##### Table of Contents



United StatesSecurities 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 September 30, 2008
 Commission file number 000-28401
 MAXYGEN, INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State of incorporation)
    
    77-0449487(I.R.S. Employer Identification No.)
 515 Galveston Drive
Redwood City, California 94063  (Address of principal executive offices, including zip code)
 (650) 298-5300  (Registrants telephone number, including area code)
 
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




---



##### 



MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2008
 INDEXPart I FINANCIAL INFORMATIONItem 1: Financial Statements:Condensed Consolidated Balance Sheets as of December 31, 2007
and September 30, 2008
    
    
    1Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 2007 and 2008
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2007 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    17Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4: Controls and Procedures
    
    
    25Part II OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    26Item 1A: Risk Factors
    
    
    26Item 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
    
    
    43SIGNATURES
    
    
    44EX-10.1EX-31.1EX-31.2EX-32.1
    i




---



##### Table of Contents



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 or status of any clinical trials or preclinical development;
    
    our liquidity and future financial performance;
    
    the establishment, development and maintenance of any manufacturing or collaborative
relationships;
    
    the effectiveness of our MolecularBreeding directed evolution platform and other
technologies and processes;
    
    our ability to protect our intellectual property portfolio and rights;
    
    our ability to identify and develop new potential products;
    
    the attributes of any products we may develop; and
    
    our business strategies and plans.
   ii




---



##### Table of Contents



PartI  Financial Information
 
 Item 1. Financial Statements
 MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 December 31,
    
    
    September 30,2007
    
    
    2008(Note 1)
    
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    77,130
    
    
    $
    172,032Short-term investments
    
    
    68,683
    
    
    
    40,803Related party receivable
    
    
    7,493
    
    
    
    Accounts receivable and other receivables
    
    
    1,383
    
    
    
    1,790Prepaid expenses and other current assets
    
    
    2,683
    
    
    
    1,109Total current assets
    
    
    157,372
    
    
    
    215,734Property and equipment, net
    
    
    3,060
    
    
    
    2,531Goodwill
    
    
    12,192
    
    
    
    Deposits and other long-term assets
    
    
    85
    
    
    
    Total assets
    
    $
    172,709
    
    
    $
    218,265LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,871
    
    
    $
    2,182Accrued compensation
    
    
    6,880
    
    
    
    3,517Accrued restructuring charges
    
    
    4,413
    
    
    
    18Accrued project costs
    
    
    3,787
    
    
    
    3,657Other accrued liabilities
    
    
    1,250
    
    
    
    1,086Deferred revenue
    
    
    
    
    
    
    5,828Total current liabilities
    
    
    19,201
    
    
    
    16,288Non-current deferred revenue
    
    
    
    
    
    
    4,011Other long-term liabilities
    
    
    14
    
    
    
    Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2007 and
September 30, 2008
    
    
    
    
    
    
    Common stock, $0.0001 par value: 100,000,000 shares
authorized, 36,926,566 and 37,174,377 shares issued and
outstanding at December 31, 2007 and September 30,
2008, respectively
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    423,541
    
    
    
    430,089Accumulated other comprehensive loss
    
    
    (32
    )
    
    
    (152
    )Accumulated deficit
    
    
    (270,019
    )
    
    
    (231,975
    )Total stockholders equity
    
    
    153,494
    
    
    
    197,966Total liabilities and stockholders equity
    
    $
    172,709
    
    
    $
    218,265




---



##### Table of Contents



MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008(unaudited)Collaborative research and development revenue
    
    $
    5
    
    
    $
    359
    
    
    $
    8,476
    
    
    $
    359Technology and license revenue (including
amounts from related party: three
months2008-$121; 2007-$34; nine
months2008-$398; 2007-$590)
    
    
    34
    
    
    
    90,348
    
    
    
    590
    
    
    
    90,625Grant revenue
    
    
    964
    
    
    
    1,417
    
    
    
    3,110
    
    
    
    3,740Total revenues
    
    
    1,003
    
    
    
    92,124
    
    
    
    12,176
    
    
    
    94,724Operating expenses:Research and development
    
    
    13,570
    
    
    
    10,257
    
    
    
    44,513
    
    
    
    35,897General and administrative
    
    
    3,951
    
    
    
    3,321
    
    
    
    11,810
    
    
    
    11,865Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,192Restructuring charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    799Total operating expenses
    
    
    17,521
    
    
    
    13,578
    
    
    
    56,323
    
    
    
    60,753Income (loss) from operations
    
    
    (16,518
    )
    
    
    78,546
    
    
    
    (44,147
    )
    
    
    33,971Interest income and other income (expense), net
    
    
    1,814
    
    
    
    1,323
    
    
    
    6,106
    
    
    
    4,073Net income (loss)
    
    $
    (14,704
    )
    
    $
    79,869
    
    
    $
    (38,041
    )
    
    $
    38,044Basic net income (loss) per share
    
    $
    (0.40
    )
    
    $
    2.15
    
    
    $
    (1.04
    )
    
    $
    1.03Diluted net income (loss) per share
    
    $
    (0.40
    )
    
    $
    2.14
    
    
    $
    (1.04
    )
    
    $
    1.02Shares used in basic net income (loss) per
share calculations
    
    
    36,872
    
    
    
    37,140
    
    
    
    36,750
    
    
    
    37,061Shares used in diluted net income (loss) per
share calculations
    
    
    36,872
    
    
    
    37,308
    
    
    
    36,750
    
    
    
    37,260
  2




---



##### Table of Contents



MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Nine months endedSeptember 30,2007
    
    
    2008(unaudited)Operating activitiesNet income(loss)
    
    $
    (38,041
    )
    
    $
    38,044Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:Depreciation
    
    
    1,188
    
    
    
    1,159Goodwill impairment
    
    
    
    
    
    
    12,192Non-cash stock compensation
    
    
    5,428
    
    
    
    5,744Changes in operating assets and liabilities:Related party receivable
    
    
    
    
    
    
    7,493Accounts receivable and other receivables
    
    
    3,646
    
    
    
    (408
    )Prepaid expenses and other current assets
    
    
    124
    
    
    
    1,575Deposits and other assets
    
    
    
    
    
    
    85Accounts payable
    
    
    2,045
    
    
    
    (689
    )Accrued compensation
    
    
    69
    
    
    
    (3,363
    )Accrued restructuring charges
    
    
    
    
    
    
    (4,395
    )Accrued project costs
    
    
    1,360
    
    
    
    (130
    )Other accrued liabilities
    
    
    (495
    )
    
    
    (178
    )Taxes payable
    
    
    (140
    )
    
    
    Deferred revenue
    
    
    (5,593
    )
    
    
    9,839Net cash provided by (used in) operating activities
    
    
    (30,409
    )
    
    
    66,968Investing activitiesPurchases of available-for-sale securities
    
    
    (154,758
    )
    
    
    (51,120
    )Maturities of available-for-sale securities
    
    
    165,141
    
    
    
    78,880Acquisition of property and equipment
    
    
    (876
    )
    
    
    (630
    )Net cash provided by investing activities
    
    
    9,507
    
    
    
    27,130Financing activitiesProceeds from issuance of common stock
    
    
    5,086
    
    
    
    804Net cash provided by financing activities
    
    
    5,086
    
    
    
    804Effect of exchange rate changes on cash and cash equivalents
    
    
    131
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (15,685
    )
    
    
    94,902Cash and cash equivalents at beginning of period
    
    
    46,504
    
    
    
    77,130Cash and cash equivalents at end of period
    
    $
    30,819
    
    
    $
    172,032
  3




---



##### Table of Contents



MAXYGEN, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
    Principles of Consolidation
  Reclassifications
  Accounting for Clinical Trial Costs
  
    
    start-up  initial setting up of the trial;
    
    enrollment of patients in the trial; and
    
    close down and reporting of the trial.
 4




---



##### Table of Contents



Restructuring Charge
  Revenue Recognition
   5




---



##### Table of Contents



Taxes
  Net Income (Loss) Per Share
  6




---



##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Numerator:Net income (loss)
    
    $
    (14,704
    )
    
    $
    79,869
    
    
    $
    (38,041
    )
    
    $
    38,044Denominator:Weighted-average shares used in
computing basic net income
(loss) per share
    
    
    36,872
    
    
    
    37,140
    
    
    
    36,750
    
    
    
    37,061Effect of dilutive securities
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    199Weighted-average shares used in
computing diluted net income
(loss) per share
    
    
    36,872
    
    
    
    37,308
    
    
    
    36,750
    
    
    
    37,260Basic net income (loss) per share
    
    $
    (0.40
    )
    
    $
    2.15
    
    
    $
    (1.04
    )
    
    $
    1.03Diluted net income (loss) per share
    
    $
    (0.40
    )
    
    $
    2.14
    
    
    $
    (1.04
    )
    
    $
    1.02
  Comprehensive Income (Loss)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Net income (loss)
    
    $
    (14,704
    )
    
    $
    79,869
    
    
    $
    (38,041
    )
    
    $
    38,044Changes in unrealized gains (losses)
on securities available-for-sale
    
    
    176
    
    
    
    10
    
    
    
    263
    
    
    
    (120
    )Changes in foreign currency translation
adjustments
    
    
    138
    
    
    
    
    
    
    
    130
    
    
    
    Comprehensive income (loss)
    
    $
    (14,390
    )
    
    $
    79,879
    
    
    $
    (37,648
    )
    
    $
    37,924
  December 31,
    
    
    September 30,2007
    
    
    2008Unrealized gain on available-for-sale securities
    
    $
    220
    
    
    $
    132Unrealized losses on available-for-sale securities
    
    
    
    
    
    
    (32
    )Foreign currency translation adjustments
    
    
    (252
    )
    
    
    (252
    )Accumulated other comprehensive loss
    
    $
    (32
    )
    
    $
    (152
    )
 7




---



##### Table of Contents



Recent Accounting Pronouncements
      Stock-Based Compensation
  8




---



##### Table of Contents



Stock Options
    Three months ended
    
    Three months endedSeptember 30, 2007
    
    September 30, 2008(1)U.S.
    
    Danish
    
    U.S.
    
    DanishEmployees
    
    Employees
    
    Employees
    
    EmployeesExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    Risk-free interest rate rangeOptions
    
    
    4.90
    %
    
    
    4.86
    %
    
    
    3.33
    %
    
    
    Risk-free interest rate rangeESPP
    
    4.95% to 4.98%
    
    
    
    
    
    1.62% to 2.38%
    
    
    Expected lifeOptions
    
    5.70 years
    
    2.4 years
    
    5.72 years
    
    
    Expected lifeESPP
    
    0.50 years
    
    
    
    
    
    0.16 to 0.49 years
    
    
    Expected volatilityOptions
    
    
    50.93
    %
    
    
    45.99
    %
    
    
    55.61
    %
    
    
    Expected volatilityESPP
    
    
    44.76
    %
    
    
    
    
    
    53.60% to 100.07%
    
    
    
 Nine months ended
    
    Nine months endedSeptember 30, 2007
    
    September 30, 2008(1)U.S.
    
    Danish
    
    U.S.
    
    DanishEmployees
    
    Employees
    
    Employees
    
    EmployeesExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    Risk-free interest rate rangeOptions
    
    4.64% to 4.90%
    
    4.76% to 4.97%
    
    2.75% to 3.33%
    
    
    Risk-free interest rate rangeESPP
    
    4.74% to 5.09%
    
    
    
    
    
    1.62% to 4.98%
    
    
    Expected lifeOptions
    
    5.70 years
    
    2.40 years
    
    5.72 years
    
    
    Expected lifeESPP
    
    0.50 years to 0.94 years
    
    
    
    
    
    0.08 to 1.0 years
    
    
    Expected volatilityOptions
    
    50.93% to 52.96%
    
    44.88% to 45.99%
    
    50.61% to 55.61%
    
    
    Expected volatilityESPP
    
    44.76% to 48.31%
    
    
    
    
    
    43.36% to 100.07%
    
    
    
 
 (1)
    
    As the result of cessation of research and development operations at Maxygen ApS, no options
were granted to Danish employees during the three and nine months ended September 30, 2008. 9




---



##### Table of Contents



Restricted Stock Units
  Valuation and Expense Information under SFAS 123(R)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Research and development
    
    $
    814
    
    
    $
    1,111
    
    
    $
    2,248
    
    
    $
    2,800General and administrative
    
    
    851
    
    
    
    767
    
    
    
    2,984
    
    
    
    2,689Stock-based compensation expense
before income taxes
    
    
    1,665
    
    
    
    1,878
    
    
    
    5,232
    
    
    
    5,489Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
stock-based compensation expense after income taxes
    
    $
    1,665
    
    
    $
    1,878
    
    
    $
    5,232
    
    
    $
    5,489
  2. Cash Equivalents and Investments
  10




---



##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    172,032
    
    
    $
    
    
    
    $
    
    
    
    $
    172,032Commercial paper
    
    
    29,372
    
    
    
    131
    
    
    
    
    
    
    
    29,503Corporate bonds
    
    
    2,335
    
    
    
    
    
    
    
    (27
    )
    
    
    2,308U.S. government agency securities
    
    
    8,996
    
    
    
    1
    
    
    
    (5
    )
    
    
    8,992Total
    
    
    212,735
    
    
    
    132
    
    
    
    (32
    )
    
    
    212,835Less amounts classified as cash
equivalents
    
    
    (172,032
    )
    
    
    
    
    
    
    
    
    
    
    (172,032
    )Total investments
    
    $
    40,703
    
    
    $
    132
    
    
    $
    (32
    )
    
    $
    40,803
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    77,130
    
    
    $
    
    
    
    $
    
    
    
    $
    77,130Commercial paper
    
    
    43,704
    
    
    
    211
    
    
    
    
    
    
    
    43,915Corporate bonds
    
    
    13,569
    
    
    
    5
    
    
    
    
    
    
    
    13,574U.S. government agency securities
    
    
    11,190
    
    
    
    4
    
    
    
    
    
    
    
    11,194Total
    
    
    145,593
    
    
    
    220
    
    
    
    
    
    
    
    145,813Less amounts classified as cash
equivalents
    
    
    (77,130
    )
    
    
    
    
    
    
    
    
    
    
    (77,130
    )Total investments
    
    $
    68,463
    
    
    $
    220
    
    
    $
    
    
    
    $
    68,683
   Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue within one year
    
    $
    40,703
    
    
    $
    40,803Due after one year through two years
    
    
    
    
    
    
    $
    40,703
    
    
    $
    40,803
 3. Litigation
  11




---



##### Table of Contents



In re Initial Public Offering
Securities Litigation
 ,
    4. Commitments
  12




---



##### Table of Contents



For the remainder of 2008
    
    $
    952
 Year endingDecember 31,2009
    
    $
    1,4592010
    
    
    44Thereafter
    
    
    Total commitments beyond current year
    
    $
    1,503
  5. Guarantees and Indemnifications
    6. Related Party Transactions
  13




---



##### Table of Contents



7. Fair Value
       14




---



##### Table of Contents



EstimatedFair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Money market funds
    
    $
    172,032
    
    
    $
    172,032
    
    
    $
    
    
    
    $
    Commercial paper
    
    
    29,503
    
    
    
    
    
    
    
    29,503
    
    
    
    Corporate bonds
    
    
    2,308
    
    
    
    
    
    
    
    2,308
    
    
    
    U.S. government agency securities
    
    
    8,992
    
    
    
    
    
    
    
    8,992
    
    
    
    Total
    
    $
    212,835
    
    
    $
    172,032
    
    
    $
    40,803
    
    
    $
    
  8. Restructuring Charges
    Chargesduring thenine months
    
    
    
    
    
    
    
    
    
    
    As of September 30, 2008Balance at
    
    
    ended
    
    
    
    
    
    
    Balance at
    
    
    
    
    
    
    TotalDecember
    
    
    September
    
    
    Cash
    
    
    September
    
    
    Total Costs to
    
    
    Expected31, 2007
    
    
    30, 2008
    
    
    payments
    
    
    30, 2008
    
    
    Date
    
    
    CostsEmployee severance
and other benefits
charges
    
    $
    4,413
    
    
    $
    74
    
    
    $
    (4,487
    )
    
    $
    
    
    
    $
    5,286
    
    
    $
    5,286Contract
termination and
other associated
costs
    
    
    
    
    
    
    725
    
    
    
    (707
    )
    
    
    18
    
    
    
    725
    
    
    
    725$
    4,413
    
    
    $
    799
    
    
    $
    (5,194
    )
    
    $
    18
    
    
    $
    6,011
    
    
    $
    6,011
 15




---



##### Table of Contents



9. Derivatives and Financial Instruments
   10. Goodwill
  11. Sale of Hematology Assets and Grant of Licenses to Bayer
  12. Astellas MAXY-4 Collaboration
  13. Subsequent Events
  16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Executive Summary
      17




---



##### Table of Contents



18




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Results of Operations
 Revenues
    19




---



##### Table of Contents



Research and Development Expenses
    20




---



##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Collaborative projects and
transition services related
to technology and license
revenue funded by third
parties(1)
    
    $
    
    
    
    $
    1,066
    
    
    $
    2,451
    
    
    $
    1,066Government grants
    
    
    1,118
    
    
    
    1,691
    
    
    
    3,379
    
    
    
    4,123Internal projects
    
    
    12,452
    
    
    
    7,500
    
    
    
    38,683
    
    
    
    30,708Total
    
    $
    13,570
    
    
    $
    10,257
    
    
    $
    44,513
    
    
    $
    35,897
 
 (1)
    
    Research and development expenses related to collaborative projects funded by third parties
may be less than the reported revenues due to the amortization of non-refundable upfront payments,
as well as a portion of the collaborative research and development revenue that is charged for
general and administrative expenses.   General and Administrative Expenses
  21




---



##### Table of Contents



Goodwill Impairment
  Restructuring Charge
  Interest Income and Other Income (Expense), Net
   Recent Accounting Pronouncements
  22




---



##### Table of Contents



Liquidity and Capital Resources
   23




---



##### Table of Contents



Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1-3
    
    
    4-5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating lease obligations
    
    $
    498
    
    
    $
    299
    
    
    $
    199
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    1,957
    
    
    
    653
    
    
    
    1,304
    
    
    
    
    
    
    
    Total
    
    $
    2,455
    
    
    $
    952
    
    
    $
    1,503
    
    
    $
    
    
    
    $
    
   24




---



##### Table of Contents



Item 3. Quantitative And Qualitative Disclosures About Market Risk
 Market Risk Management
  
 Item 4. Controls and Procedures
 Evaluation of Controls and Procedures
  Changes in Internal Control
  Limitations on the Effectiveness of Controls
  25




---



##### Table of Contents



Part II  Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 A restated description of the risk factors associated with our business is set forth below.
This description includes all material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2007. You should carefully consider the risks
described below, together with all of the other information included in this report, in considering
our business and prospects. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the following risks
actually occur, our business could be harmed. In such case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
 We have implemented a substantial restructuring of our operations and revised our strategic
plan, and we may fail to successfully execute this plan.
   If we do not retain key employees, our ability to maintain our ongoing operations or execute a
potential strategic option could be impaired.
  26




---



##### Table of Contents



If we are unable to enter into a collaborative or other arrangement with a third party to fund
the further development and commercialization of our MAXY-G34 product candidate, we may elect to
further delay or cease all development activities on this program.
   We have a history of net losses. We expect to continue to incur net losses and may not achieve
or maintain profitability.
  We are an early stage company deploying unproven technologies. If we do not develop
commercially successful products, we may be forced to cease operations.
  27




---



##### Table of Contents



The prospects of our current product candidates are highly uncertain.
    Litigation or other proceedings or third party claims of intellectual property infringement
relating to our MAXY-G34 product candidate may delay or materially impact our ability to
commercialize MAXY-G34.
   28




---



##### Table of Contents



Drug development is a long, expensive and uncertain process and may not result in the
development of any commercially successful products.
    The development of our product candidates, which is based on modifications to natural human
proteins, may be subject to substantial delays, increased development costs, reduced market
potential for any resulting product or the termination of the affected development program by us or
a collaborator, each of which could adversely affect our business.
 29




---



##### Table of Contents



Our clinical development strategy, which relies on third party contract research
organizations, exposes us to additional risk.
  Our revenues, expenses and operating results are subject to fluctuations that may cause our
stock price to decline.
  30




---



##### Table of Contents




    
    the termination of research and development contracts with collaborators or
government research grants, which may not be renewed or replaced;
    
    the success rate of our development or discovery efforts leading to milestones and
royalties under collaboration arrangements, if any;
    
    the timing of licensing fees or the achievement of milestones under new or existing
licensing and collaborative arrangements;
    
    the timing of expenses, particularly with respect to contract manufacturing,
preclinical studies and clinical trials;
    
    the timing and willingness of any existing or future collaborators to commercialize
our products, which would result in royalties to us; and
    
    general and industry specific economic conditions, which may affect the research
and development expenditures of any future collaborator.
   Our current and future product candidates could take a long time to complete clinical
development, may fail in clinical development, or may never gain approval, which could reduce or
eliminate our revenue by delaying or terminating the potential commercialization of our product
candidates.
    31




---



##### Table of Contents




    
    deficiencies in the conduct of the clinical trials;
    
    negative or inconclusive results from the clinical trials that necessitate
additional clinical studies;
    
    difficulties or delays in identifying and enrolling patients who meet trial
eligibility criteria;
    
    delays in obtaining or maintaining required approvals from institutions, review
boards or other reviewing entities at clinical sites;
    
    inadequate supply or deficient quality of product candidate materials necessary for
the conduct of the clinical trials;
    
    the occurrence of unacceptable toxicities or properties or unforeseen adverse
events, especially as compared to currently approved drugs intended to treat the same
indications;
    
    our lack of financial resources to continue the development of a product candidate;
    
    future legislation or administrative action or changes in FDA policy or the policy
of foreign regulatory agencies during the period of product development, clinical
trials and FDA regulatory review; or
    
    other reasons that are internal to the business of a collaborative partner, which
it may not share with us.
  Our potential products are subject to a lengthy and uncertain regulatory process and may never
gain approval. If our potential products are not approved, we will not be able to commercialize
those products.
    32




---



##### Table of Contents




    
    a drug candidate may not be safe or effective;
    
    regulatory officials may not find the data from preclinical testing and clinical
trials sufficient;
    
    the FDA and other regulatory agencies might not approve our third-party
manufacturers processes or facilities; or
    
    the FDA or other regulatory agencies may change their approval policies or adopt
new regulations.
   Our manufacturing strategy, which relies on third-party manufacturers, exposes us to
additional risks.
   33




---



##### Table of Contents



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 product candidates for the treatment of
a particular disease or condition, we must demonstrate to the satisfaction of the FDA
and other governmental authorities that the drug manufactured for commercial use is
comparable to the drug manufactured for clinical trials and that the manufacturing
facility complies with applicable laws and regulations;
    
    it may not be technically feasible to scale up an existing manufacturing process to
meet demand or such scale-up may take longer than anticipated; and
    
    failure to comply with strictly enforced GMP regulations and similar foreign
standards may result in delays in product approval or withdrawal of an approved
product from the market.
  We may need additional capital in the future. If additional capital is not available, we may
have to curtail or cease operations.
   34




---



##### Table of Contents



If our collaborations are not successful or we are unable to enter into and maintain future
collaboration arrangements for any of our product candidates, we may not be able to effectively
develop and market some of our products.
    Any conflicts with a collaborator could harm our business.
   Any inability to adequately protect our proprietary technologies could harm our competitive
position.
   35




---



##### Table of Contents



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.
   36




---



##### Table of Contents



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.
    Our revenues have primarily been derived from collaboration and license agreements and
government grants, and our inability to maintain these grants and agreements or establish and
maintain new collaborations, license agreements or grants would adversely impact our revenues,
financial position and results of operation.
  Other biological products may compete with our products.
  37




---



##### Table of Contents



® ®
 ®
   Many potential competitors who have greater resources and experience than we do may develop
products and technologies that make ours obsolete.
    38




---



##### Table of Contents



Legislative actions, new accounting pronouncements and higher compliance costs may adversely
impact our future financial position and results of operations.
   The operation of international locations may increase operating expenses and divert management
attention.
  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
 39




---



##### Table of Contents




    
    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.
  
    
    our failure to meet our publicly announced revenue and/or expense projections
and/or product development timetables;
    
    adverse or inconclusive results or delays in preclinical development or clinical
trials;
    
    any entry into or material amendment or termination of a collaborative or license
agreement;
    
    any decisions to discontinue or delay development programs or clinical trials;
    
    announcements of new technological innovations or new products by us or our
competitors;
    
    conditions or trends in the biotechnology and life science industries;
    
    changes in the market valuations of other biotechnology or life science companies;
    
    developments in domestic and international governmental policy or regulations;
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    changes in general economic, political and market conditions, such as recessions,
interest rate changes, terrorist acts and other factors;
    
    developments in or challenges relating to our patent or other proprietary rights,
including lawsuits or proceedings alleging patent infringement based on the
development, manufacturing or commercialization of our product candidates;
    
    sales of our common stock or other securities in the open market; and
    
    sales of assets or other strategic transactions.
  40




---



##### Table of Contents



Substantial sales of shares may adversely impact the market price of our common stock.
  If current levels of market disruption and volatility continue or worsen, we may not be able
to preserve our cash balances or access such sources if necessary.
  If we or a collaborator receives regulatory approval for one of our drug candidates, we will
be subject to ongoing FDA obligations and continued regulatory review, and we may also be subject
to additional FDA post-marketing obligations, all of which may result in significant expense and
limit our ability to commercialize our potential drugs.
  We may be subject to costly product liability claims and may not have adequate insurance.
  We currently have no product marketing capabilities.
  The coverage and reimbursement status of newly approved drugs is uncertain and failure to
obtain adequate coverage and reimbursement could limit our ability to market any drugs we may
develop and decrease our ability to generate revenue.
 41




---



##### Table of Contents



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 facilities in California are located near an earthquake fault, and an earthquake or other
types of natural disasters or resource shortages could disrupt our operations and adversely affect
our results.
  
 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
  42




---



##### Table of Contents



Exhibits
  10.1
    
    Co-Development and Commercialization Agreement, dated as of September 18,
2008, by and between Astellas Pharma Inc. and Maxygen, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 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
 
 
    
    Confidential treatment has been requested with respect to portions of the exhibit. A
complete copy of the agreement, including the redacted terms, has been separately filed with
the Securities and Exchange Commission. 43




---



##### Table of Contents



Signatures
  MAXYGEN, INC.November 7, 2008
    By:
    /s/ Russell J. HowardRussell J. HowardChief Executive OfficerNovember 7, 2008
    By:
    /s/ Lawrence W. BriscoeLawrence W. BriscoeChief Financial Officer 44