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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, 2004

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.  x

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 June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, 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 National Stock Market as of that date, was $238,996,518. Shares of common stock held by each executive officer and director and by each person who owned 5% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2005, there were 35,668,446 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s proxy statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this report. In addition, certain exhibits filed with the registrant’s prior annual reports, quarterly reports, registration statements and current reports are incorporated by reference into Part IV, Item 15(b) of this report.

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This report and the disclosures herein include, on a consolidated basis, the continuing business and operations of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS and Maxygen Holdings Ltd., as well as its consolidated subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary. In this report “Maxygen”, the “Company”, “we”, “us” and “our” refer to such consolidated entities, unless, in each case, the context indicates that the disclosure applies only to a named subsidiary. The operations of Verdia, Inc. prior to its sale on July 1, 2004 are reflected in our financial statements as discontinued operations. Please note that as a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, Maxygen’s voting rights in Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated subsidiary of Maxygen.

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 report.

Maxygen is a registered trademark of Maxygen, Inc. MaxyScan and MolecularBreeding are some of our trademarks. Codexis, Thoroughbred and SmartSynth are trademarks of Codexis, Inc. Verdia 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.

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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 25 to 37 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 biotechnology company focused on using our protein optimization and modification technologies to create and develop novel therapeutic and industrial products. We are a leader in the field of directed molecular evolution, a process by which genes are modified for specific commercial uses. Our technologies bring together advances in molecular biology and protein modification to help create novel biotechnology products. 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 high-value protein pharmaceutical products. We also seek to capture value from our technologies in the chemicals industry through our subsidiary Codexis, Inc. 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: Roche in interferon alpha and interferon beta therapies; InterMune in next generation interferon gamma therapies; the International AIDS Vaccine Initiative (IAVI) 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 entered into a range of other strategic alliances in industrial applications, including with Novozymes, Chevron, Sandoz, Cargill and Cargill-Dow. We also have received funding from U.S. government

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organizations including from the Defense Advanced Research Projects Agency (DARPA), 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 plan to continue to establish strategic collaborations with leaders in our target industries. We will also seek to continue to retain rights in 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 currently have four potential high value protein pharmaceutical products in pre-clinical development at our partners or at Maxygen, with several other potential products in the research phase. In addition, Codexis has five processes that are operating at commercial scale, each process generating royalty payments.

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 (SEC), 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 and Maxygen Holdings Ltd., as well as our consolidated subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary. The operations of Verdia, Inc. (formerly our agriculture subsidiary) prior to its sale on July 1, 2004 are reflected in our financial statements as discontinued operations. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, Maxygen’s voting rights in Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated subsidiary of Maxygen.

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 have four potential high value protein pharmaceutical products in pre-clinical development at our partners or at Maxygen, with several other potential products in the research phase. In addition, Codexis has five processes that are operating at commercial scale, each process generating royalty payments. Our target markets include protein pharmaceuticals and chemicals. Within these markets, we are focused on specific high-value opportunities.

Human Therapeutics.    We have research and development programs in both the protein pharmaceutical and vaccine business areas.

Our primary focus, the therapeutic protein pharmaceutical market, represents a large and growing opportunity. In 2003, worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $32 billion. Protein pharmaceutical products, such as alpha interferon and granulocyte colony stimulating factor (“G-CSF”), represent some of the world’s most profitable pharmaceutical products and the protein therapeutics sector is one of the fastest growing of the pharmaceutical market, with an annual sales growth rate of 8 to 12%. We have a portfolio of improved protein therapeutics in development.

We also work on novel vaccines, primarily funded through government grants and partnerships. Worldwide sales of all vaccines were estimated to be over $6.2 billion in 2002.

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Industrial Applications.    Our chemicals business is operated through our subsidiary Codexis, Inc. Codexis is a provider of biocatalysis and fermentation processes and products to the life science and fine chemical industries. This business area provides an attractive market opportunity for Codexis.

Sales in the chemical industry exceeded $1.7 trillion in 2000, with 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. Codexis focuses on developing novel biocatalytic processes that increase yields and decrease manufacturing costs for multiple currently marketed products. In particular Codexis is focused on developing proprietary catalysts and processes for the production of several currently marketed pharmaceutical products.

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 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 positive changes is expensive and time consuming. The second approach to directed molecular evolution

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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 more 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 often 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 is our MolecularBreeding directed evolution platform, 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 and chemicals. We have also developed expertise in other technologies that can be applied to optimize protein drugs, in particular directed conjugation technologies. These include rational approaches to glycosylation and PEGylation of proteins. Such post-translational modifications of proteins have been demonstrated to improve the pharmacokinetics and pharmacodynamics of protein drugs. In addition, these modifications can improve the solubility, bioavailability and immunogencity profile of protein drugs.

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 through our chemicals subsidiary Codexis. 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 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 provide our strategic collaborators with licenses to intellectual property developed by us in the collaboration for specific products for specific uses. Generally, we retain the right to work independently or with others on products outside the scope of the areas that are the subject of our collaborations. In exchange for commercial licenses to the products developed in specified fields, we typically seek up-front license fees, research funding, technology advancement funding, research and commercial milestone payments and royalties on product sales. Our goal is to benefit from the combined expertise of Maxygen and our collaborators.

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

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Expand Our Proprietary Technology Leadership.    To expand our technology leadership, we plan to:

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.

Our Progress to Date

Since 1997 we have entered into over 20 strategic collaborations and several proof of principle collaborations with commercial entities and have received ten grants from U.S. government agencies and philanthropic organizations. Since inception we have received $164.7 million of cash from our collaborators and from government grants, which includes $55.5 million of funding received by Verdia, our agriculture subsidiary and sole component of our agriculture segment, prior to its disposition, and $4.7 million of deferred revenue relating to continuing operations to be recognized over approximately the next two years. Approximately $131.9 million was received from our collaborators and $32.8 million was received from government funding. Assuming our research efforts for existing collaborations and grants from continuing operations continue for their full research terms, as of December 31, 2004, we had total committed funding of approximately $16.6 million remaining to be received over approximately the next two years, of which $12.2 million is to be received by Codexis. Potential milestone payments from our existing collaborations could exceed $400 million based on the accomplishment of specific performance criteria. We are also entitled to receive royalties on product sales generated from these collaborations.

In 2004, we were successful in achieving most of our corporate goals. On July 1, 2004 we sold our agriculture business (Verdia) to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for $64 million in cash. We also enhanced the value of our human therapeutics business by continuing to advance our pre-clinical protein pharmaceutical product candidates. These product candidates include: an optimized interferon alpha to treat hepatitis C virus infection in collaboration with Roche; an optimized interferon gamma to treat idiopathic pulmonary fibrosis and other human diseases in collaboration with InterMune; and two internal product candidates, an optimized G-CSF for the treatment of neutropenia and an optimized Factor VII to treat uncontrolled bleeding. In addition to these four human therapeutic product candidates, we have other product candidates in development for which we continue to seek outside funding for continued development.

Codexis, our chemicals subsidiary, continued to grow its business in 2004. Codexis is owned by a combination of Maxygen (51.4% Maxygen ownership as of December 31, 2004) and independent investors, and is independently capitalized. In July 2004, Codexis established a multi-year product development collaboration with Pfizer. In addition to the collaboration Pfizer made a $10 million equity investment in Codexis. During 2004 Codexis also established a research collaboration with Teva Pharmaceutical Industries Ltd. and announced the commercialization of a manufacturing process with Lonza Group Ltd. Codexis now has over 20 potential products and processes in its research and development pipeline with two product candidates in development. In addition, Codexis has five processes now operating at commercial scale, each generating royalty payments. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, Maxygen’s voting rights in

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Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated subsidiary of Maxygen.

In 2004, we had eight additional U.S. patents issue and seven additional foreign patents granted bringing the total number of U.S. and foreign patents owned or licensed by us as of December 31, 2004 to more than 180. We also have over 500 patent applications pending worldwide that are owned by us or licensed to us.

Current Fields of Application

We are currently applying our technologies to high-value opportunities in the fields of human therapeutics, with a focus on next generation protein drugs. In addition, our subsidiary Codexis is engaged in the development of bio-based solutions for pharmaceutical chemical process development and manufacturing.

Human Therapeutics

Our human therapeutics business presents us with opportunities in a wide variety of disease indications for which there is a significant unmet medical need for improved protein drugs that are more efficacious (or effective), safer and/or provide more convenient treatments.

Although our primary focus is on next generation protein therapeutics, we have a small number of limited and focused ongoing vaccine research projects that are principally funded by third parties.

Protein Therapeutics

Our goal is to be one of the world’s leading providers of improved, proprietary, protein-based therapeutics.

Market Opportunity.    With a worldwide market (sales) in 2003 of approximately $32 billion, the area of recombinant DNA produced protein therapeutics is one of the fastest growing sectors of the pharmaceuticals market. Despite this commercial success, many presently marketed protein pharmaceuticals have deficiencies as therapeutics. For example, some protein drugs have limited pharmacologic half-life and as a result, require frequent, high doses. Other protein pharmaceuticals have adverse side effects that limit dosing and patient compliance. Proteins can also be immunogenic, potentially leading to adverse events or reduced therapeutic efficacy. Our opportunity and focus is to develop products with improved attributes.

The need to modify natural proteins to make them into better drugs is evident in that most FDA-approved protein pharmaceuticals have required some level of engineering to improve pharmacological properties. Some examples of FDA-approved recombinant protein pharmaceuticals that have been modified are listed below.

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By applying our technologies, which include our MolecularBreeding directed evolution platform and also post-translational modification tools, we believe we will be able to develop more potent, safer and/or more convenient protein pharmaceuticals that help address the limitations of current protein pharmaceuticals, as well those currently in development where clear deficiencies have already been identified. Our goal is to make “best in class” protein drugs. This strategy has driven some of the most successful commercial franchises in the pharmaceutical industry. For example Lipitor, a lipid-lowering agent that was the fifth product in its class and approved 11 years after the first product in its class, is now the market leader with worldwide sales of over $10 billion in 2003.

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 evolution platform, our proprietary technologies include 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 evolution platform to seek to modulate the receptor specificity of a protein, and subsequently use directed PEGylation to potentially reduce immunogenicity and improve the pharmacokinetic profile of the modified protein.

Business Strategy.    Our strategy for protein pharmaceuticals is to balance partnering with independent development of our therapeutic products. In furtherance of our internal development activities, we are selectively building internal pre-clinical and clinical capabilities and establishing relationships with contract research organizations to allow us to move products through the drug approval processes in the United States, Europe, and other important markets. In parallel, we are working with pharmaceutical and biotechnology 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.

In order to capture value from our pipeline of product opportunities while maintaining a controlled cash burn, we are focusing our efforts on advancing key product opportunities in areas where we can most effectively compete, such as:

Products/Pipeline.    We have continued to advance our product portfolio with significant progress towards the clinic with our MAXY-ALPHA, MAXY-GCSF, MAXY-GAMMA and MAXY-FACTOR VII programs (see below). As a result of a portfolio reprioritization, we terminated our MAXY-BETA (interferon beta) program in November 2004. At present, we have four active programs aimed at improving therapeutic proteins, each of which are next generation versions of successfully marketed products. All four of the projects are in pre-clinical development and we currently expect that INDs will be filed on two of these four programs in 2006.

Lead Product Candidates in Our Protein Pharmaceutical Pipeline

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Potential Products in Research and Development.

MAXY-ALPHA

Optimized interferon alpha to treat hepatitis C

We have used our proprietary technologies and expertise to develop multiple optimized versions of interferon alpha that are designed to have superior safety and efficacy profiles compared to other interferon alpha products currently on the market. Specifically, these improved interferon alphas have been engineered to induce enhanced antiviral activity and immune response to clear viruses more effectively in patients who do not respond to existing therapies. In addition to improvements in the drug’s mechanism of action, use of PEGylation may allow us to maintain the convenience and improved efficacy associated with once-weekly dosing.

Status

Based on the current development state of the project, we expect Roche to file an IND for our improved interferon alpha in 2006. In 2005 we expect our improved interferon alpha to move into cGMP manufacturing and for Roche to complete the necessary pharmacokinetic and pharmacodynamic studies required for filing the IND. We expect to receive a preclinical milestone payment in 2005 from Roche related to specific pre-clinical advancements.

Scope

Total worldwide sales of interferon alpha therapies for the treatment of hepatitis C virus infection, hepatitis B virus infection and cancer were approximately $3.0 billion worldwide in 2003 (including ribavirin), with the treatment of hepatitis C virus infection representing approximately two-thirds of the total sales.

Through optimized use of interferon alpha with ribavirin, response rates have improved dramatically over the past decade. However, the efficacy for hepatitis C virus therapies is still relatively low, especially in patients infected with certain subtypes of hepatitis C virus. Overall, approximately 60 percent of patients respond to combination therapy as measured by clearance of the virus from the blood. However, in patients infected with certain strains of hepatitis C virus only 40 percent of patients respond to current therapies. In either case, the durability of response is inadequate and many patients will relapse.

Strategy

In 2003, we entered into a broad alliance with Roche to develop novel improved interferon alpha and beta products for a wide range of indications. Roche licensed from Maxygen worldwide commercialization rights to specific novel interferon alpha and beta product candidates for the treatment of hepatitis C and B virus infections. We received an initial payment, research and development funding for the first two years of the collaboration and option fees. In addition, we are eligible to receive milestone payments and royalties based on product sales.

The Roche agreement also provides the companies with the option to expand the collaboration to develop other novel interferon alpha and beta products specifically tailored for indications outside of the treatment of hepatitis C and B virus infections, including oncology, autoimmune diseases, inflammatory diseases, and other infectious diseases such as HIV. We retain the right to develop such products while Roche may elect to acquire worldwide license and commercialization rights to these product candidates. We also have the option to co-develop in the United States any product to which Roche acquires a license in exchange for profit sharing or an increased royalty rate.

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MAXY-GCSF

Improved G-CSF to treat neutropenia

We have used our proprietary technologies and expertise to develop an improved version of granulocyte colony stimulating factor (“G-CSF”) that is designed to provide improved effectiveness at decreasing the duration of neutropenia over currently marketed products while maintaining the convenience of once per chemotherapy cycle dosing. The profile of our improved G-CSF has been validated in rat, mouse and primate models of chemotherapy-induced neutropenia.

Status

In September 2004 we established an agreement with Rentschler Biotechnologie GmbH in Germany for the scale-up and manufacture of clinical supplies of our next generation G-CSF molecule. Since then, we have completed technology transfer for the manufacturing runs in preparation for regulatory toxicology studies later in 2005. We are moving this program forward towards an expected IND filing in 2006.

Scope

A first-generation and second-generation G-CSF product currently dominate the market to treat chemotherapy and radiation induced neutropenia. Worldwide sales of G-CSF products exceeded $3 billion in 2004 and are expected to exceed $4 billion in 2005. An improved G-CSF with greater efficacy presents a significant market opportunity.

Strategy

Even with the currently available G-CSF products, cancer patients who receive chemotherapy are still at risk for life threatening infections due to the time it takes these drugs to produce a therapeutic effect. An improved G-CSF that reduced the duration of neutropenia while maintaining once per cycle dosing could meet a significant medical need. We currently retain all rights to our proprietary G-CSF program.

MAXY-FACTOR VII

Improved factor VII for uncontrolled bleeding indications

We have generated several novel factor VIIa (MAXY-VII) molecules that may provide a more effective treatment for uncontrolled bleeding in several important clinical areas. In preclinical animal models, our lead molecule, MAXY-VII has demonstrated enhanced efficacy and an improved in vivo circulating half-life compared to alternative products. MAXY-VII appears to stimulate more rapid and increased thrombin generation in blood resulting in a significant reduction in blood loss in relevant preclinical models. We believe our MAXY-VII product candidate may provide significant advantages over currently marketed products and products in development to treat bleeding episodes in multiple indications such as trauma, hemophilia and intracerebral hemorrhage (ICH).

Status

In November 2004, we announced advancement of our factor VII program into pre-clinical development in anticipation of future clinical development.

Scope

The current worldwide market for factor VII based products is approximately $1.6 billion, predominantly for the treatment of hemophilia. The hemophilia treatments market is expected to grow at a rate of approximately 8.6% with estimated worldwide 2008 sales of approximately $4.9 billion. Over the last year, new clinical data

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has validated the use of factor VII based products in the treatment of severe bleeding in trauma and surgery and for the treatment of intracranial bleeding (hemorrhagic stroke). These additional indications represent substantial market opportunities for our factor VII product candidate.

Strategy

Data suggests that our improved factor VII may be useful in a number of indications to treat bleeding episodes in trauma, hemophilia and intracerebral hemorrhage (ICH). We currently retain all rights to our proprietary factor VII program.

MAXY-GAMMA

Optimized interferon gamma to Treat Idiopathic Pulmonary Fibrosis and Other Severe Diseases

We have created an improved version of interferon gamma to treat a variety of diseases including fibrosis, hepatitis C, tuberculosis, meningitis, and cancer. We believe that interferon gamma may help in the prevention of excessive scarring or fibrosis of organs such as the liver and the lung.

Status

Our improved interferon gamma is currently in preclinical development at InterMune, which has informed us that it plans to put the improved compound into the clinic within the next few years.

Scope

Idiopathic pulmonary fibrosis (IPF) is an inflammatory disease that results in severe scarring or “fibrosis” of the lungs. In time, this fibrosis can build up to the point where the lungs are unable to provide oxygen to the tissues of the body. An effective treatment for IPF could be a lifesaver for affected patients who today have no viable treatment options. The average survival rate of a patient with IPF is four to six years after diagnosis. The estimated market for interferon gamma to treat IPF is believed to be up to $2.5 billion annually.

Strategy

We have established a collaboration with InterMune, in which InterMune will develop and market Maxygen’s improved version of interferon gamma. Our improved product candidate is designed to have improved efficacy and a less-frequent dosing regimen over InterMune’s currently marketed interferon gamma (Actimmune^®). Actimmune^® is marketed for the treatment of chronic granulomatous disease (CGD) and severe, malignant osteoporosis, and it is in Phase III clinical trials for the treatment of IPF, multidrug-resistant tuberculosis (MDR TB) and ovarian cancer. Actimmune^® is also in Phase II trials in combination with Infergen^® for the treatment of Hepatitis C viral infection.

Protein Pharmaceutical Alliances.

Roche.    In May 2003, we formed a broad strategic alliance with F. Hoffmann-La Roche Ltd. (“Roche”) to collaborate on the global development and commercialization of our portfolio of next-generation interferon alpha and beta variants for a wide range of indications. The collaboration will initially focus on the development of lead candidates for the treatment of hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) infection that have been designed by us to have novel and superior efficacy compared to currently marketed interferon alpha products. This builds on Roche’s commitment to hepatitis, following Pegasys, a new generation interferon that provides significant benefit over conventional interferon therapy in patients infected with HCV.

Roche has licensed from us worldwide commercialization rights to specific novel interferon product candidates for the treatment of HBV and HCV infection. We received an initial payment and are entitled to research and development funding for the first two years of the collaboration. We are also entitled to receive option fees. In addition, we are eligible to receive milestone payments and royalties based on product sales.

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The alliance also provides the companies with the option to expand the collaboration to develop other novel interferon alpha and beta products specifically tailored for indications outside the treatment of HBV and HCV infection, including oncology, autoimmune diseases, inflammatory diseases, and other infectious diseases such as HIV infection. We retain the right to develop such products while Roche may elect to acquire worldwide license and commercialization rights to these product candidates. We also have the option to co-develop in the United States any product to which Roche acquires a license in exchange for profit sharing or an increased royalty rate.

The Interferon Alpha Market

Total worldwide sales of interferon alpha therapies for the treatment of hepatitis C virus infection, hepatitis B virus infection and cancer were approximately $3.0 billion worldwide in 2003 (including ribavirin), with the treatment of hepatitis C virus infection representing approximately two-thirds of the total sales.

About Hepatitis B

HBV is a blood-born virus that attacks the liver and is the most common serious liver infection in the world. The hepatitis B virus is highly contagious and is relatively easy to transmit from one infected individual to another. It is on the order of 100 times more infectious than the HIV virus.

About Hepatitis C

Hepatitis C is a serious blood-born viral infection that attacks the liver, and in many patients it leads to liver disease, cirrhosis and cancer. It is the leading cause of liver transplantation. Only identified in 1989, the hepatitis C virus has infected more than 170 million people world-wide, making it more common than the HIV virus.

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 was 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), a Phase III trial for ovarian cancer and a Phase II trial in combination with Infergen^® for the treatment of Hepatitis C viral infection. Under the terms of the agreement, InterMune has taken product candidates developed by us into pre-clinical development. We have developed a series of pre-clinical candidates that have been shown in animal models to improve pharmacokinetic properties that should allow a once-per-week dosing regimen. InterMune has exclusive worldwide commercialization rights for these next-generation interferon gamma product candidates for all human therapeutic indications. We have received up-front license fees and research and development funding from InterMune and in October 2002 we announced that we had received a $1 million milestone payment from InterMune for successfully achieving drug performance criteria established by InterMune. We are entitled to receive additional development and commercialization milestone payments based upon clinical development, regulatory approvals and commercial sales. In addition, we are entitled to receive royalties on product sales. The funded research term of the collaboration ended in June 2004.

Rentschler.    In September 2004, we entered into a manufacturing agreement with Rentschler Biotechnologie GmbH for the scale-up and manufacture of clinical supplies of our MAXY-GCSF next-generation G-CSF product candidate. Rentschler Biotechnologie has over 25 years of expertise in mammalian cell culture technology and proven capabilities in manufacturing recombinant biopharmaceutical products. It was amongst the pioneers for the development and production of interferon beta-1a and was also the first company to receive market authorization for an interferon biologic.

Vaccines

We have a number of active programs focused on the development of novel vaccines for the prevention of infectious diseases. This work is primarily being funded by research grants and collaborations.

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Market Opportunity.    Worldwide sales of vaccines were estimated to be over $6.2 billion in 2002. By 2010, some industry professionals predict the market for therapeutic vaccines alone could reach more than $15 billion. 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 had sales of almost $700 million in 2003.

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

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.

Business Strategy.    Our strategy for vaccines is to develop selected vaccine opportunities with Maxygen and grant funding to a point third party funding can be secured to develop new and improved preventative and therapeutic vaccines. We intend to partner or outlicense potential products and enter into additional collaborations to access additional vaccine product technologies and product development capabilities. By collaborating with leading vaccine companies we seek to balance our return and our development risk. Additionally, the flexibility of our technologies allows many targets to be pursued, 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 also enabled us to advance key programs and our technology platform as a whole. In the future we expect to fund our vaccine research and development primarily through research grants and other third party funding.

Products/Pipeline.    We are developing vaccines for the prevention of infectious diseases.

Our Vaccine Pipeline

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Our lead vaccine product candidate is a vaccine to prevent dengue virus infection and the risk of dengue hemorrhagic fever that is in the pre-clinical development stage. We are collaborating with the Henry Jackson Foundation and U.S. Naval Medical Research on the development of this vaccine. While our lead product candidate has proven successful in pre-clinical primate studies, we will not initiate clinical development without third-party funding support from an appropriate corporate, government or philanthropic partner.

Vaccine Alliances

U.S. Army