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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, 2007
 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)
 
 þ o
  o þ o
 o þ




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##### 



MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2007
  Part I FINANCIAL INFORMATIONItem 1: Financial Statements:Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007
    
    
    1Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2006 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2006 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4: Controls and Procedures
    
    
    22Part II OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    24Item 1A: Risk Factors
    
    
    24Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3: Defaults Upon Senior Securities
    
    
    39Item 4: Submission of Matters to a Vote of Security Holders
    
    
    40Item 5: Other Information
    
    
    40Item 6: Exhibits
    
    
    40SIGNATURES
    
    
    41EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
    i




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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 and jurisdiction of any regulatory filing or submission relating to
the clinical development of any product candidate, the timing of any commencement of
clinical trials of any product candidate and the progress or status of such clinical
trials;
    
    our liquidity and future financial performance;
    
    the establishment, development and maintenance of any manufacturing or collaborative
relationships;
    
    the effectiveness of our MolecularBreeding directed evolution platform and other
technologies and processes;
    
    our ability to protect our intellectual property portfolio and rights;
    
    our ability to identify and develop new potential products;
    
    the attributes of any products we may develop; and
    
    our business strategies and plans.
   ii




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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 30,2006
    
    
    2007(Note 1)
    
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    46,504
    
    
    $
    30,819Short-term investments
    
    
    133,384
    
    
    
    121,255Accounts receivable and other receivables
    
    
    4,099
    
    
    
    452Prepaid expenses and other current assets
    
    
    3,133
    
    
    
    3,010Total current assets
    
    
    187,120
    
    
    
    155,536Property and equipment, net
    
    
    3,262
    
    
    
    2,949Goodwill
    
    
    12,192
    
    
    
    12,192Long-term investments
    
    
    2,988
    
    
    
    5,000Deposits and other long-term assets
    
    
    85
    
    
    
    85Total assets
    
    $
    205,647
    
    
    $
    175,762LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,435
    
    
    $
    4,480Accrued compensation
    
    
    4,708
    
    
    
    4,776Other accrued liabilities
    
    
    2,954
    
    
    
    3,777Deferred revenue
    
    
    1,527
    
    
    
    Taxes payable
    
    
    140
    
    
    
    Total current liabilities
    
    
    11,764
    
    
    
    13,033Non-current deferred revenue
    
    
    4,066
    
    
    
    Other long-term liabilities
    
    
    18
    
    
    
    62Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2006 and September 30, 2007
    
    
    
    
    
    
    Common stock, $0.0001 par value: 100,000,000 shares
authorized, 36,157,910 and 36,897,250 shares issued and
outstanding at December 31, 2006 and September 30,
2007, respectively
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    411,195
    
    
    
    421,708Accumulated other comprehensive loss
    
    
    (696
    )
    
    
    (301
    )Accumulated deficit
    
    
    (220,704
    )
    
    
    (258,744
    )Total stockholders equity
    
    
    189,799
    
    
    
    162,667Total liabilities and stockholders equity
    
    $
    205,647
    
    
    $
    175,762
  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 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(unaudited)Collaborative research and development revenue
    
    $
    3,201
    
    
    $
    5
    
    
    $
    15,218
    
    
    $
    8,476Revenue from related party
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    590Grant revenue
    
    
    1,040
    
    
    
    964
    
    
    
    3,293
    
    
    
    3,110Total revenues
    
    
    4,241
    
    
    
    1,003
    
    
    
    18,511
    
    
    
    12,176Operating expenses:Research and development
    
    
    12,020
    
    
    
    13,570
    
    
    
    35,494
    
    
    
    44,513General and administrative
    
    
    4,547
    
    
    
    3,951
    
    
    
    12,930
    
    
    
    11,810Total operating expenses
    
    
    16,567
    
    
    
    17,521
    
    
    
    48,424
    
    
    
    56,323Loss from operations
    
    
    (12,326
    )
    
    
    (16,518
    )
    
    
    (29,913
    )
    
    
    (44,147
    )Interest income and other income (expense), net
    
    
    2,267
    
    
    
    1,814
    
    
    
    6,091
    
    
    
    6,106Equity in net loss of minority investee
    
    
    (658
    )
    
    
    
    
    
    
    (1,000
    )
    
    
    Net loss
    
    $
    (10,717
    )
    
    $
    (14,704
    )
    
    $
    (24,822
    )
    
    $
    (38,041
    )Basic and diluted net loss per share
    
    $
    (0.30
    )
    
    $
    (0.40
    )
    
    $
    (0.69
    )
    
    $
    (1.04
    )Shares used in basic and diluted net loss per
share calculations
    
    
    36,078
    
    
    
    36,872
    
    
    
    36,025
    
    
    
    36,750
  2




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MAXYGEN,
INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine months endedSeptember 30,2006
    
    
    2007(unaudited)Operating activitiesNet loss
    
    $
    (24,822
    )
    
    $
    (38,041
    )Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:Depreciation and amortization
    
    
    1,787
    
    
    
    1,188Equity in net loss of minority investee
    
    
    1,000
    
    
    
    Non-cash stock compensation
    
    
    4,600
    
    
    
    4,867Common stock issued and stock options granted to
consultants for services rendered and for certain
technology rights
    
    
    540
    
    
    
    561Changes in operating assets and liabilities:Accounts receivable and other receivables
    
    
    2,649
    
    
    
    3,646Prepaid expenses and other current assets
    
    
    361
    
    
    
    124Deposits and other assets
    
    
    (15
    )
    
    
    Accounts payable
    
    
    167
    
    
    
    2,045Accrued compensation
    
    
    (598
    )
    
    
    69Other accrued liabilities
    
    
    (753
    )
    
    
    865Taxes payable
    
    
    
    
    
    
    (140
    )Deferred revenue
    
    
    (2,072
    )
    
    
    (5,593
    )Net cash used in operating activities
    
    
    (17,156
    )
    
    
    (30,409
    )Investing activitiesPurchases of available-for-sale securities
    
    
    (99,635
    )
    
    
    (154,758
    )Maturities of available-for-sale securities
    
    
    124,799
    
    
    
    165,141Investment in minority investee
    
    
    (1,000
    )
    
    
    Acquisition of property and equipment
    
    
    (1,146
    )
    
    
    (876
    )Net cash provided by (used in) investing activities
    
    
    23,018
    
    
    
    9,507Financing activitiesProceeds from issuance of common stock
    
    
    713
    
    
    
    5,086Net cash provided by financing activities
    
    
    713
    
    
    
    5,086Effect of exchange rate changes on cash and cash equivalents
    
    
    7
    
    
    
    131Net increase (decrease) in cash and cash equivalents
    
    
    6,582
    
    
    
    (15,685
    )Cash and cash equivalents at beginning of period
    
    
    26,940
    
    
    
    46,504Cash and cash equivalents at end of period
    
    $
    33,522
    
    
    $
    30,819
  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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Revenue Recognition
     5




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Loss Per Common Share
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Net loss
    
    $
    (10,717
    )
    
    $
    (14,704
    )
    
    $
    (24,822
    )
    
    $
    (38,041
    )Basic and diluted:Weighted-average
shares used in
computing basic
and diluted net
loss per share
    
    
    36,078
    
    
    
    36,872
    
    
    
    36,025
    
    
    
    36,750Basic and diluted
net loss per common
share
    
    $
    (0.30
    )
    
    $
    (0.40
    )
    
    $
    (0.69
    )
    
    $
    (1.04
    )
  Accumulated Other Comprehensive Loss
  December 31,
    
    
    September 30,2006
    
    
    2007Unrealized gain on available-for-sale securities
    
    $
    46
    
    
    $
    204Unrealized losses on available-for-sale securities
    
    
    (108
    )
    
    
    (1
    )Foreign currency translation adjustments
    
    
    (634
    )
    
    
    (504
    )Accumulated other comprehensive loss
    
    $
    (696
    )
    
    $
    (301
    )
 6




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Recent Accounting Pronouncements
     Stock-Based Compensation
  7




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Stock Options
    Three months ended
    
    Three months endedSeptember 30, 2006
    
    September 30, 2007U.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%
    
    4.90%
    
    4.86%Risk-free interest rate rangeESPP
    
    4.74% to 5.05%
    
    
    
    4.95% to 4.98%
    
    Expected lifeOptions
    
    5.13 years
    
    2.4 years
    
    5.7 years
    
    2.4 yearsExpected lifeESPP
    
    0.48 years
    
    
    
    0.50 years
    
    Expected volatility-Options
    
    53.70%
    
    44.67%
    
    50.93%
    
    45.99%Expected volatilityESPP
    
    51.05%
    
    
    
    44.76%
    
    
 8




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Nine months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2007U.S.
    
    Danish
    
    U.S.
    
    DanishEmployees
    
    Employees
    
    Employees
    
    EmployeesExpected dividend yield
    
    0.0%
    
    0.0%
    
    0.0%
    
    0.0%Risk-free interest rate rangeOptions
    
    4.30% to 5.11%
    
    4.34% to 5.17%
    
    4.64% to 4.90%
    
    4.76% to 4.97%Risk-free interest rate rangeESPP
    
    3.20% to 5.05%
    
    
    
    4.74% to 5.09%
    
    Expected lifeOptions
    
    5.13 years
    
    2.40 years
    
    5.70 years
    
    2.40 yearsExpected lifeESPP
    
    0.48 years to 0.92 years
    
    
    
    0.50 years to 0.94 years
    
    Expected volatilityOptions
    
    53.70% to 56.42%
    
    44.38% to 45.78%
    
    50.93% to 52.96%
    
    44.88% to 45.99%Expected volatilityESPP
    
    42.97% to 51.05%
    
    
    
    44.76% to 48.31%
    
    
  Valuation and Expense Information under SFAS 123(R)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Research and development
    
    $
    564
    
    
    $
    814
    
    
    $
    1,595
    
    
    $
    2,248General and administrative
    
    
    1,240
    
    
    
    851
    
    
    
    3,355
    
    
    
    2,984Stock-based compensation expense
before income taxes
    
    
    1,804
    
    
    
    1,665
    
    
    
    4,950
    
    
    
    5,232Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stock-based compensation
expense after income taxes
    
    $
    1,804
    
    
    $
    1,665
    
    
    $
    4,950
    
    
    $
    5,232
  2. Cash Equivalents and Investments
  9




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Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    30,817
    
    
    $
    2
    
    
    $
    
    
    
    $
    30,819Commercial paper
    
    
    56,997
    
    
    
    166
    
    
    
    
    
    
    
    57,163Corporate bonds
    
    
    11,732
    
    
    
    10
    
    
    
    
    
    
    
    11,742U.S. government agency securities
    
    
    57,323
    
    
    
    28
    
    
    
    (1
    )
    
    
    57,350Total
    
    
    156,869
    
    
    
    206
    
    
    
    (1
    )
    
    
    157,074Less amounts classified as cash
equivalents
    
    
    (30,817
    )
    
    
    (2
    )
    
    
    
    
    
    
    (30,819
    )Total investments
    
    $
    126,052
    
    
    $
    204
    
    
    $
    (1
    )
    
    $
    126,255
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    45,258
    
    
    $
    
    
    
    $
    
    
    
    $
    45,258Commercial paper
    
    
    60,139
    
    
    
    28
    
    
    
    
    
    
    
    60,167Corporate bonds
    
    
    20,082
    
    
    
    2
    
    
    
    (7
    )
    
    
    20,077U.S. government agency securities
    
    
    57,459
    
    
    
    16
    
    
    
    (101
    )
    
    
    57,374Total
    
    
    182,938
    
    
    
    46
    
    
    
    (108
    )
    
    
    182,876Less amounts classified as cash
equivalents
    
    
    (46,504
    )
    
    
    
    
    
    
    
    
    
    
    (46,504
    )Total investments
    
    $
    136,434
    
    
    $
    46
    
    
    $
    (108
    )
    
    $
    136,372
   Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue within one year
    
    $
    121,053
    
    
    $
    121,255Due after one year through two years
    
    
    4,999
    
    
    
    5,000$
    126,052
    
    
    $
    126,255
 10




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3. Derivatives and Financial Instruments
  4. Litigation
 In
re Initial Public Offering Securities Litigation
 In re Initial Public Offering Securities Litigation
    11




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5. Commitments
   For the remainder of 2007
    
    $
    3,926
 Year endingDecember 31,2008
    
    $
    7,1462009
    
    
    904Thereafter
    
    
    22Total commitments beyond current year
    
    $
    8,072
  6.  Guarantees and Indemnifications
   12




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7. Related Party Transactions
   8. Income Taxes
  13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Executive Summary
   MAXY-G34
 MAXY-G34
is our lead candidate being developed for chemotherapy-induced
neutropenia. To date,
we have conducted two Phase I trials in normal healthy volunteers and currently have an ongoing
Phase IIa trial in breast cancer patients receiving myelosuppressive
chemotherapy. The initial Phase I clinical trial was initiated in August 2006 in the United States. This
study in healthy volunteers was designed to determine safety, pharmacokinetics, pharmacodynamics
and immunogenicity of MAXY-G34. The study initially investigated doses ranging from 10 to 150 μg/kg
of MAXY-G34 with a subsequent study extension to investigate the 5 μg/kg dose of MAXY-G34 in a
total of 47 subjects, of which 40 received MAXY-G34. The results of the Phase I clinical trial with
a single dose of MAXY-G34 indicate that the drug was generally safe and well tolerated throughout
the study, at all doses from 5 to 150 μg/kg of MAXY-G34. All doses tested in this Phase I trial
increased the neutrophil levels as compared to the placebo controls. The half-life observed for
MAXY-G34 in the initial Phase I clinical trial was approximately 2.3 times the terminal half-life
for Neulasta in healthy volunteers, as estimated from 14




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the historical literature for Neulasta. No antibodies were detected in any clinical trial
participants 30 and 90 days after the administration of MAXY-G34, The adverse events observed were
similar in frequency and type to those previously reported for currently marketed G-CSF products.
The most common adverse event observed was bone pain. Low but detectable levels of MAXY-G34 were
observed at the end of the 21-day collection period across the dose range studied. Preliminary data from a separate Phase I study that examined MAXY-G34 at a 100 μg/kg dose or a
6mg fixed dose of Neulasta in healthy volunteers were generally consistent with the results
previously obtained in the initial Phase I study (which did not involve a Neulasta cohort). Six
volunteers were examined in each group. These results further indicated that both drugs were
generally safe and well tolerated in healthy volunteers. Both MAXY-G34 and Neulasta increased the
neutrophil levels and both drugs led to a substantial increase in the level of CD34+ cells in
blood. Based on comparisons of the area under the curve for neutrophils and CD34+, at the single
doses of MAXY-G34 and Neulasta being compared, MAXY-G34 administration resulted in numerically
larger neutrophil levels, while Neulasta administration resulted in numerically larger number of
CD34+ progenitor cells released. No inferences can be reliably drawn regarding these observed
differences, in light of the small number of subjects in this study.
In this study, the half-life observed for MAXY-G34 was approximately 1.3 times that observed for Neulasta. No antibodies binding to
MAXY-G34 were detected in this trial at any time up to 90 days post-administration of MAXY-G34. In July 2007, we commenced a Phase IIa clinical trial of MAXY-G34 in breast cancer patients in
Eastern Europe. In this Phase IIa clinical trial patients are being administered a single dose of
MAXY-G34 therapy per three week chemotherapy cycle, with each patient receiving six cycles of TAC
(docetaxel, adriamycin and cyclophosphamide) chemotherapy. The study intends to investigate
safety, efficacy and pharmacokinetics of MAXY-G34 across the dose range of 10 μg/kg to 100 μg/kg
with recommendations for dose-escalation provided by an independent Data Safety Monitoring Board. MAXY-alpha
 In November 2006, F. Hoffmann-La Roche Ltd., or Roche, initiated a Phase Ia clinical trial in
New Zealand to evaluate MAXY-alpha, an interferon alpha product for the treatment of hepatitis C
virus (HCV) infection and other indications. Roche had planned to initiate a Phase Ib clinical trial in the United States in 2007.
However, in September 2007, Roche advised us that it had voluntarily placed a hold on further
clinical development of MAXY-alpha based on preliminary observations from the Phase Ia trial which
indicated that an unexpected reduction of the pharmacodynamic and pharmacokinetic effects of
MAXY-alpha occurred in the majority of subjects who received two doses of MAXY-alpha. In addition,
antibodies binding to MAXY-alpha were identified in some subjects. Roche is currently performing
additional investigational studies in order to assess these results, but the clinical significance
of these antibodies is currently uncertain. The impact of these results and the additional
investigational studies being performed by Roche on the future timing or advancement of our
MAXY-alpha program are not yet known. Roche may elect to terminate this program in its entirety or
advance it, likely at a delayed pace. MAXY-VII
 Our MAXY-VII product candidates are designed to be superior next-generation factor VII
products to treat hemophilia and acute bleeding indications. We currently intend to advance one of
our MAXY-VII product candidates into clinical trials for the treatment of hemophilia and plan to
file a clinical trial application (CTA) in Europe for our lead MAXY-VII product candidate in the
first half of 2008 and expect to commence clinical trials in hemophilia patients in 2008. We also
are currently evaluating our plans for the continued development of our MAXY-VII product candidates
for acute bleeding indications. We previously had an agreement with Roche relating to the
development and commercialization of these product candidates for acute bleeding indications.
Roche terminated this agreement in April 2007 due to the inability of the parties to establish an
animal model intended to provide preclinical de-risking of the 15




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program. As a result of the termination of this agreement, we hold all rights to our MAXY-VII
product candidates. MAXY-gamma
 Our MAXY-gamma product candidates are next-generation versions of interferon gamma. In 2001,
we granted an exclusive license to InterMune, Inc., or InterMune, to develop and market our
MAXY-gamma product candidates for all human therapeutic indications. Based on InterMunes decision
to discontinue the development of our MAXY-gamma product candidates, we agreed with InterMune to
terminate the license agreement, effective July 31, 2007. As a result of the termination of this
license agreement, all rights licensed to InterMune under the agreement have reverted to us.       16




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Critical Accounting Policies and Estimates
  Results of Operations
 Revenues
  17




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Research and Development Expenses
    18




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Collaborative
projects funded by
third parties(1)
    
    $
    2,207
    
    
    $
    
    
    
    $
    7,049
    
    
    $
    2,451Government grants
    
    
    1,149
    
    
    
    1,118
    
    
    
    3,279
    
    
    
    3,379Internal projects
    
    
    8,664
    
    
    
    12,452
    
    
    
    25,166
    
    
    
    38,683Total
    
    $
    12,020
    
    
    $
    13,570
    
    
    $
    35,494
    
    
    $
    44,513
 
 (1)
    
    Research and development expenses related to collaborative projects funded by third parties
may be less than the reported revenues due to the amortization of non-refundable up-front payments,
as well as a portion of the collaborative research and development revenue that is charged for
general and administrative expenses.   General and Administrative Expenses
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Interest Income and Other Income (Expense), Net
  Recent Accounting Pronouncements
    20




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Liquidity and Capital Resources
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Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1-3
    
    
    4-5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating lease obligations
    
    $
    2,210
    
    
    $
    838
    
    
    $
    1,372
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    9,788
    
    
    
    3,088
    
    
    
    6,700
    
    
    
    
    
    
    
    Total
    
    $
    11,998
    
    
    $
    3,926
    
    
    $
    8,072
    
    
    $
    
    
    
    $
    
   
 Item 3. Quantitative And Qualitative Disclosures About Market Risk
 Market risk management
  
 Item 4. Controls and Procedures
 Evaluation of Controls and Procedures
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Changes in Internal Control
  Limitations on the Effectiveness of Controls
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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 any material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2006. You should carefully consider the risks
described below, together with all of the other information included in this report, in considering
our business and prospects. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the following risks
actually occur, our business could be harmed. In such case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
 We have a history of net losses. We expect to continue to incur net losses and may not achieve
or maintain profitability.
  We are an early stage company deploying unproven technologies. If we do not develop
commercially successful products, we may be forced to cease operations.
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Drug development is a long, expensive and uncertain process and may not result in the
development of any commercially successful products.
    The development of our product candidates may be subject to substantial delays, increased
development costs, reduced market potential for any resulting product or the termination of the
affected development program by us or a collaborator, each of which could adversely affect our
business.
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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.
  
    
    termination of research and development contracts with collaborators or government
research grants, which may not be renewed or replaced;
    
    the success rate of our development or discovery efforts leading to milestones and
royalties;
    
    timing of licensing fees or the achievement of milestones under new or existing
licensing and collaborative arrangements;
    
    timing of expenses, particularly with respect to contract manufacturing,
preclinical studies and clinical trials;
    
    the timing and willingness of collaborators to commercialize our products, which
would result in royalties to us; and
    
    general and industry specific economic conditions, which may affect our
collaborators research and development expenditures.
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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.
     
    
    a drug candidate may not be safe or effective;
    
    regulatory officials may not find the data from preclinical testing and clinical
trials sufficient;
    
    the FDA and other regulatory agencies might not approve our third-party
manufacturers processes or facilities; or
    
    the FDA or other regulatory agencies may change its approval policies or adopt new
regulations.
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Our current and future product candidates could take a long time to gain regulatory approval,
or may never gain approval, which could reduce or eliminate our revenue by delaying or terminating
the potential commercialization of our product candidates.
    
    
    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;
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
    
    delays in obtaining or maintaining required approvals from institutions, review
boards or other reviewing entities at clinical sites;
    
    inadequate supply or deficient quality of product candidate materials necessary for
the conduct of the clinical trials;
    
    the occurrence of unacceptable toxicities or properties or unforeseen adverse side
effects, especially as compared to currently approved drugs intended to treat the same
indications;
    
    our lack of financial resources to continue the development of a product candidate;
    
    future legislation or administrative action or changes in FDA policy or the policy
of foreign regulatory agencies during the period of product development, clinical
trials and FDA regulatory review; or
    
    other reasons that are internal to the businesses of our collaborative partners,
which they may not share with us.
  Our manufacturing strategy, which relies on third-party manufacturers, exposes us to
additional risks.
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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.
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If our collaborations are not successful, we may not be able to effectively develop and market
some of our products.
     Any conflicts with our collaborators could harm our business.
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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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Our revenues are primarily derived from government grants, and our inability to maintain these
grants or establish or maintain new collaborations or grants would adversely impact our revenues,
financial position and results of operation.
  Other biological products may compete with our products.
    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.
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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.
  
    
    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.
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
    
    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.
  
    
    our failure to meet our publicly announced revenue and/or expense projections
and/or product development timetables;
    
    adverse or inconclusive results or delays in preclinical development or clinical
trials;
    
    any material amendment or termination of our collaborative agreements;
    
    any decisions to discontinue or delay development programs or clinical trials;
    
    announcements of new technological innovations or new products by us or our
competitors;
    
    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;
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
    
    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;
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.
  If we or our collaborators receive regulatory approval for our drug candidates, we will be
subject to ongoing FDA obligations and continued regulatory review, and we may also be subject to
additional FDA post-marketing obligations, all of which may result in significant expense and limit
our ability to commercialize our potential drugs.
  We may be subject to costly product liability claims and may not have adequate insurance.
  We currently have no product marketing capabilities.
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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.
  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
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Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Exhibits
  3.1
    
    Amended and Restated By-laws, effective September 6, 2007 (incorporated by
reference to Exhibit 3.1 to Maxygens Current Report on Form 8-K (File No. 000-28401)
filed with the Securities and Exchange Commission on September 7, 2007).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 1, 2007
    
    By:
    
    /s/ Russell J. HowardRussell J. HowardChief Executive OfficerNovember 1, 2007
    
    By:
    
    /s/ Lawrence W. BriscoeLawrence W. BriscoeChief Financial Officer
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ExhibitNumber
    
    Description3.1
    
    Amended and Restated By-laws, effective September 6,
2007 (incorporated by reference to Exhibit 3.1 to
Maxygens Current Report on Form 8-K (File No.
000-28401) filed with the Securities and Exchange
Commission on September 7, 2007).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
 42