Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number 000-28401

MAXYGEN, INC.

(Exact name of registrant as specified in its charter)

515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices)

(650) 298-5300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.0001 per share

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x    No ¨

As of February 28, 2003, there were 34,593,197 shares of the registrant’s common stock outstanding, which is the only class of common or voting stock of the registrant issued as of that date. The aggregate market value of the voting stock held by non-affiliates computed by reference to the closing price for the common stock as quoted by the Nasdaq Stock Market as of February 28, 2003 was approximately $174,975,867.

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of the registrant’s definitive proxy statement for its 2003 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

Table of Contents

TABLE OF CONTENTS

In this report “Maxygen”, the “Company”, “we”, “us” and “our” refer to Maxygen, Inc. and all its consolidated subsidiaries, including, unless the context indicates otherwise, our majority-owned chemicals subsidiary Codexis, Inc. and our wholly-owned agriculture subsidiary Verdia, Inc.

Maxygen and the Maxygen logo are registered trademarks of Maxygen, Inc. MaxyScan and MolecularBreeding are some of our trademarks. Codexis is a trademark of Codexis, Inc. and Verdia, Inc. is a trademark of Verdia, Inc. Other service marks, trademarks and trade names referred to in this report, and in the documents incorporated by reference in this report, are the property of their respective owners. The use of the word “partner” and “partnership” does not mean a legal partner or legal partnership.

Table of Contents

Forward Looking Statements

This report contains forward-looking statements about our research, business prospects and future financial performance. In some cases, you can identify forward-looking statements by terminology, such as “may”, “can”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “intend”, “potential” or “continue” or the negative of these terms or other comparable words. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:

These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. The risk factors set forth below at pages 29 to 40 should be considered carefully in evaluating us and our business.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. Other than as required by applicable law, we disclaim any obligation to update or revise any forward-looking statement contained in this report as a result of new information or future events or developments.

PART I

Overview

We are a leader in the field of directed molecular evolution, a process by which genes are modified for specific commercial uses. We are focused on creating novel therapeutic and industrial products using our integrated technologies. Our technologies bring together advances in molecular biology and protein modification to help create novel biotechnology products. Unlike conventional technologies, our approaches require minimal understanding of complex underlying biological systems and can therefore help develop products faster and more cost-effectively. We have designed our technologies to rapidly improve existing biotechnology products as well as to create products that would be difficult or impossible to develop through other processes.

Our principal objective is to commercialize multiple high-value products in a broad range of industries including human therapeutics, agriculture and chemicals. Our products will be developed and marketed either through corporate collaborations or independently by Maxygen. To date, we have established strategic collaborations with leading companies including: Aventis Pasteur in novel vaccines; InterMune in next generation interferon gamma therapies; Lundbeck in interferon beta therapies for nervous system diseases, including multiple sclerosis; ALK-Abelló in allergy; the International AIDS Vaccine Initiative in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and Shearwater Corporation (a subsidiary of Nektar Therapeutics) in protein pharmaceutical PEGylation technologies. Additionally, we have a range of other strategic alliances in industrial applications, including with Novozymes, DuPont, Syngenta, Rio Tinto and Chevron. We also have received funding from U.S. government organizations including from the Defense

1

Table of Contents

Advanced Research Projects Agency, the National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command.

We will continue to establish strategic collaborations with leaders in our target industries. We will also continue to retain rights in some of our collaborations to internally develop and market products resulting from our alliances. In addition, we have invested, and will continue to invest, our own funds in specific areas and product opportunities. We have over 40 potential products in various stages of research, with sixteen potential products in development. In addition, Codexis has five processes that are operating at commercial scale. We have also established over 20 strategic alliances.

We began operations in 1997 to commercialize technologies originally conceived at Affymax Research Institute, then a subsidiary of what is now GlaxoSmithKline plc. We were incorporated in Delaware on May 7, 1996 and began operations in March 1997. Our principal executive offices are located at 515 Galveston Drive, Redwood City, CA 94063. Our telephone number is (650) 298-5300. We make available on our website all reports filed with the Securities and Exchange Commission, including our reports on Form 10-K, 10-Q and 8-K, as soon as reasonably practicable after they have been filed. Our website is located at www.maxygen.com. Information contained on our website is not a part of this annual report.

This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen and our wholly-owned subsidiaries, Maxygen ApS, Maxygen Holdings Ltd. and Verdia, Inc., as well as our 57% owned subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.

Market Opportunity

We have a platform of proprietary technologies that helps allow us to integrate the powerful tools available in the biotechnology industry to develop novel and improved products for human therapeutics and industrial applications. We are currently working on over 40 different potential products, including sixteen potential products that are in the development stage, either on our own or with companies that are leaders in their fields. In addition, Codexis has five processes that are operating at commercial scale. Our target markets include protein pharmaceuticals, preventative and therapeutic vaccines, chemicals and agriculture. Within these markets, we are focused on specific high-value opportunities.

Human Therapeutics.    The human therapeutic protein pharmaceutical and vaccine markets represent a large opportunity for Maxygen. In 2001, worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $25 billion. Protein pharmaceutical products, such as erythropoietin and granulocyte colony stimulating factor, represent some of the world’s most profitable pharmaceutical products. The protein therapeutics sector is one of the fastest growing sectors of the pharmaceutical market, with an annual sales growth rate of 5 to 15%.

Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to exceed approximately $11 billion by 2010. This dramatic growth in the vaccine market is expected to be driven by the anticipated success of therapeutic vaccines and the development of novel vaccines that address significant unmet clinical needs.

In human therapeutics, we are focused on developing products for a number of indications, including multiple forms of cancer, infectious diseases such as HIV, hematology, allergies, and autoimmune diseases such as rheumatoid arthritis and multiple sclerosis.

Industrial Applications.    The industrial application markets of chemicals and agriculture also offer an attractive market opportunity for Maxygen. In 2000, sales in the chemical industry exceeded $1.7 trillion, with

2

Table of Contents

approximately $50 billion in sales readily addressable by biological processing, for example, either by fermentation or through the use of enzyme catalysts. An additional $200 billion in sales has been identified as potentially addressable by biological approaches within the next 10-20 years.

In chemicals, we are focused on developing novel biocatalytic processes that increase yields and decrease manufacturing costs for multiple known products. In particular we are focused on developing proprietary catalysts and processes for the production of pharmaceutical products. The agricultural biotechnology seed market was estimated at approximately $3 billion in sales in 2001. It is expected to grow to approximately $5–8 billion in sales by 2005 and to approximately $20-25 billion in sales by 2010. Biotechnology crops, first introduced to the market in 1996, have been adopted rapidly by farmers and were planted on approximately 130 million acres in 2001. In agriculture, we are primarily applying our technologies to potentially increase crop yield, including through insect and pesticide resistance.

Uses and Limitations of Genes as Products

Genes and the protein products expressed by genes have significant value in multiple commercial areas. The modern biotechnology industry was founded to capture this value, primarily through the isolation of genes from natural sources, and subsequent protein production from these genes for use in commercial production systems. Despite some notable exceptions, the majority of proteins discovered by scientists and developed by the modern biotechnology industry have not been commercially successful. The lack of product success is due in part to the fact that the relevant proteins did not evolve for commercial purposes.

In recent years, significant research efforts in biotechnology have focused on identifying genes and elucidating their function. These efforts, which are known as genomics, have been highly successful in identifying tens of thousands of genes, but to date have not lead to rapid product development. This results from two primary causes. First, the genes identified by genomics did not evolve for commercial purposes. Second, once a gene has been identified, a number of steps need to be completed before the genetic information can be used for the development of products.

Typical deficiencies of naturally occurring genes and proteins that limit their commercial utility as therapeutic products include inappropriate availability in the body, instability, difficulty and cost to manufacture, lack of specificity, toxicity and other side effects. Similarly, in applications such as agriculture and chemical processes using enzymes as catalysts, problems include the levels at which proteins can be made, lack of specificity, instability, poor efficiency of enzyme function under industrial manufacturing conditions and the degree of purity. In addition, potential products with the highest commercial value often result from the action of multiple genes or multiple biological reactions and are difficult to optimize with modern biotechnology techniques. Many biotechnology companies have abandoned or never pursued development efforts with potential product candidates as a result of the unsuitability of the wild-type proteins for commercial uses.

The biotechnology industry has used two other main approaches to attempt to adapt genes and their protein products for commercial uses. One approach, rational design, seeks to modify a gene to improve its properties based on knowledge regarding how the structure of the gene determines the function of its resultant protein. Fundamental research on the mechanism of action of the relevant protein is pursued until the knowledge gained is used to try to make a rational prediction of how to change the gene for desired effect. This process requires many simplifying assumptions, is costly, time intensive and has been generally unsuccessful.

A second approach, directed molecular evolution, seeks to improve genes for commercial purposes by mimicking the natural events of evolution. There are two general approaches to directed molecular evolution, those utilizing targeted mutagenesis and those utilizing recombination-based techniques. Targeted mutagenesis involves the mutation of genes at preselected sites, most of which are harmful to gene function. The mutated genes are then screened to determine which mutations have resulted in improved attributes. Since targeted mutation has a low probability of improving a gene or sequence of complex biological reactions, screening for

3

Table of Contents

positive changes is expensive and time consuming. The second approach to directed molecular evolution involves recombination-based techniques, which mimic naturally occurring sexual recombination, a process in which regions of DNA are exchanged between strands of DNA. As recombination-based techniques do not require an understanding of the underlying biological process, and do not generate as many harmful changes as random mutagenesis, use of this approach is generally less costly and less time intensive than genomics, rational design or targeted mutagenesis approaches.

The Maxygen Solution

We have developed proprietary technologies that help address the limitations of modern biotechnology, allow for the rapid identification of lead product candidates and increase the opportunities for developing characteristics optimally suited for specific commercial purposes. Our integrated technologies bring together advances in molecular biology and protein modification to help create novel biotechnology products. Our technologies are faster and less expensive than conventional technologies. Our use of such technologies is commercially-focused and results-oriented, and unlike many conventional approaches, requires minimal understanding of complex underlying biological systems.

The most significant of our technologies are our MolecularBreeding directed molecular evolution technologies, of which there are two components. The first is DNAShuffling, our proprietary process for recombining genes into a diverse high-quality library of novel DNA sequences known as gene variants. The second is MaxyScan, a series of proprietary screening capabilities for the selection of desired commercial properties from the library of gene variants. The combination of DNAShuffling recombination technologies and MaxyScan specialized screening help allow us to identify new potential products in a more rapid, cost-effective manner than conventional techniques.

Virtually any product or process that utilizes, or could utilize, DNA or proteins can potentially be improved for optimal function using our technologies. We are currently applying our technologies to adapt genes and proteins for use in fields as diverse as protein pharmaceuticals, vaccines, chemicals and agriculture.

We believe that our technologies provide distinctive advantages over traditional biotechnology, as summarized in the following table.

Advantages of Maxygen’s Technologies

The Maxygen Strategy

Our goal is to be a world leader in the commercialization of biotechnology products. We believe our technologies have broad commercial application, including short-, medium- and long-term commercial opportunities in human therapeutics and industrial applications (agriculture and chemicals). Our business strategy is built around two major efforts:

Commercialize Proprietary Products.    We will continue to strengthen our capabilities to develop high value products in each of our target markets through two primary mechanisms:

Product Development Partnerships:    Our strategy in entering into strategic collaborations is to work with leaders in their respective industries in specific areas of product focus. Our agreements grant to our

4

Table of Contents

Independent Product Development:    We plan to develop multiple products for a number of industries. We have invested and will continue to invest our own funds in specific, economically attractive, product opportunities.

Expand Our Proprietary Technology Leadership.    To expand our technology leadership, we will continue to develop our core technologies by investing in research and development. We will continue to acquire and license technologies from third parties that complement our capabilities to develop products. We will protect and build upon our existing patent portfolio and also rely on trade secrets to protect our proprietary technologies. We will continue to recruit, and collaborate with, leaders in the field of directed molecular evolution and complementary technologies and in various therapeutic indications and industrial segments.

We will continue to support both elements of our business strategy by gaining access to complementary technologies, capabilities and expertise through in-licensing agreements, corporate partnerships and corporate acquisitions. We may also pursue additional grants from U.S. government agencies in areas of commercial interest.

Since 1997 we have entered into over 20 strategic collaborations and several proof of principle collaborations with commercial entities and have received nine grants from U.S. government agencies. Since inception we have received $116.1 million in funding from our collaborators and from government grants, which includes $10.3 million in deferred revenue to be recognized over the next three years. Approximately $89.5 million was received from our collaborators and $26.6 million was received from government funding. We have also received $15 million from our collaborators in consideration for purchases of equity. Assuming our research efforts for existing collaborations and grants are expended for their full research terms, as of December 31, 2002 we had total committed funding of approximately $30.6 million remaining to be received over the next three years. Potential milestone payments from our existing collaborations could exceed $300 million based on the accomplishment of specific performance criteria. These payments are in addition to royalties on product sales.

In 2002, we were successful in achieving most of our corporate goals. We advanced our four pre-clinical product candidates further in the development process. These product candidates include: interferon beta in our collaboration with Lundbeck; interferon gamma in our collaboration with InterMune; a therapeutic colon cancer vaccine in internal development and a preventative vaccine for Dengue hemorraghic fever, also in internal development. We currently have 16 potential products in development; 13 with corporate collaborators, one that is being funded by Maxygen and two that we are actively seeking outside funding for continued development. We entered into three new product development collaborations in 2002; alliances with Cargill Dow and Eli Lilly in chemicals, and a joint venture with Delta and Pine Land Company in agriculture called DeltaMax Cotton LLC to exploit opportunities in cotton. In 2002 we also received our first commercialization royalties and completed an independent financing of our chemicals subsidiary, Codexis, Inc. In 2002, we had 34 additional U.S. patents issue and 32 additional foreign patents granted bringing the total number of patents owned or licensed by us as of December 31, 2002 to 156. We also have over 400 patent applications worldwide.

Current Fields of Application

We are currently applying our technologies to high-value opportunities in the fields of human therapeutics (protein pharmaceuticals, prophylactic vaccines and therapeutic vaccines) and industrial applications (agriculture and chemicals).

5

Table of Contents

Human Therapeutics

Our human therapeutics business, consisting of protein pharmaceuticals, prophylactic vaccines and therapeutic vaccines, presents us with opportunities in a wide variety of disease indications for which there is a significant unmet medical need for more efficacious (or effective) treatments. The markets for many of these disease indications are very large and are summarized in the table below.

Source: MedAdNews May 2002

Protein Pharmaceuticals

We are dedicated to becoming one of the world’s leading providers of improved, proprietary, protein-based therapeutics.

Market Opportunity.    In 2001, worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $25 billion. Protein pharmaceutical products, such as erythropoietin and granulocyte colony stimulating factor, represent some of the world’s most profitable pharmaceutical products. The protein therapeutics sector is one of the fastest growing sectors of the pharmaceutical market, with an annual sales growth rate of 5 to 15%.

However, many presently marketed protein pharmaceuticals have deficiencies as therapeutics. For examples some protein drugs have limited stability or efficacy in vivo and, as a result, require frequent and high doses. Other protein pharmaceuticals have adverse side effects that limit dosing and patient compliance. Furthermore, proteins can also be immunogenic, potentially leading to adverse events or reduced therapeutic efficacy.

As a result of the problems associated with use of naturally-occurring proteins as drugs, most FDA-approved protein pharmaceuticals have required some level of engineering to improve pharmacological properties. We believe significant opportunity exists to further improve these approved drugs and other protein therapeutics. A subset of the FDA-approved recombinant protein pharmaceuticals that have been modified is listed below.

Sources: Product monographs and Kurtzman, et al. Current Opinion in Biotechnology 2001, 12: 361–370.

6

Table of Contents

By applying our technologies, including our MolecularBreeding directed molecular evolution technologies and post-translational modification tools, we believe we will be able to develop more potent and safer protein pharmaceuticals that help address the limitations of current protein pharmaceuticals. Our technology offers a means both to develop new therapeutics, with better commercial and therapeutic attributes than naturally occurring proteins, and to develop improved next-generation protein drugs.

Business Strategy.    Our strategy for protein pharmaceuticals is to partner and independently develop new and improved therapeutic products. Biopharmaceuticals at all stages of development—research, clinical, marketed or failed—are potential targets for improvement. We are currently building internal pre-clinical and clinical capabilities to allow us to move multiple products through the approval processes in the United States, Europe, and other important markets. In parallel, we are working with pharmaceutical companies to develop, manufacture and commercialize biopharmaceutical candidates made using our technologies. By collaborating with leading pharmaceutical companies and creating better versions of proven protein therapeutics we believe that we can maximize our return and decrease our development risk.

Our protein pharmaceuticals activities were expanded considerably in August 2000 by our acquisition of Maxygen ApS (then known as Profound Pharma A/S), a Danish company, which contributed protein modification technologies and capabilities, as well as strong additions to our management team with drug development expertise. With the acquisition of Maxygen ApS, our research-stage protein pharmaceutical product pipeline was doubled. We have also benefited by additional expertise related to all stages of protein pharmaceutical development including molecular biology, protein chemistry, in vitro and in vivo pharmacology, immunology, and pre-clinical and clinical development. Additionally, having a European presence may provide us European business opportunities that may not have been accessible otherwise.

Technology Platform.    We are capable of improving biopharmaceuticals in important parameters through the use of our integrated platform of proprietary technologies. In addition to our MolecularBreeding directed molecular evolution technologies, our proprietary platform includes a number of significant technologies for structure-based molecular design, intelligent diversity generation, and directed PEGylation and glycosylation. We have also designed and implemented expression systems, automated high-throughput fermentation capabilities, and protein purification and characterization techniques that are specific to proteins. Our technology platform is highly flexible and enables us to apply a wide selection of technologies in an integrated fashion to improve proteins for a desired function. For example, we can use our MolecularBreeding directed molecular evolution technologies to modulate the receptor specificity of a protein, and subsequently use directed PEGylation to reduce immunogenicity and improve the pharmacokinetic profile.

In addition, we have a broad strategic relationship with Shearwater Corporation (a subsidiary of Nektar Therapeutics), a leader in PEG technology. This alliance provides us with access to Shearwater’s proprietary PEGylation chemistries, as well as PEG compound supply, for the development of our product candidates.

Products/Pipeline.    Our protein pharmaceuticals activities are focused on the development of second-generation, “tailor made”, and novel protein therapeutics. At present, we have thirteen active programs aimed at improving therapeutic proteins, many of which are next generation versions of successfully marketed products. Two of those potential products are in pre-clinical development.

7

Table of Contents

Examples of Potential Products in Protein Pharmaceutical Pipeline

Protein Pharmaceutical Alliances.

InterMune.    In September 2001, we granted a license to, and established a three-year collaboration with, InterMune, Inc. to develop and commercialize novel, next-generation interferon gamma products. The main purpose of the collaboration is to develop a next-generation Actimmune^® with enhanced pharmacokinetics and a less-frequent dosing regime. Actimmune^® (Interferon gamma-1b), is currently being marketed by InterMune in the United States for the treatment of chronic granulomatous disease (CGD) and severe, malignant osteopetrosis. InterMune is continuing the development of Actimmune^® by conducting several advanced stage clinical trials, including a Phase III trial for the treatment of idiopathic pulmonary fibrosis (IPF) and a Phase III trial for ovarian cancer. Under the terms of the agreement, InterMune has taken forward into clinical development product candidates created by Maxygen. InterMune has funded and will continue to fund optimization and development of the next-generation interferon gamma products, and will retain exclusive worldwide commercialization rights for all human therapeutic indications. Maxygen has received up-front license fees, and has received and will continue to receive full research funding. It has also received one development milestone payment and will be entitled to receive future development and commercialization milestone payments based upon clinical development, regulatory approvals and commercial sales. In addition, Maxygen will receive royalties on product sales. In October 2002 we announced that Maxygen had received a $1 million milestone payment from InterMune for successfully achieving drug performance criteria established by InterMune. Maxygen has developed a series of preclinical candidates that have been shown in animal models to improve pharmacokinetic properties that should allow a once-per-week dosing regimen. These compounds are now advancing into further pre-clinical development.

Lundbeck.    In September 2000, we established a three-year strategic alliance with H. Lundbeck A/S, a Danish pharmaceutical company, to develop an interferon beta pharmaceutical product to address nervous system diseases, including multiple sclerosis. Treatments for these diseases may provide Lundbeck with access to a market with a potential value of $3.0 billion. Lundbeck specializes in the development of pharmaceuticals to treat psychiatric and neurological disorders. We have received research and development funding as well as license fees and milestone payments based on developmental success and are entitled to receive further research and development funding, license fees and milestone payments based on clinical trials, regulatory approval and commercial sales. We are also entitled to receive royalties on product sales. We retain development and marketing rights to the product in key Asian markets and global rights for all indications outside of nervous system diseases, including inflammatory diseases, infectious diseases and cancer. In February 2002 we announced that Lundbeck intended to move an optimized interferon beta lead compound from the collaboration forward into pre-clinical development. The lead compound has been engineered by us to have an improved drug profile for therapy, with reduced immunogenicity, increased bioavailablility and substantially improved half life, to minimize side effects and maximize therapeutic efficacy.

8

Table of Contents

Vaccines

We are dedicated to becoming a leader in the development of novel vaccines for the prevention and treatment of infectious diseases, cancer, autoimmune disease and allergy.

Market Opportunity.    Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to exceed approximately $11 billion by 2010. Recombinant DNA technology has enabled the development of prophylactic vaccine products that are safer, cheaper and easier to manufacture. This may create new market potential for these types of products, such as the Hepatitis B vaccine market, which is estimated to have had 2001 sales of $1.6 billion.

The vaccine market is expected to increase dramatically for several key reasons:

Business Strategy.    Our strategy for vaccines is to partner and independently develop new and improved preventative and therapeutic vaccines. We intend to outlicense and partner potential products that we choose not to develop independently and enter into additional collaborations to further our technologies and product development capabilities. By collaborating with leading pharmaceutical companies we seek to balance our return and our development risk. Additionally, the speed of our technologies allows many targets to be pursued simultaneously, thus decreasing portfolio risk.

Our vaccine business activities have been built primarily through grant funding of more than $25 million from the U.S. government. This funding has enabled us to advance key programs and our technology platform as a whole.

Technology Platform.    We believe our proprietary technologies have the potential to transform the design and development of vaccines through the optimization of properties that allow for the generation of broad and strong immune responses. We have shown that we can generate new modified vaccines that have the potential to overcome the limitations of traditional vaccine development. This may enable us to help address both the treatment and prevention of a wide variety of diseases including cancer, allergy, autoimmune disease and infectious diseases such as AIDS and hepatitis.

We believe our technologies will help enable us to develop prophylactic and therapeutic vaccines with one or more of the following key characteristics:

9

Table of Contents

Products/Pipeline.    We are developing vaccines for the prevention and treatment of cancer, autoimmune diseases, allergy and infectious diseases. Products may be developed both internally by Maxygen, as well as through corporate collaborations for specific product opportunities.

Examples of Potential Products in Vaccine Pipeline

Our two lead vaccine product candidates are in the pre-clinical development stage; the first is a therapeutic vaccine for the treatment of colorectal cancer; the second is a vaccine to prevent dengue virus infection and the risk of dengue hemmorrhagic fever. We are pursuing out-licensing and/or joint development opportunities for each of these lead products. While each of the two lead product candidates has proven successful in pre-clinical primate studies, we will not be continuing into clinical development on our own with either of the lead product candidates. However, we will move towards clinical development with either or both of the lead product candidates if we are able to secure funding from an appropriate corporate, government or philanthropic partner. In addition to our two lead product candidates, we have approximately ten prophylactic and therapeutic vaccine candidates in our research pipeline.

10

Table of Contents

Vaccine Alliances

U.S. Army Medical Research and Materiel Command.    In August 2002, we received a $