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United States
Securities and Exchange Commission
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
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) | 77-0449487 (I.R.S. Employer Identification No.) |
515 Galveston Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 298-5300
(Registrant’s telephone number, including area code)
(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 [ ] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] | No [ X ] |
As of October 31, 2006, there were 36,103,009 shares of the registrant’s common stock, $0.0001 par value per share, outstanding, which is the only class of common or voting stock of the registrant issued.
MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
INDEX
Part I | ||||||||
Item 1: | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
Item 2: | 19 | |||||||
Item 3: | 28 | |||||||
Item 4: | 28 | |||||||
Part II | ||||||||
Item 1: | 30 | |||||||
Item 1A: | 30 | |||||||
Item 2: | 42 | |||||||
Item 3: | 42 | |||||||
Item 4: | 42 | |||||||
Item 5: | 42 | |||||||
Item 6: | 42 | |||||||
SIGNATURES | 43 | |||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 |
This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS and Maxygen Holdings Ltd. For the nine months ended September 30, 2005, the operations of Codexis, Inc., through February 28, 2005, are also included. On February 28, 2005, our voting interests in Codexis fell below 50% and, from such date, the financial position and results of operations of Codexis are no longer consolidated with our financial position and results of operations. We instead reflect our investment in Codexis under the equity method of accounting. In this report, “Maxygen,” the “company,” “we,” “us” and “our” refer to such consolidated entities, unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.
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Our web site is located at www.maxygen.com. We make available free of charge, on or through our web site, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such reports with the Securities and Exchange Commission, or SEC. Information contained on our web site is not part of this report.
We own or have rights to various copyrights, trademarks and trade names used in our business, including Maxygen™ and MolecularBreeding.™ Other service marks, trademarks and trade names referred to in this report are the property of their respective owners. The use of the word “partner” and “partnership” does not mean a legal partner or legal partnership.
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,” “can,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:
• | our ability to develop products suitable for commercialization; | ||
• | our predicted development and commercial timelines for any of our potential products, including the timing of any commencement of clinical trials of any product candidate and the progress of such clinical trials; | ||
• | the commercial success of any of our products that may be marketed or sold; | ||
• | our liquidity and future financial performance; | ||
• | the establishment, development and maintenance of any manufacturing or collaborative relationships; | ||
• | the effectiveness of our MolecularBreeding directed evolution platform and other technologies and processes; | ||
• | our ability to protect our intellectual property portfolio and rights; | ||
• | our ability to identify and develop new potential products; | ||
• | the attributes of any products we may develop; and | ||
• | our business strategies and plans. |
These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in this report, including the factors described in the section entitled “Item 1A – Risk Factors,” as well as those discussed in our Annual Report on Form 10-K for the year ended December 31, 2005.
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. Other than as required by applicable law, we disclaim any obligation to update or revise any forward-looking statement contained in this report as a result of new information or future events or developments.
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PartI – Financial Information
Item 1. Financial Statements
MAXYGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, | September 30, | |||||||
2005 | 2006 | |||||||
(Note 1) | (unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 26,940 | $ | 33,522 | ||||
Short-term investments | 127,336 | 120,567 | ||||||
Accounts receivable and other receivables | 6,076 | 3,427 | ||||||
Prepaid expenses and other current assets | 3,530 | 3,616 | ||||||
Total current assets | 163,882 | 161,132 | ||||||
Property and equipment, net | 4,068 | 3,427 | ||||||
Goodwill | 12,192 | 12,192 | ||||||
Long-term investments | 34,047 | 16,103 | ||||||
Deposits and other long-term assets | 334 | 349 | ||||||
Total assets | $ | 214,523 | $ | 193,203 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,540 | $ | 1,707 | ||||
Accrued compensation | 4,323 | 3,727 | ||||||
Other accrued liabilities | 3,121 | 2,378 | ||||||
Deferred revenue | 2,668 | 1,788 | ||||||
Total current liabilities | 11,652 | 9,600 | ||||||
Non-current deferred revenue | 5,517 | 4,325 | ||||||
Other long-term liabilities | 10 | — | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2005 and September 30, 2006 | — | — | ||||||
Common stock, $0.0001 par value: 100,000,000 shares authorized, 35,922,178 and 36,095,827 shares issued and outstanding at December 31, 2005 and September 30, 2006, respectively | 3 | 4 | ||||||
Additional paid-in capital | 403,120 | 408,972 | ||||||
Accumulated other comprehensive loss | (1,557) | (654) | ||||||
Accumulated deficit | (204,222) | (229,044) | ||||||
Total stockholders’ equity | 197,344 | 179,278 | ||||||
Total liabilities and stockholders’ equity | $ | 214,523 | $ | 193,203 | ||||
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months ended | Nine Months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2006 | 2005 | 2006 | |||||||||||||
(unaudited) | ||||||||||||||||
Collaborative research and development revenue | $ | 106 | $ | 3,201 | $ | 6,509 | $ | 15,218 | ||||||||
Grant revenue | 629 | 1,040 | 1,721 | 3,293 | ||||||||||||
Total revenues | 735 | 4,241 | 8,230 | 18,511 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 9,986 | 12,020 | 31,090 | 35,494 | ||||||||||||
General and administrative | 2,997 | 4,547 | 10,144 | 12,930 | ||||||||||||
Total operating expenses | 12,983 | 16,567 | 41,234 | 48,424 | ||||||||||||
Loss from operations | (12,248) | (12,326) | (33,004) | (29,913) | ||||||||||||
Interest income and other (expense), net | 1,659 | 2,267 | 3,808 | 6,091 | ||||||||||||
Equity in net loss of minority investee | — | (658) | — | (1,000) | ||||||||||||
Loss from continuing operations | (10,589) | (10,717) | (29,196) | (24,822) | ||||||||||||
Cumulative effect adjustment | — | — | 16,616 | — | ||||||||||||
Net loss | (10,589) | (10,717) | (12,580) | (24,822) | ||||||||||||
Subsidiary preferred stock accretion | — | — | (167) | — | ||||||||||||
Loss applicable to common stockholders | $ | (10,589) | $ | (10,717) | $ | (12,747) | $ | (24,822) | ||||||||
Basic and diluted loss per share: | ||||||||||||||||
Continuing operations | $ | (0.30) | $ | (0.30) | $ | (0.82) | $ | (0.69) | ||||||||
Cumulative effect adjustment | $ | — | $ | — | $ | 0.47 | $ | — | ||||||||
Applicable to common stockholders | $ | (0.30) | $ | (0.30) | $ | (0.36) | $ | (0.69) | ||||||||
Shares used in basic and diluted per share calculations | 35,812 | 36,078 | 35,724 | 36,025 |
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
(unaudited) | ||||||||
Operating activities | ||||||||
Net loss | $ | (12,580) | $ | (24,822) | ||||
Cumulative effect adjustment | 16,616 | — | ||||||
Loss from continuing operations | (29,196) | (24,822) | ||||||
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,829 | 1,787 | ||||||
Equity in losses of minority investee | — | 1,000 | ||||||
Non-cash stock compensation | 11 | 4,600 | ||||||
Common stock issued and stock options granted to consultants for services rendered and for certain technology rights | 110 | 540 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable and other receivables | 565 | 2,649 | ||||||
Prepaid expenses and other current assets | 77 | 361 | ||||||
Deposits and other assets | 2 | (15) | ||||||
Accounts payable | 624 | 167 | ||||||
Accrued compensation | (1,150) | (598) | ||||||
Accrued program termination costs | (2,209) | — | ||||||
Other accrued liabilities | 605 | (753) | ||||||
Taxes payable | (921) | — | ||||||
Deferred revenue | (458) | (2,072) | ||||||
Net cash used in operating activities | (29,111) | (17,156) | ||||||
Investing activities | ||||||||
Purchases of available-for-sale securities | (147,735) | (99,635) | ||||||
Maturities of available-for-sale securities | 175,757 | 124,799 | ||||||
Investment in minority investee | — | (1,000) | ||||||
Cash used in acquisition, net of cash acquired | (2,617) | — | ||||||
Acquisition of property and equipment | (1,954) | (1,146) | ||||||
Net cash provided by investing activities | 23,451 | 23,018 | ||||||
Financing activities | ||||||||
Repayments under equipment financing obligations | (115) | — | ||||||
Borrowings under equipment financing obligations | 1,229 | — | ||||||
Proceeds from issuance of common stock | 1,259 | 713 | ||||||
Net cash provided by financing activities | 2,373 | 713 | ||||||
Codexis related net adjustment | (2,365) | — | ||||||
Effect of exchange rate changes on cash and cash equivalents | 302 | 7 | ||||||
Net increase (decrease) in cash and cash equivalents | (5,350) | 6,582 | ||||||
Cash and cash equivalents at beginning of period | 40,415 | 26,940 | ||||||
Cash and cash equivalents at end of period | $ | 35,065 | $ | 33,522 | ||||
Supplemental Cash Flow Information | ||||||||
Non-cash transactions: | ||||||||
Codexis common stock issued in acquisition | $ | (188) | — |
See accompanying notes.
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MAXYGEN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(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, 2006, and for the three and nine months ended September 30, 2005 and September 30, 2006, includes all adjustments (consisting only of normal recurring adjustments) that the management of Maxygen, Inc. (the “Company”) believes necessary for fair presentation of the results for the periods presented. The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In addition, 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 Annual Report on Form 10-K for the year ended December 31, 2005.
On February 28, 2005, as a result of the issuance of the common stock of Codexis, Inc. (“Codexis”) in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other events, the Company’s voting rights in Codexis were reduced below 50%. As a result, as of February 28, 2005, the Company no longer consolidates the financial position and results of operations of Codexis with the Company’s financial results and instead accounts for Codexis under the equity method of accounting from that date forward.
Principles of Consolidation
The consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries, Maxygen ApS (Denmark) (“Maxygen ApS”), which was acquired by the Company in August 2000, and Maxygen Holdings Ltd. (Cayman Islands) (“Maxygen Holdings”). For the two months ended February 28, 2005, the results of operations of Codexis are also included in the condensed consolidated financial statements. Subsequent to February 28, 2005, the Company’s investment in Codexis is reflected using the equity method of accounting.
As of December 31, 2004, the Company’s ownership in Codexis was approximately 51.4%, based upon the voting rights of the issued and outstanding shares of Codexis common and preferred stock. In accordance with Emerging Issues Task Force Consensus 96-16, “Investor Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights” (“EITF 96-16”) and paragraph 1 of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”), the Company has included 100% of the net losses of Codexis in the determination of the Company’s consolidated net loss. The Company recorded minority interest in the condensed consolidated financial statements to account for the ownership interest of the minority owner. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, the Company’s voting rights of the issued and outstanding shares of Codexis common and preferred stock were reduced below 50%. As a result, as of February 28, 2005, the date upon which such rights fell below 50%, the Company no longer consolidates the financial results of Codexis. In accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock,” the Company accounts for its investment in Codexis under the equity method of accounting after February 28, 2005.
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In 2002, Codexis sold $25 million of Codexis series B redeemable convertible preferred stock to investors, of which, $5 million was purchased by the Company and $20 million was purchased by several unrelated investors. In connection with the redemption rights of the Codexis series B stockholders, the Company has recorded accretion of the redemption premium for the series B redeemable convertible preferred stock, excluding the shares owned by the Company, in the amount of $167,000 in the nine months ended September 30, 2005. The accretion is recorded as subsidiary preferred stock accretion on the condensed consolidated statements of operations and as a reduction of additional paid-in capital and an increase to minority interest on the condensed consolidated balance sheets. No accretion was recorded for the nine months ended September 30, 2006. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis.
As of September 30, 2005, the Company had recorded losses equal to its investment basis in Codexis. In May 2006, the Company purchased $600,000 of secured subordinated convertible promissory notes and, in August 2006, the Company purchased approximately $1 million of Codexis preferred stock (including the conversion of its convertible promissory note). Subsequent to its investments in May and August 2006, the Company recorded losses of $1.0 million under the equity method of accounting and, at September 30, 2006, had recorded losses equal to its investment basis in Codexis. The Company is not obligated to provide additional funding to Codexis. As of September 30, 2006, the Company’s equity interest in Codexis was approximately 33%.
As of September 30, 2006, the Company’s equity interest in Avidia Inc. (“Avidia”), a biotechnology company formed by the Company and an unrelated third party investor in July 2003, was approximately 5%. Until March 31, 2005, the Company’s investment in Avidia was accounted for under the equity method of accounting and the Company’s share of Avidia’s results were recorded to the extent of the Company’s accounting basis in Avidia as a component of equity in net loss of minority investee in the Consolidated Statements of Operations. In April 2005, Avidia issued additional equity securities, which reduced the Company’s ownership below 20%. Avidia issued additional equity securities in May 2006 that further reduced the Company’s ownership. Since the Company does not have the ability to exercise significant influence over Avidia’s operating and financial policies, after March 31, 2005, the Company’s investment in Avidia is being accounted for under the cost method of accounting. For more information regarding the Company’s investment in Avidia, see Note 10.
Cumulative Effect Adjustment
Codexis was formed in January 2002 and financed by the Company and several other independent investors. In accordance with EITF 96-16 and ARB 51, through February 28, 2005, the Company consolidated 100% of the operating results of Codexis, even though it only owned a majority of the voting interests in Codexis. From March 2002 through February 28, 2005, the Company had recorded cumulative losses of Codexis of $26.4 million, which was in excess of the Company’s investment basis of $9.8 million. On February 28, 2005, the Company’s voting rights in Codexis were reduced below 50%. As a result, the Company no longer consolidates the financial position and results of operations of Codexis with the Company’s financial results as of such date and instead accounts for Codexis under the equity method of accounting. To reflect what the Company’s basis in Codexis would have been under equity accounting as required by EITF 96-16, the Company recorded a cumulative effect adjustment of $16.6 million in the first quarter of 2005 to bring its investment basis in Codexis to zero as of February 28, 2005. This cumulative effect adjustment does not have any tax consequences.
Reclassifications
Stock compensation expenses of approximately $4,000 and $121,000 in the three and nine months ended September 30, 2005 have been reclassified to operating expenses (either research and development expenses or general and administrative expenses) in the Company’s Consolidated Statement of Operations as a result of the Company’s implementation of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payments” (“SFAS 123(R)”), effective January 1, 2006. Previously, stock compensation expense had been presented separately on the face of the consolidated statement of operations.
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Revenue Recognition
The Company recognizes revenue from multiple element arrangements under collaborative research agreements, including license payments, research and development services, milestones and royalties. Revenue arrangements with multiple deliverables are accounted for under the provisions of Staff Accounting Bulletin No. 104 and Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items in the arrangement. The consideration the Company receives is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.
Non-refundable up-front payments received in connection with research and development collaboration agreements, including license fees, and technology advancement funding that is intended for the development of the Company’s core technologies, are deferred upon receipt and recognized as revenue over the relevant research and development periods specified in the agreement. Under arrangements where the Company expects its research and development obligations to be performed evenly over the specified period, the up-front payments are recognized on a straight-line basis over the period. Under arrangements where the Company expects its research and development obligations to vary significantly from period to period, the Company recognizes the up-front payments based upon the actual amount of research and development efforts incurred relative to the amount of the total expected effort to be incurred by the Company. In cases where the planned levels of research services fluctuate substantially over the research term, this requires the Company to make critical estimates in both the remaining time period and the total expected costs of its obligations and, therefore, a change in the estimate of total costs to be incurred or in the remaining time period could have a significant impact on the revenue recognized in future periods.
Revenue related to collaborative research payments from 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 typically required to perform research and development activities as specified in the respective agreement. Generally, the payments received are not refundable and are based on a contractual cost per full-time equivalent employee working on the project. Under certain collaborative research and development agreements, the Company and the collaborative partner have agreed to share in the costs of research and development. In periods where the Company incurs more costs than the collaborative partner, payments from the collaborative partner are included in collaborative research and development revenues and, in periods where the collaborative partner incurs more expenses than the Company, the Company’s payments to the collaborative partner are included in research and development expenses. Research and development expenses (including general and administrative expenses) under the collaborative research agreements approximate or exceed the research funding 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.
Payments received relating to substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event because the Company has no future performance obligations related to the payment. Incentive milestone payments may be triggered either by the results of the Company’s research efforts or by events external to the Company, such as regulatory approval to market a product. Milestone revenues totaled $5.0 million for the nine months ended September 30, 2006 and $2.4 million for the nine months ended September 30, 2005 and are included in collaborative research and development revenues in the condensed consolidated statements of operations. There were no milestone revenues for the three months ended September 30, 2006 and three months ended September 30, 2005.
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The Company is eligible to receive royalties from licensees, which are typically based on sales of licensed products to third parties. Royalties are recorded as earned in accordance with the contract terms when third party sales can be reliably measured and collectibility is reasonably assured.
The Company has been awarded grants from the Defense Advanced Research Projects Agency, the National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development, the U.S. Army Medical Research and Materiel Command, the National Institutes of Health, and the U.S. Army Space & Missile Defense Command for various research and development projects. The terms of these grant agreements range from one to five years with various termination dates, the last of which is January 2010 for existing agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred.
Loss Per Common Share
Basic and diluted loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period.
The following table presents the calculation of basic and diluted loss per common share (in thousands, except per share data):
Three Months ended | Nine Months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2006 | 2005 | 2006 | |||||||||||||
Loss applicable to common stockholders | $ | (10,589) | $ | (10,717) | $ | (12,747) | $ | (24,822) | ||||||||
Basic and diluted: | ||||||||||||||||
Weighted-average shares used in computing basic and diluted loss per share | 35,812 | 36,078 | 35,724 | 36,025 | ||||||||||||
Basic and diluted loss per common share | $ | (0.30) | $ | (0.30) | $ | (0.36) | $ | (0.69) | ||||||||
In accordance with paragraph 15 of Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” the Company has excluded all outstanding stock options, outstanding warrants and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive to loss from continuing operations for all applicable periods presented. The total number of shares excluded from the calculations of diluted loss per share, prior to application of the treasury stock method for options, was approximately 9,824,735 at September 30, 2005 and 10,774,083 at September 30, 2006.
Comprehensive Loss
Comprehensive loss is primarily comprised of net loss, net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. Comprehensive loss and its components for the three-month and nine-month periods ended September 30, 2005 and 2006 were as follows (in thousands):
Three Months ended | Nine Months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2006 | 2005 | 2006 | |||||||||||||
Net loss | $ | (10,589) | $ | (10,717) | $ | (12,580) | $ | (24,822) | ||||||||
Changes in unrealized gain (loss) on available-for-sale securities | (134) | 443 | 57 | 449 | ||||||||||||
Changes in foreign currency translation adjustments | (24) | (165) | (452) | 454 | ||||||||||||
Comprehensive loss | $ | (10,747) | $ | (10,439) | $ | (12,975) | $ | (23,919) | ||||||||
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The components of accumulated other comprehensive loss are as follows (in thousands):
December 31, | September 30, | |||||||
2005 | 2006 | |||||||
Unrealized gain on available-for-sale securities | $ | — | $ | 82 | ||||
Unrealized losses on available-for-sale securities | (592) | (225) | ||||||
Foreign currency translation adjustments | (579) | (572) | ||||||
Unrealized gains(losses) on foreign currency contracts | (386) | 61 | ||||||
Accumulated other comprehensive loss | $ | (1,557) | $ | (654) | ||||
Recent Accounting Pronouncements
In November 2005, the FASB issued FASB Staff Position Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The adoption of FSP 115-1 did not have a material impact on the Company’s results of operations or financial condition.
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), a replacement of Accounting Principles Board Opinions No. 20, “Accounting Changes,” and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles were recognized by including in net income during the period of change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. However, SFAS 154 does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS 154 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is still evaluating what impact, if any, the adoption of this standard will have on its financial position or results of operations.
Stock-Based Compensation
As of September 30, 2006, the Company had four stock option plans: the 2006 Equity Incentive Plan (the “2006 Plan”); the 1999 Nonemployee Directors Stock Option Plan; the 2000 International Stock Option Plan; and the 2000 Non-Officer Stock Option Plan. These stock plans generally provide for the grant of stock options to employees, directors and/or consultants. The 2006 Plan also provides for the grant of additional equity-based awards, including stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and dividend equivalents. The Company also has an Employee Stock Purchase Plan (“ESPP”) that enables eligible employees to purchase Company common stock.
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Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards. The fair value of stock options and ESPP shares was estimated using the Black-Scholes-Merton option valuation model. This model requires the input of subjective assumptions in implementing SFAS 123(R), including expected stock price volatility, estimated life and estimated forfeitures of each award. The Company has adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, compensation cost recognized during the nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) amortized on a graded vesting basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R) amortized on a straight-line basis over the options’ vesting period. Under this method of implementation, no restatement of prior periods has been made.
Stock-based compensation expense recognized under SFAS 123(R) in the condensed consolidated statements of operations for the three months ended September 30, 2006 was $1.8 million related to stock options and $20,000 related to the ESPP, and for the nine months ended September 30, 2006 was $4.9 million related to stock options and $87,000 related to the ESPP. As a result of its implementation of SFAS 123(R), the Company’s net loss for the three months and nine months ended September 30, 2006 increased by $1.8 million and $5.0 million, respectively. The implementation of SFAS 123(R) also increased basic and fully diluted loss per share to $0.25 and $0.55 for the three months and nine months ended September 30, 2006. The implementation of SFAS 123(R) did not have an impact on cash flows from operations during the nine months ended September 30, 2006.
Prior to January 1, 2006, the Company measured compensation expense for its employee equity-based compensation plans using the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. As the exercise price of all options granted under these plans was not below the fair market price of the underlying common stock on the grant date, no equity-based compensation cost was recognized in the condensed consolidated statements of operations under the intrinsic value method.
Stock Options
The exercise price of each stock option equals the closing market price of the Company’s stock on the date of grant. Most options are scheduled to vest over four years and all options expire no later than 10 years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of publicly traded options.
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As part of its adoption of SFAS 123(R), the Company also examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, the Company identified no discernable activity patterns other than the employee populations for its U.S. and Danish operations. The Company used the Black- Scholes-Merton option pricing model to value the options for each of the employee populations. The weighted average assumptions used in the model for each employee population are outlined in the following table:
Three Months ended | Nine Months ended | |||||||||||||||
September 30, 2006 | September 30, 2006 | |||||||||||||||
U.S. | Danish | U.S. | Danish | |||||||||||||
Employees | Employees | Employees | Employees | |||||||||||||
Expected dividend yield | 0.0% | 0.0% | 0.0% | 0.0% | ||||||||||||
Risk-free interest rate range—Options | 5.11 | % | 5.17% | 4.30% to 5.11% | 4.34% to 5.17% | |||||||||||
Risk-free interest rate range—ESPP | 4.74% to 5.05% | — | 3.20% to 5.05% | — | ||||||||||||
Expected life—Options | 5.13 years | 2.4 years | 5.13 years | 2.4 years | ||||||||||||
Expected life—ESPP | 0.48 years | — | 0.48 years to 0.92 years | — | ||||||||||||
Expected volatility-Options | 53.70 | % | 44.67% | 53.70% to 56.42% | 44.38% to 45.78% | |||||||||||
The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods.
A summary of the changes in stock options outstanding under the Company’s equity-based compensation plans during the nine months ended September 30, 2006 is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Price Per | Term | Value | ||||||||||||||
Shares | Share | (in years) | (in thousands) | |||||||||||||
Options outstanding at December 31, 2005 | 9,401,599 | $ | 16.13 | |||||||||||||
Granted | 2,132,836 | $ | 7.80 | |||||||||||||
Exercised | (101,555) | $ | 3.97 | |||||||||||||
Canceled | (658,797) | $ | 40.78 | |||||||||||||
Options outstanding at September 30, 2006 | 10,774,083 | $ | 13.09 | 6.75 | $ | 6,485 | ||||||||||
Options exercisable at September 30, 2006 | 7,114,791 | $ | 15.44 | 5.72 | $ | 4,555 |
The intrinsic value of options exercised during the three months ended September 30, 2005 and 2006 was $330,000 and $2,000, respectively, and was $673,000 and $405,000 in the nine months ended September 30, 2005 and 2006, respectively. The estimated fair value of shares vested during the three months ended September 30, 2005 and 2006 was $2.9 million and $1.6 million, respectively, and was $9.7 million and $5.9 million in the nine months ended September 30, 2005 and 2006, respectively. The weighted average grant date fair value of options granted during the three months and nine months
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ended September 30, 2006 was $7.49 and $7.80, respectively. At September 30, 2006, the Company had $10.5 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over the weighted average remaining vesting period of 1.21 years. Cash received from stock option exercises and purchases under the ESPP was $175,000 and $713,000 during the three and nine months ended September 30, 2006.
The following table summarizes outstanding and exercisable options at September 30, 2006:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
Average | ||||||||||||||||||||
Number of | Remaining | Weighted- | Number of | Weighted- | ||||||||||||||||
Range of | Shares | Contractual Life | Average | Shares | Average | |||||||||||||||
Exercise Prices | Outstanding | (in years) | Exercise Price | Outstanding | Exercise Price | |||||||||||||||
$0.20 - $7.00 | 1,377,260 | 6.64 | $ | 5.50 | 869,874 | $ | 4.62 | |||||||||||||
$7.08 - $7.40 | 1,497,169 | 6.85 | $ | 7.33 | 1,310,271 | $ | 7.36 | |||||||||||||
$7.47 - $7.89 | 1,818,982 | 8,78 | $ | 7.73 | 116,278 | $ | 7.54 | |||||||||||||
$7.92 - $10.33 | 1,221,042 | 8.04 | $ | 9.20 | 641,315 | $ | 9.56 | |||||||||||||
$10.41 - $10.76 | 1,277,872 | 6.64 | $ | 10.58 | 1,121,007 | $ | 10.59 | |||||||||||||
$10.80 - $12.44 | 1,237,860 | 7.03 | $ | 12.02 | 712,148 | $ | 11.95 | |||||||||||||
$12.99 - $17.20 | 1,116,807 | 4.78 | $ | 13.80 | 1,116,807 | $ | 13.80 | |||||||||||||
$17.41 - $53.75 | 796,925 | 4.19 | $ | 36.12 | 796,925 | $ | 36.12 | |||||||||||||
$56.88 - $59.81 | 430,166 | 3.76 | $ | 57.17 | 430,166 | $ | 57.17 | |||||||||||||
10,774,083 | 7,114,791 | |||||||||||||||||||
Employee Stock Purchase Plan
Under the ESPP, eligible employees may purchase common stock at a discount, through payroll deductions, during defined offering periods. The price at which stock is purchased under the ESPP is equal to 85% of the lower of (i) the fair market value of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the purchase date. During the nine months ended September 30, 2006, 46,815 shares of common stock were purchased pursuant to the ESPP. The weighted average fair value of purchase rights granted during the nine months ended September 30, 2006 was $0.82. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes-Merton model. For the three and nine months ended September 30, 2006, ESPP compensation expense was $20,000 and $87,000.
Pro Forma Information under SFAS 123 for Periods Prior to 2006
Prior to January 1, 2006, the Company followed the disclosure-only provisions of SFAS 123. The following table illustrates the effect on net loss and loss per common share for the three and nine months ended September 30, 2005 if the fair value recognition provisions of SFAS 123, as amended, had been applied to options granted under the Company’s equity-based employee compensation plans. For purposes of this pro forma disclosure, the estimated value of the options is recognized over the options’ vesting periods. If the Company had recognized the expense of equity programs in the consolidated statement of operations, additional paid-in capital would have increased by a corresponding amount, net of applicable taxes.
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Three Months | Nine Months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
(in thousands) | 2005 | 2005 | ||||||
Net loss, as reported | $ | (10,589) | $ | (12,580) | ||||
Add: Stock based employee compensation cost included in the determination of net loss, as reported | — | — | ||||||
Deduct: Total stock based employee compensation expense determined under the fair value-based method for all awards | (2,136) | (4,782) | ||||||
Pro forma net loss | $ | (12,725) | $ | (17,362) | ||||
Loss per common share: | ||||||||
Basic and diluted | $ | (0.30) | $ | (0.35) | ||||
Basic and diluted – pro forma | $ | (0.36) | $ | (0.49) | ||||
For purposes of the weighted average estimated fair value calculations, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model and the following assumptions:
Three Months | Nine Months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2005 | 2005 | |||||||
Expected dividend yield | 0.0 | % | 0.0 | % | ||||
Risk-free interest rate range—Options | 3.92 | % | 3.71% to 3.92% | |||||
Risk-free interest rate range—ESPP | 3.20% to 3.38% | 1.23% to 3.38% | ||||||
Expected life—Options | 4 years | 4 years | ||||||
Expected life—ESPP | 0.5 years | 0.5 years to 0.85 years | ||||||
Expected volatility | 52.82 | % | 52.82% to 54.69% |
Based on the Black-Scholes-Merton option pricing model, the weighted average estimated fair value of employee stock option grants was $3.87 and $5.39 for the three and nine months ended September 30, 2005, respectively, and the weighted average fair value of purchase rights granted under the ESPP was $2.10 and $2.01 for the three and nine months ended September 30, 2005, respectively.
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Valuation and Expense Information under SFAS 123(R)
For the three-month and nine-month periods ended September 30, 2006, stock-based compensation expense related to employee stock options, consultant options and employee stock purchases under SFAS 123(R) was allocated as follows (in thousands):
Three Months | Nine Months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2006 | 2006 | |||||||
Research and development | $ | 564 | $ | 1,595 | ||||
General and administrative | 1,240 | 3,355 | ||||||
Stock-based compensation expense before income taxes | 1,804 | 4,950 | ||||||
Income tax benefit | — | — | ||||||
Total stock-based compensation expense after income taxes | $ | 1,804 | $ | 4,950 | ||||
There was no capitalized stock-based employee compensation cost as of September 30, 2006. There were no recognized tax benefits during the quarter ended September 30, 2006.
2. Cash Equivalents and 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 investments. Unrealized gains and losses are reported as accumulated other comprehensive loss in stockholders’ equity. The amortized cost 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 and declines in value deemed to be other than temporary, if any, 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, 2006 were as follows (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Money market funds | $ | 26,055 | $ | — | $ | — | $ | 26,055 | ||||||||
Commercial paper | 32,565 | 37 | 32,602 | |||||||||||||
Corporate bonds | 47,726 | 6 | (29) | 47,703 | ||||||||||||
U.S. government agency securities | 63,989 | 39 | (196) | 63,832 | ||||||||||||
Total | 170,335 | 82 | (225) | 170,192 | ||||||||||||
Less amounts classified as cash equivalents | (33,518) | (4) | — | (33,522) | ||||||||||||
Total investments | $ | 136,817 | $ | 78 | $ | (225 | ) | $ | 136,670 | |||||||
There were no realized gains or losses on the sale of available-for-sale securities for the three-month and nine-month periods ended September 30, 2005 and September 30, 2006. The change in unrealized holdings gains (losses) on available-for-sale securities included in accumulated other comprehensive loss were unrealized gains of $57,000 and $449,000 for the nine-month periods ended September 30, 2005 and September 30, 2006. The Company has the intent and ability to hold the securities until maturity and therefore does not believe that the unrealized losses of $225,000 are other than temporary.
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At September 30, 2006, the contractual maturities of investments were as follows (in thousands):
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Due within one year | $ | 120,748 | $ | 120,567 | ||||
Due after one year | 16,069 | 16,103 | ||||||
$ | 136,817 | $ | 136,670 | |||||
3. Derivatives and Financial Instruments
The Company addresses certain financial exposures through a program of risk management that includes the use of derivative financial instruments. To date, the Company has only entered into foreign currency forward exchange contracts generally expiring within fifteen months to reduce the effects of fluctuating foreign currency exchange rates on forecasted cash requirements.
The purpose of the hedging activities is to minimize the effect of foreign currency exchange rate movements on the cash flows related to the Company’s funding of Maxygen ApS and payments to vendors in Europe. To date, foreign currency contracts are denominated in Danish kroner and euros. At September 30, 2006, the Company had foreign currency contracts outstanding in the form of forward exchange contracts totaling $3.0 million that expire over the next three months.
The Company accounts for derivative instruments under the provisions of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and evaluating effectiveness of hedging relationships.
All derivatives are recognized on the balance sheet at their fair value. The Company has designated its derivatives as foreign currency cash flow hedges. Changes in the fair value of derivatives that are highly effective as, and that are designated and qualify as, foreign currency cash flow hedges are recorded in other comprehensive income until the associated hedged transaction impacts earnings. Changes in the fair value of derivates that are ineffective are recorded as interest income and other (expense), net in the period of change.
The Company documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.
As a matter of policy, the Company only enters into contracts with counterparties that have at least an “A” (or equivalent) credit rating. The counterparties to these contracts are major financial institutions. Exposure to credit loss in the event of nonperformance by any of the counterparties is limited to only the recognized, but not realized, gains attributable to the contracts. Management believes risk of loss is remote and in any event would not be material. Costs associated with entering into such contracts have not been material to the Company’s financial results. The Company does not utilize derivative financial instruments for trading or speculative purposes.
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4. Litigation
In December 2001, a lawsuit was filed in the U.S. District Court for the Southern District of New York against the Company, its chief executive officer, Russell Howard, and its chief financial officer at the time of the initial public offering, Simba Gill, together with certain underwriters of the Company’s initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called “laddering” cases that have been commenced against over 300 companies that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styledIn re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against Drs. Howard and Gill; the remainder of the case remains pending.
In June 2003, the Company agreed to the terms of a tentative settlement agreement along with other defendant issuers inIn re Initial Public Offering Securities Litigation. The tentative settlement provides that the insurers of the 309 defendant issuers will pay to the plaintiffs $1 billion, less any recovery of damages the plaintiffs receive from the defendant underwriters. If the plaintiffs receive over $5 billion in damages from the defendant underwriters, the Company will be entitled to reimbursement of various expenses incurred by it as a result of the litigation. As part of the tentative settlement, the Company will assign to the plaintiffs “excess compensation claims” and certain other of its claims against the defendant underwriters based on the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial majority of defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. On February 15, 2005, the Court tentatively approved the proposed settlement, conditioned upon the parties altering the proposed settlement to comply with the Private Securities Litigation Reform Act’s settlement discharge provision. The settlement does not contemplate any settlement payments by the Company.
If the settlement is not accepted by the requisite number of defendants or if it is not approved by the Court, the Company intends to defend the lawsuit vigorously. The Company believes the lawsuit against the Company and its officers is without merit. However, the litigation is in the preliminary stage, and the Company cannot predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, the Company’s business would be significantly harmed.
The Company is not currently a party to any other material pending legal proceedings.
From time to time, the Company becomes involved in claims and legal proceedings that arise in the ordinary course of its business. The Company does not believe that the resolution of these claims will have a material adverse effect on its financial statements.
5. Segment Information
On February 28, 2005, the Company’s voting interests in Codexis were reduced below 50% and from such time Codexis ceased to be a consolidated subsidiary of the Company. Accordingly, the financial position of Codexis is excluded from the December 31, 2005 condensed consolidated balance sheet, and the results of operations of Codexis are included in the consolidated results presented below only until February 28, 2005. Thereafter the Company’s investment in Codexis is reflected under the equity method of accounting. The Company has determined its reportable operating segments based upon how the business is managed and operated. The accounting policies of the segments described above are the same as those described in Note 1.
The Company operates its business in one segment, human therapeutics. Prior to February 28, 2005, the date on which Codexis ceased to be the Company’s consolidated subsidiary, the Company operated its business in two segments, human therapeutics and chemicals. The operations of Codexis are not included in the consolidated operations of Maxygen for the three months ended September 30, 2005 or for the three months and nine months ended September 30, 2006.
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Segment Earnings
(in thousands) | Human | Chemicals | Maxygen, Inc. | |||||||||
Therapeutics | (Codexis) | Consolidated | ||||||||||
Nine months ended September 30, 2005 | ||||||||||||
Segment loss | $ | (31,558 | ) | $ | (1,325 | ) | $ | (32,883 | ) | |||
Stock compensation | (121 | ) | — | (121 | ) | |||||||
Interest income and other (expense), net | 3,788 | 20 | 3,808 | |||||||||
Loss from continuing operations | (27,891 | ) | (1,305 | ) | (29,196 | ) | ||||||
Cumulative effect adjustment | 16,616 | — | 16,616 | |||||||||
Subsidiary preferred stock accretion | — | (167 | ) | (167 | ) | |||||||
Loss applicable to common stockholders | $ | (11,275 | ) | $ | (1,472 | ) | $ | (12,747 | ) | |||
(in thousands) | Human | Chemicals | Maxygen, Inc. | |||||||||
Therapeutics | (Codexis) | Consolidated | ||||||||||
Nine months ended September 30, 2006 | ||||||||||||
Segment loss | $ | (29,913 | ) | — | $ | (29,913 | ) | |||||
Interest income and other (expense), net | 6,091 | — | 6,091 | |||||||||
Equity in net loss of minority investee | (1,000 | ) | — | (1,000 | ) | |||||||
Loss from continuing operations | (24,822 | ) | — | (24,822 | ) | |||||||
Loss applicable to common stockholders | $ | (24,822 | ) | — | $ | (24,822 | ) | |||||
Segment Revenue
Revenues for each operating segment are derived from the Company’s research collaboration agreements and government grants and are categorized based on the industry of the product or technology under development. On February 28, 2005, the Company’s voting interests in Codexis were reduced below 50% and from such time Codexis ceased to be a consolidated subsidiary of the Company. Thus, the revenues of Codexis are included in the consolidated results presented below only until February 28, 2005 and thereafter the Company’s investment in Codexis is reflected under the equity method of accounting. The revenues of Codexis are not included in the consolidated operations of Maxygen for the three months ended September 30, 2005 and for the three and nine months ended September 30, 2006. The following table presents revenues for each reporting segment (in thousands):
Nine Months ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
Human therapeutics | $ | 6,720 | $ | 18,511 | ||||
Chemicals | 1,510 | — | ||||||
Total revenue | $ | 8,230 | $ | 18,511 | ||||
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Identifiable Assets
The following table presents identifiable assets for each reporting segment (in thousands):
December 31, | September 30, | |||||||
2005 | 2006 | |||||||
Human therapeutics | $ | 214,523 | $ | 193,203 | ||||
Chemicals | — | — | ||||||
Total assets | $ | 214,523 | $ | 193,203 | ||||
6. Commitments
The Company has entered into various operating leases for its facilities and certain computer equipment and material contracts. The leases expire on various dates through 2009. The facilities leases also include scheduled rent increases. The scheduled rent increases are recognized on a straight-line basis over the term of the leases. The purchase obligations are due on various dates through 2008.
Minimum annual rental commitments under operating leases and purchase obligations are as follows (in thousands):
For the remainder of 2006 | $ | 3,640 |
Year ending | ||||
December 31, | ||||
2007 | $ | 6,865 | ||
2008 | 2,673 | |||
Thereafter | 199 | |||
Total commitments beyond current year | $ | 9,737 | ||
7. Codexis
Prior to February 28, 2005, the Company’s chemicals business was operated through its consolidated subsidiary, Codexis. Codexis was incorporated in January 2002 and the Company’s chemicals business was contributed to Codexis in March 2002 in exchange for all the capital stock of Codexis. Prior to its establishment as an independent company, Codexis was the chemicals business unit of the Company, which had been operating since 1997. As of February 28, 2005, the Company controlled less than 50% of the voting rights of the issued and outstanding shares of Codexis common and preferred stock. In accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock,” the Company is accounting for its investment in Codexis under the equity method of accounting after February 28, 2005. Codexis’ financial position and results of operations are included in the Company’s “Chemicals” segment through February 28, 2005.
8. Guarantees and Indemnifications
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others,” which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee.
As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The indemnification agreements with the Company’s officers and directors terminate upon termination of their employment, but the termination does not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited;
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however, the Company’s director and officer insurance policy reduces the Company’s exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2006.
In addition, the Company customarily agrees in the ordinary course of its business to indemnification provisions in its collaboration and license agreements, in various agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s collaboration and license agreements are generally similar, but in addition provide some limited indemnification for its collaborator or licensor in the event of third party claims alleging infringement of certain intellectual property rights. In each of the cases above, the indemnification obligation generally survives the termination of the agreement for some extended period, although the obligation typically has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability that reduce its exposure for indemnification and would enable it in many cases to recover a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2006.
9. Related Party Transactions
On April 1, 2006, the Company entered into a consulting agreement with Waverley Associates, Inc. (“Waverly”), a private investment firm for which Mr. Isaac Stein is the president and sole stockholder. Mr. Stein also currently serves as chairman of the Company’s board of directors. Pursuant to the terms of the consulting agreement, the Company has agreed to pay consulting fees to Waverly of $24,166 per month during the term of the consulting agreement and has granted Mr. Stein an option to purchase 250,000 shares of the Company’s common stock. The option vests and is exercisable as to 1/12 of the underlying shares monthly beginning May 1, 2006 and has an exercise price of $8.28 per share. For the three months ended September 30, 2006, the Company recognized $1.8 million of stock-based compensation expense under SFAS 123(R) in the condensed consolidated statements of operations related to stock options, of which approximately $258,000 is attributable to the option granted to Mr. Stein and, for the nine months ended September 30, 2006, the Company recognized $5.0 million of stock-based compensation expense related to stock options, of which approximately $528,000 is attributable to the option granted to Mr. Stein. Total expense under this arrangement was approximately $330,000 and $673,000 for the three and nine months ended September 30, 2006, respectively.
10. Subsequent Events
On October 24, 2006, Amgen, Inc. (“Amgen”) completed the acquisition of Avidia. As a result of the acquisition, the Company received approximately $17.8 million in exchange for its equity interests in Avidia and may receive up to an additional $2.8 million of contingent payments based upon the development of certain Avidia products by Amgen. Accordingly, the Company expects to record a gain on the exchange of its equity interest in Avidia of approximately $17.8 million in the fourth quarter of 2006. Any additional gain as a result of the contingent amounts potentially payable to the Company by Amgen will be recognized only if and when the contingency is satisfied.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
We are a biotechnology company committed to the discovery, development and commercialization of superior next-generation protein pharmaceuticals for the treatment of disease and serious medical conditions. We began operations in March 1997 with the mission to develop important commercial products through the use of biotechnology. Since then, we have established a focus in human therapeutics, particularly on the development and commercialization of optimized protein pharmaceuticals.
Our business strategy focuses on developing next-generation protein pharmaceuticals that address significant markets, on our own or with collaborative partners. We have developed four next-generation product candidates that are currently in clinical or pre-clinical development: MAXY-G34, a next generation granulocyte colony stimulating factor, or G-CSF, product for the treatment of neutropenia; MAXY-alpha, a next generation interferon alpha product for the treatment of hepatitis C virus infection and other indications; MAXY-VII, an improved factor VII product for the treatment of uncontrolled bleeding in trauma, intracerebral hemorrhage and other indications; and MAXY-gamma, an optimized interferon gamma product for the treatment of idiopathic pulmonary fibrosis and other indications.
In August 2006, we initiated a Phase I clinical trial in the United States to evaluate Maxy-G34. On November 3, 2006, Roche initiated a Phase Ia clinical trial in New Zealand to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic profile of MAXY-alpha.
The successful development of our product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product candidate and are difficult to accurately predict. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking all necessary approvals to commercialize products, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our business.
Prior to our focus on human therapeutics, we established two industrial subsidiaries, Codexis, Inc., or Codexis, and Verdia, Inc., or Verdia.
We established Codexis to focus on the development of biocatalysis and fermentation processes and advanced small-molecule pharmaceutical intermediaries for the pharmaceutical industry. Codexis received financing from third party investors and operated as independent subsidiary beginning in September 2002 and, in February 2005, our voting rights in Codexis were reduced below 50%. As a result, we no longer consolidate the financial position and results of operations of Codexis with our financial results as of such date and instead account for Codexis under the equity method of accounting. To reflect what our basis in Codexis would have been under equity accounting, we recorded a cumulative effect adjustment of $16.6 million in the first quarter of 2005 to bring our investment basis in Codexis to zero as of February 28, 2005.
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We established Verdia to focus on the development of processes and products for the agricultural industry. On July 1, 2004, we completed the sale of Verdia to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for cash proceeds of $64 million.
In July 2003, we established Avidia, Inc., or Avidia, together with a third-party investor. Avidia was formed as a spin-out of Maxygen to focus on the development of a new class of subunit proteins as therapeutic products. We also received equity interests in Avidia through our initial contribution of technology and funding and our participation in subsequent preferred stock financings of Avidia. On October 24, 2006, Amgen, Inc. completed the acquisition of Avidia. As a result of the acquisition, we received approximately $17.8 million in cash in exchange for our equity interests in Avidia and may receive up to an additional $2.8 million of contingent payments based upon the development of certain Avidia products by Amgen, Inc. Accordingly, we expect to record a gain on the exchange of our equity interest in Avidia of approximately $17.8 million in the fourth quarter of 2006. Any additional gain as a result of the contingent amounts potentially payable to us by Amgen, Inc. will be recognized only if and when the contingency is satisfied. Under an agreement that we entered into with Avidia at the time of Avidia’s formation, we have retained exclusive and non-exclusive rights to use certain Avidia technology to develop and commercialize products directed to certain specific targets.
To date, we have generated revenues from research collaborations with pharmaceutical, chemical and agriculture companies and from government grants. Moving forward, we anticipate establishing additional strategic alliances. However, as our internal resources and expertise have evolved, we have strategically shifted our focus to pharmaceutical products and internal product development in order to capture more of the potential value resulting from our efforts. We believe this is an important step in building long-term value in our company. Consistent with our strategic shift, revenue from collaborative research agreements and government grants decreased from $22.9 million in 2003 to $16.3 million in 2004 and to $14.5 million in 2005. However, our revenues increased to $4.2 million and $18.5 million in the three months and nine months ended September 30, 2006 compared to $735,000 and $8.2 million in the three months and nine months ended September 30, 2005, due primarily to collaborative research and development revenue from our collaboration with Roche for our MAXY-VII product candidates and an increase in activity on our existing grant projects. We expect our revenue to increase for the remainder of 2006 compared to 2005.
For the purposes of this report, our continuing operations consist of the results of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS (Denmark) and Maxygen Holdings Ltd. (Cayman Islands), as well as the results of Codexis through February 28, 2005.
We continue to maintain a strong cash position to fund our expanded internal product development, with cash, cash equivalents and marketable securities totaling $170.2 million as of September 30, 2006. In addition, we received approximately $17.8 million in cash in exchange for our equity interests in Avidia as a result of the acquisition of Avidia by Amgen, Inc. in October 2006.
We have incurred significant operating losses since our inception. As of September 30, 2006, our accumulated deficit was $229.0 million. We have invested heavily in establishing our proprietary technologies. Our research and development expenses from continuing operations for the three months and nine months ended September 30, 2006 were $12.0 million and $35.5 million, compared to $10.0 million and $28.6 million for the comparable periods in 2005 (excluding $2.5 million of research and development expenses attributable to Codexis in the nine months ended September 30, 2005). We expect to incur additional operating losses over at least the next several years.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Except as described below, we believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2005.
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Revenue Recognition – Non-Refundable Up-Front Payments
The following is intended to supplement the discussion of our revenue recognition policy as described in our Annual Report on Form 10-K for the year ended December 31, 2005. Non-refundable up-front payments received in connection with research and development collaboration agreements, including license fees, and technology advancement funding that is intended for the development of our core technologies, are deferred upon receipt and recognized as revenue over the relevant research and development periods specified in the agreement. Under arrangements where we expect our research and development obligations to be performed evenly over the specified period, the up-front payments are recognized on a straight-line basis over the period. Under arrangements where we expect our research and development obligations to vary significantly from period to period, we recognize the up-front payments based upon the actual amount of research and development efforts incurred relative to the amount of our total expected effort. In cases where the planned levels of research services fluctuate substantially over the research term, this requires us to make critical estimates in both the remaining time period and the total expected costs of our obligations and, therefore, a change in the estimate of total costs to be incurred or in the remaining time period could have a significant impact on the revenue recognized in future periods.
Stock-Based Compensation
Beginning on January 1, 2006, we began accounting for stock options and shares purchased under our Employee Stock Purchase Plan, or ESPP, under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payments,” or SFAS 123(R), which requires the recognition of the fair value of equity-based compensation. We estimated the fair value of stock options and ESPP shares using the Black-Scholes-Merton option valuation model. This model requires the input of subjective assumptions in implementing SFAS 123(R), the most significant of which are our estimates of the expected volatility of the market price of our stock and the expected term of each award. We estimated expected volatility and future stock price trends based on a combination of historical and implied volatilities. When establishing an estimate of the expected term of an award, we considered the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures), the expected volatility, and a comparison to relevant peer group data. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be significantly different from what we have recorded in the current period.
We have adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, compensation cost recognized during the nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting For Stock-Based Compensation,” amortized on a graded vesting basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R) amortized on a straight-line basis over the options’ vesting period. Under this method of implementation, no restatement of prior periods has been made. Prior to our implementation of SFAS 123(R), we accounted for stock options and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and made pro forma footnote disclosures as required by SFAS No. 148, “Accounting For Stock-Based Compensation — Transition and Disclosure,” which amended SFAS 123. Since the exercise price of all options granted was not below the fair market price of the underlying common stock on the grant date, we generally recognized no equity-based compensation expense in our condensed consolidated statements of operations. Accordingly, there was no stock-based compensation expense related to employee stock options and ESPP shares recognized during the quarter ended September 30, 2005. See Note 1 to the condensed consolidated financial statements under the caption “Stock-Based Compensation” for a further discussion.
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For further information about other critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2005.
Results of Operations
Revenues
Our revenues are derived primarily from research collaboration agreements and government research grants. Our total revenues from continuing operations were $4.2 million and $18.5 million in the three months and nine months ended September 30, 2006, compared to $735,000 and $8.2 million in the comparable periods in 2005. Revenues from our research and development collaboration agreements increased to $3.2 million and $15.2 million in the three months and nine months ended September 30, 2006 from $106,000 and $5.0 million in the comparable periods in 2005 (excluding $1.5 million of revenues attributable to Codexis in the nine months ended September 30, 2005). Revenues from our research collaboration agreements included, in the nine months ended September 30, 2005, a $2 million payment from Roche for the achievement of a significant milestone with regard to our MAXY-alpha product candidates and, in the nine months ended September 30, 2006, consisted of revenues from our co-development and collaboration agreement with Roche for our MAXY-VII product candidates, including a $5.0 million event-based payment. Revenues from government research grants increased to $1.0 million and $3.3 million in the three months and nine months ended September 30, 2006 compared to $629,000 and $1.7 million in the comparable periods in 2005, primarily as a result of three government grant projects that began in the third quarter of 2005.
During the nine months ended September 30, 2006, Roche was the only collaborative partner that contributed to our collaborative research and development revenues. The initial funded research term of our collaboration with Roche for our MAXY-alpha product candidates ended in December 2005. In December 2005, we entered into a new collaboration with Roche for co-development and commercialization of our MAXY-VII product candidates. For the nine months ended September 30, 2006, revenues for the co-development of our MAXY-VII product candidates are net of the cost sharing amounts that we owed to Roche. Our revenues for the nine months ended September 30, 2006 consisted primarily of a $5.0 million event-based payment we received from Roche, $8.1 million earned as net reimbursement of our research and development activities, and $2.1 million related to the amortization of the non-refundable up-front payment we received from Roche in December 2005.
We expect our revenue for 2006 to increase compared to 2005, due to collaborative research and development revenue we expect to receive from our collaboration with Roche for our MAXY-VII product candidates and an increase in activity on our existing grant projects. However, due to the nature of our research, our dependence on our collaborative partners to commercialize certain results of the research and our focus on product development, our revenue may fluctuate substantially from year to year based on the completion of existing collaborative agreements, potential new licensing or collaborative agreements and the achievement of development and commercialization related milestones. For example, we expect the amount of revenue we recognize related to the amortization of the up-front payment received in December 2005 under our factor VII collaboration with Roche to decrease in future periods as our obligations to perform services under this arrangement decrease over the expected development period. Due to uncertainty regarding whether the events that lead to the obligation of our collaborative partners to pay the applicable revenue will be achieved, we cannot predict with any certainty whether we will receive future milestone payments or royalty payments under our collaborations or whether any particular collaboration or research effort will ultimately result in a commercial product.
Prior to our deconsolidation of Codexis in February 2005, we operated as two segments, human therapeutics and chemicals. Revenues for each operating segment were derived from our research collaboration agreements and government research grants and were categorized based on the industry of the product or technology under development. Results of Codexis through February 28, 2005 are shown as our chemicals segment. After February 28, 2005, we have operated as one segment, human therapeutics.
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The following table presents revenues for each operating segment (in thousands):
Nine Months ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
Human therapeutics | $ | 6,720 | $ | 18,511 | ||||
Chemicals | 1,510 | — | ||||||
Total revenue | $ | 8,230 | $ | 18,511 | ||||
Research and Development Expenses
Our research and development expenses consist primarily of salaries and other personnel-related expenses, external collaborative research expenses (including contract manufacturing and research), facility costs including depreciation, and laboratory supplies. Research and development expenses were $12.0 million and $35.5 million in the three months and nine months ended September 30, 2006 and $10.0 million and $28.6 million in the comparable periods in 2005 (excluding $2.5 million of research and development expenses attributable to Codexis in the nine months ended September 30, 2005). The increases in our research and development expenses (excluding Codexis) were primarily due to increased external collaborative research expenses associated with the development of our product candidates, including the manufacture of product candidates for clinical trials and to our implementation of SFAS 123(R) as of January 1, 2006.
Stock compensation expenses included in research and development expenses increased to $564,000 and $1.6 million in the three months and nine months ended September 30, 2006, compared to $4,000 and $115,000 in the comparable periods in 2005, primarily as a result of our implementation of SFAS 123(R). See Note 1 to the condensed consolidated financial statements under the caption “Stock-Based Compensation.”
We do not track fully burdened research and development costs by project. However, we do estimate, based on full-time equivalent personnel effort, the percentage of research and development efforts (as measured in hours incurred, which approximates costs) undertaken for projects funded by our collaborators and government grants, on the one hand, and projects funded by us, on the other hand. To approximate research and development expenses by funding category, the number of hours expended in each category has been multiplied by the approximate cost per hour of research and development effort added to project-specific external costs. We believe that presenting our research and development expenses in these categories will provide our investors with meaningful information on how our resources are being used.
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The following table presents our approximate research and development expenses by funding category (in thousands):
Three Months ended | Nine Months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2006 | 2005 | 2006 | |||||||||||||
Collaborative projects funded by third parties(1) | $ | 1,526 | $ | 3,356 | $ | 5,644 | $ | 10,328 | ||||||||
Internal projects | 8,460 | 8,664 | 25,446 | 25,166 | ||||||||||||
Total | $ | 9,986 | $ | 12,020 | $ | 31,090 | $ | 35,494 | ||||||||
(1) Research and development expenses related to collaborative projects funded by third parties are less than the reported revenues due to the amortization of non-refundable up-front payments, as well as a portion of the collaborative research and development revenue that is charged for general and administrative expenses. |
Our product development programs are at an early stage and may not result in any marketed products. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals, may prove impracticable to manufacture in commercial quantities at reasonable costs and with acceptable quality and may be barred from commercialization if they are found to infringe or otherwise violate a third party’s intellectual property rights. In addition, competitors may develop superior competing products. Furthermore, it is uncertain which of our internally developed product candidates will be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce the cost to us of a product candidate or it may delay the time to completion and increase the cost to us due to the alteration of our existing strategy. The risks and uncertainties associated with our research and development projects are discussed more fully in the section of this report entitled “Item 1A – Risk Factors.” Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of any of our product candidates or the ultimate product development cost in any particular case.
We expect that our research and development costs will increase substantially in 2006 over 2005, due to an increase in research and development costs resulting from advancement our product candidates into and through clinical development. We expect to continue to devote substantial resources to research and development and we expect research and development expenses to increase over the next several years if we are successful in advancing our product candidates into and through clinical trials. To the extent we out-license our product candidates prior to commencement of clinical trials or collaborate with others with respect to clinical trials, increases in research and development expenses may be reduced or avoided. We intend to manage the level of our expenditures for research and development, including clinical trials, to balance advancing our product candidates against maintaining adequate cash resources for our operations. We expect stock compensation expense related to research and development to increase considerably as a result of our implementation of SFAS 123(R). Our implementation of SFAS 123(R) had a material impact on our consolidated results of operations and net loss per share for the three months and nine months ended September 30, 2006 and is expected to have a material impact on our consolidated results of operations and net loss per share in the future. The continued impact of our implementation of SFAS 123(R) will depend on, among other things, the levels of share-based payments granted in the future. See Note 1 to the condensed consolidated financial statements under the caption “Stock-Based Compensation.”
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs for finance, legal, general management, business development and human resources, as well as insurance premiums and professional expenses, such as external expenditures for legal and accounting. General and administrative expenses increased from $3.0 million and $9.8 million in the three months and nine months ended September 30, 2005 (excluding $300,000 of general and administrative expenses
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attributable to Codexis in the nine months ended September 30, 2005) to $4.5 million and $12.9 million in the comparable periods in 2006, primarily due to the increase in stock compensation expense included in general and administrative expenses resulting from our implementation of SFAS 123(R). This increase was offset in part by reduced personnel costs resulting from terminations in 2005 and the deconsolidation of Codexis as of February 28, 2005. Stock compensation expenses included in general and administrative expenses increased to $1.2 million and $3.4 million in the three months and nine months ended September 30, 2006, compared to $6,000 in the nine months ended September 30, 2005. There were no stock compensation expenses included in general and administrative expenses in the three months ended September 30, 2005. The increases in general and administrative stock compensation expense in the 2006 periods were due to our implementation of SFAS 123(R). See Note 1 to the condensed consolidated financial statements under the caption “Stock-Based Compensation.”
We expect that our general and administrative expenses will increase in 2006, due to increased compensation expense related to our implementation of FAS123(R) and by increased professional fees, partially offset by reduced personnel costs resulting from terminations in 2005 and the deconsolidation of Codexis. We expect that stock compensation expense related to general and administration expenses will increase considerably in 2006 as a result of our implementation of SFAS 123(R) and that our implementation of SFAS 123(R) will continue to have a material impact on our consolidated results of operations and net loss per share. The ongoing impact of SFAS 123(R) will depend on, among other things, the levels of share-based payments granted in the future. See Note 1 to the condensed consolidated financial statements under the caption “Stock-Based Compensation.”
Interest Income and Other (Expense), net
Interest income and other (expense), net represents income earned on our cash, cash equivalents and marketable securities, net of currency transaction gains or losses related to the funding of our Danish subsidiary, Maxygen ApS. Interest income and other (expense), net increased from $1.7 million and $3.8 million in the three months and nine months ended September 30, 2005 to $2.3 million and $6.1 million in the comparable periods in 2006, due to higher interest income reflecting higher interest rates in 2006 on lower average balances of cash, cash equivalents and marketable securities, plus a decrease in foreign exchange losses. Included in these amounts are foreign exchange losses of $17,000 and $542,000 in the three and nine months ended September 30, 2005 and foreign exchange gains of $106,000 and $1,000 in the three and nine months ended September 30, 2006.
Equity in Net Loss of Minority Investee
Equity in losses of minority investee reflects our share of the net loss of Codexis. In May 2006, we purchased $600,000 of secured subordinated convertible promissory notes and, in August 2006, we purchased approximately $1 million of Codexis preferred stock (including the conversion of our convertible promissory note). Subsequent to our investments in May and August 2006, we recorded losses of $1.0 million under the equity method of accounting and as of September 30, 2006, we had recorded losses equal to our investment basis in Codexis. We are not obligated to provide additional funding to Codexis. As of September 30, 2006, our equity interest in Codexis was approximately 33%.
Cumulative Effect Adjustment
Codexis was formed in January 2002 and independently financed by us and several other investors in September and October of 2002. In August 2004, Codexis received additional equity funding from Pfizer Inc. Until February 28, 2005, we recognized 100% of the operating results of Codexis, even though we only owned a majority of the voting interests in Codexis. At such time, we had recorded cumulative losses of Codexis in the amount of $26.4 million, which was in excess of our investment basis of $9.8 million. On February 28, 2005, our voting rights in Codexis were reduced below 50%. As a result, we no longer consolidate the financial position and results of operations of Codexis with our financial results as of such date and instead account for Codexis under the equity method of accounting. To reflect what our basis in Codexis would have been under equity accounting, we recorded a non-recurring cumulative effect adjustment of $16.6 million in the first quarter of 2005 to bring our investment basis in Codexis to zero as of February 28, 2005. This cumulative effect adjustment does not have any tax consequences.
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Subsidiary Preferred Stock Accretion
In 2002, Codexis sold $25 million of Codexis series B redeemable convertible preferred stock to investors, of which $5 million was purchased by us and $20 million was purchased by several unrelated investors. In connection with the redemption rights of the Codexis series B stockholders, we recorded accretion of the redemption premium for the series B redeemable convertible preferred stock, excluding the shares owned by us, in the amount of $167,000 for the nine months ended September 30, 2005. The accretion was recorded as subsidiary preferred stock accretion on the condensed consolidated statement of operations and as a reduction of additional paid-in capital and an increase to minority interest on the condensed consolidated balance sheets. No accretion was recorded for the nine months ended September 30, 2006. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis. Since we no longer consolidate the financial position of Codexis, as of February 28, 2005, we no longer recognized accretion for the Codexis redemption premium. We also no longer reflect amounts as minority interest on the condensed consolidated balance sheets. We have recorded a $2.3 million adjustment to additional paid-in capital in the three month period ended March 31, 2005 to eliminate the reduction of additional paid-in capital that had resulted from Codexis’ preferred stock accretion prior to February 28, 2005.
Recent Accounting Pronouncements
In November 2005, the FASB issued FASB Staff Position Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” or FSP 115-1, which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The adoption of FSP 115-1 did not have a material impact on our results of operations or financial condition.
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” or SFAS 154, a replacement of Accounting Principles Board Opinions No. 20, “Accounting Changes,” and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles were recognized by including in net income during the period of change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, SFAS 154 does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS 154 did not have a material effect on our consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48, as an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” or SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are still evaluating what impact, if any, the adoption of this standard will have on our financial position or results of operations.
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Liquidity and Capital Resources
Since inception, we have financed our continuing operations primarily through private placements and public offerings of equity securities, research and development funding from collaborators and government grants. In addition, on July 1, 2004, we received net proceeds of $62.6 million in cash from the sale of Verdia, our former agriculture subsidiary and the sole component of our agriculture segment. As of September 30, 2006, we had $170.2 million in cash, cash equivalents and marketable securities.
Net cash used in operating activities decreased from $29.1 million in the nine months ended September 30, 2005 to $17.2 million in the nine months ended September 30, 2006, primarily due to the receipt of a $5 million event-based payment from Roche in the second quarter of 2006 related to our MAXY-VII program and the receipt of a $5 million milestone payment from Roche in the first quarter of 2006 related to our MAXY-alpha program earned in the last quarter of 2005. Uses of cash in operating activities were primarily to fund losses from continuing operations.
Net cash provided by investing activities was $23.5 million in the nine months ended September 30, 2005 and $23.0 million in the nine months ended September 30, 2006. The cash provided during the nine months ended September 30, 2005 was primarily related to maturities of available-for-sale securities in excess of purchases, offset by the $2.6 million used by Codexis to acquire Julich Fine Chemicals GmbH in February 2005 and $2.0 million for property and equipment purchases. The cash provided during the nine months ended September 30, 2006 was primarily related to maturities of available-for-sale securities in excess of purchases. The majority of additions of property and equipment in 2005 related to Codexis’ investment in its bioprocessing facility. We expect to continue to make investments in the purchase of property and equipment to support our operations. We may use a portion of our cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.
Net cash provided for continuing operations by financing activities was $2.4 million in the nine months ended September 30, 2005 and $713,000 in the nine months ended September 30, 2006. The cash provided during the 2005 and 2006 periods was primarily from proceeds from the sale of common stock in connection with our ESPP and the exercise of stock options by employees. The cash provided during 2005 also included proceeds of equipment loans entered into by Codexis, net of repayments of such loans.
In accordance with FASB Statement No. 52, “Foreign Currency Translation,” the functional currency for our Danish operations is its local currency. The effects of foreign exchange rate changes on the translation of the local currency financial statements into U.S. dollars are reported as a component of accumulated other comprehensives loss on the our condensed consolidated balance sheets. The effect of exchange rate changes on cash and cash equivalents was an increase of $302,000 and $7,000 in the nine months ended September 30, 2005 and September 30, 2006, respectively.
The following are contractual commitments as of September 30, 2006 associated with lease obligations and purchase obligations (in thousands):
Payments Due by Period | ||||||||||||||||||||
More | ||||||||||||||||||||
Contractual Obligations | Total | Less than | 1-3 | 4-5 | than 5 | |||||||||||||||
1 year | years | years | years | |||||||||||||||||
Operating Lease Obligations | $ | 3,460 | $ | 843 | $ | 2,418 | $ | 199 | $ | — | ||||||||||
Purchase Obligations | 9,917 | 2,797 | 7,120 | — | — | |||||||||||||||
Total | $ | 13,377 | $ | 3,640 | $ | 9,538 | $ | 199 | $ | — | ||||||||||
As of September 30, 2006, potential milestone payments from our existing collaborations could exceed $350.0 million based on the accomplishment of specific performance criteria, $134.0 million of which relates to potential milestone payments in connection with currently active development programs. We may also earn royalties on product sales. In general, the obligation of our corporate collaborators to provide research funding may be terminated by either party before the end of the research term under certain conditions, including upon a material breach of the contract. In the case of such an event, the agreement specifies the rights, if any, that each party will retain.
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We believe that our current cash, cash equivalents, short-term investments and long-term investments, together with funding expected to be 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 twelve 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.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Market risk management
Our cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and our stock price. We attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. There were no significant changes in our market risk exposures during the nine months ended September 30, 2006. These activities are discussed in further detail in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 4. Controls and Procedures
Company management is required to perform two evaluations each quarter in connection with its disclosure controls and procedures (“Disclosure Controls”) and its internal control over financial reporting (“Internal Control”). This Controls and Procedures section describes those evaluations, their limitations and the conclusions of Company management based on such evaluations.
Controls Evaluations.Company management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has (i) evaluated the effectiveness of our Disclosure Controls as of September 30, 2006, and (ii) evaluated whether any change in Internal Control that occurred in the most recently completed fiscal quarter has materially affected, or is reasonably likely to materially affect, our Internal Control.
CEO and CFO Certifications.Appearing as Exhibits 31.1 and 31.2 of this report are the certifications of our CEO and CFO that are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Definition of Disclosure Controls.Disclosure Controls are controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Definition of Internal Control.Internal Control consists of the control processes designed with the objective of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
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dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Limitations on the Effectiveness of Controls.Our management, including our CEO and CFO, does not expect that our Disclosure Controls and Internal Control will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Maxygen have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation.The CEO/CFO evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the controls’ implementation by Maxygen and the effect of the controls on the information generated for use in this report. In the course of the controls evaluation, we sought to identify errors, controls problems or acts of fraud. Elements of our controls are also evaluated on an ongoing basis by personnel in our Finance department. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to make modifications as necessary. Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were any significant deficiencies or material weaknesses in our Internal Control, or whether we had identified any acts of fraud involving personnel who have a significant role in our Internal Control. This information was important both for the controls evaluation generally and because item 5 in the certifications of our CEO and CFO require that the CEO and CFO disclose that information to our Audit Committee and to our independent registered public accounting firm.
Quarterly Reports
Quarterly Evaluation of Disclosure Controls.Based upon the controls evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of September 30, 2006 to ensure that material information relating to Maxygen and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
Quarterly Evaluation of Changes in Internal Control.During the most recently completed fiscal quarter there has been no change in our Internal Control that has materially affected, or is reasonably likely to materially affect, our Internal Control.
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Part II – Other Information
Item 1. Legal Proceedings
In December 2001, a lawsuit was filed in the U.S. District Court for the Southern District of New York against us, our chief executive officer, Russell Howard, and our chief financial officer at the time of our initial public offering, Simba Gill, together with certain underwriters of our initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called “laddering” cases that have been commenced against over 300 companies that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styledIn re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against Drs. Howard and Gill; the remainder of the case remains pending.
In June 2003, we agreed to the terms of a tentative settlement agreement along with other defendant issuers inIn re Initial Public Offering Securities Litigation. The tentative settlement provides that the insurers of the 309 defendant issuers will pay to the plaintiffs $1 billion, less any recovery of damages the plaintiffs receive from the defendant underwriters. If the plaintiffs receive over $5 billion in damages from the defendant underwriters, we will be entitled to reimbursement of various expenses incurred by us as a result of the litigation. As part of the tentative settlement, we will assign to the plaintiffs “excess compensation claims” and certain other of our claims against the defendant underwriters based on the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial majority of defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. On February 15, 2005, the Court tentatively approved the proposed settlement, conditioned upon the parties altering the proposed settlement to comply with the Private Securities Litigation Reform Act’s settlement discharge provision. The settlement does not contemplate any settlement payments by us.
If the settlement is not accepted by the requisite number of defendants or if it is not approved by the Court, we intend to defend the lawsuit vigorously. We believe the lawsuit against us and our officers is without merit. However, the litigation is in the preliminary stage, and we cannot predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to us and if we are required to pay significant damages, our business would be significantly harmed.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other information included in this report, inconsideringour 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. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
We have a history of net losses. We expect to continue to incur net losses and may not achieve or maintain profitability.
We have incurred losses since our inception, including a loss applicable to common stockholders of $35.2 million in 2005, before a positive non-recurring adjustment of $16.6 million resulting from the cumulative effect adjustment recorded as a result of the deconsolidation of Codexis, and $33.7 million in 2003. During 2004, we recognized income applicable to common stockholders of $8.3 million, primarily due to the sale of Verdia, but our loss from continuing operations was $49.1 million. Our loss from continuing operations in 2005 was $35.1 million. As of September 30, 2006, we had an accumulated deficit of $229.0 million. We expect to incur net losses and negative cash flow from operating activities for at least the next several years. To date, we have derived substantially all our revenues from
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collaborations and grants and expect to derive a substantial majority of our revenue from such sources for at least the next several years. Revenues from collaborations and grants are uncertain because our existing agreements generally have fixed terms and may be terminated under certain conditions, and because our ability to secure future agreements will depend upon our ability to address the needs of current and potential future collaborators. We expect to spend significant amounts to fund the development of our product candidates. As a result, we expect that our operating expenses will exceed revenues in the near term and we do not expect to achieve profitability during the next several years. If the time required for us to achieve profitability is longer than we anticipate, we may not be able to continue our business.
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. We may not be successful in the commercial development of products. Successful products will require significant investment and development, including clinical testing, to demonstrate their safety and effectiveness before 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 or commercialize any products. We, either alone or in conjunction with our corporate collaborators, must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our potential products. This 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 could limit our ability to develop commercially successful products.
Our revenues, expenses and operating results are subject to fluctuations that may cause our stock price to decline.
Our revenues, expenses and 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 revenues, expenses and operating results to fluctuate include:
• | termination of research and development contracts with collaborators or government research grants, which may not be renewed or replaced; | ||
• | the success rate of our development or discovery efforts leading to milestones and royalties; | ||
• | timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements; | ||
• | timing of expenses, particularly with respect to contract manufacturing, pre-clinical studies and clinical trials; | ||
• | the timing and willingness of collaborators to commercialize our products, which would result in royalties to us; 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 fluctuate unexpectedly due to unexpected expiration of research contracts or government research grants, failure to obtain anticipated new contracts or other factors, we may not be able to immediately reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.
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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.
Our revenues are substantially dependent on a limited number of collaborative arrangements and government grants, and our inability to establish or maintain collaborations or grants would adversely impact our revenues, financial position and results of operation.
We expect that substantially all of our revenue for the foreseeable future will result from payments under our collaborative arrangements and from government grants. We currently have one collaboration agreement with Roche for our MAXY-VII product candidates, and three government grants that are expected to generate revenue in 2006. If Roche terminates the agreement relating to our MAXY-VII product candidates or the government grants are terminated and we are unable to enter into new collaboration agreements or secure additional grants, our revenues, financial position and results of operations would be materially adversely affected.
Drug development is a long, expensive and uncertain process and may not result in the development of any commercially successful products.
The development of human therapeutic products is long and uncertain. Most product candidates fail before entering clinical trials or in clinical trials. Most clinical trials do not result in a marketed product. In addition, due to the nature of human therapeutic research and development, the expected timing of product development and initiation of clinical trials and the results of such development and clinical trials are uncertain and subject to change at any point. This uncertainty may result in research delays, clinical trial delays and failures and product candidate failures. Such delays and failures could reduce or eliminate our revenue by delaying or terminating the potential development and commercialization of our product candidates and could drastically reduce the price of our stock and our ability to raise capital. Without sufficient capital, we would need to reduce operations and could be forced to cease operations.
We, or our collaborators, may determine that certain preclinical or clinical product candidates or programs do not have sufficient potential to warrant further advancement. Accordingly, we may elect to terminate our programs for such product candidates or programs at any time. If we terminate a preclinical program in which we have invested significant resources, our financial condition and results of operations may be adversely affected, as we will have expended resources on a program that will not provide a return on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses. Termination of such programs could cause the price of our stock to drop significantly.
For example, in regards to our collaboration with Roche regarding our MAXY-VII product candidates, we are seeking to develop such products for several acute indications. To date, no factor VII–based product has been approved by any regulatory agency for such indications and it is not certain that any such products can be shown to be safe or efficacious for the treatment or prevention of such indications. Moreover, the available animal bleeding models may be unsuitable for assessing our potential products for such acute indications, increasing the risk that animal models may not provide accurate or meaningful data as to the suitability or advantages of our potential products as treatments for the diseases or medical conditions of interest. As a result, we, or Roche, may elect to delay or terminate this program.
Our potential 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 FDA must approve any therapeutic product or vaccine before it can be marketed in the United States. Other countries also require approvals from regulatory authorities comparable to the FDA before products can be marketed in the applicable country. Before we can file a new drug application (NDA) or biologic license application (BLA) with the FDA or other regulatory entity, the product candidate must
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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.
Because our potential 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 these authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. Neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our MolecularBreeding directed evolution platform for commercialization in the United States or elsewhere. We may not be able to, or 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.
Even if we receive regulatory approval, this approval will likely 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 continued review, and discovery of previously unknown problems or side effects associated with an approved product or the discovery of previously unknown problems with the manufacturer may result in restrictions on the product, the manufacturer or the manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices.
Clinical trials for MAXY-G34, MAXY-alpha or any of our other current or future product candidates could take a long time to gain regulatory approval or may never gain approval, which could reduce or eliminate our revenue by delaying or terminating the potential commercialization of our product candidates.
As indicated in the risk factors above, the conduct of clinical trials is a time-consuming, expensive and uncertain process and typically requires years to complete. In August 2006, we initiated a Phase I clinical trial in the United States for our Maxy-G34 product candidate for the treatment of chemotherapy-induced neutropenia. This clinical trial is a double-blind placebo controlled dose escalation study in healthy volunteers. In November 2006, Roche initiated a Phase I clinical trial in New Zealand for our lead MAXY-alpha product candidate for the treatment of Hepatitis C virus infection. Thus, our most advanced product candidates are now only in the early stages of clinical trials. Further, although both MAXY-G34 and MAXY-alpha have demonstrated improved properties in preclinical testing compared to currently marketed drugs, the results from preclinical testing and early clinical trials often are not predictive of results obtained in later clinical trials. There are no assurances that clinical trials of any of our current or future product candidates will produce sufficient safety and efficacy data necessary to obtain regulatory approval or result in a marketed product.
In addition, the timing of the commencement, continuation and completion of clinical trials may be subject to significant delays, or a clinical trial may be suspended or delayed by us, our collaborators, the FDA or other foreign governmental agencies for various reasons, including:
• | deficiencies in the conduct of the clinical trials; | ||
• | negative or inconclusive results from the clinical trials that necessitate additional clinical studies; | ||
• | difficulties or delays in identifying and enrolling patients who meet trial eligibility criteria; | ||
• | delays in obtaining or maintaining required approvals from institutions, review boards or other reviewing entities at clinical sites; |
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• | inadequate supply or deficient quality of product candidate materials necessary for the conduct of the clinical trials; | ||
• | the occurrence of unacceptable toxicities or unforeseen adverse side effects, especially as compared to currently approved drugs intended to treat the same indications; | ||
• | our lack of financial resources to continue the development of a product candidate; | ||
• | future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review; or | ||
• | other reasons that are internal to the businesses of our collaborative partners, which they may not share with us. |
In addition, we do not have the ability to independently conduct clinical trials for our product candidates and therefore rely on third parties, such as contract research organizations, to enroll qualified patients and conduct our clinical trials. If these third parties do not successfully carry out their contractual duties, conduct the clinical trials in accordance with the approved protocol and regulatory requirements or meet planned deadlines, we may be affected by increased costs, delays of our clinical trials or both, which may harm our business.
As a result of these risks and other factors, we and/or our collaborators may conduct lengthy and expensive clinical trials of MAXY-G34, MAXY-alpha or our other current or future product candidates, only to learn that a product candidate has failed to demonstrate sufficient safety or efficacy necessary to obtain regulatory approval, does not offer therapeutic or other improvements compared to currently marketed drugs, has unforeseen adverse side effects or does not otherwise demonstrate sufficient potential to make the commercialization of the product worthwhile. Any failure or substantial delay in successfully completing clinical trials, obtaining regulatory approval and commercializing our product candidates could severely harm our business.
The manufacturing of our product candidates presents technological, logistical and regulatory risks, each of which may adversely affect our potential revenues.
The manufacturing and manufacturing development of pharmaceuticals, and, in particular, biologicals, are technologically and logistically complex and heavily regulated by the FDA and other governmental authorities. The manufacturing and manufacturing development of our product candidates present many risks, including, but not limited to, the following:
• | before we can obtain approval of any of our products or product candidates for the treatment of a particular disease or condition, we must demonstrate to the satisfaction of the FDA and other governmental authorities that the drug manufactured for the clinical trials is comparable to the drug manufactured for commercial use and that the manufacturing facility complies with applicable laws and regulations; | ||
• | it may not be technically feasible to scale up an existing manufacturing process to meet demand or such scale-up may take longer than anticipated; and | ||
• | failure to comply with strictly enforced Good Manufacturing Practices (GMP) regulations and similar foreign standards may result in delays in product approval or withdrawal of an approved product from the market. |
Any of these factors could delay any clinical trials, regulatory submissions or commercialization of our product candidates, entail higher costs and result in our being unable to effectively sell any products.
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Our manufacturing strategy, which relies on third-party manufacturers, exposes us to additional risks.
We do not currently have the resources, facilities or experience to manufacture any product candidates or potential products ourselves. Completion of any clinical trials and any commercialization of our products will require access to, or development of, manufacturing facilities that meet FDA standards or other regulatory requirements to manufacture a sufficient supply of our potential products. We currently depend on third parties for the scale up and manufacture of our product candidates for preclinical and clinical purposes. If our third party manufacturers are unable to manufacture preclinical or clinical supplies in a timely manner, or are unable or unwilling to satisfy our needs or FDA or other regulatory requirements, it could delay clinical trials, regulatory submissions and commercialization of our potential products, entail higher costs and possibly result in our being unable to sell our products. In addition, technical problems or other manufacturing delays could delay the advancement of potential products into preclinical or clinical trials, delay or prevent us from achieving development milestones under our collaborative agreements or result in the termination of development of particular product candidates, adversely affecting our revenues and product development timetable, which in turn could adversely affect our stock price.
In addition, failure of any third party manufacturers or us to comply with applicable regulations, including pre- or post-approval inspections and the GMP requirements of the FDA or other comparable regulatory agencies, could result in sanctions being imposed on us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.
If our collaborations are not successful, we may not be able to effectively develop and market some of our products.
Since we do not currently possess the resources necessary to develop and commercialize multiple products, or the resources to complete all approval processes that may be required for these potential products, we generally seek to enter into collaborative arrangements to develop and commercialize potential products. We have entered into collaborative agreements with other companies to fund the development of new products for specific purposes. These contracts generally 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 potential products may not be commercialized.
We have limited or no control over the resources that any collaborator may devote to the development and commercialization of our potential products. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may delay such development or commercialization, terminate their agreement with us, or breach or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop potential products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. If any of these events occur, we may not be able to develop or commercialize our potential products.
In particular, we have entered into agreements with Roche for the co-development and commercialization of two of our lead product candidates, MAXY-alpha and MAXY-VII. The failure of Roche to perform its obligations under either agreement, our failure to perform our obligations under either agreement or to effectively manage our relationship with Roche, a material contractual dispute with Roche under either agreement, or termination of either agreement by Roche, would have a material adverse effect on our prospects, our ability to develop the product candidates subject to the applicable agreement and our financial results.
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We 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. As a result, 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 currently market products intended to treat medical conditions that our product candidates are planned to be used to treat, and could become our competitors in the future. Our collaborators could develop competing products, preclude us from entering into collaborations with their competitors, fail to rapidly develop our product candidates, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to allow the development and commercialization of our products. Any of these circumstances could harm our product development efforts.
In some cases, our collaborators already market a product that could be competitive with the product(s) that we are collaborating with them on for an improved version, and could conduct their operations in a manner that discriminates against the product that we developed.
We will either commercialize products resulting from our proprietary programs directly or through licensing to other companies. We have no experience in manufacturing or 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, each of which could require significant capital investment. 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.
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 intellectual property for our technologies and products in the United States 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 United States, 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 allowing for meaningfully defending intellectual property rights.
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. The patent positions of biopharmaceutical and biotechnology companies, including our patent positions, are often uncertain and involve complex legal and factual questions. We apply for patents covering our technologies and potential products as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. 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. Enforcement of our patents against infringers could require us to expend significant amounts with no assurance that we would be successful in any litigation. Others may independently develop similar or alternative technologies or design around our patented technologies or products. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages.
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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 or misuse 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 require us to shut down some of our operations.
Our ability to develop products depends in part on not infringing patents or other proprietary rights of third parties, and not 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 or corresponding proteins or peptides that we may wish to utilize with our proprietary technologies, or products that are similar to products developed with the use of our technologies or alternative methods of generating gene diversity. If these patent applications result in issued patents and we wish to use the patented technology, we would need to obtain a license from the third party, which may not be available on acceptable terms, if at all.
Third parties may assert that we are employing their proprietary technology without authorization. In particular, our efforts to develop improved, next-generation protein pharmaceuticals could lead to allegations of patent infringement by the parties commercializing other versions of such proteins. In addition, third parties may obtain patents in the future and claim that our technologies or product candidates infringe these patents. We could incur substantial costs and diversion of the time and attention 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. In addition, 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 affected products.
We 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.
Budget or cash constraints may force us to delay or terminate our efforts to develop certain products and could prevent us from executing our business plan, meeting our stated timetables and commercializing our potential products as quickly as possible.
Because we are an emerging company with limited resources, and because the research and development of pharmaceuticals is a long and expensive process, we must regularly assess the most efficient allocation of our research and development resources. Accordingly, we may choose to delay or terminate our research and development efforts for a promising product candidate to allocate those resources to another program, which could cause us to fall behind our timetables for development and prevent us from commercializing product candidates as quickly as possible. As a result, we may not be able to fully realize the value of some of our product candidates in a timely manner, since they will be delayed in reaching the market, or may not reach the market at all.
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We are continuing our efforts to contain costs. On June 16, 2005, we announced a reduction in force of approximately 16% of our personnel, across both our research and administrative functions. This reduction in force was a part of our efforts to focus our resources on product development. As a result of the reduction in force, we recorded termination costs of $807,000 during 2005, comprised primarily of involuntary termination benefits. We continue to believe strict cost containment in the near term is essential if our current funds are to be sufficient to allow us to continue our currently planned operations. We assess market conditions on an ongoing basis and plan to take appropriate actions as required. However, we may not be able to effectively contain our costs and achieve an expense structure commensurate with our business activities and revenues. As a result, we could have inadequate levels of cash for future operations or for future capital requirements, which could significantly harm our ability to operate the business.
We may need additional capital in the future. If additional capital is not available, we may have to curtail or cease operations.
We anticipate that existing cash and cash equivalents and income earned thereon, together with anticipated revenues from collaborations and grants, will enable us to maintain our currently planned operations for at least the next twelve months. However, our current plans and assumptions may change, and our capital requirements may increase in future periods depending 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 extent to which we advance products into clinical trials with our own resources, 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 have no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable to us or our stockholders. If additional funds are not available, we may be forced to delay or terminate research or preclinical development programs, clinical trials, if any, or the commercialization of products, if any, resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.
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 or product development by others may result in our products and technologies becoming obsolete.
As a company that is focused on next-generation protein therapeutic products, we face, and will continue to face, intense competition from both 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 companies and organizations may develop technologies that are alternatives to our technologies. Further, our competitors in the protein optimization field, including companies that have developed and commercialized prior versions of protein therapeutic products, 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 commercial products.
Any products that we develop through our technologies will compete in multiple, highly competitive markets may fail to achieve market acceptance, which would impair our ability to become profitable. Most of the companies and organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staff and facilities and capabilities, and greater experience in modifying DNA and proteins, obtaining regulatory approvals, manufacturing products and marketing. Our product candidates, even if approved by the FDA or a comparable foreign regulatory agency, may fail to achieve market acceptance, which would impair our ability to become profitable.
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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.
Legislative actions, recent and potential new accounting pronouncements and higher compliance costs are likely to adversely impact our future financial position and results of operations.
Recent changes in financial accounting standards may cause adverse, unexpected earnings fluctuations and will adversely affect our reported results of operations. For example, on December 16, 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based at their fair values. Our implementation of SFAS 123(R), which we adopted as of January 1, 2006, had a material impact on our consolidated results of operations and net loss per share for the three months and nine months ended September 30, 2006 and is expected to have a material impact on our results of operations in the future. Such charges will significantly increase our net loss and impact our ability to achieve profitability. The magnitude of the impact of expensing stock-based compensation will depend in part upon the timing and amount of future equity compensation awards. New accounting pronouncements and varying interpretations of such pronouncements have occurred with frequency in the recent past and may occur in the future. In addition, we may make changes in our accounting policies in the future.
Compliance with changing regulations regarding corporate governance and public disclosure will also result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations and Nasdaq Global Market listing requirements, have created uncertainty for companies such as ours and compliance costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment will result in increased general and administrative expenses and may cause a diversion of management time and attention from revenue-generating activities to compliance activities.
If we do not attract and retain key employees, our business could be impaired.
To be successful and achieve our objectives, we must attract and retain qualified scientific and management personnel. If we are unsuccessful in attracting and retaining qualified personnel, particularly at the management level, our business could be impaired. We have been successful in hiring and retaining key personnel in the past; however, we face significant competition for experienced, management level personnel. Although we believe have been successful in attracting and retaining qualified personnel, competition for experienced management personnel and scientists from numerous companies and academic and other research institutions may limit our ability to do so in the future on acceptable terms. Failure to attract and retain personnel could prevent us from pursuing collaborations or developing our products or core technologies.
The operation of international locations may increase operating expenses and divert management attention.
We conduct certain of our operations through Maxygen ApS, our Danish subsidiary. Operation as an international entity requires additional management attention and resources. We have limited experience in operating internationally and in conforming our operations to local cultures, standards and policies. The costs of operating internationally are expected to continue to exceed our international revenues, if any, for at least the next several years. As we continue to operate internationally, we are subject to risks of doing business internationally, including the following:
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• | regulatory requirements that may limit or prevent the offering of our products in local jurisdictions; | ||
• | local legal and governmental limitations on company-wide employee benefit practices, such as the operation of our employee stock option plan in local jurisdictions; | ||
• | government limitations on research and/or research involving genetically engineered products or processes; | ||
• | difficulties in staffing and managing foreign operations; | ||
• | currency exchange risks; and | ||
• | potentially adverse tax consequences. |
Acquisitions could result in dilution, operating difficulties and other harmful consequences.
If appropriate opportunities present themselves, we may acquire businesses or technologies that complement our capabilities. 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 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 before acquisition had been smaller, private companies. |
We do not have extensive 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 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.
Our stock price has been, and may continue to be, extremely volatile, and an investment in our stock could decline in value.
The trading prices of life science company stocks in general, and ours in particular, have experienced significant price fluctuations in the last several years. During the twelve-month period ended September 30, 2006, the price of our common stock on the Nasdaq Global Market ranged from $6.78 to $8.95. The valuations of many life science companies without product revenues and earnings, including ours, are based on valuation standards such as price to sales ratios and progress in product development or clinical trials. Trading prices based on these 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. In addition, our stock price could be subject to wide fluctuations in response to factors including the following:
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• | our failure to meet our publicly announced revenue and/or expense projections and/or product development timetables; | ||
• | adverse results or delays in preclinical development or clinical trials; | ||
• | any decisions to discontinue or delay development programs or clinical trials; | ||
• | announcements of new technological innovations or new products by us or our competitors; | ||
• | 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; | ||
• | changes in general economic, political and market conditions, such as recessions, interest rate changes, terrorist acts and other factors; | ||
• | developments in or challenges relating to patent or other proprietary rights; 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 could incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation.
Substantial sales of shares may adversely impact the market price of our common stock.
If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, the market price of our common stock may decline. Our common stock trading volume is low and thus the market price of our common stock is particularly sensitive to trading volume. Our low trading volume may also make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate. Significant sales of our common stock may adversely impact the then-prevailing market price of our common stock.
Some of our existing stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders.
As of September 30, 2006, our executive officers and directors, together with GlaxoSmithKline plc, controlled approximately 26% of our outstanding common stock. As a result, these stockholders, if they act together, and GlaxoSmithKline plc, which owns approximately 18% of our outstanding common stock, by itself, could 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 our company 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. This concentration of ownership could also depress our stock price.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
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
The following exhibits are filed as part of this report:
10.1 | First Amendment to Lease, dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to Exhibit 10.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 25, 2006) | ||
10.2 | Fifth Amendment to Lease, dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to Exhibit 10.2 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 25, 2006) | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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 7, 2006 | By: | /s/ Russell J. Howard | ||||
Russell J. Howard | ||||||
Chief Executive Officer | ||||||
November 7, 2006 | By: | /s/ Lawrence W. Briscoe | ||||
Lawrence W. Briscoe | ||||||
Chief Financial Officer |
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Exhibit Index
10.1 | First Amendment to Lease, dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to Exhibit 10.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 25, 2006) | |
10.2 | Fifth Amendment to Lease, dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to Exhibit 10.2 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 25, 2006) | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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