United States
Securities and Exchange Commission
Washington, D.C. 20549
___________________
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0449487
(State of incorporation) (I.R.S. Employer Identification No.)
515 Galveston Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 298-5300
(Registrant's telephone number, including area code)
___________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
As of May 1, 2001, there were 33,817,985 shares of the registrant's common stock
outstanding.
MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
Part I FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements and Notes:
Condensed Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001.............................................. 3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2000 and 2001..................... 4
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 2000 and 2001..................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk...... 22
Part II OTHER INFORMATION
Item 1: Legal Proceedings. .......................................... 23
Item 2: Changes in Securities and Use of Proceeds....................... 23
Item 3: Defaults Upon Senior Securities................................. 24
Item 4: Submission of Matters to a Vote of Security Holders............. 24
Item 5: Other Information............................................... 24
Item 6: Exhibits and Reports on Form 8-K................................ 24
SIGNATURES............................................................... 25
2
================================================================================
Part I - Financial Information
Item 1
Financial Statements
MAXYGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, March 31,
2000 2001
---- ----
ASSETS (Note 1) (unaudited)
Current assets:
Cash and cash equivalents................................................... $ 111,374 $ 120,425
Short-term investments...................................................... 110,805 76,170
Grant and other receivables................................................. 8,425 8,046
Prepaid expenses and other current assets................................... 1,180 1,629
---------- -----------
Total current assets....................................................... 231,784 206,270
Property and equipment, net................................................. 9,916 11,494
Goodwill and other intangible assets, net of accumulated amortization of
$3,418 at December 31, 2000 and $5,599 at March 31, 2001................... 22,760 20,579
Long-term investments....................................................... 35,836 58,301
Deposits and other assets................................................... 1,403 1,434
---------- -----------
Total assets............................................................... $ 301,699 $ 298,078
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 2,143 $ 1,771
Accrued compensation........................................................ 1,859 2,603
Other accrued liabilities................................................... 4,633 4,243
Deferred revenue............................................................ 6,228 7,749
Current portion of equipment financing obligations.......................... 533 850
---------- -----------
Total current liabilities.................................................. 15,396 17,216
Deferred revenue............................................................. 2,810 3,191
Non-current portion of equipment financing obligations....................... 1,295 1,816
Commitments
Stockholders' equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares
issued and outstanding at December 31, 2000 and March 31, 2001............. -- --
Common stock, $0.0001 par value: 100,000,000 shares authorized, 33,576,736,
and 33,803,226 shares issued and outstanding at December 31, 2000 and
March 31, 2001, respectively............................................... 3 3
Additional paid-in capital.................................................. 386,026 386,772
Notes receivable from stockholders.......................................... (776) (776)
Deferred stock compensation................................................. (19,880) (16,384)
Accumulated other comprehensive income...................................... 587 1,066
Accumulated deficit......................................................... (83,762) (94,826)
---------- -----------
Total stockholders' equity................................................. 282,198 275,855
---------- -----------
Total liabilities and stockholders' equity................................. $ 301,699 $ 298,078
========== ===========
See accompanying notes.
3
MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months ended
March 31,
-----------------------------
2000 2001
--------- ---------
Collaborative research and development revenue....................................... $ 3,046 $ 5,025
Grant revenue........................................................................ 2,368 1,905
--------- ---------
Total revenues....................................................................... 5,414 6,930
Operating expenses:
Research and development........................................................... 6,246 12,696
General and administrative......................................................... 2,013 3,548
Stock compensation expense (1)..................................................... 4,911 3,543
Amortization of intangible assets.................................................. -- 2,181
--------- ---------
Total operating expenses............................................................. 13,170 21,968
--------- ---------
Loss from operations................................................................. (7,756) (15,038)
Interest income, net................................................................. 2,116 3,974
--------- ---------
Net loss............................................................................. $ (5,640) $(11,064)
========= =========
Basic and diluted net loss per share................................................. $ (0.20) $ (0.34)
Shares used in computing basic and diluted net loss per share........................ 28,062 32,184
__________
(1) Stock compensation expense related to the following:
Research and development....................................................... $ 3,536 $ 2,876
General and administrative..................................................... 1,375 667
--------- ---------
$ 4,911 $ 3,543
========= =========
See accompanying notes.
4
MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
March 31,
------------------------------
2000 2001
------------ ------------
Operating activities
Net loss..................................................................... $ (5,640) $ (11,064)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................................. 309 649
Amortization of intangible assets....................................... -- 2,181
Deferred stock compensation amortization - employees....................... 4,911 3,497
Common stock issued and stock options granted to
consultants for services rendered........................................ -- 57
Changes in operating assets and liabilities:
Grant and other receivables.............................................. (900) 379
Prepaid expenses and other current assets................................ 64 (449)
Deposits and other assets................................................ (123) (106)
Accounts payable......................................................... 165 (372)
Accrued liabilities...................................................... 270 354
Deferred revenue......................................................... (1,747) 1,902
------------ ------------
Net cash used in operating activities........................................ (2,691) (2,972)
Investing activities
Purchases of available-for-sale securities................................... (24,152) (60,819)
Maturities of available-for-sale securities.................................. -- 73,543
Acquisition of property and equipment........................................ (521) (1,246)
------------ ------------
Net cash used in investing activities........................................ (24,673) 11,478
Financing activities
Repayments under equipment financing obligation.............................. (6) (143)
Proceeds from issuance of common stock - net of issuance costs............... 137,389 688
Payments received on promissory notes........................................ 159 --
------------ ------------
Net cash provided by financing activities.................................... 137,542 545
------------ ------------
Net increase in cash and cash equivalents.................................... 110,178 9,051
Cash and cash equivalents at beginning of period............................. 136,343 111,374
------------ ------------
Cash and cash equivalents at end of period................................... $ 246,521 $ 120,425
============ ============
Schedule of non-cash financing transactions
Equipment purchased under capital lease obligations.......................... $ -- $ 981
See accompanying notes.
5
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 March 31, 2001 and for the three
months ended March 31, 2000 and 2001 includes all adjustments (consisting only
of normal recurring adjustments) that the management of Maxygen, Inc. ("Maxygen"
or the "Company") believes necessary for fair presentation of the results for
the periods presented.
Results for any interim period are not necessarily indicative of results for any
future interim period or for the entire year. The accompanying condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Report on Form
10-K for the year ended December 31, 2000.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Non-refundable up-front payments received in connection with research and
development collaboration agreements, including technology advancement funding
that is intended for the development of the Company's core technology, are
deferred and recognized on a straight-line basis over the relevant periods
specified in the agreement, generally the research term.
Revenue related to collaborative research with the Company's corporate
collaborators is recognized as research services are performed over the related
funding periods for each contract. Under these agreements, the Company is
required to perform research and development activities as specified in each
respective agreement. The payments received under each respective agreement are
not refundable and are generally based on a contractual cost per full-time
equivalent employee working on the project. Research and development expenses
under the collaborative research agreements approximate or exceed the revenue
recognized under such agreements over the term of the respective agreements.
Deferred revenue may result when the Company does not incur the required level
of effort during a specific period in comparison to funds received under the
respective contracts. Milestone and royalty payments, if any, are recognized
pursuant to collaborative agreements upon the achievement of specified
milestones or the sale of applicable products.
The Company has also been awarded Defense Advanced Research Projects Agency
("DARPA") grants and National Institute of Standards and Technology-Advanced
Technology Program grants for various research and development projects. The
terms of these grant agreements are three years. Revenue related to grant
agreements is recognized as related research and development expenses are
incurred.
Net loss per share
Basic and diluted net loss per common share are presented in conformity with the
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), for all periods presented. In accordance with SFAS 128, basic and
diluted net loss per share has been computed using the weighted-average number
of shares of common stock outstanding during the period, less shares subject to
repurchase.
6
The following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share data):
Three Months ended
March 31,
-------------------------------
2000 2001
----------- -----------
Net Loss........................................... $(5,640) $(11,064)
=========== ===========
Basic and diluted:
Weighted-average shares of common stock
outstanding...................................... 30,977 33,657
Less: weighted-average shares subject to
repurchase....................................... (2,915) (1,473)
----------- -----------
Weighted-average shares used in computing basic
and diluted net loss per share................... 28,062 32,184
----------- -----------
Basic and diluted net loss per share............... $ (0.20) $ (0.34)
=========== ===========
The Company has excluded all outstanding stock options and shares subject to
repurchase from the calculation of diluted loss per common share because all
such securities are antidilutive for all applicable periods presented. The
total number of shares excluded from the calculations of diluted net loss per
share, prior to application of the treasury stock method for options, was
6,362,000 at March 31, 2001. Such securities, had they been dilutive, would
have been included in the computations of diluted net loss per share along with
restricted common stock subject to the Company's right of repurchase.
Comprehensive loss
Comprehensive loss is primarily comprised of net unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments.
There is no material difference between the reported net loss and the
comprehensive net loss for all the periods presented.
Derivatives and Financial Instruments
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS 133 was later amended by SFAS No. 137 and SFAS No. 138. This
standard requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The adoption of this standard has not had a material effect on
the Company's consolidated financial position, results of operations or cash
flows. At March 31, 2001, the Company had foreign currency contracts in the
form of forward exchange contracts totalling $12.4 million.
2. Investments
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company's debt securities are classified as available-for-sale and are
carried at estimated fair value in cash equivalents and short-term investments.
Unrealized gains and losses are reported as accumulated other comprehensive
income (loss) in stockholders' equity. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses on available-for-sale securities are included in
interest income and expense. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income. The Company's cash
equivalents and investments as of March 31, 2001 are as follows (in thousands):
7
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Money market funds.................................. $ 120,425 $ -- $ -- $ 120,425
Commercial paper.................................... 75,465 705 -- 76,170
Corporate bonds..................................... 57,930 371 -- 58,301
--------- --------- ---------- ----------
Total.............................................. 253,820 1,076 -- 254,896
Less amounts classified as cash equivalents......... (120,425) -- -- (120,425)
--------- --------- ---------- ----------
Total investments................................... $ 133,395 $1,076 $ -- $ 134,471
========= ========= ========== ==========
Realized gains or losses on the sale of available-for-sale securities for the
three month periods ended March 31, 2000 and March 31, 2001 were insignificant.
At March 31, 2001, the contractual maturities of investments were as follows (in
thousands):
----------- ----------
Amortized Estimated
Cost Fair Value
----------- ----------
Due within one year................... $ 75,465 $ 76,170
Due after one year.................... 57,930 58,301
----------- ----------
$133,395 $134,471
=========== ==========
3. Collaborative Agreements
ALK-Abello A/S
In February 2001, the Company established a three-year collaboration with ALK-
Abello A/S, a wholly owned subsidiary of Chr. Hansen Holding A/S, Denmark, to
research and develop novel recombinant therapeutics for the treatment of
specific allergies. The Company will collaborate with ALK-Abello to create
therapies for treating specific allergies, including allergies to house dust
mites and grass, which are the cause of many common allergies. Under the terms
of the collaboration, the Company will receive license fees, technology access
fees, research and development funding, and potential milestone payments. Such
payments to the Company, including milestone payments, could total a maximum of
$80 million. The Company will also be entitled to receive royalties on product
sales, if any. ALK-Abello will receive exclusive worldwide rights to
commercialize all recombinant human therapeutics developed in the collaboration.
International AIDS Vaccine Initiative
In February 2001, the Company established a three-year collaboration with the
International AIDS Vaccine Initiative and DBLV, LLC, an entity established and
funded by the Rockefeller Foundation to develop novel HIV vaccines. Under the
agreement, DBLV will provide full research and development funding to the
Company for at least three years to expand the Company's ongoing program in HIV
vaccine development. The Company will retain all rights to commercialize the
HIV vaccine candidates in all developed countries of the world, as well as in
certain markets in the developing world.
8
================================================================================
Forward-Looking Statements
This report contains forward-looking statements within the meaning of federal
securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "can," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Risks and uncertainties and the occurrence of other events could cause actual
results to differ materially from these predictions. Factors that could cause
or contribute to such differences include those discussed below under "--Risk
Factors," as well as those discussed in our Annual Report on Form 10-K for the
year ended December 31, 2000.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this report or to conform these statements to
actual results.
================================================================================
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Maxygen was founded in May 1996 and began operations in March 1997. To date, we
have generated revenues from research collaborations with agriculture,
pharmaceutical, petroleum, and chemical companies and from government grants.
Our current collaborators are Novozymes, DuPont, Pfizer, Syngenta, DSM, Rio
Tinto, Lundbeck, Chevron, Hercules, ALK-Abello and IAVI. Our government grants
are from the Defense Advanced Research Projects Agency and the National
Institute of Standards and Technology-Advanced Technology Program.
Revenue under strategic alliances and government grants increased from $14.0
million in 1999 to $24.5 million in 2000 and was $6.9 million in the three
months ended March 31, 2001. Revenues may fluctuate from period to period and
there can be no assurance that these collaboration agreements will continue for
their initial term or beyond.
We have incurred significant losses since our inception. As of March 31, 2001,
our accumulated deficit was $94.8 million and total stockholders' equity was
$275.9 million. We have invested heavily in establishing our proprietary
technologies. These investments have contributed to the increases in operating
expenses from $26.7 million in 1999 to $99.4 million in 2000 and $22.0 million
in the three months ended March 31, 2001. Our total headcount increased from
143 employees at the end of 1999 to 252 employees at the end of 2000. As of
March 31, 2001 Maxygen had 266 employees, of whom 84% were engaged in research
and development. We expect to incur additional operating losses over at least
the next several years as we continue to expand our research and development
efforts and infrastructure.
Source of Revenue and Revenue Recognition Policy
We recognize revenues from research collaboration agreements as earned upon
achievement of the performance requirements of the agreements. Revenue related
to grant agreements is recognized as related research and development expenses
are incurred. Our existing corporate collaboration agreements generally provide
for research funding for a specified number of full time researchers working in
defined research programs. Revenue related to these payments is earned as the
related research work is performed. In addition, these collaborators generally
make technology advancement payments that are intended to fund development of
our core technology, as opposed to a defined research program. These payments
are recognized ratably over the applicable funding period. Payments received
that are related to future performance are deferred and recognized as revenue as
the performance requirements are achieved. As of March 31, 2001, we have
deferred revenues of approximately $10.9 million. Our sources of potential
revenue for the next several years are likely to be license, research,
technology advancement and milestone payments under existing and possible future
collaborative arrangements, government
9
research grants, and royalties from our collaborators based on revenues received
from any products commercialized under those agreements.
Deferred Compensation
Deferred compensation for options granted to employees has been determined as
the difference between the deemed fair market value for financial reporting
purposes of our common stock on the date the applicable options were granted and
the exercise price. Deferred compensation for options granted to consultants
has been determined in accordance with Statement of Financial Accounting
Standards No. 123 as the fair value of the equity instruments issued.
Compensation for related options granted to consultants is periodically
remeasured as the underlying options vest.
In connection with the grant of stock options to employees before our initial
public offering, we recorded deferred stock compensation of approximately $2.4
million in 1998 and $19.5 million in 1999. These amounts were initially
recorded as a component of stockholders' equity and are being amortized as
charges to operations over the vesting period of the options using a graded
vesting method. We recognized stock compensation expense of approximately $4.9
million in 1999, $7.8 million in 2000 and $1.3 million in the three months ended
March 31, 2001 related to the deferred compensation amortization on these option
grants. In connection with the grant of stock options to consultants, we
recorded stock compensation expense of $0.8 million in 1999, $3.0 million in
2000 and $46,000 in the three months ended March 31, 2001. Due to the
acceleration of an executive stock option award, an additional $1.6 million
stock compensation expense was recorded in 2000.
In connection with the Maxygen ApS acquisition in August 2000, stock options
were granted in exchange for outstanding warrants to purchase Maxygen ApS
securities. In connection with this exchange we recorded aggregate deferred
compensation totaling $1.5 million. This amount is being amortized over the
remaining vesting period of the options, of which $298,000 was expensed in 2000
and $179,000 in the three months ended March 31, 2001. For the shares exchanged
that had a right of repurchase, deferred compensation of $13.1 million was
recorded. This amount is being amortized to expense over a three year graded
vesting period. A total of $3.3 million was recognized as expense in 2000 and
$2.0 million in the three months ended March 31, 2001.
Results of Operations
Revenues
Our total revenues for the three months ended March 31, 2000 were $5.4 million
and were $6.9 million for the three months ended March 31, 2001. The increase
in collaborative research and development revenue was due to additional
strategic alliances and the expansion of existing alliances. The decline in
grant revenue reflects the expiration of two government grants that began in
late 1997 and early 1998. We expect our total revenues to increase in 2001 as
new projects are initiated under existing collaboration agreements and as new
collaboration arrangements are consummated.
Research and Development Expenses
Our research and development expenses consist primarily of salaries and other
personnel-related expenses, facility costs, supplies and depreciation of
facilities and laboratory equipment. Research and development expenses
increased from $9.8 million in the three months ended March 31, 2000 to $15.6
million in the three months ended March 31, 2001. The increase is primarily due
to our accelerated efforts in all aspects of research and development, including
increased expenditures resulting from our acquisition of the Maxygen ApS in
August 2000, as well as investments in our technology platforms and in the
development of product candidates. Also included in research and development
expenses is stock compensation expense of $3.5 million for the three months
ended March 31, 2000 and $2.9 million for the three months ended March 31, 2001.
Research and development expenses represented 181% of total revenue in the three
months ended March 31, 2000 and 225% of total revenue in the three months ended
March 31, 2001. The increase was due primarily to increased staff necessary to
manage and support our growth plus increased research and development costs
resulting from our acquisition of Maxygen ApS, offset in part by the growth in
our total revenues.
We expect research and development cost to increase during the remainder of 2001
as new projects are initiated under existing collaboration agreements and as new
collaboration arrangements are consummated. We expect to continue to devote
substantial resources to research and development, and we expect that research
and
10
development expenses will continue to increase in absolute dollars for at least
the next several years. The acquisition of Maxygen ApS has significantly
increased our research and development expense in absolute dollars.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs for
finance, human resources, business development, legal and general management, as
well as professional expenses, such as legal and accounting. General and
administrative expenses increased from $3.4 million in the three months ended
March 31, 2000 to $4.2 million in the three months ended March 31, 2001.
Expenses increased primarily due to increased staffing necessary to manage and
support our growth. Also included in general and administrative expenses is
stock compensation expense of $1.4 million in the three months ended March 31,
2000 and $667,000 in the three months ended March 31, 2001.
General and administrative expenses represented 63% of total revenue in the
three months ended March 31, 2000 and 61% of total revenue in the three months
ended March 31, 2001. The small decrease was due primarily to the growth in
our total revenue between periods.
We expect that our general and administrative expenses will increase in absolute
dollar amounts for at least the next several years as we expand our legal and
accounting staff, add infrastructure and incur additional costs related to being
a public company, including directors' and officers' insurance, investor
relations programs and increased professional fees. We also expect that general
and administrative expenses will increase in absolute dollar amounts due to the
increased costs associated with integrating, operating and coordinating our
recently acquired operations in Denmark. We expect that general and
administrative expenses as a percentage of total revenue will continue to
decrease as our revenues increase and research and development activities expand
more quickly then our general and administrative expenses.
Goodwill and Other Intangible Assets
In connection with the Maxygen ApS acquisition, we allocated $26.2 million to
goodwill and other intangible assets and will amortize this goodwill and other
intangible assets over three years, the term of expected benefit. We believe
this term is reasonable given that Maxygen ApS was a development stage entity
and its technology is at an early stage of development and is yet unproven.
Amortization expense of $3.4 million in 2000 and $2.2 million in the three
months ended March 31, 2001 was recorded on goodwill and other intangible
assets.
Goodwill and other intangible assets are generally evaluated on an individual
acquisition or market basis whenever events or changes in circumstances indicate
that such assets are impaired or the estimated useful lives are no longer
appropriate. If indicators of impairment exist, we will review our long-lived
assets (including goodwill) for impairment based on estimated future discounted
cash flows attributable to the assets. In the event such cash flows are not
expected to be sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values. No impairment charges
have been recorded in 2000 or in the three months ended March 31, 2001.
Net Interest Income
Net interest income represents income earned on our cash, cash equivalents and
marketable securities net of interest expense. Net interest income increased
from $2.1 million in the three months ended March 31, 2000 to $4.0 million in
the three months ended March 31, 2001. The increase was due to higher average
cash balances, cash equivalents and marketable securities.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
placements and public offerings of equity securities, receiving aggregate
consideration from such sales totaling $302.5 million and research and
development funding from collaborators and government grants totaling
approximately $55.2 million. As of March 31, 2001, we had $254.9 million in
cash, cash equivalents and investments.
Our operating activities used cash of $2.7 million in the three months ended
March 31, 2000 and $2.9 million in the three months ended March 31, 2001. Uses
of cash in operating activities were primarily to fund net operating losses.
11
Net cash used in investing activities was $24.7 million in the three months
ended March 31, 2000. Investing activities provided $11.5 million in the three
months ended March 31, 2001. The cash used during the three months ended March
31, 2000 primarily represented purchases of available-for-sale securities after
the Company's follow-on stock offering in March of 2000. The net cash provided
from investing activities for the three months ended March 31, 2001 was
primarily due to the maturities of available-for-sale securities, some of which
were converted to cash and cash equivalents and the balance was used to purchase
new securities.
Additions of property and equipment were $521,000 in the three months ended
March 31, 2000 and $1.2 million in the three months ended March 31, 2001. We
expect to continue to make significant investments in the purchase of property
and equipment to support our expanding operations. We may use a portion of our
cash to acquire or invest in complementary businesses, products or technologies,
or to obtain the right to use such complementary technologies. In addition
during the three months ended March 31, 2001 we purchased $1.0 million of
equipment under a new capital lease.
Financing activities provided cash of $137.5 million in the three months ended
March 31, 2000 and $545,000 in the three months ended March 31, 2001. The 2000
amount primarily consists of the net proceeds we received from the sale of
common stock in a follow-on public offering in March 2000. The cash provided in
the three months ended March 31, 2001 was primarily from the proceeds of the
sale of common stock in connection with Maxygen's Employee Stock Purchase Plan,
partially offset by payments on capital lease obligations.
Assuming our research efforts for existing collaborations are expended for the
full research term, as of March 31, 2001 we have total committed funding of
$118.7 million, of which approximately $91.5 million is from our collaborators
and $27.2 million is from government funding. Of these committed funds, we have
$63.5 million remaining to be received over the next four years. In addition,
potential milestone payments from our existing collaborations could exceed $240
million based on the accomplishment of specific performance criteria, and we may
earn royalties on product sales. In general, the obligation of our corporate
collaborators to provide research funding cannot be terminated by either party
before the end of the research term unless there has been a material breach of
contract or either party has become bankrupt or insolvent. In the case of such
an event, the agreement specifies the rights, if any, that each party will
retain.
We believe that our current cash, cash equivalents, short-term investments and
long-term investments together with funding received from collaborators and
government grants will be sufficient to satisfy our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, it is possible that we will seek additional financing within this
timeframe. We may raise additional funds through public or private financing,
collaborative relationships or other arrangements. Additional funding, if
sought, may not be available on terms favorable to us. Further, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants. Our failure to raise capital when
needed may harm our business and operating results.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
You should carefully consider the risks described below, together with all of
the other information included in this report, in considering our business and
prospects. The risks and uncertainties described below are not the only ones
facing Maxygen. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business operations. If
any of the following risks actually occur, our business could be harmed. In
such case, the trading price of our common stock could decline, and you may lose
all or part of your investment.
We Have a History of Net Losses. We Expect to Continue to Incur Net Losses and
We May Not Achieve or Maintain Profitability.
We have incurred net losses since our inception, including a net loss of
approximately $59.6 million for the year ended December 31, 2000 and $11.1
million for the three months ended March 31, 2001. As of March 31, 2001, we had
an accumulated deficit of approximately $94.8 million. We expect to have
increasing net losses and negative cash flow for at least the next several
years. The size of these net losses will depend, in part, on the rate of
growth, if any, in our contract revenues and on the level of our expenses. To
date, we have derived all our revenues from collaborations and grants and expect
to do so for at least the next several years. Revenues from collaborations and
grants are uncertain because our existing agreements have fixed terms and
because our ability to secure future agreements will depend upon our ability to
address the needs of our potential future collaborators.
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We expect to spend significant amounts to fund research and development and
enhance our core technologies. As a result of our acquisition of Maxygen ApS, we
expect costs to increase further due to expanded operations, integration costs
associated with the acquisition and costs associated with operating in multiple
international locations. As a result, we expect that our operating expenses will
increase significantly in the near term and, consequently, we will need to
generate significant additional revenues to achieve profitability. Even if we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis.
Commercialization of Our Technologies Depends On Collaborations With Other
Companies. If We Are Unable to Find Collaborators in the Future, We May Not Be
Able to Develop Our Technologies or Products.
Since we do not currently possess the resources necessary to develop and
commercialize potential products that may result from our technologies, or the
resources to complete any approval processes that may be required for these
products, we must enter into collaborative arrangements to develop and
commercialize products. We have entered into collaborative agreements with
other companies to fund the development of certain new products for specific
purposes. These contracts expire after a fixed period of time. If they are not
renewed or if we do not enter into new collaborative agreements, our revenues
will be reduced and our products may not be commercialized.
We have limited or no control over the resources that any collaborator may
devote to our products. Any of our present or future collaborators may not
perform their obligations as expected. These collaborators may breach or
terminate their agreement with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Further, our
collaborators may elect not to develop products arising out of our collaborative
arrangements or devote sufficient resources to the development, manufacture,
marketing or sale of these products. If any of these events occur, we may not
be able to develop our technologies or commercialize our products.
We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not
Develop Commercially Successful Products, We May Be Forced to Cease Operations.
You must evaluate us in light of the uncertainties and complexities affecting an
early stage biotechnology company. Our proprietary technologies are new and in
the early stage of development. We may not develop products that prove to be
safe and efficacious, meet applicable regulatory standards, are capable of being
manufactured at reasonable costs, or can be marketed successfully.
We may not be successful in the commercial development of products. Successful
products will require significant development and investment, including testing,
to demonstrate their cost-effectiveness before their commercialization. To
date, companies in the biotechnology industry have developed and commercialized
only a limited number of products. We have not proven our ability to develop
and commercialize products. We must conduct a substantial amount of additional
research and development before any regulatory authority will approve any of our
products. Our research and development may not indicate that our products are
safe and effective, in which case regulatory authorities may not approve them.
Problems frequently encountered in connection with the development and
utilization of new and unproven technologies and the competitive environment in
which we operate might limit our ability to develop commercially successful
products.
We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our
Collaborators or Any Inability to Commercialize Products Resulting from This
Research Could Harm Our Business.
An important part of our strategy involves conducting proprietary research
programs. We may pursue opportunities in fields that could conflict with those
of our collaborators. Moreover, disagreements with our collaborators could
develop over rights to our intellectual property. Any conflict with our
collaborators could reduce our ability to obtain future collaboration agreements
and negatively impact our relationship with existing collaborators, which could
reduce our revenues.
Certain of our collaborators could also become competitors in the future. Our
collaborators could develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain timely regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of products. Any
of these developments could harm our product development efforts.
We will either commercialize products resulting from our proprietary programs
directly or through licensing to other companies. We have no experience in
manufacturing and marketing, and we currently do not have the resources
13
or capability to manufacture products on a commercial scale. In order for us to
commercialize these products directly, we would need to develop, or obtain
through outsourcing arrangements, the capability to manufacture, market and sell
products. We do not have these capabilities, and we may not be able to develop
or otherwise obtain the requisite manufacturing, marketing and sales
capabilities. If we are unable to successfully commercialize products resulting
from our proprietary research efforts, we will continue to incur losses.
We May Encounter Difficulties in Managing Our Growth. These Difficulties Could
Increase Our Losses.
We have experienced rapid and substantial growth that has placed and, if this
growth continues as expected, will continue to place a strain on our human and
capital resources. If we are unable to manage this growth effectively, our
losses could increase. The number of our employees increased from 74 at
December 31, 1998 to 143 at December 31, 1999 to 252 at December 31, 2000 to 266
at March 31, 2001. Our revenues increased from $2.7 million in 1998 to $14.0
million in 1999 to $24.5 million in 2000 and were $6.9 for the three months
ended March 31, 2001. Our ability to manage our operations and growth
effectively requires us to continue to expend funds to enhance our operational,
financial and management controls, reporting systems and procedures and to
attract and retain sufficient numbers of talented employees. If we are unable
to implement improvements to our management information and control systems in
an efficient or timely manner, or if we encounter deficiencies in existing
systems and controls, then management may have access to inadequate information
to manage our day-to-day operations. Failure to attract and retain sufficient
numbers of talented employees will further strain our human resources and could
impede our growth and ability to satisfy our obligations under collaboration
agreements. This would reduce our revenue, increase our losses and harm our
reputation in the marketplace.
The Operation of International Locations May Increase Operating Expenses and
Divert Management Attention.
We are expanding internationally. We recently acquired Maxygen ApS, a Danish
biotechnology company, and are now operating with international business
locations. Expansion into an international operational entity will require
additional management attention and resources. We have limited experience in
localizing our operations and in conforming our operations to local cultures,
standards and policies. We may have to compete with local companies who
understand the local situation better than we do. We may not be successful in
expanding into international locations or in generating revenues from foreign
operations. Even if we are successful, the costs of operating internationally
are expected to exceed our international revenues for at least the next several
years. As we continue to expand internationally, we are subject to risks of
doing business internationally, including the following:
. regulatory requirements that may limit or prevent the offering of our
products in local jurisdictions;
. government limitations on research and/or research involving
genetically engineered products or processes;
. difficulties in staffing and managing foreign operations;
. longer payment cycles, different accounting practices and problems in
collecting accounts receivable;
. cultural non-acceptance of genetic manipulation and genetic
engineering; and
. potentially adverse tax consequences.
To the extent we expand our international operations and have additional
portions of our international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in collecting accounts
receivable and risks relating to foreign currency exchange rate fluctuations.
Acquisitions Could Result in Dilution, Operating Difficulties and Other Harmful
Consequences.
If appropriate opportunities present themselves, we intend to acquire businesses
and 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 and future products during the period of negotiation
through closing and further diversion of such time after closing;
. decline in employee morale and retention issues resulting from
changes in compensation, reporting relationships, future prospects,
or the direction of the business;
14
. the need to integrate each company's accounting, management
information, human resource and other administrative systems to
permit effective management and the lack of control if such
integration is delayed or not implemented; and
. the need to implement controls, procedures and policies appropriate
for a larger public company in companies that before acquisition had
been smaller, private companies.
We do not have extensive experience in managing this integration process.
Moreover, the anticipated benefits of any or all of these acquisitions may not
be realized.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
harm our business. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all. Even if available, this financing may be dilutive.
Since Our Technologies Can Be Applied to Many Different Industries, If We Focus
Our Efforts on Industries That Fail to Produce Viable Product Candidates, We May
Fail to Capitalize on More Profitable Areas.
We have limited financial and managerial resources. Since our technologies may
be applicable to numerous, diverse industries, we must prioritize our
application of resources to discrete efforts. This requires us to focus on
product candidates in selected industries and forego efforts with regard to
other products and industries. Our decisions may not produce viable commercial
products and may divert our resources from more profitable market opportunities.
Public Perception of Ethical and Social Issues May Limit the Use of Our
Technologies, Which Could Reduce Our Revenues.
Our success will depend in part upon our ability to develop products discovered
through our proprietary and non-proprietary technologies. Governmental
authorities could, for social or other purposes, limit the use of genetic
processes or prohibit the practice of our directed molecular evolution
technologies or other technologies. Ethical and other concerns about our
directed molecular evolution technologies or other technologies, particularly
the use of genes from nature for commercial purposes, and products resulting
therefrom, could adversely affect their market acceptance.
If the Public Rejects Genetically Engineered Products, We Will Have Less Demand
for Our Products.
The commercial success of our potential products will depend in part on public
acceptance of the use of genetically engineered products including drugs, plants
and plant products. Claims that genetically engineered products are unsafe for
consumption or pose a danger to the environment may influence public attitudes.
Our genetically engineered products may not gain public acceptance. Negative
public reaction to genetically modified organisms and products could result in
greater government regulation of genetic research and resultant products,
including stricter labeling laws or regulations, and could cause a decrease in
the demand for our products.
The subject of genetically modified organisms has received negative publicity in
Europe and the United States, which has aroused public debate. The adverse
publicity could lead to greater regulation and trade restrictions on genetic
research and the resultant agricultural and other products could be subject to
greater domestic or international regulation. Such regulation and restrictions
could cause a decrease in the demand for our products.
Many Potential Competitors Who Have Greater Resources and Experience Than We Do
May Develop Products and Technologies That Make Ours Obsolete.
The biotechnology industry is characterized by rapid technological change, and
the area of gene research is a rapidly evolving field. Our future success will
depend on our ability to maintain a competitive position with respect to
technological advances. Rapid technological development by others may result in
our products and technologies becoming obsolete.
We face, and will continue to face, intense competition from organizations such
as large and small biotechnology companies, as well as academic and research
institutions and government agencies that are pursuing competing technologies
for modifying DNA and proteins. These organizations may develop technologies
that are alternatives to our technologies. Further, our competitors in the
directed molecular evolution field may be more effective at
15
implementing their technologies to develop commercial products. Some of these
competitors have entered into collaborations with leading companies within our
target markets to produce commercial products.
Any products that we develop through our technologies will compete in multiple,
highly competitive markets. Most of the organizations competing with us in the
markets for such products have greater capital resources, research and
development and marketing staffs and facilities and capabilities, and greater
experience in modifying DNA and proteins, obtaining regulatory approvals,
manufacturing products and marketing.
Accordingly, our competitors may be able to develop technologies and products
more easily, which would render our technologies and products and those of our
collaborators obsolete and noncompetitive.
Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our
Competitive Position.
Our success will depend in part on our ability to obtain patents and maintain
adequate protection of our other intellectual property for our technologies and
products in the U.S. and other countries. If we do not adequately protect our
intellectual property, competitors may be able to practice our technologies and
erode our competitive advantage. The laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting their proprietary
rights in these foreign countries. These problems can be caused by, for
example, a lack of rules and processes for defending intellectual property
rights.
The patent positions of biopharmaceutical and biotechnology companies, including
our patent position, are generally uncertain and involve complex legal and
factual questions. We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. We will apply for patents covering our
technologies and products as we deem appropriate. However, we may not obtain
patents on all inventions that we seek to protect with 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. Others may independently develop similar or alternative
technologies or design around our patented technologies. Furthermore, our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from developing competing products. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages.
We rely upon trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. We seek to protect our proprietary
information by entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose our proprietary information, and we may not be
able to meaningfully protect our trade secrets. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.
Litigation or Other Proceedings or Third Party Claims of Intellectual Property
Infringement Could Require Us to Spend Time and Money and Could Shut Down Some
of Our Operations.
Our commercial success depends in part on neither infringing patents nor
proprietary rights of third parties, nor breaching any licenses that we have
entered into with regard to our technologies and products. Others have filed,
and in the future are likely to file, patent applications covering genes or gene
fragments that we may wish to utilize with our proprietary technologies, or
products that are similar to products developed with the use of our technologies
or alternative methods of generating gene diversity. If these patent
applications result in issued patents and we wish to use the claimed technology,
we would need to obtain a license from the third party.
Third parties may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain patents in the
future and claim that use of our technologies infringes these patents. We could
incur substantial costs and diversion of 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, and such claims could result in the
award of substantial damages against us. In the event of a successful claim of
infringement against us, we may be
16
required to pay damages and obtain one or more licenses from third parties. We
may not be able to obtain these licenses at a reasonable cost, if at all. In
that event, we could encounter delays in product introductions while we attempt
to develop alternative methods or products or be required to cease
commercializing effected products.
We routinely monitor the public disclosures of other companies operating in our
industry regarding their technological development efforts. If we determine
that these efforts violate our intellectual property or other rights, we intend
to take appropriate action, which could include litigation. Any action we take
could result in substantial costs and diversion of management and technical
personnel. Furthermore, the outcome of any action we take to protect our rights
may not be resolved in our favor.
On April 27, 2000, we announced that we had initiated an arbitration proceeding
against Enchira in connection with Enchira's claim that it had developed a "new
gene shuffling" technology. We alleged that Enchira had breached the
confidentiality provisions and certain other terms of the Development and
License Agreement entered into by Enchira and Maxygen in 1997, pursuant to which
we disclosed confidential information regarding our MolecularBreeding directed
molecular evolution technologies to Enchira. An arbitration hearing was held in
November 2000 and on March 8, 2001 we announced that the arbitrator had found
that Enchira had breached three separate provisions of the Development and
License Agreement. The arbitrator found that the gene shuffling technology that
Enchira calls Rachitt, and claims as its own, "was derived from Maxygen's
technologies and has no notable or significant distinctions from those
technologies" and that "Maxygen is the exclusive owner of the gene shuffling
technology contained in Rachitt". The arbitrator also found that Enchira had
misused our confidential information. There will be further arbitration
proceedings to determine the remedies we will receive for Enchira's breaches of
the Agreement.
If We Lose Key Personnel or Are Unable to Attract and Retain Additional
Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to our success. We do not currently have sufficient executive
management personnel to execute fully our business plan. There is currently a
shortage of skilled executives, which is likely to continue. As a result,
competition for skilled personnel is intense, and the turnover rate can be high.
Although we believe we will be successful in attracting and retaining qualified
personnel, competition for experienced scientists from numerous companies and
academic and other research institutions may limit our ability to do so on
acceptable terms. Failure to attract and retain personnel could prevent us from
pursuing collaborations or developing our products or core technologies.
Our planned activities will require additional expertise in specific industries
and areas applicable to the products developed through our technologies. These
activities will require the addition of new personnel, including management, and
the development of additional expertise by existing management personnel. The
inability to acquire these services or to develop this expertise could impair
the growth, if any, of our business.
We Will Need Additional Capital in the Future. If Additional Capital is Not
Available, We Will Have to Curtail or Cease Operations.
Our future capital requirements will be substantial and will depend on many
factors including payments received under collaborative agreements and
government grants, the progress and scope of our collaborative and independent
research and development projects, the effect of any acquisitions, and the
filing, prosecution and enforcement of patent claims.
Changes may also occur that would consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital. If we fail to raise sufficient funds, we will have to
curtail or cease operations. We anticipate that existing cash and cash
equivalents and income earned thereon, together with anticipated cash flows from
operations, will enable us to maintain our currently planned operations for at
least the next 12 months. If our capital resources are insufficient to meet
future capital requirements, we will have to raise additional funds to continue
the development of our technologies and complete the commercialization of
products, if any, resulting from our technologies.
17
Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The
Government Has License Rights to Technology Developed With Its Funds.
We have received and expect to continue to receive funds under various U.S.
government research and technology development programs. The government may
reduce funding in the future for a number of reasons. For example, some
programs are subject to a yearly appropriations process in Congress.
Additionally, we may not receive funds under existing or future grants because
of budgeting constraints of the agency administering the program. There can be
no assurance that we will receive the entire funding under our existing or
future grants.
Our grants provide the U.S. government a non-exclusive, non-transferable, paid-
up license to practice for or on behalf of the U.S. inventions made with federal
funds. If the government exercises these rights, the U.S. government could use
these inventions and our potential market could be reduced.
Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain
Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be
Able to Commercialize Those Products.
The Food and Drug Administration must approve any vaccine or therapeutic product
before it can be marketed in the U.S. Before we can file a new drug application
or biologic license application with the FDA, the product candidate must undergo
extensive testing, including animal and human clinical trials, which can take
many years and require substantial expenditures. Data obtained from such
testing are susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. In addition, changes in regulatory policy for
product approval during the period of product development and regulatory agency
review of each submitted new application or product license application may
cause delays or rejections. The regulatory process is expensive and time
consuming. The regulatory agencies of foreign governments must also approve our
therapeutic products before the products can be sold in those other countries.
Because our products involve the application of new technologies and may be
based upon new therapeutic approaches they may be subject to substantial review
by government regulatory authorities and government regulatory authorities may
grant regulatory approvals more slowly for our products than for products using
more conventional technologies. We have not submitted an application to the FDA
or any other regulatory authority for any product candidate, and neither the FDA
nor any other regulatory authority has approved any therapeutic product
candidate developed with our MolecularBreeding directed molecular evolution
technologies for commercialization in the U.S. or elsewhere. We may not be able
to, or our collaborators may not be able to, conduct clinical testing or obtain
the necessary approvals from the FDA or other regulatory authorities for our
products.
Even after investing significant time and expenditures we may not obtain
regulatory approval for our products. Even if we receive regulatory approval,
this approval may entail limitations on the indicated uses for which we can
market a product. Further, once regulatory approval is obtained, a marketed
product and its manufacturer are subject to continual review, and discovery of
previously unknown problems with a product or manufacturer may result in
restrictions on the product, manufacturer or manufacturing facility, including
withdrawal of the product from the market. In certain countries, regulatory
agencies also set or approve prices.
Laws May Limit Our Provision of Genetically Engineered Agricultural Products in
the Future. These Laws Could Reduce Our Ability to Sell These Products.
We may develop genetically engineered agricultural products. The field-testing,
production and marketing of genetically engineered plants and plant products are
subject to federal, state, local and foreign governmental regulation.
Regulatory agencies administering existing or future regulations or legislation
may not allow us to produce and market our genetically engineered products in a
timely manner or under technically or commercially feasible conditions. In
addition, regulatory action or private litigation could result in expenses,
delays or other impediments to our product development programs or the
commercialization of resulting products.
The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as apply to foods developed through traditional
plant breeding. However, genetically engineered food products will be subject
to pre-market review if these products raise safety questions or are deemed to
be food additives. Our products may be subject to lengthy FDA reviews and
unfavorable FDA determinations if they raise questions, are deemed to be food
additives, or if the FDA changes its policy.
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The FDA has also announced in a policy statement that it will not require that
genetically engineered agricultural products be labeled as such, provided that
these products are as safe and have the same nutritional characteristics as
conventionally developed products. The FDA may reconsider or change its
labeling policies, or local or state authorities may enact labeling
requirements. Any such labeling requirements could reduce the demand for our
products.
The U.S. Department of Agriculture prohibits genetically engineered plants from
being grown and transported except pursuant to an exemption, or under strict
controls. If our future products are not exempted by the USDA, it may be
impossible to sell such products.
Adverse Events in the Field of Gene Therapy May Negatively Impact Regulatory
Approval or Public Perception of Any Gene Therapy Products We or Our
Collaborators May Develop.
Currently, we are not engaged in developing gene therapy products; however, we
may engage in these activities in the future either for our own account or with
collaborators. If we develop, or our collaborators develop, gene therapy
products, these products may encounter substantial delays in development and
approval due to the government regulation and approval process. Adverse events
reported in gene therapy clinical trials may lead to more government scrutiny of
proposed clinical trials of gene therapy products, stricter labeling
requirements for these products and delays in the approval of gene therapy
products for commercial sale.
The commercial success of any potential gene therapy products made by us or our
collaborators will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapies are unsafe, and gene therapy
products may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy could result in a decrease in demand
for any gene therapy products we or our collaborators may develop.
Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on
Pharmaceutical Products.
Our future products are expected to include pharmaceutical products. Our
ability and that of our collaborators to commercialize pharmaceutical products
developed with our technologies may depend in part on the extent to which
reimbursement for the cost of these products will be available from government
health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third party coverage will be available for any product
to enable us to maintain price levels sufficient to realize an appropriate
return on our investment in research and product development.
Our Collaborations With Outside Scientists May Be Subject to Change, Which Could
Limit Our Access to Their Expertise.
We work with scientific advisors, consultants and collaborators at academic and
other institutions. These scientists are not our employees and may have other
commitments that could limit their availability to us. Although our scientific
advisors generally agree not to do competing work, if a conflict of interest
between their work for us and their work for another entity arises, we may lose
their services. Although our scientific advisors and collaborators sign
agreements not to disclose our confidential information, it is possible that
certain of our valuable proprietary knowledge may become publicly known through
them.
We May Be Sued for Product Liability.
We may be held liable if any product we develop, or any product that is made
with the use or incorporation of, any of our technologies, causes injury or is
found otherwise unsuitable during product testing, manufacturing, marketing or
sale. These risks are inherent in the development of chemical, agricultural and
pharmaceutical products. Although we intend in the future to obtain product
liability insurance, we do not have such insurance currently and this insurance
may be prohibitively expensive, or may not fully cover our potential
liabilities. Inability to obtain sufficient insurance coverage at an acceptable
cost or otherwise to protect against potential product liability claims could
prevent or inhibit the commercialization of products developed by us or our
collaborators. If we are sued for any injury caused by our products, our
liability could exceed our total assets.
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We Use Hazardous Chemicals and Radioactive and Biological Materials in Our
Business. Any Claims Relating to Improper Handling, Storage or Disposal of
These Materials Could Be Time Consuming and Costly.
Our research and development processes involve the controlled use of hazardous
materials, including chemicals, radioactive and biological materials. Some of
these materials may be novel, including viruses with novel properties and animal
models for the study of viruses. Our operations also produce hazardous waste
products. Some of our work also involves the development of novel viruses and
viral animal models. We cannot eliminate the risk of accidental contamination
or discharge and any resultant injury from these materials. Federal, state and
local laws and regulations govern the use, manufacture, storage, handling and
disposal of these materials. We believe that our current operations comply in
all material respects with these laws and regulations. We could be subject to
civil damages in the event of an improper or unauthorized release of, or
exposure of individuals to, hazardous materials. In addition, claimants may sue
us for injury or contamination that results from our use or the use by third
parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development, or
production efforts. We believe that our current operations comply in all
material respects with applicable Environmental Protection Agency regulations.
In addition, certain of our collaborators are working with these types of
hazardous materials in connection with our collaborations. To our knowledge,
the work is performed in accordance with biosafety regulations. In the event of
a lawsuit or investigation, we could be held responsible for any injury caused
to persons or property by exposure to, or release of, these viruses and
hazardous materials. Further, under certain circumstances, we have agreed to
indemnify our collaborators against damages and other liabilities arising out of
development activities or products produced in connection with these
collaborations.
Our Stock Price Has Been, and May Continue to Be, Extremely Volatile.
The trading prices of life science company stocks in general, and ours in
particular, have experienced extreme price fluctuations in recent months. The
valuations of many life science companies without consistent product revenues
and earnings, including ours, are high based on conventional valuation standards
such as price to earnings and price to sales ratios. These trading prices and
valuations may not be sustained. Any negative change in the public's perception
of the prospects of biotechnology or life science companies could depress our
stock price regardless of our results of operations. Other broad market and
industry factors may decrease the trading price of our common stock, regardless
of our performance. Market fluctuations, as well as general political and
economic conditions such as recession or interest rate or currency rate
fluctuations, also may decrease the trading price of our common stock. In
addition, our stock price could be subject to wide fluctuations in response to
factors including the following:
. announcements of new technological innovations or new products by us
or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the biotechnology and life science
industries;
. changes in the market valuations of other biotechnology or life
science companies;
. developments in domestic and international governmental policy or
regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. developments in or challenges relating to patent or other proprietary
rights;
. period-to-period fluctuations in our operating results;
. future royalties from product sales, if any, by our strategic
partners; and
. sales of our common stock or other securities in the open market.
In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us,
we would incur substantial legal fees and our management's attention and
resources would be diverted from operating our business to respond to the
litigation.
20
We Expect that Our Quarterly Results of Operations Will Fluctuate, and This
Fluctuation Could Cause Our Stock Price to Decline.
Our quarterly operating results have fluctuated in the past and are likely to do
so in the future. These fluctuations could cause our stock price to fluctuate
significantly or decline. Some of the factors that could cause our operating
results to fluctuate include:
. expiration of research contracts with collaborators or government
research grants, which may not be renewed or replaced;
. the success rate of our discovery efforts leading to milestones and
royalties;
. the timing and willingness of collaborators to commercialize our
products, which would result in royalties; and
. general and industry specific economic conditions, which may affect our
collaborators' research and development expenditures.
A large portion of our expenses are relatively fixed, including expenses for
facilities, equipment and personnel. Accordingly, if revenues decline or do not
grow as anticipated due to expiration of research contracts or government
research grants, failure to obtain new contracts or other factors, we may not be
able to correspondingly reduce our operating expenses. In addition, we plan to
significantly increase operating expenses in 2001. Failure to achieve
anticipated levels of revenues could therefore significantly harm our operating
results for a particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters
may not meet the expectations of stock market analysts and investors. In that
case, our stock price would likely decline.
Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make
Decisions that Are in the Best Interests of All Stockholders.
Our executive officers, directors and principal stockholders together control
approximately 34% of our outstanding common stock, including GlaxoSmithKline
plc, which owns approximately 19% of our outstanding common stock. As a result,
these stockholders, if they act together, and GlaxoSmithKline plc by itself, are
able to exert a significant degree of influence over our management and affairs
and over matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change in control of Maxygen
and might affect the market price of our common stock, even when a change may be
in the best interests of all stockholders. In addition, the interests of this
concentration of ownership may not always coincide with our interests or the
interests of other stockholders and accordingly, they could cause us to enter
into transactions or agreements that we would not otherwise consider.
21
Item 3
Quantitative And Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange. To mitigate some of these risks, we utilize
currency forward contracts. We do not use derivative financial instruments for
speculative or trading purposes.
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents, short-
term and long-term investments in a variety of securities, including corporate
obligations and money market funds. As of March 31, 2001, approximately 77% of
our total portfolio will mature in one year or less, with the remainder maturing
in less than two years.
The following table represents the fair value balance of our cash, cash
equivalents, short-term and long-term investments that are subject to interest
rate risk by year of expected maturity and average interest rates as of March
31, 2001 (dollars in thousands):
2001 2002
----------- ---------
Cash and cash equivalents.............. $120,425 --
Average interest rates................. 5.40% --
Short-term investments................. $ 76,170 --
Average interest rates................. 7.05% --
Long-term investments.................. -- $58,301
Average interest rates................. -- 5.48%
We did not hold derivative instruments intended to mitigate interest rate risk
as of March 31, 2001, and we have never held such instruments in the past. In
addition, we had outstanding debt related to equipment financing of $2.9 million
as of March 31, 2001, with a range of interest rates of between 11.73% and
12.96%.
Foreign Currency Risk
A substantial majority of our revenue, expense and capital purchasing activities
are transacted in U.S. dollars. However, beginning in 2000 we began to enter
into transactions in Danish kroner. To protect against reductions in value and
the volatility of future cash flows caused by changes in foreign exchange rates,
we have established balance sheet hedging programs. Currency forward contracts
are utilized in these hedging programs. Our hedging programs reduce, but do not
always entirely eliminate, the impact of foreign currency exchange rate
movements. Gains and losses on these foreign currency investments would
generally be offset by corresponding losses and gains on the related hedging
instruments, resulting in negligible net exposure to Maxygen.
At March 31, 2001 we had a total of $12.4 million committed in foreign currency
cash flow forward contracts. The fair value of these forward contracts as at
March 31, 2001 was immaterial.
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Part II - Other Information
Item 1
Legal Proceedings
Not applicable.
Item 2
Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On February 28, 2001 we issued 709 shares of our common stock to a consultant in
partial payment for consulting services rendered to us. There was no
underwriter employed in connection with the transaction. The issuance of
securities was deemed to be exempt from registration under the Securities Act of
1933, as amended (the "Securities Act") in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
The recipient of the securities represented his intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificate issued in the transaction. The recipient either received adequate
information about us or had access, through employment or other relationships,
to such information. The recipient was knowledgeable, sophisticated and
experienced in making investment decisions of this kind and received adequate
information about us.
Application of Initial Public Offering Proceeds
The effective date of our first registration statement, filed on Form S-1 under
the Securities Act (No. 333-89413) relating to our initial public offering of
common stock, was December 15, 1999. A total of 6,900,000 shares of our common
stock were sold at a price of $16.00 per share to an underwriting syndicate led
by Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and Invemed
Associates LLC. Of these 6,900,000 shares, 900,000 were issued upon exercise of
the underwriters' over-allotment option. The offering commenced on December 16,
1999 and closed on December 21, 1999. The initial public offering resulted in
gross proceeds of $110.4 million, $7.7 million of which was applied toward the
underwriting discount. Expenses related to the offering totaled approximately
$1.7 million. Net proceeds to us were approximately $101.0 million. From the
time of receipt through March 31, 2001, the proceeds were applied toward:
. purchases and installation of equipment and build-out of facilities,
$6.6 million;
. repayment of indebtedness, $315,000;
. working capital, $16.2 million; and
. temporary investments in certificates of deposits, mutual funds and
corporate debt securities, $77.9 million.
The use of the proceeds from the offering does not represent a material change
in the use of the proceeds described in the registration statement.
23
Item 3
Defaults Upon Senior Securities
Not applicable.
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5
Other Information
Not applicable.
Item 6
Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
None.
(b) There were no reports on Form 8-K filed during the quarter ended March 31,
2001.
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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.
May 11, 2001 By: /s/ Russell J. Howard
--------------------------------
Russell J. Howard
Chief Executive Officer
May 11, 2001 By: /s/ Lawrence Briscoe
--------------------------------
Lawrence Briscoe
Chief Financial Officer and
Senior Vice President
25