##### Table of Contents



United States 
Securities and Exchange Commission
  
 Form 10-Q
 
   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)
 (650) 298-5300  (Registrants telephone number, including area code)
 
  Yes
[ X ]
    
    No [   ]
    Yes [   ]
    
    No [ X ]




---



##### 



MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
  Part I
    
    FINANCIAL INFORMATIONItem 1:
    
    Financial Statements:Condensed Consolidated Balance Sheets as of December 31, 2005 and September 30, 2006
    
    
    1Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2005 and 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2005 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2:
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3:
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4:
    
    Controls and Procedures
    
    
    28Part II
    
    OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    30Item 1A:
    
    Risk Factors
    
    
    30Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3:
    
    Defaults Upon Senior Securities
    
    
    42Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    42Item 5:
    
    Other Information
    
    
    42Item 6:
    
    Exhibits
    
    

    42SIGNATURES
    
    
    43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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Forward Looking Statements
  
    
    our ability to develop products suitable for commercialization;
    
    our predicted development and commercial timelines for any of our potential products,
including the timing of any commencement of clinical trials of any product candidate and
the progress of such clinical trials;
    
    the commercial success of any of our products that may be marketed or sold;
    
    our liquidity and future financial performance;
    
    the establishment, development and maintenance of any manufacturing or collaborative
relationships;
    
    the effectiveness of our MolecularBreeding directed evolution platform and other
technologies and processes;
    
    our ability to protect our intellectual property portfolio and rights;
    
    our ability to identify and develop new potential products;
    
    the attributes of any products we may develop; and
    
    our business strategies and plans.




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PartI  Financial Information
 
 Item 1. Financial Statements
 MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts)
 December 31,
    
    
    September 30,2005
    
    
    2006(Note 1)
    
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,940
    
    
    $
    33,522Short-term investments
    
    
    127,336
    
    
    
    120,567Accounts receivable and other receivables
    
    
    6,076
    
    
    
    3,427Prepaid expenses and other current assets
    
    
    3,530
    
    
    
    3,616Total current assets
    
    
    163,882
    
    
    
    161,132Property and equipment, net
    
    
    4,068
    
    
    
    3,427Goodwill
    
    
    12,192
    
    
    
    12,192Long-term investments
    
    
    34,047
    
    
    
    16,103Deposits and other long-term assets
    
    
    334
    
    
    
    349Total assets
    
    $
    214,523
    
    
    $
    193,203LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,540
    
    
    $
    1,707Accrued compensation
    
    
    4,323
    
    
    
    3,727Other accrued liabilities
    
    
    3,121
    
    
    
    2,378Deferred revenue
    
    
    2,668
    
    
    
    1,788Total current liabilities
    
    
    11,652
    
    
    
    9,600Non-current deferred revenue
    
    
    5,517
    
    
    
    4,325Other long-term liabilities
    
    
    10
    
    
    
    Stockholders equity:Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2005 and September 30, 2006
    
    
    
    
    
    
    Common stock, $0.0001 par value: 100,000,000 shares
authorized, 35,922,178 and 36,095,827 shares issued and
outstanding at December 31, 2005 and September 30,
2006, respectively
    
    
    3
    
    
    
    4Additional paid-in capital
    
    
    403,120
    
    
    
    408,972Accumulated other comprehensive loss
    
    
    (1,557)
    
    
    
    (654)Accumulated deficit
    
    
    (204,222)
    
    
    
    (229,044)Total stockholders equity
    
    
    197,344
    
    
    
    179,278Total liabilities and stockholders equity
    
    $
    214,523
    
    
    $
    193,203
  1




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MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(unaudited)Collaborative research and development revenue
    
    $
    106
    
    
    $
    3,201
    
    
    $
    6,509
    
    
    $
    15,218Grant revenue
    
    
    629
    
    
    
    1,040
    
    
    
    1,721
    
    
    
    3,293Total revenues
    
    
    735
    
    
    
    4,241
    
    
    
    8,230
    
    
    
    18,511Operating expenses:Research and development
    
    
    9,986
    
    
    
    12,020
    
    
    
    31,090
    
    
    
    35,494General and administrative
    
    
    2,997
    
    
    
    4,547
    
    
    
    10,144
    
    
    
    12,930Total operating expenses
    
    
    12,983
    
    
    
    16,567
    
    
    
    41,234
    
    
    
    48,424Loss from operations
    
    
    (12,248)
    
    
    
    (12,326)
    
    
    
    (33,004)
    
    
    
    (29,913)Interest income and other (expense), net
    
    
    1,659
    
    
    
    2,267
    
    
    
    3,808
    
    
    
    6,091Equity in net loss of minority investee
    
    
    
    
    
    
    (658)
    
    
    
    
    
    
    
    (1,000)Loss from continuing operations
    
    
    (10,589)
    
    
    
    (10,717)
    
    
    
    (29,196)
    
    
    
    (24,822)Cumulative effect adjustment
    
    
    
    
    
    
    
    
    
    
    16,616
    
    
    
    Net loss
    
    
    (10,589)
    
    
    
    (10,717)
    
    
    
    (12,580)
    
    
    
    (24,822)Subsidiary preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    (167)
    
    
    
    Loss applicable to common stockholders
    
    $
    (10,589)
    
    
    $
    (10,717)
    
    
    $
    (12,747)
    
    
    $
    (24,822)Basic and diluted loss per share:Continuing operations
    
    $
    (0.30)
    
    
    $
    (0.30)
    
    
    $
    (0.82)
    
    
    $
    (0.69)Cumulative effect adjustment
    
    $
    
    
    
    $
    
    
    
    $
    0.47
    
    
    $
    Applicable to common stockholders
    
    $
    (0.30)
    
    
    $
    (0.30)
    
    
    $
    (0.36)
    
    
    $
    (0.69)Shares used in basic and diluted per share
calculations
    
    
    35,812
    
    
    
    36,078
    
    
    
    35,724
    
    
    
    36,025
  2




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MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Nine Months endedSeptember 30,2005
    
    
    2006(unaudited)Operating activitiesNet loss
    
    $
    (12,580)
    
    
    $
    (24,822)Cumulative effect adjustment
    
    
    16,616
    
    
    
    Loss from continuing operations
    
    
    (29,196)
    
    
    
    (24,822)Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:Depreciation and amortization
    
    
    2,829
    
    
    
    1,787Equity in losses of minority investee
    
    
    
    
    
    
    1,000Non-cash stock compensation
    
    
    11
    
    
    
    4,600Common stock issued and stock options granted to
consultants for services rendered and for certain
technology rights
    
    
    110
    
    
    
    540Changes in operating assets and liabilities:Accounts receivable and other receivables
    
    
    565
    
    
    
    2,649Prepaid expenses and other current assets
    
    
    77
    
    
    
    361Deposits and other assets
    
    
    2
    
    
    
    (15)Accounts payable
    
    
    624
    
    
    
    167Accrued compensation
    
    
    (1,150)
    
    
    
    (598)Accrued program termination costs
    
    
    (2,209)
    
    
    
    Other accrued liabilities
    
    
    605
    
    
    
    (753)Taxes payable
    
    
    (921)
    
    
    
    Deferred revenue
    
    
    (458)
    
    
    
    (2,072)Net cash used in operating activities
    
    
    (29,111)
    
    
    
    (17,156)Investing activitiesPurchases of available-for-sale securities
    
    
    (147,735)
    
    
    
    (99,635)Maturities of available-for-sale securities
    
    
    175,757
    
    
    
    124,799Investment in minority investee
    
    
    
    
    
    
    (1,000)Cash used in acquisition, net of cash acquired
    
    
    (2,617)
    
    
    
    Acquisition of property and equipment
    
    
    (1,954)
    
    
    
    (1,146)Net cash provided by investing activities
    
    
    23,451
    
    
    
    23,018Financing activitiesRepayments under equipment financing obligations
    
    
    (115)
    
    
    
    Borrowings under equipment financing obligations
    
    
    1,229
    
    
    
    Proceeds from issuance of common stock
    
    
    1,259
    
    
    
    713Net cash provided by financing activities
    
    
    2,373
    
    
    
    713Codexis related net adjustment
    
    
    (2,365)
    
    
    
    Effect of exchange rate changes on cash and cash equivalents
    
    
    302
    
    
    
    7Net increase (decrease) in cash and cash equivalents
    
    
    (5,350)
    
    
    
    6,582Cash and cash equivalents at beginning of period
    
    
    40,415
    
    
    
    26,940Cash and cash equivalents at end of period
    
    $
    35,065
    
    
    $
    33,522Supplemental Cash Flow InformationNon-cash transactions:Codexis common stock issued in acquisition
    
    $
    (188)
    
    
    
    
  3




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MAXYGEN, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
     Principles of Consolidation
   4




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Cumulative Effect Adjustment
  Reclassifications
  5




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Revenue Recognition
     6




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Loss Per Common Share
   Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Loss applicable to common stockholders
    
    $
    (10,589)
    
    
    $
    (10,717)
    
    
    $
    (12,747)
    
    
    $
    (24,822)Basic and diluted:Weighted-average shares used in
computing basic and diluted loss
per share
    
    
    35,812
    
    
    
    36,078
    
    
    
    35,724
    
    
    
    36,025Basic and diluted loss per common
share
    
    $
    (0.30)
    
    
    $
    (0.30)
    
    
    $
    (0.36)
    
    
    $
    (0.69)
  Comprehensive Loss
  Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Net loss
    
    $
    (10,589)
    
    
    $
    (10,717)
    
    
    $
    (12,580)
    
    
    $
    (24,822)Changes in unrealized gain (loss) on
available-for-sale securities
    
    
    (134)
    
    
    
    443
    
    
    
    57
    
    
    
    449Changes in foreign currency translation
adjustments
    
    
    (24)
    
    
    
    (165)
    
    
    
    (452)
    
    
    
    454Comprehensive loss
    
    $
    (10,747)
    
    
    $
    (10,439)
    
    
    $
    (12,975)
    
    
    $
    (23,919)
 7




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December 31,
    
    
    September 30,2005
    
    
    2006Unrealized gain on available-for-sale securities
    
    $
    
    
    
    $
    82Unrealized losses on available-for-sale securities
    
    
    (592)
    
    
    
    (225)Foreign currency translation adjustments
    
    
    (579)
    
    
    
    (572)Unrealized
gains(losses) on foreign currency contracts
    
    
    (386)
    
    
    
    61Accumulated other comprehensive loss
    
    $
    (1,557)
    
    
    $
    (654)
 Recent Accounting Pronouncements
    Stock-Based Compensation
  8




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Stock Options
  9




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Three Months ended
    
    Nine Months endedSeptember 30, 2006
    
    September 30, 2006U.S.
    
    Danish
    
    U.S.
    
    DanishEmployees
    
    Employees
    
    Employees
    
    EmployeesExpected dividend yield
    

    0.0%

    

    0.0%

    

    0.0%

    

    0.0%Risk-free interest rate
rangeOptions
    
    
    5.11
    %
    

    5.17%

    
    4.30% to 5.11%
    
    4.34% to 5.17%Risk-free interest rate
rangeESPP
    
    4.74% to 5.05%
    

    

    
    3.20% to 5.05%
    
    
    Expected lifeOptions
    
    5.13 years
    
    2.4 years
    
    5.13 years
    
    2.4 yearsExpected lifeESPP
    
    0.48 years
    

    

    
    0.48 years to 0.92 years
    
    
    Expected volatility-Options
    
    
    53.70
    %
    

    44.67%

    
    53.70% to 56.42%
    
    44.38% to 45.78%
   Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicPrice Per
    
    
    Term
    
    
    ValueShares
    
    
    Share
    
    
    (in years)
    
    

(in
thousands)Options outstanding at December 31, 2005
    
    
    9,401,599
    
    
    $
    16.13Granted
    
    
    2,132,836
    
    
    $
    7.80Exercised
    
    
    (101,555)
    
    
    $
    3.97Canceled
    
    
    (658,797)
    
    
    $
    40.78Options outstanding at September 30, 2006
    
    
    10,774,083
    
    
    $
    13.09
    
    
    
    6.75
    
    
    $
    6,485Options exercisable at September 30, 2006
    
    
    7,114,791
    
    
    $
    15.44
    
    
    
    5.72
    
    
    $
    4,555
  10




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Options Outstanding
    
    
    Options ExercisableWeighted-AverageNumber of
    
    
    Remaining
    
    
    Weighted-
    
    
    Number of
    
    
    Weighted-Range of
    
    Shares
    
    
    Contractual Life
    
    
    Average
    
    
    Shares
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    (in years)
    
    
    Exercise Price
    
    
    Outstanding
    
    
    Exercise Price$0.20 - $7.00
    
    
    1,377,260
    
    
    
    6.64
    
    
    $
    5.50
    
    
    
    869,874
    
    
    $
    4.62$7.08 - $7.40
    
    
    1,497,169
    
    
    
    6.85
    
    
    $
    7.33
    
    
    
    1,310,271
    
    
    $
    7.36$7.47 - $7.89
    
    
    1,818,982
    
    
    
    8,78
    
    
    $
    7.73
    
    
    
    116,278
    
    
    $
    7.54$7.92 - $10.33
    
    
    1,221,042
    
    
    
    8.04
    
    
    $
    9.20
    
    
    
    641,315
    
    
    $
    9.56$10.41 - $10.76
    
    
    1,277,872
    
    
    
    6.64
    
    
    $
    10.58
    
    
    
    1,121,007
    
    
    $
    10.59$10.80 - $12.44
    
    
    1,237,860
    
    
    
    7.03
    
    
    $
    12.02
    
    
    
    712,148
    
    
    $
    11.95$12.99 - $17.20
    
    
    1,116,807
    
    
    
    4.78
    
    
    $
    13.80
    
    
    
    1,116,807
    
    
    $
    13.80$17.41 - $53.75
    
    
    796,925
    
    
    
    4.19
    
    
    $
    36.12
    
    
    
    796,925
    
    
    $
    36.12$56.88 - $59.81
    
    
    430,166
    
    
    
    3.76
    
    
    $
    57.17
    
    
    
    430,166
    
    
    $
    57.1710,774,083
    
    
    
    
    
    
    
    
    
    
    
    7,114,791
 Employee Stock Purchase Plan
  Pro Forma Information under SFAS 123 for Periods Prior to 2006
  11




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Three Months
    
    
    Nine Monthsended
    
    
    endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2005
    
    
    2005Net loss, as reported
    
    $
    (10,589)
    
    
    $
    (12,580)Add: Stock based employee compensation cost included in the
determination of net loss, as reported
    
    
    
    
    
    
    Deduct: Total stock based employee compensation expense
determined under the fair value-based method for all
awards
    
    
    (2,136)
    
    
    
    (4,782)Pro forma net loss
    
    $
    (12,725)
    
    
    $
    (17,362)Loss per common share:Basic and diluted
    
    $
    (0.30)
    
    
    $
    (0.35)Basic and diluted  pro forma
    
    $
    (0.36)
    
    
    $
    (0.49)
  Three Months
    
    Nine Monthsended
    
    endedSeptember 30,
    
    September 30,2005
    
    2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate rangeOptions
    
    
    3.92
    %
    
    3.71% to 3.92%Risk-free interest rate rangeESPP
    
    3.20% to 3.38%
    
    1.23% to 3.38%Expected lifeOptions
    
    4 years
    
    4 yearsExpected lifeESPP
    
    0.5 years
    
    0.5 years to 0.85 yearsExpected volatility
    
    
    52.82
    %
    
    52.82% to 54.69%
  12




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Valuation and Expense Information under SFAS 123(R)
  Three Months
    
    
    Nine Monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2006
    
    
    2006Research and development
    
    $
    564
    
    
    $
    1,595General and administrative
    
    
    1,240
    
    
    
    3,355Stock-based compensation expense before income taxes
    
    
    1,804
    
    
    
    4,950Income tax benefit
    
    
    
    
    
    
    Total stock-based compensation expense after income taxes
    
    $
    1,804
    
    
    $
    4,950
  2. Cash Equivalents and Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    26,055
    
    
    $
    
    
    
    $
    
    
    
    $
    26,055Commercial paper
    
    
    32,565
    
    
    
    37
    
    
    
    
    
    
    
    32,602Corporate bonds
    
    
    47,726
    
    
    
    6
    
    
    
    (29)
    
    
    
    47,703U.S. government agency securities
    
    
    63,989
    
    
    
    39
    
    
    
    (196)
    
    
    
    63,832Total
    
    
    170,335
    
    
    
    82
    
    
    
    (225)
    
    
    
    170,192Less amounts classified as cash
equivalents
    
    
    (33,518)
    
    
    
    (4)
    
    
    
    
    
    
    
    (33,522)Total investments
    
    $
    136,817
    
    
    $
    78
    
    
    $
    (225
    )
    
    $
    136,670
  13




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Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue within one year
    
    $
    120,748
    
    
    $
    120,567Due after one year
    
    
    16,069
    
    
    
    16,103$
    136,817
    
    
    $
    136,670
 3. Derivatives and Financial Instruments
       14




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4. Litigation
 In
re Initial Public Offering Securities Litigation
 In re Initial Public Offering Securities Litigation
    5. Segment Information
   15




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##### Table of Contents



Segment Earnings
 (in thousands)
    
    Human
    
    Chemicals
    
    Maxygen, Inc.Therapeutics
    
    (Codexis)
    
    ConsolidatedNine months ended September 30, 2005Segment loss
    
    $
    (31,558
    )
    
    $
    (1,325
    )
    
    $
    (32,883
    )Stock compensation
    
    
    (121
    )
    
    
    
    
    
    
    (121
    )Interest income and other (expense), net
    
    
    3,788
    
    
    
    20
    
    
    
    3,808Loss from continuing operations
    
    
    (27,891
    )
    
    
    (1,305
    )
    
    
    (29,196
    )Cumulative effect adjustment
    
    
    16,616
    
    
    
    
    
    
    
    16,616Subsidiary preferred stock accretion
    
    
    
    
    
    
    (167
    )
    
    
    (167
    )Loss applicable to common stockholders
    
    $
    (11,275
    )
    
    $
    (1,472
    )
    
    $
    (12,747
    )(in thousands)
    
    Human
    
    Chemicals
    
    Maxygen, Inc.Therapeutics
    
    (Codexis)
    
    ConsolidatedNine months ended September 30, 2006Segment loss
    
    $
    (29,913
    )
    
    
    
    
    
    $
    (29,913
    )Interest income and other (expense), net
    
    
    6,091
    
    
    
    
    
    
    
    6,091Equity in net loss of minority investee
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )Loss from continuing operations
    
    
    (24,822
    )
    
    
    
    
    
    
    (24,822
    )Loss applicable to common stockholders
    
    $
    (24,822
    )
    
    
    
    
    
    $
    (24,822
    )
 Segment Revenue
  Nine Months endedSeptember 30,2005
    
    
    2006Human therapeutics
    
    $
    6,720
    
    
    $
    18,511Chemicals
    
    
    1,510
    
    
    
    Total revenue
    
    $
    8,230
    
    
    $
    18,511
 16




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##### Table of Contents



Identifiable Assets
  December 31,
    
    
    September 30,2005
    
    
    2006Human therapeutics
    
    $
    214,523
    
    
    $
    193,203Chemicals
    
    
    
    
    
    
    Total assets
    
    $
    214,523
    
    
    $
    193,203
 6. Commitments
   For the remainder of 2006
    
    $
    3,640
 Year endingDecember 31,2007
    
    $
    6,8652008
    
    
    2,673Thereafter
    
    
    199Total commitments beyond current year
    
    $
    9,737
 7. Codexis
  8. Guarantees and Indemnifications
   17




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9. Related Party Transactions
  10. Subsequent Events
  18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Executive Summary
       19




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Critical Accounting Policies and Estimates
  20




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Revenue Recognition  Non-Refundable Up-Front Payments
  Stock-Based Compensation
   21




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Results of Operations
 Revenues
     22




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Nine Months endedSeptember 30,2005
    
    
    2006Human therapeutics
    
    $
    6,720
    
    
    $
    18,511Chemicals
    
    
    1,510
    
    
    
    Total revenue
    
    $
    8,230
    
    
    $
    18,511
 Research and Development Expenses
    23




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Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Collaborative projects funded by third parties(1)
    
    $
    1,526
    
    
    $
    3,356
    
    
    $
    5,644
    
    
    $
    10,328Internal projects
    
    
    8,460
    
    
    
    8,664
    
    
    
    25,446
    
    
    
    25,166Total
    
    $
    9,986
    
    
    $
    12,020
    
    
    $
    31,090
    
    
    $
    35,494
 
 (1) Research and development expenses related to collaborative projects funded by third
parties are less than the reported revenues due to the amortization of non-refundable up-front
payments, as well as a portion of the collaborative research and development revenue that is
charged for general and administrative expenses.   General and Administrative Expenses
  24




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Interest Income and Other (Expense), net
  Equity in Net Loss of Minority Investee
  Cumulative Effect Adjustment
  25




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Subsidiary Preferred Stock Accretion
  Recent Accounting Pronouncements
    26




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Liquidity and Capital Resources
       Payments
Due by PeriodMoreContractual Obligations
    
    Total

    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    than 51 year
    
    
    years
    
    
    years
    
    
    yearsOperating Lease Obligations
    
    $
    3,460
    
    
    $
    843
    
    
    $
    2,418
    
    
    $
    199
    
    
    $
    Purchase Obligations
    
    
    9,917
    
    
    
    2,797
    
    
    
    7,120
    
    
    
    
    
    
    
    Total
    
    $
    13,377
    
    
    $
    3,640
    
    
    $
    9,538
    
    
    $
    199
    
    
    $
    
  27




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Item 3. Quantitative And Qualitative Disclosures About Market Risk
 Market risk management
  
 Item 4. Controls and Procedures
  Controls Evaluations.
 CEO and CFO Certifications.
 Definition of Disclosure Controls.
 Definition of Internal Control.
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Limitations on the Effectiveness of Controls.
 Scope of the Controls Evaluation.
  Quarterly Reports
 Quarterly Evaluation of Disclosure Controls.
 Quarterly Evaluation of Changes in Internal Control.
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Part II  Other Information
 
 Item 1. Legal Proceedings
 In re Initial Public
Offering Securities Litigation
 In re Initial Public Offering Securities Litigation
  
 Item 1A. Risk Factors
 You should carefully consider the risks described below, together with all of the other
information included in this report, in 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 may not achieve
or maintain profitability.
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We are an early stage company deploying unproven technologies. If we do not develop
commercially successful products, we may be forced to cease operations.
  Our revenues, expenses and operating results are subject to fluctuations that may cause our
stock price to decline.
  
    
    termination of research and development contracts with collaborators or government
research grants, which may not be renewed or replaced;
    
    the success rate of our development or discovery efforts leading to milestones and
royalties;
    
    timing of licensing fees or the achievement of milestones under new or existing
licensing and collaborative arrangements;
    
    timing of expenses, particularly with respect to contract manufacturing, pre-clinical
studies and clinical trials;
    
    the timing and willingness of collaborators to commercialize our products, which would
result in royalties to us; and
    
    general and industry specific economic conditions, which may affect our collaborators
research and development expenditures.
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Our revenues are substantially dependent on a limited number of collaborative arrangements and
government grants, and our inability to establish or maintain collaborations or grants would
adversely impact our revenues, financial position and results of operation.
  Drug development is a long, expensive and uncertain process and may not result in the
development of any commercially successful products.
    Our potential products are subject to a lengthy and uncertain regulatory process. If our
potential products are not approved, we will not be able to commercialize those products.
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Clinical trials for MAXY-G34, MAXY-alpha or any of our other current or future product
candidates could take a long time to gain regulatory approval or may never gain approval, which
could reduce or eliminate our revenue by delaying or terminating the potential commercialization of
our product candidates.
   
    
    deficiencies in the conduct of the clinical trials;
    
    negative or inconclusive results from the clinical trials that necessitate additional clinical studies;
    
    difficulties or delays in identifying and enrolling patients who meet trial eligibility criteria;
    
    delays in obtaining or maintaining required approvals from institutions, review boards
or other reviewing entities at clinical sites;
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
    
    inadequate supply or deficient quality of product candidate materials necessary for the
conduct of the clinical trials;
    
    the occurrence of unacceptable toxicities or unforeseen adverse side effects, especially
as compared to currently approved drugs intended to treat the same indications;
    
    our lack of financial resources to continue the development of a product candidate;
    
    future legislation or administrative action or changes in FDA policy during the period
of product development, clinical trials and FDA regulatory review; or
    
    other reasons that are internal to the businesses of our collaborative partners, which
they may not share with us.
   The manufacturing of our product candidates presents technological, logistical and regulatory
risks, each of which may adversely affect our potential revenues.
  
    
    before we can obtain approval of any of our products or product candidates for the
treatment of a particular disease or condition, we must demonstrate to the satisfaction of
the FDA and other governmental authorities that the drug manufactured for the clinical
trials is comparable to the drug manufactured for commercial use and that the manufacturing
facility complies with applicable laws and regulations;
    
    it may not be technically feasible to scale up an existing manufacturing process to meet
demand or such scale-up may take longer than anticipated; and
    
    failure to comply with strictly enforced Good Manufacturing Practices (GMP) regulations
and similar foreign standards may result in delays in product approval or withdrawal of an
approved product from the market.
  34




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Our manufacturing strategy, which relies on third-party manufacturers, exposes us to
additional risks.
   If our collaborations are not successful, we may not be able to effectively develop and market
some of our products.
    35




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We conduct proprietary research programs, and any conflicts with our collaborators or any
inability to commercialize products resulting from this research could harm our business.
     Any inability to adequately protect our proprietary technologies could harm our competitive
position.
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Litigation or other proceedings or third party claims of intellectual property infringement
could require us to spend time and money and could require us to shut down some of our operations.
    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.
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We may need additional capital in the future. If additional capital is not available, we may
have to curtail or cease operations.
   Many potential competitors who have greater resources and experience than we do may develop
products and technologies that make ours obsolete.
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Legislative actions, recent and potential new accounting pronouncements and higher compliance
costs are likely to adversely impact our future financial position and results of operations.
   If we do not attract and retain key employees, our business could be impaired.
  The operation of international locations may increase operating expenses and divert management
attention.
  39




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
    
    regulatory requirements that may limit or prevent the offering of our products in local
jurisdictions;
    
    local legal and governmental limitations on company-wide employee benefit practices,
such as the operation of our employee stock option plan in local jurisdictions;
    
    government limitations on research and/or research involving genetically engineered
products or processes;
    
    difficulties in staffing and managing foreign operations;
    
    currency exchange risks; and
    
    potentially adverse tax consequences.
 Acquisitions could result in dilution, operating difficulties and other harmful consequences.
  
    
    diversion of management time (both ours and that of the acquired company) from focus on
operating the businesses to issues of integration during the period of negotiation through
closing and further diversion of such time after closing;
    
    decline in employee morale and retention issues resulting from changes in compensation,
reporting relationships, future prospects, or the direction of the business;
    
    the need to integrate each companys accounting, management information, human resource
and other administrative systems to permit effective management and the lack of control if
such integration is delayed or not implemented; and
    
    the need to implement controls, procedures and policies appropriate for a larger public
company in companies that before acquisition had been smaller, private companies.
   Our stock price has been, and may continue to be, extremely volatile, and an investment in our
stock could decline in value.
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
    
    our failure to meet our publicly announced revenue and/or expense projections and/or
product development timetables;
    
    adverse results or delays in preclinical development or clinical trials;
    
    any decisions to discontinue or delay development programs or clinical trials;
    
    announcements of new technological innovations or new products by us or our competitors;
    
    conditions or trends in the biotechnology and life science industries;
    
    changes in the market valuations of other biotechnology or life science companies;
    
    developments in domestic and international governmental policy or regulations;
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    changes in general economic, political and market conditions, such as recessions,
interest rate changes, terrorist acts and other factors;
    
    developments in or challenges relating to patent or other proprietary rights; and
    
    sales of our common stock or other securities in the open market.
  Substantial sales of shares may adversely impact the market price of our common stock.
  Some of our existing stockholders can exert control over us, and may not make decisions that
are in the best interests of all stockholders.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Exhibits
  10.1
    
    First Amendment to Lease, dated as of August 24, 2006, by and between
Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to
Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with
the Securities and Exchange Commission on August 25, 2006)10.2
    
    Fifth Amendment to Lease, dated as of August 24, 2006, by and between
Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to
Exhibit 10.2 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with
the Securities and Exchange Commission on August 25, 2006)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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Signatures
  
 November 7, 2006
    
    By:
    
    /s/ Russell J. HowardRussell J. HowardChief Executive OfficerNovember 7, 2006
    
    By:
    
    /s/ Lawrence W. BriscoeLawrence W. BriscoeChief Financial Officer
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Exhibit Index
 10.1
    
    First Amendment to Lease, dated as of August 24, 2006, by and between
Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to
Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with
the Securities and Exchange Commission on August 25, 2006)10.2
    
    Fifth Amendment to Lease, dated as of August 24, 2006, by and between
Metropolitan Life Insurance Company and Maxygen, Inc. (incorporated by reference to
Exhibit 10.2 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with
the Securities and Exchange Commission on August 25, 2006)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 44