<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 March 31, 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 May 1, 2000, there were 32,285,355 shares of the registrant's common stock
outstanding.
<PAGE>
MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<S> <C>
Part I FINANCIAL INFORMATION
Item 1: Financial Statements:
Balance Sheet as of December 31, 1999 and March 31, 2000................................... 3
Statement of Operations for the three month periods ended March 31, 1999 and 2000.......... 4
Statement of Cash Flows for the three month periods ended March 31, 1999 and 2000.......... 5
Notes to Financial Statements.............................................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations...... 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk................................. 21
Part II OTHER INFORMATION
Item 1: Legal Proceedings.......................................................................... 22
Item 2: Changes in Securities and Use of Proceeds.................................................. 22
Item 3: Defaults Upon Senior Securities............................................................ 22
Item 4: Submission of Matters to a Vote of Security Holders........................................ 22
Item 5: Other Information.......................................................................... 22
Item 6: Exhibits and Reports on Form 8-K........................................................... 22
SIGNATURES........................................................................................... 23
</TABLE>
<PAGE>
================================================================================
Part I - Financial Information
Item 1
Financial Statements
MAXYGEN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ----------
ASSETS (Note 1) (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $136,343 $246,521
Short-term investments............................................................... -- 9,990
Grant and other receivables.......................................................... 3,038 3,938
Prepaid expenses and other current assets............................................ 800 736
---------- ---------
Total current assets................................................................ 140,181 261,185
---------- ---------
Property and equipment, net.......................................................... 4,764 4,976
Long-term investments................................................................ -- 14,076
Deposits and other assets............................................................ 633 756
---------- ---------
Total assets........................................................................ $145,578 $280,993
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 370 $ 535
Accrued compensation................................................................. 393 1,058
Other accrued liabilities............................................................ 1,803 1,408
Deferred revenue..................................................................... 4,935 3,388
Current portion of equipment financing obligations................................... 170 284
---------- ---------
Total current liabilities............................................................. 7,671 6,673
Deferred revenue...................................................................... 2,527 2,327
Non-current portion of equipment financing obligations................................ 1,664 1,544
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 March 31, 2000, respectively.................................. -- --
Common stock, $0.0001 par value: 70,000,000 shares
authorized, 30,860,781, and 32,270,769 shares issued and
outstanding at December 31, 1999 and March 31, 2000, respectively................... 3 3
Additional paid-in capital........................................................... 176,517 315,931
Notes receivable from stockholders................................................... (1,411) (1,201)
Deferred stock compensation.......................................................... (17,216) (14,381)
Accumulated other comprehensive loss................................................. --- (86)
Accumulated deficit.................................................................. (24,177) (29,817)
---------- ---------
Total stockholders' equity.......................................................... 133,716 270,449
---------- ---------
Total liabilities and stockholders' equity.......................................... $145,578 $280,993
---------- ---------
</TABLE>
See accompanying notes.
<PAGE>
MAXYGEN, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
1999 2000
-------- --------
<S> <C> <C>
Collaborative research and development revenue................................... $ 1,330 $ 3,046
Grant revenue.................................................................... 984 2,368
-------- --------
Total revenues................................................................... 2,314 5,414
Operating expenses:
Research and development (Including charges for stock compensation of
$237 and $3,536 in the three months ended March 31, 1999 and 2000,
respectively)................................................................ 2,791 9,782
General and administrative (Including charges for stock compensation of $296
and $1,375 in the three months ended March 31, 1999 and 2000, respectively).. 996 3,388
-------- --------
Total operating expenses......................................................... 3,787 13,170
-------- --------
Loss from operations............................................................. (1,473) (7,756)
Interest income (expense), net................................................... 170 2,116
-------- --------
Net loss......................................................................... $ (1,303) $ (5,640)
======== ========
Basic and diluted net loss per share............................................. $ (0.18) $ (0.20)
Shares used in computing basic and diluted net loss per share.................... 7,211 28,062
</TABLE>
See accompanying notes.
<PAGE>
MAXYGEN, INC.
STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
1999 2000
-------- --------
<S> <C> <C>
Operating activities
Net loss..................................................................... $ (1,303) $ (5,640)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 71 309
Deferred stock compensation amortization.................................... 533 4,911
Common stock issued and stock options granted to consultants for services
rendered................................................................... 7 --
Changes in operating assets and liabilities:
Grant and other receivables................................................ (769) (900)
Prepaid expenses and other current assets.................................. (133) 64
Deposits and other assets.................................................. (154) (123)
Accounts payable........................................................... 437 165
Accrued compensation....................................................... 38 665
Other accrued liabilities.................................................. 109 (395)
Deferred revenue........................................................... 247 (1,747)
Related party payables..................................................... 108 --
-------- --------
Net cash used in operating activities........................................ (809) (2,691)
-------- --------
Investing activities
Purchase of short-term investments........................................... -- (10,001)
Purchase of long-term investments............................................ -- (14,151)
Acquisition of property and equipment........................................ (1,152) (521)
-------- --------
Net cash used in investing activities........................................ (1,152) (24,673)
-------- --------
Financing activities
Repayment of equipment financing obligation.................................. -- (6)
Proceeds from issuance of common stock - net of issuance costs............... 1 137,445
Repurchase of common stock................................................... -- (56)
Payments of stockholders' notes receivable................................... -- 159
-------- --------
Net cash provided by financing activities.................................... 1 137,542
-------- --------
Net increase (decrease) in cash and cash equivalents......................... (1,960) 110,178
Cash and cash equivalents at beginning of period............................. 15,306 136,343
-------- --------
Cash and cash equivalents at end of period................................... $ 13,346 $246,521
======== ========
</TABLE>
See accompanying notes.
<PAGE>
MAXYGEN, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statement have been prepared in accordance
with generally accepted accounting principles for interim financial information.
The information as of March 31, 2000 and for the quarters ended March 31, 1999
and 2000 includes all adjustments (consisting only of normal recurring
adjustments) that the management of 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 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.
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. Following the guidance given by the Securities
and Exchange Commission Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock that has been issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if these shares had been outstanding for all periods presented.
To date, the Company has not issued or granted shares for nominal consideration.
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Pro forma basic and
diluted net loss per common share has been computed for the three months ended
March 31, 1999 as described above, and also gives effect to the conversion of
the
<PAGE>
convertible preferred stock that automatically converted to common stock
immediately prior to the completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months ended
March 31,
1999 2000
-------- --------
<S> <C> <C>
Net Loss................................................................... $ (1,303) $ (5,640)
======== ========
Basic and diluted:
Weighted-average shares of common stock outstanding...................... 9,239 30,977
Less: weighted-average shares subject to repurchase...................... (2,028) (2,915)
-------- --------
Weighted-average shares used in computing basic and diluted net
loss per share......................................................... 7,211 28,062
======== ========
Basic and diluted net loss per share....................................... $ (0.18) $ (0.20)
======== ========
Pro forma:
Shares used above........................................................ 7,211
Pro forma adjusted to reflect weighted effect of conversion of
convertible preferred stock (unaudited)................................ 6,799
--------
Shares used in computing pro forma basic and diluted net loss per
share (unaudited)...................................................... 14,010
========
Pro forma basic and diluted net loss per share (unaudited)................. $ (0.09)
========
</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 11,503,000 at March 31, 1999 and 5,000,000 at March 31, 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. 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 the 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 year ending
December 31, 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 June 30, 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 had no effect on results of operations.
<PAGE>
2. Collaborative Agreement
Technological Resources PTY Limited
In January 2000, the Company entered into a three year collaborative research
and development agreement with Technological Resources PTY Limited, a wholly
owned subsidiary of Rio Tinto Limited ("TRPL"), to develop novel enzymatic
systems to increase the efficiency of carbon dioxide fixation in connection with
the combustion of fossil fuels and for other purposes more generally for use in
chemical bioprocessing and other applications. Pursuant to the agreement, TRPL
agreed to provide nonrefundable research and development funding and technology
advancement payments of up to $2.7 million, as well as revenue sharing on
certain commercialized products and processes.
3. Stockholders Equity--Follow-on Offering
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.
4. Subsequent Events
ProFound Pharma Acquisition
On April 12, 2000, the Company agreed to acquire ProFound Pharma A/S, a Danish
biotechnology company located in Copenhagen, Denmark. ProFound focuses on
discovery and development of improved biopharmaceuticals applying a broad
proprietary technology platform, involving computer modeling, derivatization of
proteins and robotic high-throughput screening systems. The transaction will be
accounted for as a purchase. The Company expects to issue 980,000 shares of its
common stock and additional shares (subject to put and call options) having a
value of an additional $10 million. The Company anticipates that a portion of
the purchase price will be allocated to in-process research and development and
will result in a one-time charge against earnings in the quarter of closing.
Closing is subject to certain conditions, including a ruling from Danish tax
authorities, and is expected to take place in the third quarter of 2000.
Energy BioSystems Arbitration
On April 27, 2000, Maxygen announced that it had initiated an arbitration
proceeding against Energy BioSystems Corporation in connection with Energy
BioSystems' claim that it has developed a "new gene shuffling'' technology.
Maxygen alleges that Energy BioSystems has breached the confidentiality
provisions and certain other terms of the Development and License Agreement
entered into by Energy BioSystems and Maxygen in 1997, pursuant to which Maxygen
disclosed confidential information regarding Maxygen's MolecularBreeding
technology to Energy BioSystems.
<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, AstraZeneca, DSM and Rio Tinto. Our
government grants are from the Defense Advanced Research Projects Agency and the
National Institute of Standards and Technology-Advanced Technology Program.
We have invested heavily in establishing our MolecularBreeding technologies.
These investments contributed to revenue increases from $2.7 million in 1998 to
$14.0 million in 1999 and $5.4 million in the three months ended March 31, 2000.
Our total headcount increased from 74 employees at the end of 1998 to 143
employees at the end of 1999 and 151 employees at the end March 31, 2000, of
whom 75% were engaged in research and development. Research and development
consisted of work for collaborators, government grant agencies and work
advancing our technologies.
We have incurred significant losses since our inception. As of March 31, 2000,
our accumulated deficit was $29.8 million and total stockholders' equity was
$270.4 million. Operating expenses increased from $11.8 million in fiscal 1998,
to $26.7 million in fiscal 1999 and to $13.2 million for the three months ended
March 31, 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 April 12, 2000, we agreed to acquire ProFound Pharma A/S, a Danish
biotechnology company located in Copenhagen, Denmark. ProFound focuses on
discovery and development of improved biopharmaceuticals applying a broad
proprietary technology platform, involving computer modeling, derivatization of
proteins and robotic high-throughput screening systems. The transaction will be
accounted for as a purchase. We expect to issue 980,000 shares of our common
stock and additional shares (subject to put and call options) having a value of
an additional $10 million. We anticipate that a portion of the purchase price
will be allocated to in-process research and development and will result in a
one-time charge against after-tax earnings in the quarter of closing. Closing
is subject to certain conditions, including a ruling from Danish tax
authorities, and is expected to take place in the third quarter of 2000. We
have not yet had an opportunity to evaluate the specific effect the transaction
will have on our results of operations. As such, the transaction has been
omitted from the forward-looking comments in the discussion of the results of
operation.
9
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Source of Revenue and Revenue Recognition Policy
We recognize revenues from research collaboration agreements as earned upon
achievement of the performance requirements of the agreements. Revenue related
to grant agreements is recognized as related research and development expenses
are incurred. Our existing corporate collaboration agreements with
DuPont/Pioneer Hi-Bred and AstraZeneca provide for research funding for a
specified number of full time researchers working in defined research programs.
Revenue related to these payments is earned as the related research work is
performed. In addition, these collaborators make technology advancement
payments that are intended to fund development of our core technology, as
opposed to a defined research program. These payments are recognized ratably
over the applicable funding period. Payments received that are related to future
performance are deferred and recognized as revenue as the performance
requirements are achieved. As of March 31, 2000, we have deferred revenues of
approximately $5.7 million. Our sources of potential revenue for the next
several years are likely to be research, technology advancement and milestone
payments under existing and possible future collaborative arrangements,
government research grants, and royalties from our collaborators based on
revenues received from any products commercialized under those agreements.
Deferred Compensation
Deferred compensation for options granted to employees has been determined as
the difference between the deemed fair market value for financial reporting
purposes of our common stock on the date options were granted and the exercise
price. Deferred compensation for options granted to consultants has been
determined in accordance with Statement of Financial Accounting Standards No.
123 as the fair value of the equity instruments issued. Deferred compensation
for options granted to consultants is periodically remeasured as the underlying
options vest.
In connection with the grant of stock options to employees and consultants, we
recorded deferred stock compensation of approximately $2.4 million in 1998,
$19.5 million in 1999 and $1.0 million in the three months ended March 31, 2000.
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 $4.9 million in
the three months ended March 31, 2000. The amortization expense relates to
options awarded to employees and consultants in all operating expense
categories.
Results of Operations
Revenues
Our total revenues for the three months ended March 31, 1999 and 2000 were $2.3
million and $5.4 million, respectively. The increase of $3.1 million was due
primarily to the addition of new research collaborations with AstraZeneca and
DuPont/Pioneer Hi-Bred, new government grants and the expansion of existing
government grants. Collaboration research and development revenue and grant
revenue accounted for 57% and 43%, respectively, of total revenues in the three
months ended March 31, 1999, and 56% and 44%, respectively, of total revenues in
the three months ended March 31, 2000.
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
250% from $2.8 million in the three months ended March 31, 1999 to $9.8 million
in the three months ended March 31, 2000. The increase was due primarily to
increased staffing and other personnel-related costs to support our additional
collaborative and internal research efforts. Also included in research and
development expenses is stock compensation expense of $237,000 in the three
months ended March 31, 1999 and $3.5 million in the three months ended March 31,
2000.
Research and development expenses represented 121% of total revenues in the
three months ended March 31, 1999 and 181% of total revenues in the three months
ended March 31, 2000. The increase as a percentage of total revenues was due
primarily 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.
10
<PAGE>
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 240% from $996,000 in the three months ended
March 31, 1999 to $3.4 million in the three months ended March 31, 2000.
Expenses increased primarily due to increased staffing necessary to manage and
support our growth. Also included in general and administrative expenses is
stock compensation expense of $296,000 in the three months ended March 31, 1999
and $1.4 million in the three months ended March 31, 2000.
General and administrative expenses represented 43% of total revenues for the
three months ended March 31, 1999 and 63% of total revenues for the three months
ended March 31, 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 our general and administrative
expenses will increase in absolute dollar amounts as we expand our legal and
accounting staff, add infrastructure and incur additional costs related to being
a public company, including directors' and officers' insurance, investor
relations programs and increased professional fees.
Net Interest Income
Net interest income represents income earned on our cash, cash equivalents and
marketable securities net of interest expense. Net interest income increased
from $170,000 in the three months ended March 31, 1999 to $2.1 million in the
three months ended March 31, 2000. This increase was due to higher average
balances of cash, cash equivalents and marketable securities.
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 $62 million. As of March 31, 2000, we had $270.6 million in cash,
cash equivalents and marketable securities and $166,000 available under an
equipment financing line of credit.
Our operating activities used cash of $808,000 in the three months ended March
31, 1999 and $2.7 million in the three months ended March 31, 2000. Uses of cash
in operating activities were primarily to fund net operating losses offset by
receipt of funding from collaborators that has been deferred.
Additions of property and equipment were $1.2 million the three months ended
March 31, 1999 and $521,000 the three months ended March 31, 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 no cash in the three months ended March 31, 1999
and $137.5 million in the three months ended March 31, 2000. This 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 corporate collaborators for the funding of
research and technology advancement to total approximately $12 million in both
2000 and 2001 and up to this amount in 2002 and 2003 if our collaboration with
DuPont/Pioneer Hi-Bred extends to a fourth and fifth year. DuPont/Pioneer Hi-
Bred may terminate the agreement after three years, upon six months notice if a
specified milestone has not been met. The above amounts include $1 million
annually of technology advancement funding from AstraZeneca. In lieu of making
this payment, AstraZeneca can elect to purchase $3 million of our equity
securities at a 50% premium to the fair value of the securities on the date of
issuance. Cash flows from government grants are determined by the expenses
incurred by Maxygen. Total remaining committed grant funding amounts to $20
million through fiscal 2002; however some grant programs are subject to a yearly
appropriations process in Congress and we may not receive funds under existing
grants because of budgeting constraints of the agency administering the program.
We believe that our current cash, cash equivalents and marketable securities and
funding received from collaborators and government grants will be sufficient to
satisfy our anticipated cash needs for working
11
<PAGE>
capital and capital expenditures for the foreseeable future. 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
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 $5.6
million for the three months ended March 31, 2000. As of March 31, 2000, we had
an accumulated deficit of approximately $29.8 million. We expect to have
increasing net losses and negative cash flow in the foreseeable future. The
size of these net losses will depend, in part, on the rate of growth, if any, in
our contract revenues and on the level of our expenses. To date, we have
derived all of our revenues from collaborations and grants and will continue to
do so in the foreseeable future. Revenues from collaborations and grants are
uncertain because our existing agreements have fixed terms and because our
ability to secure future agreements will depend upon our ability to address the
needs of our potential future collaborators. We expect to spend significant
amounts to fund research and development and enhance our core technologies. If
our recently announced acquisition of ProFound Pharma A/S is completed, we
expect costs to increase further due to expanded operations and integration
costs associated with the acquisition. As a result, we expect that our
operating expenses will increase significantly in the near term and,
consequently, we will need to generate significant additional revenues to
achieve profitability. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or annual basis.
We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not
Develop Commercially Successful Products, We May Be Forced to Cease Operations.
You must evaluate us in light of the uncertainties and complexities affecting an
early stage biotechnology company. Our MolecularBreeding technologies are new
and in the early stage of development. We may not develop products that prove
to be safe and efficacious in any market, meet applicable regulatory standards,
are capable of being manufactured at reasonable costs, or can be marketed
successfully.
We may not be successful in the commercial development of products. Successful
products will require significant development and investment, including testing,
to demonstrate their cost-effectiveness prior to their commercialization. To
date, companies in the biotechnology industry have developed and commercialized
only a limited number of gene-based products. We have not proven our ability to
develop and commercialize products. Further, none of our potential vaccine or
protein therapeutic products are expected to enter clinical trials within the
next year. We must conduct a substantial amount of additional research and
development before any regulatory authority will approve any of our products.
Our research and development may not indicate that our products are safe and
effective, in which case regulatory authorities may not approve them. Problems
frequently encountered in connection with the development and utilization of new
and unproven technologies and the competitive environment in which we operate
might limit our ability to develop commercially successful products.
Commercialization of Our Technologies Depends On Collaborations With Other
Companies. If We Are Not Able to Find Collaborators in the Future, We May Not
Be Able to Develop Our Technologies or Products.
Since we do not currently possess the resources necessary to develop and
commercialize potential products that may result from our MolecularBreeding
technologies, or the resources to complete any
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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 Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our
Collaborators or Any Inability to Commercialize Products Resulting from This
Research Could Harm Our Business.
An important part of our strategy involves conducting proprietary research
programs. We may pursue opportunities in fields that could conflict with those
of our collaborators. Moreover, disagreements with our collaborators could
develop over rights to our intellectual property. Any conflict with our
collaborators could reduce our ability to obtain future collaboration agreements
and negatively impact our relationship with existing collaborators, which could
reduce our revenues.
Certain of our collaborators could also become competitors in the future. Our
collaborators could develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain timely regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of products. Any
of these developments could harm our product development efforts.
We will either commercialize products resulting from our proprietary programs
directly or through licensing to other companies. We have no experience in
manufacturing and marketing, and we currently do not have the resources or
capability to manufacture products on a commercial scale. In order for us to
commercialize these products directly, we would need to develop, or obtain
through outsourcing arrangements, the capability to manufacture, market and sell
products. We do not have these capabilities, and we may not be able to develop
or otherwise obtain the requisite manufacturing, marketing and sales
capabilities. If we are unable to successfully commercialize products resulting
from our proprietary research efforts, we will continue to incur losses.
We May Encounter Difficulties in Managing Our Growth. These Difficulties Could
Increase Our Losses.
We have experienced a period of rapid and substantial growth that has placed
and, if this growth continues, will place a strain on our human and capital
resources. If we are unable to manage this growth effectively, our losses could
increase. The number of our employees increased from 74 at December 31, 1998 to
143 at December 31, 1999 to 151 at March 31, 2000. Our revenues increased from
$2.7 million in 1998 to $14.0 million in 1999 and were $5.4 million for the
three months ended March 31, 2000. Our ability to manage our operations and
growth effectively requires us to continue to expend funds to improve our
operational, financial and management controls, reporting systems and procedures
and to attract and retain sufficient numbers of talented employees. If we are
unable to successfully implement improvements to our management information and
control systems in an efficient or timely manner, or if we encounter
deficiencies in existing systems and controls, then management may receive
inadequate information to manage our day-to-day operations.
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 April 12, 2000 we announced an agreement to acquire ProFound Pharma
A/S, 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:
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. diversion of management time (both ours and that of the acquired
company) during the period of negotiation through closing and further
diversion of such time after closing from focus on operating the
businesses to issues of integration and future products;
. 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.
In addition, recent proposed changes in the Financial Accounting Standards Board
rules for merger accounting may affect the cost of making acquisitions or of
being acquired. For example, if these proposed changes become effective we
would likely have to record goodwill or other intangible assets that we would
amortize to earnings if we merge with another company. Such amortization would
adversely impact our future operating results. Further, accounting rule changes
that reduce the availability of write-offs of the value of in-process research
and development in connection with an acquisition could result in the
capitalization and amortization of these amounts, which would negatively impact
results of operations in future periods.
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.
Public Perception of Ethical and Social Issues May Limit the Use of Our
Technologies, Which Could Reduce Our Revenues.
Our success will depend in part upon our ability to develop products discovered
through our MolecularBreeding technologies. Governmental authorities could, for
social or other purposes, limit the use of genetic processes or prohibit the
practice of our MolecularBreeding technologies. Ethical and other concerns about
our MolecularBreeding technologies, particularly the use of genes from nature
for commercial purposes, and products resulting therefrom could adversely affect
their market acceptance.
If the Public Does Not Accept Genetically Engineered Products, We Will Have Less
Demand for Our Products.
The commercial success of our potential products will depend in part on public
acceptance of the use of genetically engineered products including drugs, plants
and plant products. Claims that genetically engineered products are unsafe for
consumption or pose a danger to the environment may influence public attitudes.
Our genetically engineered products may not gain public acceptance. Negative
public reaction to genetically modified organisms and products could result in
greater government regulation of genetic research and resultant products,
including stricter labeling laws or regulations, and could cause a decrease in
the demand for our products.
The subject of genetically modified organisms has received negative publicity in
Europe, which has aroused public debate. The adverse publicity in Europe could
lead to greater regulation and trade restrictions on imports of genetically
altered products. If similar adverse public reaction occurs in the
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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. These organizations may develop technologies that are
superior alternatives to our technologies. Further, our competitors in the
directed molecular evolution field may be more effective at implementing their
technologies to develop commercial products. Some of these competitors have
entered into collaborations with leading companies within our target markets to
produce enzymes for commercial purposes.
Any products that we develop through our MolecularBreeding technologies will
compete in multiple, highly competitive markets. Most of the organizations
competing with us in the markets for such products have greater capital
resources, research and development and marketing staffs and facilities and
capabilities, and greater experience in modifying DNA, obtaining regulatory
approvals, manufacturing products and marketing.
Accordingly, our competitors may be able to develop technologies and products
more easily, which would render our technologies and products and those of our
collaborators obsolete and noncompetitive.
Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our
Competitive Position.
Our success will depend in part on our ability to obtain patents and maintain
adequate protection of our other intellectual property for our technologies and
products in the U.S. and other countries. If we do not adequately protect our
intellectual property, competitors may be able to practice our technologies and
erode our competitive advantage. The laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting their proprietary
rights in these foreign countries. These problems can be caused by, for
example, a lack of rules and methods for defending intellectual property rights.
The patent positions of biopharmaceutical and biotechnology companies, including
our patent position, are generally uncertain and involve complex legal and
factual questions. We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. We will apply for patents covering both our
technologies and products as we deem appropriate. However, these applications
may be challenged and may not result in issued patents. Our existing patents
and any future patents we obtain may not be sufficiently broad to prevent others
from practicing our technologies or from developing competing products.
Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others
may challenge or invalidate our patents, or our patents may fail to provide us
with any competitive advantages.
We rely upon trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. We seek to protect our proprietary
information by entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose our proprietary information, and we may not be
able to meaningfully protect our trade secrets. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.
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Litigation or Other Proceedings or Third Party Claims of Intellectual Property
Infringement Could Require Us to Spend Time and Money and Could Shut Down Some
of Our Operations.
Our commercial success depends in part on neither infringing patents and
proprietary rights of third parties, nor breaching any licenses that we have
entered into with regard to our technologies and products. Others have filed,
and in the future are likely to file, patent applications covering genes or gene
fragments that we may wish to utilize with our MolecularBreeding technologies,
or products that are similar to products developed with the use of our
MolecularBreeding technologies 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 Energy BioSystems Corporation in connection with Energy BioSystems'
claim that it has developed a "new gene shuffling" technology. We allege that
Energy BioSystems has breached the confidentiality provisions and certain other
terms of the Development and License Agreement entered into by Energy BioSystems
and Maxygen in 1997, pursuant to which we disclosed confidential information
regarding our MolecularBreeding technology to Energy BioSystems.
If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional
Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to our success. We do not currently have sufficient executive
management personnel to fully execute our business plan. There is currently a
shortage of skilled executives, which is likely to continue. As a result,
competition for skilled personnel is intense, and the turnover rate can be high.
Although we believe we will be successful in attracting and retaining qualified
personnel, competition for experienced scientists from numerous companies and
academic and other research institutions may limit our ability to do so on
acceptable terms. Failure to attract and retain personnel would prevent us from
pursuing collaborations or developing our products or core technologies.
Our planned activities will require additional expertise in specific industries
and areas applicable to the products developed through our technologies. These
activities will require the addition of new personnel, including management, and
the development of additional expertise by existing management personnel. The
inability to acquire these services or to develop this expertise could impair
the growth, if any, of our business.
We Will Need Additional Capital in the Future. If Additional Capital is Not
Available, We Will Have to Curtail or Cease Operations.
Our future capital requirements will be substantial and will depend on many
factors including payments received under collaborative agreements and
government grants, the progress and scope of our
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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
recent 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 the foreseeable future. If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds to continue the development of our technologies
and complete the commercialization of products, if any, resulting from our
technologies.
Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The
Government Has License Rights to Technology Developed With Its Funds.
We have received and expect to continue to receive significant funds under
various U.S. government research and technology development programs. The
government may significantly reduce funding in the future for a number of
reasons. For example, some programs are subject to a yearly appropriations
process in Congress. Additionally, we may not receive funds under existing or
future grants because of budgeting constraints of the agency administering the
program. There can be no assurance that we will receive the entire funding
under our existing or future grants.
Our grants provide the U.S. government a non-exclusive, non-transferable, paid-
up license to practice for or on behalf of the U.S. inventions made with federal
funds. If the government exercises these rights, the U.S. government could use
these inventions and Maxygen's potential market could be reduced.
Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain
Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be
Able to Commercialize Those Products.
The Food and Drug Administration must approve any vaccine or therapeutic product
before it can be marketed in the U.S. Before we can file a new drug application
or biologic license application with the FDA, the product candidate must undergo
extensive testing, including animal and human clinical trials, which can take
many years and require substantial expenditures. Data obtained from such testing
are susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new application or product license application may cause
delays or rejections. The regulatory process is expensive and time consuming.
Because our products involve the application of new technologies and may be
based upon new therapeutic approaches they may be subject to substantial review
by government regulatory authorities and government regulatory authorities may
grant regulatory approvals more slowly for our products than for products using
more conventional technologies. We have not submitted an application 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. The regulatory
agencies of foreign governments must also approve our therapeutic products
before the products can be sold in those other countries.
Even after investing significant time and expenditures we may not obtain
regulatory approval for our products. Even if we receive regulatory approval,
this approval may entail limitations on the indicated uses for which we can
market a product. Further, once regulatory approval is obtained, a marketed
product and its manufacturer are subject to continual review, and discovery of
previously unknown problems with a product or manufacturer may result in
restrictions on the product, manufacturer and manufacturing facility, including
withdrawal of the product from the market. In certain countries, regulatory
agencies also set or approve prices.
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Laws May Limit Our Provision of Genetically Engineered Agricultural Products in
the Future. These Laws Could Reduce Our Ability to Sell These Products.
We may develop genetically engineered agricultural products. The field testing,
production and marketing of genetically engineered plants and plant products are
subject to federal, state, local and foreign governmental regulation. Regulatory
agencies administering existing or future regulations or legislation may not
allow us to produce and market our genetically engineered products in a timely
manner or under technically or commercially feasible conditions. In addition,
regulatory action or private litigation could result in expenses, delays or
other impediments to our product development programs or the commercialization
of resulting products.
The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as applied to foods developed through traditional
plant breeding. However, genetically engineered food products will be subject to
premarket review if these products raise safety questions or are deemed to be
food additives. Our products may be subject to lengthy FDA reviews and
unfavorable FDA determinations if they raise questions, are deemed to be food
additives, or if the FDA changes its policy.
The FDA has also announced in a policy statement that it will not require that
genetically engineered agricultural products be labeled as such, provided that
these products are as safe and have the same nutritional characteristics as
conventionally developed products. The FDA may reconsider or change its
labeling policies, or local or state authorities may enact labeling
requirements. Any such labeling requirements could reduce the demand for our
products.
The U.S. Department of Agriculture prohibits genetically engineered plants from
being grown and transported except pursuant to an exemption, or under strict
controls. If our future products are not exempted by the USDA, it may be
impossible to sell such products.
Adverse Events in the Field of Gene Therapy May Negatively Impact Regulatory
Approval or Public Perception of Any Gene Therapy Products We or Our
Collaborators May Develop.
Currently, we are not engaged in developing gene therapy products; however, we
may engage in these activities in the future either for our own account or with
collaborators. If we or our collaborators develop gene therapy products, these
products may encounter substantial delays in development and approval due to the
government regulation and approval process. A recent death and other adverse
events reported in gene therapy clinical trials may lead to more government
scrutiny of proposed clinical trials of gene therapy products, stricter labeling
requirements for these products and delays in the approval of gene therapy
products for commercial sale.
The commercial success of any potential gene therapy products made by us or our
collaborators will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapies are unsafe, and gene therapy
products may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy could result in a decrease in demand
for any gene therapy products we or our collaborators may develop.
Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on
Pharmaceutical Products.
Our future products are expected to include pharmaceutical products. Our
ability and that of our collaborators to commercialize pharmaceutical products
developed with our MolecularBreeding technologies may depend in part on the
extent to which reimbursement for the cost of these products will be available
from government health administration authorities, private health insurers and
other organizations. Third-party payors are increasingly challenging the price
of medical products and services. Significant uncertainty 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:
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. announcements of new technological innovations or new products by us
or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the biotechnology and life science industries;
. changes in the market valuations of other biotechnology or life
science companies;
. developments in domestic and international governmental policy or
regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. developments in patent or other proprietary rights;
. period-to-period fluctuations in our operating results;
. future royalties from product sales, if any, by our strategic
partners; and
. sales of our common stock or other securities in the open market.
In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us,
we would incur substantial legal fees and our management's attention and
resources would be diverted from operating our business in order to respond to
the litigation.
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 2000. Failure to achieve
anticipated levels of revenues could therefore significantly harm our operating
results for a particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters
may not meet the expectations of stock market analysts and investors. In that
case, our stock price would probably decline.
Future Sales of Our Common Stock May Depress Our Stock Price.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock.
There were approximately 32,270,769 shares of common stock outstanding as of
March 31, 2000. Of these shares, 7,081,834 shares are freely transferable
without restriction or further registration under the Securities Act, except for
any shares held by our "affiliates," as defined in Rule 144 of the Securities
Act, 1,218,366 shares are subject to lock-up agreements providing that the
stockholders will not offer, sell or otherwise dispose of any of the shares of
common stock owned by them until June 19, 2000 and 100,925 shares are subject to
lock-up agreements that expire on June 12, 2000. The remaining 23,869,644
shares of common stock outstanding are "restricted securities" as defined in
Rule 144 and may be sold without registration under the Securities Act to the
extent permitted by Rule 144 or other exemptions under the Securities Act. Our
directors, officers and certain stockholders, including greater than 5%
stockholders, who hold approximately 17,004,809 of these remaining shares have
agreed not to sell any
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of these shares until June 19, 2000. Other stockholders holding approximately
6,864,835 shares have agreed in connection with our initial public offering not
to sell any of these shares until June 13, 2000.
Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make
Decisions that Are in the Best Interests of All Stockholders.
Our officers, directors and principal stockholders (greater than 5%
stockholders) together control approximately 46% of our outstanding common
stock, and Glaxo Wellcome International B.V. owns approximately 21% of our
outstanding common stock. As a result, these stockholders, if they act
together, and Glaxo Wellcome International B.V. by itself, are able to exert a
significant degree of influence over our management and affairs and over matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change in control of Maxygen and might affect
the market price of our common stock, even when a change may be in the best
interests of all stockholders. In addition, the interests of this concentration
of ownership may not always coincide with our interests or the interests of
other stockholders and accordingly, they could cause us to enter into
transactions or agreements that we would not otherwise consider.
Item 3
Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objective of our investment activities is to preserve the 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 March 31, 2000, approximately 95% 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 March
31, 2000 (in thousands, except interest rates):
2000 2001
Cash equivalents.................................. $243,819 --
Average interest rates............................ 5.89% --
Short-term investments............................ $ 9,990 --
Average interest rates............................ 6.41% --
Long-term investments............................. -- $14,076
Average interest rates............................ -- 7.04%
We did not hold derivative instruments as of March 31, 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 $1.8
million as of March 31, 2000, with average interest rates of approximately 11%.
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. While we expect to effect some transactions in
foreign currencies during 2000, we do not expect that foreign exchange gains or
losses will be significant. We have not engaged in foreign currency hedging to
date.
21
<PAGE>
================================================================================
Part II - Other Information
Item 1
Legal Proceedings
Not applicable.
Item 2
Changes in Securities and Use of Proceeds
The effective date of our first registration statement, filed on Form S-1 under
the Securities Act of 1933 (No. 333-89413) relating to our initial public
offering of common stock, was December 15, 1999. A total of 6,900,000 shares of
our common stock were sold at a price of $16.00 per share to an underwriting
syndicate led by Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and
Invemed Associates LLC. Of these 6,900,000 shares, 900,000 were issued upon
exercise of the underwriters' over-allotment option. The offering commenced on
December 16, 1999 and closed on December 21, 1999. The initial public offering
resulted in gross proceeds of $110.4 million, $7.7 million of which was applied
toward the underwriting discount. Expenses related to the offering totaled
approximately $1.7 million. Net proceeds to us were approximately $101.0
million. From the time of receipt through March 31, 2000, the proceeds were
applied toward:
. purchases and installation of equipment and build-out of facilities,
$521,000;
. repayment of indebtedness, $6,000;
. working capital, $2.7 million; and
. temporary investments in certificates of deposits, mutual funds and
corporate debt securities, $98 million.
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:
27.01 Financial Data Schedule (EDGAR version only)
(b) There were no reports on Form 8-K filed during the quarter ended March 31,
2000.
22
<PAGE>
================================================================================
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.
May 12, 2000 By: /s/ Russell J. Howard
----------------------------------
Russell J. Howard
Chief Executive Officer
May 12, 2000 By: /s/ Simba Gill
----------------------------------
Simba Gill
President, Chief Financial Officer and Senior Vice
President of Corporate Development
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAXYGEN,
INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 246,521
<SECURITIES> 9,990
<RECEIVABLES> 3,938
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 261,185
<PP&E> 6,232
<DEPRECIATION> 1,256
<TOTAL-ASSETS> 280,993
<CURRENT-LIABILITIES> 6,673
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 270,446
<TOTAL-LIABILITY-AND-EQUITY> 280,993
<SALES> 0
<TOTAL-REVENUES> 5,414
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (5,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,640)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
