the results
of operations of ProFound are included in the condensed consolidated financial
statements from the date of acquisition. See Note 6 of Notes to Condensed
Consolidated Financial Statements.
The $28.0 million in-process research and development charge represents the
value determined by an independent appraiser, using a discounted cash flow
methodology, to be attributable to the in-process research and development of
ProFound based on a valuation analysis of such research and development. In-
process technology was expensed upon acquisition as technological feasibility
had not been established and no alternative future uses existed. The charge
relates to specific on-going research and development. Management of Maxygen
believes that the allocation of the purchase price to in-process research and
development is appropriate given the future potential of this research and
development to contribute to the operations of Maxygen. Assuming this research
continues
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through all stages of clinical development, we project substantial future
research and development expenditures related to this technology. If we would
have allocated less of the purchase price to in-process research and
development, the value would have been recorded as goodwill on our balance sheet
and amortized over the expected benefit period, resulting in increased
amortization expense during that period.
Acquisition Related Costs
During the three and nine months ended September 30, 2000, we incurred direct
acquisition related transaction costs of approximately $1.0 million, including
$800,000 for legal and other professional consulting fees, which are included in
the calculation of the ProFound acquisition purchase price. There can be no
assurance that we will not incur additional charges in subsequent quarters to
reflect costs associated with the transaction, including integration costs, or
that we will be successful in our efforts to integrate the operations of
ProFound. As opportunities present themselves, we intend to continue to acquire
companies and complementary technologies; such acquisitions could lead to
additional direct and indirect expenses that could negatively affect our result
of operations.
Net Interest Income
Net interest income represents income earned on our cash, cash equivalents and
marketable securities net of interest expense. Net interest income increased
from $421,000 and $783,000 in the three and nine months ended September 30, 1999
to $4.4 million and $10.8 million in the comparable periods of 2000. This
increase was due to higher average balances of cash, cash equivalents and
marketable securities.
Goodwill
In connection with the ProFound acquisition, we allocated $35.2 million to
goodwill and will amortize this goodwill over 3 years, the term of expected
benefit. We expect quarterly amortization of approximately $3.3 million
beginning the fourth quarter of 2000.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
placements and public offerings of equity securities, receiving aggregate
consideration from such sales totaling $302.5 million and research and
development funding from collaborators and government grants totaling
approximately $39.6 million. As of September 30, 2000, we had $265.7 million in
cash, cash equivalents and marketable securities.
Our operating activities used cash of $1.4 million in the nine months ended
September 30, 1999 and $7.4 million in the comparable period of 2000. Uses of
cash in operating activities were primarily to fund net operating losses.
Net cash used in investing activities was $4.0 million in the nine months ended
September 30, 1999 and $84.7 million in the nine months ended September 30,
2000. The cash used in the 2000 period primarily represented purchases of
available-for-sale securities.
Additions of property and equipment were $4.0 million in the nine months ended
September 30, 1999 and $2.5 million in the comparable period of 2000. 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 $26.3 million in the nine months ended September
30, 1999 and $138.9 million in the comparable period of 2000. The 2000 amount
primarily consists of the net proceeds we received from the sale of common stock
in a follow-on public offering in March 2000.
We expect cash flows from our existing corporate collaborators for the funding
of research and technology advancement to total approximately $16.7 million
through fiscal 2001. The above amounts include $1.0 million annually of
technology advancement funding from AstraZeneca. In lieu of making this
payment, AstraZeneca can elect to purchase $3.0 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 cash to be received for grant
funding is approximately $15.8 million through fiscal 2002; however some grant
programs are subject to a yearly
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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, cash equivalents, short-term investments and
long-term investments together with 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 12 months.
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. Additional funding, if
sought, may not 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.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 and $46.7
million for the nine months ended September 30, 2000. As of September 30, 2000,
we had an accumulated deficit of approximately $70.9 million. We expect to have
increasing net losses and negative cash flow for at least the next several
years. 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 our revenues from collaborations and grants and expect
to do so for at least the next several years. 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 of our recently completed acquisition of ProFound, we
expect costs to increase further due to expanded operations, integration costs
associated with the acquisition and costs associated with operating in multiple
international locations. 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.
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 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 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 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 proprietary technologies are new and in
the early stage of development. We may not develop products that
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prove to be safe and efficacious, 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 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.
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 rapid and substantial growth that has placed and, if this
growth continues as expected, 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 74 at December 31, 1998 to
143 at December 31, 1999 to 236 at September 30, 2000. Our revenues increased
from $2.7 million in 1998 to $14.0 million in 1999 and were $17.5 million for
the nine months ended September 30, 2000. Our ability to manage our operations
and growth effectively requires us to continue to expend funds to enhance 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 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 have access to inadequate
information to manage our day-to-day operations. Failure to attract and retain
sufficient numbers of talented employees will further strain our human resources
and could impede our growth and ability to satisfy our obligations under
collaboration agreements. This would reduce our revenue, increase our losses
and harm our reputation in the marketplace.
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The Operation of International Locations May Raise Operating Expenses and Divert
Management Attention.
We are expanding internationally. We recently acquired ProFound, a Danish
biotechnology company, and are now operating with international business
locations. Expansion into an international operational entity will require
additional management attention and resources. We have limited experience in
localizing our operations and in conforming our operations to local cultures,
standards and policies. We may have to compete with local companies who
understand the local situation better than we do. We may not be successful in
expanding into international locations or in generating revenues from foreign
operations. Even if we are successful, the costs of operating internationally
are expected to exceed our international revenues for at least the next several
years. As we continue to expand internationally, we are subject to risks of
doing business internationally, including the following:
. regulatory requirements that may limit or prevent the offering of
our products in local jurisdictions ;
. government limitations on research and/or research including
genetically engineered products or processes;
. difficulties in staffing and managing foreign operations;
. longer payment cycles, different accounting practices and problems
in collecting accounts receivable ;
. cultural nonacceptance of genetic manipulation and genetic
engineering; and
. potentially adverse tax consequences.
Some of these factors may cause our international costs to exceed our domestic
costs of doing business. To the extent we expand our international operations
and have additional portions of our international revenues denominated in
foreign currencies, we also could become subject to increased difficulties in
collecting accounts receivable and risks relating to foreign currency exchange
rate fluctuations.
Acquisitions Could Result in Operating Difficulties and Other Harmful
Consequences.
If appropriate opportunities present themselves, we intend to acquire businesses
and technologies that complement our capabilities. As set forth above in this
report, on August 10, 2000 we completed our acquisition of ProFound, a Danish
biotechnology company. The process of integrating any acquisition may create
unforeseen operating difficulties and expenditures and is itself risky. The
areas where we may face difficulties include:
. diversion of management time (both ours and that of the acquired
company) from focus on operating the businesses to issues of
integration and future products during the period of negotiation
through closing and further diversion of such time after closing;
. decline in employee morale and retention issues resulting from
changes in compensation, reporting relationships, future prospects,
or the direction of the business;
. the need to integrate each company's accounting, management
information, human resource and other administrative systems to
permit effective management and the lack of control if such
integration is delayed or not implemented; and
. the need to implement controls, procedures and policies appropriate
for a larger public company in companies that prior to acquisition
had been smaller, private companies.
We have almost no experience in managing this integration process. Moreover,
the anticipated benefits of any or all of these acquisitions may not be
realized.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
harm our business. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all. Even if available, this financing may be dilutive.
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 regard to other products and industries. Our decisions may not
produce viable commercial products and may divert our resources from more
profitable market opportunities.
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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 or other technologies. Governmental authorities
could, for social or other purposes, limit the use of genetic processes or
prohibit the practice of our MolecularBreeding or other technologies. Ethical
and other concerns about our MolecularBreeding or other 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, where ProFound is based, 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 agricultural and
other 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 and small biotechnology companies, as well as academic and research
institutions and government agencies that are pursuing competing technologies
for modifying DNA and proteins. These organizations may develop technologies
that are 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 proprietary 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 and proteins, obtaining regulatory
approvals, manufacturing products and marketing.
Accordingly, our competitors may be able to develop technologies and products
more easily, which would render our technologies and products and those of our
collaborators obsolete and noncompetitive.
Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our
Competitive Position.
Our success will depend in part on our ability to obtain patents and maintain
adequate protection of our other intellectual property for our technologies and
products in the U.S. and other countries. If we do not adequately protect our
intellectual property, competitors may be able to practice our technologies and
erode our competitive advantage. The laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting their proprietary
rights in these foreign countries. These problems can be caused by, for
example, a lack of rules and processes 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
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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 proprietary technologies, or
products that are similar to products developed with the use of our
MolecularBreeding and other technologies or alternative methods of generating
gene diversity. 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 such claims 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 or be required to cease
commercializing effected products.
We routinely monitor the public disclosures of other companies operating in our
industry regarding their technological development efforts. If we determine
that these efforts violate our intellectual property or other rights, we intend
to take appropriate action, which could include litigation. Any action we take
could result in substantial costs and diversion of management and technical
personnel. Furthermore, the outcome of any action we take to protect our rights
may not be resolved in our favor.
On April 27, 2000, we announced that we had initiated an arbitration proceeding
against Echira Biotechnology (then known as Energy BioSystems Corporation) in
connection with Echira's claim that it has developed a "new gene shuffling''
technology. We allege that Echira has breached the confidentiality provisions
and certain other terms of the Development and License Agreement entered into by
Echira and Maxygen in 1997, pursuant to which we disclosed confidential
information regarding our MolecularBreeding technologies to Echira. We expect
the arbitration to be held during the fourth quarter of 2000.
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 execute fully 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
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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 could 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 the net proceeds from our
public offerings and interest earned thereon, together with existing cash and
cash equivalents and anticipated cash flows from operations, will enable us to
maintain our currently planned operations for at least the next 12 months. 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 our potential market could be reduced.
Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain
Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be
Able to Commercialize Those Products.
The Food and Drug Administration must approve any vaccine or therapeutic product
before it can be marketed in the U.S. Before we can file a new drug application
or biologic license application with the FDA, the product candidate must undergo
extensive testing, including animal and human clinical trials, which can take
many years and require substantial expenditures. Data obtained from such testing
are susceptible to varying interpretations 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.
The regulatory agencies of foreign governments must also approve our therapeutic
products before the products can be sold in those other countries.
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 to 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.
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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.
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. 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 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.
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Our Collaborations With Outside Scientists May Be Subject to Change, Which Could
Limit Our Access to Their Expertise.
We work with scientific advisors and collaborators at academic and other
institutions. These scientists are not our employees and may have other
commitments that would limit their availability to us. Although our scientific
advisors generally agree not to do competing work, if a conflict of interest
between their work for us and their work for another entity arises, we may lose
their services. Although our scientific advisors and collaborators sign
agreements not to disclose our confidential information, it is possible that
certain of our valuable proprietary knowledge may become publicly known through
them.
We May Be Sued for Product Liability.
We may be held liable if any product we develop, or any product 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.
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;
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. 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 part-
ners; and
. sales of our common stock or other securities in the open market.
In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us,
we would incur substantial legal fees and our management's attention and
resources would be diverted from operating our business in order to respond to
the litigation.
We Expect that Our Quarterly Results of Operations Will Fluctuate, and This
Fluctuation Could Cause Our Stock Price to Decline.
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 2001. 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 likely decline.
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 executive officers, directors and principal stockholders (greater than 5%
stockholders) together control approximately 34% of our outstanding common
stock, including Glaxo Wellcome which owns approximately 19% of our outstanding
common stock. As a result, these stockholders, if they act together, and Glaxo
Wellcome 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.
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Item 3
Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents, short-
term and long-term investments in a variety of securities, including corporate
obligations and money market funds. As of September 30, 2000, approximately 91%
of our total portfolio will mature in one year or less, with the remainder
maturing in less than two years.
The following table represents the fair value balance of our cash, cash
equivalents, short-term and long-term investments that are subject to interest
rate risk by year of expected maturity and average interest rates as of
September 30, 2000 (dollars in thousands):
<TABLE>
2000 2001
--------- ----------
<S> <C> <C>
Cash and cash equivalents........................................ $183,131 --
Average interest rates........................................... 6.62% --
Short-term investments........................................... $ 59,585 --
Average interest rates........................................... 6.98% --
Long-term investments............................................ -- $22,953
Average interest rates........................................... -- 7.14%
</TABLE>
We did not hold derivative instruments as of September 30, 2000, and we have
never held such instruments in the past. In addition, we had outstanding debt,
consisting of borrowings under an equipment financing line of credit, of $1.9
million as of September 30, 2000, with a range of interest rates of between
11.73% and 12.78%.
Foreign Currency Risk
Currently the majority of our revenue and expenses are denominated in U.S.
dollars and as a result we have experienced no significant foreign exchange
gains and losses to date. As a result of our recent acquisition of ProFound and
our recent collaboration with Lundbeck A/S we will be effecting transactions in
foreign currencies during 2000. We do not expect that foreign exchange gains or
losses will be significant. As we expand internationally, foreign currency
risks will become more important. We have not engaged in foreign currency
hedging to date but may choose to do so in the future.
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Part II - Other Information
Item 1
Legal Proceedings
Not applicable.
Item 2
Changes in Securities and Use of Proceeds
c) (i) On August 4, 2000, we issued an aggregate of 16,000 shares of our
common stock in connection with the acquisition of a license of
certain technology.
(ii) On August 10, 2000, we completed our acquisition of ProFound. We
acquired all of the outstanding equity securities of ProFound from
prior security holders in exchange for 1,102,578 shares of our
common stock and options to purchase 41,812 shares of our common
stock.
(iii) On August 31, 2000 we issued 210 shares of our common stock to a
consultant in partial payment for consulting services rendered to
us. On June 8, 2000 we issued 185 shares of our common stock to a
second consultant in partial payment for consulting services
rendered to us.
There were no underwriters employed in connection with any of the transactions
set forth in Item 2(c).
The issuances of securities described in Item 2(c) were deemed to be exempt from
registration under the Securities Act of 1933, as amended (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. Each
purchaser of Maxygen securities represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
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. All
recipients, either alone or with a duly appointed purchaser representative, were
knowledgeable, sophisticated and experienced in making investment decisions of
this kind and received adequate information about the registrant. In addition,
the transactions described in paragraph (ii) above were exempt from registration
under the Securities Act pursuant to Regulation S promulgated thereunder as
involving securities offered and sold outside the United States.
d) The effective date of our first registration statement, filed on Form S-1
under the Securities Act (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 September 30, 2000, the proceeds were
applied toward:
. purchases and installation of equipment and build-out of facilities,
$2.5 million;
. repayment of indebtedness, $76,000;
. working capital, $2.7 million; and
. temporary investments in certificates of deposits, mutual funds and
corporate debt securities, $95.7 million.
The use of the proceeds from the offering does not represent a material change
in the use of the proceeds described in the registration statement.
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Item 3
Defaults Upon Senior Securities
Not applicable.
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5
Other Information
Not applicable.
Item 6
Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
10.1 Lease Agreement between ProFound Pharma A/S and The
Sciense Park in Horsholm, dated May 5, 2000.
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K.
(1) On August 15, 2000, Maxygen filed a report on Form 8-K reporting the
acquisition of ProFound Pharma A/S.
(2) On October 24, 2000, Maxygen filed a report on Form 8-K/A that
amended the report on Form 8-K filed on August 15, 2000.
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Signatures
Pursuant to the requirements 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.
November 14, 2000 By: /s/ Russell J. Howard
----------------------
Russell J. Howard
Chief Executive Officer
November 14, 2000 By: /s/ Simba Gill
---------------
Simba Gill
President, Chief Financial Officer and Senior Vice
Development
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Exhibit Index
-------------
10.1 Lease Agreement between ProFound Pharma A/S and The Sciense Park in
Horsholm, dated May 5, 2000.
27.1 Financial Data Schedule (EDGAR version only)
