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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 June 30, 2007
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
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.
Yesþ Noo
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 filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
As of July 31, 2007, there were 36,858,458 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 JUNE 30, 2007
FORM 10-Q
QUARTER ENDED JUNE 30, 2007
INDEX
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. 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.
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.
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We own or have rights to various copyrights, trademarks and trade names used in our business, including Maxygen®, MaxyScan® 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,” “could,” “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; | ||
• | 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, 2006.
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)
(in thousands, except share and per share amounts)
December 31, | June 30, | |||||||
2006 | 2007 | |||||||
(Note 1) | (unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 46,504 | $ | 25,070 | ||||
Short-term investments | 133,384 | 137,831 | ||||||
Accounts receivable and other receivables | 4,099 | 588 | ||||||
Prepaid expenses and other current assets | 3,133 | 2,470 | ||||||
Total current assets | 187,120 | 165,959 | ||||||
Property and equipment, net | 3,262 | 3,023 | ||||||
Goodwill | 12,192 | 12,192 | ||||||
Long-term investments | 2,988 | 4,990 | ||||||
Deposits and other long-term assets | 85 | 85 | ||||||
Total assets | $ | 205,647 | $ | 186,249 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,435 | $ | 2,032 | ||||
Accrued compensation | 4,708 | 3,656 | ||||||
Other accrued liabilities | 2,954 | 5,477 | ||||||
Deferred revenue | 1,527 | — | ||||||
Taxes payable | 140 | — | ||||||
Total current liabilities | 11,764 | 11,165 | ||||||
Non-current deferred revenue | 4,066 | — | ||||||
Other long-term liabilities | 18 | 49 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2006 and June 30, 2007 | — | — | ||||||
Common stock, $0.0001 par value: 100,000,000 shares authorized, 36,157,910 and 36,847,558 shares issued and outstanding at December 31, 2006 and June 30, 2007, respectively | 4 | 4 | ||||||
Additional paid-in capital | 411,195 | 419,688 | ||||||
Accumulated other comprehensive loss | (696 | ) | (616 | ) | ||||
Accumulated deficit | (220,704 | ) | (244,041 | ) | ||||
Total stockholders’ equity | 189,799 | 175,035 | ||||||
Total liabilities and stockholders’ equity | $ | 205,647 | $ | 186,249 | ||||
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2006 | 2007 | 2006 | 2007 | |||||||||||||
(unaudited) | ||||||||||||||||
Collaborative research and development revenue | $ | 7,950 | $ | 874 | $ | 12,017 | $ | 8,471 | ||||||||
Revenue from related party | — | — | — | 556 | ||||||||||||
Grant revenue | 1,355 | 1,207 | 2,253 | 2,146 | ||||||||||||
Total revenues | 9,305 | 2,081 | 14,270 | 11,173 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 10,212 | 16,343 | 23,474 | 30,943 | ||||||||||||
General and administrative | 4,065 | 3,528 | 8,383 | 7,859 | ||||||||||||
Total operating expenses | 14,277 | 19,871 | 31,857 | 38,802 | ||||||||||||
Loss from operations | (4,972 | ) | (17,790 | ) | (17,587 | ) | (27,629 | ) | ||||||||
Interest income and other (expense), net | 1,931 | 2,118 | 3,824 | 4,292 | ||||||||||||
Equity in net loss of minority investee | (342 | ) | — | (342 | ) | — | ||||||||||
Net loss | $ | (3,383 | ) | $ | (15,672 | ) | $ | (14,105 | ) | $ | (23,337 | ) | ||||
Basic and diluted net loss per share | $ | (0.09 | ) | $ | (0.43 | ) | $ | (0.39 | ) | $ | (0.64 | ) | ||||
Shares used in basic and diluted net loss per share calculations | 36,024 | 36,791 | 35,999 | 36,688 |
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Six months ended | ||||||||
June 30, | ||||||||
2006 | 2007 | |||||||
(unaudited) | ||||||||
Operating activities | ||||||||
Net loss | $ | (14,105 | ) | $ | (23,337 | ) | ||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,213 | 847 | ||||||
Equity in net loss of minority investee | 342 | — | ||||||
Non-cash stock compensation | 3,335 | 3,750 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable and other receivables | 3,175 | 3,511 | ||||||
Prepaid expenses and other current assets | 953 | 663 | ||||||
Deposits and other assets | (16 | ) | — | |||||
Accounts payable | 513 | (403 | ) | |||||
Accrued compensation | (915 | ) | (1,052 | ) | ||||
Other accrued liabilities | (428 | ) | 2,553 | |||||
Taxes payable | — | (140 | ) | |||||
Deferred revenue | (1,474 | ) | (5,593 | ) | ||||
Net cash used in operating activities | (7,407 | ) | (19,201 | ) | ||||
Investing activities | ||||||||
Purchases of available-for-sale securities | (70,127 | ) | (122,005 | ) | ||||
Maturities of available-for-sale securities | 87,499 | 115,646 | ||||||
Investment in minority investee | (600 | ) | — | |||||
Acquisition of property and equipment | (730 | ) | (609 | ) | ||||
Net cash provided by (used in) investing activities | 16,042 | (6,968 | ) | |||||
Financing activities | ||||||||
Proceeds from issuance of common stock | 538 | 4,743 | ||||||
Net cash provided by financing activities | 538 | 4,743 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 24 | (8 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 9,197 | (21,434 | ) | |||||
Cash and cash equivalents at beginning of period | 26,940 | 46,504 | ||||||
Cash and cash equivalents at end of period | $ | 36,137 | $ | 25,070 | ||||
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 June 30, 2007, and for the three and six months ended June 30, 2006 and June 30, 2007, 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, 2006 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, 2006.
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”).
The Company has a minority investment in Codexis, Inc. (“Codexis”), a biotechnology company focused on developing innovative biotechnology-based solutions for improving the manufacture of pharmaceuticals, transportation fuels and industrial chemicals. Prior to February 28, 2005, the Company recorded minority interest in the condensed consolidated financial statements to account for the ownership interest of the minority owner. As of February 28, 2005, the date upon which the Company’s equity interests in Codexis fell below 50%, the Company no longer consolidates the financial results of Codexis and, instead accounts for its investment in Codexis under the equity method of accounting. As of December 31, 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 notes and accrued interest were converted into Codexis preferred stock and the Company purchased approximately $400,000 of additional preferred stock. Subsequent to its investments in May and August 2006, the Company recorded losses of $1.0 million in 2006 under the equity method of accounting and, at December 31, 2006, had recorded losses equal to its investment basis in Codexis. The Company’s investment basis in Codexis as of December 31, 2006 and June 30, 2007 was zero. The Company is not obligated to fund the operations or other capital requirements of Codexis. As of June 30, 2007, the Company’s equity interest in Codexis was approximately 32%.
On October 24, 2006, Amgen Inc. (“Amgen”) completed the acquisition of Avidia Inc. (“Avidia”), a private biotechnology company in which the Company had a minority investment. Avidia was established by the Company and third party investors in July 2003. 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 was 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 condensed consolidated statements of operations. After March 31, 2005, the Company’s investment in Avidia was accounted for under the cost method of accounting. At
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the time of the acquisition of Avidia by Amgen, the Company’s basis in Avidia was zero. As a result of the acquisition, the Company received a cash payment of approximately $17.8 million in the fourth quarter of 2006 in exchange for its equity interests in Avidia and may receive up to an additional $1.4 million in cash, contingent upon the development of certain Avidia products by Amgen. Accordingly, the Company recorded a gain on disposal of this investment of approximately $17.7 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.
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 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 associated 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
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the results of the Company’s research efforts or by events external to the Company, such as regulatory approval to market a product.
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 | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2006 | 2007 | 2006 | 2007 | |||||||||||||
Net loss | $ | (3,383 | ) | $ | (15,672 | ) | $ | (14,105 | ) | $ | (23,337 | ) | ||||
Basic and diluted: | ||||||||||||||||
Weighted-average shares used in computing basic and diluted net loss per share | 36,024 | 36,791 | 35,999 | 36,688 | ||||||||||||
Basic and diluted net loss per common share | $ | (0.09 | ) | $ | (0.43 | ) | $ | (0.39 | ) | $ | (0.64 | ) | ||||
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 net loss per share 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 10,126,000 at June 30, 2006 and 10,798,000 at June 30, 2007.
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Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is primarily comprised of net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. The components of accumulated other comprehensive loss are as follows (in thousands):
December 31, | June 30, | |||||||
2006 | 2007 | |||||||
Unrealized gain on available-for-sale securities | $ | 46 | $ | 71 | ||||
Unrealized losses on available-for-sale securities | (108 | ) | (45 | ) | ||||
Foreign currency translation adjustments | (634 | ) | (642 | ) | ||||
Accumulated other comprehensive loss | $ | (696 | ) | $ | (616 | ) | ||
Recent Accounting Pronouncements
On June 27, 2007, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the FASB Emerging Issues Task Force on Issue No. 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires entities to defer income statement recognition of nonrefundable advance payments for research and development activities, such as up-front nonrefundable payments to contract research organizations, if the contracted party has not yet performed activities related to the up-front payment. Amounts deferred are to be recognized by the contracting company as expense when the research and development activities are performed. The application of EITF 07-3 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007. Earlier application of EITF 07-3 is not permitted. Companies are required to report the effects of applying EITF 07-3 prospectively for new contracts entered into after the effective date of EITF 07-3. The Company currently is evaluating the effect that the application of EITF 07-3 will have on its consolidated results of operations and financial condition.
In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. The Company currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157��). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its consolidated results of operations and financial condition.
In September 2006, the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year
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misstatements in quantifying current year effects of each of the company’s balance sheet and statement of operations and the related financial statement disclosures. Early application of the guidance in SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s balance sheet and statement of operations and the related financial statement disclosures.
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 adopted FIN 48 as of January 1, 2007 and its adoption did not have a material impact on the Company’s financial position, results of operations or cash flows. See note 8 for additional information regarding the Company’s adoption of FIN 48.
Stock-Based Compensation
As of June 30, 2007, the Company had five stock option plans: the 2006 Equity Incentive Plan (the “2006 Plan”); the 1997 Stock Option Plan (the “1997 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, which has replaced the 1997 Plan as to future awards, 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. In connection with stockholder approval of the 2006 Plan, the 1997 Plan was terminated as to future awards. The Company also has an Employee Stock Purchase Plan (“ESPP”) that enables eligible employees to purchase Company common stock.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”) using the modified prospective transition method. Stock-based compensation expense recognized under SFAS 123(R) in the condensed consolidated statements of operations for the three months and six months ended June 30, 2007 was $1.6 million and $3.0 million related to employee stock options, compared to $1.7 million and $3.1 million for the three months and six months ended June 30, 2006. Stock-based compensation expense related to the ESPP for the six months ended June 30, 2007 and June 30, 2006 was $13,000 and $66,000, respectively. No shares of common stock were purchased pursuant to the ESPP during the three months ended June 30, 2007 and June 30, 2006, and, as a result, no stock-based compensation expense was recognized related to the ESPP for such periods. Stock-based compensation expense related to consultant stock options was $160,000 and $590,000 for the three months and six months end June 30, 2007, compared to $282,000 for the three and six months ended June 30, 2006.
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.
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 uses the Black-Scholes
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-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 tables:
Three months ended | Three months ended | |||||||||||||||
June 30, 2006 | June 30, 2007 | |||||||||||||||
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 | 5.01 | % | 5.05 | % | 4.76 | % | 4.97 | % | ||||||||
Expected life—Options | 5.13 years | 2.4 years | 5.7 years | 2.4 years | ||||||||||||
Expected volatility—Options | 54.48 | % | 45.78 | % | 51.30 | % | 44.88 | % |
Six months ended | Six months ended | |||||||||||||||
June 30, 2006 | June 30, 2007 | |||||||||||||||
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 | 4.30% to 5.01% | 4.34% to 5.05% | 4.64% to 4.76% | 4.76% to 4.97% | ||||||||||||
Risk-free interest rate range—ESPP | 3.2% to 4.36% | — | 4.74% to 5.09% | — | ||||||||||||
Expected life—Options | 5.13 years | 2.4 years | 5.7 years | 2.4 years | ||||||||||||
Expected life—ESPP | 0.92 years | — | 0.94 years | — | ||||||||||||
Expected volatility—Options | 54.48% to 56.42% | 44.38% to 45.78% | 51.30% to 52.96% | 44.88% to 45.28% | ||||||||||||
Expected volatility—ESPP | 42.97 | % | — | 48.31 | % | — |
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.
Valuation and Expense Information under SFAS 123(R)
For the three and six months ended June 30, 2006 and 2007, stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) and stock-based compensation expense related to consultant stock options was allocated as follows (in thousands):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2006 | 2007 | 2006 | 2007 | |||||||||||||
Research and development | $ | 426 | $ | 816 | $ | 1,031 | $ | 1,434 | ||||||||
General and administrative | 1,237 | 898 | 2,115 | 2,133 | ||||||||||||
Stock-based compensation expense before income taxes | 1,663 | 1,714 | 3,146 | 3,567 | ||||||||||||
Income tax benefit | — | — | — | — | ||||||||||||
Total stock-based compensation expense after income taxes | $ | 1,663 | $ | 1,714 | $ | 3,146 | $ | 3,567 | ||||||||
There was no capitalized stock-based employee compensation cost as of June 30, 2006 and 2007. There were no recognized tax benefits during the quarters ended June 30, 2006 and 2007.
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2. Cash Equivalents and Investments
Management determines the appropriate classification of debt securities as current or non-current 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 income (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 June 30, 2007 were as follows (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Money market funds | $ | 25,070 | $ | — | $ | — | $ | 25,070 | ||||||||
Commercial paper | 67,375 | 68 | — | 67,443 | ||||||||||||
Corporate bonds | 3,740 | 1 | — | 3,741 | ||||||||||||
U.S. government agency securities | 71,680 | 2 | (45 | ) | 71,637 | |||||||||||
Total | 167,865 | 71 | (45 | ) | 167,891 | |||||||||||
Less amounts classified as cash equivalents | (25,070 | ) | — | — | (25,070 | ) | ||||||||||
Total investments | $ | 142,795 | $ | 71 | $ | (45 | ) | $ | 142,821 | |||||||
The Company’s cash equivalents and investments as of December 31, 2006 were as follows (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Money market funds | $ | 45,258 | $ | — | $ | — | $ | 45,258 | ||||||||
Commercial paper | 60,139 | 28 | — | 60,167 | ||||||||||||
Corporate bonds | 20,082 | 2 | (7 | ) | 20,077 | |||||||||||
U.S. government agency securities | 57,459 | 16 | (101 | ) | 57,374 | |||||||||||
Total | 182,938 | 46 | (108 | ) | 182,876 | |||||||||||
Less amounts classified as cash equivalents | (46,504 | ) | — | — | (46,504 | ) | ||||||||||
Total investments | $ | 136,434 | $ | 46 | $ | (108 | ) | $ | 136,372 | |||||||
Realized gains or losses on the maturity of available-for-sale securities for the three and six-month periods ended June 30, 2006 and 2007 were insignificant. The change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive loss were unrealized losses of $13,000 for the three months ended June 30, 2006, unrealized gains of $9,000 for the six months ended June 30, 2006, and unrealized gains of $30,000 and $89,000 for the three and six months ended June 30, 2007, respectively. The Company intends to hold the securities until maturity and therefore does not believe the current unrealized losses of $45,000 are other than temporary.
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At June 30, 2007, the contractual maturities of investments were as follows (in thousands):
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Due within one year | $ | 137,796 | $ | 137,831 | ||||
Due after one year through two years | 4,999 | 4,990 | ||||||
$ | 142,795 | $ | 142,821 | |||||
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. The Company generally enters into foreign currency forward exchange contracts that expire within eighteen 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. The Company had no foreign currency contracts outstanding at June 30, 2007 or December 31, 2006.
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.
On December 5, 2006, the U.S. Second Circuit Court of Appeals reversed the District Court’s ruling certifying the consolidated cases as class actions. On April 9, 2007, the Court of Appeals denied a motion for a rehearing en banc. On June 22, 2007, the parties submitted a Stipulation and Proposed Order to terminate the settlement agreement, which the District Court so ordered on June 25, 2007. The parties are now considering alternative options.
If an alternative settlement agreement is not reached, and an action proceeds against the Company based on the facts alleged in the above referenced proceeding, the Company intends to defend the lawsuit vigorously. The Company believes the lawsuit against it and its officers is without merit. If the
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outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, its business would be significantly harmed.
In addition, on July 30, 2007, the Company received a demand letter, addressed to its board of directors, from counsel for a purported stockholder concerning alleged violations by unspecified persons and entities of Section 16(b) of the Securities Exchange Act of 1934 Act apparently related to the Company’s initial public offering and secondary public offering. The Company will evaluate the demand and make an appropriate response.
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. 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 material contracts expire on various dates through 2010.
Minimum annual commitments are as follows (in thousands):
For the remainder of 2007 | $ | 7,937 |
Year ending | ||||
December 31, | ||||
2008 | $ | 5,148 | ||
2009 | 865 | |||
Thereafter | 21 | |||
Total commitments beyond current year | $ | 6,034 | ||
6. 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” (“FIN 45”). FIN 45 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; 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 June 30, 2007.
In addition, the Company customarily agrees in the ordinary course of its business to indemnification provisions in its collaboration 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 agreements are similar, but in addition provide some limited indemnification for its collaborator 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
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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 June 30, 2007.
7. Related Party Transactions
On April 1, 2006, the Company entered into a two-year consulting agreement with Waverley Associates, Inc. (“Waverley”), 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 agreed to pay consulting fees to Waverley of $24,166 per month during the term of the consulting agreement and granted Mr. Stein an option to purchase 250,000 shares of the Company’s common stock at an exercise price of $8.28 per share. The option vested and became exercisable in full on April 1, 2007. For the three and six-month periods ended June 30, 2007, the Company recognized stock-based compensation expense of approximately $430,000 attributable to the option granted to Mr. Stein. Total expense under this arrangement, including cash payments, was approximately $73,000 and $575,000 for the three and six month periods ended June 30, 2007, respectively.
In December 2006, the Company expanded the scope of exclusive licenses previously granted to Codexis to its MolecularBreeding directed evolution platform for certain applications relating to energy, including biofuels. Under the license agreement, as amended, the Company is entitled to receive a portion of any revenues received by Codexis for the sale of energy products and the use of processes in the energy field. Accordingly, in March 2007, the Company received $556,000 from Codexis as a result of revenues received by Codexis under its collaboration agreement with Shell Oil Products US to explore enhanced methods of converting biomass to biofuels. The payment from Codexis is reflected as revenue from related party in the condensed consolidated statements of operations.
8. Income Taxes
Effective January 1, 2007, the Company adopted FIN 48. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS 109. Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48 on January 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date. As a result of the implementation of FIN 48, the Company recognized no change in the liability for unrecognized tax benefits related to tax positions taken in prior periods, and no corresponding change in retained earnings. Additionally, FIN 48 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. The Company made no reclassifications between current taxes payable and long-term taxes payable upon adoption of FIN 48. The Company’s total amount of unrecognized tax benefits as of the January 1, 2007 adoption date and June 30, 2007 was approximately $5.6 million at each date. These unrecognized tax benefits if recognized would be offset by a full valuation allowance. The Company had no amounts of unrecognized tax benefits that, if recognized, would affect its effective tax rate.
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Upon adoption of FIN 48, the Company’s policy to include interest and penalties related to unrecognized tax benefits within the Company’s operating expenses did not change. As of June 30, 2007, the Company had no amount accrued for payment of interest and penalties related to unrecognized tax benefits. For the three and six months ended June 30, 2007 and 2006, the Company recognized no amounts of interest and penalties related to unrecognized tax benefits.
The tax years 1997 to 2006 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject and for the years 2001 to 2006 for the international taxing jurisdictions to which the Company is subject.
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 and development of improved 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 of optimized protein pharmaceuticals.
Two of the drug candidates that we have developed are currently in clinical trials: MAXY-G34, an improved next-generation granulocyte colony stimulating factor (G-CSF), for the treatment of neutropenia, and MAXY-alpha, an interferon alpha product for the treatment of hepatitis C virus (HCV) infection and other indications. In August 2006, we initiated a Phase I clinical trial in the United States to evaluate MAXY-G34 and, in June 2007, we initiated a Phase IIa clinical trial of MAXY-G34. In November 2006, F. Hoffmann-La Roche Ltd., or Roche, initiated a Phase Ia clinical trial in New Zealand to evaluate MAXY-alpha for the treatment of HCV. We received a $2.0 million milestone payment from Roche in the fourth quarter of 2006 as a result of the commencement of this clinical trial. Roche has informed us that it plans to initiate a Phase Ib clinical trial in the United States in 2007.
In addition to our clinical stage product candidates, we have other preclinical and research stage programs, including our MAXY-VII and MAXY-gamma programs, and assets outside of our core business, including research on certain vaccine programs.
Our MAXY-VII product candidates are designed to be superior next-generation factor VII products to treat hemophilia and acute bleeding indications. Effective April 12, 2007, Roche terminated its agreement with us relating to the development and commercialization of these product candidates for acute bleeding indications due to the inability of the parties to establish an animal model intended to provide preclinical de-risking of the program. As a result of the termination of this agreement, we hold all rights to our MAXY-VII product candidates. We currently intend to advance one of our MAXY-VII product candidates into clinical trials for the treatment of hemophilia and plan to file an investigational new drug (IND) application with the FDA for our lead MAXY-VII product candidate in the first half of 2008. We also are currently evaluating our plans for the continued development of our MAXY-VII product candidates for acute bleeding indications.
Our MAXY-gamma product candidates are next-generation versions of interferon gamma. In 2001, we granted an exclusive license to InterMune, Inc., or InterMune, to develop and market our MAXY-gamma product candidates for all human therapeutic indications. Based on InterMune’s decision to discontinue the development of our MAXY-gamma product candidates, we agreed with InterMune to terminate the license agreement, effective July 31, 2007. As a result of the termination of this license agreement, all rights licensed to InterMune under the agreement have reverted to us.
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.
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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. As of June 30, 2007, we had an equity interest in Codexis of approximately 32% and our investment basis in Codexis was zero. We are not obligated to fund the operations or other capital requirements of Codexis.
In December 2006, we expanded the scope of exclusive licenses previously granted to Codexis to our MolecularBreeding directed evolution platform for certain applications relating to energy, including biofuels. Under the license agreement, as amended, we are entitled to receive a portion of any revenues received by Codexis for the sale of energy products and the use of processes in the energy field. Accordingly, in March, 2007, we received $556,000 from Codexis as a result of revenues received by Codexis under its collaboration agreement with Shell Oil Products US to explore enhanced methods of converting biomass to biofuels.
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 $64.0 million.
In July 2003, we established Avidia Inc. (formerly Avidia Research Institute), or Avidia, together with third-party investors. 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 and Avidia became a wholly owned subsidiary of Amgen Inc. At the time of the acquisition of Avidia by Amgen Inc., our basis in Avidia was zero. As a result of the acquisition, we received approximately $17.8 million in cash in the fourth quarter of 2006 in exchange for our equity interests in Avidia and may receive up to an additional $1.4 million in cash, contingent upon the development of certain Avidia products by Amgen Inc. Under an agreement that we entered into with Avidia at the time of Avidia’s formation, we have retained certain exclusive and non-exclusive rights to use 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. Over the past several years, we have strategically shifted our focus to pharmaceutical products and believe this is an important step in building long-term value in our company. Total revenues decreased from $9.3 million and $14.3 in the three months and six months ended June 30, 2006 to $2.1 million and $11.2 million in the comparable periods in 2007, primarily as a result of the April 12, 2007 termination of our collaboration agreement with Roche relating to the co-development and commercialization of our MAXY-VII product candidates. We expect our revenues to decrease in 2007 compared to 2006, primarily due to the loss of collaborative research and development revenue under this co-development agreement. Due to the nature of our research and our dependence on our collaborative partners to commercialize certain results of the research, our revenue may fluctuate substantially from year to year, based on the completion of new licensing or collaborative agreements and the achievement of development related milestones. As a result, due to the uncertain nature of the events generating the revenue, 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.
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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).
We continue to maintain a strong cash position to fund our expanded product development efforts, with cash, cash equivalents and marketable securities totaling $167.9 million as of June 30, 2007.
We have incurred significant operating losses from continuing operations since our inception. As of June 30, 2007, our accumulated deficit was $244.0 million. We have invested heavily in establishing our proprietary technologies and our research and development expenses have increased due to an increase in external research expenses associated with the pre-clinical and clinical development of our product candidates, including expenses associated with the ongoing clinical trials of our MAXY-G34 product candidates. Our research and development expenses for the three months and six months ended June 30, 2007 were $16.3 million and $30.9 million, compared to $10.2 million and $23.5 million for the comparable periods in 2006. 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. 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, 2006.
Results of Operations
Revenues
Our total revenues in the three months and six months ended June 30, 2007 were $2.1 million and $11.2 million, respectively, compared to $9.3 million and $14.3 million in the comparable periods in 2006. Our revenues are derived primarily from research collaboration agreements and government research grants. Roche was the only collaborative partner that contributed significantly to our collaborative research and development revenues during the six months ended June 30, 2006 and June 30, 2007. Effective April 12, 2007, Roche terminated its agreement with us relating to the development and commercialization of our MAXY-VII product candidates for acute bleeding indications due to the inability of the parties to establish an animal model intended to provide preclinical de-risking of the program. As a result, revenues from our research collaboration agreements decreased from $8.0 million and $12.0 million in the three months and six months ended June 30, 2006 to $874,000 and $8.5 million in the comparable periods in 2007. The termination of the agreement with Roche for our MAXY-VII product candidates caused us to accelerate the recognition of $5.6 million of deferred revenue in the first half of 2007 relating to the $8.0 million upfront payment received from Roche in 2005. For the three months and six months ended June 30, 2007, our revenues also included $700,000 and $2.9 million, respectively, earned as net reimbursement of our research and development activities prior to the termination of our MAXY-VII co-development and commercialization agreement with Roche.
Our revenues from government research grants were $1.2 million and $2.1 million in the three months and six months ended June 30, 2007 and $1.4 million and $2.3 million in the comparable periods in 2006.
For the six months ended June 30, 2007, our revenues also included $556,000 received from Codexis under our license agreement with Codexis, which reflects amounts due to us from payments received by Codexis under its collaboration agreement with Shell Oil Products US. The payment from Codexis is reflected as revenue from related party in the condensed consolidated statements of operations.
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We expect our revenues for the remainder of 2007 to decrease compared to 2006, due primarily to the loss of collaborative research and development revenue under the co-development and commercialization agreement with Roche for our MAXY-VII product candidates. However, due to the nature of our research and our dependence on our collaborative partners to commercialize certain results of the research, our revenue may fluctuate substantially from year to year, based on the completion of new licensing or collaborative agreements and the achievement of development related milestones. As a result, due to the uncertain nature of the events generating the revenue, 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.
Research and Development Expenses
Our research and development expenses consist primarily of research consultants and external collaborative research expenses (including contract manufacturing and clinical trial expenses), salaries and benefits, facility costs, supplies and depreciation. Research and development expenses were $16.3 million and $30.9 million in the three months and six months ended June 30, 2007, compared to $10.2 million and $23.5 million in the comparable periods in 2006. The $6.1 million and $7.5 increases in our research and development expenses were primarily related to increased external expenses associated with the development of our product candidates, including expenses related to clinical trials, the manufacture of product for clinical trials and increased salaries and benefits.
Stock compensation expenses included in research and development expenses increased from $426,000 and $1.0 million in the three months and six months ended June 30, 2006 to $816,000 and $1.4 million in the comparable periods in 2007, primarily as a result of the issuance of additional stock options.
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 and added to project-specific external costs. In the case where a collaborative partner is sharing the research and development costs, the expenses for that project are allocated proportionately between the collaborative projects funded by third parties and internal projects. 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.
The following table presents our approximate research and development expenses by funding category (in thousands):
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2006 | 2007 | 2006 | 2007 | |||||||||||||
Collaborative projects funded by third parties(1) | $ | 2,201 | $ | 214 | $ | 4,842 | $ | 2,451 | ||||||||
Government grants | 1,284 | 1,329 | 2,130 | 2,261 | ||||||||||||
Internal projects | 6,727 | 14,800 | 16,502 | 26,231 | ||||||||||||
Total | $ | 10,212 | $ | 16,343 | $ | 23,474 | $ | 30,943 | ||||||||
(1) | Research and development expenses related to collaborative projects funded by third parties may be 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
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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 in 2007 over 2006, due to an increase in research and development costs resulting from advancement of our product candidates through clinical and preclinical development, including the continued clinical development of our MAXY-G34 product candidates. In addition, because we are proceeding with the preclinical development of our MAXY-VII product candidates for hemophilia and evaluating our plans for the continued development of our MAXY-VII product candidates for acute indications, the research and development costs associated with the development of our MAXY-VII product candidates may increase substantially in 2007 compared to 2006. 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.
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 stock compensation, insurance premiums and professional expenses, such as external expenditures for legal and accounting. General and administrative expenses decreased from $4.1 million and $8.4 million in the three months and six months ended June 30, 2006 to $3.5 million and $7.9 million in the comparable periods in 2007. The decrease for the three-month period ended June 30, 2007 was primarily due to lower stock compensation expense. The decrease for the six-month period ended June 30, 2007 was mostly due to lower expenditures on external consultants and market surveys. General and administrative stock compensation expense was $1.2 million and $2.1 million in the three and six months ended June 30, 2006 compared to $899,000 and $2.1 million in the comparable periods in 2007. The decrease for the three months ended June 30, 2007 was primarily due to consultant options granted in April 2006 that became fully vested after one year and were no longer expensed after such vesting.
Our general and administrative expenses may increase slightly for the remainder of 2007 compared to 2006, depending on, among other things, the levels of share-based payments granted in 2007.
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net represents income earned on our cash, cash equivalents and marketable securities and currency transaction gains or losses related to the funding of our Danish subsidiary, Maxygen ApS. Interest income and other income (expense), net increased from $1.9 million and $3.8 million in the three months and six months ended June 30, 2006 to $2.1 million and $4.3 million in the comparable periods in 2007, due to higher interest income reflecting higher interest rates in 2007 on lower average balances of cash, cash equivalents and marketable securities. Included in these amounts are foreign exchange losses of $95,000 and $105,000 in the three months and six months
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ended June 30, 2006 and foreign exchange losses of $128,000 and $233,000 in the three months and six months ended June 30, 2007.
Recent Accounting Pronouncements
On June 27, 2007, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the FASB Emerging Issues Task Force on Issue No. 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3). EITF 07-3 requires entities to defer income statement recognition of nonrefundable advance payments for research and development activities, such as up-front nonrefundable payments to contract research organizations, if the contracted party has not yet performed activities related to the up-front payment. Amounts deferred are to be recognized by the contracting company as expense when the research and development activities are performed. The application of EITF 07-3 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007. Earlier application of EITF 07-3 is not permitted. Companies are required to report the effects of applying EITF 07-3 prospectively for new contracts entered into after the effective date of EITF 07-3. We currently are evaluating the effect that the application of EITF 07-3 will have on our consolidated results of operations and financial condition.
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” or SFAS 159. SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. We currently are determining whether fair value accounting is appropriate for any of our eligible items and cannot estimate the impact, if any, which SFAS 159 will have on our consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS 157. SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We currently are evaluating the effect that the adoption of SFAS 157 will have on our consolidated results of operations and financial condition.
In September 2006, the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” or SAB 108. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year effects of each of the company’s balance sheets and statement of operations and the related financial statement disclosures. Early application of the guidance in SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on our balance sheet and statement of operations and the related financial statement disclosures.
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 adopted FIN 48 as of January 1, 2007 and its adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.
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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, as a result of the acquisition of Avidia by Amgen Inc., we received approximately $17.8 million in cash in the fourth quarter of 2006 in exchange for our equity interests in Avidia and, on July 1, 2004, we received cash proceeds of $64.0 million from the sale of Verdia, our former agriculture subsidiary and the sole component of our agriculture segment. As of June 30, 2007, we had $167.9 million in cash, cash equivalents and marketable securities.
Net cash used in operating activities increased from $7.4 million in the six months ended June 30, 2006 to $19.2 million in the six months ended June 30, 2007, primarily due to the receipt of a $5.0 million event-based payment from Roche in the second quarter of 2006 relating to our MAXY-VII program and the receipt of a $5.0 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 $16.0 million in the six months ended June 30, 2006 and net cash used in investing activities was $7.0 million in the six months ended June 30, 2007. The cash provided during the six months ended June 30, 2006 was primarily related to maturities of available-for-sale securities in excess of purchases. The cash used during the six months ended June 30, 2007 was primarily related to purchases of available-for-sale securities in excess of maturities. 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 by financing activities was $538,000 in the six months ended June 30, 2006 and $4.7 million in the six months ended June 30, 2007. The cash provided during the 2006 and 2007 periods relate to proceeds from the sale of common stock in connection with our Employee Stock Purchase Plan (ESPP) and the exercise of stock options by employees.
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 our condensed consolidated balance sheets. The effect of exchange rate changes on cash and cash equivalents was an increase of $24,000 in the six months ended June 30, 2006 and a decrease of $8,000 in the six months ended June 30, 2007.
The following are contractual commitments as of June 30, 2007 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 | $ | 2,445 | $ | 1,074 | $ | 1,371 | $ | — | $ | — | ||||||||||
Purchase obligations | 11,526 | 6,863 | 4,663 | — | — | |||||||||||||||
Total | $ | 13,971 | $ | 7,937 | $ | 6,034 | $ | — | $ | — | ||||||||||
As of June 30, 2007, we are eligible to receive up to $50.0 million in potential milestone payments from Roche under our existing collaboration agreement relating to the development of our MAXY-alpha product candidates. We may also earn royalties on future product sales, if any.
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,
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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, the fair value of equity securities held 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 six months ended June 30, 2007. 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, 2006.
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control
There has been no change in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures and internal controls over financial reporting 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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Part II – Other Information
Item 1. Legal Proceedings
The information set forth above under Note 4 contained in the unaudited condensed consolidated financial statements in Part I – Item 1 of this report is incorporated herein by reference.
Item 1A. Risk Factors
A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2006. You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing our company. 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 losses from continuing operations of $16.5 million, $35.1 million and $49.1 million in 2006, 2005 and 2004, respectively. For the six months ended June 30, 2007, our loss from continuing operations was $23.3 million and, as of June 30, 2007, we had an accumulated deficit of $244.0 million. We expect to incur 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 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, alone or in conjunction with corporate collaborators, must conduct a substantial amount of additional 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 are 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.
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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 products that commence 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, initiation of clinical trials and the results of such development and clinical trials are uncertain and subject to change at any point. Such uncertainty, which exists even for product candidates that appear promising based on earlier data, may result in research or development delays, clinical trial delays and failures, product candidate failures and delays in regulatory action or approval. 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.
All of our product candidates are subject to the risks of failure inherent in drug development. Preclinical studies may not yield results that would satisfactorily support the filing of an investigational new drug application (IND) with respect to our drug candidates, and the results of preclinical studies do not necessarily predict the results of clinical trials. Moreover, the available animal models may be unsuitable for assessing our potential products for one or more 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. Similarly, early-stage clinical trials may not predict the results of later-stage clinical trials, including the safety and efficacy profiles of any particular drug candidate. In addition, there can be no assurance that the design of our clinical trials will result in obtaining the desired efficacy data to support regulatory approval. Even if we believe the data collected from clinical trials of our drug candidates are promising, such data may not be sufficient to support approval by the U.S. Food and Drug Administration (FDA) or any foreign regulatory agency, which could delay, limit or prevent regulatory approval.
We design our product candidates to confer what we believe will be improved biological properties as compared to one or more currently marketed products. As a result, our product candidates differ from currently marketed drugs in ways that we expect will be beneficial. However, the impact of the modifications that we make in our product candidates may not be fully apparent in preclinical testing and may only be discovered in clinical testing. Such altered properties may render a product candidate unsuitable or less beneficial than expected for one or more diseases or medical conditions of possible interest or make the product candidate unsuitable for further development. For a particular product candidate, this may lead to the redirection of the development strategy which could lead to substantial delays, increased development costs, decreased likelihood of obtaining regulatory approval, and reduced market potential for any resulting product. This also could result in the termination of the development of the affected product candidate. In either case, such results could adversely affect our business.
In addition, we or our collaborators may determine that certain preclinical or clinical product candidates or programs do not have sufficient therapeutic or commercial potential to warrant further advancement for a particular indication or all indications, and may elect to terminate our programs for such indications or product candidates at any time. If we terminate a preclinical or clinical 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.
In particular, the failure of our MAXY-G34 or MAXY-alpha product candidates in clinical development could have a material adverse impact on our business. Termination of such programs may also cause the price of our stock to drop significantly.
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Our clinical development strategy, which relies on third party contract research organizations, exposes us to additional risk.
We do not have the ability to independently conduct clinical trials for our product candidates in the U.S. and other countries, and therefore rely on third parties, such as contract research organizations, to design our clinical trials, enroll qualified patients, conduct our clinical trials, and to analyze the results of such trials. If these third parties do not successfully carry out their contractual duties, do not conduct the clinical trials in accordance with planned deadlines and the approved protocol and regulatory requirements, or are unable to manage the conduct of our clinical trials effectively in compliance with FDA and other regulatory requirements, it could adversely impact the results obtained in such trials and delay the progress or completion of clinical trials, regulatory submissions and commercialization of our potential products. In any such case, we may be affected by increased costs and delays or both, which may harm our business.
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, preclinical 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. |
In addition, a large portion of our expenses is relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if revenues fluctuate unexpectedly due to unexpected expiration of 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.
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 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 biologic license application (BLA) with the FDA or other regulatory entity, the product candidate must undergo extensive testing, including animal studies and human clinical trials, which can take many years and require substantial expenditures.
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Data obtained from such testing may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.
Our product candidates or potential product candidates may produce undesirable toxicities and adverse effects in preclinical studies. Such toxicities or adverse effects could delay or prevent the filing of an IND with respect to such product candidates or potential product candidates. In clinical trials, administering any of our product candidates to humans may produce undesirable toxicities or side effects. These toxicities or side effects could interrupt, delay, suspend or terminate clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications. Indications of potential adverse effects or toxicities which may occur in clinical trials and which we believe are not significant during the course of such trials may later turn out to actually constitute serious adverse effects or toxicities when a drug has been used in large populations or for extended periods of time.
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, 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.
Regulatory approval of a BLA is never guaranteed, and the approval process typically takes several years and is extremely expensive. The FDA and other regulatory agencies also have substantial discretion in the drug approval process. Despite the time and expense exerted, failure can occur at any stage and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical testing and clinical trials. The number and focus of preclinical studies and clinical trials that will be required for approval from the FDA and other regulatory agencies varies depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate. The FDA and other regulatory agencies can delay, limit or deny approval of a drug candidate for many reasons, including:
• | a drug candidate may not be safe or effective; | ||
• | regulatory officials may not find the data from preclinical testing and clinical trials sufficient; | ||
• | the FDA and other regulatory agencies might not approve our third-party manufacturer’s processes or facilities; or | ||
• | the FDA or other regulatory agencies may change its approval policies or adopt new regulations. |
Even if we receive regulatory approval to sell a product, the approved label for a product may entail limitations on the indicated uses for which we can market a product. For example, even if MAXY-G34 is approved by the FDA, if we are not able to obtain broad labeling for this product allowing approved use with multiple chemotherapy regimens for multiple cancers, MAXY-G34 may not be adopted by hospital formularies or otherwise have limited commercial success which could have a significant adverse impact on our business. 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.
During the period while we are engaged in product development, the policies of the FDA and foreign regulatory entities may change and additional government laws or regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. If we are not able to maintain regulatory
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compliance, we might not obtain approval of our products or be permitted to market our products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. In this regard, legislation has been proposed in the United States but not yet enacted into law that would define a regulatory approval process for protein drugs that are similar to already marketed protein drugs.
Our current and 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.
The conduct of clinical trials for a single product candidate 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 and, in June 2007, we initiated a Phase IIa clinical trial of MAXY-G34. In November 2006, Roche initiated a Phase Ia 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.
Although both MAXY-G34 and MAXY-alpha have demonstrated properties in preclinical testing indicating that they may have advantages as compared to currently marketed drugs, the results from preclinical testing in vitro and animal models, as well as early, small scale clinical trials, often are not predictive of results obtained in larger later stage clinical trials designed to prove safety and efficacy. 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 or 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; | ||
• | inadequate supply or deficient quality of product candidate materials necessary for the conduct of the clinical trials; | ||
• | the occurrence of unacceptable toxicities or properties 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 or the policy of foreign regulatory agencies 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. |
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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 particular product candidate has failed to demonstrate sufficient safety or efficacy necessary to obtain regulatory approval for one or more therapeutic indications, has failed to demonstrate clinically relevant differentiation of our products from currently marketed products, does not offer therapeutic or other improvements compared to other 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.
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 manufacturer is unable to manufacture preclinical or clinical supplies in a timely manner, or is 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.
There are a limited number of contract manufacturers that are suitable for the manufacture of protein pharmaceuticals in compliance with current Good Manufacturing Practices (GMP) requirements and there is often limited access to such facilities. If we are unable to enter into agreements with qualified manufacturers that will provide us with our product candidates in a timely manner and at an acceptable cost, our business will be adversely affected.
With regard to our MAXY-G34 product, we obtain polyethylene glycol (PEG) for use in making such product from Nektar Therapeutics AL, Corporation (formerly Shearwater Polymers, Inc.), a subsidiary of Nektar Therapeutics. If Nektar fails or is unable to timely supply us with PEG that meets our product needs, then we could encounter delays in the development or commercialization of MAXY-G34, which in turn could adversely affect our business and 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 current 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.
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:
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• | 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 commercial use is comparable to the drug manufactured for clinical trials 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 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.
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 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 and through 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 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.
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 have generally sought to enter into collaborative arrangements to fund the development of new product candidates for specific indications and develop and commercialize potential products. These contracts generally expire after a fixed period of time. If any such collaboration arrangements are not maintained or if we do not enter into new collaborative agreements, our revenues would be reduced and our potential products may not be commercialized.
We have limited or no control over the resources that any present or future collaborator may devote to the development and commercialization of our potential products. A collaborator may elect not to develop potential products arising out of our collaborative arrangements or not to devote sufficient resources to the development, manufacture, marketing or sale of these products. Further, 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. If any of these events occur, we may not be able to develop or commercialize our potential products.
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In April 2007, Roche terminated its agreement with us relating to the co-development and commercialization of our MAXY-VII product candidates for acute bleeding indications due to the inability of the parties to establish an animal model intended to provide preclinical de-risking of the program. We currently intend to advance one of our MAXY-VII product candidates into clinical trials for the treatment of hemophilia, and we are currently evaluating our plans for the continued development of our MAXY-VII product candidates for acute bleeding indications. However, the termination of this agreement by Roche may make it more difficult or impossible for us to enter into an agreement with another third party for the development or commercialization of our MAXY-VII product candidates for acute indications. If we are unable to enter into a new collaboration or licensing arrangement for the development our MAXY-VII product candidates, we may elect to discontinue further development of these product candidates for acute indications. If, on the other hand, we decide to use or own resources to continue the development of these product candidates for acute indications, as well as for hemophilia, our operating expenses could increase substantially, which may harm our business.
We are also party to an agreement with Roche for the development and commercialization of our MAXY-alpha product candidates. If Roche fails to perform its obligations under this agreement or seeks to materially amend or terminate this agreement, our prospects, including our ability to develop our MAXY-alpha product candidates, would be materially adversely affected.
Any conflicts with our collaborators 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 present or future collaborators. Moreover, disagreements with a collaborator could develop over rights to our intellectual property. Any conflict with a collaborator could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with an existing collaborator, which could reduce our revenues.
In addition, a collaborator may currently market products intended to treat the medical conditions that our product candidates are planned to be used to treat, and could become our competitors in the future. For example, a collaborator could develop and commercialize competing products, fail to rapidly develop our product candidates, fail to obtain timely regulatory approvals for product commercialization, 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. For example, Roche currently markets Pegasys, an interferon alpha product for the treatment of hepatitis C virus, that would likely be competitive with the improved interferon alpha product(s) that we have licensed to Roche for the treatment of hepatitis C virus and hepatitis B virus. As a result, Roche could conduct their operations in a manner that discriminates against the product that we developed, for example, by advancing our MAXY-alpha product slowly through development. We have limited ability to prevent actions by Roche that could have any adverse impact on the development and commercialization of our MAXY-alpha product candidates.
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
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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.
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. In particular, others have obtained patents, and have filed, and in the future are likely to file, patent applications that may issue as patents that cover genes or gene fragments or corresponding proteins or peptides that we may wish to utilize to develop, manufacture and commercialize our product candidates. There are often multiple patents owned by third parties that cover particular proteins and related nucleic acids that are of interest to us in the development of our product candidates. For example, we are aware that Amgen, Inc. and others have issued patents and pending patent applications relating to G-CSF, and that Novo Nordisk A/S and others have issued patents and pending patent applications relating to Factor VII. To the extent that these patents, or patents that may issue in the future, cover methods or compositions that we wish to use in developing, manufacturing or commercializing our product candidates, and such use by us or on our behalf would constitute infringement of an issued valid patent claim, we would need to obtain a license from the proprietor of the relevant patent rights, which may not be available to us 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 that hold patents covering other versions of such proteins or methods of making and using such proteins. In addition, third parties that do not have patents that currently cover our activities may obtain such patents in the future and then claim that our activities 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.
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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.
We are continuing our efforts to contain costs and continue to believe that 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.
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 our government grants. Our collaboration agreement with Roche for our MAXY-VII product candidates terminated in April 2007. We currently have five government grants that we expected to generate revenue in 2007. If the government grants are terminated and we are unable to enter into new collaboration agreements, our revenues, financial position and results of operations would be materially adversely affected.
Other biological products may compete with our products.
If approved for sale by regulatory authorities, our next-generation protein therapeutics will likely compete with already approved earlier-generation products based on the same protein. In addition, as the patent protection for such earlier-generation protein products expires, we expect that additional products with amino acid sequences identical or substantially similar to those of the earlier-generation protein products that have lost patent protection will also enter the marketplace, and compete with such earlier generation protein products and our products. This competition may be intense, with success determined by product attributes, price and marketing power. The availability of such similar products may result in price erosion for all products of the class and could lead to limits on reimbursement for our products by third party payors.
The Committee for Medicinal Products for Human Use (CHMP) of the European Agency for the Evaluation of Medicinal Products (EMEA) has adopted guidelines for assessing the comparability of biosimilar products including G-CSF. The basis for such approvals in the European Union will be proof of comparability of the new protein drug to the prior drug, which will require clinical studies of the biosimilar protein drug.
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In the United States, there is presently no legislation that specifically addresses the regulatory process for approval of biosimilar protein drugs, and to date only a biosimilar human growth hormone and certain insulin products have been approved by the FDA under a new drug application (NDA) in accordance with Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act. However, legislation has been introduced into both the U.S. Senate and House of Representatives that addresses the development path and requirements for biosimilar protein drugs. It is not clear whether such legislation will be enacted into law, and if passed, what the substance of such legislation will be. However, any law that permits the approval of biosimilars would likely lead to the eventual introduction of biosimilar protein products in the United States.
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.
Even if approved by the FDA or a comparable foreign regulatory agency, 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. 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.
In addition, if any of our drug candidates are approved for commercial sale, they will need to compete with other products intended to treat the same disease, including the marketed versions of the protein therapeutic drug that we have sought to improve, and possibly including other variant versions of such drug, and generic bioequivalent or biosimilar versions of such drugs, and small molecule drugs. Such competition may be intense and lead to price reductions for all forms of a particular therapeutic protein. Moreover, any adverse developments related to a currently marketed version of the protein therapeutic drug that we have sought to improve or a generic bioequivalent or biosimilar version of such drug may have a significant adverse impact on the continued development or future commercialization and marketing of our related product candidates and could cause us to change our development plans or discontinue further development of such product candidates. If we are unable to market and commercialize our product successfully, our business would be adversely affected.
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.
Recently adopted or future changes in financial accounting standards may cause adverse, unexpected earnings fluctuations and may adversely affect our reported results of operations. For example, our recent implementation of FASB Statement No. 123 (revised 2004), “Share-Based
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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 had a material impact on our consolidated results of operations and net loss per share for the three and six months ended June 30, 2007 and is expected to have a material impact on our results of operations in the future. The continued 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:
• | 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. |
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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 or adversely affect our results of operations. 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 June 30, 2007, the price of our common stock on the Nasdaq Global Market ranged from $6.78 to $12.41. 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:
• | our failure to meet our publicly announced revenue and/or expense projections and/or product development timetables; | ||
• | adverse or inconclusive results or delays in preclinical development or clinical trials; | ||
• | any material amendment or termination of our collaborative agreements; | ||
• | any decisions to discontinue or delay development programs or clinical trials; | ||
• | announcements of new technological innovations or new products by us or our competitors; |
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• | 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.
If we or our collaborators receive regulatory approval for our drug candidates, we will be subject to ongoing FDA obligations and continued regulatory review, and we may also be subject to additional FDA post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize our potential drugs.
Any regulatory approvals that we or our collaborators receive for our product candidates may also be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA or a foreign regulatory agency approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion, and record-keeping for the product will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product, including adverse events of unanticipated severity or frequency, may result in restriction on the marketing of the product, and could include withdrawal of the drug from the market.
We may be subject to costly product liability claims and may not have adequate insurance.
Because we conduct clinical trails in humans, we face the risk that the use of our product candidates will result in adverse effects. We currently maintain product liability insurance for our clinical trials, however, such liability insurance may not be adequate to fully cover any liabilities that arise from clinical trials of our product candidates. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limit of, our insurance coverage.
We currently have no product marketing capabilities.
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We plan to commercialize products resulting from our proprietary programs either directly or through licensing to other companies or co-promotion with other companies. We have no experience in marketing, and we currently do not have the resources or capability to market products. In order for us to commercialize these products directly, we would need to develop, or obtain through outsourcing arrangements, the capability to market and sell products, 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 marketing and sales capabilities. If we are unable to successfully commercialize products resulting from our proprietary research efforts, we will continue to incur losses.
The coverage and reimbursement status of newly approved drugs is uncertain and failure to obtain adequate coverage and reimbursement could limit our ability to market any drugs we may develop and decrease our ability to generate revenue.
There is significant uncertainty related to the coverage and reimbursement of newly approved drugs. The commercial success of our potential drugs in both domestic and international markets is substantially dependent on whether third-party coverage and reimbursement is available for the ordering of our potential drugs by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs, and, as a result, they may not cover or provide adequate payment for our potential drugs. They may not view our potential drugs as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential drugs to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control or reduce healthcare costs or reform government healthcare programs could result in lower prices or rejection of our potential drugs. Changes in coverage and reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our drugs may cause our revenue to decline.
Some of our existing stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders.
As of June 30, 2007, our executive officers and directors, together with GlaxoSmithKline plc, controlled approximately 22% 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.
Our facilities in California are located near an earthquake fault, and an earthquake or other types of natural disasters or resource shortages could disrupt our operations and adversely affect our results.
Our U.S. facilities are located in our corporate headquarters in Redwood City, California near active earthquake zones. We do not have a formal business continuity or disaster recovery plan, and in the event of a natural disaster, such as an earthquake or localized extended outages of critical utilities or transportation systems, we could experience a significant business interruption.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on May 30, 2007. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for, withheld, or against and the number of abstentions with respect to each matter.
(a) | The stockholders reelected the seven nominees for our board of directors: |
Shares Voted For | Shares | |||||||
Candidate | Candidate | Withheld | ||||||
M.R.C. Greenwood | 26,586,563 | 894,120 | ||||||
Russell J. Howard | 26,774,184 | 706,499 | ||||||
Louis G. Lange | 26,537,735 | 942,948 | ||||||
Ernest Mario | 26,537,749 | 942,934 | ||||||
Gordon Ringold | 26,584,113 | 896,570 | ||||||
Isaac Stein | 26,583,454 | 897,229 | ||||||
James R. Sulat | 26,710,277 | 770,406 |
(b) | The stockholders ratified the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007: |
Shares voted for | 27,262,917 | |||
Shares voted against | 206,634 | |||
Shares abstaining | 11,132 | |||
Broker non-votes | 0 |
Item 5. Other Information
Not applicable.
Item 6.Exhibits
The following exhibits are filed as part of this report:
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. | ||||||
August 2, 2007 | By: /s/ Russell J. Howard | |||||
Russell J. Howard | ||||||
Chief Executive Officer | ||||||
August 2, 2007 | By: /s/ Lawrence W. Briscoe | |||||
Lawrence W. Briscoe | ||||||
Chief Financial Officer |
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Exhibit Index
Exhibit No. | Description | |
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 |