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United States
Securities and Exchange Commission
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) | 77-0449487 (I.R.S. Employer Identification No.) |
515 Galveston Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 298-5300
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
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 October 31, 2008, there were 37,175,341 shares of the registrant’s common stock, $0.0001 par value per share, outstanding, which is the only class of common or voting stock of the registrant issued.
MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2008
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2008
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 or status of any clinical trials or preclinical development; | ||
• | 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, 2007.
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 data)
December 31, | September 30, | |||||||
2007 | 2008 | |||||||
(Note 1) | (unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 77,130 | $ | 172,032 | ||||
Short-term investments | 68,683 | 40,803 | ||||||
Related party receivable | 7,493 | — | ||||||
Accounts receivable and other receivables | 1,383 | 1,790 | ||||||
Prepaid expenses and other current assets | 2,683 | 1,109 | ||||||
Total current assets | 157,372 | 215,734 | ||||||
Property and equipment, net | 3,060 | 2,531 | ||||||
Goodwill | 12,192 | — | ||||||
Deposits and other long-term assets | 85 | — | ||||||
Total assets | $ | 172,709 | $ | 218,265 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,871 | $ | 2,182 | ||||
Accrued compensation | 6,880 | 3,517 | ||||||
Accrued restructuring charges | 4,413 | 18 | ||||||
Accrued project costs | 3,787 | 3,657 | ||||||
Other accrued liabilities | 1,250 | 1,086 | ||||||
Deferred revenue | — | 5,828 | ||||||
Total current liabilities | 19,201 | 16,288 | ||||||
Non-current deferred revenue | — | 4,011 | ||||||
Other long-term liabilities | 14 | — | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2007 and September 30, 2008 | — | — | ||||||
Common stock, $0.0001 par value: 100,000,000 shares authorized, 36,926,566 and 37,174,377 shares issued and outstanding at December 31, 2007 and September 30, 2008, respectively | 4 | 4 | ||||||
Additional paid-in capital | 423,541 | 430,089 | ||||||
Accumulated other comprehensive loss | (32 | ) | (152 | ) | ||||
Accumulated deficit | (270,019 | ) | (231,975 | ) | ||||
Total stockholders’ equity | 153,494 | 197,966 | ||||||
Total liabilities and stockholders’ equity | $ | 172,709 | $ | 218,265 | ||||
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
(unaudited) | ||||||||||||||||
Collaborative research and development revenue | $ | 5 | $ | 359 | $ | 8,476 | $ | 359 | ||||||||
Technology and license revenue (including amounts from related party: three months—2008-$121; 2007-$34; nine months—2008-$398; 2007-$590) | 34 | 90,348 | 590 | 90,625 | ||||||||||||
Grant revenue | 964 | 1,417 | 3,110 | 3,740 | ||||||||||||
Total revenues | 1,003 | 92,124 | 12,176 | 94,724 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 13,570 | 10,257 | 44,513 | 35,897 | ||||||||||||
General and administrative | 3,951 | 3,321 | 11,810 | 11,865 | ||||||||||||
Goodwill impairment | — | — | — | 12,192 | ||||||||||||
Restructuring charge | — | — | — | 799 | ||||||||||||
Total operating expenses | 17,521 | 13,578 | 56,323 | 60,753 | ||||||||||||
Income (loss) from operations | (16,518 | ) | 78,546 | (44,147 | ) | 33,971 | ||||||||||
Interest income and other income (expense), net | 1,814 | 1,323 | 6,106 | 4,073 | ||||||||||||
Net income (loss) | $ | (14,704 | ) | $ | 79,869 | $ | (38,041 | ) | $ | 38,044 | ||||||
Basic net income (loss) per share | $ | (0.40 | ) | $ | 2.15 | $ | (1.04 | ) | $ | 1.03 | ||||||
Diluted net income (loss) per share | $ | (0.40 | ) | $ | 2.14 | $ | (1.04 | ) | $ | 1.02 | ||||||
Shares used in basic net income (loss) per share calculations | 36,872 | 37,140 | 36,750 | 37,061 | ||||||||||||
Shares used in diluted net income (loss) per share calculations | 36,872 | 37,308 | 36,750 | 37,260 |
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended | ||||||||
September 30, | ||||||||
2007 | 2008 | |||||||
(unaudited) | ||||||||
Operating activities | ||||||||
Net income(loss) | $ | (38,041 | ) | $ | 38,044 | |||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
Depreciation | 1,188 | 1,159 | ||||||
Goodwill impairment | — | 12,192 | ||||||
Non-cash stock compensation | 5,428 | 5,744 | ||||||
Changes in operating assets and liabilities: | ||||||||
Related party receivable | — | 7,493 | ||||||
Accounts receivable and other receivables | 3,646 | (408 | ) | |||||
Prepaid expenses and other current assets | 124 | 1,575 | ||||||
Deposits and other assets | — | 85 | ||||||
Accounts payable | 2,045 | (689 | ) | |||||
Accrued compensation | 69 | (3,363 | ) | |||||
Accrued restructuring charges | — | (4,395 | ) | |||||
Accrued project costs | 1,360 | (130 | ) | |||||
Other accrued liabilities | (495 | ) | (178 | ) | ||||
Taxes payable | (140 | ) | — | |||||
Deferred revenue | (5,593 | ) | 9,839 | |||||
Net cash provided by (used in) operating activities | (30,409 | ) | 66,968 | |||||
Investing activities | ||||||||
Purchases of available-for-sale securities | (154,758 | ) | (51,120 | ) | ||||
Maturities of available-for-sale securities | 165,141 | 78,880 | ||||||
Acquisition of property and equipment | (876 | ) | (630 | ) | ||||
Net cash provided by investing activities | 9,507 | 27,130 | ||||||
Financing activities | ||||||||
Proceeds from issuance of common stock | 5,086 | 804 | ||||||
Net cash provided by financing activities | 5,086 | 804 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 131 | — | ||||||
Net increase (decrease) in cash and cash equivalents | (15,685 | ) | 94,902 | |||||
Cash and cash equivalents at beginning of period | 46,504 | 77,130 | ||||||
Cash and cash equivalents at end of period | $ | 30,819 | $ | 172,032 | ||||
See accompanying notes.
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MAXYGEN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The information as of September 30, 2008, and for the three and nine months ended September 30, 2007 and 2008, 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, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
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, 2007.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Maxygen ApS (Denmark) (“Maxygen ApS”) and Maxygen Holdings Ltd. (Cayman Islands) (“Maxygen Holdings”).
Reclassifications
Certain previously reported amounts have been reclassified to conform with the current period presentation. Cash provided by (used in) operating activities of $1.4 million has been reclassified from other accrued liabilities to accrued project costs for the nine months ended September 30, 2007 on the Condensed Consolidated Statements of Cash Flows. This reclassification did not have any effect on net loss, total assets or total liabilities and stockholders’ equity or cash used or provided by operating activities, investing activities or financing activities.
Accounting for Clinical Trial Costs
The Company charges research and development costs, including clinical study costs, to expense when incurred, consistent with Statement of Financial Accounting Standard (“SFAS”) No. 2, “Accounting for Research and Development Costs.” Clinical study costs are a significant component of research and development expenses. Most of the Company’s clinical studies are performed by a third-party contract research organization (CRO). The clinical trials generally have three distinctive stages plus pass through costs:
• | start-up — initial setting up of the trial; | ||
• | enrollment of patients in the trial; and | ||
• | close down and reporting of the trial. |
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The Company reviews the list of expenses for the trial from the original signed agreements and separates them into what it considers the start-up, enrollment or closedown expenses of the clinical trial. The start-up costs, which usually occur within a few months after the contract has been executed and include costs, such as study initiation, site recruitment, regulatory applications and investigator meetings, are expensed ratably over the start-up period. The site management, study management, medical and safety monitoring and data management expenses are calculated on a per patient basis and expensed ratably over the treatment period beginning on the date that the patient enrolls. The close down and reporting expenses are expensed ratably over the close out period of time. Pass through costs, including the costs of the drugs, are expensed as incurred.
In general, the Company’s service agreements permit it to terminate at will where it would continue to be responsible for payment of all services completed (or pro-rata completed) at the time of notice of termination, plus any non-cancellable expenses that have been entered into by the CRO on the Company’s behalf.
Restructuring Charge
In November 2007, the Company implemented a plan to consolidate its research and development activities at its U.S. facilities in Redwood City, California. The consolidation has resulted in the cessation of research and development operations at Maxygen ApS, the Company’s wholly owned subsidiary in Denmark. In connection with the consolidation, the Company has recorded estimated expenses for severance and outplacement costs and other restructuring costs. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” generally costs associated with restructuring activities are recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated or at the point when the Company ceases to use the leased equipment. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including estimating the salvage value of equipment consistent with abandonment date. In addition, post-employment benefits accrued for workforce reductions related to restructuring activities are accounted for under SFAS No. 112, “Employer’s Accounting for Post-employment Benefits.” A liability for post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, the obligation is attributable to employees’ services already rendered and the obligation relates to rights that have vested or accumulated.
Revenue Recognition
The Company has generally recognized 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 upfront payments received in connection with 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 upfront 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 upfront 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.
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Revenue related to collaborative research payments from a collaborator 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 may agree 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 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.
Revenue from the sale of pre-clinical program assets or license agreements for which no further performance obligations exist are recognized as revenue on the earlier of when payments are received or the amount can be reliably measured and collectibility is reasonably assured.
The Company has been awarded grants from various government agencies. The terms of these grant agreements range from one to five years with various termination dates, the last of which is July 2010 for existing agreements. Revenue related to these grant agreements is recognized as the related research and development expenses are incurred.
Taxes
The Company’s effective tax rate differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of earnings from operations in lower tax foreign jurisdictions.
Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. During the periods in which the Company has net income, the diluted net income per share has been computed using the weighted average number of shares of common stock outstanding and other dilutive securities. The following table presents a reconciliation of the numerators and denominators of the basic and dilutive net income (loss) per share computations and the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
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Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) | $ | (14,704 | ) | $ | 79,869 | $ | (38,041 | ) | $ | 38,044 | ||||||
Denominator: | ||||||||||||||||
Weighted-average shares used in computing basic net income (loss) per share | 36,872 | 37,140 | 36,750 | 37,061 | ||||||||||||
Effect of dilutive securities | — | 168 | — | 199 | ||||||||||||
Weighted-average shares used in computing diluted net income (loss) per share | 36,872 | 37,308 | 36,750 | 37,260 | ||||||||||||
Basic net income (loss) per share | $ | (0.40 | ) | $ | 2.15 | $ | (1.04 | ) | $ | 1.03 | ||||||
Diluted net income (loss) per share | $ | (0.40 | ) | $ | 2.14 | $ | (1.04 | ) | $ | 1.02 | ||||||
The total number of shares excluded from the calculations of diluted net income (loss) per share, prior to application of the treasury stock method, was approximately 11,377,000 options at September 30, 2007 and 10,714,000 options and 1,163,000 restricted stock units at September 30, 2008.
Comprehensive Income (Loss)
Comprehensive income (loss) is primarily comprised of net income (loss), net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. Comprehensive income (loss) and its components for the three and nine-month periods ended September 30, 2007 and 2008 were as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Net income (loss) | $ | (14,704 | ) | $ | 79,869 | $ | (38,041 | ) | $ | 38,044 | ||||||
Changes in unrealized gains (losses) on securities available-for-sale | 176 | 10 | 263 | (120 | ) | |||||||||||
Changes in foreign currency translation adjustments | 138 | — | 130 | — | ||||||||||||
Comprehensive income (loss) | $ | (14,390 | ) | $ | 79,879 | $ | (37,648 | ) | $ | 37,924 | ||||||
The components of accumulated other comprehensive loss are as follows (in thousands):
December 31, | September 30, | |||||||
2007 | 2008 | |||||||
Unrealized gain on available-for-sale securities | $ | 220 | $ | 132 | ||||
Unrealized losses on available-for-sale securities | — | (32 | ) | |||||
Foreign currency translation adjustments | (252 | ) | (252 | ) | ||||
Accumulated other comprehensive loss | $ | (32 | ) | $ | (152 | ) | ||
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Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) ratified the final consensus reached by the FASB Emerging Issues Task Force (“EITF”) on Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”), which requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. EITF 07-1 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the effect that the adoption of EITF 07-1 will have on its consolidated results of operations and financial condition.
During the nine months ended September 30, 2008, the Company adopted the following accounting standards:
On June 27, 2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-3, “Accounting for Nonrefundable 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 non-refundable advance payments for research and development activities, such as upfront non-refundable payments to contract research organizations, if the contracted party has not yet performed activities related to the upfront payment. Amounts deferred are to be recognized by the contracting company as expense when the goods are delivered or the research and development activities are performed. The deferral of income statement recognition of non-refundable advance payments for research and development activities under EITF 07-3 is consistent with the Company’s accounting for such payments prior to the adoption of EITF 07-3. The Company adopted EITF 07-3 effective January 1, 2008 and there was no effect upon adoption of EITF 07-3.
In February 2007, the FASB issued 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. The Company has not elected to measure any of its eligible existing financial instruments at fair value.
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. This standard defines fair value, establishes framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. 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, except that under FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157”, companies are allowed to delay the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value on a recurring basis until fiscal years beginning after November 15, 2008. Effective January 1, 2008, the Company adopted the provisions of SFAS 157 for all financial assets and liabilities and measures its required financial assets and liabilities at fair value. The Company elected to delay the adoption of SFAS 157 for such non-financial assets and non-financial liabilities. See Note 7.
Stock-Based Compensation
Stock-based compensation expense recognized under SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 was $791,000 and $3.7 million related to employee stock options, compared to $1.6 million and $4.5 million related to employee stock options for the comparable periods in 2007. Stock-based compensation expense related to restricted stock units for the three and nine months ended September 30, 2008 was $1.0 million and $1.6 million, respectively. There was no stock-based compensation expense related to restricted stock units for the three and nine months ended September 30, 2007. Stock-based compensation expense related to the ESPP for the three and nine months ended September 30, 2008 was $73,000 and $194,000, compared to $67,000 and $80,000 for the comparable periods in 2007. Stock-based compensation expense related to consultant stock options was zero and $45,000 for the three and nine months ended September 30, 2008, compared to $39,000 and $628,000 for the comparable periods in 2007.
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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 former Danish operations. The Company uses the Black-Scholes-Merton option pricing model to value the options for each of the employee populations.
The weighted average assumptions used in the model for each employee population are outlined in the following tables:
Three months ended | Three months ended | |||||||||||||||
September 30, 2007 | September 30, 2008(1) | |||||||||||||||
U.S. | Danish | U.S. | Danish | |||||||||||||
Employees | Employees | Employees | Employees | |||||||||||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | — | |||||||||
Risk-free interest rate range—Options | 4.90 | % | 4.86 | % | 3.33 | % | — | |||||||||
Risk-free interest rate range—ESPP | 4.95% to 4.98% | — | 1.62% to 2.38% | — | ||||||||||||
Expected life—Options | 5.70 years | 2.4 years | 5.72 years | — | ||||||||||||
Expected life—ESPP | 0.50 years | — | 0.16 to 0.49 years | — | ||||||||||||
Expected volatility—Options | 50.93 | % | 45.99 | % | 55.61 | % | — | |||||||||
Expected volatility—ESPP | 44.76 | % | — | 53.60% to 100.07% | — |
Nine months ended | Nine months ended | |||||||||||||||
September 30, 2007 | September 30, 2008(1) | |||||||||||||||
U.S. | Danish | U.S. | Danish | |||||||||||||
Employees | Employees | Employees | Employees | |||||||||||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | — | |||||||||
Risk-free interest rate range—Options | 4.64% to 4.90% | 4.76% to 4.97% | 2.75% to 3.33% | — | ||||||||||||
Risk-free interest rate range—ESPP | 4.74% to 5.09% | — | 1.62% to 4.98% | — | ||||||||||||
Expected life—Options | 5.70 years | 2.40 years | 5.72 years | — | ||||||||||||
Expected life—ESPP | 0.50 years to 0.94 years | — | 0.08 to 1.0 years | — | ||||||||||||
Expected volatility—Options | 50.93% to 52.96% | 44.88% to 45.99% | 50.61% to 55.61% | — | ||||||||||||
Expected volatility—ESPP | 44.76% to 48.31% | — | 43.36% to 100.07% | — |
(1) | As the result of cessation of research and development operations at Maxygen ApS, no options were granted to Danish employees during the three and nine months ended September 30, 2008. |
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The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new grants is based on historical volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods.
Restricted Stock Units
In May 2008, the Company granted restricted stock unit awards under its 2006 Equity Incentive Plan representing an aggregate of 1,273,000 shares of Company common stock. The restricted stock units granted represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. An exercise price and monetary payment are not required for receipt of restricted stock units or the shares issued in settlement of the award. Instead, consideration is furnished in the form of the participant’s services to the Company. The restricted stock units vest over two years. Compensation cost for these awards is based on the estimated fair value on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period. For the three and nine months ended September 30, 2008, the Company recognized $1.0 million and $1.6 million, respectively, in stock-based compensation expenses related to these restricted stock unit awards. At September 30, 2008, the unrecognized compensation cost related to these awards was $6.0 million, which is expected to be recognized on a straight-line basis over the requisite service period which ends on May 3, 2010.
Valuation and Expense Information under SFAS 123(R)
For the three and nine months ended September 30, 2007 and 2008, stock based compensation expense related to employee stock options, restricted stock units 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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Research and development | $ | 814 | $ | 1,111 | $ | 2,248 | $ | 2,800 | ||||||||
General and administrative | 851 | 767 | 2,984 | 2,689 | ||||||||||||
Stock-based compensation expense before income taxes | 1,665 | 1,878 | 5,232 | 5,489 | ||||||||||||
Income tax benefit | — | — | — | — | ||||||||||||
Total stock-based compensation expense after income taxes | $ | 1,665 | $ | 1,878 | $ | 5,232 | $ | 5,489 | ||||||||
There was no capitalized stock-based employee compensation cost as of September 30, 2007 and 2008. There were no recognized tax benefits during the quarters ended September 30, 2007 and 2008.
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 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.
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The Company’s cash equivalents and investments as of September 30, 2008 were as follows (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Money market funds | $ | 172,032 | $ | — | $ | — | $ | 172,032 | ||||||||
Commercial paper | 29,372 | 131 | — | 29,503 | ||||||||||||
Corporate bonds | 2,335 | — | (27 | ) | 2,308 | |||||||||||
U.S. government agency securities | 8,996 | 1 | (5 | ) | 8,992 | |||||||||||
Total | 212,735 | 132 | (32 | ) | 212,835 | |||||||||||
Less amounts classified as cash equivalents | (172,032 | ) | — | — | (172,032 | ) | ||||||||||
Total investments | $ | 40,703 | $ | 132 | $ | (32 | ) | $ | 40,803 | |||||||
The Company’s cash equivalents and investments as of December 31, 2007 were as follows (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Money market funds | $ | 77,130 | $ | — | $ | — | $ | 77,130 | ||||||||
Commercial paper | 43,704 | 211 | — | 43,915 | ||||||||||||
Corporate bonds | 13,569 | 5 | — | 13,574 | ||||||||||||
U.S. government agency securities | 11,190 | 4 | — | 11,194 | ||||||||||||
Total | 145,593 | 220 | — | 145,813 | ||||||||||||
Less amounts classified as cash equivalents | (77,130 | ) | — | — | (77,130 | ) | ||||||||||
Total investments | $ | 68,463 | $ | 220 | $ | — | $ | 68,683 | ||||||||
Realized gains or losses on the maturity of available-for-sale securities for the three and nine-month periods ended September 30, 2007 and 2008 were insignificant. The change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive loss were unrealized gains of $10,000 for the three months ended September 30, 2008 and unrealized losses of $120,000 for the nine months ended September 30, 2008 and unrealized gains of $176,000 and $263,000 for the three and nine months ended September 30, 2007. The Company intends to hold the securities until maturity and therefore does not believe the current unrealized losses of $32,000 are other than temporary.
At September 30, 2008, the contractual maturities of investments were as follows (in thousands):
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Due within one year | $ | 40,703 | $ | 40,803 | ||||
Due after one year through two years | — | — | ||||||
$ | 40,703 | $ | 40,803 | |||||
3. 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
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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,which was preliminarily approved by the District Court. The settlement did not contemplate any settlement payments by the Company. Separately, the District Court certified the consolidated cases as class actions. 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 and a rehearing of the matter was subsequently denied. As a result of the Second Circuit’s decision, and its impact on the expected finality of the tentative settlement agreement, the parties to the tentative settlement submitted a Stipulation and Proposed Order on June 22, 2007 to terminate the settlement agreement, which the District Court so ordered on June 25, 2007. The parties are now considering alternative options and the cases are proceeding against certain selected issuers, not including the Company, as test cases.
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 is without merit. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, its business could be significantly harmed.
On July 30, 2007, the Company received a demand letter, addressed to its board of directors, from counsel for Vanessa Simmonds, a purported stockholder of the Company, concerning alleged violations by unspecified persons and entities of Section 16(b) of the Securities Exchange Act of 1934 Act in connection with the Company’s initial public offering. On October 5, 2007, a complaint was filed in the U.S. District Court for the Western District of Washington against certain underwriters of the Company’s initial public offering of common stock alleging Section 16(b) violations by such underwriters. The complaint named the Company as a nominal defendant, but plaintiff seeks no relief against the Company. An amended complaint was filed on February 28, 2008. Similar actions were filed by the same plaintiff in the same court against underwriters involved with the initial public offerings of some 50 other companies’ common stock. The cases have been related before the Honorable James L. Robart. On July 25, 2008, both the underwriter defendants and most of the various issuer nominal defendants (including the Company) filed motions to dismiss the various Section 16(b) lawsuits. Briefing on the motions closed in October 2008 and the court has scheduled a hearing on the motions for January 2009. As the Simmonds action seeks no relief against the Company, the Company does not believe that these claims will have a material effect on its business.
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.
4. 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.
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Minimum annual rental commitments under operating leases and commitments relating to material contracts at September 30, 2008 are as follows (in thousands):
For the remainder of 2008 | $ | 952 |
Year ending | ||||
December 31, | ||||
2009 | $ | 1,459 | ||
2010 | 44 | |||
Thereafter | — | |||
Total commitments beyond current year | $ | 1,503 | ||
Total rent expense for the three and nine months ended September 30, 2008 was $353,000 and $1.2 million, respectively, and $564,000 and $1.7 million for the comparable periods in 2007.
5. 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 September 30, 2008.
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 contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability that reduce its exposure for indemnification and would enable it in many cases to recover a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2008.
6. Related Party Transactions
On April 1, 2006, the Company entered into a 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. The consulting agreement provides for the
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payment of consulting fees to Waverley of $24,166 per month. The consulting agreement, as amended in May 2008, provides for the automatic renewal of the agreement for successive one year terms and a two year notice period for termination of the agreement by either party. Under the consulting agreement, Mr. Stein was also granted an option on April 1, 2006 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 fully exercisable in May 2007. For the three and nine months ended September 30, 2007, the Company recognized stock-based compensation expense under SFAS 123(R) in the Consolidated Statements of Operations related to stock options of zero and $430,000, respectively, attributed to the option granted to Mr. Stein. The Company recognized no stock-based compensation expense for the three and nine months ended September 30, 2008 attributed to such option. Total expense under this arrangement, including cash payments, was approximately $72,000 and $217,000 for the three and nine month periods ended September 30, 2008, and approximately $73,000 and $647,000 for the three and nine month periods ended September 30, 2007.
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 percentage of all consideration received by Codexis from a third party, including license fees, milestone payments, royalties and the purchase of equity securities (subject to certain limitations) and research funding (in excess of a specified base rate), that relates to the use of the licensed rights for the development or commercialization of certain products or processes in the energy field. In November 2006, Codexis entered into a collaboration agreement with Shell Oil Products US to explore enhanced methods of converting biomass to biofuels and, in November 2007, Codexis entered into an expanded collaboration agreement with Royal Dutch Shell plc. During the three and nine months ended September 30, 2008, the Company recognized revenues under the license agreement of approximately $121,000 and $398,000, respectively, as a result of payments received by Codexis under its collaboration agreements with Shell, compared to $34,000 and $590,000 of revenue recognized by the Company during the three and nine months ended September 30, 2007. The payments from Codexis are reflected as technology and license revenue in the Condensed Consolidated Statements of Operations.
7. Fair Value
Effective January 1, 2008, the Company adopted the provisions of SFAS 157 for its financial assets and liabilities measured at fair value.
Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
Assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS 157 and directly related to the amount of subjectivity associated with the inputs to valuation of these assets and liabilities, are as follows:
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
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In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2008 (in thousands):
Estimated | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 172,032 | $ | 172,032 | $ | — | $ | — | ||||||||
Commercial paper | 29,503 | — | 29,503 | — | ||||||||||||
Corporate bonds | 2,308 | — | 2,308 | — | ||||||||||||
U.S. government agency securities | 8,992 | — | 8,992 | — | ||||||||||||
Total | $ | 212,835 | $ | 172,032 | $ | 40,803 | $ | — | ||||||||
The Company did not have any financial liabilities that were required to be measured at fair value as of September 30, 2008.
8. Restructuring Charges
In November 2007, the Company implemented a plan to consolidate its organization to reduce costs and increase overall operational efficiency across its research, preclinical, clinical and regulatory activities. The consolidation has resulted in the cessation of research and development operations at Maxygen ApS, the Company’s wholly owned subsidiary in Denmark, and the elimination of all employment positions at that site. As a result of these actions, a charge of $5.2 million was recorded in the year ended December 31, 2007. The restructuring charge, which included approximately $287,000 of non-cash stock compensation, was related to severance and other benefits for the Company’s Danish employees.
For the nine months ended September 30, 2008, the Company incurred additional costs of $799,000 relating to benefits for the Company’s Danish employees, the closure of the facility, the disposal of remaining fixed assets and the termination of various leases. No additional costs were incurred during the three months ended September 30, 2008. The Company completed the activities related to this consolidation during the first half of 2008 and does not expect to incur any additional costs relating to such consolidation.
The activity in the restructuring accrual for the nine months ended September 30, 2008 related to the action described above was as follows (in thousands):
Charges | ||||||||||||||||||||||||
during the | ||||||||||||||||||||||||
nine months | As of September 30, 2008 | |||||||||||||||||||||||
Balance at | ended | Balance at | Total | |||||||||||||||||||||
December | September | Cash | September | Total Costs to | Expected | |||||||||||||||||||
31, 2007 | 30, 2008 | payments | 30, 2008 | Date | Costs | |||||||||||||||||||
Employee severance and other benefits charges | $ | 4,413 | $ | 74 | $ | (4,487 | ) | $ | — | $ | 5,286 | $ | 5,286 | |||||||||||
Contract termination and other associated costs | — | 725 | (707 | ) | 18 | 725 | 725 | |||||||||||||||||
$ | 4,413 | $ | 799 | $ | (5,194 | ) | $ | 18 | $ | 6,011 | $ | 6,011 | ||||||||||||
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9. 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 have been denominated in Danish kroner and euros. At December 31, 2007, the Company had foreign currency contracts outstanding in the form of forward exchange contracts totaling $8.8 million. These contracts were entered into in December of 2007 to cover a substantial portion of the disbursements scheduled for the first quarter of 2008. Because of the short duration of less than 90 days, the Company made the decision to not designate these contracts as cash flow hedges and therefore recognized changes in their fair value as interest income and other income (expense), net in the period of change. During the three and nine months ended September 30, 2008, the Company recognized $0 and $386,000 of foreign exchange gains from the hedge contracts which were included with interest and other income (expense), net. The Company had no foreign currency contracts outstanding at September 30, 2008.
10. Goodwill
In the second quarter of 2008, the Company performed an additional goodwill impairment test due to the significant decline of its stock price subsequent to the announcement on June 13, 2008 of certain patent matters related to the Company’s MAXY-G34 product candidate, and concluded that the carrying value of the net assets exceeded the Company’s fair value, based on quoted market prices of the Company’s common stock. Accordingly, the Company performed an additional analysis, as required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which indicated that an impairment loss was probable because the implied fair value of goodwill recorded on the Company’s balance sheet was zero. As a result, the Company recorded an estimated impairment charge of $12.2 million in the second quarter of 2008 relating to the write-off of its goodwill. The Company completed its determination of the fair value of the affected goodwill during the third quarter of 2008 and has concluded that no revision of the estimated charge will be required.
11. Sale of Hematology Assets and Grant of Licenses to Bayer
In July 2008, the Company sold its hematology assets, including MAXY-VII, the Company’s factor VIIa program, and its assets related to factor VIII and factor IX, and granted licenses to the Company’s MolecularBreeding™ technology platform to Bayer HealthCare LLC (“Bayer”) for aggregate cash proceeds of $90 million. The Company is also eligible to receive future cash milestone payments of up to an additional $30 million based on the achievement of certain events related to the potential initiation of a phase II clinical trial of MAXY-VII and the satisfaction of certain patent related conditions associated with the MAXY-VII program.
12. Astellas MAXY-4 Collaboration
In September 2008, the Company entered into a co-development and collaboration agreement with Astellas Pharma Inc. (“Astellas”), relating to the development and commercialization of the Company’s MAXY-4 product candidates for autoimmune diseases and transplant rejection. Under the agreement, the Company received an upfront fee of $10 million and is eligible to receive future milestone payments totaling $160 million. Astellas will also be responsible for payment of the first $10 million of certain pre-clinical development costs that would otherwise be shared by the parties.
13. Subsequent Events
In October 2008, the Company announced plans to reduce spending on its MAXY-G34 program by delaying Phase III manufacturing until it identifies a partner who can share manufacturing costs. The Phase III manufacturing costs were anticipated to begin in September 2008, and delay of this expenditure is expected to have a material
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impact on the MAXY-G34 project timeline. The Company also announced that it does not plan to commence Phase IIb clinical trials of this product candidate without funding from a substantial collaborative partner. The Company’s original schedule called for the Phase IIb trial to begin in the second half of 2009.
As a consequence of the Company’s decreasing investment in the MAXY-G34 program, and in order to preserve cash, it also committed to a restructuring plan that will result in the termination of approximately 30% of its workforce, with staggered terminations from January 1 through the end of April 2009. The Company plans to retain approximately 65 employees, with a primary focus on its MAXY-4 alliance with Astellas. The Company also plans to continue minimal activities on its MAXY-G34 program, and a small team will continue protein drug discovery for autoimmune disease therapies using the Company’s MolecularBreeding™ platform. As a result of this restructuring plan, the Company expects to record restructuring charges of approximately $2.0 million, primarily in the fourth quarter of 2008. The restructuring charges are primarily associated with one-time termination benefits, the majority of which will be paid out during the first quarter of 2009. The Company expects to complete the activities related to this restructuring plan by April 2009.
The Company also announced that it would be evaluating potential strategic options, including a sale or disposition of one or more corporate assets, a strategic business combination, or other transactions, and that it had hired a financial advisor to assist it in this process.
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. Two of our next-generation product candidates, MAXY-G34 and MAXY-4, are currently in clinical or preclinical development.
Our MAXY-G34 product candidate has been designed to be an improved next-generation pegylated, granulocyte colony stimulating factor, or G-CSF, for the treatment of chemotherapy-induced neutropenia. G-CSF is a natural protein that functions by stimulating the body’s bone marrow to produce more white blood cells.
In July 2007, we commenced a Phase IIa clinical trial of MAXY-G34 in breast cancer patients in Eastern Europe and this clinical trial is currently being completed. In this Phase IIa clinical trial, patients are being administered a single dose of MAXY-G34 therapy per three week chemotherapy cycle, with each patient receiving six cycles of TAC (docetaxel, adriamycin and cyclophosphamide) chemotherapy. The study intends to investigate safety, efficacy and pharmacokinetics of MAXY-G34 across the dose range of 10 µg/kg to 100 µg/kg. As discussed further below, in October 2008, we made the decision to substantially reduce our development activities on MAXY-G34 until we identify a partner who can share development costs.
Our MAXY-4 product candidates are designed to be superior, next-generation CTLA-4 Ig therapeutics for the treatment of a broad array of autoimmune disorders, including rheumatoid arthritis. These candidates are designed to block the co-stimulation of T cells, a subset of white blood cells that are known to be involved in the pathogenesis of autoimmunity. In September 2008, we entered into a co-development and collaboration agreement with Astellas Pharma Inc., or Astellas, relating to the development and commercialization of our MAXY-4 product candidates for autoimmune diseases and transplant rejection. Under the agreement, we received an upfront fee of $10 million and are eligible to receive future milestone payments totaling $160 million. Astellas will also be responsible for payment of the first $10 million of certain pre-clinical development costs that would otherwise be shared by the parties.
In October 2008, we announced plans to reduce spending on our MAXY-G34 program by delaying Phase III manufacturing until we identify a partner who can share manufacturing costs. The Phase III manufacturing costs were anticipated to begin in September 2008, and delay of this expenditure is expected to have a material impact on the MAXY-G34 project timeline. We also announced that we do not plan to commence Phase IIb clinical trials of this product candidate without funding from a substantial collaborative partner. Our original schedule called for the Phase IIb trial to begin in the second half of 2009.
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As a consequence of our decreasing investment in the MAXY-G34 program, and in order to preserve cash, we also committed to a restructuring plan that will result in the termination of approximately 30% of our workforce, with staggered terminations from January 1 through the end of April 2009. We plan to retain approximately 65 employees, with a primary focus on our MAXY-4 alliance with Astellas. We also plan to continue minimal activities on our MAXY-G34 program, and a small team will continue protein drug discovery for autoimmune disease therapies using our MolecularBreeding™ platform.
We also announced that we would be evaluating potential strategic options, including a sale or disposition of one or more corporate assets, a strategic business combination, or other transactions, and that we had hired a financial advisor to assist us in this process.
In July 2008, we sold our hematology assets, including MAXY-VII, the Company’s factor VIIa program, and our assets related to factor VIII and factor IX, and granted licenses to the Company’s MolecularBreeding™ technology platform to Bayer HealthCare LLC, or Bayer, for aggregate cash proceeds of $90 million. We are also eligible to receive future cash milestone payments of up to an additional $30 million based on the achievement of certain events related to the potential initiation of a phase II clinical trial of MAXY-VII and the satisfaction of certain patent related conditions associated with the MAXY-VII program. Our MAXY-VII product candidate was designed to be a superior next-generation factor VIIa product to treat hemophilia and, potentially, acute bleeding indications. Factor VIIa is a natural protein with a pivotal role in blood coagulation and clotting.
In addition to our clinical and preclinical stage product candidates, we have other research stage programs and assets outside of our core business, including research on certain vaccine programs.
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 the production of advanced small-molecule pharmaceutical intermediates for the pharmaceutical industry. As of September 30, 2008, we had an equity interest in Codexis of approximately 25% of its outstanding shares 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 consideration received by Codexis related to the development of energy products and the use of processes in the energy field. We have received approximately $8.7 million from Codexis under this license agreement as a result of payments received by Codexis under its collaboration arrangement with Shell Oil Products US that began in November 2006 and an expanded collaboration arrangement with Royal Dutch Shell plc for the development of new enzymes to convert biomass to fuel that began in November 2007.
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. As a result of the acquisition of Avidia by Amgen Inc. in October 2006, 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.
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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 product development efforts, with cash, cash equivalents and marketable securities totaling $212.8 million as of September 30, 2008.
We have incurred significant operating losses from continuing operations since our inception. As of September 30, 2008, our accumulated deficit was $232.0 million. Although we expect to achieve profitability in 2008 due to the $90 million we received from Bayer, we expect to incur additional operating losses over at least the next several years and may not achieve profitability in the future.
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, 2007.
Results of Operations
Revenues
Our revenues have been derived primarily from collaboration and license agreements and government research grants. Our total revenues in the three and nine months ended September 30, 2008 were $92.1 million and $94.7 million, compared to $1.0 million and $12.2 million in the comparable periods in 2007. The increase in revenue for each period was primarily due to the recognition of the $90 million of cash proceeds we received under our agreements with Bayer for the sale of our hematology assets and the license of our MolecularBreeding™ technology platform. Our revenues also include recognition of $162,000 of the $10 million up-front fee we received from Astellas under the co-development and collaboration agreement for our MAXY-4 program and $197,000 earned as net reimbursement of our research and development activities under this agreement.
Revenues from our research collaboration agreements increased from $5,000 in the three months ended September 30, 2007 to $359,000 in the comparable period in 2008, primarily due to the recognition of the $162,000 of the $10 million up-front fee and the $197,000 earned as net reimbursement of our research and development activities performed relating to the MAXY-4 program during the three months ended September 30, 2008. Revenues from our research collaboration agreements decreased from $8.5 million in the nine months ended September 30, 2007 to $359,000 during the comparable period in 2008. During the nine months ended September 30, 2007, our revenues included $2.9 million 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 and the recognition of $5.6 million of deferred revenue relating to the $8.0 million upfront payment received from Roche in 2005. The termination of this agreement by Roche in April 2007 caused us to accelerate the recognition of the $5.6 million of deferred revenue. Roche was the only collaborative partner that contributed significantly to our collaborative research and development revenues during the nine months ended September 30, 2007. Astellas was the only collaborative partner that contributed significantly to our collaborative research and development revenues during the nine months ended September 30, 2008.
Technology and license revenue (including related party) was $90.3 million and $90.6 million for the three and nine months ended September 30, 2008, compared to $34,000 and $590,000 for the comparable periods in 2007. These revenues reflect amounts received from Bayer for the sale of our hematology assets and the license of our MolecularBreeding™ technology platform and amounts received under our license agreement with Codexis as a result of payments received by Codexis under its collaboration arrangements with Shell.
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Revenues from government research grants were $1.4 million and $3.7 million in the three months and nine months ended September 30, 2008, compared to $964,000 and $3.1 million in the comparable periods in 2007. The changes in grant revenue primarily reflect changes in activity under existing and new grants and the completion of one grant in October 2007.
Our revenue may fluctuate substantially from year to year based on the completion of new licensing or collaborative agreements and our receipt of any development related milestones, royalties and other payments under such agreements. However, we cannot predict with any certainty whether we will enter into any new licensing or collaborative agreements or receive any milestone, royalty or other payments under any existing or future licensing, collaboration or other agreements 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 external collaborative research expenses (including contract manufacturing and clinical trial expenses), salaries and benefits, facility costs, supplies, research consultants and depreciation. Research and development expenses were $10.3 million and $35.9 million in the three and nine month periods ended September 30, 2008, compared to $13.6 million and $44.5 million in the comparable periods in 2007. The decrease in our research and development expenses for the three and nine month periods were primarily related to reduced salaries and benefits resulting from the cessation of operations in Denmark in the first quarter of 2008 and decreased external expenses associated with the development of our product candidates, including expenses related to clinical trials of our MAXY-G34 product candidates and the manufacture of MAXY-G34 and MAXY-VII product for clinical trials. These decreases were partially offset by increases in stock compensation expenses.
Stock compensation expenses included in research and development expenses increased to $1.1 million and $2.8 million in the three and nine month periods ended September 30, 2008 from $814,000 and $2.2 million in the comparable periods in 2007, primarily as a result of our issuance of restricted stock units in May 2008. These increases were partially offset by our cessation of research and development operations at Maxygen ApS, our wholly owned subsidiary in Denmark. In connection with the implementation of our plan to consolidate our operations in 2007, we expensed the remaining stock compensation related to the Danish employees in the fourth quarter of 2007 due to the extension of the exercise period of certain stock options held by affected employees of Maxygen ApS, as required under Danish law, in connection with the termination of such employees. A portion of this stock compensation related to the Danish employees was included in the restructuring charge recorded in the fourth quarter of 2007. There was no additional stock compensation related to the Danish employees during the three and nine months ended September 30, 2008.
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 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.
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The following table presents our approximate research and development expenses by funding category (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Collaborative projects and transition services related to technology and license revenue funded by third parties(1) | $ | — | $ | 1,066 | $ | 2,451 | $ | 1,066 | ||||||||
Government grants | 1,118 | 1,691 | 3,379 | 4,123 | ||||||||||||
Internal projects | 12,452 | 7,500 | 38,683 | 30,708 | ||||||||||||
Total | $ | 13,570 | $ | 10,257 | $ | 44,513 | $ | 35,897 | ||||||||
(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 upfront payments, as well as a portion of the collaborative research and development revenue that is charged for general and administrative expenses. |
Our product development programs are at an early stage and may not result in any marketed products. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to progress 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.
Our research and development expenses may increase in the future depending on increases in research and development costs resulting from advancement of our product candidates through clinical and preclinical development, including the preclinical development of our MAXY-4 product candidates, the cost of which will be shared by Astellas, and any recommencement or increase in development activities on our MAXY-G34 program. Any increase in research and development expenses may be partially offset by savings realized in connection with a continued reduction in spending on our MAXY-G34 program.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs for finance, legal, general management, business development and human resources, insurance premiums and professional expenses, such as external expenditures for legal and accounting services. General and administrative expenses were $3.3 million and $11.9 million in the three months and nine months ended September 30, 2008, compared to $4.0 million and $11.8 million in the comparable periods in 2007. Included in general and administrative expenses were stock-based compensation expenses of $767,000 and $2.7 million in the three and nine months ended September 30, 2008 compared to $851,000 and $3.0 million in the comparable periods in 2007. The decrease in general and administrative expenses for the three months ended September 30, 2008 compared to the comparable period in 2007 was primarily due to decreases in salaries and employee related costs, including lower expenditures on salaries and benefits related to the cessation of our operations in Denmark, offset in part by an increase in external legal and accounting costs. The slight increase in general and administrative expenses for the nine months ended September 30, 2008 compared to the comparable period in 2007 was primarily due to increases in external legal and accounting costs offset in part by decreases in salaries and employee related costs, including lower expenditures on salaries and benefits related to the cessation of our operations in Denmark.
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Our general and administrative expenses during the remainder of 2008 may be higher than the general and administrative expenses for the comparable period in 2007, depending on, among other things, the levels of share-based payments granted in 2008, the use of external consultants and market analysis, and expenditures for legal and accounting services.
Goodwill Impairment
In the second quarter of 2008, we performed an additional goodwill impairment test due to the significant decline of our stock price subsequent to the announcement on June 13, 2008 of certain patent matters related to our MAXY-G34 product candidate and concluded that the carrying value of the net assets exceeded our fair value, based on quoted market prices of our common stock. Accordingly, we performed an additional analysis, as required by SFAS No. 142, “Goodwill and Other Intangible Assets,” which indicated that an impairment loss was probable because the implied fair value of goodwill recorded on our balance sheet was zero. As a result, we recorded an estimated impairment charge of $12.2 million in the second quarter of 2008 relating to the write-off of our goodwill. We completed our determination of the fair value of the affected goodwill during the third quarter of 2008 and have concluded that no revision of the estimated charge is required.
Restructuring Charge
In the nine months ended September 30, 2008, we recognized a charge of $799,000 resulting from the cessation of operations at Maxygen ApS, our Danish subsidiary, and the consolidation of our operations in the United States. These charges, including those recorded in the fourth quarter of 2007, primarily reflect one-time termination benefits for the affected employees of Maxygen ApS and other costs associated with the closure of the facility, the disposal of remaining fixed assets and termination of various leases. We completed the activities related to this consolidation during the first half of 2008 and do not expect to incur any additional costs relating to such consolidation. See Note 8 of the Notes to Condensed Consolidated Financial Statements for further discussion of this matter.
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 foreign currency gains or losses related to our Danish subsidiary, Maxygen ApS. Interest income and other income (expense), net decreased to $1.3 million and $4.1 million, respectively, in the three and nine months ended September 30, 2008 from $1.8 million and $6.1 million in the comparable periods in 2007. These decreases were due to lower interest income resulting from lower interest rates on a lower investment base. The decrease in interest income for the nine month periods was partially offset by a foreign exchange gain in the nine months ended September 30, 2008, compared to a foreign exchange loss in the nine months ended September 30, 2007.
Included in these amounts is interest income of $1.2 million and $3.6 million for the three and nine months ended September 30, 2008 and $2.2 million and $6.7 million for the comparable periods in 2007. Also included in interest income and other income (expense), net are foreign exchange gains of $68,000 and $437,000 in the three and nine month periods ended September 30, 2008 and foreign exchange losses of $374,000 and $607,000 in the three and nine month periods ended September 30, 2007.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) ratified the final consensus reached by the FASB Emerging Issues Task Force (EITF) on Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1), which requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. EITF 07-1 is effective for us beginning January 1, 2009. We are currently evaluating the effect that the adoption of EITF 07-1 will have on our consolidated results of operations and financial condition.
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During the nine months ended September 30, 2008, we adopted the following accounting standards:
On June 27, 2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-3, “Accounting for Nonrefundable 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 non-refundable advance payments for research and development activities, such as upfront non-refundable payments to contract research organizations, if the contracted party has not yet performed activities related to the upfront payment. Amounts deferred are to be recognized by the contracting company as expense when the goods are delivered or the research and development activities are performed. The deferral of income statement recognition of non-refundable advance payments for research and development activities under EITF 07-3 is consistent with how we have accounted for such payments prior to the adoption of EITF 07-3. We adopted EITF 07-3 effective January 1, 2008 and there was no effect upon adoption of EITF 07-3.
In February 2007, the FASB issued 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. We have not elected to measure any of our eligible existing financial instruments at fair value.
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. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. 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, except that under FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157”, companies are allowed to delay the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value on a recurring basis until fiscal years beginning after November 15, 2008. Effective January 1, 2008, we have adopted the provisions of SFAS 157 and measure our required financial assets and liabilities at fair value. We elected to delay the adoption of SFAS 157 for such non-financial assets and non-financial liabilities. See Note 7 of the Notes to Condensed Consolidated Financial Statements.
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. We have also financed our operations through the sale or license of various assets. In July 2008, we received cash proceeds of $90 million from the sale of our hematology assets and the grant of certain license rights to our MolecularBreeding™ technology platform. As a result of the acquisition of Avidia by Amgen Inc., we received cash proceeds of approximately $17.8 million (before $140,000 of income taxes) in the fourth quarter of 2006 in exchange for our equity interests in Avidia. In addition, 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 September 30, 2008, we had $212.8 million in cash, cash equivalents and marketable securities.
Net cash provided by operating activities was $67.0 million in the nine months ended September 30, 2008 and the net cash used in operating activities was $30.4 million in the nine months ended September 30, 2007. The net cash provided by operating activities during the nine months ended September 30, 2008 was due to the receipt of $90 million of cash resulting from our sale of our hematology assets, including MAXY-VII and the $10 million upfront payment received from Astellas offset in part by cash used to fund our operating expenses. Uses of cash in operating activities for the nine months ended September 30, 2008 were primarily to fund losses from continuing operations.
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Net cash provided by investing activities was $27.1 million in the nine months ended September 30, 2008 and $9.5 million in the comparable period in 2007. The cash provided during the nine-month periods ended September 30, 2008 and 2007 was primarily related to maturities of available-for-sale securities in excess of purchases. 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 $804,000 in the nine months ended September 30, 2008 and $5.1 million in the comparable period in 2007. The cash provided during the 2008 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 was its local currency through November 30, 2007. However, as the result of the consolidation of our research and development activities to our U.S. facilities in Redwood City, California and cessation of operations at Maxygen ApS, we determined that the functional currency of our Danish operations is the U.S. dollar after November 30, 2007. Consequently, Maxygen ApS no longer generates translation adjustments which would impact the balance of accumulated other comprehensive income(loss). Translation adjustments from prior periods will continue to remain in accumulated other comprehensive income(loss) on the Condensed Consolidated Balance Sheets. The effect of exchange rate changes on cash and cash equivalents was an increase of $131,000 in the nine months ended September 30, 2007. There was no effect of exchange rate changes on cash and cash equivalents in the nine months ended September 30, 2008.
The following are contractual commitments as of September 30, 2008 associated with lease obligations and purchase obligations (in thousands):
Payments Due by Period | ||||||||||||||||||||
Less | More | |||||||||||||||||||
than 1 | 1-3 | 4-5 | than 5 | |||||||||||||||||
Contractual Obligations | Total | Year | Years | Years | Years | |||||||||||||||
Operating lease obligations | $ | 498 | $ | 299 | $ | 199 | $ | — | $ | — | ||||||||||
Purchase obligations | 1,957 | 653 | 1,304 | — | — | |||||||||||||||
Total | $ | 2,455 | $ | 952 | $ | 1,503 | $ | — | $ | — | ||||||||||
As of September 30, 2008, we are eligible to receive up to $213.0 million in potential milestone and event based payments, including up to $160 million from Astellas based on the achievement of certain events related to the development and commercialization of our MAXY-4 program, up to $30 million from Bayer based on the achievement of certain events related to the potential initiation of a phase II clinical trial of MAXY-VII and the satisfaction of certain patent related conditions associated with the MAXY-VII program, and up to $23 million from sanofi pasteur, the vaccines division of the sanofi-aventis Group, under our existing license agreement relating to the development of a vaccine for the dengue virus. However, there can be no assurances that we will receive any milestone or event based payments under any of these agreements.
We believe that our current cash, cash equivalents and short-term investments, together with funding expected to be received from licensors and government grants, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, it is possible that we will seek additional financing within this timeframe. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. Additional funding, if sought, may not be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk
Market Risk Management
Our cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and other factors. We attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. There were no significant changes in our market risk exposures during the nine months ended September 30, 2008. 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, 2007.
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 3 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 all 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 on Form 10-K for the year ended December 31, 2007. 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 implemented a substantial restructuring of our operations and revised our strategic plan, and we may fail to successfully execute this plan.
In October 2008, we announced a restructuring plan that will result in the reduction of approximately 30% of our workforce and a delay in the development activities on MAXY-G34, our lead drug candidate. We also announced our engagement of a financial advisor to assist us in evaluating strategic options. These options could include a sale or disposition of one or more corporate assets, a strategic business combination, or other transactions. However, there can be no assurance that any particular strategic option or outcome will be pursued or that any transaction, or series of transactions required to sell individual assets, will occur, or whether we will be able to successfully consummate any such transaction on a timely basis, on terms acceptable to us or at all. If we continue to execute our operating plan instead of pursuing a strategic option, our stock price could decline. In addition, we may be unsuccessful in implementing an option that is chosen by our board of directors or we may implement an option that yields unexpected results. The process of continuing to review, and potentially executing, strategic options may be very costly and time-consuming and may distract our management and otherwise disrupt our operations, which could have an adverse effect on our business, financial condition and results of operations. As a result, there can be no assurances that any particular business arrangement or transaction will lead to increased stockholder value.
In addition, to the extent that we elect to pursue a transaction or series of transactions that includes a sale of one or more corporate assets, our ability to sell any assets may be limited by many factors beyond our control, such as general economic conditions, and we cannot predict whether we would be able to sell any particular asset on favorable terms and conditions, if at all, or the length of time needed to sell any asset. For example, the shares that we own of Codexis, Inc. common and preferred stock represent shares of a private company that are not freely tradeable and we cannot predict the likelihood or length of time for Codexis to achieve a liquidity event, if any, for its shares, such as an initial public offering or sale of the company. Accordingly, there can be no assurances that we or our stockholders would realize any value from this asset.
If we do not retain key employees, our ability to maintain our ongoing operations or execute a potential strategic option could be impaired.
To be successful and achieve our objectives under our revised corporate strategy, we must retain qualified scientific and management personnel. The recently announced reduction of our workforce and the continued review of our strategic options may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees, including our senior management, and to hire new talent necessary to maintain our ongoing operations, including the maintenance of the co-development agreement with Astellas for our MAXY-4 program, or to execute a potential strategic option, which could have a material adverse effect of our business.
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In addition, even if we retain key personnel, our recent restructuring and the revision of our corporate strategy could place significant strain on our resources and our ability to maintain our ongoing operations. Our restructuring plan may also require us to rely more heavily on third party contractors and consultants to assist with managing our operations. Accordingly, we may fail to maintain our ongoing operations or execute our strategic plan if we are unable to manage such changes effectively.
If we are unable to enter into a collaborative or other arrangement with a third party to fund the further development and commercialization of our MAXY-G34 product candidate, we may elect to further delay or cease all development activities on this program.
We recently announced the delay of Phase III manufacturing and Phase IIb trials of MAXY-G34, our lead candidate, until we identify a partner who can share the costs of these activities. However, there can be no assurances that we will find a suitable partner or enter into a collaborative or other arrangement with a third party to fund the further development of MAXY-G34. Accordingly, we may further delay or cease development of MAXY-G34, which could adversely affect our business and our ability to realize any value from this program.
In addition, the delay of Phase III manufacturing and Phase IIb trials for this program is expected to have an adverse impact on the timeline for any potential commercialization of MAXY-G34, which could make it more difficult for us to secure a collaborative or other arrangement to fund the further development of this product candidate and could limit the commercial potential of MAXY-G34, if commercialized.
We have a history of net losses. We expect to continue to incur net losses and may not achieve or maintain profitability.
As of September 30, 2008, we had an accumulated deficit of $232.0 million. Although we expect to achieve profitability in 2008, primarily due to the $90 million we received from Bayer HealthCare LLC in connection with the sale of our hematology assets, we expect to incur additional operating losses for the foreseeable future and may not achieve profitability in the future. To date, we have derived substantially all our revenues from collaborations, license agreements and grants and expect to derive a substantial majority of our revenue from such sources for the foreseeable future. Revenues from such sources are uncertain because such agreements and grants 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 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 at all. 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 biological products. We have not proven our ability to develop or commercialize any products. We, alone or in conjunction with corporate collaborators, will need to 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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The prospects of our current product candidates are highly uncertain.
There is a substantial risk that our drug discovery and development efforts may not result in the development of any commercially successful products. Our MAXY-G34 product candidate is currently in Phase IIa clinical trials in breast cancer patients for the treatment of chemotherapy-induced neutropenia. While we have previously announced positive progress in this clinical trial, the results of preliminary studies and early-stage clinical trials do not necessarily predict the results of later-stage clinical trials, including the safety and efficacy profiles of any particular drug candidate. Moreover, in our industry, most product candidates fail before entering clinical trials or in clinical trials and most products that commence clinical trials are not approved for use in humans and never reach the market. Accordingly, negative or inconclusive results from ongoing or future clinical trials of MAXY-G34 could lead us to cease the development of this product candidate and decide not to advance this product candidate into later stage clinical trials, such as a Phase IIb trial or pivotal Phase III trials.
We may also decide to delay or cease further development of the product candidate for a variety of other reasons, including evidence that MAXY-G34 may not meaningfully reduce the period or risk of neutropenia following chemotherapy, may remain in circulation longer than desired or cause adverse side effects. In addition, as noted above, regardless of the clinical properties of MAXY-G34, we may continue to delay or cease development of this product candidate at any time if we determine that we cannot afford the costs of further developing this product candidate ourselves and we are unable to enter into a collaborative or other arrangement with a third party to fund the further development and commercialization of this product candidate.
Even if we are able to enter into a collaborative or other arrangement with a third party to fund the further development and commercialization of MAXY-G34 and this product candidate successfully completes clinical trials and is approved for marketing in the United States or other countries, it will need to compete with other G-CSF drugs then on the market. The ability of MAXY-G34 to be successful in the market will depend on a variety of factors, including, for example, whether MAXY-G34 is clinically differentiated from other G-CSF drugs, the scope and limitations of the label approved by regulators for the use of MAXY-G34, the price of MAXY-G34, reimbursement decisions by third parties with regard to MAXY-G34, and the effort and success of marketing activities undertaken with regard to MAXY-G34.
Litigation or other proceedings or third party claims of intellectual property infringement relating to our MAXY-G34 product candidate may delay or materially impact our ability to commercialize MAXY-G34.
We are aware that Amgen Inc. and other third parties have a number of issued patents that claim certain G-CSF compositions and their use. Amgen Inc. and other third parties also have pending patent applications that are directed at certain G-CSF compositions and their use and these applications could result in issued patents. The owners of issued patents, such as Amgen, Inc., could elect to commence a patent infringement suit against us with regard to MAXY-G34 in the courts or before the International Trade Commission. While we believe that we would have good defenses to any such suit, the outcome of patent litigation is necessarily uncertain and we could be forced to expend significant resources in the defense of any such suit, and we may not prevail. If the outcome of any such suit or action was unfavorable to us, we might have to pay significant damages to the patent owner, and if any patents found to be infringed had not expired, we could be enjoined from commercializing or importing MAXY-G34.
For example, on June 3, 2008, the United States Patent & Trademark Office (USPTO) granted a U.S. patent (U.S. Patent No. 7,381,804B2) to Amgen with certain claims to mutated G-CSF molecules. We do not believe that the USPTO should have granted this patent because we do not believe the claims of the patent are valid. Moreover, the grant of this patent to Amgen does not affect the validity of our existing patents on our novel, proprietary G-CSF compositions. However, Amgen may contend that the claims of this recently issued patent cover our patented MAXY-G34 product candidate. While our current activities related to MAXY-G34 are exempt from patent infringement liability because these activities are strictly limited to obtaining information for regulatory approval, if and when our MAXY-G34 related activities extend beyond those related to seeking regulatory approval, such as, for example, if and when we commercialize MAXY-G34, Amgen might then commence an infringement action against us based on this patent and/or other related patents that it may be granted in the future. If Amgen elects to sue us, we believe that we would have viable defenses to any such infringement suit and intend to vigorously defend against
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any such claims. Typically, such defenses include non-infringement and invalidity defenses. However, there can be no assurance that the relevant court would find in our favor with respect to such defenses. If we are unable to show that Amgen’s patent is invalid, or that we do not infringe the claims of such patent, and we are unable to obtain a license from Amgen for the use of their intellectual property, this may materially impact our ability to manufacture and sell MAXY-G34.
The delay and cost to us of any patent litigation or other proceedings, such as interference proceedings, even if resolved in our favor, could be substantial. Some of our competitors, including Amgen, may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. In addition, the existence of this Amgen patent may limit our ability to enter into a partnering or other arrangement with respect to MAXY-G34. Patent litigation and other proceedings may also absorb significant management time which may materially and adversely impact our financial position and results of operations.
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. Moreover, most products that commence clinical trials are not approved for use in humans and never reach the market. 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 or 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 could be forced to reduce or cease our 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 of our drug candidates. The FDA and similar regulatory agencies determine the type and amount of data necessary to obtain approval of any drug candidate, and as a result of new data or changes in the policies or practices of such agencies, the type and amount of data required for approval may change in the period between the start of product development and the completion of clinical trials.
Any failure or substantial delay in successfully completing clinical trials, obtaining regulatory approval and commercializing any of our current or future product candidates could severely harm our business.
The development of our product candidates, which is based on modifications to natural human proteins, may be subject to substantial delays, increased development costs, reduced market potential for any resulting product or the termination of the affected development program by us or a collaborator, each of which could adversely affect our business.
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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 example, our products may be found to be more immunogenic than the corresponding natural human proteins or demonstrate undesirable pharmokinetic or pharmodynamic properties. For a particular product candidate, this may lead to the redirection of the development strategy which could result in 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 a collaborator 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 a program for such indications or product candidates at any time. Our assessment of the commercial potential for a product may change significantly from the time when we invest in discovery and development to the time when the product either reaches the market or reaches clinical development stages that require investment at risk. Commercial potential can change due to many factors beyond our control, such as general economic conditions, the qualitative and quantitative properties of medical reimbursement schemes at the time, the legal status for sale of biologic generics (i.e. bioequivalent protein drugs, generic biologicals and biogenerics), and the financial status of potential partner companies. As commercial potential decreases so the ability or interest of other parties to share the costs of further development of our products may decrease, thus precluding advancement of our products. Furthermore, we may conclude that a product candidate is not differentiated in a meaningful way from existing products, or that the costs of seeking to establish that a product candidate is differentiated would be prohibitive, or that the market size for a differentiated product with the attributes of a particular product candidate does not justify the expense and risk of further development. 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 product candidate in clinical development or MAXY-4 product candidates in preclinical development could have a material adverse impact on our business. Termination of either program may also cause the price of our stock to drop significantly.
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 United States and other countries, and therefore rely on third parties, such as contract research organizations, to assist us in designing our clinical trials, preparing documents for submission to regulatory authorities, obtaining regulatory approval to conduct clinical trials, enrolling qualified patients, conducting and maintaining our clinical trials, and analyzing 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:
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• | the 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 under collaboration arrangements, if any; | ||
• | the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements; | ||
• | the timing of expenses, particularly with respect to contract manufacturing, preclinical studies and clinical trials; | ||
• | the timing and willingness of any existing or future collaborators to commercialize our products, which would result in royalties to us; and | ||
• | general and industry specific economic conditions, which may affect the research and development expenditures of any future collaborator. |
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, which could 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 current and future product candidates could take a long time to complete clinical development, may fail in clinical development, 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 July 2007, we initiated a Phase IIa clinical trial in Eastern Europe for our MAXY-G34 product candidate for the treatment of chemotherapy-induced neutropenia in breast cancer patients. Thus, our most advanced product candidate is now only in the early stages of clinical trials.
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.
Although MAXY-G34 has demonstrated properties in preclinical and early clinical testing indicating that it 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. For example, after promising preclinical and early clinical data from our lead MAXY-alpha product candidate, clinical trials of this product candidate were terminated after an unexpected reduction of the pharmacodynamic and pharmacokinetic effects was observed and antibodies binding to MAXY-alpha were identified in a Phase I trial. As a result, there can be no assurances that clinical trials of any of our current or future product candidates will be completed or produce sufficient safety and efficacy data necessary to obtain regulatory approval or result in a marketed product.
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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, a collaborator, 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 events, 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 business of a collaborative partner, which it may not share with us. |
As a result of these risks and other factors, we may conduct lengthy and expensive clinical trials of MAXY-G34 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 events 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 potential products are subject to a lengthy and uncertain regulatory process and may never gain approval. 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. Data obtained from such testing may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.
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 a collaborator, 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
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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 their 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 adverse events 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 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 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 a collaborative agreement 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 business and 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, the development or commercialization of a potential product could be delayed, which would adversely affect our business.
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With regard to our MAXY-G34 product candidate, 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:
• | before we can obtain approval of any of our 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 existing collaboration and license agreements and grants, will enable us to maintain our currently planned operations for at least the next twelve months. However, our current plans and assumptions may change, and our capital requirements may increase in future periods depending on many factors, including payments received under our collaboration and license agreements and government grants, the progress and scope of our 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.
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If our collaborations are not successful or we are unable to enter into and maintain future collaboration arrangements for any of our product candidates, 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 to develop and commercialize potential products. We are currently party to a collaboration arrangement only with respect to our MAXY-4 product candidates and, if we are unable to enter into any new collaboration arrangements, or if existing or future collaboration arrangements are not maintained, our potential products may not be commercialized.
We have limited or no control over the resources that a collaborator may devote to the development and commercialization of our potential products. A collaborator may elect not to develop potential products arising out of a collaborative arrangement or not to devote sufficient resources to the development, manufacture, marketing or sale of these products. Further, a collaborator may not perform its obligations as expected and may delay the development or commercialization of a product candidate, terminate its agreement with us, or breach or otherwise fail to conduct its 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.
For example, if we are unable to enter into a collaboration or licensing arrangement for the continued clinical development of MAXY-G34, or are unable to maintain our existing collaboration arrangement for our MAXY-4 program, we may elect to delay or discontinue further development of such program, which may harm our business.
Any conflicts with a collaborator 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 a future collaborator. 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 a future collaborator, which could reduce our revenues.
In addition, a collaborator may 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. We have limited ability to prevent actions by any future collaborator that could have any adverse impact on the development and commercialization of our related 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 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
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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.
Recently, the USPTO adopted new rules that were to become effective on November 1, 2007, regarding processes for obtaining patents in the United States. However, in April 2008, the U.S. District Court for the Eastern District of Virginia granted summary judgment for plaintiffs challenging the new rules to permanently enjoin enforcement of the new rules by the USPTO. If the USPTO successfully appeals the court’s decision and the rules are implemented, the new rules could make it more difficult for patent applicants to obtain patents, especially with regard to biotechnology products and processes. Although we do not believe that the rule changes, if made effective, would likely have a material adverse impact with regard to our MAXY-G34 or MAXY-4 programs, it may be more difficult to obtain patent protection in the United States for any future product candidates.
We also 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. 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 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.
For example, in October 2008, we announced the delay of Phase III manufacturing and Phase IIb trials of MAXY-G34, our lead candidate, until we identify a partner who can share the costs of these activities and the delay of these activities are expected to have a material impact on the timeline for any potential commercialization of MAXY-G34. We also implemented a restructuring plan that will result in the reduction of approximately 30% of our workforce and announced the engagement of a financial advisor to assist us in evaluating strategic options.
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 and execute our revised strategic plan. 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 have primarily been derived from collaboration and license agreements and government grants, and our inability to maintain these grants and agreements or establish and maintain new collaborations, license agreements or grants would adversely impact our revenues, financial position and results of operation.
We currently have a collaboration agreement for our MAXY-4 program, three government grants and a license agreement with Codexis that we expect to generate revenue for the remainder of 2008 and expect that a substantial portion of our revenue for the foreseeable future will result from these sources. If these agreements or grants are materially amended or terminated and we are unable to enter into new agreements or obtain new grants, 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.
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With regard to our MAXY-G34 product candidate, we expect Neulasta® and Neupogen® (from Amgen, Inc.) to compete with MAXY-G34, if commercialized. In addition, we are aware that Neose Technologies, Inc. (in collaboration with BioGeneriX AG) and Teva Pharmaceutical Industries Ltd. are developing G-CSF products based on naturally occurring human G-CSF.
With regard to our MAXY-4 product candidates, we expect Orencia® (from Bristol Myers Squibb Company) to compete with MAXY-4, if commercialized. In addition, we are aware that Bristol Myers Squibb Company is also developing belatacept that, if marketed, could compete with MAXY-4.
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.
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, which could result in increased competition for all forms of a particular therapeutic protein.
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. In addition, therapeutic products that are small molecules may be developed by our competitors that could reduce or displace the market for our protein therapeutic products. Small molecule drugs are often less expensive and easier to administer than protein therapeutics and therefore would have competitive advantages if they were developed and shown to be safe and effective for the indication that our product candidates are targeting.
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 a collaborator obsolete and noncompetitive.
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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, new accounting pronouncements and higher compliance costs may adversely impact our future financial position and results of operations.
Future changes in financial accounting standards may cause adverse, unexpected earnings fluctuations and may adversely affect our reported results of operations. 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.
In addition, compliance with changing regulations regarding corporate governance and public disclosure may 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 often created uncertainty for companies such as ours. 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 may result in increased general and administrative expenses and cause a diversion of management time and attention from revenue-generating activities to compliance activities.
The operation of international locations may increase operating expenses and divert management attention.
Since 2000, we have conducted certain of our operations through Maxygen ApS, our Danish subsidiary. Although we have completed the consolidation of our operations in the United States, we may continue to conduct limited administrative activities through Maxygen ApS for the foreseeable future. As a result, we will continue to face certain risks related to the operation of a foreign subsidiary. Operation as an international entity requires additional management attention and resources. As long as we continue to operate internationally, we are subject to risks of doing business internationally, including compliance with foreign regulatory and legal requirements; difficulties in staffing and managing foreign operations; currency exchange risks; and potentially adverse tax consequences.
Acquisitions could result in dilution, operating difficulties and other harmful consequences.
If appropriate opportunities present themselves, we may acquire businesses or technologies that complement our capabilities. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:
• | diversion of management time (both ours and that of the acquired company) from focus on operating the businesses to issues of integration during the period of negotiation through closing and further diversion of such time after closing; | ||
• | decline in employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects, or the direction of the business; | ||
• | the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management and the lack of control if such integration is delayed or not implemented; and |
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• | 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 months ended September 30, 2008, the price of our common stock on the Nasdaq Global Market ranged from $3.28 to $8.94. 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 entry into or material amendment or termination of a collaborative or license agreement; | ||
• | any decisions to discontinue or delay development programs or clinical trials; | ||
• | announcements of new technological innovations or new products by us or our competitors; | ||
• | conditions or trends in the biotechnology and life science industries; | ||
• | changes in the market valuations of other biotechnology or life science companies; | ||
• | developments in domestic and international governmental policy or regulations; | ||
• | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; | ||
• | changes in general economic, political and market conditions, such as recessions, interest rate changes, terrorist acts and other factors; | ||
• | developments in or challenges relating to our patent or other proprietary rights, including lawsuits or proceedings alleging patent infringement based on the development, manufacturing or commercialization of our product candidates; | ||
• | sales of our common stock or other securities in the open market; and | ||
• | sales of assets or other strategic transactions. |
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.
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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 current levels of market disruption and volatility continue or worsen, we may not be able to preserve our cash balances or access such sources if necessary.
The capital and credit markets have been experiencing extreme volatility and disruption. As of September 30, 2008, we had $212.8 million in cash, cash equivalents and marketable securities. While we maintain an investment portfolio primarily of short-term commercial paper and money market funds and have not experienced any liquidity issues with respect to these securities, we may experience reduced liquidity with respect to some of our investments if current levels of market disruption and volatility continue or worsen. Under extreme market conditions, there can be no assurance that we would be able to preserve our cash balances or that such sources would be available or sufficient for our business.
If we or a collaborator receives regulatory approval for one of 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 a collaborator receives for one of 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 trials 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.
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.
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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 any revenue from a potential drug 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 September 30, 2008, our executive officers and directors, together with GlaxoSmithKline plc, controlled approximately 21% 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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6.Exhibits
The following exhibits are filed as part of this report:
10.1† | Co-Development and Commercialization Agreement, dated as of September 18, 2008, by and between Astellas Pharma Inc. and Maxygen, Inc. | ||
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 |
† | Confidential treatment has been requested with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MAXYGEN, INC. | ||||
November 7, 2008 | By: | /s/ Russell J. Howard | ||
Russell J. Howard | ||||
Chief Executive Officer | ||||
November 7, 2008 | By: | /s/ Lawrence W. Briscoe | ||
Lawrence W. Briscoe | ||||
Chief Financial Officer | ||||
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