-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HTRa30ZdhpeDwMtrSN18CZ1+uTR+epdDXJc7eWV2sKMXu/MJ4twYrplMpBr/uaCX 23oMKvOQtuN4z2M5iptVVw== 0001012870-99-004648.txt : 19991216 0001012870-99-004648.hdr.sgml : 19991216 ACCESSION NUMBER: 0001012870-99-004648 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19991215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXYGEN INC CENTRAL INDEX KEY: 0001068796 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770449487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-89413 FILM NUMBER: 99774710 BUSINESS ADDRESS: STREET 1: 515 GALVESTON DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6502985300 MAIL ADDRESS: STREET 1: 515 GALVESTON DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 S-1/A 1 AMENDMENT NO. 2 TO THE FORM S-1 As filed with the Securities and Exchange Commission on December 15, 1999 Registration No. 333-89413 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- MAXYGEN, INC. (Exact name of Registrant as specified in its charter) --------------- Delaware 8731 77-0449487 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
MAXYGEN, INC. 515 Galveston Drive Redwood City, California 94063 (650) 298-5300 (Address, including zip code, and telephone number, including area code, of Maxygen, Inc.'s principal executive offices) --------------- RUSSELL J. HOWARD, Ph.D. President and Chief Executive Officer MAXYGEN, INC. 515 Galveston Drive Redwood City, California 94063 (650) 298-5300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: JULIAN N. STERN BARRY E. TAYLOR AUGUST J. MORETTI TREVOR J. CHAPLICK Heller Ehrman White & McAuliffe Wilson Sonsini Goodrich & Rosati 2500 Sand Hill Road, Suite 100 Professional Corporation Menlo Park, California 94025-7063 650 Page Mill Road Telephone: (650) 234-4229 Palo Alto, California 94304 Facsimile: (650) 234-4299 Telephone: (650) 493-9300 Facsimile: (650) 845-5000
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable following the effectiveness of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] --------------- CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum Securities to be Amount to be Offering Price Aggregate Offering Amount of Registered Registered(1) Per Share Price(3) Registration Fee(3) - --------------------------------------------------------------------------------------------------------- Common Stock, $.0001 par value................ 6,325,000 $15.00 $94,875,000 $26,174 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
(1) Includes 825,000 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended. (3) $22,379 of such amount previously paid. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +The information in this preliminary prospectus is not complete and may be + +changed. These securities may not be sold until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +preliminary prospectus is not an offer to sell nor does it seek an offer to + +buy these securities in any jurisdiction where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, Dated December 15, 1999. 5,500,000 Shares [MAXYGEN LOGO] Common Stock ----------- This is an initial public offering of 5,500,000 shares of common stock of Maxygen, Inc. Maxygen is selling all of the shares of common stock in this offering. At the request of Maxygen, the underwriters have reserved at the initial public offering price up to 1,112,508 shares of common stock for sale to Dr. Alejandro Zaffaroni and his affiliates, R.A. Investment Group and its affiliates and Pioneer Overseas Corporation, each of whom is an existing Maxygen stockholder. We will sell all of these reserved shares on the same terms and conditions as the shares sold to the public. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $13.00 and $15.00. The common stock has been approved for quotation on The Nasdaq National Market under the symbol "MAXY." See "Risk Factors" beginning on page 7 to read about factors you should consider before buying shares of the common stock. ----------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. -----------
Per Share Total --------- ----------- Initial public offering price............................ $ $ Underwriting discount.................................... $ $ Proceeds, before expenses, to Maxygen.................... $ $
To the extent that the underwriters sell more than 5,500,000 shares of common stock, the underwriters have the option to purchase up to an additional 825,000 shares from Maxygen at the initial public offering price less the underwriting discount. ----------- The underwriters expect to deliver the shares against payment in New York, New York on December , 1999. Goldman, Sachs & Co. Robertson Stephens Invemed Associates ----------- Prospectus dated , 1999. [Diverse Market Opportunities Graphic] Header: Diverse Market Opportunities Description: Graphical illustration description of the four industry areas in which Maxygen is currently focused, including chemicals, agriculture, vaccines and pharmaceuticals. [MolecularBreeding Graphic] Header: Maxygen's technologies known as MolecularBreeding create novel genes for commercial purposes. Description: Graphical illustration of the MolecularBreeding process, showing genes undergoing DNAShuffling and MaxyScan. Identification of the potential business models intended to capture value, including alliances, proprietary products and technology access. PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us, the sale of our common stock in this offering, and our financial statements and notes to those financial statements that appear elsewhere in this prospectus. Our Business Overview We believe that we are the leader in the emerging field of directed molecular evolution, the process by which genes are modified for specific commercial uses. Our proprietary technologies, known as MolecularBreeding(TM), mimic the natural process of evolution and bring together advances in molecular biology and classical breeding, while capitalizing on the large amount of genetic information generated by government, academic and commercial laboratories. Unlike conventional technologies, MolecularBreeding technologies are efficient, in part because they require minimal understanding of complex underlying biological systems. We have designed our technologies to rapidly develop new genes for commercial applications, where such genes would be difficult or impossible to develop through other processes. We believe our MolecularBreeding technologies are commercially applicable to a broad range of industries. We are currently conducting research on more than 35 product candidates for the chemical, agricultural and pharmaceutical industries, enabling us to potentially generate short-term as well as long-term revenues. We have established collaborations with Novo Nordisk, DuPont/Pioneer Hi- Bred, AstraZeneca and DSM, all leaders in their respective markets, as well as with United States government agencies. Our commercial collaborators and U.S. government agencies have committed funding of over $94 million. While we will continue to establish strategic collaborations with leading companies and pursue additional grants from U.S. government agencies, we will also invest our own funds in certain areas. To that end, we have retained significant product commercialization rights to future applications of our technologies. Our Target Markets Our technologies address a number of multi-billion dollar industries. Our target markets include chemicals, agriculture, protein pharmaceuticals, and preventative and therapeutic vaccines. Within these markets, we are focusing our efforts on specific high-value opportunities. In chemicals, we are developing new processes using enzymes as catalysts that could increase yields and decrease manufacturing costs for multiple product classes, such as vitamins, pharmaceuticals, paints and plastics. In addition, we believe that processes using enzymes as catalysts may have utility for generating new useful materials such as fibers for industrial and consumer product applications. In agriculture, we are applying our technologies to potentially increase crop yield and qualities, including enhanced nutritional value in human food and animal feed. In pharmaceuticals and vaccines, we are focusing our efforts on developing products for a number of indications, including multiple forms of cancer, infectious diseases such as HIV and hepatitis, and diseases in which the body generates an improper immune response, such as rheumatoid arthritis and multiple sclerosis. Our Technologies Our MolecularBreeding technologies consist of two components: DNAShuffling(TM) technologies and MaxyScan(TM) screening systems. DNAShuffling is the process of recombining single genes or gene families to generate a library of new modified genes. MaxyScan is a series of specialized screening systems that efficiently and rapidly select those gene products and enzymes best suited for specific commercial purposes. We have an extensive patent portfolio, including 15 issued U.S. patents, of which five are owned by us and 10 have been licensed to us by others. Furthermore, we have over 40 families of patent 3 applications relating to our MolecularBreeding technologies, the application of our technologies to diverse industries and specific proteins improved by our technologies. Our Accomplishments We have attracted a multi-disciplinary team comprised of leading experts in the field of directed molecular evolution. We have consistently been able to generate significant enhancements in many different genes that have relevance to multiple commercial applications. We have demonstrated improvements in 10 product candidates and have an additional 29 product candidates in earlier stages of development. For example, we have increased the anti-viral activity of a protein and developed new modified enzymes which have the potential to streamline chemical and pharmaceutical manufacturing processes. In addition, we have significantly improved the performance of multiple commercially relevant properties of the industrial enzyme, subtilisin, one of the most studied and extensively modified commercial enzymes. Subtilisin, which is widely used in laundry detergents, had annual sales of $500 million in 1998. We believe that this example demonstrates the ability of MolecularBreeding to achieve significant improvements beyond the limits of other approaches in biotechnology. To date, we have established strategic alliances with Novo Nordisk in the area of industrial enzymes, DuPont/Pioneer Hi-Bred and AstraZeneca in agriculture, and DSM in antibiotic manufacturing. Since 1997, our collaborators have committed funding of over $67 million, assuming we perform research for the full term of the existing collaborations. Of this amount, we have received approximately $24 million, including $10 million in equity investments. In addition, we could receive over $145 million in milestone payments based on the accomplishment of specific performance criteria, as well as royalties on product sales. We have received six grants from the U.S. National Institute of Standards and Technology-Advanced Technology Program and the Defense Advanced Research Projects Agency with total committed grant funding of over $27 million, of which we have expended approximately $5 million. These grants are primarily for the development of vaccines and the advancement of our MolecularBreeding technologies. Our Strategy Our strategy has four major components: . We will continue to develop our core MolecularBreeding technologies to extend our proprietary technology leadership by investing significantly in research and development programs. . We will continue to establish strategic collaborations with leading companies in targeted industries and will pursue additional grants from U.S. government agencies. We have retained, and intend to retain, significant rights to develop and market certain applications of products arising from our strategic collaborations. . We plan to develop multiple products in the chemicals, agriculture and pharmaceutical industries to generate revenues in the short-, medium- and long-term. We expect to receive a diversified royalty stream from the sale of commercial products and processes that may be developed and commercialized by our existing collaborators as well as revenues from any products that result from our grant-funded programs and self-funded programs. . We plan to retain rights to use our technologies in multiple applications. We will invest our own funds in selected areas and product opportunities with the aim of capturing a high percentage of profits on product sales. Our History We began operations in 1997 to commercialize technologies originally conceived by Dr. Willem P.C. Stemmer while at Affymax Research Institute, a subsidiary of Glaxo Wellcome plc. We now have over 125 employees and occupy our own facilities and executive offices, totaling 47,880 square feet, located at 515 Galveston Drive, Redwood City, California 94063. Our telephone number is (650) 298-5300. We were incorporated under the laws of Delaware on May 7, 1996. 4 Maxygen(TM), MaxyScan(TM), MolecularBreeding(TM), DNAShuffling(TM), and the Maxygen logo are some of our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. The Offering Shares offered by Maxygen.................... 5,500,000 shares Shares outstanding after this offering....... 29,410,568 shares Proposed Nasdaq National Market symbol....... MAXY Use of proceeds.............................. For research and development activities, for capital expenditures, to finance possible acquisitions and investments in technology, and for working capital and other general corporate purposes.
--------------- The above information is based on shares outstanding as of November 15, 1999. This information excludes 1,903,975 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.85 per share and 2,108,488 shares of common stock reserved for future issuance under our benefit plans. Except as otherwise indicated, we have presented information in this prospectus based on the following assumptions: . the underwriters do not exercise their over-allotment option; and . each outstanding share of preferred stock converts into one share of common stock upon the closing of this offering. 5 Summary Financial Data See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing per share data below. See Note 8 to Financial Statements for information concerning the deemed dividend upon issuance of convertible preferred stock in August 1999.
Nine Months Year Ended Ended September December 31, 30, ---------------- ---------------- 1997 1998 1998 1999 ------- ------- ------- ------- (in thousands, except per share data) Statement of Operations Data: Collaborative research and development revenue.................................. $ 341 $ 1,077 $ 729 $ 6,068 Grant revenue............................. -- 1,646 1,090 3,625 ------- ------- ------- ------- Total revenues............................ 341 2,723 1,819 9,693 Operating expenses: Research and development................ 3,074 7,858 5,229 12,897 General and administrative.............. 1,461 3,920 2,313 4,333 ------- ------- ------- ------- Total operating expenses.................. 4,535 11,778 7,542 17,230 ------- ------- ------- ------- Loss from operations...................... (4,194) (9,055) (5,723) (7,537) Net interest income....................... 161 229 75 783 ------- ------- ------- ------- Net loss.................................. $(4,033) $(8,826) $(5,648) $(6,754) Deemed dividend upon issuance of convertible preferred stock.............. -- -- -- (2,200) ------- ------- ------- ------- Net loss attributable to common stockholders............................. $(4,033) $(8,826) $(5,648) $(8,954) ======= ======= ======= ======= Basic and diluted net loss per share...... $ (0.82) $ (1.31) $ (1.54) $ (1.15) ======= ======= ======= ======= Shares used in computing basic and diluted net loss per share....................... 4,917 6,748 3,679 7,778 Pro forma basic and diluted net loss per share.................................... $ (0.75) $ (0.53) ======= ======= Shares used in computing pro forma basic and diluted net loss per share........... 11,762 17,028
In the "pro forma" column below, we have adjusted the actual balance sheet data to give effect to the net proceeds from the issuance of 1,846,707 shares of common stock upon the exercise of stock options for $180,000 of promissory notes and $687,000 in cash in October and November 1999. In the "pro forma as adjusted" column below, we have adjusted the pro forma balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of 5,500,000 shares of common stock at an assumed initial public offering price of $14.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
September 30, 1999 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Balance Sheet Data: Cash and cash equivalents....................... $ 36,120 $ 36,807 $107,417 Working capital................................. 32,268 32,955 103,565 Total assets.................................... 43,458 44,145 114,755 Accumulated deficit............................. (19,613) (19,613) (19,613) Total stockholders' equity...................... 33,589 34,276 104,886
6 RISK FACTORS You should carefully consider the risks described below, together with all of the other information included in this prospectus, before deciding whether to invest in our common stock. The occurrence of any of the following risks could harm our business, financial condition or results of operations. 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 We May Not Achieve or Maintain Profitability. We have incurred net losses since our inception, including a net loss of approximately $6.8 million for the nine months ended September 30, 1999. As of September 30, 1999, we have an accumulated deficit of approximately $19.6 million. We expect to have increasing net losses and negative cash flow in the foreseeable future. The size of these net losses will depend, in part, on the rate of growth, if any, in our contract revenues and on the level of our expenses. To date, we have derived all of our revenues from collaborations and grants and will continue to do so in the foreseeable future. Revenues from collaborations and grants are uncertain because our existing agreements have fixed terms and because our ability to secure future agreements will depend upon our ability to address the needs of our potential future collaborators. We expect to spend significant amounts to fund research and development and enhance our core technologies. As a result, we expect that our operating expenses will increase significantly in the near term and, consequently, we will need to generate significant additional revenues to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not Develop Commercially Successful Products, We May Be Forced to Cease Operations. You must evaluate us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our MolecularBreeding technologies are new and in the early stage of development. We may not develop products that prove to be safe and efficacious in any market, meet applicable regulatory standards, are capable of being manufactured at reasonable costs, or can be marketed successfully. We may not be successful in the commercial development of products. Successful products will require significant development and investment, including testing, to demonstrate their cost-effectiveness prior to their commercialization. To date, companies in the biotechnology industry have developed and commercialized only a limited number of gene-based products. We have not proven our ability to develop and commercialize products. Further, none of our potential vaccine or protein therapeutic products are expected to enter clinical trials within the next year. We must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our products. Our research and development may not indicate that our products are safe and effective, in which case regulatory authorities may not approve them. Problems frequently encountered in connection with the development and utilization of new and unproven technologies and the competitive environment in which we operate might limit our ability to develop commercially successful products. Commercialization of Our Technologies Depends On Collaborations With Other Companies. If We Are Not Able to Find Collaborators in the Future, We May Not Be Able to Develop Our Technologies or Products. Since we do not currently possess the resources necessary to develop and commercialize potential products that may result from our MolecularBreeding technologies, or the resources to complete any approval processes which may be required for these products, we must enter into collaborative arrangements to develop and commercialize products. We have entered into collaborative agreements 7 with other companies to fund the development of certain new products for specific purposes. These contracts expire after a fixed period of time. If they are not renewed or if we do not enter into new collaborative agreements, our revenues will be reduced and our products may not be commercialized. We have limited or no control over the resources that any collaborator may devote to our products. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, market or sale of these products. If any of these events occur, we may not be able to develop our technologies or commercialize our products. We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our Collaborators or Any Inability to Commercialize Products Resulting from This Research Could Harm Our Business. An important part of our strategy involves conducting proprietary research programs. We may pursue opportunities in fields that could conflict with those of our collaborators. Moreover, disagreements with our collaborators could develop over rights to our intellectual property. Any conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators, which could reduce our revenues. Certain of our collaborators could also become competitors in the future. Our collaborators could develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforts. We will either commercialize products resulting from our proprietary programs directly or through licensing to other companies. We have no experience in manufacturing and marketing, and we currently do not have the resources or capability to manufacture products on a commercial scale. In order for us to commercialize these products directly, we would need to develop, or obtain through outsourcing arrangements, the capability to manufacture, market and sell products. We do not have these capabilities, and we may not be able to develop or otherwise obtain the requisite manufacturing, marketing and sales capabilities. If we are unable to successfully commercialize products resulting from our proprietary research efforts, we will continue to incur losses. We May Encounter Difficulties in Managing Our Growth. These Difficulties Could Increase Our Losses. We have experienced a period of rapid and substantial growth that has placed and, if this growth continues, will place a strain on our human and capital resources. If we are unable to manage this growth effectively, our losses could increase. The number of our employees increased from 20 at December 31, 1997 to 109 at September 30, 1999. Our revenues increased from $341,000 in 1997 to $2.7 million in 1998 and $9.7 million for the nine months ended September 30, 1999. Our ability to manage our operations and growth effectively requires us to continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to successfully implement improvements to our management information and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then management may receive inadequate information to manage the day-to-day operations of the Company. 8 Since Our Technologies Can Be Applied to Many Different Industries, If We Focus Our Efforts on Industries Which Fail to Produce Viable Product Candidates, We May Fail to Capitalize on More Profitable Areas. We have limited financial and managerial resources. In light of the fact that our technologies may be applicable to numerous, diverse industries, we will be required to prioritize our application of resources to discrete efforts. This requires us to focus on product candidates in selected industries and forego efforts with regard to other products and industries. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities. Public Perception of Ethical and Social Issues May Limit the Use of Our Technologies, Which Could Reduce Our Revenues. Our success will depend in part upon our ability to develop products discovered through our MolecularBreeding technologies. Governmental authorities could, for social or other purposes, limit the use of genetic processes or prohibit the practice of our MolecularBreeding technologies. Ethical and other concerns about our MolecularBreeding technologies, particularly the use of genes from nature for commercial purposes, and products resulting therefrom could adversely affect their market acceptance. If the Public Does Not Accept Genetically Engineered Products, We Will Have Less Demand for Our Products. The commercial success of our potential products will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Our genetically engineered products may not gain public acceptance. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling requirements, and could cause a decrease in the demand for our products. The subject of genetically modified organisms has received negative publicity in Europe, which has aroused public debate. The adverse publicity in Europe could lead to greater regulation and trade restrictions on imports of genetically altered products. If similar adverse public reaction occurs in the United States, genetic research and resultant products could be subject to greater domestic regulation and could cause a decrease in the demand for our products. Many Potential Competitors Who Have Greater Resources and Experience Than We Do May Develop Products and Technologies That Make Ours Obsolete. The biotechnology industry is characterized by rapid technological change, and the area of gene research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may result in our products and technologies becoming obsolete. We face, and will continue to face, intense competition from organizations such as large biotechnology companies, as well as academic and research institutions and government agencies that are pursuing competing technologies for modifying DNA. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors in the directed molecular evolution field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce enzymes for commercial purposes. Any products that we develop through our MolecularBreeding technologies will compete in multiple, highly competitive markets. Most of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs and facilities and capabilities, and greater experience in modifying DNA, obtaining regulatory approvals, product manufacturing and marketing. 9 Accordingly, our competitors may be able to develop technologies and products more easily which would render our technologies and products and those of our collaborators obsolete and noncompetitive. Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our Competitive Position. Our success will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights. The patent positions of biopharmaceutical and biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and products as we deem appropriate. However, these applications may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. We rely upon trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets. Litigation or Other Proceedings or Third Party Claims of Intellectual Property Infringement Could Require Us to Spend Time and Money and Could Shut Down Some of Our Operations. Our commercial success depends in part on neither infringing patents and proprietary rights of third parties, nor breaching any licenses that we have entered into with regard to our technologies and products. Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments which we may wish to utilize with our MolecularBreeding technologies, or products that are similar to products developed with the use of our MolecularBreeding technologies. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product 10 introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products. If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products. We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. We do not currently have sufficient executive management personnel to fully execute our business plan. There is currently a shortage of skilled executives, which is likely to continue. As a result, competition for skilled personnel is intense, and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. Failure to attract and retain personnel would prevent us from pursuing collaborations or developing our products or core technologies. Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business. We Will Need Additional Capital in the Future. If Additional Capital is Not Available, We Will Have to Curtail or Cease Operations. Our future capital requirements will be substantial and will depend on many factors including payments received under collaborative agreements and government grants, the progress and scope of our collaborative and independent research and development projects, and the filing, prosecution and enforcement of patent claims. Changes may also occur that would consume available capital resources significantly sooner than we expect. We may be unable to raise sufficient additional capital. If we fail to raise sufficient funds, we will have to curtail or cease operations. We anticipate that the net proceeds of this offering and interest earned thereon will enable us to maintain our currently planned operations for at least the next two years. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if any, resulting from our technologies. Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The Government Has License Rights to Technology Developed With Its Funds. We have received and expect to continue to receive significant funds under various U.S. government research and technology development programs. The government may significantly reduce funding in the future for a number of reasons. For example, some programs are subject to a yearly appropriations process in Congress. Additionally, we may not receive funds under existing or future grants because of budgeting constraints of the agency administering the program. There can be no assurance that we will receive the entire funding under our existing or future grants. Our grants provide the U.S. government a non-exclusive, non-transferable paid up license to practice for or on behalf of the U.S. inventions made with federal funds. If the government exercises these rights, the U.S. government could use these inventions and Maxygen's potential market could be reduced. 11 Our Potential Therapeutic 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. The Food and Drug Administration must approve any vaccine or therapeutic product before it can be marketed in the U.S. Before we can file a new drug application or biologic license application with the FDA, the product candidate must undergo extensive testing, including animal and human clinical trials, which can take many years and require substantial expenditures. Data obtained from such testing are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application or product license application may cause delays or rejections. The regulatory process is expensive and time consuming. Because our products involve the application of new technologies and may be based upon new therapeutic approaches, they may be subject to substantial review by government regulatory authorities and, government regulatory authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. We have not submitted an application with the FDA or any other regulatory authority for any product candidate, and neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our MolecularBreeding technologies for commercialization in the U.S. or elsewhere. We or any of our collaborators may not be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for our products. The regulatory agencies of foreign governments must also approve our therapeutic products before the products can be sold in those other countries. Even after investing significant time and expenditures, we may not obtain regulatory approval for our products. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer and manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices. Laws May Limit Our Provision of Genetically Engineered Agricultural Products in the Future. These Laws Could Reduce Our Ability to Sell These Products. We may develop genetically engineered agricultural products. The field testing, production and marketing of genetically engineered plants and plant products are subject to federal, state, local and foreign governmental regulation. Regulatory agencies administering existing or future regulations or legislation may not allow us to produce and market our genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to our product development programs or the commercialization of resulting products. The FDA currently applies the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding. However, genetically engineered food products will be subject to premarket review if these products raise safety questions or are deemed to be food additives. Our products may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise questions, are deemed to be food additives, or if the FDA changes its policy. The FDA has also announced in a policy statement that it will not require that genetically engineered agricultural products be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its labeling policies, or local or state authorities may enact labeling requirements. Any such labeling requirements could reduce the demand for our products. 12 The U.S. Department of Agriculture prohibits genetically engineered plants from being grown and transported except pursuant to an exemption, or under strict controls. If our future products are not exempted by the USDA, it may be impossible to sell such products. Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on Pharmaceutical Products. Our future products are expected to include pharmaceutical products. Our ability and that of our collaborators to commercialize pharmaceutical products developed with our MolecularBreeding technologies may depend in part on the extent to which reimbursement for the cost of these products will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third party coverage will be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. Our Collaborations With Outside Scientists May Be Subject to Change Which Could Limit Our Access to Their Expertise. We work with scientific advisors and collaborators at academic and other institutions. These scientists are not our employees and may have other commitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. Although our scientific advisors and collaborators sign agreements not to disclose our confidential information, it is possible that certain of our valuable proprietary knowledge may become publicly known through them. We May Be Sued for Product Liability. We may be held liable if any product we develop, or any product which is made with the use or incorporation of, any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. These risks are inherent in the development of chemical, agricultural and pharmaceutical products. Although we intend to obtain product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. If we are sued for any injury caused by our products, our liability could exceed our total assets. We Use Hazardous Chemicals and Radioactive and Biological Materials in Our Business. Any Claims Relating to Improper Handling, Storage or Disposal of These Materials Could Be Time Consuming and Costly. Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Some of these materials may be novel, including viruses with novel properties and animal models for the study of viruses. Our operations also produce hazardous waste products. Some of our work also involves the development of novel viruses and viral animal models. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts. We believe that our current operations comply in all material respects with applicable Environmental Protection Agency regulations. 13 In addition, certain of our collaborators are working with these types of hazardous materials in connection with our collaborations. To our knowledge, the work is performed in accordance with biosafety regulations. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these viruses and hazardous materials. Further, under certain circumstances, we have agreed to indemnify our collaborators against all damages and other liabilities arising out of development activities or products produced in connection with these collaborations. Management May Invest or Spend the Proceeds of This Offering in Ways With Which You May Not Agree and in Ways That May Not Yield a Return. Management will retain broad discretion over the use of proceeds from this offering. Stockholders may not deem such uses desirable, and our use of the proceeds may not yield a significant return or any return at all. Management intends to use a majority of the proceeds from this offering for research and development, working capital and other general corporate purposes and to finance potential acquisitions or investments. Because of the number and variability of factors that determine our use of the net proceeds from this offering, we cannot assure you that these uses will not vary substantially from our currently planned uses. Pending these uses of the net proceeds from this offering, we intend to invest the net proceeds from this offering in short-term, interest-bearing, investment grade and U.S. government securities. Our Stock Price Could Be Extremely Volatile and You May Not Be Able to Resell Your Shares at or Above the Initial Offering Price. Prior to this offering, there has been no public market for shares of our common stock. An active trading market may not develop following completion of this offering, or if developed, may not be maintained. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters. This price may not be indicative of prices that will prevail later in the market. The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly life science companies such as ours, without consistent product revenues and earnings, have been highly volatile. You may not be able to resell your shares at or above the initial public offering price. In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company's securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees and our management's attention and resources would be diverted from operating our business in order to respond to the litigation. We Expect that Our Quarterly Results of Operations Will Fluctuate, and This Fluctuation Could Cause Our Stock Price to Decline, Causing Investor Losses. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors which could cause our operating results to fluctuate include: . expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced; . the success rate of our discovery efforts leading to milestones and royalties; . the timing and willingness of collaborators to commercialize our products which would result in royalties; and . general and industry specific economic conditions, which may affect our collaborators' research and development expenditures. 14 A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if revenues decline or do not grow as anticipated due to expiration of research contracts or government research grants, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. In addition, we plan to significantly increase operating expenses in 2000. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. Future Sales of Our Common Stock May Depress Our Stock Price. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market after the closing of this offering, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. There will be 29,410,568 shares of common stock outstanding immediately after this offering, or 30,235,568 shares if the representatives of the underwriters exercise their over-allotment option in full. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates," as defined in Rule 144 of the Securities Act. The remaining 23,910,568 shares of common stock outstanding will be "restricted securities" as defined in Rule 144. These shares may be sold on the 181st day after the date of this prospectus without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See "Shares Eligible for Future Sale." Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make Decisions that Are in the Best Interests of All Stockholders. After this offering, our officers, directors and principal stockholders (greater than 5% stockholders) will together control approximately 51% of our outstanding common stock, and Affymax Technologies N.V. will own approximately 23% of our outstanding common stock. As a result, these stockholders, if they act together, and Affymax Technologies N.V. by itself, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Maxygen and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider. If We Engage in Any Acquisition, We Will Incur a Variety of Costs, and We May Never Realize the Anticipated Benefits of the Acquisition. If appropriate opportunities become available, we may attempt to acquire businesses, technologies, services or products that we believe are a strategic fit with our business. We currently have no commitments or agreements with respect to any material acquisitions. If we do undertake any transaction of this sort, the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition. Future acquisitions could reduce your ownership in Maxygen and could cause us to incur debt, expose us to future liabilities and result in amortization expenses related to goodwill and other intangible assets. 15 In addition, recent proposed changes in the Financial Accounting Standards Board rules for merger accounting may affect the cost of making acquisitions or of being acquired. For example, if these proposed changes become effective we would likely have to record goodwill or other intangible assets that we would amortize to earnings if we merge with another company. Such amortization would adversely impact our future operating results. Further, accounting rule changes that reduce the availability of write-offs of the value of in-process research and development in connection with an acquisition could result in the capitalization and amortization of these amounts which would negatively impact results of operations in future periods. Our Facilities Are Located Near Known Earthquake Fault Zones, and the Occurrence of an Earthquake or Other Catastrophic Disaster Could Cause Damage to Our Facilities and Equipment, Which Could Require Us to Cease or Curtail Operations. Our facilities are located in the San Francisco Bay Area near known earthquake fault zones and are vulnerable to damage from earthquakes. In October 1989 a major earthquake that caused significant property damage and a number of fatalities struck this area. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the unique nature of our research activities and of much of our equipment could make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. As a New Investor, You Will Experience Immediate and Substantial Dilution. If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution of $8.85 per share in pro forma net tangible book value. If the holders of outstanding options or warrants exercise those options or warrants, you will incur further dilution. See "Dilution." If We, Our Customers or Our Suppliers Fail to Remedy Year 2000 Issues, Our Research Programs Could Be Interrupted and Our Business and Operating Results Could be Harmed. If we, our customers, our providers of hardware and software or our third- party computer network providers fail to remedy any Year 2000 issues, our research programs could be interrupted. Any significant interruption in our research would harm our operating results. Presently, we are unable to predict whether an interruption is likely to occur, the duration of any interruption or the effect an interruption would have on our future revenue. We cannot guarantee that we will be able to identify and correct all Year 2000 problems on a timely basis. Similarly, we cannot guarantee that unknown or unanticipated Year 2000 issues will not arise. As a result, Year 2000 compliance efforts may involve significant time and expense and the occurrence of unknown, unanticipated or unremediated Year 2000 problems could harm our business and operating results. We currently have no contingency plans to address the risks associated with unremediated Year 2000 problems. 16 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following: (1) our MolecularBreeding technologies and processes, (2) our ability to realize commercially valuable discoveries in our programs, (3) our intellectual property portfolio, (4) our business strategies and plans and (5) our ability to develop products suitable for commercialization. These statements are only predictions. 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. We are under no duty to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. USE OF PROCEEDS We expect to receive net proceeds from the sale of the 5,500,000 shares of common stock of approximately $70,610,000 at an assumed initial public offering price of $14.00 per share (approximately $81,351,500 if the underwriters' over- allotment option is exercised in full), after deducting the estimated underwriting discounts and offering expenses payable by us. We intend to use the net proceeds of the offering for research and development, working capital and other general corporate purposes and capital expenditures. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development and commercialization efforts, the amount of proceeds actually raised in this offering, the amount of cash generated by our operations, competition, and sales and marketing activities. We may also use a portion of the proceeds for the acquisition of, or investment in, companies, technologies or assets that complement our business. However, we have no present understandings, commitments or agreements to enter into any potential acquisitions and investments. Further, we have not determined the amounts we plan to spend on any of the areas listed above or the timing of these expenditures. As a result, our management will have broad discretion to allocate the net proceeds from this offering. Pending application of the net proceeds as described above, we will invest the net proceeds in short-term, interest-bearing investment-grade and U.S. government securities. DIVIDEND POLICY We have never paid cash dividends on our common stock or any other securities. We anticipate that we will retain all of our future earnings, if any, for use in the expansion and operation of our business and do not anticipate paying cash dividends in the foreseeable future. 17 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999: . on an actual basis; . on a pro forma basis to reflect the net proceeds from the issuance in October and November 1999 of 1,846,707 shares of common stock upon the exercise of stock options for $180,000 of full-recourse promissory notes and $687,000 in cash, and the automatic conversion concurrent with the closing of this offering, of all outstanding shares of preferred stock into 11,898,031 shares of common stock; and . on a pro forma as adjusted basis to reflect the sale of 5,500,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $14.00 per share, after deducting the estimated underwriting discounts and offering expenses payable by us. The outstanding share information excludes 1,903,975 shares of common stock issuable upon the exercise of outstanding options under our option plan with a weighted average exercise price of $2.85 per share as of November 15, 1999. In addition, the outstanding share information excludes 2,108,488 shares of common stock reserved for issuance under our stock option and employee stock purchase plans as of November 15, 1999. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes thereto included elsewhere in this prospectus.
September 30, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands, except share and per share data) Long-term obligations.......................... $ 1,159 $ 1,159 $ 1,159 -------- -------- -------- Stockholders' equity:.......................... Convertible preferred stock, $0.0001 par value; 25,000,000 shares authorized; 11,898,031 shares issued and outstanding, actual; no shares issued and outstanding pro forma and pro forma as adjusted............. 1 -- -- Common stock, $0.0001 par value, 50,000,000 shares authorized; 10,165,830 shares issued and outstanding, actual; 23,910,568 shares issued and outstanding, pro forma; 29,410,568 shares issued and outstanding, pro forma as adjusted....................... 1 2 2 Additional paid-in capital................... 71,217 72,084 142,694 Notes receivable from stockholders........... (971) (1,151) (1,151) Deferred stock compensation.................. (17,046) (17,046) (17,046) Accumulated deficit.......................... (19,613) (19,613) (19,613) -------- -------- -------- Total stockholders' equity................... 33,589 34,276 104,886 -------- -------- -------- Total capitalization........................... $ 34,748 $ 35,435 $106,045 ======== ======== ========
18 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. The pro forma net tangible book value of Maxygen at September 30, 1999, was $34.3 million, or $1.43 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of outstanding shares of common stock after giving effect to the issuance in October and November 1999 of 1,846,707 shares of common stock upon the exercise of stock options for $180,000 of full-recourse promissory notes and $687,000 in cash and to the conversion of all outstanding shares of our preferred stock into 11,898,031 shares of common stock effective automatically upon completion of the closing of this offering. After giving effect to the sale of the 5,500,000 shares of common stock at an assumed initial public offering price of $14.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at September 30, 1999, would be $104.9 million or $3.57 per share. This represents an immediate increase in the pro forma as adjusted net tangible book value of $2.14 per share to existing stockholders and an immediate dilution of $10.43 per share to new investors, or approximately 75% of the assumed offering price of $14.00 per share. The following table illustrates this per share dilution: Assumed initial public offering price per share................... $14.00 Pro forma net tangible book value per share at September 30, 1999........................................................... $1.43 Increase per share attributable to this offering ............... 2.14 ----- Pro forma net tangible book value per share after this offering .. 3.57 ------ Dilution per share to new investors............................... $10.43 ======
The following table shows on a pro forma as adjusted basis at September 30, 1999, after giving effect to the sale of the 5,500,000 shares of common stock at an assumed initial public offering price of $14.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering:
Shares Purchased Total Consideration Average --------------------- ------------------------- Price Number Percentage Amount Percentage Per Share ---------- ---------- -------------- ---------- --------- (in thousands) Existing stockholders... 23,910,568 81.3% $ 49,963 39.4% $ 2.09 New investors........... 5,500,000 18.7 77,000 60.6 14.00 ---------- ----- -------- ----- Total................. 29,410,568 100.0% $126,963 100.0% ========== ===== ======== =====
The computations in the table above assume no exercise of any stock options outstanding at November 15, 1999. As of November 15, 1999, there were options outstanding to purchase a total of 1,903,975 shares of common stock at a weighted average exercise price of $2.85 per share. If any of these options are exercised, there will be further dilution to new public investors. 19 SELECTED FINANCIAL DATA The statement of operations data for the years ended December 31, 1997 and 1998 and for the nine month period ended September 30, 1999 and the balance sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors and are included elsewhere in this prospectus. The financial data for the nine months ended September 30, 1998 are derived from unaudited financial statements included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. When you read this selected financial data, it is important that you also read the historical financial statements and related notes included in this prospectus, as well as the section of this prospectus related to "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historical results are not necessarily indicative of future results. See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing pro forma net loss per share. See Note 8 to Financial Statements for information concerning the deemed dividend upon issuance of convertible preferred stock in August 1999.
Nine Months Year Ended Ended September December 31, 30, ---------------- ---------------- 1997 1998 1998 1999 ------- ------- ------- ------- (in thousands, except per share data) Statement Of Operations Data: Collaborative research and development revenue.................................. $341 $1,077 $729 $6,068 Grant revenue............................. -- 1,646 1,090 3,625 ------- ------- ------- ------- Total revenues............................ 341 2,723 1,819 9,693 Operating expenses: Research and development................ 3,074 7,858 5,229 12,897 General and administrative.............. 1,461 3,920 2,313 4,333 ------- ------- ------- ------- Total operating expenses.................. 4,535 11,778 7,542 17,230 ------- ------- ------- ------- Loss from operations...................... (4,194) (9,055) (5,723) (7,537) Net interest income....................... 161 229 75 783 ------- ------- ------- ------- Net loss.................................. $(4,033) $(8,826) $(5,648) $(6,754) Deemed dividend upon issuance of convertible preferred stock.............. -- -- -- (2,200) ------- ------- ------- ------- Net loss attributable to common stockholders............................. $(4,033) $(8,826) $(5,648) $(8,954) Basic and diluted net loss per share...... $(0.82) $(1.31) $ (1.54) $(1.15) ======= ======= ======= ======= Shares used in computing basic and diluted net loss per share....................... 4,917 6,748 3,679 7,778 Pro forma basic and diluted net loss per share.................................... $(0.75) $(0.53) ======= ======= Shares used in computing pro forma basic and diluted net loss per share........... 11,762 17,028
December 31, ----------------- September 30, 1997 1998 1999 ------- -------- ------------- (in thousands) Balance Sheet Data: Cash and cash equivalents...................... $2,693 $15,306 $36,120 Working capital................................ 2,152 12,264 32,268 Total assets................................... 3,154 17,600 43,458 Accumulated deficit............................ (4,033) (12,859) (19,613) Total stockholders' equity..................... 2,571 11,700 33,589
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. These forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. Overview Maxygen was founded in May 1996 and began operations in March 1997. To date, we have generated revenues from research collaborations with large agriculture and chemical companies and from government grants. Our current collaborators are Novo Nordisk, DuPont/Pioneer Hi-Bred, AstraZeneca and DSM. Our government grants are from the Defense Advanced Research Projects Agency and the National Institute of Standards and Technology-Advanced Technology Program. We have invested heavily in establishing our MolecularBreeding technologies. These investments contributed to revenue increases from $341,000 in 1997 to $2.7 million in 1998 and $9.7 million in the nine months ended September 30, 1999. Our total headcount increased from 20 employees at the end of fiscal 1997 to 74 employees at the end of fiscal 1998 and to 109 employees at September 30, 1999 of whom 80% were engaged in research and development. Research and development consisted of work for collaborators, government grant agencies and work advancing our core technologies. We have incurred significant losses since our inception. As of September 30, 1999, our accumulated deficit was $19.6 million and total stockholders' equity was $33.6 million. Operating expenses increased from $4.5 million in fiscal 1997, to $11.8 million in fiscal 1998 and to $17.2 million for the nine months ended September 30, 1999. We expect to incur additional operating losses over at least the next several years as we continue to expand our research and development efforts and infrastructure. Source of Revenue and Revenue Recognition Policy We recognize revenues from research collaboration agreements as earned upon achievement of the performance requirements of the agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Our existing corporate collaboration agreements with DuPont/Pioneer Hi-Bred and AstraZeneca provide for research funding for a specified number of full time researchers working in defined research programs. Revenue related to these payments is earned as the related research work is performed. In addition, our collaborators make technology advancement payments which are intended to fund development of our core technology, as opposed to a defined research program. These payments are recognized ratably over the applicable funding period. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are achieved. As of September 30, 1999, we have deferred revenues of approximately $6.9 million. Our sources of potential revenue for the next several years are likely to be research, technology advancement and milestone payments under existing and possible future collaborative arrangements, government research grants, and royalties from our collaborators based on revenues received from any products commercialized under those agreements. See Note 2 of Notes to Financial Statements. Deferred Compensation Deferred compensation for options granted to employees has been determined as the difference between the deemed fair market value for financial reporting purposes of our common stock on the date 21 options were granted and the exercise price. Deferred compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued. Deferred compensation for options granted to consultants is periodically remeasured as the underlying options vest. In connection with the grant of stock options to employees, we recorded deferred stock compensation of approximately $17.0 million in the nine month period ended September 30, 1999 and $2.6 million and $2.4 million in the fiscal years ended December 31, 1997 and 1998 respectively. These amounts were initially recorded as a component of stockholders' equity and are being amortized as charges to operations over the vesting period of the options using a graded vesting method. We recorded amortization of deferred compensation of approximately $2.6 million for the nine months ended September 30, 1999 and $863,000 and $1.6 million for the fiscal years ended December 31, 1997 and 1998, respectively. The amortization expense relates to options awarded to employees in all operating expense categories. See Note 8 of Notes to Financial Statements. We recorded additional deferred stock compensation of approximately $2.5 million for additional stock option grants made in October and November 1999. Results of Operations Comparison of Nine Months Ended September 30, 1998 and 1999 Revenues Our total revenues increased from $1.8 million for the nine months ended September 30, 1998 to $9.7 million for the nine months ended September 30, 1999. This increase was due primarily to the addition of new research collaborations with AstraZeneca and DuPont/Pioneer Hi-Bred, new government grants and the expansion of existing government grants. Collaboration research and development revenue and grant revenue accounted for 40% and 60%, respectively, of total revenues for the nine months ended September 30, 1998, and 63% and 37% of total revenues, for the nine months ended September 30, 1999, respectively. Research and Development Expenses Our research and development expenses consist primarily of salaries and other personnel-related expenses, facility costs, supplies and depreciation of facilities and laboratory equipment. Research and development expenses increased 147% from $5.2 million for the nine months ended September 30, 1998 to $12.9 million for the nine months ended September 30, 1999. The increase was due primarily to increased staffing and other personnel-related costs to support our additional collaborative and internal research efforts. Also included in research and development expenses is $783,000 related to the acquisition of certain technology licenses from research institutions. The technology is being used in research and development and has no alternative future uses. Research and development expenses represented 287% of total revenues for the nine months ended September 30, 1998 and 133% of total revenues for the nine months ended September 30, 1999. The decrease as a percentage of total revenues was due primarily to the growth in our total revenues. We expect to continue to devote substantial resources to research and development, and we expect that research and development expenses will continue to increase in absolute dollars. General and Administrative Expenses Our general and administrative expenses consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as professional expenses, such as legal and accounting. General and administrative expenses increased 87% from $2.3 million for the 22 nine months ended September 30, 1998 to $4.3 million for the nine months ended September 30, 1999. Expenses increased primarily due to increased staffing necessary to manage and support our growth. General and administrative expenses represented 127% of total revenues for the nine months ended September 30, 1998 and 45% of total revenues for the nine months ended September 30, 1999. The decrease as a percentage of our total revenues was due primarily to the growth in our total revenues. We expect that our general and administrative expenses will increase in absolute dollar amounts as we expand our legal and accounting staff, add infrastructure and incur additional costs related to being a public company, including directors' and officers' insurance, investor relations programs and increased professional fees. Net Interest Income Net interest income represents income earned on our cash and cash equivalents. Interest income increased from $75,000 for the nine months ended September 30, 1998 to $783,000 for the nine months ended September 30, 1999. This increase was due to higher average cash balances. We recorded a deemed dividend of $2.2 million in August 1999 upon the issuance of Series E convertible preferred stock. At the date of issuance, we believed the per share price of $6.25 represented the fair value of the preferred stock and was in excess of the deemed fair value of our common stock. Subsequent to the commencement of our initial public offering process, we re- evaluated the deemed fair market value of our common stock as of August 1999 and determined it to be $9.00 per share. Accordingly, the incremental fair value is deemed to be the equivalent of a preferred stock dividend. We recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital, without any effect on total stockholders' equity. The amount increased the loss allocable to common stockholders, in the calculation of basic net loss per share for the nine months ended September 30, 1999. Provision for Income Taxes We incurred net operating losses in the nine months ended September 30, 1998 and 1999, and consequently we did not pay any federal, state or foreign income taxes. As of September 30, 1999, we had a federal net operating loss carryforwards of approximately $11.9 million. We also had federal research and development tax credit carryforwards of approximately $600,000. If not utilized, the net operating losses and credit carryforwards will expire at various dates beginning in 2011 through 2019. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the change in the ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 9 of Notes to Financial Statements. Comparison of Years Ended December 31, 1997 and 1998 Revenues Our total revenues for fiscal 1997 and 1998 were $341,000 and $2.7 million, respectively. The increase of $2.4 million was due primarily to the addition of new research collaborations and government grants. Collaborative research and development revenue accounted for 100% of total revenues in fiscal 1997. Collaborative research and development revenue and grant revenue accounted for 40% and 60%, respectively, of total revenues in fiscal 1998. Research and Development Expenses Research and development expenses increased from $3.1 million in fiscal 1997 to $7.9 million in fiscal 1998. The increase was due primarily to increased staffing and other personnel-related costs. Research and development expenses represented 901% and 289% of total revenues in fiscal 1997 and 1998, respectively. The decrease as a percentage of total revenues was due primarily to the growth in our total revenues. 23 General and Administrative Expenses General and administrative expenses increased from $1.5 million in fiscal 1997 to $3.9 million in fiscal 1998. Expenses increased in each period due primarily to increased staffing and personnel-related costs resulting from additional staffing necessary to manage and support our growth. General and administrative expenses represented 428% of total revenues for fiscal 1997 and 144% of total revenues for fiscal 1998. The decrease as a percentage of our total revenues was due primarily to the growth in our total revenues. Net Interest Income Net interest income was $161,000 in fiscal 1997 and $229,000 in fiscal 1998. Changes in interest income were due primarily to changes in our average cash balances during these periods. Provision for Income Taxes We incurred net operating losses in fiscal 1997 and 1998 and consequently we did not pay any federal, state or foreign income taxes. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private placements of preferred stock, totaling $46.5 million and research and development funding from collaborators and government grants. As of September 30, 1999, we had $36.1 million in cash and cash equivalents and $800,000 available under an equipment financing line of credit. Our operating activities used cash of $2.6 million and $2.7 million in fiscal 1997 and 1998, respectively, and $4.4 million and $1.4 million in the nine months ended September 30, 1998 and 1999, respectively. Uses of cash in operating activities were primarily to fund net operating losses offset by receipt of funding from collaborators which has been deferred. Additions of property and equipment were $459,000 and $760,000 in fiscal 1997 and 1998, respectively, and $683,000 and $4.0 million in the nine months ended September 30, 1998 and 1999, respectively. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations. We may use a portion of our cash to acquire or invest in complementary businesses, products or technologies, or to obtain the right to use such complementary technologies. Financing activities provided cash of $5.7 million and $16.1 million in fiscal 1997 and 1998, respectively, and $11.1 million and $26.3 million in the nine months ended September 30, 1998 and 1999, respectively. These amounts are the proceeds we received from the sale of preferred stock, net of issuance costs, and proceeds from the sale of common stock. We expect cash flows from our corporate collaborators for the funding of research and technology advancement to total $10.8 million in both 2000 and 2001 and up to this amount in 2002 and 2003 if our collaboration with DuPont/Pioneer Hi-Bred extends to a fourth and fifth year. DuPont/Pioneer Hi- Bred may terminate the agreement after three years, upon six months notice if a specified milestone has not been met. The above amounts include $1 million annually of technology advancement funding from AstraZeneca. In lieu of making this payment, AstraZeneca can elect to purchase $3 million of our equity securities at a 50% premium to the fair value of the securities on the date of issuance. Cash flows from government grants are determined by the expenses incurred by the Company. Total remaining committed grant funding amounts to $21.8 million through fiscal 2002; however some grant programs are subject to a yearly appropriations process in Congress and we may not receive funds under existing grants because of budgeting constraints of the agency administering the program. 24 We believe that the net proceeds from this offering, together with our current cash balances and funding received from collaborators and government grants will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 24 months. However, it is possible that we will seek additional financing within this timeframe. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. We cannot assure you that additional funding, if sought, will be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results. Disclosure about Market Risk Our exposure to market risk is confined to our cash and cash equivalents which have maturities of less than three months. We maintain an investment portfolio of depository accounts, master notes and liquidity optimized investment contracts. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have any negative impact on the realized value of our investment portfolio. Year 2000 Issues The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations for any company using such computer programs or hardware, including, among other things, a temporary inability to process research data, send invoices or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid "Year 2000" issues. State of Readiness We completed an assessment of our information technology systems for year 2000 problems in June 1999. Our information technology group coordinated a program to assess and document all other systems. We are a relatively new enterprise and therefore a majority of the computer hardware and software we use to operate our business has been acquired within the past 30 months. While this itself is not protection against Year 2000 issues, it is a factor to consider when comparing the efforts required to achieve Year 2000 readiness against other enterprises with older legacy systems. Our approach was to prioritize a comprehensive list of all systems on the basis of their importance to the operation of our business. Working from this list, we would: . obtain documentation from third party vendors as to their Year 2000 compliance testing and recommendations; . devise a review and testing plan for all internal systems; . conduct the review and testing; . assess any necessary follow-on actions or remediation required; and . execute the measures identified. Principally because information from third party hardware and software vendors has continued to change throughout this year, we have determined that an additional set of compliance tests are prudent. We conducted a final review process of all systems in October 1999. Based on the continuing release of information and recommended remediation activities from the principal vendor of our enterprise productivity software, Microsoft, we expect to continue to be required to make changes to our server software throughout the remainder of 1999. 25 Budget To date we have incurred expenses relating to Year 2000 compliance of less than $10,000. We do not expect the remaining planned work to exceed $15,000. These costs have been included in the operating expenses of 1999. Reasonably Likely Worst Case Scenario If we, our customers, our providers of hardware and software or our third- party computer network providers fail to remedy any Year 2000 issues, the reasonably likely worst case scenario would be the interruption of our research programs, which could have a material adverse affect on our business, financial conditions and results of operations. Presently we are unable to quantitatively estimate the duration and extent of any such interruption, or estimate the effect such interruption may have on our future revenue. However, we believe that the impact of any Year 2000 issue on our research operations will be limited to the ongoing execution of new experiments. We do not expect that any historical data will be affected. Contingency Plans We do not believe that we will need to implement a Year 2000 contingency plan. We expect to complete our Year 2000 plan in November 1999. The effort required to complete the plan is minimal. Therefore, we believe that we can complete the planned work within this timeframe. Additionally, we may implement a company-wide system shutdown on December 31, 1999 and a controlled startup by the information technology organization on January 2, 2000 prior to the opening of business on January 3, 2000. This will allow us to immediately identify and address any issues. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities," which will be effective for our fiscal year 2001. This Statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. SFAS 133 is not anticipated to have a significant impact on our operating results or financial condition when adopted, since we currently do not engage in hedging activities. 26 BUSINESS Overview We believe that we are the leader in the emerging field of directed molecular evolution, the process by which new, modified genes are generated for specific commercial uses. Our MolecularBreeding technologies bring together advances in molecular biology and classical breeding, while capitalizing on the large amount of genetic information being generated by government, academic and commercial laboratories. Our principal objective is to maximize the value of our MolecularBreeding technologies through the development of multiple products in a broad range of industries including agriculture, chemicals and human therapeutics. We have established strategic alliances with recognized leaders in our target industries and with U.S. government agencies. To date, our corporate collaborators include Novo Nordisk in the area of industrial enzymes, DuPont/Pioneer Hi-Bred and AstraZeneca in agriculture and DSM in antibiotic manufacturing. Our government grants are from the Defense Advanced Research Projects Agency (DARPA) and the National Institute of Standards and Technology- Advanced Technology Program (NIST-ATP) primarily for the development of vaccines and the advancement of our MolecularBreeding technologies. Committed funding from our commercial collaborators and grant agencies totals over $94 million. We may additionally receive over $145 million in milestone payments based on the accomplishment of specific performance criteria, as well as royalties on product sales. We will continue to establish strategic collaborations with recognized leaders in several of our target industries and with U.S. government agencies. We plan to retain significant rights to develop and market products arising from our funded strategic collaborations. In addition, we will identify and invest our own funds in certain specific areas and product opportunities with the aim of capturing a high percentage of profits on product sales. We intend to fully develop and exploit the breadth of opportunity which we believe can be addressed by our MolecularBreeding technologies. Background Evolution and DNA Evolution is the process by which living organisms adapt to their environment. The first step of this process is sexual reproduction, which creates a variety of physical characteristics that increase the diversity of a population. Second, nature exerts a selective force on the individuals, dictating which characteristics will be favored and be passed to the next generation. As a result of changing environmental and competitive pressures, diversity may increase, leading to variation in the physical characteristics of individuals and species adapted for specific environments. The physical characteristics of an organism are determined by genetic information inherited from the previous generation. This genetic information is coded for by DNA, a molecule found in the cells of living organisms. DNA is comprised of four different chemical bases called nucleotides. Human cells have several billion nucleotides, the precise sequence of which determines the content of the genetic information. DNA is organized into discrete units called genes. Genes act alone or in combination to produce proteins, that not only form the fabric of cells but also direct them to perform biological functions which may in turn influence physical characteristics. Generally, the inherited biological properties or physical characteristics of an organism change only when the DNA in a gene is altered. In summary, variations in genes provide the basis for inherited diversity in a population, thus maximizing the opportunity for developing characteristics optimally suited for a specific environment. Mutation and Recombination There are two predominant methods by which nature is able to change the genetic information encoded by DNA to create diversity: mutation and recombination. 27 All organisms incur a certain number of mutations in their DNA as a result of normal cellular processes or interactions with external environmental factors such as radiation from sunlight. Mutation typically involves changes in individual nucleotides and is essentially random. Almost all mutations are harmful to the function of genes, but a very small percentage are beneficial and may pass more broadly into the population. Sexually reproducing organisms use recombination, a process that involves the organized exchange and reassortment of large sections of DNA from their parents. This process allows for new combinations of genes without disrupting the function of the newly created genes. This has a significant impact on physical characteristics and is the primary cause of diversity in a sexually reproducing population. Classical Breeding and Its Limitations Without any knowledge of the genetic basis of evolution, humans have been breeding crops and animals for over 4,000 years in the search for better physical characteristics. All of the domestic breeds of farm animals and horses, cereal crops, fruits, vegetables, crops for fiber, household pets, most ornamental flowers and many other species represent the results of many generations of selective breeding by humans. In all these cases, humans have cross-bred crops or animals with the most desired physical characteristics to produce improvements in the next generation. For example, modern corn now has a dramatically higher yield than the wild strain of corn which produced very small amounts of grain. This improvement probably began with ancient Inca farmers continually selecting, breeding and propagating the most robust seed corn. This is known as classical breeding. In the 19th century, advances in biology led to a better understanding of the basis of heredity. The discovery of the structure of DNA in 1953 subsequently led to the realization that genetic information was responsible for physical characteristics and that its manipulation could further improve the breeding process. In modern breeding, the DNA of offspring is often sequenced to determine whether or not they are carrying undesirable genes. This reduces the probability of breeding poor quality stock and increases the pace of improvement. Despite the improvements in classical breeding, this technique still has a number of significant limitations. First, the process is extremely time consuming, since the offspring must mature in order to determine if they carry the desired characteristic. For example, this cycle takes several years in cattle. Second, classical breeding can only be used to breed entire organisms and cannot readily use genetic information to modify or select for specific genes and the traits they represent. This limitation is compounded when multiple genes encode the selected trait or when the simultaneous breeding of multiple traits is desired. Thus, the scope of potential improvements accessible by classical breeding is limited. Modern Biotechnology and Its Current Limitations The modern biotechnology industry was founded on the ability to isolate genes from natural sources, and to make proteins from these genes for use in 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. Similarly, in the chemical industry, most naturally occurring enzymes are not efficient or stable enough to be used for manufacturing chemicals. The lack of product success is due in part to the fact that the relevant proteins have not been evolved 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 are limited in their ability to rapidly develop products. This results from two primary causes. First, the genes identified by genomics have not been evolved 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. 28 Typical deficiencies of naturally occurring genes and proteins which limit their commercial utility as therapeutic products include inappropriate availability in the body, stability, difficulty and cost of manufacture, lack of specificity, toxicity and other side effects. Similarly, in applications such as agricultural biotechnology and chemical processes using enzymes as catalysts, problems include the levels at which proteins can be made, specificity, stability, efficiency of enzyme function under industrial manufacturing conditions and 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 native proteins for commercial uses. One approach used by the traditional biotechnology industry to attempt to improve genes for commercial purposes is random mutagenesis. This technique, involving the random mutation of genes, usually results in harmful changes. In addition, the low probability of randomly improving a gene or sequence of complex biological reactions makes screening for positive changes prohibitively expensive and time consuming. A second 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 allows a rational prediction of how to change the gene for desired effect. This process requires many simplifying assumptions, is costly and time intensive, and has been generally unsuccessful. As such, genes and gene products are generally too complex to commercialize using genomics, rational design, random mutagenesis or other current technologies. The Maxygen Solution We have developed proprietary MolecularBreeding technologies that address the limitations of classical breeding and traditional biotechnology by maximizing DNA variation, which is known as genetic diversity, through directed evolution at the molecular level. Maximizing genetic diversity increases the opportunity for developing characteristics optimally suited for a specific commercial purpose. Our MolecularBreeding technologies bring together advances in molecular biology and classical breeding, while capitalizing on the wealth of genetic information being developed by genomics. Our technologies are fast, inexpensive, commercially focused and results oriented. Our approach, unlike conventional approaches, requires minimal understanding of complex underlying biological systems. There are two components of our MolecularBreeding technologies. The first is DNAShuffling, our proprietary process for recombining genes into a diverse 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 DNA sequences. The combination of DNAShuffling and MaxyScan specialized screening enables us to identify new products in a rapid, cost-effective manner. Virtually any product or process that utilizes or could utilize DNA or proteins can potentially be improved for optimal function using our MolecularBreeding technologies. We are therefore applying our technologies to evolve genes and proteins for use in fields as diverse as chemicals, agriculture, vaccines and protein pharmaceuticals. 29 We believe that our MolecularBreeding technologies provide distinctive advantages over traditional biotechnology, as summarized in the following table. Advantages of Maxygen's MolecularBreeding Technologies
Maxygen's Modern MolecularBreeding Characteristic Biotechnology Technologies - ------------------------------------------------------------------------------ Time to generate lead product candidates several years weeks to months - ------------------------------------------------------------------------------ Necessary understanding of the biological processes underlying lead product candidates yes no - ------------------------------------------------------------------------------ Ability to optimally improve properties for commercial applications no yes - ------------------------------------------------------------------------------ Cost to generate lead product candidates high low - ------------------------------------------------------------------------------ Amount of resulting genetic diversity limited virtually unlimited
30 Maxygen's MolecularBreeding Technologies Our technologies mimic the natural events of evolution. First, genes are subjected to DNAShuffling, generating a diverse library of gene variants. Second, our proprietary MaxyScan screening systems select individual proteins from the gene variants in the library. The proteins that show improvements in the desired characteristics become the initial lead candidates. After confirmation of activity, the initial lead candidates are then used as the genetic starting material for additional rounds of shuffling. Once the level of improvement needed for the particular commercial application is achieved, the group of lead candidates is moved forward to the product or process development stage. [MolecularBreeding Process Graphic] Header: The MolecularBreeding Process Description: Graphical illustration of the MolecularBreeding(TM) process showing genes undergoing DNAshuffling and MaxyScan. 31 Step One: DNAShuffling Technologies Our DNAShuffling technologies work as follows: a single gene or multiple genes are cleaved into fragments and recombined, creating a population of new gene variants. The new genes created by DNAShuffling are then selected for one or more desired characteristics. This selection process yields a population of genes which becomes the starting point for the next cycle of recombination. As with classical breeding, this process is repeated until genes expressing the desired properties are identified. DNAShuffling technologies can be used to evolve properties which are coded for by single genes, multiple genes and entire genomes. By repeating the process, DNAShuffling technologies ultimately generate libraries with a high percentage of genes which have the desired function. Due to the high quality of these libraries, a relatively small number of screening tests need to be performed in order to identify gene variants with the desired commercial qualities. This process significantly reduces the cost and time associated with identifying multiple potential products. Step Two: MaxyScan Screening The ability to screen or select for a desired improvement in function is essential to the effective development of a newer improved gene or protein. As a result, we have invested significant resources in developing automated, rapid screens and selection formats. We have developed screening tests which can measure the production of proteins or small molecules in culture without significant purification steps or specific test reagents, thereby eliminating time-consuming steps required for traditional screening tests. We are also focusing on the development of reliable, cell-based screening tests that are predictive of specific functions relevant to our human therapeutics programs. Accordingly, we continue to develop new screening approaches and technologies. Our approach is to create multitiered screening systems whereby we use a less sensitive screening test as a first screen to quickly select proteins with the desired characteristics, followed by a more sensitive screening test to confirm value in these variants and to select for final lead product candidates. Unlike approaches that create random diversity, MolecularBreeding produces potentially valuable libraries of gene variants with a predominance of active genes with the desired function. This allows us to use complex biological screens and formats as a final screening test, as relatively few proteins must be screened to detect an improvement in the starting gene activity. We have access to multiple sources of genetic starting material. In addition to the wealth of publicly available genetic sequence information, we are able to access our collaborators' proprietary genes. Furthermore, we are able to inexpensively obtain our own genetic starting material which, when coupled with the DNAShuffling process, provides a virtually infinite amount of new, proprietary gene variants with potential commercial value. We use certain equipment and vendor software in conjunction with our DNAShuffling technologies and MaxyScan technologies, but to date, have not used internally developed software. We also use other software purchased from third party vendors to a limited extent in our research and development activities. Demonstrated Successes of MolecularBreeding in Multiple Applications We have consistently achieved improvement in gene function using our MolecularBreeding technologies. Impressive results have been demonstrated in many different systems that have relevance to multiple commercial applications. Our technologies have the ability to generate improvements that would be difficult, costly, time intensive and, in many cases, impossible to achieve using other methods. We have shown that we can achieve improved gene function without a detailed understanding of the underlying complex biological processes. 32 For example, we have demonstrated our ability to improve genes that increase the anti-viral activity of a protein and develop new enzymes which have the potential to streamline chemical and pharmaceutical manufacturing processes. In addition, we have improved the performance of subtilisin, one of the most commercially valuable laundry detergent enzymes. Subtilisin is one of the most highly studied enzymes which has been extensively modified to improve its commercial properties. This example demonstrates the ability of MolecularBreeding to achieve further improvements beyond the limits of modern biotechnology. A summary of representative experiments published by our scientists is set forth below.
Example Property Activity Increase Publication - ----------------------------------------------------------------------------------------------------------- (beta)-lactamase Increased antibiotic 32,000-fold Nature (1994) resistance/enzyme activity Antibody Increased expression level 100-fold Nature Medicine (1996) Antibody Increased antibody/receptor >440-fold Nature Medicine (1996) binding Green fluorescent Increased fluorescence 45-fold Nature Biotechnology (1996) protein (beta)-galactosidase to Increase in activity 66-fold activity Proceedings of the fucosidase National Academy of Sciences (1997) Increase in specificity 1,000-fold specificity Arsenate pathway (3 Increased bacterial resistance 40-fold Nature Biotechnology (1997) genes) to arsenate Cephalosporinase family Increased antibiotic resistance 270-540-fold Nature (1998) Subtilisin protease Simultaneous improvement 2 to 4 fold in Nature Biotechnology (1999) in 3 properties 3 properties Human (alpha)-interferon Increased activity as 285,000-fold Nature Biotechnology (1999) family measured by antiviral activity on mouse cells HSV thymidine kinase Increased sensitivity to 32-fold Nature Biotechnology (1999) family prodrug (AZT)
The Maxygen Strategy Our goal is to be the world leader in the commercialization of products and processes developed using directed molecular evolution. There are four basic elements to our business strategy: Expand Our Proprietary Technology Leadership. In order to expand our technology leadership, we will continue to develop our core MolecularBreeding technologies by investing significantly in research and development. We will license from others and acquire technologies that complement our core capabilities. We will protect and build on 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. Expand Our Strategic Collaborations and Grants. We will continue to establish strategic collaborations with leading companies in different industries. We will also pursue additional grants from major U.S. government agencies. Our goal is to benefit from the combined expertise of Maxygen and 33 our collaborators. Additionally, we seek to receive financial support from our collaborators for research and development of products and for our core technologies, as well as potential milestone and royalty payments on any products commercialized. Maximize Commercial Applications of Our Technologies. We plan to develop multiple products for multiple industries. We believe we have short-, medium- and long-term commercial opportunities in the chemicals, agriculture and pharmaceutical industries. We believe our technologies have broad commercial applications, including the development of new and improved pharmaceuticals and vaccines, better agricultural products and more efficient chemical manufacturing systems. Retain Our Commercialization Rights. We have invested and plan to invest our own funds in certain areas and product opportunities with the aim of capturing a high percentage of profits on product sales. Potential Fields of Application We believe that our MolecularBreeding technologies can be applied to many different industries. We can potentially improve virtually any product or process that utilizes or could utilize DNA or proteins using our MolecularBreeding technologies. Potential applications of MolecularBreeding technologies include the development of new high-value products and the improvement of existing products and manufacturing processes. We can potentially use multiple approaches to develop products to solve complex problems, including the following: In Medicine . New and improved treatments for major diseases such as cancer, cardiovascular disease, diabetes and obesity. . New vaccines to treat and prevent viral diseases such as hepatitis, AIDS and emerging viral diseases and parasitic diseases such as malaria which affect millions of people each year. . Therapeutic vaccines and gene therapies to treat and prevent diseases such as multiple sclerosis, allergies and cancer. . New natural products for the development of better and cheaper antibiotics to counter the spread of infectious organisms that have developed a resistance to conventional antibiotics. . New natural products as improved therapies for cancer. . New gene therapies for treatments for hereditary diseases such as hemophilia and cystic fibrosis. In Agriculture and Food Production . Crops with increased yields which require less fertilizers, herbicides or insecticides. . Plants which can thrive on land where they could not otherwise survive, for example because of lack of water, high salt level or extreme temperatures. . Vaccines to treat and prevent diseases of farm animals. . Nutritionally improved forms of food and animal feed. . Food with increased health benefits. In the Chemical Industry . New, more cost-effective and more environmentally friendly production systems for plastics, vitamins, pharmaceuticals, fibers and adhesives. 34 . New materials such as fibers and plastics. . Plants as factories for the cheaper and more environmentally friendly production of substances such as plastics and pharmaceuticals. In the Environmental and Energy Industries . New systems for controlling pollution, such as novel processes for reduction of carbon emissions and polluting effluents. . Preparation of non-polluting and cleaner-burning energy sources. . Removal of pollutants, such as sulphur, from oil and other fossil fuels. Current Fields of Application We are currently applying our MolecularBreeding technologies to high-value opportunities in the fields of chemicals, agriculture, preventative and therapeutic vaccines and protein pharmaceuticals. Chemicals The chemicals industry is comprised of three major segments: commodity, specialty and fine chemicals. Together, 1998 sales in these segments exceeded $800 billion. Within these segments, approximately $50 billion is readily addressable by biological processing, for example, either by fermentation or through the use of enzyme catalysts. An additional $200 billion has been identified as potentially addressable by biological approaches within the next 10-20 years. Included in the potential market is the manufacturing of major chemicals, plastics, vitamins, compounds used in the manufacture of pharmaceuticals, enzymes for use as catalysts, the pigments and additives in paint and the polymers and fibers in our clothing. Enzymes occurring in nature are generally not able to meet the stringent activity requirements that would allow for the broad commercial use of enzymes as catalysts. We have demonstrated that MolecularBreeding technologies allow for the creation of new modified enzymes for use as catalysts, and metabolic pathways that overcome the limitations of naturally occurring enzymes. We are currently generating libraries of proprietary enzymes for use as catalysts, which we believe will offer a significant competitive advantage over existing chemical catalysts. These enzymes could provide increased yields and decreased manufacturing costs by a reduction in requirements for raw materials, capital equipment and energy. In addition, we believe these enzyme catalysts will have applicability in generating new useful materials. We have established two collaborations in the chemical industry, one with Novo Nordisk, the world's leading manufacturer of industrial enzymes, and another with DSM, a leader in the production of bulk antibiotic products and intermediates. Our partnership with Novo Nordisk was established in September 1997. Novo Nordisk had a market share of 45% of the industrial enzymes market in 1998. The total industrial enzymes market (a segment of the chemicals market) is estimated at $1.4 billion today, growing to over $3 billion by 2008. Together with Novo Nordisk, we are applying our MolecularBreeding technologies to the potential production of improved industrial enzymes. For example, we have significantly improved multiple commercially relevant properties in subtilisin, one of the most studied and highly modified industrial enzyme products. Under the five-year agreement, Novo Nordisk will pay us royalties on any sales of industrial enzyme products that are developed through our MolecularBreeding technologies. In March 1999, we commenced a three-year strategic collaboration with DSM to evolve new enzymes for use in the manufacture of certain classes of penicillin antibiotics. We are receiving research funding over the three-year collaboration, and we will receive royalties from the implementation of any evolved enzymes developed through our MolecularBreeding technologies. In addition to the existing collaborations, we expect to pursue independent development of high-value chemical products, as well as to enter into additional strategic alliances with leading chemical companies. 35 Agriculture Today's agricultural biotechnology market is estimated at approximately $1 billion. It is expected to grow to approximately $6 billion by 2005. Over the past decade, companies have used biotechnology to provide protection from herbicides, diseases and pests, resulting in impressive increases in crop yield. The need for increased crop yield, the desire to move away from chemical pesticides, and the determination of the DNA sequence have combined to provide significant growth in agricultural biotechnology. In addition to yield improvement, the agricultural industry is investing heavily in biotechnology to develop crops with improved qualities such as higher oil content and enhanced nutritional value for human food or animal feed. A third area of great market potential is the use of plants as "factories" where the plant produces a substance that has commercial value, generally when processed and separated from the plant and sold as a pure preparation. Plants potentially can be used to manufacture pharmaceutical products and specialty or fine chemicals. We believe our MolecularBreeding technologies can be used to create numerous commercial opportunities in crop protection and plant quality traits. We are developing multiple commercial products for the agriculture industry through commercial collaborations with two of the world's leading agriculture companies, AstraZeneca and DuPont/Pioneer Hi-Bred. From these collaborations we have committed funding of over $61 million and may receive milestone payments of over $145 million based on the accomplishment of specific performance criteria, as well as royalties on product sales. The AstraZeneca and DuPont/Pioneer Hi-Bred collaborations fully fund our research and development efforts under these collaborations, and provide us with a large portfolio of potentially high-value gene products for the agricultural markets. Together with our collaborators, we are currently working on a broad portfolio of 12 potential products in areas of yield improvement and quality traits. We have retained significant rights to develop and market certain applications of the products resulting from the collaborations. In addition to the existing collaborations, we are pursuing and expect to pursue independent development of high-value agricultural products, and intend to enter into additional strategic alliances with leading agriculture companies. Preventative and Therapeutic Vaccines Worldwide sales of vaccines in 1998 exceeded $4 billion and are expected to exceed approximately $10 billion by 2005. Vaccines have been used for decades to prevent the onset of infectious disease in humans and animals. The vaccine market has the potential to increase dramatically for the following reasons: . Many physicians recognize vaccines as the preferred therapy for numerous infectious diseases given the increasing drug resistance of pathogens and the inability to prevent or effectively treat traditional and newly emerging viral infections. . Researchers are investigating vaccines as treatments for cancer, autoimmune diseases, allergy and other non-infectious diseases. . Adults are increasingly using vaccines. . Travelers from developed countries are increasingly using vaccines. Vaccines are typically comprised of two elements: antigens, which are components of the invading pathogen that are recognized by cells of the immune system and trigger the body's defenses; and adjuvants, which are immune system boosters. The limited ability of existing antigens and adjuvants to generate the required immune responses has hindered the development of vaccines. We believe that we can generate new modified vaccines that have the potential to overcome the limitations of traditional vaccine development. 36 We are building our research and development capabilities in the vaccine area with the support of government grant funding and have retained full commercialization rights, subject only to a license to the U.S. government as required by applicable statutes and regulations. Total committed government grant funding in the vaccine area is over $22 million. We believe our MolecularBreeding technologies have the potential ability to transform the design and development of vaccines through the identification of new genes and proteins that allow for the generation of broad and strong immune response. This would enable us to address both the treatment and prevention of a wide variety of diseases including cancer, allergy, diseases in which the body generates an improper immune response and infectious diseases such as AIDS and hepatitis. We are developing a portfolio of products in the vaccine area, including, for example, proprietary new improved antigens and adjuvants for stimulating the immune system. Protein Pharmaceuticals In 1998, the worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $17 billion, and are projected to reach approximately $19 billion in 2000. Protein pharmaceutical products, such as erythropoietin (1998 worldwide sales of $4 billion) and granulocyte colony stimulating factor (1998 worldwide sales of over $1.6 billion) represent some of the world's highest revenue pharmaceutical products. While some protein pharmaceuticals containing naturally occurring proteins can address large markets, many naturally occurring proteins are not well suited for commercialization without modification. We believe that our MolecularBreeding technologies provide the capabilities necessary to attain the improvements suitable for commercial use. Our MolecularBreeding technologies potentially can be applied to improve existing pharmaceutical proteins, create superior second generation high-value proteins with, for instance, improved stability, and create new proteins and pioneer new therapies. Our MolecularBreeding technologies potentially can also be applied to protein pharmaceuticals to improve desirable biological activities, alter binding activity, and reduce harmful side effects and toxicities. The area of human therapeutics presents significant opportunity for us as the rapid cloning and sequencing of the human genome is leading to the identification of hundreds of new genes and proteins that potentially could be optimized and developed as new protein pharmaceuticals. We are currently working on a number of protein pharmaceuticals at the research stage. We are pursuing a two-fold strategy to develop protein pharmaceuticals. First, we intend to collaborate with leading pharmaceutical and biotechnology companies and second, we are internally developing our own pharmaceutical product pipeline for future collaboration opportunities, licensing to others or independent commercialization. 37 The following chart summarizes the current status of our commercially- focused research projects. This table does not include our proof of principle research focused publications. Current Status of Commercially-Focused Research Projects [CHART] 38 Areas of Exploration In addition to those areas described above, we will continue to evaluate opportunities in fields such as antibody engineering, food and feed with enhanced nutritional benefits, natural products, gene therapy, liquid fuels and environmental applications. We are assessing these and other commercialization opportunities through discussions with potential corporate and academic collaborators and U.S. government agencies. In many instances, we have already established initial technology development and proof of principle models. Additional development may be funded through federal grants, corporate collaborators or our own funds. Antibodies Our MolecularBreeding technologies potentially allow for the generation of new antibodies with improved binding specificity for their targets and other improved therapeutic properties for multiple diseases. In particular, monoclonal antibodies, which originate from a single cell and that have specificity for particular disease targets, are an important sector of the biotechnology industry representing over 20% of all biopharmaceutical products in development. The FDA has recently approved for commercial sale several antibodies, including Genentech's Herceptin(R) and Novartis' Simulect(R), which have potential utility in a broad range of diseases. Nutritional Compounds We believe that our technologies may be applied to individual genes, gene families and entire complex biological pathways to develop foods, nutritional supplements and animal feed with improved health benefits. Specific applications include vitamins, sweeteners, preservatives and cholesterol lowering agents. These are potentially high-value products that are currently receiving significant attention in both the food and pharmaceutical industries. Natural Product Drug Discovery Natural products and natural product derivatives represent approximately 80% of 1998 product sales in the areas of antibiotics and cancer therapies. We may enter into collaborations with biotechnology and pharmaceutical companies to generate new libraries of lead natural product compounds by modifying enzymes and metabolic pathways through MolecularBreeding. We believe that new enzymes and pathways created through MolecularBreeding may allow for the generation of natural product variants in ways that are not feasible using existing chemical synthesis methodologies. Our efforts could potentially create new natural products with increased activity, stability, availability in the body or specificity. Gene Therapy Gene therapy is an approach to treat or prevent certain diseases by introducing therapeutic genes into target cells to produce specific proteins that will elicit a desired therapeutic response. We believe that our MolecularBreeding technologies are potentially well suited to the development of gene delivery and cell-targeting systems that could improve current modes of disease treatment and prevention. We have completed two internal programs that demonstrate the technical feasibility of MolecularBreeding to improve the properties of viral and non-viral gene therapy delivery methodologies. Liquid Fuels and Environmental Uses The depletion of fossil fuels and the effects of carbon dioxide emissions on the environment have raised awareness of the need to develop alternative fuels. Companies may employ our MolecularBreeding technologies to develop biological systems that produce cleaner burning fuels, such as methanol and ethanol, from alternative carbon sources, such as plant biomass and animal waste rather than petroleum. Additionally, companies potentially could use our MolecularBreeding technologies to develop systems containing enzymes for use as catalysts that could capture carbon dioxide which would otherwise be released into the environment, and potentially use the carbon dioxide to produce value- added products, such as fertilizers, polymers and plastics and cleaner burning fuels. 39 Corporate Collaborations Since inception, we have entered into strategic collaborations and several additional proof of principle collaborations with commercial entities and have received six grants from U.S. government agencies. Assuming our research efforts for existing collaborations are expended for the full research term, we have total committed funding of over $94 million, of which approximately $67 million is from our collaborators and $27 million from government funding. Of these committed funds, we have earned approximately $13 million; additionally, we have received $10 million in consideration of purchase of our equity. In addition, potential milestone payments from our existing collaborations could exceed $145 million based on the accomplishment of specific performance criteria, in addition to earned royalties on product sales. We expect that strategic collaborations and government grants will continue to be an important element of our business strategy. Our strategy in entering into strategic collaborations is to work with leaders in their respective industries on specific research projects. Our agreements grant to our strategic collaborators exclusive licenses under intellectual property developed by us in the collaboration for specific products for specific uses. Generally, we retain the right to work ourselves or with others on projects outside the scope of the areas and projects which are the subject of our collaborations. In the chemicals area, where we have entered into research agreements with Novo Nordisk for industrial enzymes and with DSM for enzymes for use in the manufacture of penicillin, we retain the right to conduct other projects ourselves or with third parties. Even in those areas, such as agriculture, where we have entered into research agreements with DuPont/Pioneer Hi-Bred and AstraZeneca for multiple research projects relating to multiple crops and traits, we have the right to use these same crops to conduct other projects and develop other products, as well as the right to conduct projects using other crops. In our strategic collaborations, in exchange for commercial licenses to the products developed during the program in specified fields, we typically seek initial license fees, collaborative research funding, technology advancement funding, milestone payments for significant developments and royalties on product sales. We have entered into the following significant collaborations: Novo Nordisk In September 1997, we entered into a five year strategic collaboration with Novo Nordisk A/S, the world's largest producer of industrial enzymes, for the development and bulk production of specific industrial enzymes in fields such as laundry detergents, leather processing and pulp and paper manufacturing. Industrial enzymes are used for a broad spectrum of activities ranging from food preparation, to detergents, to pulp and paper manufacturing. Industrial enzymes today represent over a $1.4 billion market. Novo Nordisk will use our MolecularBreeding technologies to generate new industrial enzymes. In addition, Novo Nordisk has made a five year commitment to contribute funding for the research and development of new directed evolution technologies. Under the agreement, Novo Nordisk has an exclusive royalty-bearing license to use our MolecularBreeding technologies to develop proteins and enzymes for use in certain industrial enzyme fields. We have received an exclusive royalty-free license to certain Novo Nordisk technologies useful for the practice of MolecularBreeding in all fields outside the scope of the collaboration, except the field of human and veterinary diagnostic and therapeutic products, for which we received a co-exclusive license from Novo Nordisk. Under this agreement, Novo Nordisk will pay us a royalty on the sales of industrial enzyme products developed using our MolecularBreeding technologies. 40 DuPont/Pioneer Hi-Bred In December 1998, we entered into a five year strategic collaboration with Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. duPont de Nemours and Company, to utilize our MolecularBreeding technologies to generate new gene variants for use in the development of specific crop protection and quality grain traits in corn, soybeans and certain other crops. Under the terms of the agreement, in exchange for global commercialization rights, DuPont/Pioneer Hi-Bred purchased $5 million of our preferred stock and paid $2.5 million in initial license fees. In addition, DuPont/Pioneer Hi-Bred has committed to pay us up to $27.5 million over five years for research and technology development, as well as possible milestone payments of up to $45 million based on the accomplishment of specific performance criteria and royalties on future product sales, if any. The agreement may be terminated by DuPont/Pioneer Hi-Bred after three years, upon six months notice, if a specified milestone has not been met. DSM In March 1999, we entered into a three year collaboration with Gist- brocades N.V., a subsidiary of DSM N.V., to utilize our proprietary MolecularBreeding technologies to develop certain new enzymes for use in the manufacture of certain classes of penicillin antibiotics. Under the terms of the agreement, in exchange for global commercialization rights, we will receive research funding over three years and will receive royalties from the commercialization of any enzymes developed through our MolecularBreeding technologies. AstraZeneca In June 1999, we entered into a five year strategic collaboration with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc, to utilize our MolecularBreeding technologies to improve the yield and quality of several of AstraZeneca's strategic crops. AstraZeneca is one of the world's leading agricultural companies. We have received $5 million in a preferred stock equity investment and could receive up to $21.5 million for research and development funding and technology advancement funding. We may receive over $100 million in potential milestone payments based on the accomplishment of specific performance criteria, in addition to royalties on product sales. In addition, each year of the collaboration AstraZeneca has the right to substitute their obligation to pay us $1 million in annual technology advancement funding with a $3 million equity investment at a 50% premium to the current market value. In addition to the above collaborations, we have entered into several proof of principle collaborations with parties such as Abbott, Pfizer and Novartis. 41 U.S. Government Grants Government grants allow us to focus on key internal scientific programs. In addition, we retain ownership of all intellectual property and commercial rights generated during the project, subject to a non-exclusive, non- transferable, paid-up license to practice for or on behalf of the U.S. inventions made with federal funds which is retained by the U.S. government as provided by the applicable statutes and regulations. We have obtained grant funding of over $27 million, primarily for the development of vaccines and the advancement of core technology, as outlined below. Summary of Grants
Granting Dollar Area of Grant Agency Description Grant Date Amount - ------------------------------------------------------------------------------------------------- Improved Drug Testing NIST-ATP Use of MolecularBreeding Sept. 1997 $2.0 million technologies to develop new screening systems for use in accelerated discovery and development of new AIDS therapies and vaccines. Evolution of Vectors DARPA Use of MolecularBreeding Feb. 1998 $5.6 million technologies to evolve a new generation of DNA vectors for rapid and efficient delivery of antigens for immunization. Whole Genome Shuffling NIST-ATP Use of MolecularBreeding Oct. 1998 $1.2 million technologies to develop new or improved manufacturing processes. Decontamination DARPA Use of MolecularBreeding Dec. 1998 $3.8 million technologies to create enzyme-based decontamination compounds effective against pathogens. New Therapeutic and DARPA Use of MolecularBreeding April 1999 $7.7 million Preventative DNA technologies to generate Vaccines new vaccines with a broad spectrum of activity against multiple strains of several different pathogens. Aerosol-Based Vaccines DARPA Use of MolecularBreeding Sept. 1999 $6.8 million technologies to deliver aerosol-based preventative and therapeutic agents.
Intellectual Property and Technology Licenses Pursuant to the technology transfer agreement we entered into with Affymax Technologies N.V. and Glaxo Group Limited, each a wholly-owned subsidiary of Glaxo Wellcome plc, we were assigned all rights to the patents, applications and know-how related to MolecularBreeding technologies. Affymetrix, Inc. retains an exclusive, royalty-free license under the patents and patent applications previously owned by Affymax for use in the diagnostics and research supply markets for specific applications. In addition, Affymax assigned jointly to us and to Affymetrix a family of patent applications relating to circular PCR techniques. 42 We have an extensive patent portfolio including five issued U.S. patents relating to our proprietary MolecularBreeding technology. Counterpart applications of these U.S. patents are pending in other major industrialized countries. We have an additional 77 pending U.S. patent applications and 63 pending foreign and international counterpart applications relating to our MolecularBreeding technologies and specialized screening technologies, and the application of these technologies to diverse industries including agriculture, protein pharmaceuticals, vaccines, gene therapy, chemicals and therapeutic drugs. We have exclusively licensed patent rights and technology for specific uses from Novo Nordisk, the California Institute of Technology, Stanford University and the University of Washington. These licenses give us rights to an issued U.S. patent, 10 U.S. patent applications, and 79 additional international or foreign counterpart applications. In addition, we received from Affymax a worldwide, non-exclusive license to certain Affymax patent applications and patents related to technology for displaying multiple diverse proteins on the surface of bacterial viruses. Competition We believe we are the leader in the field of directed molecular evolution. We are aware that companies such as Diversa and Ixsys have alternative methods for obtaining genetic diversity. Academic institutions such as Caltech and the University of Washington are working in this field, and we have licensed certain technology from Caltech and the University of Washington. In the future, we expect the field to become highly competitive and that companies and academic and research institutions will seek to develop technologies that could be competitive with our MolecularBreeding technologies. Any products that we may develop through our MolecularBreeding technologies will compete in highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and personnel resources than we do, and we cannot assure you that they will not succeed in developing technologies and products that would render our technologies and products or those of our collaborators obsolete or noncompetitive. In addition, many of those competitors have significantly greater experience than we do in their respective fields. Employees As of November 15, 1999, we had 126 full-time employees, 59 of whom hold Ph.D. or M.D. degrees and 88 of whom were engaged in full-time research activities. We plan to expand our corporate development programs and hire additional staff as corporate collaborations and government grants are established. We continue to search for qualified individuals with interdisciplinary training and flexibility to address the various aspects and applications of our technologies. None of our employees are represented by a labor union, and we consider our employee relations to be good. Facilities We lease an aggregate of 47,880 square feet of office and laboratory facilities in Redwood City, California. The lease expires on February 24, 2005 with respect to 31,166 square feet and on March 31, 2002 with respect to 16,714 square feet. We have an option to extend the term of the lease for three years with respect to the 16,714 square feet. We believe that the facilities we currently lease are sufficient for approximately the next six months. We believe we will require additional space thereafter and will seek additional facilities. Legal Proceedings We are not currently a party to any material pending legal proceedings. 43 MANAGEMENT Directors and Executive Officers Our directors and executive officers as of November 15, 1999 are as follows:
Name Age Position ---- --- -------- Russell J. Howard, Ph.D....... 49 Director, President and Chief Executive Officer Simba Gill, Ph.D.............. 35 Chief Financial Officer and Senior Vice President of Business Development Michael Rabson, Ph.D.......... 45 General Counsel and Senior Vice President of Legal Affairs Willem P.C. Stemmer, Ph.D. ... 42 Vice President of Research John Bedbrook, Ph.D........... 50 President of Agriculture Joseph Affholter, Ph.D. ...... 35 Vice President of Biocatalysis and Chemicals Howard A. Simon............... 40 Vice President of Human Resources Norman Kruse, Ph.D............ 50 Director of Intellectual Property, Chief Patent Counsel Isaac Stein (1)(2)............ 53 Chairman of the Board and Director Robert J. Glaser, M.D. (2).... 81 Director M.R.C. Greenwood, Ph.D........ 56 Director Adrian Hennah (1)............. 42 Director Gordon Ringold, Ph.D. (1)(2).. 48 Director George Poste, D.V.M., Ph.D.... 55 Director Julian N. Stern............... 75 Secretary
- -------- (1)Member of the audit and finance committee (2)Member of the compensation committee Russell J. Howard, Ph.D., has served as our President, Chief Executive Officer and Director since June 1998 and is one of our co-founders. Dr. Howard was elected our President and Chief Operating Officer in May 1997. Originally trained in biochemistry and chemistry, Dr. Howard has spent over 20 years studying infectious diseases, primarily malaria, and currently serves on the National Institutes of Health and USAID advisory panels for malaria vaccine development. Prior to joining Maxygen, Dr. Howard was from August 1994 to June 1996 the President and Scientific Director of Affymax Research Institute. Simba Gill, Ph.D., joined us in July 1998 as the Chief Financial Officer and Senior Vice President of Business Development. Prior to joining us, from November 1996 to July 1998, Dr. Gill was at Megabios Corp. where he was Vice President of Business Development. Prior to this from November 1995 to November 1996, Dr. Gill was Director of Business Development at Systemix. Prior to joining Systemix, Dr. Gill worked at Boehringer Mannheim in a variety of corporate functions including Global Product Manager for erythropoietin, Manager of Corporate Business Development and Director of New Diagnostics Program Management. Dr. Gill received his Ph.D. in immunology at King's College, London University in collaboration with the U.K. biotechnology company CellTech, and his M.B.A. from INSEAD in Fontainbleau, France. Michael Rabson, Ph.D., joined us in September 1999 as Senior Vice President of Legal Affairs and General Counsel. Prior to joining us from February 1996 to September 1999, Dr. Rabson was a member of Wilson Sonsini Goodrich & Rosati, P.C. Prior to becoming a member, Dr. Rabson was an associate at Wilson Sonsini Goodrich & Rosati, P.C. Dr. Rabson received his Ph.D. in infectious disease epidemiology from Yale University and did a post-doctoral fellowship at the National Cancer Institute, National Institutes of Health. He was a patent examiner at the U.S. Patent and Trademark Office before he received his J.D. from Yale Law School. Willem P.C. Stemmer, Ph.D., is one of our co-founders and the inventor of MolecularBreeding. He has served as our Vice President of Research since March 1997. Dr. Stemmer's background is in medical genetics, where he originally worked on antibody engineering for immunotherapy of cancer. Prior to the 44 organization of Maxygen, he was a distinguished scientist at Affymax Research Institute from 1992 to 1996. He is a co-founder and board member of the Diversity Biotechnology Consortium, a joint academic and business effort focused on theoretical issues in molecular diversity and evolution. Dr. Stemmer has pioneered our MolecularBreeding technologies and has authored more than 14 papers on the subject and is the named inventor on more than 20 patent applications covering the technologies and, to date, five issued patents. John Bedbrook, Ph.D., joined us in November 1999 as President of Agriculture. Prior to this Dr. Bedbrook was Chief Executive Officer of Plant Science Ventures since 1999 and Chief Technology Officer at SAVIA from February 1998 to October 1999. Prior to joining SAVIA, Dr. Bedbrook held several senior management positions including Executive Vice President of Research and Development and Co-President at DNA Plant Technology Corp. from 1988 to 1997. Dr. Bedbrook also served as a Scientific Board Member and Director for many organizations. Dr. Bedbrook received his Ph.D. in Molecular Biology from the University of Auckland in New Zealand. Joseph Affholter, Ph.D., joined us in April 1998 as Vice President of Biocatalysis and Chemicals. Prior to joining us, Dr. Affholter was from 1997 to 1998 a member of the Biotechnology Steering Committee and from July 1996 to March 1998 was the research leader of the biotechnology program at the Dow Chemical Company. Prior to this, Dr. Affholter was the Project Leader of industrial biocatalysis research and development. Dr. Affholter serves on a number of academic and corporate technical advisory boards and has given numerous invited seminars on the coming future impact of biotechnology on the chemical industry. Dr. Affholter received his B.S. degree in chemistry from Michigan Technological University and his Ph.D. in molecular pharmacology from Stanford University. Howard A. Simon joined us in November 1999 as Vice President of Human Resources. Prior to joining us, from 1993 to November 1999 Mr. Simon was a partner in the Labor, Employment and Benefits Law Group of Landels Ripley & Diamond, LLP. Mr. Simon is a 1985 graduate of the Boalt Hall School of Law at the University of California, Berkeley. Also in 1985, Mr. Simon received his Master of Arts Degree with highest honors from the Graduate Theological Union of Berkeley. Norman Kruse, Ph.D., joined us in March 1998 as the Director of Intellectual Property, Chief Patent Counsel. Prior to joining us, from December 1995 to February 1998, Dr. Kruse was a patent attorney at Chiron Corporation. Dr. Kruse was a patent attorney at Townsend and Townsend and Crew from January 1993 to December 1995. Dr. Kruse received his Ph.D. in molecular biology from the University of Washington and worked initially as a scientist and manager in the diagnostics industry. Subsequently, he managed technology assessment and acquisition for Triton Biosciences, during which time he obtained his J.D. from Golden Gate University of Law in San Francisco. Isaac Stein has served as our Chairman of the Board since June 1998 and a director since May 1996 and is one of our co-founders. Since November 1982, Mr. Stein has been president of Waverley Associates, Inc. a private investment firm. Mr. Stein is also a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general partner of Technogen Associates, L.P. and a director of ALZA Corporation, the Benham Group of mutual funds and CV Therapeutics, Inc. He is also a trustee of Stanford University and the Chairman of the Board of UCSF Stanford Health Care. Robert J. Glaser, M.D., has served as our Director since September 1997. Dr. Glaser was Director for Medical Science at the Lucille P. Markey Charitable Trust from 1984 to June 1997, and a trustee from 1988 to June 1997. In accordance with the donor's will, the Trust ceased operations in June 1997. Dr. Glaser is also a director of ALZA Corporation and Hanger Orthopedic Group, Inc. Dr. Glaser has held faculty appointments at several universities, including Dean of the School of Medicine at Stanford University and Professor of Social Medicine at Harvard University. Originally trained as an internist, Dr. Glaser has 124 publications on streptococcal infections, rheumatic fever, medical education and health care, as well as being a contributor to numerous scientific treatises. 45 M.R.C. Greenwood, Ph.D., has served as our Director since February 1999. Dr. Greenwood has been Chancellor of the University of California ("UC") at Santa Cruz since July 1996. Prior to being named Chancellor of UC Santa Cruz, Dr. Greenwood was Dean of Graduate Studies and Vice President at UC Davis from July 1989 to July 1996. In addition, from November 1993 to May 1995, Dr. Greenwood took a leave from UC Davis to serve as Associate Director for Science in the White House Office of Science and Technology Policy. Dr. Greenwood received her doctorate in physiology, developmental biology and neurosciences from Rockefeller University. Adrian Hennah has served as our Director since September 1997. Mr. Hennah has held several key positions in the Glaxo Wellcome organization. He is currently Senior Vice President and Chief Financial Officer of Glaxo Wellcome Inc. Prior to that, Mr. Hennah had a range of responsibilities within research and development including finance, business redesign and strategy process, human resources and engineering, and he led the team coordinating the integration of Glaxo and Wellcome. Mr. Hennah is also a Director of Affymetrix. Mr. Hennah has a degree in law from Cambridge University and is a Sloan Fellow of the London Business School. Gordon Ringold, Ph.D., has served as our Director since September 1997. Since March 1995, Dr. Ringold has been Chief Executive Officer and Scientific Director of Affymax Research Institute where he manages the development of novel technologies to accelerate the pace of drug discovery. Prior to serving as Chief Executive Officer, Dr. Ringold was the President and Scientific Director of Affymax Research Institute. Dr. Ringold received his Ph.D. in the laboratory of Dr. Harold Varmus, prior to joining the Stanford University School of Medicine, Department of Pharmacology, and serving as the Vice President and Director of the Institute for Cancer and Development Biology of Syntex Research. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general partner of Technogen Associates, L.P. and has served as Chairman and Chief Executive Officer of SurroMed, a biotechnology company focused on novel clinical databases since 1997. George Poste, D.V.M., Ph.D., has served as our Director since October 1999. Dr. Poste has been Chief Science and Technology Officer at SmithKline Beecham since January 1997 and is a member of the Board of Directors of SmithKline Beecham. Prior to being appointed to Chief Science and Technology Officer, Dr. Poste was President of Research and Development at SmithKline Beecham. Dr. Poste is also a Research Professor at the University of Pennsylvania and holds the William Pitt Fellowship at Pembroke College, Cambridge University. He is a Board-certified pathologist and was awarded a D.Sc. for meritorious research contributions by the University of Bristol in 1987. Dr. Poste received his Doctorate in Veterinary Medicine in 1966 and his Ph.D. in Virology in 1969 from the University of Bristol. Julian N. Stern, J.D., has served as our Secretary since March 1997. He is the sole employee of a professional corporation that is a partner of the law firm of Heller Ehrman White & McAuliffe and is a director of ALZA Corporation. Scientific Advisory Board The following individuals are members of our Scientific Advisory Board: Baruch S. Blumberg, M.D., Ph.D., is a Distinguished Scientist at Fox Chase Cancer Center, Philadelphia, and University Professor of Medicine and Anthropology at the University of Pennsylvania. Dr. Blumberg's research has covered many areas including clinical research, epidemiology, virology, genetics and anthropology. Dr. Blumberg was awarded the Nobel Prize in 1976 for his work on infectious diseases and specifically for the discovery of the hepatitis B virus and has also been elected to the National Inventors Hall of Fame for similar work. Dr. Blumberg's research and insight into infectious diseases are valuable to Maxygen programs related to vaccines and hepatitis B in particular. Arthur Kornberg, M.D., is an active Professor Emeritus at the Stanford University School of Medicine, Department of Biochemistry. Dr. Kornberg has received numerous accolades including several 46 honorary degrees and awards, the National Medal of Science, and the Nobel Prize in Medicine in 1959. He is a member of several prestigious scientific societies and serves as a member of several scientific advisory boards. Dr. Kornberg's years of research in enzymes and metabolism is a valuable contribution to directing the internal research programs of Maxygen. Joshua Lederberg, Ph.D., a research geneticist, is Professor Emeritus at the Rockefeller University, in New York. Formerly, Dr. Lederberg was a professor of genetics at the University of Wisconsin and at Stanford University School of Medicine. Dr. Lederberg is a pioneer in the field of bacterial genetics with the discovery of genetic recombination in bacteria, work for which he received the Nobel Prize in Physiology and Medicine in 1958. Maxygen is funding work in Dr. Lederberg's laboratory pertaining to the study of cell fusion and the generation of genetically diverse recombinants. His work and guidance in genetic recombination is important to our MolecularBreeding technologies. Alejandro C. Zaffaroni, Ph.D., is one of our co-founders. Dr. Zaffaroni is a biochemist by training and a highly successful biotechnology entrepreneur, who has co-founded and built several companies including ALZA Corporation, DNAX Institute of Molecular and Cellular Biology, Affymax N.V. and Affymetrix, Inc. Dr. Zaffaroni has repeatedly recognized the commercial value of leading-edge technologies and has turned those visions into highly successful companies. In 1995, Dr. Zaffaroni was awarded the National Medal of Technology by President Clinton in recognition of his contributions to the pharmaceutical and biotechnology industries. Dr. Zaffaroni is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C., which is the general partner of Technogen Associates, L.P. Frances Arnold, Ph.D., is a Professor of Chemical Engineering and Biochemistry at the California Institute of Technology. She received her Ph.D. in Chemical Engineering from the University of California, Berkeley. She has authored or co-authored more than 120 publications and has 18 patents issued or pending. Dr. Arnold's research focuses on engineering new enzymes and pathways by directing their evolution in the laboratory. Her awards include an Office of Naval Research Young Investigator Award, a Presidential Young Investigator Award and a David and Lucille Packard Fellowship in Science and Engineering. Maxygen is funding work at Dr. Arnold's laboratory pertaining to directed molecular evolution. Dr. Arnold provides on-going guidance in the field of directed molecular evolution and its applications in the chemical industry. Board Composition and Committees We currently have seven directors. Our board of directors currently has an audit committee and a compensation committee. The audit committee consists of Adrian Hennah, Gordon Ringold and Isaac Stein. The audit committee makes recommendations to the board of directors regarding the selection of independent auditors, reviews the scope of audit and other services by our independent auditors, reviews the accounting principles and auditing practices and procedures to be used for our financial statements and reviews the results of those audits. The compensation committee consists of Robert J. Glaser, Gordon Ringold and Issac Stein. The compensation committee makes recommendations to the board of directors regarding our stock and compensation plans, approves compensation of certain officers and grants stock options. Compensation Committee Interlocks and Insider Participation Interlocks None of the members of the compensation committee is currently, or has ever been at any time since our formation, one of our officers or employees, nor has served as a member of the board of directors or compensation committee of any entity that has one or more officers serving as a member of our board of directors or compensation committee. 47 In March 1998, Dr. Ringold executed a full recourse promissory note in the amount of $99,000 in favor of Maxygen for the payment of the exercise price in connection with the exercise of options to purchase 550,000 shares of our common stock. In addition, in August 1998, Dr. Ringold purchased 16,667 shares of Series B preferred stock at a purchase price of $3.00 per share. In March 1997, Mr. Stein issued a full recourse promissory note in the amount of $120,000, of which $98,800 is outstanding, in favor of Maxygen in connection with the purchase of 600,000 shares of our common stock. In addition, in August 1998, the Stein 1995 Revocable Trust, of which Mr. Stein is a trustee, purchased 31,667 shares of Series B preferred stock at a price of $3.00 per share and Stein Partners, of which Mr. Stein is a partner, purchased 41,667 shares of Series B preferred stock at a price of $3.00 per share. Director Compensation We reimburse our nonemployee directors for expenses incurred in connection with attending board and committee meetings but do not compensate them for their services as board or committee members. We have in the past granted nonemployee directors options to purchase our common stock pursuant to the terms of our stock plans, and our board continues to have the discretion to grant options to new nonemployee directors. Beginning after our stockholders meeting in 2000, our nonemployee directors will each receive nondiscretionary, automatic grants of options to purchase 20,000 shares of our common stock upon joining the board of directors and nondiscretionary, automatic grants of options to purchase 5,000 shares of our common stock each year pursuant to the 1999 Nonemployee Directors Stock Option Plan. 48 Executive Compensation The following table sets forth the compensation paid by us during 1998 to our Chief Executive Officer and to our four other most highly compensated executive officers who received salary and bonus compensation of more than $100,000 during 1998. The following table also sets forth compensation information about John Bedbrook and Michael Rabson, each of whom would have been one of our four most highly compensated executive officers if they had been employed by us in fiscal year 1998. Summary Compensation Table
Long-Term Compensation ------------ Awards Annual Compensation Securities -------------------- Underlying All Other Name and Position Year Salary Bonus Options Compensation ----------------- ---- ------ ----- ------------ ------------ Russell J. Howard............... 1998 $218,333 $ -- 200,000 $ -- President, Chief Executive Officer and Director Simba Gill(1)................... 1998 99,750 10,000 330,000 35,864(2) Chief Financial Officer and Senior Vice President of Business Development Michael Rabson(3)............... 1998 -- -- -- -- Senior Vice President of Legal Affairs and General Counsel Willem P.C. Stemmer............. 1998 136,667 -- -- -- Vice President of Research John Bedbrook(4)................ 1998 -- -- -- -- President of Agriculture Joseph Affholter(5)............. 1998 84,480 10,000 110,000 82,397(6) Vice President of Biocatalysis and Chemicals Norman Kruse(7)................. 1998 118,767 10,000 87,500 114,808(8) Director of Intellectual Property, Chief Patent Counsel
- -------- (1) Dr. Gill joined Maxygen in July 1998. His annual salary is $190,000. (2) Consists of $35,864 for reimbursement of relocation expenses. (3) Dr. Rabson joined Maxygen in September 1999. Dr. Rabson's annual salary is currently $220,000. (4) Dr. Bedbrook joined Maxygen in November 1999. Dr. Bedbrook's annual salary is currently $212,500. (5) Dr. Affholter joined Maxygen in May 1998. His annual salary is $135,960. (6) Consists of $39,953 in the form of a housing allowance and $42,444 for reimbursement of relocation expenses. (7) Dr. Kruse joined Maxygen in March 1998. His annual salary is $144,200. (8) Consists of $31,233 in the form of a housing allowance and $83,575 for reimbursement of relocation expenses. 49 Stock Options Granted in the Fiscal Year Ended December 31, 1998 The following table sets forth information with respect to stock options granted during the fiscal year ended December 31, 1998 to each of the named executive officers. All options were granted under Maxygen's 1997 Stock Option Plan. The following options are immediately exercisable in full at the date of grant, but shares purchased on exercise of unvested options are subject to a repurchase right in our favor that entitles us to repurchase unvested shares at their original exercise price on termination of the employee's services with us. The repurchase right lapses as to 25% of the shares on the first anniversary of the grant date and the balance, ratably by year, over the next three years. The percentage of options granted is based on an aggregate of 1,537,120 options granted by Maxygen during the fiscal year ended December 31, 1998 to our employees, including the named executive officers. The potential realizable value amounts in the last two columns of the following chart represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% annual rates of stock price appreciation from the date of grant to the end of the option term are provided in accordance with rules of the SEC and do not represent our estimate or projection of the future common stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock, overall market conditions and the option holder's continued employment through the vesting period.
Individual Grants ------------------------------------------ Potential Realizable Value at % of Assumed Annual Total Rates of Stock Options Price Number of Granted Appreciation Securities to Exercise for Option Underlying Employees Price Terms Options in Fiscal Per Expiration --------------- Name Granted Year Share Date 5% 10% ---- ---------- --------- -------- ---------- ------- ------- Russell J. Howard President, Chief Executive Officer and Director............... 200,000 13.0% $0.30 6/16/08 $37,733 $95,624 Simba Gill Chief Financial Officer and Senior Vice President of Business Development............ 330,000(1) 21.5% 0.30 6/16/08 62,261 157,781 Michael Rabson Senior Vice President of Legal Affairs and General Counsel(2)..... -- -- -- -- -- -- Willem P.C. Stemmer Vice President of Research.............. -- -- -- -- -- -- John Bedbrook President of Agriculture(3)........ -- -- -- -- -- -- Joseph Affholter Vice President of Biocatalysis and Chemicals.............. 110,000 7.2% 0.30 6/16/08 20,753 52,593 Norman Kruse Director of Intellectual Property, Chief Patent Counsel... 87,500 5.7% 0.20 3/11/08 11,006 27,890
- -------- (1) Our right of repurchase lapses over a four-year period with respect to 25% of the underlying shares at the first anniversary of the grant date and in equal monthly installments over the next three years. (2) Dr. Rabson joined Maxygen in September 1999. (3) Dr. Bedbrook joined Maxygen in November 1999. 50 Aggregated Option Exercises in Fiscal Year 1998 and Fiscal-Year End Option Values The following table sets forth certain information regarding exercised stock options during the fiscal year ended December 31, 1998 and unexercised options held as of December 31, 1998 by each of the named executive officers. We granted all options under our 1997 Stock Option Plan. These options are immediately exercisable in full at the date of grant, but shares purchased on exercise of unvested options are subject to a repurchase right in our favor that entitles us to repurchase unvested shares at their original exercise price on termination of the employee's services with us. Unless otherwise indicated, the repurchase right lapses as to 25% of the shares on the first anniversary of the grant date and the balance, ratably by year, over the next three years. The value realized is based on the fair market value of the underlying securities as of the date of exercise, minus the per share exercise price, multiplied by the number of shares underlying the option. The value of unexercised in-the- money options are based on a value of $0.50 per share, the fair market value of our common stock on December 31, 1998 as determined by our board of directors. Amounts reflected are based on the value of $0.50 per share, minus the per share exercise price, multiplied by the number of shares underlying the option. Each of the people below who exercised options paid the entire exercise price with a full recourse promissory note secured by the acquired stock, except Dr. Gill who paid 10% of the exercise price by cash and the remaining amount with a full recourse promissory note.
Number Of Securities Value Of Underlying Unexercised Unexercised In-The Money Options At Options At Shares Fiscal Year-End(#) Fiscal Year-End($) Acquired On Value ------------------------- ------------------------- Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ---------- ----------- ------------- ----------- ------------- Russell J. Howard President, Chief Executive Officer and Director............... 150,000 -- 200,000 -- $40,000 -- Simba Gill Chief Financial Officer and Senior Vice President of Business Development(1) ........ 330,000 33,000 -- -- -- -- Michael Rabson Senior Vice President of Legal Affairs and General Counsel(2)..... -- -- -- -- -- -- Willem P.C. Stemmer Vice President of Research............... 300,000 -- -- -- -- -- John Bedbrook President of Agriculture(3)......... -- -- -- -- -- -- Joseph Affholter Vice President of Biocatalysis and Chemicals.............. -- -- 110,000 -- 22,000 -- Norman Kruse Director of Intellectual Property, Chief Patent Counsel... -- -- 87,500 -- 26,250 --
- -------- (1) Our right of repurchase lapses over a four-year period with respect to 25% of the underlying shares at the first anniversary of the grant date and in equal monthly installments over the next three years. (2) Dr. Rabson joined Maxygen in September 1999. (3) Dr. Bedbrook joined Maxygen in November 1999. 51 Employee Benefit Plans 1997 Stock Option Plan Our board of directors adopted our 1997 Stock Option Plan on March 1, 1997. This plan provides for the grant of incentive stock options to our employees and nonstatutory stock options to our employees, directors and consultants. As of November 15, 1999, 7,500,000 shares of common stock were reserved for issuance under this plan. Of these shares, 4,187,537 were issued upon exercise of stock options, 1,903,975 shares were subject to outstanding options and 1,408,488 shares were available for future grant. The stock option plan provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the lesser of 1,500,000 shares, 4% of the outstanding shares on the date of the annual increase or an amount determined by our board of directors. Our board of directors or a committee appointed by the board administers the stock option plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options. The exercise price of nonstatutory options must generally be at least 85% of the fair market value of the common stock on the date of grant. The exercise price of incentive stock options cannot be lower than 100% of the fair market value of the common stock on the date of grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. The term of an incentive stock option cannot exceed ten years, and the term of an incentive stock option granted to a holder of more than 10% of our voting power cannot exceed five years. A participant may not transfer rights granted under our stock option plan other than by will, the laws of descent and distribution or as otherwise provided under the stock option plan. Options granted under our stock option plan will accelerate and become fully exercisable for a period of 30 days in the event we are acquired, unless the successor corporation assumes or substitutes other equivalent options in their place. Our board of directors may not, without the adversely affected optionee's prior written consent, amend, modify or terminate the stock plan if the amendment, modification or termination would impair the rights of optionees. Our stock option plan will terminate in 2007 unless terminated earlier by the board of directors. 1999 Employee Stock Purchase Plan Our board of directors adopted our 1999 Employee Stock Purchase Plan on September 29, 1999. This plan provides our employees with an opportunity to purchase our common stock through accumulated payroll deductions. A total of 400,000 shares of common stock has been reserved for issuance under the purchase plan through March 2001. In addition, the purchase plan provides for annual increases in the number of shares available for issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase or such amount as may be determined by the board. The board of directors or a committee appointed by the board administers the purchase plan. The board or its committee has full and exclusive authority to interpret the terms of the purchase plan and determine eligibility. Employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week. However, an employee may not be granted an option to purchase stock under the purchase plan: . if such an employee immediately after grant owns stock possessing five percent or more of the total combined voting power or value of all classes of our capital stock, or 52 . if, and to the extent that, such an employee has rights to purchase stock under all of our employee stock purchase plans in excess of $25,000 worth of stock for each calendar year. The purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended, allows for favorable tax treatment of participants, offering periods of up to 24 months, as determined by the plan administrator, although it is anticipated that offering periods will generally be 12 months, each including two six-month purchase periods. The offering periods will generally start on the first trading day on or after April 1 of each year, except for the first offering period which will commence on the first trading day before the effective date of this offering, will end on the last trading day on or before March 31, 2001, and will have two purchase periods ending on the last trading days of September 2000 and March 2001. The purchase plan permits participants to purchase common stock though payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings and commissions but excludes payments for overtime, shift premium payments, incentive compensation, incentive payments, bonuses and other compensation. Amounts deducted and accumulated for the participant's account are used to purchase shares of common stock on the last trading day of each purchase period at a price of 85% of the lower of the fair market values of the common stock at the beginning of the offering period and the end of the purchase period. Participants may reduce their withholding percentage to zero at any time during an offering period and may increase their withholding percentage or decrease it, but to more than zero, on the first day of each purchase period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. A participant may not transfer rights granted under the purchase plan other than by will, the laws of descent and distribution or as otherwise provided under the purchase plan. The purchase plan provides that, if we merge with or into another corporation or a sale of substantially all of our assets, a successor corporation may assume or substitute for each outstanding purchase right. If the successor corporation refuses to assume or substitute for the outstanding purchase rights, the offering period then in progress will be shortened, and a new exercise date will be set. The purchase plan will terminate in 2009. However, the board of directors has the authority to amend or terminate the purchase plan at any time and may apply any action to affect their outstanding rights to purchase stock under the purchase plan. 1999 Nonemployee Directors Stock Option Plan We have adopted the 1999 Nonemployee Directors Stock Option Plan and have reserved a total of 300,000 shares of common stock for issuance thereunder. Maxygen will automatically grant each nonemployee director who becomes a Maxygen director after our stockholder meeting in 2000 a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which such person first becomes a director. At the first board of directors meeting immediately following each annual stockholders meeting beginning with the 1999 Annual Stockholders Meeting, Maxygen will automatically grant each nonemployee director a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the director plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the director plan is ten years. Options will become exercisable at the rate determined by the plan administrator. Shares underlying options granted to a director upon joining our board are subject to a right of repurchase in our favor which lapses with respect to 25% of the shares one year after the date of grant and at a rate of 25% of the shares at the end of each year thereafter. Each subsequent grant is subject to a right of repurchase for one year after the date of grant. The director plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the director plan. 53 401(k) Plan In May 1997, our board of directors adopted a Retirement Savings and Investment Plan covering our full-time employees located in the United States. This plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions to this plan by employees, and the investment earnings thereon, are not taxable to employees until withdrawn. Pursuant to the plan, employees may elect to reduce their current compensation by up to the lesser of 25% of their annual compensation or the statutory prescribed annual limit ($10,000 in 1999) and to have the amount of the reduction contributed to the plan. We do not currently make additional matching contributions on behalf of plan participants. Limitation of Liability and Indemnification Our certificate of incorporation and bylaws limit the liability of directors, officers, employees and other agents to the fullest extent permitted by Delaware law; provided however that we indemnify any such person in connection with a proceeding initiated by such person only if such proceeding was authorized by our board. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for: (1) breach of their duty of loyalty to the corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) unlawful payments of dividends or unlawful stock repurchases or redemptions, or (4) any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal or state securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. We believe that indemnification under our bylaws and certificate of incorporation covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws permit indemnification. We intend to enter into agreements to indemnify our directors, in addition to the indemnification provided for in our bylaws. These agreements, among other things, will indemnify our directors for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Maxygen arising out of such person's services as one of our directors or such person's services to any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors. There is no pending litigation or proceeding involving a director or officer of Maxygen in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. CERTAIN TRANSACTIONS In February 1997, we entered into a services agreement with Affymax Research Institute. Pursuant to the services agreement, Affymax provided certain accounting, administrative and facilities management services to us and allowed us to occupy certain facilities leased by Affymax in exchange for specified annual fees. The services agreement terminated on April 1, 1999. At the time of our formation, we entered into a technology transfer agreement with Affymax Technologies N.V. and Glaxo Group Limited, each a wholly-owned subsidiary of Glaxo Wellcome plc, pursuant to which we were assigned all right, title and interest in the patents, patent applications and confidential information relating to our MolecularBreeding technologies, subject to an exclusive royalty-free license under the patents and patent applications for use in the diagnostics and research supply markets for specific applications. In exchange for the intellectual property transferred we issued 5,460,000 shares of our common stock to Affymax. 54 In March 1997, in connection with our formation, we made loans to certain officers and directors to purchase our common stock, which are evidenced by full recourse promissory notes and secured by the common stock underlying this stock purchase. The promissory notes bear interest at 6.42% per year, and interest payments on the notes are due and payable on June 30 and December 31 of each year. Unpaid principal and interest on the notes are due and payable on the earlier of 30 days after termination of the participant's employment with us, or three years after the date of the promissory note. As of November 15, 1999, the original and outstanding principal amounts of each promissory note by a director or executive officer are set forth below.
Outstanding Director or Executive Officer Original Note Amount Note Amount ----------------------------- -------------------- ----------- Russell Howard.............................. $ 60,000 $ 60,000 Isaac Stein................................. 120,000 98,800 Willem P.C. Stemmer......................... 120,000 120,000
Options granted to our directors, executive officers and key employees are immediately exercisable as to both vested and unvested shares, with unvested shares being subject to a right of repurchase in our favor in the event of termination of employment prior to vesting of all shares. These individuals pay the exercise price for their outstanding options pursuant to full recourse promissory notes secured by the common stock underlying the options. The notes bear interest at 5.59% per year, and interest payments on the notes are due and payable on June 30 and December 31 of each year. Unpaid principal and interest on the notes are due and payable on the earlier of 30 days after termination of the participant's employment with us, or three years after the date of the promissory note. As of November 15, 1999, the original and outstanding principal amounts of each promissory note by a director or executive officer are set forth below.
Original and Outstanding Director or Executive Officer Note Amount ----------------------------- ----------- Joseph Affholter................................................. $ 74,048 Simba Gill....................................................... 173,163 Russell J. Howard................................................ 47,250 Norman Kruse..................................................... 56,728 Michael S. Rabson................................................ 236,250 Gordon Ringold................................................... 99,000 Willem P.C. Stemmer.............................................. 136,688
In April 1998, we loaned $72,500 to Dr. Joseph Affholter, which is evidenced by a full recourse promissory note. In April 1999, we loaned an additional $77,500 to Dr. Affholter and received from Dr. Affholter a full recourse promissory note covering all amounts due from Dr. Affholter, which note is secured by a deed of trust on Dr. Affholter's principal residence and bears interest at 5.70% per year with respect to $72,500 of the principal and 4.83% with respect to $77,500 of the principal. Under the terms of the promissory note, interest is generally forgiven. The promissory note is due with respect to $72,500 of the principal on April 1, 2003 and with respect to $77,500 of the principal on March 30, 2004. The outstanding principal amount of the promissory note is $150,000. In March 1997, December 1997 and April 1998, we sold to various investors a total of 2,795,000 shares of Series A preferred stock at a purchase price of $2.00 per share. In August 1998, we sold to various investors a total of 3,666,667 shares of Series B preferred stock at a purchase price of $3.00 per share. In December 1998, we sold to a collaborator a total of 1,000,000 shares of Series C preferred stock at a purchase price of $5.00 per share. In June 1999, we sold to various investors a total of 3,636,364 shares of Series D preferred stock at a purchase price of $5.50 per share. In August 1999, we sold to a collaborator a total of 800,000 shares of Series E preferred stock at a purchase price of $6.25. 55 The table below sets forth the officers, directors, immediate family members of officers and directors and holders of more than 5% of our outstanding stock who invested in, or are beneficial owners of our preferred stock as of November 15, 1999. The numbers in the table below are on an as converted to common stock basis at a conversion ratio of one share of common stock for each share of preferred stock.
Preferred Stockholder Preferred Stock --------------------- --------------- Holders of More than 5%: Affymax Technologies N.V. (a wholly-owned subsidiary of Glaxo Wellcome plc)..................................... 1,250,000 Technogen Associates, L.P. (1)........................... 3,274,772 Technogen Enterprises, L.L.C. (2)........................ 3,274,772 Directors: Gordon Ringold (3)....................................... 3,291,439 Isaac Stein (4).......................................... 3,348,106 Officers: Russell Howard (5)....................................... 55,136 Willem Stemmer........................................... 125,000 Michael Rabson........................................... 9,100 Immediate Family Members of Officers and Directors: Bhagwant Gill and Krishna Gill (6)....................... 128,787 Joseph Glaser, II (7).................................... 8,712 Robert Glaser, Jr. (8)................................... 10,991 Sally Glaser (9)......................................... 9,718
- -------- (1) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. (2) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. (3) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. (4) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Mr. Stein is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. Also includes 525,667 shares held by the Stein 1995 Revocable Trust, of which Mr. Stein is a trustee and 41,667 shares held by Stein Partners, of which Mr. Stein is a general partner. (5) Includes 53,636 shares held by the Russell and Maureen Howard Trust, of which Dr. Howard is a trustee. (6) Drs. Gill are the parents of Simba Gill. (7) Mr. Glaser is the son of Robert J. Glaser. (8) Mr. Glaser is the son of Robert J. Glaser. (9) Ms. Glaser is the daughter of Robert J. Glaser. Holders of our preferred stock are entitled to registration rights with respect to the shares of common stock that they will hold following this offering. See "Description of Capital Stock--Registration Rights." We believe that all transactions between us and our officers, directors, principal stockholders and other affiliates have been and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 56 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of November 15, 1999 (assuming conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering and as adjusted to reflect the sale of the shares offered by this prospectus) by: . each person who is known by us to beneficially own more than 5% of our common stock; . each of the named executive officers and each of our directors; and . all of our officers and directors as a group. Percentage of ownership is based on 23,910,568 shares outstanding as of November 15, 1999, assuming conversion of the preferred stock, and 29,410,568 shares outstanding after this offering, assuming no exercise of the underwriters' over-allotment options. Beneficial ownership is calculated based on SEC requirements. All shares of the common stock subject to options currently exercisable or exercisable within 60 days after November 15, 1999 are deemed to be outstanding for the purpose of computing the percentage of ownership of the person holding such options, but are not deemed to be outstanding for computing the percentage of ownership of any other person. Unless otherwise indicated below, each stockholder named in the table has sole or shared voting and investment power with respect to all shares beneficially owned, subject to applicable community property laws. Unless otherwise indicated in the table, the address of each individual listed in the table is Maxygen, Inc., 515 Galveston Drive, Redwood City, California 94063.
Number of Percentage of Shares Shares Beneficially Owned Beneficially ------------------------ Owned Prior to Before After Beneficial Owner the Offering Offering Offering ---------------- -------------- ---------- ---------- Affymax Technologies N.V. (1) Greenford Road, Greenford, Middlesex, UBG OHE, UK....................... 6,785,000 28.4% 23.1% Technogen Associates, L.P. (2) 525 University Avenue, Suite 700 Palo Alto, California 94301....... 3,274,772 13.7% 11.1% Technogen Enterprises, L.L.C. (3) 525 University Avenue, Suite 700 Palo Alto, California 94301....... 3,274,772 13.7% 11.1% Russell J. Howard, Ph.D. (4)....... 877,636 3.7% 3.0% Willem P.C. Stemmer, Ph.D. (5)..... 1,147,500 4.8% 3.9% Simba Gill, Ph.D. (6).............. 456,738 1.9% 1.6% Joseph Affholter, Ph.D. (7)........ 175,700 * * John Bedbrook, Ph.D. (8)........... 200,000 * * Norman Kruse, Ph.D. (9)............ 154,043 * * Michael Rabson, Ph.D. (10)......... 359,100 1.5% 1.2% Isaac Stein (11)................... 3,892,106 16.3% 13.2% Robert J. Glaser, M.D.............. -- * * M.R.C. Greenwood, Ph.D. (12)....... 75,000 * * Adrian Hennah (13)................. 75,000 * * George Poste, Ph.D. (14)........... 75,000 * * Gordon Ringold, Ph.D. (15)......... 10,531,439 44.1% 35.8% All directors and executive officers as a group (15 persons) (16).............................. 14,978,202 62.6% 50.9%
- -------- *Less than 1% of Maxygen's outstanding common stock. (1) Affymax Technologies N.V. is a wholly-owned subsidiary of Glaxo Wellcome plc. Includes 75,000 shares subject to immediately exercisable options held by Adrian Hennah and which Mr. Hennah has assigned to Glaxo Wellcome plc. (2) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. 57 (3) Consists of 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Enterprises, L.L.C. and Technogen Associates, L.P. are under common control. (4) Includes 53,636 shares held by the Russell and Maureen Howard Trust, of which Dr. Howard is a trustee. Also includes 297,500 shares that are subject to immediately exercisable options. As of November 15, 1999, we have the right to repurchase 448,125 shares including shares issuable upon exercise of options held by Dr. Howard if Dr. Howard ceases his employment, directorship or consultancy with us. (5) Includes 379,375 shares that are subject to our right of repurchase as of November 15, 1999 if Dr. Stemmer ceases his employment, directorship or consultancy with us. (6) Includes 336,600 shares that are subject to our right of repurchase as of November 15, 1999 if Dr. Gill ceases his employment, directorship or consultancy with us. (7) Includes 144,375 shares that are subject to our right of repurchase as of November 15, 1999 if Dr. Affholter ceases his employment, directorship or consultancy with us. (8) Includes 200,000 shares that are subject to immediately exercisable options. As of November 15, 1999, we have the right to repurchase all of the shares issuable upon exercise of these options if Dr. Bedbrook ceases his employment, directorship or consultancy with us. (9) Includes 127,500 shares that are subject to our right of repurchase as of November 15, 1999 if Dr. Kruse ceases his employment, directorship or consultancy with us. (10) As of November 15, 1999, we have the right to repurchase 350,000 of these shares if Dr. Rabson ceases his employment, directorship or consultancy with us. (11) Includes 3,211,574 shares that are held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Mr. Stein is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. Includes 525,667 shares held by the Stein 1995 Revocable Trust, of which Mr. Stein is a trustee and 41,667 shares held by Stein Partners, of which Mr. Stein is a general partner. As of November 15, 1999, we have the right to repurchase 162,500 shares held by Mr. Stein if he ceases his employment, directorship or consultancy with us. (12) Includes 75,000 shares that are subject to immediately exercisable options. As of November 15, 1999, we have the right to repurchase all of the shares issuable upon exercise of these options if Dr. Greenwood ceases her employment, directorship or consultancy with us. (13) Includes 75,000 shares that are subject to immediately exercisable options. As of November 15, 1999, we have the right to repurchase 37,500 shares issuable upon exercise of these options if Mr. Hennah ceases his employment, directorship or consultancy with us. Mr. Hennah has assigned beneficial ownership of these shares to Glaxo Wellcome plc and disclaims beneficial ownership of the shares. (14) Includes 75,000 shares that are subject to immediately exercisable options. As of November 15, 1999, we have the right to repurchase all of the shares issuable upon exercise of these options if Dr. Poste ceases his employment, directorship or consultancy with us. (15) Includes 3,211,574 shares held by Technogen Associates, L.P. and 63,198 shares held by Technogen Enterprises, L.L.C. Technogen Managers, L.L.C. is the general partner of Technogen Associates, L.P. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and Technogen Managers, L.L.C. and disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the limited liability companies. Also includes 6,710,000 shares held by Affymax Technologies N.V. Dr. Ringold is the Chief Executive Officer of Affymax Research Institute which is under common control with Affymax Technologies N.V. Dr. Ringold disclaims beneficial ownership of these shares. Also includes 20,000 shares held by the Gregory Zarucki Ringold 1998 Trust, 20,000 shares held by the Alexander Zarucki Ringold 1998 Trust and 20,000 shares held by the Melanie Gault-Ringold 1998 Trust. As of November 15, 1999, we have the right to repurchase 137,500 shares held by Dr. Ringold if he ceases his employment, directorship or consultancy with us. (16) Includes shares included pursuant to notes (2), (3), (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15). 58 DESCRIPTION OF CAPITAL STOCK General Our amended and restated certificate of incorporation, the filing of which will occur at the closing of this offering, authorizes the issuance of up to 70 million shares of common stock, par value $0.0001 per share, and five million shares of preferred stock, par value $0.0001 per share, the rights and preferences of which may be established from time to time by our board of directors. As of November 15, 1999, after giving effect to the conversion of all preferred stock into common stock, 23,910,568 shares of common stock were outstanding. As of November 15, 1999, we had 254 stockholders. Common Stock Each holder of common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of preferred stock issued after the sale of the common stock offered hereby may be entitled, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock offered by us in this offering, when issued and paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future. Preferred Stock Upon the closing of this offering, the board of directors will be authorized, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of five million shares of preferred stock, $0.0001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock. Registration Rights Pursuant to a registration rights agreement entered into between us and holders of 19,458,031 shares of common stock issuable upon conversion of our Series A, Series B, Series C, Series D and Series E preferred stock, we are obligated, under limited circumstances and subject to specified conditions and limitations, to use our reasonable best efforts to register the registrable shares. We must use our reasonable best efforts to register shares of the registrable shares: - if we receive written notice from holders of 50% or more of the registrable shares requesting that we effect a registration with respect to at least 20% of the registrable shares then held by the holders requesting registration; 59 -if we decide to register our own securities; or - if (1) we receive written notice from any holder or holders of the registrable shares requesting that we effect a registration on Form S-3 (a shortened form of registration statement) with respect to the registrable shares and (2) we are then eligible to use Form S-3 (which at the earliest could occur 12 calendar months after the closing of this offering). However, in addition to certain other conditions and limitations, if we are proposing to issue registered shares and the underwriters request to decrease the number of shares registered, we can limit the number of registerable shares included in the registration statement. The underwriters have requested that no registerable shares be registered in this offering. In addition, the holders of these registration rights have entered into lockup agreements and waived their registration rights until 180 days following this offering. Delaware Anti-Takeover Law and Charter Provisions Certain provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, require advance notification of stockholder proposals and nominations of candidates for election as directors, and eliminate cumulative voting in the election of directors. In addition, our bylaws provide that special meetings of the stockholders may be called only by the board of directors and that the authorized number of directors may be changed only by resolution of the board of directors. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of Maxygen. In addition, we are subject to Section 203 of the Delaware General Corporation Law. This law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless any of the following conditions are met. First, this law does not apply if prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. Second, the law does not apply if upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer. Third, the law does not apply if at or after the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Transfer Agent and Registrar The Transfer Agent and Registrar for our common stock is ChaseMellon Shareholder Services. 60 SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of our common stock. Upon completion of this offering, we will have outstanding an aggregate of 29,410,568 shares of common stock, assuming the issuance of 5,500,000 shares of common stock offered hereby and no exercise of options after November 15, 1999. Of these shares, the 3,976,192 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of Maxygen as that term is defined in Rule 144 under the Securities Act. Shares purchased by affiliates may generally only be sold pursuant to an effective registration statement under the Securities Act or in compliance with limitations of Rule 144 as described below. The remaining 25,493,900 shares of common stock held by existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. All of these shares and approximately 1,523,808 shares purchased in the offering will be subject to "lock-up" agreements providing that the stockholder will not offer, sell or otherwise dispose of any of the shares of common stock owned by them for a period of 180 days after the date of this prospectus. Goldman, Sachs & Co., however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. Upon expiration of the lock-up agreements, 824,500 shares will become eligible for sale pursuant to Rule 144(k), 17,973,531 shares will become eligible for sale under Rule 144, 4,187,537 shares will become eligible for sale under Rule 701 and 1,523,808 shares sold in the offering will become eligible for sale.
Days After Date Of Shares Eligible This Prospectus For Sale Comment ------------------ --------------- ---------------------------------------------------- Upon Effectiveness...... 3,976,192 Shares sold in the offering that are not subject lock-up agreements 180 days................ 28,485,568 Lock-up released; shares saleable under Rules 144(k), 144 and 701
Immediately after the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our stock option plans and our stock purchase plan. Based upon the number of shares subject to outstanding options as of November 15, 1999 and currently reserved for issuance under both of the stock option plans and the stock purchase plans, this registration statement would cover approximately 4,012,463 shares in addition to annual increases in the number of shares available under the stock option plans and stock purchase plan pursuant to the terms of such plans. Shares registered under the registration statement will generally be available for sale in the open market immediately after the 180 day lock-up agreements expire. Also beginning six months after the date of this offering, holders of 19,458,031 shares of our common stock, including shares issuable upon conversion of preferred stock will be entitled to certain rights with respect to registration of these shares for sale in the public market. See "Description of Capital Stock -- Registration Rights". Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the registration. Rule 144 In general, under Rule 144 as currently in effect, beginning 180 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would 61 be entitled to sell in "broker's transactions" or to market makers, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding (which will equal approximately 294,106 shares immediately after this offering); or - the average weekly trading volume in the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are generally subject to the availability of current public information about Maxygen. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice filing provisions of Rule 144. Therefore, "144(k) shares" may be sold immediately upon expiration of the lock-up agreements. Rule 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell such shares 180 days after the effective date of this offering in reliance on Rule 144, in the case of affiliates, without having to comply with the holding period and notice filing requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice filing requirements of Rule 144. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Maxygen by Heller Ehrman White & McAuliffe, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation. An investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own 4,546 shares of our common stock. HEWM Investors, an entity affiliated with Heller Ehrman White & McAuliffe, beneficially owns 27,000 shares of our common stock. Julian N. Stern, the sole shareholder of a professional corporation that is a partner of Heller Ehrman White & McAuliffe and Secretary of Maxygen beneficially owns 65,000 shares of our common stock. CHANGE IN INDEPENDENT AUDITORS Effective December 1998, Ernst & Young LLP was engaged as our independent auditors and replaced other auditors who were dismissed as our independent auditors on the same date. The decision to change auditors was approved by our board of directors. Our former auditors issued a report for the period ended December 31, 1997 which contained an emphasis paragraph as to our ability to continue as a going concern. In connection with the audit for the period ended December 31, 1997 and through the date at which Ernst & Young LLP was engaged as our independent auditors, there were no disagreements with our former auditors on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of our former auditors, would have caused them to make reference thereto in any of their reports. Our former auditors have not audited or reported on any of the financial statements included in this prospectus. Prior to December 1998, we had not consulted with Ernst & Young LLP on items that involved our accounting principles or the form of audit opinion to be issued on our financial statements. 62 EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1997 and 1998 and September 30, 1999, and for the each of the two years in the period ended December 31, 1998 and for the nine- month period ended September 30, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon the authority of such firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 (including exhibits and schedules) under the Securities Act, with respect to the shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to us and the common stock offered in this prospectus, reference is made to the registration statement, including the exhibits, financial statements and notes to the financial statements filed as a part of the registration statement. You should read the documents filed with the SEC as exhibits to the registration statement for a more complete description of the matter involved. We will be filing quarterly and annual reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's web site at http://www.sec.gov. 63 MAXYGEN, INC. INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP Independent Auditors.......................... F-2 Balance Sheets............................................................ F-3 Statements of Operations.................................................. F-4 Statement of Stockholders' Equity......................................... F-5 Statements of Cash Flows.................................................. F-6 Notes to Financial Statements............................................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Maxygen, Inc. We have audited the accompanying balance sheets of Maxygen, Inc. as of December 31, 1997 and 1998 and September 30, 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1998 and the nine month period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Maxygen, Inc. at December 31, 1997 and 1998 and September 30, 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1998 and the nine month period ended September 30, 1999, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Palo Alto, California October 29, 1999 F-2 MAXYGEN, INC. BALANCE SHEETS (in thousands, except share and per share amounts)
Pro Forma Stockholders' December 31, Equity at ---------------- September 30, September 30, 1997 1998 1999 1999 (Note 1) ------- ------- ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents...... $2,693 $15,306 $36,120 Grant and other receivables.... 10 600 1,708 Prepaid expenses and other current assets................ 32 271 424 ------- ------- ------- Total current assets.......... 2,735 16,177 38,252 Property and equipment, net.... 419 1,001 4,567 Deposits and other assets...... -- 422 639 ------- ------- ------- Total assets.................. $3,154 $17,600 $43,458 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............... $101 $466 $502 Accrued compensation........... 53 153 304 Other accrued liabilities...... 178 286 965 Deferred revenue............... 199 2,903 4,134 Related party payables......... 52 105 13 Current portion of equipment financing obligations......... -- -- 66 ------- ------- ------- Total current liabilities........ 583 3,913 5,984 Deferred revenue................. -- 1,987 2,726 Non-current portion of equipment financing obligations .......... -- -- 1,159 Commitments Stockholders' equity: Convertible preferred stock, $0.0001 par value, 25,000,000 shares authorized, issuable in series: 2,790,000, 7,461,667 and 11,898,031 shares issued and outstanding in December 31, 1997, 1998 and September 30, 1999, respectively (no shares outstanding pro forma) (aggregate liquidation preference of $21,590 and $46,590 at December 31, 1998 and September 30, 1999, respectively)................. -- 1 1 $ -- Common stock, $0.0001 par value: 50,000,000 shares authorized, 7,660,000, 9,230,500, and 10,165,830 shares issued and outstanding at December 31, 1997, 1998, and September 30, 1999, respectively (22,063,861 shares outstanding pro forma)........................ 1 1 1 2 Additional paid-in capital..... 8,658 27,706 71,217 71,217 Notes receivable from stockholders.................. (279) (548) (971) (971) Deferred stock compensation.... (1,776) (2,601) (17,046) (17,046) Accumulated deficit............ (4,033) (12,859) (19,613) (19,613) ------- ------- ------- ------- Total stockholders' equity.... 2,571 11,700 33,589 $33,589 ------- ------- ------- ======= Total liabilities and stockholders' equity......... $3,154 $17,600 $43,458 ======= ======= =======
See accompanying notes. F-3 MAXYGEN, INC. STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year ended Nine months ended December 31, September 30, ---------------- ------------------- 1997 1998 1998 1999 ------- ------- ----------- ------- (Unaudited) Collaborative research and development revenue............................... $341 $1,077 $729 $6,068 Grant revenue.......................... -- 1,646 1,090 3,625 ------- ------- ------- ------- Total revenues......................... 341 2,723 1,819 9,693 Operating expenses: Research and development (Including charges for stock compensation of $317 and $651 in 1997 and 1998, respectively, and $462 and $1,360 for the nine months ended September 30, 1998 and 1999, respectively).... 3,074 7,858 5,229 12,897 General and administrative (Including charges for stock compensation of $546 and $910 in 1997 and 1998, respectively, and $655 and $1,218 for the nine months ended September 30, 1998 and 1999, respectively).... 1,461 3,920 2,313 4,333 ------- ------- ------- ------- Total operating expenses............... 4,535 11,778 7,542 17,230 ------- ------- ------- ------- Loss from operations................... (4,194) (9,055) (5,723) (7,537) Interest income, net................... 161 229 75 783 ------- ------- ------- ------- Net loss............................... $(4,033) $(8,826) $(5,648) $(6,754) Deemed dividend upon issuance of convertible preferred stock (Note 8).. -- -- -- (2,200) ------- ------- ------- ------- Net loss attributable to common stockholders.......................... $(4,033) $(8,826) $(5,648) $(8,954) Basic and diluted net loss per share... $(0.82) $(1.31) $ (1.54) $(1.15) ======= ======= ======= ======= Shares used in computing basic and diluted net loss per share............ 4,917 6,748 3,679 7,778 Pro forma basic and diluted net loss per share (unaudited)................. $(0.75) $(0.53) ======= ======= Shares used in computing pro forma basic and diluted net loss per share (unaudited)........................... 11,762 17,028
See accompanying notes. F-4 MAXYGEN, INC. STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share and per share amounts)
Convertible Notes Preferred Stock Common Stock Additional Receivable Deferred Total ----------------- ----------------- Paid-In from Stock Accumulated Stockholders' Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity ---------- ------ ---------- ------ ---------- ------------ ------------ ----------- ------------- Issuance of common stock to Affymax Technologies N.V. and Glaxo Group Limited for technology in March 1997................ -- $-- 5,460,000 $-- $-- $-- $ -- $-- $-- Issuance of common stock to founders for promissory notes at $0.20 per share.. -- -- 2,100,000 1 419 (420) -- -- -- Issuance of Series A convertible preferred stock to investors at $2.00 per share for cash.. 2,790,000 -- -- -- 5,580 -- -- -- 5,580 Issuance of common stock to employees upon exercise of stock options for $0.20 per share..... -- -- 100,000 -- 20 -- -- -- 20 Payments received on promissory notes.... -- -- -- -- -- 141 -- -- 141 Deferred stock compensation........ -- -- -- -- 2,639 -- (2,639) -- -- Amortization of deferred stock compensation........ -- -- -- -- -- -- 863 -- 863 Net loss from inception to December 31, 1997... -- -- -- -- -- -- -- (4,033) (4,033) ---------- --- ---------- ---- ------- ----- -------- -------- ------- Balance at December 31, 1997............ 2,790,000 -- 7,660,000 1 8,658 (279) (1,776) (4,033) 2,571 Issuance of Series A convertible preferred stock to investors at $2.00 per share for cash.. 5,000 -- -- -- 10 -- -- -- 10 Issuance of Series B convertible preferred stock to investors at $3.00 per share for cash, less issuance cost of $36.............. 3,666,667 1 -- -- 10,966 -- -- -- 10,967 Issuance of Series C convertible preferred stock to a collaborator for cash at $5.00 per share............... 1,000,000 -- -- -- 5,000 -- -- -- 5,000 Options granted to consultants for services rendered... -- -- -- -- 209 -- -- -- 209 Issuance of common stock to consultants for cash and services at $2.25 and $4.00 per share, and to employees upon exercise of stock options for cash and promissory notes at $0.20 and $0.30 per share..... -- -- 1,570,500 -- 477 (269) -- -- 208 Deferred stock compensation........ -- -- -- -- 2,386 -- (2,386) -- -- Amortization of deferred stock compensation........ -- -- -- -- -- -- 1,561 -- 1,561 Net loss............ -- -- -- -- -- -- -- (8,826) (8,826) ---------- --- ---------- ---- ------- ----- -------- -------- ------- Balance at December 31, 1998............ 7,461,667 1 9,230,500 1 27,706 (548) (2,601) (12,859) 11,700 Issuance of common stock to employees upon exercise of options for cash and promissory notes at $0.20, $0.30 and $0.75 per share..... -- -- 745,330 -- 486 (423) -- -- 63 Options granted to consultants for services rendered... -- -- -- -- 204 -- -- -- 204 Issuance of common stock for services rendered and certain technology rights at $4.00 and $5.16 per share............... -- -- 190,000 -- 835 -- -- -- 835 Issuance of Series D convertible preferred stock to investors at $5.50 per share for cash, less issuance costs of $37.............. 3,636,364 -- -- -- 19,963 -- -- -- 19,963 Issuance of Series E convertible preferred stock to a collaborator at $6.25 per share..... 800,000 -- -- -- 5,000 -- -- -- 5,000 Deferred stock compensation........ -- -- -- -- 17,023 -- (17,023) -- -- Amortization of deferred stock compensation........ -- -- -- -- -- -- 2,578 -- 2,578 Net loss............ -- -- -- -- -- -- -- (6,754) (6,754) ---------- --- ---------- ---- ------- ----- -------- -------- ------- Balance at September 30, 1999............ 11,898,031 $1 10,165,830 $1 $71,217 $(971) $(17,046) $(19,613) $33,589 ========== === ========== ==== ======= ===== ======== ======== =======
See accompanying notes. F-5 MAXYGEN, INC. STATEMENTS OF CASH FLOWS (in thousands, except per share data)
Year ended Nine months ended December 31, September 30, ---------------- ------------------- 1997 1998 1998 1999 ------- ------- ----------- ------- (unaudited) Operating activities Net loss................................ $(4,033) $(8,826) $(5,648) $(6,754) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......... 40 178 123 442 Deferred stock compensation amortization......................... 863 1,561 1,117 2,578 Common stock issued and stock options granted to consultants for services rendered and for certain technology rights............................... -- 332 198 1,039 Changes in operating assets and liabilities: Grant and other receivables......... (10) (590) (399) (1,108) Prepaid expenses and other current assets............................. (32) (239) (1) (153) Deposits and other assets........... -- (422) (73) (217) Accounts payable.................... 101 365 81 36 Accrued liabilities................. 231 208 162 830 Deferred revenue.................... 199 4,691 3 1,970 Related party payables.............. 52 53 35 (92) ------- ------- ------- ------- Net cash used in operating activities... (2,589) (2,689) (4,402) (1,429) ------- ------- ------- ------- Investing activities Acquisition of property and equipment... (459) (760) (683) (4,008) ------- ------- ------- ------- Financing activities Proceeds from issuance of convertible preferred stock, net of issuance costs.................................. 5,580 14,477 9,497 24,963 Proceeds from notes payable............. -- 1,500 1,500 -- Borrowings under equipment financing obligations............................ -- -- -- 1,225 Payments received on promissory notes... 141 -- -- -- Proceeds from issuance of common stock.. 20 85 63 63 ------- ------- ------- ------- Net cash provided by financing activities............................. 5,741 16,062 11,060 26,251 ------- ------- ------- ------- Net increase in cash and cash equivalents............................ 2,693 12,613 5,975 20,814 Cash and cash equivalents at beginning of period.............................. -- 2,693 2,693 15,306 ------- ------- ------- ------- Cash and cash equivalents at end of period................................. $2,693 $15,306 $8,668 $36,120 ======= ======= ======= ======= Schedule of noncash transactions Issuance of common stock in exchange for note receivable........................ $420 $269 $269 $423 Conversion of note payable to preferred stock.................................. $-- $1,500 $1,500 $--
See accompanying notes. F-6 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS (Information for the nine months ended September 30, 1998 is unaudited) 1. Organization and Summary of Significant Accounting Policies Maxygen, Inc. (the "Company") was incorporated in Delaware on May 7, 1996 to develop and apply proprietary directed evolution technologies, also known as "MolecularBreeding" technologies, to evolve new or improved properties into single genes, multigene pathways, vectors, and genomes. Since the technology can be applied to a wide range of genetic targets, the Company will explore commercial opportunities for the directed evolution of novel enzymes and metabolic processes, novel products for agriculture, as well as opportunities in the fields of human medicine, such as gene therapy, vaccines, and protein pharmaceuticals. The MolecularBreeding technology was conceived at Affymax Research Institute ("Affymax"), a subsidiary of Glaxo Group Ltd. In March 1997, as a result of the determination that a substantial future investment in the further research and development of the technology was merited, all rights to the MolecularBreeding technology were transferred by Affymax to the Company in exchange for the issuance of 5,460,000 shares of common stock. This transaction represented the formation of the Company and thus the common shares issued were not assigned any value for accounting purposes. The technology rights transferred to the Company represented research and development stage technology with no immediate commercial application or alternative future use, and were recorded at the historic carrying value of Glaxo Group Ltd. as determined in accordance with generally accepted accounting principles in the United States. The total amount of costs incurred by Glaxo Group Ltd. to develop the MolecularBreeding technology are not determinable but were not significant to Affymax or Glaxo Group Ltd. Operations commenced in March 1997 and have consisted primarily of technology and product development. Operational activity and expenses incurred for the period from inception (May 7, 1996) through March 1997 were immaterial. Through December 31, 1998, the Company was in the development stage. During fiscal 1999, the Company entered into its second corporate research collaboration and recognized significant revenues associated with collaborative research agreements and expects to receive significant revenues under these agreements in the future. Consequently, the Company is no longer considered to be in the development stage. The Company will require additional financial resources to complete the development and commercialization of its products. Management plans to continue to finance the Company primarily through issuances of equity securities, collaborative research and development arrangements, government grants, and debt financing. If the financing arrangements contemplated by management are not consummated, the Company may have to seek other sources of capital or reevaluate its operating plans. Initial Public Offering In September 1999, the board of directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. If the initial public offering is closed under the terms presently anticipated, all of the preferred stock outstanding will automatically convert into 11,898,031 shares of common stock. Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion of the preferred stock, is set forth on the balance sheet. Interim Financial Information The financial information at September 30, 1998 and for the nine months ended September 30, 1998 is unaudited but has been prepared on the same basis as the annual financial statements and, in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments) that the F-7 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for such periods. Results for the interim period are not necessarily indicative of the results to be expected for any subsequent period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company's cash and cash equivalents are maintained with one financial institution and consist of depository accounts, master notes, and liquidity optimized general investment contracts. The Company has classified its marketable securities as "available-for- sale" and recorded these securities at fair value. At September 30, 1999, these instruments are classified as cash equivalents. Unrealized gains and losses, which are considered to be temporary, are recorded as a separate component of stockholders' equity until realized. At December 31, 1997 and 1998 and September 30, 1999, the fair value of all of the Company's marketable securities approximated cost. Property and Equipment Property and equipment, including the cost of purchased software, are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets (generally three to five years). Leasehold improvements are amortized over the shorter of six years or the estimated useful life of the assets. Revenue Recognition Non-refundable up-front payments received in connection with research and development collaboration agreements, including technology advancement funding which is intended for the development of the Company's core technology, are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenue related to collaborative research with the Company's corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is required to perform research and development activities as specified in each respective agreement. The payments received under each respective agreement are not refundable and are generally based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts. Milestone and royalty payments, if any, will be recognized pursuant to collaborative agreements upon the achievement of specified milestones. F-8 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) In 1997 and 1998 and for the nine months ended September 30, 1999, the Company was awarded Defense Advanced Research Projects Agency grants and National Institute of Standards and Technology-Advanced Technology Program grants totaling approximately $2.0 million, $10.6 million, and $14.5 million, respectively, for various research and development projects. The terms of these grant agreements are three years. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Research and Development Expenses Research and development expenses consist of costs incurred for Company- sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses as well as the cost of funding research at universities and other research institutions, and are expensed as incurred. Costs to acquire technologies which are utilized in research and development and which have no alternative future use are expensed when incurred (see Note 3). Stock-Based Compensation The Company accounts for common stock options granted to employees using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than the fair value of the Company's common stock on the date of the grant. In 1998 and 1999, the Company recognized deferred stock compensation related to certain stock option grants (see Note 8). Pro forma information required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") is also included in Note 8. Stock compensation expense for options granted to nonemployees has been determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to non- employees is periodically remeasured as the underlying options vest. Net Loss Per Share Basic and diluted net loss per common share are presented in conformity with the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Following the guidance given by the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock that has been issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma basic and diluted net loss per common share, as presented in the statements of operations, has been computed for the year ended December 31, 1998 and the nine months ended September 30, 1999 as described above, and also gives effect to the conversion of the convertible preferred stock which will automatically convert to common stock immediately prior to the completion of the Company's initial public offering (using the if-converted method) from the original date of issuance. F-9 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
Nine months Year ended ended December 31, September 30, ---------------- ---------------- 1997 1998 1998 1999 ------- ------- ------- ------- Net loss attributable to common stockholders.............................. $(4,033) $(8,826) $(5,648) $(8,954) ======= ======= ======= ======= Basic and diluted: Weighted-average shares of common stock outstanding............................. 6,329 8,789 5,714 9,408 Less: weighted-average shares subject to repurchase.............................. (1,412) (2,041) (2,035) (1,630) ------- ------- ------- ------- Weighted-average shares used in computing basic and diluted net loss per share.... 4,917 6,748 3,679 7,778 ======= ======= ======= ======= Basic and diluted net loss per share....... $ (0.82) $ (1.31) $ (1.54) $ (1.15) ======= ======= ======= ======= Pro forma: Net loss attributable to common stockholders............................ $(8,826) $(8,954) ======= ======= Shares used above........................ 6,748 7,778 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock (unaudited)............................. 5,014 9,250 ------- ------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)............................. 11,762 17,028 ======= ======= Pro forma basic and diluted net loss per share (unaudited)....................... $ (0.75) $ (0.53) ======= =======
The Company has excluded all convertible preferred stock, outstanding stock options, and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options, was 6,232,000 and 11,305,000 for the years ended December 31, 1997 and 1998, respectively, and 8,976,967 and 15,454,826 for the nine months ended September 30, 1998 and 1999, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share. See Note 8 for further information on these securities. Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net loss or stockholders' equity in 1998 or for the nine months ended September 30, 1999. Segment Reporting As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related F-10 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) disclosures about its products, services, geographic areas, and major customers. The Company has determined that it operates in only one segment. Accordingly, the adoption of this statement had no impact on the Company's financial statements. Effect of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be effective for the year ending 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company believes the adoption of SFAS 133 will not have a material effect on the financial statements, since it currently does not hold derivative instruments or engage in hedging activities. 2. Collaborative Agreements AstraZeneca In June 1999, the Company entered into a noncancelable (other than for material breach), five-year collaborative research agreement with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc (hereafter known as "AstraZeneca") to improve the yield and quality of several of AstraZeneca's strategic crops. Pursuant to the agreement, AstraZeneca paid $2.5 million in technology advancement funding. AstraZeneca will also provide research funding of $15 million over the research term for defined research programs covering specified crops, potential milestone payments that could exceed $100 million as well as royalties on future product sales, as defined in the agreement. On an annual basis beginning in the second year of the agreement, AstraZeneca must either pay $1 million in annual technology advancement funding or purchase $3 million shares of the Company's stock at a 50% premium to the current fair value. If AstraZeneca elects this option, then the resulting $1.0 million premium will be accounted for as technology advancement funding. The technology advancement funding is intended to fund the Company's continuing development of its core MolecularBreeding technology. Because the agreement does not specify a required level of effort or other specific performance criteria, the funding is being recognized ratably over the five-year term of the agreement. Revenue recognized under the collaborative research agreement with AstraZeneca was $586,000 (10% of total collaborative research and development revenues) for the nine months ended September 30, 1999, consisting of research funding earned of $214,000 and technology advancement funding of $372,000. In August 1999, in conjunction with the agreement, AstraZeneca purchased 800,000 shares of Series E convertible preferred stock at $6.25 per share. DuPont/Pioneer Hi-Bred International, Inc. In December 1998, the Company entered into a five-year collaborative research and license agreement with Pioneer Hi-Bred International, Inc., a subsidiary of E.I. duPont de Nemours and F-11 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) Company (hereafter known as "DuPont/Pioneer Hi-Bred") to utilize MolecularBreeding technologies to generate novel gene products for use in the development of specific crop protection and quantity grain traits in corn, soybeans, and certain other crops. Pursuant to the agreement, DuPont/Pioneer Hi-Bred paid an up-front, nonrefundable license fee of $2.5 million and agreed to provide nonrefundable research and development funding of up to $20 million, potential milestone payments of up to $45 million and royalties on future product sales, as defined in the agreement. The agreement also provides for nonrefundable technology advancement payments of up to $7.5 million which are being recognized ratably over the applicable research term. The agreement may be terminated by DuPont/Pioneer Hi-Bred after three years upon six-months notice, if a specified technological milestone has not been met. Revenue recognized under the collaborative research agreement with DuPont/Pioneer Hi-Bred was $62,000 and $4.6 million for the year ended December 31, 1998 and for the nine months ended September 30, 1999, respectively (6% and 76%, respectively, of total collaborative research and development revenues). In December 1998, in conjunction with the agreement, DuPont/Pioneer Hi-Bred purchased 1,000,000 shares of Series C convertible preferred stock at $5.00 per share which was the fair value of the preferred stock on the date of issuance. Furthermore, upon a public offering of the Company's common stock and subject to the underwriter's discretion, the Company can require DuPont/Pioneer Hi-Bred to purchase $5,000,000 of the Company's common stock at the initial public offering price. Because this right is contingent upon future events and the price per share and number of shares to be issued, if any, pursuant to this right is presently not determinable, no accounting value has been assigned to this right in the accompanying financial statements. DSM In March 1999, the Company entered into a three-year collaborative research and license agreement with Gist-brocades N.V., a subsidiary of DSM N.V. ("DSM") to utilize the Company's proprietary MolecularBreeding technologies to develop certain novel enzymes involved in the manufacture of certain classes of antibiotics. Under the terms of the agreement, DSM will receive worldwide commercialization rights and the Company will receive research payments of approximately $2.3 million over the three-year term and may receive royalty payments in the future. Total revenue of $403,000 was recognized for the nine months ended September 30, 1999 (7% of total collaborative research and development revenue). Novo Nordisk A/S In September 1997, the Company entered into a five-year License and Collaboration Agreement with Novo Nordisk A/S ("Novo Nordisk") to use MolecularBreeding technologies to develop products. The agreement provides for research and development funding as well as royalty payments on future products to the Company upon the occurrence of specified events as defined in the agreement. As set forth in the agreement, Novo Nordisk will fund up to $500,000 of research funding under the development program on an annual basis. Total revenue of $544,000 and $336,000 was recognized for the year ended December 31, 1998 and for the nine months ended September 30, 1999, respectively (51% and 6%, respectively, of total collaborative research and development revenue). No revenue was recognized under this agreement for the year ended December 31, 1997. F-12 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) Other Collaborations The Company has entered into corporate collaborations under which it has completed all of its research obligations. Revenue recognized pursuant to these agreements was $341,000, $461,000, and $196,000 for the years ended December 31, 1997, 1998, and for the nine months ended September 30, 1999, respectively (100%, 43%, and 3%, respectively, of total collaborative research and development revenue). 3. Sponsored License and Research Agreements The Company has entered into several research agreements to fund research at universities and other organizations. These agreements are generally cancelable by either party upon written notice and may be extended by mutual consent of both parties. Research and development expenses are recognized as the related services are performed, generally ratably over the period of the service. Expenses under these agreements were approximately $254,000, $702,000, and $898,000 for the years ended December 31, 1997, 1998, and for the nine months ended September 30, 1999, respectively. In addition, in 1999 the Company issued 175,000 shares of common stock with a fair value of $783,000 to research institutions in exchange for technology licenses. This amount is included in research and development expense for nine months ended September 30, 1999 as the related technology is in research and development and has no alternative future uses. 4. Property and Equipment Property and equipment consisted of the following (in thousands):
December 31, ------------ September 30, 1997 1998 1999 ---- ------ ------------- Leasehold improvements.. $-- $ -- $ 700 Construction in progress............... -- -- 641 Machinery and laboratory equipment.............. 406 1,123 3,381 Computer equipment and software............... 36 68 157 Furniture and fixtures.. 16 28 348 ---- ------ ------ 458 1,219 5,227 Less accumulated depreciation and amortization........... (39) (218) (660) ---- ------ ------ Property and equipment, net.................... $419 $1,001 $4,567 ==== ====== ======
5. Equipment Financing In June 1999, the Company entered into an equipment financing agreement for up to $2.0 million with a financing company. In July 1999, the Company financed $1.2 million in equipment purchases structured as loans. The equipment loans are to be repaid over 48 months at an interest rate of 11.73% and are secured by the related equipment. During the first 6 months of the loan terms, the payments consist of interest only. Accumulated amortization of assets acquired pursuant to these obligations was approximately $110,000 at September 30, 1999. F-13 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) At September 30, 1999, the Company's future minimum principal payments under the equipment financing arrangements are as follows (in thousands):
Year ended December 31, ----------------------- 1999................................................................. $ -- 2000................................................................. 146 2001................................................................. 345 2002................................................................. 388 2003................................................................. 346 ------ $1,225 ======
In November 1999, the Company financed an additional $391,000 in equipment purchases structured as a loan to be repaid over 48 months at an interest rate of 12.04%. The loan is secured by the related equipment. 6. Commitments Services and Facility Agreement In February 1997, the Company entered into a services and facility agreement, which was amended in September 1998 and February 1999, with Affymax Research Institute ("ARI"), a related party. Under the agreement, ARI provided certain accounting, human resources, materials management, facility, safety, library, and information technology services, as well as the use of designated space in the ARI facility for specified periods. In exchange, the Company agreed to pay ARI $417,000 for the period from February 1, 1997 to December 31, 1997, $667,000 for the period from January 1, 1998 to December 31, 1998, and $135,000 for the period from January 1, 1999 to April 1, 1999. These expenses were determined by ARI based upon the relative percentage of effort expended by ARI personnel on the Company's affairs and the relative use of facilities and fixed assets of ARI. Management believes that the charges from ARI were reasonable and would not have been materially different on a stand-alone basis. In addition, ARI agreed to transfer title of fixed assets with a carrying value of approximately $55,000 to the Company. At December 31, 1998, the Company owed ARI approximately $105,000 under this agreement. The agreement expired in April 1999. Consulting Agreement In September 1998, the Company entered into a consulting arrangement whereby the Company is committed to pay to a consulting firm up to a specified percentage, as outlined in the agreement, of funds received in connection with certain of the Company's agricultural collaborative agreements. The term of the payments owed pursuant to this agreement is five years, ending in fiscal year 2004. For the fiscal year ended December 31, 1998 and for the nine month period ended September 30, 1999, the Company expensed $199,000 and $112,000, respectively. F-14 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) Facility Leases The Company leases facilities under an operating lease which commenced in 1999. The lease expires for specified facilities in 2002 and 2005. The lease contains a renewal option on the facilities under the portion of the lease that expires in 2002. This lease also includes scheduled rent increases. The scheduled rent increases are recognized on a straight-line basis over the term of the lease. Minimum annual rental commitments under operating leases are as follows (in thousands):
Year ended December 31, ------------ 1999.................................................................. $ 379 2000.................................................................. 1,528 2001.................................................................. 1,451 2002.................................................................. 1,113 2003.................................................................. 1,019 Thereafter............................................................ 1,216 ------ $6,706 ======
Rent expense allocated from the services and facility agreement for the years ended December 31, 1997 and 1998 was approximately $122,000 and $147,000, respectively. For the nine months ended September 30, 1999, rent expense was approximately $914,000. 7. Related Party Notes Receivable The Company issued full recourse loans to certain employees, of which $279,000, $620,000, and $1,121,000 was outstanding at December 31, 1997 and 1998 and September 30, 1999, respectively. These loans bear interest at rates ranging from 4.83% to 6.42% with terms ranging from three to five years. One loan totaling $150,000 was for the purchase of the employee's residence and is secured by a deed of trust on the employee's residence and is classified on the balance sheet as other assets. The remaining loans were for the purchase of the Company's common stock and are classified in stockholders' equity. 8. Stockholders' Equity Convertible Preferred Stock In September 1999, the board of directors approved an amendment to the Company's articles of incorporation to authorize 5,000,000 shares of undesignated preferred stock, for which the board of directors is authorized to fix the designation, powers, preferences, and rights and an increase in the authorized number of shares of common stock to 70,000,000 shares. These changes are expected to become effective concurrent with the close of the Company's initial public offering. F-15 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) Convertible preferred stock designated and outstanding is as follows (in thousands, except share amounts):
Number of Shares ---------------------- Aggregate Issued and Net Liquidation Designated Outstanding Proceeds Preference ---------- ----------- -------- ----------- Series A......................... 2,800,000 2,795,000 $ 5,590 $ 5,590 Series B......................... 3,666,667 3,666,667 10,967 11,000 Series C......................... 1,000,000 1,000,000 5,000 5,000 ---------- ---------- ------- ------- At December 31, 1998............. 7,466,667 7,461,667 21,557 21,590 Series D......................... 3,636,364 3,636,364 19,963 20,000 Series E......................... 800,000 800,000 5,000 5,000 ---------- ---------- ------- ------- At September 30, 1999............ 11,903,031 11,898,031 $46,520 $46,590 ========== ========== ======= =======
The Company issued Series E convertible preferred stock in August 1999 at $6.25 per share. At the date of issuance, the Company believed the per share price of $6.25 represented the fair value of the preferred stock and was in excess of the deemed fair value of its common stock. Subsequent to the commencement of the Company's initial public offering process, the Company re- evaluated the deemed fair market value of its common stock as of August 1999 and determined it to be $9.00 per share. Accordingly, the incremental fair value is deemed to be the equivalent of a preferred stock dividend. The Company recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital, without any effect on total stockholders' equity. The amount increased the loss allocable to common stockholders, in the calculation of basic net loss per share for the nine months ended September 30, 1999. Each share of preferred stock is convertible into common stock on a one- for-one basis (subject to, among other things, adjustment for stock splits and dividends) at the option of the holder or automatically upon a public offering in which the public offering price is equal to or exceeds $8.00 per share and the aggregate proceeds are equal to or exceeds $10 million. The holders of shares of Series A, B, C, D, and E convertible preferred stock are entitled to receive dividends, at the rate of $0.16, $0.24, $0.40, $0.44, and $0.50 per share per year, respectively, out of any assets legally available, prior to and in preference to any declaration or payment of any dividend on the common stock of the Company. Such dividends are payable annually when, as, and if declared by the board of directors, and such dividends are not cumulative. As of September 30, 1999, no dividends have been declared. In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the stockholders of Series A, B, C, D, and E convertible preferred stock are entitled to receive, prior to and in preference to any distribution of any of the assets of the Company to the stockholders of common stock by reason of their ownership, an amount equal to the sum of $2.00, $3.00, $5.00, $5.50, and $6.25, respectively, for each outstanding share of Series A, B, C, D, and E preferred stock (as adjusted for any stock dividends, combinations, or splits), plus any declared but unpaid dividends on such shares (collectively, the "Series A, B, C, D, and E Liquidation Preference"). After payment in full of the Series A, B, C, D, and E Liquidation Preference, each stockholder of shares of Series A, B, C, D, and E convertible preferred stock then outstanding shall be entitled to be paid out of the remaining net assets of the corporation, as and when distributed, ratably with the stockholders of common stock such amount as would otherwise be distributable to such stockholder on an as-converted basis. F-16 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) In the event insufficient funds are available to pay all liquidation preferences, then the net assets of the Company shall be paid ratably to the holders of the Series A, B, C, D, and E preferred stock, in proportion to their respective liquidation preferences. A merger, reorganization, or sale of all or substantially all of the assets of the Company, in which the existing stockholders of the Company prior to the transaction possess less than 50% of the voting power of the surviving entity (or its parent) immediately after the transaction, shall be deemed to be a liquidation, dissolution, or winding up of the Company. The holder of each share of preferred stock is entitled to voting rights equal to the number of shares of common stock into which each share of preferred stock could be converted, and has voting rights and powers equal to the voting rights and powers of the shares of common stock. 1997 Stock Option Plan In 1997, the Company authorized the 1997 Stock Option Plan (the "Plan") under which the board of directors may issue incentive stock options to employees, including officers and members of the board of directors who are also employees, and nonqualified stock options to employees, officers, directors, consultants, and advisors of the Company. Under the Plan, incentive options to purchase the Company's common shares may be granted to employees at prices not lower than fair value at the date of grant, as determined by the board of directors. Nonstatutory options (options which do not qualify as incentive options) may be granted to key employees, including directors and consultants, at prices not lower than 85% of fair value at the date of grant (110% in certain cases), as determined by the board of directors. Options have a term of ten years. Certain options are immediately exercisable, at the discretion of the board of directors. Shares issued pursuant to the exercise of an unvested option are subject to the Company's right of repurchase which lapse over periods specified by the board of directors, generally four years from the date of grant. If not immediately exercisable, options generally vest over four years (vesting at a rate of 25% at the end of each year). The stock option plan provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the lesser of 1,500,000 shares, 4% of the outstanding shares on the date of the annual increase or an amount determined by the board of directors. F-17 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) Activity under the Plan is as follows:
Options Outstanding -------------------------- Weighted- Average Shares Number of Exercise Price Available Shares Per Share ---------- ---------- -------------- Shares authorized..................... 2,140,000 -- -- Options granted....................... (1,891,550) 1,891,550 $0.20 Options exercised..................... -- (100,000) $0.20 ---------- ---------- Balance at December 31, 1997.......... 248,450 1,791,550 $0.20 Shares authorized..................... 3,860,000 -- -- Options granted....................... (1,537,120) 1,537,120 $0.30 Options exercised..................... -- (1,495,500) $0.22 Options canceled...................... 38,500 (38,500) $0.24 ---------- ---------- Balance at December 31, 1998.......... 2,609,830 1,794,670 $0.27 Shares Authorized..................... 1,500,000 -- -- Options granted....................... (2,044,205) 2,044,205 $0.69 Options exercised..................... -- (745,330) $0.65 Options canceled...................... 61,750 (61,750) $0.35 ---------- ---------- Balance at September 30, 1999......... 2,127,375 3,031,795 $0.46 ========== ==========
The options outstanding and exercisable at December 31, 1998 are as follows:
Options Outstanding Weighted-Average ------------------------------------ Remaining Exercise Price Number Outstanding Contractual Life Vested Options -------------- ------------------ ---------------- -------------- (In years) $0.20 818,300 8.7 207,137 $0.30 872,370 9.6 50,000 $0.50 104,000 9.9 21,500 --------- ------- 1,794,670 278,637 ========= =======
The options outstanding and exercisable at September 30, 1999 are as follows:
Options Outstanding Weighted-Average ------------------------------------ Remaining Exercise Price Number Outstanding Contractual Life Vested Options -------------- ------------------ ---------------- -------------- (In years) $0.20 764,925 7.9 355,463 $0.30 805,903 8.9 170,625 $0.50 281,500 9.4 21,500 $0.63 254,500 9.7 5,000 $0.75 924,967 8.0 30,717 --------- ------- 3,031,795 583,305 ========= =======
F-18 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) The weighted-average fair value of options granted in fiscal 1997 and 1998 was $1.80 and $2.13, respectively. The weighted-average fair value of options granted in the nine months ended September 30, 1999 was $9.35. At December 31, 1997, 1998, and September 30, 1999, 75,000, 1,064,250, and 1,237,475 shares of common stock issued upon the exercise of options were subject to repurchase at a weighted-average price of $0.20, $0.23, and $0.48, respectively. Pro forma net loss information is required to be disclosed by SFAS 123 and has been determined as if the Company has accounted for its employee stock options under the fair market value method of that statement. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions:
1997 1998 1999 ------------ ------------ ------------ Expected dividend yield............ 0% 0% 0% Risk-free interest rate range...... 5.9% to 6.6% 4.4% to 5.6% 5.2% to 5.9% Expected life...................... 5 years 5 years 5 years
The full effect of SFAS 123 will not be fully reflected until fiscal 2002. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma net loss information is as follows (in thousands, except per share amounts):
Year ended December 31, ---------------- September 30, 1997 1998 1999 ------- ------- ------------- Net loss attributable to common stockholders--as reported................ $(4,033) $(8,826) $(8,954) ======= ======= ======= Net loss attributable to common stockholders--pro forma.................. $(4,054) $(8,871) $(9,009) ======= ======= ======= Basic and diluted net loss per share--as reported................................. $ (0.82) $ (1.31) $ (1.15) ======= ======= ======= Basic and diluted net loss per share--pro forma.................................... $ (0.82) $ (1.31) $ (1.16) ======= ======= =======
In March through December 1998, the Company granted 173,000 common stock options, of which 86,500 were fully vested, to consultants for services rendered. In addition, in September 1998, 75,000 shares of common stock were issued to consultants for services at a deemed fair value of $2.25 per share. Expense of $364,000 was recognized in 1998 related to these transactions. During the nine months ended September 30, 1999, the Company issued 15,000 shares of common stock for services rendered at a deemed fair market value of $4.00 per share. Also during the nine months ended September 30, 1999, the Company granted 65,000 common stock options to consultants for services rendered. Expense of $257,000 was recognized in 1999 related to these transactions. Options granted to consultants are periodically re-valued as they vest in accordance with SFAS 123 and EITF 96-18 using a Black-Scholes model and the following weighted-average assumptions for 1999: estimated volatility of 0.7, risk-free interest rate of 5.0%, no dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. During the years ended December 31, 1997 and 1998 and during the nine months ended September 30, 1999, in connection with the grant of certain share options to employees, the Company recorded deferred stock compensation of $2.6 million, $2.4 million and $17.0 million, respectively, representing the difference between the exercise price and the deemed fair value of the Company's common stock for financial reporting purposes on the date such stock options were granted. Deferred compensation is F-19 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) included as a reduction of stockholders' equity and is being amortized to expense on a graded vesting method. During the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999, the Company recorded amortization of deferred stock compensation expense of approximately $863,000, $1.6 million and $2.6 million, respectively. Additional deferred compensation of approximately $2.5 million is expected to be recorded based on the deemed fair value of common stock options granted to employees during October and November 1999. 1999 Employee Stock Purchase Plan In September 1999, the Company's board of directors adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 400,000 shares of the Company's common stock have been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period will commence on the effective date of the offering. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, .75% of the outstanding shares on the date of the annual increase or such amount as may be determined by the board. Non Employee Directors Stock Option Plan In September 1999, the Company adopted the 1999 Nonemployee Directors Stock Option Plan and reserved a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee director who becomes a director of the Company will be automatically granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which such person first becomes a director. At each board meeting immediately following each annual stockholders meeting beginning with the first board meeting after the 1999 Annual Stockholders Meeting, each nonemployee director will automatically be granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the director plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the director plan is ten years. Each initial grant under the director plan will vest as to 25% of the shares subject to the option one year after the date of grant and at a rate of 25% of the shares at the end of each year. Each subsequent grant will vest in full one year after the date of grant. The director plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the director plan. Common Stock The founders' shares issued in March 1997 are also subject to repurchase. The repurchase right for these shares lapses at a rate of 25% on an annual basis in four years. The holders of unvested shares have voting and other rights identical to other common stockholders. At December 31, 1997, 1998, and September 30, 1999, 1,575,000, 1,050,000, and 525,000 shares, respectively, of common stock at a weighted-average price of $0.20 per share were subject to repurchase. F-20 MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 is unaudited) At December 31, 1998, the Company has reserved shares of common for future issuance as follows: Conversion of convertible preferred stock..................... 7,461,667 1997 Stock Option Plan........................................ 4,404,500 ---------- 11,866,167 ==========
At September 30, 1999, the Company has reserved shares of common stock for future issuance as follows: Conversion of convertible preferred stock..................... 11,898,031 1997 Stock Option Plan........................................ 5,159,170 ---------- 17,057,201 ==========
9. Income Taxes At September 30, 1999, the Company had federal net operating loss carryforwards of approximately $11.9 million. The Company also had federal research and development tax credit carryforwards of approximately $600,000. The net operating loss and credit carryforwards will expire at various dates beginning in the year 2011 through 2019, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows (in thousands):
September 30, December 31, 1999 ---------------- ------------- 1997 1998 ------- ------- Net operating loss carryforwards............. $ 1,000 $ 1,800 $4,500 Research credits............................. 100 400 800 Capitalized research and development......... -- 100 -- Deferred revenue............................. -- 900 400 Other........................................ 100 200 200 ------- ------- ------ Total deferred tax assets.................... 1,200 3,400 5,900 Valuation allowance.......................... (1,200) (3,400) (5,900) ------- ------- ------ Net deferred tax assets...................... $ -- $ -- $ -- ======= ======= ======
Because of the Company's lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $1.2 million and $2.2 million during the years ended December 31, 1997 and 1998, respectively. F-21 UNDERWRITING Maxygen and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., and Invemed Associates LLC are the representatives of the underwriters.
Underwriters Number of Shares ------------ ---------------- Goldman, Sachs & Co....................................... BancBoston Robertson Stephens Inc......................... Invemed Associates LLC.................................... --------- Total................................................... 5,500,000 =========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 825,000 shares from Maxygen to cover such sales. They may exercise that option for 30 days. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Maxygen. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
Paid by Maxygen --------------- No Full Exercise Exercise -------- -------- Per Share.................................................. $ $ Total...................................................... $ $
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Maxygen has agreed with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. This restriction does not apply to any existing employee benefit plans or securities issued in connection with acquisition transactions, provided that the recipients of such securities agree not to dispose of or hedge any of such securities for the same 180 day period. See "Shares Eligible for Future Sale" for a discussion of transfer restrictions. Certain persons associated with Invemed Associates LLC, one of the underwriters, hold an aggregate of 114,497 shares of common stock, of which 73,590 shares were purchased in August 1998 for $3.00 per share and 40,907 shares were purchased in June 1999 for $5.50 per share. These associated persons also hold a pecuniary interest in a small portion of the shares of common stock held by Technogen Associates, L.P. by virtue of limited partnership interests held by such associated persons in Technogen Associates. In addition, Invemed Fund L.P., a fund for which Invemed Associates is the sole general partner but holds only a 0.5 percent partnership interest, owns 363,636 shares of common stock that were purchased in June 1999 for $5.50 per share. By virtue of Invemed Associates' partnership interest in Invemed Fund, Invemed Associates beneficially owns (as that term is defined by the NASD) U-1 1,818 shares that are held directly by Invemed Fund. In addition, WS Investment Company 99A ("WS Investments"), an investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, counsel to the underwriters for this offering, owns 4,546 shares of Maxygen's common stock, all of which were purchased in June 1999 for $5.50 per share. The National Association of Securities Dealers, Inc. has deemed (i) the 40,907 shares of common stock acquired by the persons associated with Invemed Associates in June 1999, (ii) the 4,546 shares of common stock purchased by WS Investments in June 1999 and (iii) Invemed Associates' pecuniary interest in 1,818 shares of common stock held by Invemed Fund to be underwriting compensation. As such, Invemed Associates, WS Investments and the persons associated with Invemed Associates have agreed not to sell, transfer, assign or hypothecate these shares for a period of one year from the effective date of this offering. At the request of Maxygen, the underwriters have reserved at the initial public offering price up to 1,112,508 shares of common stock for sale to Dr. Alejandro Zaffaroni and his affiliates, R.A. Investment Group and its affiliates and Pioneer Overseas Corporation, a subsidiary of Pioneer Hi-Bred International, a DuPont business, each of whom is an existing Maxygen stockholder. These purchasers have expressed an interest in purchasing such shares of common stock in this offering and have agreed to lock-up such shares for a period of 180 days from the date of this prospectus. Maxygen has the right to require Pioneer Hi-Bred International to purchase $5,000,000 of shares of common stock in this offering pursuant to agreements entered into in connection with Maxygen's collaboration with Pioneer Hi-Bred International. Maxygen will not exercise such right until the effective date of this offering, and Maxygen reserves the right not to exercise such right. There can be no assurance that any of the reserved shares will be purchased. The number of shares available for sale to the general public in this offering will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered to the general public on the same basis as the other shares offered hereby. In addition, at the request of Maxygen, the underwriters have reserved for sale, at the initial public offering price, up to 411,300 shares of common stock for certain directors, employees and friends of Maxygen. There can be no assurance that any of the reserved shares will be so purchased. The number of shares available for sale to the general public in the offering will be reduced by the number reserved shares sold. Any reserved shares not so purchased will be offered to the general public on the same basis as the other shares offered hereby. Prior to this offering, there has been no public market for the common stock. The initial public offering price for the common stock will be negotiated among Maxygen and the representatives of the underwriters. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Maxygen's historical performance, estimates of Maxygen's business potential and earnings prospects, an assessment of Maxygen's management and the consideration of the above factors in relation to market valuation of companies in related businesses. Maxygen's common stock has been approved for quotation on The Nasdaq National Market under the symbol "MAXY." In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. U-2 These activities by the underwriters may stabilize, maintain or affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on The Nasdaq National Market, in the over-the-counter market or otherwise. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Maxygen estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Maxygen has agreed to indemnify the several underwriters against liabilities, including liabilities under the Securities Act of 1933. U-3 CORPORATE COLLABORATORS [LOGO] Pioneer Hi-Bred International, Inc., a DuPont business, is the world's leading developer and supplier of advanced plant genetics to farmers worldwide. [LOGO] Zeneca Agrochemicals is a world leading supplier of crop protection products which are designed to improve crop yields and food quality. [LOGO] Novo Nordisk A/S is the world's largest producer of industrial enzymes. [LOGO] DSM is a leader in chemicals, biotechnological products and plastic materials. [LOGO] The National Institute of Standards and Technology-Advanced Technology Program is a unique partnership between government and private industry to accelerate the development of technologies that promise significant commercial payoffs and widespread benefits for the economy. [LOGO] The Defense Advanced Research Projects Agency manages and directs selected basic and applied research and development projects for the Department of Defense, and pursues research and technology where risk and payoff are both very high and where success may provide dramatic advances. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ---------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Forward-Looking Statements............................................... 17 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 27 Management............................................................... 44 Certain Transactions..................................................... 54 Principal Stockholders................................................... 57 Description of Capital Stock............................................. 59 Shares Eligible for Future Sale.......................................... 61 Legal Matters............................................................ 62 Change in Independent Auditors........................................... 62 Experts.................................................................. 63 Where You Can Find Additional Information................................ 63 Index to Financial Statements............................................ F-1 Underwriting............................................................. U-1
---------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5,500,000 Shares Maxygen, Inc. Common Stock ---------------- [MAXYGEN LOGO] ---------------- Goldman, Sachs & Co. Robertson Stephens Invemed Associates Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II Information Not Required In Prospectus Item 13 Other Expenses of Issuance and Distribution.* The following table sets forth all expenses to be paid by Maxygen, other than the underwriting discounts and commissions payable by Maxygen in connection with the sale of the common stock being registered. All amounts shown are estimates except for the registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- Registration fee................................................. $ 26,174 NASD filing fee.................................................. 8,550 Nasdaq National Market........................................... 95,000 Blue sky qualification fees and expenses......................... 10,000 Printing and engraving expenses.................................. 180,000 Legal fees and expenses.......................................... 300,000 Accounting fees and expenses..................................... 300,000 Transfer agent and registrar fees................................ 25,000 Miscellaneous expenses........................................... 55,276 ---------- Total.......................................................... $1,000,000 ==========
- -------- *To be supplied by amendment. Item 14 Indemnification of Officers and Directors. Section 145 of the Delaware General Corporation Law permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. Our Certificate of Incorporation and Bylaws provide that we will indemnify our directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, we intend to enter into separate indemnification agreements with our directors which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature). The indemnification provisions in our Certificate of Incorporation and Bylaws and the indemnification agreement to be entered into between us and our directors may be sufficiently broad to permit indemnification of our officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. We also intend to maintain director and officer liability insurance, if available on reasonable terms, to insure our directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. In addition, the underwriting agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters of the Company and our officers and directors for certain liabilities arising under the Securities Act, or otherwise. Item 15 Recent Sales of Unregistered Securities. Since our incorporation in May 1996, we have sold and issued the following securities: 1. In March 1997, we issued to Affymax Technologies, N.V. and Glaxo Group Limited (both subsidiaries of Glaxo Wellcome plc) a total of 5,460,000 shares of common stock in exchange for the transfer of intellectual property and other technology assets. In addition, we sold an aggregate of 2,100,000 shares of common stock to four founders of Maxygen for aggregate consideration of $420,000 which was paid by promissory note, secured by the common stock underlying the stock purchase. In May 1998, we issued 125,000 shares of common stock to the California Institute of Technology in exchange for the license of II-1 intellectual property. In September 1998, we sold 75,000 shares of common stock to three of our consultants for aggregate consideration of $22,500. In March 1999, we issued 15,000 shares of common stock to Cahan & Associates in consideration for consulting services. In April 1999, we issued 50,000 shares of common stock to the University of Washington in exchange for the license of intellectual property. 2. In March 1997, we sold 2,500,000 shares of Series A preferred stock to two investors for aggregate consideration of $5,000,000. In December 1997, we sold 290,000 shares of Series A preferred stock to 16 investors for aggregate consideration of $580,000. In April 1998, we sold 5,000 shares of Series A preferred stock to one investor for aggregate consideration of $10,000. 3. In August 1998, we sold 3,666,667 shares of Series B preferred stock to 63 investors for aggregate consideration of $10,966,000. 4. In December 1998, we sold 1,000,000 shares of Series C preferred stock to Pioneer Overseas Corporation for an aggregate consideration of $5,000,000. 5. In June 1999, we sold 3,636,364 shares of Series D preferred stock to 62 investors for aggregate consideration of $19,963,000. 6. In August 1999, we sold 800,000 shares of Series E preferred stock to AstraZeneca Holdings, B.V. for aggregate consideration of $5,000,000. 7. As of October 15, 1999, we have issued, and there remain outstanding, options to purchase an aggregate of 3,031,795 shares of common stock with exercise prices ranging from $0.20 to $0.75 per share. As of October 15, 1999, options to purchase 2,340,830 shares of common stock have been exercised for aggregate consideration of $838,369. There were no underwriters employed in connection with any of the transactions set forth in Item 15. The issuances of securities described in Items 15(1) through 15(6) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The issuances of securities described in Item 15(7) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans approved by the registrant's board of directors. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to such information. II-2 Item 16 Exhibits and Financial Statement Schedules. (A) EXHIBITS
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 1.1** Form of Underwriting Agreement 3.1** Certificate of Incorporation, as currently in effect 3.2** Amended Certificate of Designations, Preferences and Rights of Series A Preferred Stock, as currently in effect 3.3** Amended Certificate of Designations, Preferences and Rights of Series B Preferred Stock, as currently in effect 3.4** Amended Certificate of Designations, Preferences and Rights of Series C Preferred Stock, as currently in effect 3.5** Certificate of Designations, Preferences and Rights of Series D Preferred Stock, as currently in effect 3.6** Certificate of Designations, Preferences and Rights of Series E Preferred Stock, as currently in effect 3.7** Bylaws, as currently in effect 3.8** Amended and Restated Certificate of Incorporation, to be effective upon closing 3.9** Amended and Restated Bylaws, to be effective upon closing 4.1** Specimen Common Stock Certificate 4.2** Registration Rights Agreement among the Company, Affymax Technologies N.V., Dr. Zaffaroni and Glaxo Wellcome plc dated March 14, 1997 4.3** Amendment to Registration Rights Agreement and Consent dated as of July 31, 1998 between Maxygen and certain holders of Series A preferred stock 4.4** Second Amendment to Registration Rights Agreement and Consent dated as of December 23, 1998 among Maxygen and certain holders of Series A preferred stock and Series B preferred stock 4.5** Third Amendment to Registration Rights Agreement and Consent dated as of June 15, 1999 among Maxygen, and certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock 4.6** Series E Preferred Stock Purchase Agreement between Maxygen, AstraZeneca Holdings, B.V. and Zeneca Limited dated as of June 18, 1999 4.7** Fourth Amendment to Registration Rights Agreement and Consent dated as of August 6, 1999 among Maxygen, certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock 5.1 Opinion of Heller Ehrman White & McAuliffe 10.1** 1997 Stock Option Plan, as amended 10.2** Form of Promissory Note dated March 14, 1997 executed by each of Russell J. Howard, Isaac Stein and Willem P.C. Stemmer in favor of Maxygen 10.3+ Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo Wellcome plc dated March 14, 1997, as amended, effective March 1, 1998 10.4** Lease between Metropolitan Life Insurance Company and Maxygen dated October 21, 1998 10.5** First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan Life Insurance Company and Maxygen 10.6** Promissory Note dated April 22, 1999 executed by Joseph Affholter and Roxanne Affholter in favor of Maxygen 10.7** Form of Director Indemnification Agreement 10.8** 1999 Nonemployee Directors Stock Option Plan 10.9** 1999 Employee Stock Purchase Plan 10.10** Form of Promissory Note issued in connection with exercise of stock options 10.11+ License and Collaboration Agreement between Maxygen and Novo Nordisk A/S effective as of September 17, 1997, as amended June 29, 1998, July 29, 1998, and April 19, 1999
II-3
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 10.12+ Collaborative Research and License Agreement entered into as of December 23, 1998 by and between Pioneer Hi-Bred International, Inc. and Maxygen 10.13+ Agreement between Maxygen and Gist-Brocades B.V. entered into the 15th day of March, 1999 10.14+ Collaboration Agreement effective as of June 18, 1999 by and between Zeneca Limited and Maxygen 16.1** Letter re change in certifying accountant dated October 20, 1999 16.2 Letter re change in certifying accountant dated November 22, 1999 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1) 24.1** Power of Attorney 27.1** Financial Data Schedule
- -------- *to be filed by amendment **previously filed +confidential treatment has been requested for portions of this exhibit (B) FINANCIAL STATEMENT SCHEDULES. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Item 17 Undertakings The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the Offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Redwood City, California, on the 15th day of December 1999. MAXYGEN, INC. /s/ Russell J. Howard By:_____________________________________ Russell J. Howard, Ph.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Act, this Amendment No. 2 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Russell J. Howard, Ph.D. President, Chief Executive December 15, 1999 ____________________________________ Officer and Director Russell J. Howard, Ph.D. (Principal Executive Officer) /s/ Simba Gill, Ph.D. Senior Vice President of December 15, 1999 ____________________________________ Business Development and Chief Simba Gill, Ph.D. Financial Officer (Principal Financial and Accounting Officer) Isaac Stein* Chairman of the Board December 15, 1999 ____________________________________ Isaac Stein Robert J. Glaser, M.D.* Director December 15, 1999 ____________________________________ Robert J. Glaser, M.D. M.R.C. Greenwood, Ph.D.* Director December 15, 1999 ____________________________________ M.R.C. Greenwood, Ph.D. Adrian Hennah* Director December 15, 1999 ____________________________________ Adrian Hennah Gordon Ringold, Ph.D.* Director December 15, 1999 ____________________________________ Gordon Ringold, Ph.D. George Poste, Ph.D.* Director December 15, 1999 ____________________________________ George Poste, Ph.D.
/s/ Simba Gill, Ph.D. ______________________________ *Simba Gill, Ph.D. (Attorney-in-Fact) II-5 EXHIBIT INDEX
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 1.1** Form of Underwriting Agreement 3.1** Certificate of Incorporation, as currently in effect 3.2** Amended Certificate of Designations, Preferences and Rights of Series A Preferred Stock, as currently in effect 3.3** Amended Certificate of Designations, Preferences and Rights of Series B Preferred Stock, as currently in effect 3.4** Amended Certificate of Designations, Preferences and Rights of Series C Preferred Stock, as currently in effect 3.5** Certificate of Designations, Preferences and Rights of Series D Preferred Stock, as currently in effect 3.6** Certificate of Designations, Preferences and Rights of Series E Preferred Stock, as currently in effect 3.7** Bylaws, as currently in effect 3.8** Amended and Restated Certificate of Incorporation, to be effective upon closing 3.9** Amended and Restated Bylaws, to be effective upon closing 4.1** Specimen Common Stock Certificate 4.2** Registration Rights Agreement among the Company, Affymax Technologies N.V., Dr. Zaffaroni and Glaxo Wellcome plc dated March 14, 1997 4.3** Amendment to Registration Rights Agreement and Consent dated as of July 31, 1998 between Maxygen and certain holders of Series A preferred stock 4.4** Second Amendment to Registration Rights Agreement and Consent dated as of December 23, 1998 among Maxygen and certain holders of Series A preferred stock and Series B preferred stock 4.5** Third Amendment to Registration Rights Agreement and Consent dated as of June 15, 1999 among Maxygen, and certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock 4.6** Series E Preferred Stock Purchase Agreement between Maxygen, AstraZeneca Holdings, B.V. and Zeneca Limited dated as of June 18, 1999 4.7** Fourth Amendment to Registration Rights Agreement and Consent dated as of August 6, 1999 among Maxygen, certain holders of Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock 5.1 Opinion of Heller Ehrman White & McAuliffe 10.1** 1997 Stock Option Plan, as amended 10.2** Form of Promissory Note dated March 14, 1997 executed by each of Russell J. Howard, Isaac Stein and Willem P.C. Stemmer in favor of Maxygen 10.3+ Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo Wellcome plc dated March 14, 1997, as amended, effective March 1, 1998 10.4** Lease between Metropolitan Life Insurance Company and Maxygen dated October 21, 1998 10.5** First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan Life Insurance Company and Maxygen 10.6** Promissory Note dated April 22, 1999 executed by Joseph Affholter and Roxanne Affholter in favor of Maxygen 10.7** Form of Director Indemnification Agreement 10.8** 1999 Nonemployee Directors Stock Option Plan 10.9** 1999 Employee Stock Purchase Plan 10.10** Form of Promissory Note issued in connection with exercise of stock options 10.11+ License and Collaboration Agreement between Maxygen and Novo Nordisk A/S effective as of September 17, 1997, as amended June 29, 1998, July 29, 1998, and April 19, 1999
Exhibit Number Description of Document ------- ---------------------------------------------------------------------- 10.12+ Collaborative Research and License Agreement entered into as of December 23, 1998 by and between Pioneer Hi-Bred International, Inc. and Maxygen 10.13+ Agreement between Maxygen and Gist-Brocades B.V. entered into the 15th day of March, 1999 10.14+ Collaboration Agreement effective as of June 18, 1999 by and between Zeneca Limited and Maxygen 16.1** Letter re change in certifying accountant dated October 20, 1999 16.2 Letter re change in certifying accountant dated November 22, 1999 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1) 24.1** Power of Attorney 27.1** Financial Data Schedule
- -------- *to be filed by amendment **previously filed +confidential treatment has been requested for portions of this exhibit EX-5.1 2 OPINION OF HELLER EHRMAN WHITE & MCAULIFFE EXHIBIT 5.1 [HELLER EHRMAN WHITE & MCAULIFFE LETTERHEAD] December 14, 1999 Maxygen, Inc. 515 Galveston Drive Redwood City, California 94063 Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: We have acted as counsel to Maxygen, Inc., a Delaware corporation (the "Company"), in connection with the Registration Statement on Form S-1 (Registration No. 333-89413) filed with the Securities and Exchange Commission on October 20, 1999 (as may be further amended or supplemented, the "Registration Statement") for the purpose of registering under the Securities Act of 1933, as amended, 6,325,000 shares of its authorized but unissued Common Stock, par value $.0001 per share (the "Shares"). The Shares, which include up to 825,000 shares of the Company's Common Stock issuable pursuant to an over- allotment option granted to the underwriters, are to be sold pursuant to an Underwriting Agreement (the "Underwriting Agreement") among the Company and Goldman, Sachs & Co., Robertson Stephens and Invemed Associates, as representatives of the several underwriters named in Schedule I to the Underwriting Agreement. We have assumed the authenticity of all records, documents and instruments submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons and the conformity to the originals of all records, documents and instruments submitted to us as copies. In rendering our opinion, we have examined the following records, documents and instruments: (a) The Amended and Restated Certificate of Incorporation of the Company filed as an exhibit to the Registration Statement and to be filed with the Delaware Secretary of State in connection with the sale of the Shares and certified to us by an officer of the Company as being the form to be filed with the Delaware Secretary of State in connection with the sale of the Shares; (b) The Amended and Restated Bylaws of the Company certified to us by an officer of the Company as being complete and in full force and effect as of the date of this opinion; (c) A Certificate of an officer of the Company (i) attaching records certified to us as constituting all records of proceedings and actions of the Board of Directors, including any committee thereof, and stockholders of the Company relating to the Shares, and the Registration Statement, and (ii) certifying as to certain factual matters; Maxygen, Inc. December 14, 1999 (d) The Registration Statement; and (e) The draft of the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement. This opinion is limited to the federal law of the United States of America and the General Corporation Law of the State of Delaware, and we disclaim any opinion as to the laws of any other jurisdiction. We further disclaim any opinion as to any other statute, rule, regulation, ordinance, order or other promulgation of any other jurisdiction or any regional or local governmental body or as to any related judicial or administrative opinion. Our opinion to the effect that all issued and outstanding Shares are fully paid and nonassessable is based on the certification obtained from the Company identified in item (c) above to the effect that the consideration of such Shares recited in the Board of Directors' resolutions for such Shares has been received. Based upon the foregoing and our examination of such questions of law as we have deemed necessary or appropriate for the purpose of this opinion, and assuming that (i) the Registration Statement becomes and remains effective during the period when the Shares are offered and sold, (ii) the Underwriting Agreement signed by the parties thereto conforms in all material respects to the draft filed as Exhibit 1.1 to the Registration Statement, (iii) the currently unissued Shares to be sold by the Company are issued, delivered and paid for in accordance with the terms of the Underwriting Agreement, (iv) appropriate certificates evidencing the Shares will be executed and delivered by the Company, and (v) all applicable securities laws are complied with, it is our opinion that, when issued by the Company, the currently unissued Shares covered by the Registration Statement will be legally issued, fully paid and nonassessable. This opinion is rendered to you in connection with the Registration Statement and is solely for your benefit. This opinion may not be relied upon by you for any other purpose, or relied upon by any other person, firm, corporation or other entity for any purpose, without our prior written consent. We disclaim any obligation to advise you of any change of law that occurs, or any facts of which we may become aware, after the date of this opinion. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Heller Ehrman White & McAuliffe EX-10.3 3 TECHNOLOGY TRANSFER AGREEMENT MARCH 14, 1997 Exhibit 10.3 Affymax/Maxygen Technology Transfer Agreement By and among Affymax Technologies N.V. and Glaxo Group Limited (collectively "the Glaxo Wellcome Companies"), and Maxygen, Inc. 1.0 INTRODUCTION 1.1 The parties to this Agreement are: Affymax Technologies N.V. Glaxo Wellcome House, Berkeley Avenue Greenford, Middlesex, United Kingdom UB6 ONN; (hereinafter referred to as "ATNV") Glaxo Group Limited Glaxo Wellcome House Berkeley House Greenford, Middlesex, United Kingdom UA ONN; (hereinafter referred to as "GGL") collectively "the Glaxo Wellcome Companies" and Maxygen, Inc. 4001 Miranda Avenue Palo Alto, California 94304; (hereinafter referred to as "Maxygen") 1.2 The effective date of this Agreement is February 1, 1997. 2.0 RECITALS The Glaxo Wellcome Companies and Maxygen have entered into a Registration Rights Agreement, a Securities Purchase Agreement, and a Stockholder's Agreement of even date (collectively, the "Stock Agreements") which call for the issuance of a total of 5,460,000 shares of Maxygen Common Stock to one or more of the Glaxo Wellcome Companies at the closing of the transaction in exchange for the assignment of or license to certain intellectual property from the Glaxo Wellcome Companies to Maxygen. Maxygen acknowledges that the Glaxo Wellcome Companies would not enter into this Agreement but for the Stock Agreements. This Agreement is contingent upon closing of the Stock Agreements and shall become effective only upon the closing of the last of the Stock Agreements. ________________ * CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AND THE NON-PUBLIC INFORMATION HAS BEEN FILED SEPARATELY WITH THE SEC. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. NOW, THEREFORE, in consideration of the premises, covenants, conditions and Attachments set forth herein, the parties agree as follows: 3.0 ATTACHMENTS Schedules A and B are attached and form part of this Agreement. 4.0 DEFINITIONS 4.1 "Affiliate" means any entity that directly or indirectly controls, is controlled by or is under common control with a party to this Agreement. A corporation or non-corporate business entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls at least sixty percent (60%) of the voting stock of the other company, or (a) in the absence of the ownership of at least sixty percent (60%) of the voting stock of a corporation or (b) in the case of a non-corporate business entity, if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation or non-corporate business entity, as applicable. Affiliates shall be entitled to exercise all rights of their respective party under this Agreement provided that they agree in writing to be bound by the corresponding obligations hereunder. 4.2 "Agreement" means this Agreement, fully executed by the parties, to include without limitation, all Attachments hereto. 4.3 "Associated Technology" means a body of Confidential Information that includes trade secrets, know-how, copyrights, and other technical information reasonably related to the Patents and Applications set forth in Schedules A and B, whether such information was developed by the named inventors or others. 4.4 "Confidential Information" means that information which the Glaxo Wellcome Companies and/or Maxygen desire to protect against unauthorized disclosure or use and which the disclosing party designates as confidential (i) in writing, or (ii) orally, prior to any oral disclosure of the Confidential Information, and is reduced to tangible form and provided to the receiving party pursuant to this Agreement. Confidential Information may include information of third parties. 4.5 "Derogatable Improvement" shall mean any modification of the Derogatable Technology that is invented or developed by Maxygen prior to the earlier of (i) five years from the closing of this transaction or (ii) upon the closing of an underwritten public offering of shares of Maxygen under which not less than $10 million in gross proceeds is provided to the Company and described in a U.S. or foreign patent or patent application, provided that such modification, if unlicensed, would infringe one or more of the claims of the Licensed Patents and Applications. 4.6 "Derogatable Technology" shall include all compositions, reagents, and methods described in the Licensed Patents and Applications, excluding only Licensed Technology and Designated Technology. Notwithstanding the foregoing, "Derogatable Technology" shall not include any Derogated Technology. Derogatable Technology includes, but is not limited to: (1) gene therapy, including the optimization of vectors, such as HSV, HIV, retroviral, adenoviral, and adeno-associated vectors naked DNA vectors, and protein-coated vectors; and transgenes; (2) vaccines, including live, dead, and attenuated bacterial vaccines; live, dead, attenuated, subunit, and recombinant protein and peptide viral vaccines; DNA vaccines; and diverse vectors; (3) cell therapy, including cells expressing therapeutic transgenes, protein, pharmaceuticals, and hormones; (4) protein pharmaceuticals, including enzymes, cytokines, growth factors, hormones, novel agonists and novel antagonists; and (5) antibody pharmaceuticals, including whole IgGs and IgMs, Fabs, and Fvs. 4.7 "Derogated Technology" shall mean any Derogatable Technology specifically encompassed within a collaborative research project that Maxygen has proposed to the Glaxo Wellcome Companies and upon which the Glaxo Wellcome Companies has declined to pursue a collaborative research project with Maxygen or upon which the parties have failed to negotiate a mutually satisfactory agreement within the stipulated time period, provided, that Maxygen has entered into a research collaboration with a third party on such Derogated Technology on terms involving comparable scope and financial parameters as those proposed to the Glaxo Wellcome Companies within twelve (12) months of Glaxo Wellcome declining to participate in the project. "Derogated Technology" shall also refer to any Derogatable Technology specifically encompassed within a collaborative research project between Maxygen and a third party, wherein the third party initially proposed, in confidence, the collaboration to Maxygen. 4.8 "Designated Technology" shall refer to the process of Shuffling as practiced with mammalian or other eukaryotic cells using the compositions, reagents, and methods described in the Licensed Patents and Applications in the field of human pharmaceuticals; provided, however, that the proteins, RNAs, or DNAs generated from such a process can be further manipulated, screened, selected, or used in other hosts. Designated Technology shall include (1) the Shuffling of proteins for development of assays for drug discovery and optimization, such as proteins that can be used generically in various assay formats as well as proteins for use in specific assays with specific classes of targets, including modified ligands, modified receptors, and modified proteins in signal transduction; and (2) the Shuffling of proteins for validation of drug discovery targets, such as antibodies, proteins that interfere with a pathway or process, and other binding proteins. Designated Technology shall not include: (1) the Shuffling of proteins, peptides, DNAs, and RNAs to be used as human pharmaceuticals; (2) generic assay technology for screening and selection; as well as product-specific assay technology for screening and selection; and (3) the Shuffling of viral sequences or mammalian plasmids or sequences used for gene therapy or vaccines, or fragments or precursors thereof. 4.9 "Dulbecco Patent" shall mean U.S. Patent No. 4,593,002. 4.10 "Internal Research Purposes" shall mean that the Licensed Technology and Licensed Improvements will not be used in specific research that is directly subject to consulting or licensing obligations to a non-profit institution (other than the United States Government) or to another for profit institution, corporation or business entity unless written permission is obtained from the owner of such Licensed Technology or Licensed Improvement, provided, however, that the parties shall be free to use the Licensed Technology and Licensed Improvements in furtherance of their own [*******] and the commercial marketing of their products. 4.11 "Licensed Improvements" shall mean any modification of the Licensed Technology related to the processes of generating molecular diversity within, on, or secreted from [*******], provided (1) that such modification is invented or developed by Maxygen or the Glaxo Wellcome Companies prior to the earlier of (i) five years from the closing of this transaction or (ii) upon the closing of an underwritten public offering of shares of Maxygen under which not less than $10 million in gross proceeds is provided to the Company and described in a U.S. or foreign patent or patent application and (2) that such modification, if unlicensed, would infringe one or more of the claims of the Licensed Patents and Applications. 4.12 "Licensed Technology" shall refer to the process of Shuffling of proteins, RNAs, or DNAs as practiced in [*******] using the compositions, reagents, and methods described in the Licensed Patents and Applications in the field of [*******]; provided, however, that the proteins, RNAs, or DNAs generated from such a process can be further manipulated, screened, selected, or used in other hosts. Licensed Technology includes but is not limited to: (1) the Shuffling of proteins for [*******]; (2) the Shuffling of proteins for [*******]; (3) the Shuffling of [*******]; (4) the Shuffling of proteins, RNAs, or DNAs [*******] and the subsequent screening and selection of the modified RNAs or DNAs in other cells for [*******] purposes; and (5) the Shuffling of proteins, DNAs, and RNAs for Internal Research Purposes only. Licensed Technology shall not include: (1) the Shuffling of proteins, peptides, DNAs, and RNAs to be used as [*******]; (2) generic assay technology for [*******], as well as product-specific assay technology for [*******]; and (3) the Shuffling of proteins, RNAs, or DNAs [*******] using the compositions, reagents, and methods described in the Licensed Patents and Applications. 4.13 Licensed Patents and Applications" are as defined in Schedule A. 4.14 "Patent," "Patents," "Patent Applications" or "Patents and Applications" refer to issued U.S. Patents, pending and abandoned U.S. patent applications, to any division, renewal, continuation in whole or in part, substitution, conversions, reissue, prolongation or extension thereof, to all foreign counterparts (including patent, utility model, and industrial designs), and to any Letters Patent and Registrations which may hereafter be granted on any of the foregoing in the United States and all countries throughout the world. 4.15 "Peptides-on-Plasmids Display Patents and Applications" refer to the Patents and Applications set forth in the attached Schedule B. 4.16 "Phage Display Patents and Applications" refer to the Patents and Applications set forth in the attached Schedule B. 4.17 "Polysome Display Patents and Applications" refer to the Patents and Applications set forth in the attached Schedule B. 4.18 "Receptor Immobilization Patent Application" refer to the Patents and Applications set forth in the attached Schedule B. 4.19 "Shuffling" shall mean the totality of the reiterative process of gene fragmentation; reassembly; amplification, if necessary; transformation; and screening or selection described in the Licensed Patents and Applications. 5.0 TRANSFERS 5.1 ASSIGNMENT OF PATENTS AND ASSOCIATED TECHNOLOGY 5.1.1 For good and valuable consideration, receipt of which is acknowledged by the Glaxo Wellcome Companies, the Glaxo Wellcome Companies agree to assign and hereby assign to Maxygen all right, title, and interest in and to the Licensed Patents and Applications, including the right to claim the priority from the Patents and Applications as provided by the Paris Convention, and to the Associated Technology, subject to any outstanding licenses or other rights provided to Affymetrix under the Affymax/Affymetrix Technology Transfer Agreement by and among Affymax N.V., Affymax Technologies, N.V., Affymax Research Institute, Glaxo Group Limited, and Affymetrix, Inc., effective date, March 2, 1995 ("the Affymetrix Agreement"). The right, title and interest in and to these Patents and Applications is to be held and enjoyed by Maxygen and Maxygen's successors and assigns as fully and exclusively as it would have been held and enjoyed by the Glaxo Wellcome Companies had this assignment not been made, for the full term of any Letters Patent and Registrations which may be granted thereon. 5.2 LICENSE OF PATENTS 5.2.1 The Glaxo Wellcome Companies hereby grant Maxygen, a perpetual, worldwide, royalty-free, non-exclusive license without the right to sublicense, to Peptides-on-Plasmids Display Patents and Applications, Polysome Display Patents and Applications, Phage Display Patents and Applications, the Dulbecco Patent, and Receptor Immobilization Patent Application. Maxygen agrees that use of these patents and applications shall be restricted to [*******]. 5.3 LICENSED TECHNOLOGY AND LICENSED IMPROVEMENTS 5.3.1 Grant to the Glaxo Wellcome Companies 5.3.1.1 Maxygen hereby grants and agrees to grant the Glaxo Wellcome Companies a perpetual, worldwide, royalty-free, non-exclusive license, with the right to sublicense Affiliates only, under the Licensed Patents and Applications and Associated Technology to make, have made and use Licensed Technology for Internal Research Purposes only. 5.3.1.2 Maxygen hereby grants and agrees to grant the Glaxo Wellcome Companies a perpetual, worldwide, royalty-free, non-exclusive license, with the right to sublicense Affiliates only, to make, have made, and use Licensed Improvements for Internal Research Purposes only. 5.3.1.3 Notwithstanding the foregoing, if any Licensed Improvement is derived from a collaboration between Maxygen and an independent third party, whereby Maxygen does not have the right to license such Licensed Improvement outside of the collaboration, then Maxygen shall have no obligation to license or otherwise make available such Improvement to the Glaxo Wellcome Companies. 5.3.1.4 Maxygen hereby grants and agrees to grant the Glaxo Wellcome Companies a perpetual, worldwide, royalty-free, non-exclusive license, with the right to sublicense Affiliates only, under the Licensed Patents and Applications, to make, have made, and use the [*******] for Internal Research Purposes only. 5.3.1.5 Upon the request of the Glaxo Wellcome Companies, Maxygen shall grant a license to an Affiliate of the Glaxo Wellcome Companies upon the terms set forth herein provided that the Glaxo Wellcome Companies shall guarantee the performance of such licensee. 5.4.1 Grant to Maxygen 5.4.1.1 The Glaxo Wellcome Companies hereby grant and agree to grant the Maxygen a perpetual, worldwide, royalty-free, non-exclusive license, without the right to sublicense, to make, have made and use Licensed Improvements for Internal Research Purposes only. 5.4.1.2 Notwithstanding the foregoing, if any Licensed Improvement is derived from a collaboration between any of the Glaxo Wellcome Companies and an independent third party, whereby such Glaxo Wellcome Company does not have the right to license such Licensed Improvement outside of the collaboration, then the Glaxo Wellcome Companies shall have no obligation to license or otherwise make available such Improvement to Maxygen. 5.5 RIGHT OF FIRST NEGOTIATION FOR LICENSED TECHNOLOGY AND LICENSED IMPROVEMENTS 5.5.1 Maxygen grants and agrees to grant the Glaxo Wellcome Companies a right of first negotiation for any collaborative project to develop Licensed Technology and Licensed Improvements in the field of human pharmaceuticals. Notwithstanding the foregoing, this right of first negotiation shall not extend to collaborative projects proposed by third parties in confidence to Maxygen. This right will terminate upon the earlier of five years from the closing of the transaction or upon an underwritten public offering of shares of Maxygen under which not less than $10 million in gross proceeds is provided to the Company. This proposal for a collaborative research project shall include, at a minimum, a description of the scope of the research, the financial parameters of the project, and the required nonfinancial contributions of the collaborator. 5.5.2 If the Glaxo Wellcome Companies wish to pursue such a collaborative project with Maxygen, then the Glaxo Wellcome Companies and Maxygen agree that the parties will diligently and in good faith, negotiate the terms and conditions of a collaborative research agreement and shall make a good faith effort to conclude such license agreement within five months of receipt of the Maxygen proposal by the Glaxo Wellcome Companies. If the Glaxo Wellcome Companies decide not to pursue such a collaborative project, then they shall promptly inform Maxygen of such a decision. 5.5.3 In the event that the Glaxo, Wellcome Companies decide not to pursue a proposal of Maxygen as contemplated above or that the parties are unable to negotiate a mutually satisfactory agreement within five months of receipt of the Maxygen proposal by the Glaxo Wellcome Companies, Maxygen shall be free to seek a third party sponsor of the project. If Maxygen enters into a research collaboration with a third party on terms involving, comparable scope and financial parameters as those proposed to the Glaxo Wellcome Companies within twelve months of the Glaxo Wellcome Companies declining to participate in the project or the failure of the parties to negotiate a mutually satisfactory agreement within the stipulated time period, then the Glaxo Wellcome Companies right to first negotiation for a collaborative project to develop the Licensed Technology and Licensed Improvements specifically encompassed within such proposal shall terminate. 5.5.4 If, however, Maxygen has not entered into a third party collaboration on such project within twelve months of the Glaxo Wellcome Companies declining to participate in the project or the failure of the parties to negotiate a mutually satisfactory agreement within the stipulated time period, then the Glaxo Wellcome Companies shall again have a right of first negotiation for any collaborative project to develop the Licensed Technology and Licensed Improvements encompassed within such proposal and Maxygen shall be obligated to present any collaborative project to develop such Licensed Technology and Licensed Improvements in the field of human pharmaceuticals to the Glaxo Wellcome Companies prior to seeking a third party partner. 5.5.5 Notwithstanding the foregoing, in the event that Maxygen enters into a research collaboration with a third party to Licensed Technology and Licensed Improvements in the field of human pharmaceuticals, wherein the third party initially proposed, in confidence, the collaboration to Maxygen, then the Glaxo Wellcome Companies agree that the Glaxo Wellcome Companies right to first negotiation for a collaborative project to develop the Licensed Technology and Licensed Improvements specifically encompassed within such collaboration shall terminate. 5.6 RIGHT OF FIRST NEGOTIATION FOR DESIGNATED TECHNOLOGY 5.6.1 Maxygen will grant the Glaxo Wellcome Companies a right of first negotiation for any collaborative project to develop Designated Technology in the field of human pharmaceuticals. Notwithstanding the foregoing, this right of first negotiation shall not extend to collaborative projects proposed by third parties in confidence to Maxygen. This right will terminate upon the earlier of five years from the closing of the transaction or upon an underwritten public offering of shares of Maxygen under which not less than $10 million in gross proceeds is provided to the Company. This proposal for a collaborative research project shall include, at a minimum, a description of the scope of the research, the financial parameters of the project, and the required non-financial contributions of the collaborator. 5.6.2 If the Glaxo Wellcome Companies wish to pursue such a collaborative project with Maxygen, then the Glaxo Wellcome Companies and Maxygen agree that the parties will diligently and in good faith, negotiate the terms and conditions of a collaborative research agreement and shall make a good faith effort to conclude such license agreement within five months of receipt of the Maxygen proposal by the Glaxo Wellcome Companies. If the Glaxo Wellcome Companies decide not to pursue such a collaborative project, then they shall promptly inform Maxygen of such a decision. 5.6.3 In the event that the Glaxo Wellcome Companies decide not to pursue a proposal of Maxygen as contemplated above or that the parties are unable to negotiate a mutually satisfactory agreement within five months of receipt of the Maxygen proposal by the Glaxo Wellcome Companies, Maxygen shall be free to seek a third party sponsor of the project. If Maxygen enters into a research collaboration with a third party on terms involving comparable scope and financial parameters as those proposed to the Glaxo Wellcome Companies within twelve months of the Glaxo Wellcome Companies declining to participate in the project or the failure of the parties to negotiate a mutually satisfactory agreement within the stipulated time period, then the Glaxo Wellcome Companies right to first negotiation for a collaborative project to develop the Designated Technology specifically encompassed within such proposal shall terminate. 5.6.4 If, however, Maxygen has not entered into a third party collaboration on such project within twelve months of the Glaxo Wellcome Companies declining to participate in the project or the failure of the parties to negotiate a mutually satisfactory agreement within the stipulated time period, then the Glaxo Wellcome Companies shall again have a right of first negotiation for any collaborative project to develop the Designated Technology encompassed within such proposal and Maxygen shall be obligated to present any collaborative project to develop such Designated Technology in the field of human pharmaceuticals to the Glaxo Wellcome Companies prior to seeking a third party partner. 5.6.5 Notwithstanding the foregoing, in the event that Maxygen enters into a research collaboration with a third party to Designated Technology in the field of human pharmaceuticals wherein the third party initially proposed, in confidence, the collaboration to Maxygen, then the Glaxo Wellcome Companies agree that the Glaxo Wellcome Companies right to first negotiation for a collaborative project to develop the Designated Technology specifically encompassed within such collaboration shall terminate. 5.7 RIGHT OF FIRST NEGOTIATION FOR DEROGATABLE TECHNOLOGY AND DEROGATABLE IMPROVEMENTS 5.7.1 Maxygen will grant the Glaxo Wellcome Companies a right of first negotiation for any collaborative project to develop Derogatable Technology or Derogatable Improvements in the field of human pharmaceuticals. Notwithstanding the foregoing, this right of first negotiation shall not extend to collaborative projects proposed by third parties in confidence to Maxygen. This right will terminate upon the earlier of five years from the closing of the transaction or upon an underwritten public offering of shares of Maxygen under which not less than $10 million in gross proceeds is provided to the Company. This proposal for a collaborative research project shall include, at a minimum, a description of the scope of the research, the financial parameters of the project, and the required nonfinancial contributions of the collaborator. 5.7.2 If the Glaxo Wellcome Companies wish to pursue such a collaborative project with Maxygen, then the Glaxo Wellcome Companies and Maxygen agree that the parties will diligently and in good faith, negotiate the terms and conditions of a collaborative research agreement and shall make a good faith effort to conclude such license agreement within five months of receipt of the Maxygen proposal by the Glaxo Wellcome Companies. If the Glaxo Wellcome Companies decide not to pursue such a collaborative project, then they shall promptly inform Maxygen of such a decision. 5.7.3 In the event that the Glaxo Wellcome Companies decide not to pursue a proposal of Maxygen as contemplated above or that the parties are unable to negotiate a mutually satisfactory agreement within five months of receipt of the Maxygen proposal by the Glaxo Wellcome Companies, then Maxygen shall be free to seek a third party sponsor of the project. If Maxygen enters into a research collaboration with a third party on terms involving comparable scope and financial parameters as those proposed to the Glaxo Wellcome Companies within twelve months of the Glaxo Wellcome Companies declining to participate in the project or the failure of the parties to negotiate a mutually satisfactory agreement within the stipulated time period, then the Glaxo Wellcome Companies right to first negotiation for a collaborative project to develop the Derogatable Technology or Derogatable Improvements specifically encompassed within such proposal shall terminate and the Derogatable Technology and Derogatable Improvements specifically encompassed within such proposal shall be deemed Derogated Technology and Derogated Improvements, respectively. 5.7.4 If, however, Maxygen has not entered into a third party collaboration on such project within twelve months of the Glaxo Wellcome Companies declining to participate in the project or the failure of the parties to negotiate a mutually satisfactory agreement within the stipulated time period, then such Derogated Technology or Derogated Improvements shall again be deemed Derogatable Technology or Derogatable Improvements, respectively, and the Glaxo Wellcome Companies shall again have a right of first negotiation as set forth above to such Derogatable Technology and to such Derogatable Improvements and Maxygen shall be obligated to present any collaborative project to develop such Derogatable Technology and Derogatable Improvements in the field of human pharmaceuticals to the Glaxo Wellcome Companies prior to seeking a third party for a collaborative partner based on such Derogatable Technology and Derogatable Improvements in the field of human pharmaceuticals. 5.7.5 Notwithstanding the foregoing, in the event that Maxygen enters into a research collaboration with a third party to develop Derogatable Technology or Derogatable Improvements in the field of human pharmaceuticals, wherein the third party initially proposed, in confidence, the collaboration to Maxygen, then the Glaxo Wellcome Companies agree that the Glaxo Wellcome Companies right to first negotiation for a collaborative project to develop the Derogatable Technology or Derogatable Improvements specifically encompassed within such collaboration shall terminate and the Derogatable Technology and Derogatable Improvements specifically encompassed within such collaboration shall be deemed Derogated Technology and Derogated Improvements, respectively. 5.7.6 The Glaxo Wellcome Companies shall have no rights to the Derogatable Technology and Derogatable Improvements except as otherwise provided in this section. 5.8 ASSOCIATED TECHNOLOGY Each party agrees that the other party shall not be prevented from using any Associated Technology of one party which Associated Technology was rightfully acquired by the other party under this Technology Transfer Agreement, provided that such use does not (1) result in improper disclosure or misuse of Confidential Information or (2) make use of rights to Patents and Applications which rights are not expressly provided by this Agreement. Each party further agrees to maintain such Associated Technology as Confidential Information with the same degree of care that it exercises with respect to its own information of like import, but in no event less than reasonable care. 5.9 TRADEMARKS 5.9.1 For good and valuable consideration, receipt of which is hereby acknowledged by the Glaxo Wellcome Companies, the Glaxo Wellcome Companies hereby assigns to Maxygen all right, title, and interest to the marks MAXYGEN, SHUFFLING, MOLECULAR BREEDING, and SEXUAL PCR, including all goodwill associated therewith. Maxygen shall be responsible for any and all future expenses associated with registration and/or prosecution of these marks. The rights of Maxygen at common law and/or to the end of the term or terms of which registration of the mark may be granted or renewed are to be enjoyed by Maxygen for Maxygen's own use and enjoyment, and for the use and enjoyment of its successors, assigns and other legal representatives, as fully and entirely as the same would have been held and enjoyed by the Glaxo Wellcome Companies if this assignment and sale had not been made; including all claims for royalties for licensing of the marks provided in this section and damages by reason of past infringement(s) of these marks, with the right to sue for and collect the same for its own use and benefit, for the use, benefit and on behalf of its successors, assigns and other legal representatives. 5.10 Except as expressly provided herein, the licensing, assignment or other conveyance of rights under this Agreement shall not be construed as conferring any rights, license or title, express or implied, in or to any Patents and Applications or Associated Technology. 6.0 TERM AND TERMINATION 6.1 Term. The term of this Agreement shall commence on the Effective Date and shall continue in force until terminated upon the expiration of the last-to-expire of the Licensed Patents and Applications unless terminated earlier as set forth below. 6.2 Termination for Material Breach. If either party fails to comply with any of the material terms and conditions of this Agreement, the other party may terminate this Agreement upon sixty (60) days' written notice to the defaulting party specifying any such breach unless within the period of such notice, all breaches specified therein shall have been remedied, or unless the breach is one which, by its nature, cannot be fully remedied in sixty (60) days, but the breaching party has undertaken reasonable, good faith efforts toward remedying the breach within such sixty (60) days, and continues to use reasonable, good faith, and diligent efforts to promptly remedy the breach. A material breach includes but is not limited to either party's failure to comply with the provisions prohibiting disclosure or unauthorized use of Confidential Information. 6.3 Effect of Termination. Upon termination of the Agreement, as provided in Section 6.2, all licenses granted by the nonbreaching party to the other party under this Agreement shall terminate and all other rights granted by the nonbreaching party to the other party shall revest in the nonbreaching party. 6.4 Survival. The provisions of the following sections and paragraphs shall survive expiration or termination of this Agreement: Section 4.0 ("Definitions"); Paragraph 10.8 ("Notices"); Paragraph 6.3 ("Effect of Termination"); Section 7.0 ("Confidential Information"); Section 8.0 ("Warranties and Disclaimer of Warranties"); and Section 9.0 ("Limitations of Liability"). 7.0 CONFIDENTIAL INFORMATION 7.1 Restrictions. Each party will hold in confidence any Confidential Information received by it from the other and will protect the confidentiality of such with the same degree of care that it exercises with respect to its own information of like import, but in no event less than reasonable care. 7.2 Exceptions. Notwithstanding any provisions herein concerning non-disclosure and non-use of the Confidential Information, the obligations of the above Paragraph will not apply to any portion of the Confidential Information which: (a) is now or which hereafter through no act or failure to act on the part of the receiving party becomes generally known without restriction on disclosure; (b) is hereafter furnished to the receiving party by a third party as matter of right without restriction on disclosure; (c) is independently developed by the receiving party without the use of the Confidential Information; (d) is disclosed to others by the party owning the Confidential Information without restriction. (e) is required to be disclosed by the receiving party pursuant to a legal, judicial, or administrative procedure, or is otherwise required by law; providing the party required to disclose the Confidential Information gives the party owning the Confidential Information notice of the proposed disclosure with sufficient time to seek relief and that such disclosure, if made, is made in a fashion as to maximize the protection of the information from further disclosure; (f) is already known to the receiving party without restriction on disclosure; or (g) is approved for release or use without restriction by written authorization of an officer of the party owning the Confidential Information. 7.3 Advising Employees and Suspected Violations. Each party will inform its employees having access to the Confidential Information of such party's limitations, duties, and obligations regarding non-disclosure and copying of the Confidential Information and will obtain their agreement, whether by means of existing or new agreements, to comply with those limitations, duties, and obligations. Each party will provide notice to the other party immediately after learning of, or having reason to suspect, a breach of any of the confidential restrictions set forth in this section. 7.4 Independent Development. Each party understands that the other party may develop information internally, or receive information from third parties, that may be similar to Confidential Information. Accordingly, nothing in this Agreement will be construed as a representation or inference that each party will not develop or acquire products, for itself or others, that compete with the products, systems, or methods contemplated by the other party's Confidential Information, provided that the party has not done so in breach of this Agreement. 8.0 WARRANTIES AND DISCLAIMER OF WARRANTY 8.1 Right to Enter into Agreement. The parties warrant that they have the right and power to enter into this Agreement and to convey the rights granted herein. 8.2 DISCLAIMER OF WARRANTY. EXCEPT AS PROVIDED IN THIS SECTION, NEITHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES. WARRANTIES DISCLAIMED INCLUDE, BUT ARE NOT LIMITED TO, THE WARRANTIES OF DESIGN, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE. NO REPRESENTATION OR STATEMENT NOT EXPRESSLY CONTAINED IN THIS AGREEMENT WILL BE BINDING UPON EITHER PARTY AS A WARRANTY OR OTHERWISE. 8.3 Nothing in this Agreement shall be construed as: (i) a warranty or representation by either Party as to the validity or scope of any Licensed Patent; or (ii) a warranty or representation that anything made, use, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; or (iii) a requirement that either Party shall file any patent application, secure any patent, or maintain any patent in force; or (iv) an obligation to bring or prosecute actions or suits against third parties for infringement; or (v) an obligation to furnish any manufacturing or technical information or training; or (vi) conferring a right to use in advertising, publicity, or otherwise any trademark or tradename of either Party 9.0 LIMITATIONS OF LIABILITY 9.1 IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY LOST REVENUES OR PROFITS OR OTHER INCIDENTAL, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT, EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10.0 MISCELLANEOUS 10.1 Force Majeure. Neither party will be deemed in default of this Agreement to the extent that performance of its obligations or attempts to cure any breach are delayed or prevented by reason of any act of god, fire, natural disaster, accident, act of government, or any other cause beyond the control of such party ("Force Majeure"), provided that such party gives the other party written notice thereof, and uses good faith efforts to so perform or cure. In the event of such a Force Majeure, the time for performance or cure will be extended for a period equal to the Force Majeure, but in no event more than six (6) months. 10.2 Governing Law. This Agreement is deemed entered into in the state of California and will be governed and construed in all respects according to the laws of California as such laws are applied to agreements between California residents entered into and entirely performed within California (except that body of law controlling conflict of laws). Any litigation or other dispute resolution between the parties, relating to this Agreement will take place in Santa Clara County, California. By executing this Agreement, the parties consent to personal jurisdiction of, and venue within the state and federal courts within that country. 10.3 Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, will be settled by arbitration before a single arbitrator, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration will take place in Palo Alto, California. The arbitration will be conducted in the English language, and each party will bear its own expenses and attorneys fees connected with the arbitration regardless of the outcome. If the parties cannot agree on a single arbitrator, each party will appoint an arbitrator, and the two appointed arbitrators will appoint a third neutral arbitrator, whereupon the arbitration will take place before the three arbitrators, so appointed. 10.4 Severability. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be determined by a court of competent jurisdiction to be invalid or unenforceable under applicable law, the remaining provisions of this Agreement will be interpreted so as best to reasonably effect the intent of the parties. The parties further agree to replace any such invalid or unenforceable provisions with valid and enforceable provisions designed to achieve, to the extent possible. The business purposes and intent of such invalid and unenforceable provisions. 10.5 Relationship to the Parties. No employees, consultants, contractors, or agents of one party are agents, employees, franchisees, or joint ventures of the other party, nor do they have any authority to bind the other party by contract or otherwise to any obligation. They will not represent to the contrary, either expressly, implicitly, or otherwise. 10.6 Assignment. Neither party will assign this Agreement to a third party without the other party's prior written approval, except to a third party pursuant to a merger, sale of all or substantially all of the business of which this Agreement is a part, or other corporate reorganization. 10.7 Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties hereto and to their respective successors and assigns, subject to the provisions of Paragraph 10.6. 10.8 Notices. All notices required hereunder must be in writing and delivered either in person or by a means evidenced by a delivery receipt, to the address specified in this Agreement or as otherwise notified in writing. Such notice will be effective upon receipt. Notices to the Glaxo Wellcome Companies will be to the attention of: Affymax N.V. and Affymax Technologies N.V. Via Facsimile 011-44-181-966-8838 c/o Dr. Alan Hesketh Confirmation by DHL Courier Manager, Intellectual Property Department Glaxo Wellcome plc Glaxo House, Berkeley Avenue Greenford, Middlesex, United Kingdom UB6 ONN Dr. Gordon Ringold Via Facsimile (415) 424-0832 Chief Executive Officer Confirmation by Registered Mail Affymax Research Institute 4001 Miranda Avenue Palo Alto, CA 94304 Notices to Maxygen will be to the attention of: Dr. Alejandro Zaffaroni Via Facsimile (415) 424-0832 Chief Executive Officer Confirmation by Registered Mail Maxygen, Inc. 4001 Miranda Avenue Palo Alto, CA 94304 10.9 No Waiver. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 10.10 No Rights in Third Parties. This Agreement is made for the benefit of the parties, and not for the benefit of any third parties unless otherwise agreed to by the parties. 10.11 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 10.12 Construction. This Agreement has been negotiated by the parties and by their respective counsel. This Agreement will be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either party. 10.13 Entire Agreement. This Agreement, including all Attachments hereto, represents the entire understanding and agreement of the parties with respect to the subject matter of the Agreement, and supersedes all prior or contemporaneous understandings and agreements, whether written or oral, except as specifically provided in this Agreement. Unless otherwise provided herein, this Agreement may not be modified, amended, rescinded, or waived, in whole or part except by a written instrument signed by the duly authorized representatives of both parties. 11.0 EXECUTION BY THE PARTIES IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which will constitute but one and the same instrument. Affymax Technologies N.V. By: /s/ Adrian Hennah Name: Adrian Hennah Title: Director Date: March 12, 1997 Glaxo Group Limited By: /s/ Stephen J. Cowden Name: Stephen J. Cowden Title: Company Secretary Date: March 12, 1997 Maxygen, Inc. By: /s/ Alejandro Zaffaroni Name: Alejandro Zaffaroni Title: President Date: SCHEDULE A For the purposes of this term sheet, "Licensed Patents and Applications" shall be defined as the following patents and applications: 1. U.S. Serial No. 08/198,431 filed February 17, 1994 2. U.S. Serial No. 08/537,874 filed October 30, 1995 3. U.S. Serial No. 08/564,955 filed November 30, 1995 4. U.S. Serial No. 08/621,859 filed March 25, 1996 5. U.S. Serial No. 08/621,430 filed March 25, 1996 6. U.S. Serial No. 08/650,400 filed May 20, 1996 7. PCT/US95/02126 filed February 17, 1995 and National Phase counterparts: a) Australia Appln. No. 29714/95; b) Canada Appln. No. 2,182,393; c) China Appln. No. 95191679.3; d) Europe Appln. No. 95911826.6; e) Japan Appln. No. 7-521977; f) Korea Appln. No. 96-704465; g) Russia Appln. No. 96118426 8. U.S. Serial No. 08/721,824 filed September 27, 1996 9. U.S. Serial No. 08/722,660 filed September 27, 1996 10. Townsend & Townsend file filed December 2, 1996 No. 16528J-014613PCT, entitled "Methods for generating polynucleotides having desired characteristics by iterative selection and recombination" 11. Townsend & Townsend file filed December 18, 1996 No. 16528J-0202500, entitled "Methods and compositions for polypeptide engineering" 12. U.S. Serial No. 08/425,684 filed April 18, 1995 13. U.S. Serial No. 08/675,502 filed July 3, 1996 14. PCT/US96/05480 filed April 18, 1996 15. Provisional Application filed January , 1997 Townsend & Townsend file No. 018907-0207-OOUS, entitled "Recursive sequence recombination between libraries of fragments and cellular genomes of evolving whole cells and organisms" 16. All rights of Glaxo Wellcome Companies relating to Shuffling Patents and Applications under the Affymax/Affymetrix Technology Transfer Agreement; effective date, March 2, 1995. SCHEDULE B For the purposes of this term sheet, the patents and patent applications related to various peptide display technologies shall be defined as the following patents and applications: Peptides-on-Plasmids Display-Patents and Applications - ---------------------------------------------------- 1. U.S. Patent No. 5,270,170 2. U.S. Patent No. 5,338,665 3. European Patent Application No. 93908777.1 4. U.S. Patent No. 5,498,530 5. U.S. Serial No. 08/548,540 filed October 26, 1995 6. PCT Patent Application No. US96/09809 Polysome Display Patents and Applications - ----------------------------------------- 1. U.S. Serial No. 08/300,262 filed September 2, 1994 2. U.S. Serial No. 08/586,176 filed January 17, 1996 Phage Display Patents and Applications - -------------------------------------- 1. U.S. Patent No. 5,427,908 2. European Patent Application No. 91908963.1 3. Japan Patent Application No. 3-508896 4. U.S. Serial No. 08/376,326 filed January 20, 1995 5. U.S. Serial No. 08/450,754 filed May 25, 1995 6. U.S. Serial No. 07/541,108 filed June 20, 1990 7. U.S. Patent No. 5,432,018 8. European Patent Application No. 91913221.7 9. Japan Patent Application No. 3-512623 10. Australian Patent No. 663,055 11. Canada Patent No. 2,084,411 12. U.S. Serial No. 08/465,295 filed June 5, 1995 13. U.S. Serial No. 08/463,390 filed June 5, 1995 14. U.S. Serial No. 08/465,484 filed June 5, 1995 15. U.S. Serial No. 08/466,653 filed June 6, 1995 Dulbecco Patent - --------------- 1. U.S. Patent No. 4,593,002 Receptor Immobilization Patent Application - ----------------------------------------- 1. U.S. Serial No. 08/309,345 filed September 19, 1994 as a file wrapper continuation of U.S. Serial No. 07/947,339, filed September 18, 1992 MODIFICATION TO AFFYMAX/MAXYGEN TECHNOLOGY TRANSFER AGREEMENT This modification to the Affymax/Maxygen Technology Transfer Agreement (the Agreement), is made by and between Affymax Technologies N.V. and Glaxo Group Limited, each of which is a corporation having a registered address at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, United Kingdom (collectively referred to as "the Glaxo Wellcome Companies") and Maxygen, Inc., a Delaware corporation having an address at 3410 Central Expressway, Santa Clara, CA 95051 (referred to as "Maxygen") and shall have an effective date of March 1, 1998. 1.0 Definitions ----------- "Antibodies on Phage Patents and Applications"' refer to the following Patents and Applications: US Patent No. 5,427,908; European Patent Application No. 91908963.1; and Japan Patent Application No. 3-508896 "Modification Agreement" shall refer to this agreement. 2.0 Modification of Article 5.2 --------------------------- Article 5.2 of the Agreement is hereby modified in its entirety to read as follows: 5.2.1 The Glaxo Wellcome Companies hereby grant Maxygen a perpetual, worldwide, royalty-free, non-exclusive license, without the right to sublicense, to Peptides-on-Plasmids Display Patents and Applications, Polysome Display Patents and Applications, Phage Display Patents and Applications, the Dulbecco Patent, and Receptor Immobilization Patent Application. Maxygen agrees that use of these patents and applications shall be [*******]. Maxygen further agrees that Maxygen shall not enter into a research collaboration with a third party, or conduct research on behalf of a third party, for the purpose of developing reagents for commercial use in the Diagnostic Field and using antibodies on phage technology as claimed in the Antibody on Phage Patents and Applications. Notwithstanding the foregoing, such restriction shall apply only in those countries in which the Antibody on Phage Patents have issued. 5.2.2 For purposes of this Modification Agreement, "Diagnostic Field" shall mean the [*******]. 3.0 Miscellaneous ------------- The terms of the Agreement not specifically modified by this Modification Agreement shall continue in effect. 4.0 Execution by the Parties ------------------------ IN WITNESS WHEREOF, the parties have caused this Modification Agreement to be executed by their duly authorized representatives. This Modification Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which will constitute but one and the same instrument. Affymax Technologies N.V. By: /s/ Alan Baxter Name: Alan Baxter Title: Managing Director Date: November 13, 1998 Glaxo Group Limited By: /s/ S M Bicknell Name: S M Bicknell Title: Assistant Secretary Date: May 11, 1998 Maxygen, Inc. By: /s/ Russell J. Howard Name: Russell J. Howard Title: President & CEO Date: October 7, 1998 EX-10.11 4 LICENSE AND COLLABORATION AGREEMENT Exhibit 10.11 LICENSE AND COLLABORATION AGREEMENT between MAXYGEN, INC. 3410 Central Expressway Santa Clara, California 95051, USA (hereinafter referred to as MAXYGEN) and NOVO NORDISK A/S Novo Alle DK-2880 Bagsvaerd Denmark (hereinafter referred to as NOVO NORDISK) WHEREAS, MAXYGEN has developed and possesses expertise, know-how and intellectual property rights within the generic field of in vitro and in vivo Shuffling (as defined below); WHEREAS, NOVO NORDISK has developed and possesses expertise, know-how and intellectual property rights within the field of in vitro and in vivo Shuffling for creating and screening genetic diversity for use in development of Industrial Proteins (as defined below); WHEREAS, MAXYGEN and NOVO NORDISK are both interested in exchanging such expertise and know-how and granting each other access to use such intellectual property rights in certain defined fields. WHEREAS, NOVO NORDISK and MAXYGEN are both interested in further developing such expertise, know-how and intellectual property rights by using collaborative efforts; and WHEREAS, NOVO NORDISK, as part of such collaboration, is willing to fund certain development activities to be carried out at MAXYGEN's premises in accordance with the terms described herein. * CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN 0MITTED AND THE NON-PUBLIC INFORMATION HAS BEEN FILED SEPARATELY WITH THE SEC. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1 NOW, THEREFORE, MAXYGEN and NOVO NORDISK hereby agree as follows: 1. DEFINITIONS The following definitions shall control the construction of each of the following terms wherever they appear in this Agreement: The term "Affiliate" shall mean any corporation or other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the designated party but only for so long as such relationship exists. For the purposes of this section, "Control" shall mean ownership of at least fifty (50) percent (or such lesser ------- percent as may be the maximum that may be owned by foreign interests pursuant to the laws of the country of incorporation) of the shares of stock entitled to vote for directors in the case of a corporation and at least fifty (50) percent (or such lesser percent as may be the maximum that may be owned by foreign interests pursuant to the laws of the country of domicile) of the interests in profits in the case of a business entity other than a corporation. The term "Agreement" shall mean this present License and Collaboration Agreement. The term "Assay Technology" shall mean methods wherein genetic diversity generated by Shuffling is selected or screened to identify the subset of genetic variants for inclusion in a subsequent application of Shuffling or to identify the desired product. The term "Development Program" shall mean research and development activities within the areas outlined in Exhibit A attached hereto, as --------- supplemented or amended from time to time according to mutual written agreement between the Parties. Cf. Also Section 8.1. The term "Effective Date" shall mean the date of the last signature hereto. The term "Industrial Protein Expression Pathway" shall mean any evolvable process within a cell that leads to increased expression of the desired form of an Industrial Protein, including, but not limited to evolution of enzymes and compounds that modify or transport proteins per se, creation of improved processes of cellular DNA uptake, evolution of stable, replicating genetic elements such as plasmids, as well as cellular processes or substances that are genetically encoded but not enzymatic, for example, lipid compositions of a cell membrane that affect expression of the desired form of the Industrial Protein. 2 The term "Industrial Protein" shall mean [*******] for production, sale and/or use in the NOVO NORDISK Field or, upon being activated in accordance with Section 7.3 hereof, a NOVO NORDISK Preferred Area. The term "In Vitro Shuffling" shall mean Shuffling where the gene recombination event occurs outside of a cell, but shall not include any Assay Technology. The term "In Vivo Shuffling" shall mean Shuffling where the gene recombination event occurs inside of a cell, but shall not include any Assay Technology. The term "Jointly Owned Patents" shall mean any patent applications and/or patents based on inventions made in the course of the Development Program, including any reissued patents, reexamined patents, divisions, renewals, continuations and continuations-in-part, substitutions, extensions or foreign counterparts thereof. The term "Licensed Product" shall mean any Industrial Protein (i) derived by Shuffling or (ii) expressed, made or produced by the use of a vector, organism or other material that has been improved by Shuffling, regardless of whether such Industrial Protein is Shuffled, in either case in respect of which the developing, making, having made, using or selling is covered by a Valid Claim in the relevant country and/or which is developed and/or manufactured through the use of MAXYGEN Know-How and including, but not limited to, any Industrial Protein developed or manufactured by application or use of an Industrial Protein or such improved vector, organism or other material for such purpose. The term "MAXYGEN Break-through Invention" shall mean any invention made by MAXYGEN during the term of this Agreement but outside the scope and activities of the Development Program which fulfills the following criteria: (a) The MAXYGEN Break-through Invention shall be an invention that is the result of [*******]. (b) The MAXYGEN Break-through Invention shall be patented or patentable. The term "MAXYGEN Future Patents" shall mean any patent applications filed by or on behalf of MAXYGEN on or after the Effective Date and any patents issued thereon, provided the inventions covered by such patents and/or patent applications have been made by MAXYGEN before the expiry or termination of the Development Program but outside the scope of the Development Program and, furthermore, provided such inventions consist of Shuffling methods and are applicable within the NOVO NORDISK Field and, finally, provided such patent applications would have been included in Exhibit C by virtue of their comprising Shuffling technology had they been filed prior to the Effective Date. 3 The term "MAXYGEN Field" shall mean all applications or uses of Shuffling which fall outside the NOVO NORDISK Field. Thus, the MAXYGEN Field shall include, but not be limited to, [*******], excluding, however, the NOVO NORDISK Field and existing specific projects of NOVO NORDISK as specified in Exhibit B. --------- The term "MAXYGEN Know-How" shall mean any proprietary and confidential know-how, other than MAXYGEN Patents, MAXYGEN Future Patents, Jointly Owned Patents, and MAXYGEN Breakthrough Inventions controlled by MAXYGEN on or after the Effective Date, including technical data, experimental results, specifications, techniques, methods, technology, processes, recipes and written materials, all of which shall be related exclusively to Shuffling. For the purposes of this definition, the term "controlled" shall mean owned and/or having the ability to grant licenses or sublicenses to and/or disclose MAXYGEN Know-How without violating the terms of any bona fide agreement under which MAXYGEN may have acquired such rights. The term "MAXYGEN Patents" shall mean the patents and patent applications listed in Exhibit C attached hereto or referred to in Section 2.4 hereof and any --------- patents issued on any such patent applications and including any reissued patents, re-examined patents, divisions, renewals, continuations and continuations in part, substitutions, extensions or foreign counterparts thereof. The term "Metabolic Pathways" shall mean a process using cells or cell lysates from a single organism that utilizes [*******] except for the use in Industrial Protein expression in the NOVO NORDISK Field. The term "Minimum Royalty Level" shall have the meaning set forth in Section 3.5. The term "Net Proceeds of Sales" shall mean NOVO NORDISK's and its Affiliates' and sublicensees' (other than agents, distributors, toll manufacturers, customers and other end users that are not Affiliates of NOVO NORDISK) gross receipts from sales of Licensed Products when invoiced to a third party, less the following deductions actually allowed and taken by such third parties and not otherwise received by or reimbursed to NOVO NORDISK or its Affiliates or sublicensees: (a) trade, cash and/or quantity discounts allowed, if any; (b) refunds, rebates or allowances which effectively reduce the selling price; (c) actual returns and allowances; (d) credits, if any, to customers on account of retroactive price reductions; (e) value added taxes and sales taxes; 4 (f) duties; (g) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such on the total amount invoiced; and (h) bad debt. Sales of Licensed Products between NOVO NORDISK and its Affiliates or between two or more of NOVO NORDISK's Affiliates shall not be considered included within Net Proceeds of Sales. The term "NOVO NORDISK Field" shall mean the use of Shuffling for the development, production and/or sale of Industrial Proteins in the areas described in Exhibit D attached hereto and, upon its activation in accordance --------- with the provisions of Section 7.3 hereto each Preferred Area, excluding, however, such use for the purpose of [*******] and excluding existing specific projects of MAXYGEN as specified in Exhibit E. The NOVO NORDISK Field shall not include the cure, treatment, mitigation, prevention or diagnosis of human or animal diseases, except as set forth in Section 2.2 below. The term "NOVO NORDISK Future Patents" shall mean any patent applications filed on or after the Effective Date solely by or on behalf of NOVO NORDISK's Enzyme Business (as organized and operated as a separate division according to objective and bona fide criteria) and any patents issued thereon, provided the inventions covered by such patents and/or patent applications have been made by NOVO NORDISK before expiry or termination of the Development Program but outside the scope of the Development Program and, furthermore, provided such inventions consist of Shuffling methods and, finally, provided such patent applications would have been included in Exhibit F by virtue of their comprising Shuffling technology had they been filed prior to the Effective Date. The term "NOVO NORDISK Patents" shall mean the patents and patent applications listed in Exhibit F attached hereto and any patents issued on any --------- such patent applications, including any reissued patents, re-examined patents, divisions, renewals, continuations and continuations-in-part, substitutions, extensions or foreign counterparts thereof. The term "NOVO NORDISK Preferred Areas" shall mean the fields of application of Industrial Proteins described in Exhibit G attached hereto and --------- any other fields of interest selected by NOVO NORDISK in accordance with the procedures set forth in Section 7 below. The NOVO NORDISK Preferred Areas shall not include the cure, treatment, mitigation, prevention, or diagnosis of human or animal diseases. 5 The term "Party" shall mean either MAXYGEN or NOVO NORDISK, as appropriate, whereas the term "Parties" shall mean MAXYGEN and NOVO NORDISK jointly. The term "Shuffling" shall mean new methods (as of 17 February 1994) for recombination of genetic material for creation and screening of genetic diversity, comprising methods included in or similar to those described in Exhibits C and F. Shuffling may be either in vivo or in vitro, but does not include any Assay Technology. [*******] The term "Valid Claim" shall mean a claim of an issued and unexpired patent in the relevant country within the MAXYGEN Patents, the Jointly Owned Patents, the MAXYGEN Future Patents and/or the MAXYGEN Breakthrough Inventions that has not been held unenforceable, unpatentable or invalid by a court or other governmental agency of competent jurisdiction or that has not been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. The term "Working Group" shall mean the collaborative body consisting of representatives from both Parties, the tasks and working procedures of which have been further outlined in Section 8.4 below. 2. EXCHANGE OF LICENSES 2.1 Grant of Licenses from MAXYGEN to NOVO NORDISK. MAXYGEN hereby grants ---------------------------------------------- to NOVO NORDISK a worldwide, royalty-bearing (in accordance with below), exclusive, irrevocable (except as otherwise stated in Section 9) and sublicensable right and license to practice the MAXYGEN Patents, the MAXYGEN Know-How, the MAXYGEN Future Patents, the Jointly Owned Patents and the MAXYGEN Break-through Inventions to make, have made, use, promote, market distribute and sell Licensed Products within the NOVO NORDISK Field and any NOVO NORDISK Preferred Areas which may be activated in accordance with Section 7 hereof. 2.2 Grant of Licenses from NOVO NORDISK to MAXYGEN. NOVO NORDISK hereby ---------------------------------------------- grants to MAXYGEN a worldwide, royalty-free, irrevocable (except as otherwise stated in Section 9) and sublicensable right and license to practice, within the MAXYGEN Field, the NOVO NORDISK Patents, NOVO NORDISK Future Patents and the Jointly Owned Patents and any improvements by NOVO NORDISK of the MAXYGEN Know- How to develop, make, have made, use, promote, market, distribute and sell products. Said license shall be exclusive except as otherwise stated in Exhibits F and H and except for use of NOVO NORDISK Patents and NOVO NORDISK Future Patents for the cure, treatment, mitigation, prevention or diagnosis of human or animal diseases, with respect to which this license shall be co-exclusive with NOVO NORDISK. MAXYGEN's right to sublicense hereunder shall not include sublicensing to third parties which, at the time of granting the sublicense, have industrial enzymes as their primary business; in the event that MAXYGEN should sublicense its 6 rights hereunder to any third party which, to the best of MAXYGEN's knowledge, has any activities within the industrial enzymes field, MAXYGEN shall immediately inform NOVO NORDISK of the fact that such sublicense has been granted without necessarily disclosing the field and terms of such sublicense. Nothing herein shall prevent NOVO NORDISK from scientific or commercial exploitation either by itself or through third parties (such as, but not limited to, toll manufacturers, agents or distributors) of the NOVO NORDISK Patents and the NOVO NORDISK Future Patents for the cure, treatment, mitigation, prevention, or diagnosis of human or animal diseases. 2.3 Undisclosed MAXYGEN Patents as of the Effective Date. Any and all ---------------------------------------------------- patents or patent applications belonging to MAXYGEN as of the Effective Date and relevant for use within the NOVO NORDISK Field or NOVO NORDISK Preferred Areas which have not been disclosed, fully or in part, by MAXYGEN to NOVO NORDISK as of the Effective Date shall be fully disclosed by MAXYGEN no later than fifteen (15) days after the Effective Date and automatically be considered part of the MAXYGEN Patents. 2.4 Undisclosed NOVO NORDISK Patents as of the Effective Date. NOVO --------------------------------------------------------- NORDISK shall use diligent efforts within 60 (sixty) days from the Effective Date to disclose to MAXYGEN as soon as practicable any and all patents or patent applications belonging to NOVO NORDISK and relating to Shuffling as of the Effective Date and relevant for use within the MAXYGEN Field which have not been disclosed, fully or in part, by NOVO NORDISK to MAXYGEN as of the Effective Date each of which shall automatically be considered part of the NOVO NORDISK Patents. 3. ROYALTIES 3.1 Royalty Rates. The following royalty rates shall apply and be payable ------------- by NOVO NORDISK with regard to NOVO NORDISK's and its Affiliates' sales of Licensed Products: Royalty Rate Technology Applied by calculated on Net NOVO NORDISK Proceeds of Sales ------------------------------------------ ----------------- MAXYGEN Patents: [*******] MAXYGEN Know-How (subject to fulfillment of the conditions outlined in Section 3.2 hereof): [*******] MAXYGEN Future Patents: [*******] Jointly Owned Patents: [*******] 7 MAXYGEN Break-through Inventions: [*******] 3.2 Royalties in Respect of MAXYGEN Know-How. NOVO NORDISK's payment of ---------------------------------------- royalties in respect of MAXYGEN Know-How on Net Proceeds of Sales of products not covered by a Valid Claim shall be subject to the following: (a) To the extent that NOVO NORDISK can document by competent evidence that any third party is relying on [*******] in its development and/or manufacturing of a product which is sold, in an amount equal to at least [*******] percent of the sales by NOVO NORDISK in the relevant country, in competition, either directly or indirectly, with an Industrial Protein sold in such country by NOVO NORDISK, NOVO NORDISK shall be relieved from paying royalties on Net Proceeds of Sales in such country of the relevant Industrial Protein based solely on MAXYGEN Know-How. (b) The MAXYGEN Know-How used by NOVO NORDISK must relate to [*******]. It is understood that royalties shall, nonetheless, become due at a rate of [*******] per cent of Net Proceeds of Sales in respect of sales in the USA of Licensed Products based on NOVO NORDISK's use of MAXYGEN Know-How related to [*******], provided such use has taken place in the period lasting from the Effective Date to the date of the first publication of the MAXYGEN Know-How in question and furthermore provided that [*******]. 3.3 Notwithstanding Section 3.2, to the extent that NOVO NORDISK can document by competent written evidence that it had developed, prior to the earlier of the disclosure of information by MAXYGEN to NOVO NORDISK pursuant to the Secrecy Agreement between the Parties dated March 7, 1997, or the Effective Date, know-how or technology which is substantially similar to the MAXYGEN know- how in question, no royalties shall be payable by NOVO NORDISK on the basis solely of such MAXYGEN Know-How unless other MAXYGEN Know-How that has not been so developed by NOVO NORDISK is also utilized to develop, make, have made, use, promote, market, distribute or sell Licensed Products. 3.4 Only One Royalty Payable. The above royalty rates shall not be ------------------------ applied cumulatively. Thus, only one royalty shall be paid in respect of each sale of any Licensed Product by NOVO NORDISK or its Affiliates, namely the highest applicable rate. 3.5 Minimum Royalty. --------------- (a) If the royalties otherwise payable hereunder by NOVO NORDISK in any year beginning with the fourth year from the Effective Date are less than the Minimum Royalty Levels set forth below, NOVO NORDISK shall pay to MAXYGEN [*******] percent of the difference between the Minimum Royalty Level for such year as stated below and the total royalties otherwise 8 payable hereunder including, but not limited to, royalties attributable to MAXYGEN Know-How: Year Minimum Royalty Level ----- --------------------- [*******] [*******] [*******] [*******] [*******] [*******] (b) An accumulated Minimum Royalty Level covering all NOVO NORDISK Preferred Areas that have been activated shall be set, as to amount and date of application as agreed to by the Parties, upon the activation by NOVO NORDISK of each NOVO NORDISK Preferred Area. (c) If NOVO NORDISK does not timely pay to MAXYGEN the stated Minimum Royalty Level under either subparagraph (a) or subparagraph (b) above by the end of sixty (60) days after the end of the applicable year, the licenses granted to NOVO NORDISK by MAXYGEN shall [*******] within the NOVO NORDISK Field and/or the NOVO NORDISK Preferred Areas, as appropriate. In the event that MAXYGEN, after the possible [*******] of NOVO NORDISK's license [*******] should grant a license to a third party such license shall be granted on terms which, taken as a whole, are not more favorable to such third party than the terms applying to NOVO NORDISK's [*******] license. 4. PAYMENT OF AND ACCOUNTING FOR ROYALTIES 4.1 Keeping of Records. ------------------ NOVO NORDISK shall keep, and impose on its Affiliates to keep, complete and correct records of Net Proceeds of Sales of Licensed Products for a period of not less than three (3) years after the making of a royalty payment under this Agreement. 4.2 Payment Term. All royalty payments under this Agreement shall become ------------ due and payable sixty (60) days after the last day of the calendar quarter in which the corresponding sales of Licensed Products were made. Payment shall be accompanied by a report on a country-by-country basis, showing the Net Sales in each segment of the Field as listed on Exhibit D used in the computation of the royalties payable. Any Minimum Royalty shall become due and payable sixty (60) days after the end of the applicable year. 4.3 Currency and Exchange Rate. NOVO NORDISK shall make all payments to -------------------------- MAXYGEN under this Agreement in U.S. Dollars and to a bank account to be 9 designated by MAXYGEN. Net Proceeds of Sales shall be calculated on the basis of the rates of exchange as quoted by the Wall Street Journal (U.S.A. Edition) on the last business day of the calendar quarter in which the corresponding sales of Licensed Products were made. 4.4 Auditor Statements. Upon MAXYGEN's request NOVO NORDISK shall provide ------------------ MAXYGEN with a statement from NOVO NORDISK's external auditors certifying the correctness of NOVO NORDISK's royalty payments made hereunder. The statement shall be provided at MAXYGEN's request and expense and no more than once in any given calendar year. 4.5 Audit of NOVO NORDISK's Records. NOVO NORDISK shall allow MAXYGEN to ------------------------------- appoint a firm of independent certified public accountants to whom NOVO NORDISK has no reasonable objection. NOVO NORDISK shall give such accountant access, during ordinary business hours and subject to a reasonable advance notice, to such records of NOVO NORDISK as are necessary to verify the accuracy of any royalty payments made or payable under this Agreement. Such access shall be granted no more than once in a calendar year, at MAXYGEN's request and expense. The independent certified public accountants shall be under a confidentiality obligation to NOVO NORDISK to disclose to MAXYGEN in its report only the amount and accuracy of royalty payments made or payable under this Agreement. In the event it is determined that the records of NOVO NORDISK indicate that the amount of royalties payable under this Agreement is more than that actually paid to MAXYGEN, NOVO NORDISK shall pay such difference to MAXYGEN within thirty (30) days of such accountant's report, and if that difference is greater than [*******] percent [*******] of the amounts actually paid then the costs and expenses of said independent certified public accountant shall be borne by NOVO NORDISK. 5. WARRANTIES 5.1 MAXYGEN represents and warrants to NOVO NORDISK that: (a) it has the right to grant to NOVO NORDISK the license granted under Section 2.1 hereof and that said license does not conflict with or violate the terms of any agreement between MAXYGEN and any third party. (b) it has duly informed NOVO NORDISK, prior to the Effective Date, of administrative or judicial proceedings, if any, contesting the inventorship, ownership, validity or enforceability of any element of the MAXYGEN Patents. 10 (c) it has not as of the Effective Date and it will not in the future license the MAXYGEN Know-How to any legal entity competing with NOVO NORDISK in the NOVO NORDISK Field or the NOVO NORDISK Preferred Areas for use in such Field or Areas so long as NOVO NORDISK retains rights therein pursuant to this Agreement. (d) is unaware of any present patents or patent applications relating to Shuffling of third parties, domestic or foreign, which would be infringed by NOVO NORDISK in exercising its rights granted under Section 2.1. 5.2 Warranties of NOVO NORDISK. -------------------------- (a) it has the right to grant to MAXYGEN the license granted under Section 2.2 hereof and that said license does not conflict with or violate the terms of any agreement between NOVO NORDISK and any third party. (b) it has duly informed MAXYGEN, prior to the Effective Date, of administrative or judicial proceedings, if any, contesting the inventorship, ownership, validity or enforceability of any element of the NOVO NORDISK Patents. (c) is unaware of any present patents or patent applications relating to Shuffling of third parties, domestic or foreign, that would be infringed by MAXYGEN in exercising its rights granted under Section 2.2. 6. PATENT PROSECUTION 6.1 Procedures. For all patent families licensed hereunder, the licensor ---------- shall inform about and, to the extent reasonably practicable as specified below, give the licensee a reasonable opportunity to discuss and influence major prosecution events. The licensor shall nonetheless have the final decision as to any such matter unless the Working Group shall otherwise decide. Such major prosecution events shall include official communications with the examining division at European Patent Office and United States' Patent & Trademark Office in the form of patent applications, including divisional applications, reissue applications, continuations and continuations in part, requests for examination, including reexamination, written opinions, amended claims, final rejections and notices of allowance. MAXYGEN and NOVO NORDISK shall each be responsible to utilize commercially reasonable efforts to file, prosecute and maintain, at its expense, all patents and patent applications included in their respective patent listings. 11 The licensor shall use reasonably diligent efforts to provide to licensee such communication from the licensor to the examining division no later than two (2) weeks prior to the official communication. The licensor shall use reasonably diligent efforts to disclose to the licensee within two (2) weeks from its receipt such communications from the examining division. The licensee shall have the right to enforce, at its own expense, licensed patent rights licensed to it within its field, i.e., the NOVO NORDISK Field or the MAXYGEN Field, as appropriate. The licensee must inform the licensor of such intention no later than three (3) months prior to initiation of such action. The licensor must by written notice, within four (4) weeks from the date of receipt of such information, decide to approve of such action or to delay it by up to a further four (4) weeks' period. The licensor's comments and suggestions, if any, in relation to the intended action shall be duly considered by the licensee. If the licensee does not bring any such suit, the licensor shall have the right to enforce, at its own expense, the said licensed patent rights. In any event the Parties shall assist each other and cooperate in any such litigation. If NOVO NORDISK shall institute any such enforcement with respect to uses of Shuffling to which MAXYGEN would be entitled to royalties if NOVO NORDISK was so utilizing Shuffling, MAXYGEN shall be entitled to twenty-five (25) percent of any cash recovery by NOVO NORDISK after NOVO NORDISK has first recovered its reasonable costs of enforcement. If MAXYGEN shall institute any such enforcement with respect to uses of Shuffling in the NOVO NORDISK Field, NOVO NORDISK shall be entitled to twenty-five (25) percent of any cash recovery by MAXYGEN after MAXYGEN has first recovered its reasonable costs of enforcement. Notwithstanding anything to the contrary herein, NOVO NORDISK shall be fully entitled, at its own cost to enforce its patents within the field of cure, treatment, mitigation, prevention or diagnosis of human or animal diseases. The Parties shall keep one another informed of the status of and of their respective activities regarding any litigation or settlement thereof concerning the foregoing. Neither Party shall make any settlement of any litigation or claim which will result in the grant to any third party of any rights that will diminish the other Party's rights granted hereunder. NOTWITHSTANDING THE FOREGOING, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF ANY PATENT RIGHTS OR KNOW-HOW. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL DAMAGES OF ANY KIND. 12 6.2 Invalidity or Unenforceability. In the event of any part of the ------------------------------ NOVO NORDISK Patents, the NOVO NORDISK Future Patents and/or the Jointly Owned Patents being declared invalid or unenforceable in a final judgment or administrative decision, MAXYGEN shall not be entitled to terminate this Agreement. In the event of any part of the MAXYGEN Patents, the MAXYGEN Future Patents, the Jointly Owned Patents and/or any patent(s) included in the MAXYGEN Breakthrough Inventions being declared invalid or unenforceable in a final judgment or administrative decision, NOVO NORDISK shall not be entitled to terminate this Agreement. NOVO NORDISK shall no longer have any obligation to pay royalties on Net Proceeds of Sales of a product to MAXYGEN after final judgment or administrative decision that determines that there is no material Valid Claim included in any MAXYGEN Patent or MAXYGEN Future Patent that covers the product, on a country-by-country basis, and MAXYGEN Know-How has not been used to develop or manufacture such Licensed Product. Moreover, NOVO NORDISK shall be entitled to [*******] provided that NOVO NORDISK shall not be entitled during any [*******] to [*******] an amount higher than [*******] and, furthermore provided that NOVO NORDISK shall not be entitled to make any [*******] unless it has been met with competition which has reached a level corresponding to at least [*******] of NOVO NORDISK's own sales of the same Industrial Protein in the country in question. 7. NOVO NORDISK PREFERRED AREAS 7.1 Already Defined NOVO NORDISK Preferred Areas. -------------------------------------------- The fields of application and production for Industrial Proteins described in Exhibit F hereof shall be considered to be included in the NOVO NORDISK --------- Preferred Areas, until otherwise determined by NOVO NORDISK as per Section 7.2 below. 7.2 Procedures for Selection of New NOVO NORDISK Preferred Areas. ------------------------------------------------------------ Altogether, NOVO NORDISK shall be entitled, at any time, to reserve up to [*******] NOVO NORDISK Preferred Areas as fields of potential interest for NOVO NORDISK to which to expand the license granted under Section 2.1 above as set forth in Exhibit F. Notwithstanding anything to the contrary herein, NOVO NORDISK shall be entitled to replace any selected NOVO NORDISK Preferred Areas with a different Preferred Area insofar as such replacement would not be obstructed by MAXYGEN's bona fide obligations vis-a-vis third parties entered into in the meantime or developments made by or on behalf of MAXYGEN. 7.3 Procedures for Activation of NOVO NORDISK Preferred Areas. NOVO --------------------------------------------------------- NORDISK shall activate its right to a Preferred Area by giving notice to MAXYGEN in accordance with Section 17 hereof, in which event the Parties shall enter into a license to be governed by the basic licensing terms contained herein and terminating upon termination or expiration of the basic license grant hereunder (Sections 2 through 7 and 13 9), it being understood, however, that the royalty rates and level of Annual Maintenance Fee and a work plan therefor shall be negotiated in good faith on a case-by-case basis. Unless MAXYGEN's technology in question qualifies as MAXYGEN Break-through Inventions, the royalty rate payable by NOVO NORDISK to MAXYGEN shall in no event exceed [*******] percent and shall in no event be lower than [*******] percent. 7.4 Notwithstanding the foregoing: (a) if MAXYGEN should receive a bona fide offer initiated by a third party with respect to such Preferred Area, it shall have the right so to inform NOVO NORDISK and provide to NOVO NORDISK a right of first negotiation with respect to such Area on terms at least as favorable to NOVO NORDISK as those to be proposed to the third party or that would be reasonable and in the spirit of this Agreement if MAXYGEN has determined to commit its own resources. If NOVO NORDISK does not accept such terms within forty-five (45) days, MAXYGEN shall be free to enter into such agreement with the third party. (b) If MAXYGEN should determine to commit its own resources to a Preferred Area, it shall be required first to offer to NOVO NORDISK the opportunity for sixty (60) days to activate the Preferred Area in question in accordance with Section 7.3 above. If NOVO NORDISK does not elect to activate such Preferred Area on its own behalf, MAXYGEN shall be free to proceed with developments in such Preferred Area on its own behalf. 8. DEVELOPMENT COLLABORATION 8.1 Scope of Development Collaboration. The Parties hereby undertake to ---------------------------------- jointly carry out a scientific development cooperation in accordance with the Development Program with the purpose of improving the protection of the technology and the exclusive position status provided by the MAXYGEN Patents and the NOVO NORDISK Patents, both within the MAXYGEN Field and the NOVO NORDISK Field. The more detailed description of activities together with a time schedule shall be agreed in writing between the Parties no later than sixty (60) days after the Effective Date. The development work itself shall commence no later than 1 January 1998. 8.2 Exchange of Information and Results. Each of MAXYGEN and NOVO ----------------------------------- NORDISK shall, free of separate charge, fully and promptly disclose to each other all inventions that pertain to Shuffling, whether or not patentable, made by it or on its behalf in the course of the Development Program. Furthermore, each Party shall disclose to the other Party any know-how, data, technology, methods or other information in its possession which could facilitate the other Party's performance of its specific tasks under the Development Program, which may only be used by the other Party to perform its specific tasks under the Development Program. 14 8.3 Performance of Obligations. Each Party shall use its best efforts -------------------------- to diligently carry out its tasks under the Development Program. 8.4 Working Group. A Working Group consisting of three (3) members ------------- appointed by MAXYGEN and three (3) members appointed by NOVO NORDISK shall be established in order to monitor the progress of the cooperation under this Agreement including the Development Program. Furthermore, the Working Group shall in good faith discuss questions related, but not limited to: . goals and time frame of the cooperation, . setting of priorities within the scope of the Development Program, . patent issues, e.g., filing, strategy, determination of inventorship, etc., . possible change to or abandonment of Development Program, . possible conflicts of interest, and . inclusion of any third parties or any intellectual property rights or know-how belonging to third parties in the project. During such discussions the Parties shall aim at reaching unanimity. However, in the absence of such unanimity, the Working Group shall not have any decision powers, but shall refer the matter to the top management of NOVO NORDISK and MAXYGEN, respectively, for settlement. The Working Group shall meet whenever requested by either Party and whenever deemed relevant by the Working Group. At least one (1) member from each side shall participate at each meeting. Furthermore, relevant scientific or other staff from either Party may attend. The members of the Working Group shall communicate to the extent necessary in order to coordinate their efforts and shall be responsible for the drafting of detailed minutes and records from each meeting. 8.5 Funding by NOVO NORDISK. In consideration of the rights granted to ----------------------- NOVO NORDISK hereunder, NOVO NORDISK shall, in addition to paying royalties under Section 3 and granting a cross-license under Section 2.2, compensate MAXYGEN for MAXYGEN's performance of its tasks under the Development Program. Unless modified by mutual agreement in writing, said compensation shall amount to an annual amount of [*******] out of which [*******] shall be considered as a fixed amount whereas the remaining [*******] shall cover the [*******] MAXYGEN scientists 15 referred to below. The annual funding amount shall be paid in advance in quarterly installments of [*******] each, the first of which will become due for payment on the Effective Date. MAXYGEN undertakes to designate and assign at least [*******] scientists with expertise in Shuffling towards full-time work under the Development Program during the term of such funding by NOVO NORDISK. 8.6 Ownership of Patents and Technology. MAXYGEN Patents and MAXYGEN --- ----------------------------------- Know-How are and shall continue to be the exclusive property of MAXYGEN, subject to the licenses granted hereunder. NOVO NORDISK Patents are and shall continue to be the exclusive property of NOVO NORDISK, subject to the licenses granted hereunder. Jointly Owned Patents shall be considered the joint property of and shall be co-assigned to each of the Parties, the commercial exploitation of which, however, shall be subject to the licenses, rights and restrictions outlined in this Agreement. MAXYGEN Break-through Inventions and MAXYGEN Future Patents, if any made, shall become the property of MAXYGEN subject to the licenses granted hereunder. NOVO NORDISK Future Patents, if any, shall be the exclusive property of NOVO NORDISK subject to the licenses granted hereunder. 8.7 Filing, Prosecution and Maintenance of Jointly Owned Patents. The ------------------------------------------------------------ Parties will mutually agree upon which of them shall be responsible for filing, prosecution and maintenance of Jointly Owned Patents. In case all inventors are employed by the same Party, that Party shall be responsible for filing, prosecution and maintenance of such Jointly Owned Patents. The expenses of such filing, prosecution and maintenance shall be equally shared by the Parties unless one of the Parties assigns all of its rights, on a country-by-country basis, to the other Party. 8.8 Publication of Results. Neither Party shall be entitled to publish ---------------------- the results obtained under the Development Program, without the approval of the other Party. 9. TERM AND TERMINATION 9.1 Term and Expiry. This Agreement shall enter into force on the --------------- Effective Date and shall expire five (5) years after the Effective Date, provided that NOVO NORDISK may reduce its funding obligation for the Development Program under Section 8 hereof by up to [*******] beginning with the third year after the Effective Date by notice to MAXYGEN not later than twelve (12) months prior to the year for which the reduction shall be effective. Unless due to breach of agreement or warranties 16 hereunder by the other Party, neither Party may terminate this Agreement with respect to the licenses and options exchanged hereunder. Notwithstanding the expiry of this Agreement, the licenses granted hereunder shall continue in force under the terms and conditions contained herein including the continuing obligation to pay royalties on Net Sales of Licensed Products, on a country-by- country basis, for the life of any patent containing a Valid Claim in the relevant country, provided, however, that NOVO NORDISK shall have no further right to activate any NOVO NORDISK Preferred Area that it has not bona fidely activated prior to the expiry, but NOVO NORDISK nonetheless shall have the right of first opportunity for a period of ninety (90) days after the expiry if MAXYGEN should decide to pursue development or license of such lapsed NOVO NORDISK Preferred Area with a third party. In such event, MAXYGEN shall advise NOVO NORDISK from time to time of its decision to proceed with a third party and the terms of a proposed agreement with NOVO NORDISK and NOVO NORDISK shall have ninety (90) days thereafter to advise MAXYGEN whether it desires to accept such proposed agreement. Similarly, NOVO NORDISK may propose to MAXYGEN its desire to proceed with development of such a lapsed NOVO NORDISK Preferred Area and MAXYGEN shall within sixty (60) days thereafter advise NOVO NORDISK of the terms of a proposed agreement, and NOVO NORDISK shall have ninety (90) days thereafter to advise MAXYGEN whether it desires to accept such proposed agreement. In either event if NOVO NORDISK does not accept the agreement proposed by MAXYGEN, MAXYGEN shall have six (6) months thereafter to enter into an agreement with a third party on terms and conditions, taken as a whole, that are not materially more favorable to such third party than those proposed to NOVO NORDISK. If MAXYGEN is unable to enter into such agreement with a third party by the end of such six-month period, it shall again offer to NOVO NORDISK the right of first opportunity before entering into any such agreement with a third party. 9.2 Termination Due to Breach of Contract. If a Party to this Agreement ------------------------------------- commits a material breach of any provision of this Agreement and fails to remedy such breach within thirty (30) days after written notice thereof from the other Party stating the intent to terminate the Party not in default may, at its option, terminate this Agreement by giving fifteen (15) days prior written notice to the Party in default. Said right of termination shall be in addition to any remedies for damages and/or injunctive relief and may be exercised by the non-defaulting Party whilst upholding the licenses granted to that Party under Section 2.1 or 2.2, as appropriate, on the relevant licensing terms contained herein. 9.3 Survival of Provisions. ---------------------- (a) Expiration or termination of this Agreement shall not terminate the obligation of either Party to make any payments to the other Party that have accrued prior to the date of expiry or termination. 17 (b) The provisions contained in Sections 5, 8.6, 8.7, 9, 11, 13, 19, 20 and 21 of this Agreement shall survive its expiry or termination. 10. FORCE MAJEURE Each of the Parties hereto shall be excused from the performance of its obligations hereunder and shall not be liable for damages to the other in the event that such performance is prevented by circumstances beyond its effective control. Such excuse from performance shall continue for as long as the condition responsible for such excuse continues and for a period of thirty (30) days thereafter, provided that if such excuse continues for a period of one hundred twenty (120) days, the Party whose performance is not being prevented shall be entitled to withdraw from this Agreement. For the purpose of this Agreement circumstances beyond the effective control of the Party which excuse said Party from performance shall include, without limitation, acts of God, enactments, regulations or laws of any government, injunctions or judgment of any court, war, civil commotion, destruction of facility or materials by fire, earthquake, storm or other casualty, labor disturbances and failure of public utilities or common carrier. 11. INDEPENDENT CONTRACTORS Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employment or joint venture relationship between the Parties. All activities by the Parties hereunder shall be performed by the Parties as independent parties. Neither Party shall incur any debts or make any commitment for or on behalf of the other Party except to the extent, if at all, specifically provided herein or subsequently agreed upon. 12. LIMITATION ON ASSIGNMENT Except as otherwise expressly provided herein neither this Agreement nor any interest or obligation hereunder shall be assignable by either Party without the prior written consent or agreement of the other Party, except in case of sale or transfer of substantially all of a Party's business of which this Agreement may be a part. 13. CONFIDENTIALITY In consideration of disclosure by either of the Parties to the other Party of confidential information in written or oral form or in the form of samples, the recipient and the recipient's Affiliates undertake for a period of ten (10) years from the date of disclosure to treat received information as strictly secret and therefore not to disclose it to any third party (except reliable employees and Affiliates and sublicensees under similar secrecy obligations), and to make no commercial use of it except for the purposes of this 18 Agreement or except as otherwise specifically provided for herein. This obligation does not apply to: (a) information which, at the time of disclosure, is already in the public domain; (b) information which, after disclosure, becomes a party of the public domain by publication through no violation of this Agreement; (c) information which the recipient is able to prove by competent written evidence to have been in possession of prior to any disclosure; (d) information which is hereafter lawfully disclosed by a third party to the recipient, which third party did not acquire the information under a still effective obligation of confidentiality to the disclosing Party. Neither Party shall issue any press release or other public statement concerning the existence or terms of this Agreement or any activities related hereto without consulting and agreeing with the other Party. However, each Party may disclose this Agreement or any activities related hereto without the other Party's approval if such approval has been requested but not received within forty-eight (48) hours and such party concludes, after consulting with its legal advisors, that it is required by law to disclose the transaction or part thereof. 14. AMENDMENTS OF AGREEMENT This Agreement may be amended or modified or one or more provisions hereof waived only by a written instrument signed by both Parties. 15. SEVERABILITY In the event that any one or more of the provisions of this Agreement should for any reason be held by any court or authority having jurisdiction over this Agreement and the Parties to be invalid, illegal or unenforceable such provisions shall be deleted in such jurisdiction; elsewhere this Agreement shall not be affected. 16. ARTICLE HEADINGS The section headings contained in this Agreement are for convenience only and are to be of no force or effect in construing and interpreting this Agreement. 17. NOTICES Any notice, report, request, approval, payment, consent or other communication required or permitted to be given under this Agreement shall be in writing and shall for all 19 purposes be deemed to be fully given and received if delivered in person or sent by registered mail, postage prepaid or by facsimile transmission to the respective parties at the following addresses: If to MAXYGEN: MAXYGEN, INC. 3410 Central Expressway Santa Clara, CA 95051 USA Attn: President Telefax: 408-481-0385 with a copy to: Heller Ehrman White & McAuliffe 525 University Avenue Palo Alto, CA 94301 U.S.A. Attention: Julian N. Stern Telefax: 650-324-0638 If to NOVO NORDISK: NOVO NORDISK A/S Novo Alle DK-2880 Bagsvaerd Denmark Attn: General Counsel Telefax: +45 44 98 06 70 Either Party may change its address for the purpose of this Agreement by giving the other Party written notice of its new address. 18. NON-WAIVER FOR FAILURE TO ENFORCE COMPLIANCE The express or implied waiver by either Party of a breach of any provision of this Agreement shall not constitute a continuing waiver of other breaches of the same or other provisions of this Agreement. 19. APPLICABLE LAW This Agreement shall be construed and interpreted in accordance with the laws of the State of New York. The English wording of this Agreement shall prevail. 20 20. ARBITRATION Both Parties will use their best endeavors to settle all matters in dispute amicably. All disputes and differences of any kind related to this Agreement, which cannot be solved amicably by the Parties, shall be referred to arbitration. The arbitration court shall consist of three arbitrators. The arbitration, including appointment of arbitrators, shall be carried out in accordance with the then valid rules of the American Arbitration Association (excluding any conciliation procedures). The arbitration shall take place in New York City and shall be conducted in the English language. The award of the arbitrators shall be final and binding on both Parties. The Parties bind themselves to carry out the awards of the arbitrators. 21. AUTHORITY TO SIGN Each person signing below and each Party on whose behalf such person executes this Agreement warrants that he, she or it as the case may be, has the authority to enter into this Agreement. Date: 1997-09-17 Date: 1997-09-17 NOVO NORDISK A/S MAXYGEN, INC. By: /s/ Soren Carlsen By: /s/ Russell Howard --------------------------- --------------------------- Soren Carlsen Russell Howard Corporate Vice President President Enzyme Research 21 AMENDMENT TO MAXYGEN/NOVO NORDISK LICENSE AND COLLABORATION AGREEMENT This Amendment is to the License and Collaboration Agreement (The Agreement) between Maxygen, Inc. (Maxygen) and Novo Nordisk, A/S (Novo Nordisk) dated September 17, 1997. Novo Nordisk and Maxygen hereby agree to amend and clarify the Agreement as is set forth below. It is understood and agreed that the Novo Nordisk Field in the Agreement includes without limitation the use of Shuffling to develop, manufacture, sell and use Industrial Proteins which are [*******] for those areas defined in Exhibit D and for the Novo Nordisk Preferred Areas upon their activation. The parties further acknowledge that [*******] for use in areas other than those areas defined in Exhibit D of the Agreement and for areas other than those to be included in the Novo Nordisk Preferred Areas upon their activation are not included in the Novo Nordisk Field. With specific regard to [*******] as listed in Exhibit D of the Agreement, the Novo Nordisk Field is defined as and is limited to [*******]. The parties further agree and acknowledge that such Industrial Protein use in the areas of [*******] shall be limited to use where the purified or unpurified Industrial Protein preparation does not itself constitute a significant part, [*******] of the final [*******]. Thus, by way of clarification of the above, the Novo Nordisk Field includes without limitation [*******], but excludes [*******]. 22 The parties further agree and acknowledge that the Novo Nordisk Field as defined in the Agreement includes the use of Shuffling by Novo Nordisk or any research collaborator or any contractor to [*******], provided however that such [*******] are used exclusively by Novo Nordisk or any research collaborator or any contractor for [*******] within the Novo Nordisk Field and Novo Nordisk Preferred Areas upon their activation. By way of clarification, the Novo Nordisk Field and Novo Nordisk Preferred Areas upon activation include without limitation [*******] as defined in this Amendment and in Exhibit D of the Agreement. As a further clarification, the parties acknowledge and agree that neither party shall have any a priori rights to [*******] developed by the other party or its collaborators or contractors. The parties further agree and acknowledge that the use of Shuffling specifically for development of [*******] is not sublicensable by Novo Nordisk to third parties except as is necessary for a research collaboration with a third party or for contract services provided by a third party. The parties further agree and acknowledge that the development, production, and sales of Industrial Proteins for use in [*******] as described in Exhibit D of the Agreement does not include [*******]. 23 AUTHORITY TO SIGN Each person signing below and each Party on whose behalf such person executes this Agreement warrants that he, she or it, as the case my be, has the authority to enter into this Amendment. Date: 1998-6-29 Date: 1998-6-29 By: /s/ Soren Carlsen By: /s/ Russell Howard ---------------------- ----------------------- Soren Carlsen Russell Howard Corporate Vice President President Enzyme Research 3 Amendment to Maxygen/Novo Nordisk License and Collaboration Agreement This Amendment is to the Maxygen/Novo License and Collaboration Agreement (the Agreement) between Maxygen, Inc. and Novo Nordisk A/S dated September 17, 1997. Novo Nordisk and Maxygen agree to amend the Agreement as is set forth below. This Amendment is effective as of the last date signed below. Exhibit G [*******] [Exhibit G identifies the Novo Nordisk Preferred Areas.] Each Person signing below and each Party on whose behalf such person executed this Amendment warrants that he she or it, as the case may be, has the authority to enter into this Amendment. MAXYGEN, INC. NOVO NORDISK A/S By: /s/ Russell Howard By: /s/ Soren Carlsen ------------------ ----------------- Russell Howard Soren Carlsen President and Corporate Vice President Chief Executive Officer Enzyme Research Date: 7/22/98 Date: 7/29/98 AMENDMENT TO MAXYGEN/NOVO NORDISK LICENSE AND COLLABORATION AGREEMENT This amendment is to the License and Collaboration Agreement dated September 17, 1997 (the License Agreement) between Maxygen, Inc., 515 Galveston Drive, Redwood City, CA 94063 (hereinafter referred to as MAXYGEN) and Novo Nordisk A/S, Novo Alle, DK-2880 Bagsvaerd, Denmark (hereinafter referred to as NOVO NORDISK). This amendment is effective as of the last date signed below. MAXYGEN and NOVO NORDISK hereby amend the Agreement as follows: I) The following definitions from the Agreement are amended as is set forth below: The term "Industrial Protein" shall mean [*******] for production, sale, and/or use in the Novo Nordisk Field, or upon being activated in accordance with Section 7.3 hereof, a Novo Nordisk Preferred Area, but excluding [*******]. The term "NOVO NORDISK Field" shall mean the use of Shuffling for the development, production and/or sale of Industrial Proteins in the areas described in Exhibit D attached hereto, and, upon its activation in accordance with the provisions of Section 7.3 hereof, in each Preferred Area, excluding, however, such use for the purpose of [*******], and excluding existing specific projects of MAXYGEN as specified in Exhibit E. The NOVO NORDISK Field shall not include the cure, treatment, mitigation, prevention or diagnosis of human or animal diseases, except as set forth in Section 2.2 below. II) The following new definitions are added to the Agreement: The term "Metabolic System" shall mean [*******]. The term "Circular PCR" shall mean new methods (as of 18 April 1995) for DNA amplification reactions performed on overlapping DNA fragment with complementary hybridizable ends allowing the fragments to anneal in the form of a circle. The term "MAXYGEN Circular PCR Patents" shall mean the patents and applications listed in Exhibit I and any patents issued on any such patent applications and including any reissued patents, re-examined patents, divisions, renewals, continuations-in-part, substitutions, extensions or foreign counterparts thereof. The term "Shuffling" shall mean new methods (as of 17 February 1994) for recombination of genetic material for creation and screening of genetic diversity, comprising methods included in or similar to those described in Exhibits C and F. Shuffling also encompasses the use of Circular PCR methods included in or similar to those described in patents and applications listed in Exhibit 1. Shuffling may be either in vivo or in vitro, but does not include any Assay Technology. [*******]. The term "Shuffled," when referring to nucleic acid compositions such as genes, shall mean any such compositions which have been obtained by the process of Shuffling. The term "Patent Prosecution Activities" shall mean patent filing, prosecution and maintenance, including the defense of interferences, oppositions, and similar proceedings. The term "Chemical" or "Chemicals" as used in Exhibit D herein shall mean [*******] used in the products or processes defined in Exhibit D. III) The following sections of the Agreement are amended as is set forth below: 2.1 Grant of Licenses from MAXYGEN to NOVO NORDISK. MAXYGEN hereby grants ---------------------------------------------- to NOVO NORDISK a worldwide, royalty-bearing (in accordance with Section 3 below), exclusive, irrevocable (except as otherwise stated in Section 9) and sublicensable (except for the restrictions set forth in item 13, Exhibit D) right and license to practice the MAXYGEN Patents, the MAXYGEN Know-How, the MAXYGEN Future Patents, the Jointly Owned Patents and the MAXYGEN Breakthrough Inventions, to make, have made, use, promote, market, distribute and sell Licensed Products within the NOVO NORDISK Field and any NOVO NORDISK Preferred Areas which may be activated in accordance with Section 7 hereof. This license grant expressly includes the right to manufacture Licensed Products by [*******] for the purpose of using, promoting, marketing and distributing Licensed Products in the NOVO NORDISK Field. 6. PATENT PROSECUTION 6.1 Patent Prosecution. ------------------ (a) MAXYGEN Patents, MAXYGEN Future Patents, NOVO NORDISK Patents, NOVO NORDISK Future Patents, and MAXYGEN Breakthrough Inventions: With regard to the MAXYGEN Patents, MAXYGEN Future Patents, MAXYGEN Break- through Inventions, NOVO NORDISK Patents, and NOVO NORDISK Future Patents, the licensor shall inform about and, to the extent reasonably practicable as specified below, give the licensee a reasonable opportunity to discuss and influence Patent Prosecution Activities. The licensor shall nonetheless have the final decision as to any such matter unless the Working Group shall decide otherwise. Such major prosecution events shall include official communications with the examining division at the European Patent Office and the United States' Patent and Trademark Office in the form of patent applications, including divisional applications, 2 reissue applications, continuations and continuations-in part, requests for examination, including reexamination, written opinions, amended claims, final rejections, and notices of allowance. MAXYGEN and NOVO NORDISK shall each be responsible to utilize commercially reasonable efforts to file, prosecute and maintain, at its own expense, all patents and patent applications included in the exhibits to this Agreement. The licensor shall use reasonably diligent efforts to provide to licensee such intended communications from the licensor to the examining division no later than two (2) weeks prior to the filing of the actual official communication. The licensor shall use reasonably diligent efforts to disclose to the licensee within two (2) weeks from its receipt such communications from the examining division. (b) Jointly Owned Patents: Decisions on filing, prosecution and maintenance of Jointly Owned Patents shall be as described in section 8.7 herein. Notwithstanding section 8.7, for Jointly Owned Patents describing and claiming Shuffled genes encoding Industrial Proteins, Industrial Proteins encoded by Shuffled genes and uses of such Industrial Proteins, NOVO NORDISK shall be responsible, at its sole expense, for Patent Prosecution Activities with respect to inventions made by MAXYGEN or NOVO NORDISK or jointly by the Parties in connection with the Development Program. However, if a Jointly Owned Patent solely claims uses in the MAXYGEN Field of such Shuffled genes or of proteins encoded by the Shuffled genes, then MAXYGEN shall be responsible at its sole expense for such Patent Prosecution Activities. With regard to all other Jointly Owned Patents, responsibility for Patent Prosecution Activities shall be as described in section 8.7. 6.2 Enforcement. ----------- (a) MAXYGEN Patents, MAXYGEN Future Patents, MAXYGEN Breakthrough Inventions, NOVO NORDISK Patents, and NOVO NORDISK Future Patents: In the event that any MAXYGEN Patent, MAXYGEN Future Patent, MAXYGEN Breakthrough Invention, NOVO NORDISK Patent, or NOVO/NORDISK Future Patent may be infringed or misappropriated by a third party in any country or is subject to a declaratory judgment action arising from such infringement or misappropriation in such country, or is the subject of an interference, re-examination, reissue or opposition 3 proceeding, the Party becoming aware thereof shall promptly notify the other Party thereof. NOVO NORDISK retains all rights for enforcement of the NOVO NORDISK Patents, and/or NOVO NORDISK Future Patents within the NOVO NORDISK Field. Similarly, MAXYGEN retains all rights for enforcement of the MAXYGEN Patents, MAXYGEN Future Patents, and MAXYGEN Breakthrough Inventions within the MAXYGEN Field. The licensee shall have the right to enforce, at its own expense, licensed patents within its field, i.e. the MAXYGEN Field or the NOVO NORDISK Field, as appropriate, subject to the following provisions: In cases where there is a reasonable suspicion of a commercially significant infringement in the licensed field, the licensee shall first consult the licensor and the Parties shall jointly develop and implement a plan to abate the infringement. The Parties shall consider existing and potential infringement suits by the licensor against a third party relating to the patents licensed under this Agreement, and attempt to coordinate any such enforcement efforts relating to the licensed patents without limiting the rights granted to the licensee. Should one Party be unwilling to cooperate in the development of a plan for abatement of infringement, it shall so notify the other Party in writing, and the other Party may proceed on its own with any necessary work, including the selection and use of outside counsel in order to develop such a plan. Should the licensor and licensee jointly decide to initiate an infringement suit, the Parties will cooperate with each other in the litigation, with each Party maintaining its ability to retain counsel at their own expense. Furthermore, the Parties shall both have access to copies of all documents filed in, and all written communications in any such infringement suits, with decisions regarding conduct of the litigation being made jointly between the Parties. Decisions on settlement shall be made jointly between the Parties, and neither Party shall enter into a settlement agreement without the consent of the other Party, which consent shall not be unreasonably withheld. Neither Party shall, without the other Party's consent make any settlement of any litigation or claim which would result in any grant to any third party of any rights that would diminish the rights of the other Party. Any cash recovery by such Party received as a result of any such claim, suit or proceeding shall be used first to reimburse the Parties hereto for all expenses (including court costs, attorneys and professional fees and other expenses of all kinds) incurred in connection with such claim, suit or proceeding. After reimbursement of such expenses, twenty-five percent (25%) of the remainder shall be paid to the licensor and seventy-five percent (75%) retained by the licensee. In situations where there is a reasonable suspicion of a commercially significant infringement in the licensed field, if the Parties cannot agree on a plan to abate such 4 infringement within one hundred eighty (180) days of receiving notice of such infringement from the licensee, the licensee may, at its expense, initiate such suit to abate such infringement or misappropriation; provided the licensee may not enter into any settlement without the prior consent of the licensor, which consent shall not be unreasonably withheld, and may not make any statement which admits that any of the patents licensed pursuant to this Agreement are invalid or unenforceable. Notwithstanding the 180 (one hundred and eighty) days' period referred to in the preceding sentence, the licensee shall be entitled to commence legal proceedings against the alleged infringer(s) even before expiry of said period insofar as the licensee can demonstrate that such action is necessary in order to preserve the licensee's ability to obtain an injunction, whether on a final or preliminary basis. In the event the licensee brings such an infringement suit, the licensor shall become a party to the lawsuit and shall assist the licensee in the lawsuit at licensee's expense and using counsel reasonably acceptable to licensee. Any cash recovery by such Party received as a result of any such claim, suit or proceeding shall be used first to reimburse the Parties hereto for all expenses (including court costs, attorneys and professional fees and other expenses of all kinds) incurred in connection with such claim, suit or proceeding. After reimbursement of such expenses, twenty- five percent (25%) of the remainder shall be paid to the licensor and seventy- five percent (75%) retained by the licensee. If MAXYGEN notifies NOVO NORDISK that it intends to make an initial public offering of MAXYGEN shares, then for a period of six (6) months from such notice NOVO NORDISK shall not commence any new action or proceeding against any third party with respect to any MAXYGEN patent without the prior written consent of MAXYGEN; provided, however, NOVO NORDISK may respond to and participate in any patent infringement action or other similar proceeding which has commenced as of the date of such notice or which may be commenced by a third party. Notwithstanding the 180 (one hundred and eighty) days' period referred to in the preceding sentence, the licensee shall be entitled to commence legal proceedings against the alleged infringer(s) even before expiry of said period insofar as the licensee can demonstrate that such action is necessary in order preserve the licensee's ability to obtain an injunction, whether on a final or preliminary basis. In addition, MAXYGEN may not use this paragraph to require NOVO NORDISK to delay any new actions or proceedings if more than 90 days have lapsed after NOVO NORDISK has notified MAXYGEN of its reasonable suspicion of a commercially significant infringement in the NOVO NORDISK Field of the MAXYGEN Patents, MAXYGEN Future Patents, and/or the MAXYGEN Breakthrough Inventions. (b) Jointly Owned Patents: In the event MAXYGEN or NOVO NORDISK becomes aware of any actual or threatened infringement of any Jointly Owned Patents, that Party shall promptly notify 5 the other and shall promptly discuss how to proceed in connection with such actual or threatened infringement. In the case of an act of infringement in the NOVO NORDISK Field, should MAXYGEN not wish to participate in such a proceeding, NOVO NORDISK shall have the right to proceed alone, at its expense, and may retain any cash recovery; provided, at the request and expense of NOVO NORDISK. MAXYGEN agrees to cooperate and join in any proceedings in the event that a third party asserts or that a Court finds that MAXYGEN is necessary or indispensable as a named party to such proceedings; provided, NOVO NORDISK may not enter into any settlement with respect to any of the Jointly Owned Patents without the prior consent of MAXYGEN, which consent shall not be unreasonably withheld. In the case of an act of infringement in the MAXYGEN Field, should NOVO NORDISK not wish to participate in such a proceeding, MAXYGEN shall have the right to proceed alone, at its expense, and may retain any cash recovery; provided, at the request and expense of MAXYGEN, NOVO NORDISK agrees to cooperate and join in any proceedings in the event that a third party asserts or that a Court finds that NOVO NORDISK is necessary or indispensable as a named party to such proceedings; provided, MAXYGEN may not enter into any settlement with respect to any of the Jointly Owned Patents without the prior consent of NOVO NORDISK, which consent shall not be unreasonably withheld. Neither Party may make any statement as to the invalidity and/or unenforceability of the Jointly Owned Patents. 8.7 Filing, Prosecution and Maintenance of Jointly Owned Patents. For ------------------------------------------------------------ Jointly Owned Patents describing and claiming Shuffled genes, proteins encoded by Shuffled genes and uses of such proteins, NOVO NORDISK shall be responsible, at its sole expense, for Patent Prosecution Activities with respect to inventions made by MAXYGEN or NOVO NORDISK or jointly by the Parties. For all other inventions, the Parties will agree upon which of them shall be responsible for Patent Prosecution Activities of the Jointly Owned Patents, except that in situations where all inventors are employed by the same Party, that Party shall be responsible for Patent Prosecution Activities of such Jointly Owned Patents. Except for Jointly Owned Patents describing and claiming Shuffled genes, proteins encoded by Shuffled genes and uses of such proteins, the expenses of the Patent Prosecution Activities shall be equally shared by the Parties unless one of the Parties assigns all of its rights, on a country by country basis, to the other Party. In each case, the Party responsible for Patent Prosecution Activities shall assure that the other Party will have the opportunity to provide meaningful and substantive review and comment on all major prosecution events, and shall consider such 6 comment in making decisions relating to the Patent Prosecution Activities. Such major prosecution events shall include all substantive official communications (such as patent application filings, including divisionals, reissue applications, filing of continuations and continuations-in-part, requests for examination or reexamination, responses to written opinion and office actions, claim amendments and notices of allowance), with the examining division at the European Patent Office, the United States' Patent and Trademark Office, and the patent offices of other major countries in which Jointly Owned Patents are filed. IV) Original section 6.2 of the Agreement is retained and renumbered as section 6.3. 7 V) The following Exhibits are amended as is set forth below. EXHIBIT A Development Program ------------------- [*******] [*******] [Exhibit A describes the Development Program under this Agreement. Exhibit A describes the status of certain research conducted prior to amendment of this Agreement and future development plans of the parties.] 8 EXHIBIT C (MAXYGEN Patents and Patent Applications) ----------------------------------------- [*******] [Exhibit C identifies the Maxygen Patents and Patent Applications licensed to Novo Nordisk under this Agreement.] 10 EXHIBIT D [*******] [Exhibit D identifies the specific areas within the Novo Nordisk Field.] 11 VI) The following new Exhibit is added to the Agreement. EXHIBIT I MAXYGEN Circular PCR Patents ---------------------------- Maxygen Case No. Townsend Case No. Patent/Appl. No. Filing Date [*******] VII. All other sections of the Agreement including the other exhibits are unchanged. The previous amendments to the Agreement dated June 29, 1998 and July 19, 1998 are also unchanged by this amendment. Each person signing below and each Party on behalf such person executes this Agreement warrants that he, she or it, as the case may be, has the authority to amend the Agreement. MAXYGEN, INC. NOVO NORDISK A/S By: /s/ Russell Howard By: /s/ Soren Carlsen -------------------- ---------------------------- Russell J. Howard Soren Carlsen President & C.E.O. Corporate Vice President Enzyme Research Date: 4-12-99 Date: 4-19-99 ------------------- ----------------------------- EXHIBIT A (Development Program) [*******] [Exhibit A summarized the original work plan under this Agreement. The work plan was replaced in the April 19, 1999 amendment to this Agreement.] EXHIBIT B Specific projects of NOVO NORDISK include: * the use of Shuffling for development of [*******] * the use of Shuffling for development of Industrial Proteins for use in [*******] If NOVO NORDISK should use MAXYGEN PATENTS, MAXYGEN FUTURE PATENTS, MAXYGEN Break-through Inventions or MAXYGEN Know-How in the development of any product resulting from the foregoing specific projects, it shall be royalty-bearing, as provided in this Agreement. EXHIBIT C (MAXYGEN Patents and Patent Applications) ----------------------------------------- [*******] [Exhibit C listed the Maxygen Patents and Patent Applications under this Agreement. Exhibit C was replaced in the April 19, 1999 amendment to this Agreement.] EXHIBIT D [*******] [Exhibit D identified the Novo Nordisk Field under this Agreement. Exhibit D was replaced in the April 19, 1999 amendment to this Agreement.] EXHIBIT E Projects and Project Areas within the NOVO NORDISK Field to which NOVO NORDISK cannot be granted exclusivity by virtue of prior contractual relationships and specific documented MAXYGEN discussions with other parties prior to the date of this Agreement: * Use of Shuffling for development of [*******]. EXHIBIT F DK 0907/95, DK 1047/95, and WO 97/07205; (NN 4439: in vivo gene shuffling) DK 0988/95, and WO 97/09446; (NN 4542: phage display in detergents) DK 0018/96, and WO 97/00014; (NN 4632: in vivo diversity generation) DK 1471/96, and DK 0592/97; (NN 4833: in vivo recombination in bacteria) DK 0307/97, DK 0434/97, and DK 0625/97; (NN 4859: in vitro recombination) DK 0304/97, DK 0432/97, DK 0624/97; (NN 5113: directed in vitro recombination) DK 0306/97, DK 0433/97, and DK 0623/97; (NN 5114: low-identity in vitro recombination) WO 96/10084 (NN 4126: Process for production of secondary metabolites - nonexclusive) EXHIBIT G [*******] [Exhibit G identified the Novo Nordisk Preferred Areas under this Agreement. Exhibit G was replaced in the July 29, 1998 amendment to this Agreement.] EXHIBIT H Additional rights of NOVO NORDISK pursuant to Section 2.1 and retained rights of NOVO NORDISK pursuant to Section 2.2 include: The improvement of [*******] for use in the manufacture or synthesis of [*******]. Any resulting products that are invented or developed by or on behalf of NOVO NORDISK or its Affiliates or sublicensees through application of Shuffling that are covered by MAXYGEN Patents, MAXYGEN Future Patents or MAXYGEN Break-through Inventions, shall be royalty-bearing in accordance with the provisions of Section 3 of this Agreement. EX-10.12 5 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT Exhibit 10.12 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN PIONEER HI-BRED INTERNATIONAL, INC. AND MAXYGEN, INC. December 23, 1998 * CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AND THE NON- PUBLIC INFORMATION HAS BEEN FILED SEPARATELY WITH THE SEC. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is entered into as of December 23, 1998, by and between PIONEER HI-BRED INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Iowa at 800 Capital Square, 400 Locust Street, Des Moines, Iowa 50309 ("PIONEER") and MAXYGEN, INC., a corporation organized and existing under the laws of the State of Delaware, located at 3410 Central Expressway, Santa Clara, California 95051 ("MAXYGEN"). WHEREAS, MAXYGEN has expertise in the rearrangement of DNA to produce and discover genes utilizing proprietary technologies; and WHEREAS, PIONEER has expertise in the breeding and development of proprietary crop species; and WHEREAS, PIONEER and MAXYGEN wish to enter into this Agreement in order to perform research together to discover and develop new genes that can be used by PIONEER to produce improved seeds and agricultural products; and WHEREAS, MAXYGEN will perform research on projects funded and supported by PIONEER in order to discover and develop such genes and will license the results of such research to PIONEER for the purpose of the development, manufacture and sale of products by PIONEER. MAXYGEN will also modify and adapt the MAXYGEN Intellectual Property -1- as set forth herein in order to facilitate the R&D Program and will work with PIONEER to develop and modify screening methods for each project as needed; and WHEREAS, PIONEER will perform research to develop products and technology based on the research results discovered by MAXYGEN and/or PIONEER and will grant to MAXYGEN a license to the results of such research for the purpose of the development, testing, manufacture and sale of products by MAXYGEN. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the parties hereby agree as follows: SECTION 1. DEFINITIONS. ------------------------ 1.1 "Affiliate" means any corporation, firm, limited liability company, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with a party to this Agreement. Notwithstanding the actual control exercised by PIONEER, Optimum Quality Grains, L.L.C., is to be considered an Affiliate of PIONEER. As used in this Section, "control" means ownership, directly or through one or more Affiliates, of 50 percent or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, or 50 percent or more of the equity interests in the case of any other type of legal entity, status as a general partner -2- in any partnership, or any other arrangement whereby a party controls or has the right to control the Board of Directors or equivalent governing body of a corporation or other entity, or if such level of ownership or control is prohibited in any country, any entity owned or controlled by or owning or controlling at the maximum control or ownership right permitted in the country where such entity exists. 1.2 "Agent" means any corporation or other entity through which PIONEER or MAXYGEN or one or more of their respective Affiliates produces, markets, or sells PIONEER or MAXYGEN Licensed Products, as the case may be. 1.3 "Benchmark Product" shall mean a product that (i) does not contain a Shuffled Gene and (ii) is not made or identified using any MAXYGEN Intellectual Property or Joint Intellectual Property (including without limitation, any method or process included therein), but which is otherwise identical to a PIONEER Licensed Product (or if no such product exists, substantially similar to a PIONEER Licensed Product) and is available in the same geographic market and time period. A Benchmark Product shall be a commercial product sold by PIONEER or its Affiliates or Agents; provided, if PIONEER or its Affiliates or Agents do not sell such a Benchmark Product, then the most comparable product sold by a third party in the applicable geographic market during the applicable time period shall be used as the Benchmark Product. By way of -3- illustration, and without limitation, the Benchmark Product for a PIONEER Licensed Product which contained one or more Shuffled Genes would be an otherwise comparable product not containing any Shuffled Genes. 1.4 "Confidential Information" means the Work Plans, and all information, including, but not limited to, Know-How, biological materials (including the PIONEER Material(s) and MAXYGEN Material(s)), and data, scientific, technical, or non-technical, business plans, and marketing and sales information disclosed by one party to the other hereunder or under the Confidentiality Agreement between MAXYGEN and PIONEER and E.I. duPont de Nemours and Company dated November 4, 1997, or under the Amendment to the Confidentiality Agreement between MAXYGEN, E.I. duPont de Nemours and Company and PIONEER dated July 27, 1998, for the purposes of the R&D Program, or to fulfill obligations under this Agreement, whether disclosed or provided in oral, written, graphic, photographic or any other form, except to the extent that such information: (i) as of the date of disclosure is known to the receiving party or its Affiliates, as shown by written documentation, other than by virtue of a prior confidential disclosure from the disclosing party to the receiving party or its Affiliates; -4- (ii) as of the date of disclosure is in, or subsequently enters, the public domain, through no fault or omission of the receiving party; or (iii) as of the date of disclosure or thereafter is obtained from a third party free from any obligation of confidentiality; or (iv) after the date of disclosure or thereafter is developed by the receiving party independent of the disclosure as shown by written documentation. 1.5 "Controls" or "Controlled" means, with respect to intellectual property, possession (other than by virtue of this Agreement and the licenses granted herein) of the ability to grant licenses or sublicenses to the other party hereto without violating the terms of any agreement or other arrangement with, or the rights of, any agreement with a third party. 1.6 "Effective Date" means December 23, 1998. 1.7 "Enabling Technology" means such specific tools, technologies and/or methods relating to [*******] as the parties may agree in writing to have MAXYGEN develop in the R&D Program in accordance with an agreed upon written Work Plan, to facilitate the development of PIONEER Licensed Products, in each case, which is designated by written agreement by the parties as Enabling Technology. -5- 1.8 "FTE" means the equivalent of one full year of work on a full time basis by a scientist or other professional possessing skills and experience necessary to carry out the R&D Program by MAXYGEN, determined in accordance with MAXYGEN's normal policies and procedures. 1.9 "Gene" means any gene selected for Shuffling in the R&D Program by the RDSC pursuant to (P)2.1D(a). 1.10 "Gene Library" means, with respect to a particular Gene, the complete collection of Gene Variants produced from the Shuffling of such Gene in connection with the R&D Program. 1.11 "Gene Variant" means any altered form of a Gene made in connection with the R&D Program which is the result of Shuffling. 1.12 [*******] 1.13 [*******] 1.14 [*******] 1.15 "Intellectual Property" means all Patent Rights and Know-How. It is understood that Intellectual Property does not include any intellectual property owned or Controlled by MAXYGEN relating to the practice of Shuffling Technology. It is further understood that Intellectual Property does not include any intellectual property owned or Controlled by MAXYGEN or PIONEER as of the -6- Effective Date or developed outside of and not in connection with the R&D Program. (a) "MAXYGEN Intellectual Property" means MAXYGEN Patent Rights and MAXYGEN Know-How. (b) "PIONEER Intellectual Property" means PIONEER Patent Rights and PIONEER Know-How. (c) "Joint Intellectual Property" means Joint Patent Rights and Joint Know-How. 1.16 "Jointly Developed" or "Jointly Invented" means any item developed or invented by both parties. If the item developed or invented is a patentable invention, such invention is jointly developed if both parties' employees or consultants are considered inventors under 35 U.S.C. (S)1 et. seq., and as -------- interpreted by the U.S. Patent and Trademark Office and the United States courts. 1.17 "Know-How" means all Research Results and all non-patented inventions, improvements, discoveries, data, instructions, processes, formulas, information (including, without limitation, chemical, physical and analytical, safety, manufacturing and quality control data and information) and trade secrets created, discovered, or developed during the Research Term and in connection with the R&D Program. It is understood that Know-How does not include any (i) Shuffling Technology or (ii) inventions within the Patent Rights. -7- (a) "MAXYGEN Know-How" means Know-How owned or Controlled by MAXYGEN or created, discovered, or developed solely by MAXYGEN in the R&D Program. (b) "PIONEER Know-How" means Know-How owned or Controlled by PIONEER or created, discovered or developed solely by PIONEER in the R&D Program. (c) "Joint Know-How" means Know-How which is created, discovered, or developed jointly by both parties in the R&D Program. 1.18 "Licensed Product" means a PIONEER Licensed Product or MAXYGEN Licensed Product. 1.19 "MAXYGEN Crops" means [*******]. 1.20 "MAXYGEN Licensed Product" means any product that is, or is derived from: (i) Plant cells, Plant parts, Plants or seeds of a MAXYGEN Crop, which (a) [*******] or (b) is identified or produced utilizing PIONEER Intellectual Property or Joint Intellectual Property; or (ii) Plant cells, Plant parts, Plants or seeds of a PIONEER Crop, which (a) incorporates or is made through the use of Research Materials permitted pursuant to (P)2.1F(f), or (b) is -8- identified or produced utilizing PIONEER Intellectual Property or Joint Intellectual Property; or (iii) any other product that (a) [*******] which Plant or organism is not a PIONEER Crop or MAXYGEN Crop, and products derived from such a Plant or other organism, or (b) is identified or produced utilizing PIONEER Intellectual Property or Joint Intellectual Property. It is understood and agreed that a MAXYGEN Licensed Product includes, without limitation, (i) a Plant, (ii) macro, micro, and molecular parts of a Plant, including, without limitation, seeds and DNA contained therein, and (iii) extracts from a Plant, whether in unprocessed or processed form, including [*******] in each case, that is or is from a MAXYGEN Crop in (i), above, or a PIONEER Crop in (ii), above. 1.21 "Net Sales" means, for a particular PIONEER Licensed Product, the gross monies or the monetary equivalent of all other consideration in any form, whether or not invoiced, billed by or due to PIONEER or its Affiliates, or Sublicensees for the use, sale, lease or transfer of such PIONEER Licensed Product(s); less qualifying costs directly attributable to such use, sale, lease, or transfer, to the extent actually allowed and borne by PIONEER. Such qualifying costs shall be limited to [*******] costs for the following: (i)credits or refunds, not exceeding the original or customary billing or invoice amount, for such claims or returns, -9- (ii) packaging, (iii) returnable containers, (iv) prepaid transportation insurance premiums, (v) prepaid outbound transportation expenses, (vi) discounts, in amounts customary in the trade, for quantity purchases, cash payments, prompt payments, wholesalers, and distributors, and (vii) taxes, including sales, use, excise, import, export, and other taxes or duties (excluding taxes on income), separately billed or invoiced, and borne by PIONEER, imposed by a government agency with the authority to do so on such use, sale, lease or transfer. All sales of PIONEER Licensed Products shall be recorded in U.S. dollars and recognized per U.S. Generally Accepted Accounting Principles (GAAP), consistently applied. A PIONEER Licensed Product used, sold, leased, or transferred by gift or for consideration other than money shall be deemed to have a monetary value of the higher of [*******]. In the event that any PIONEER Licensed Product(s) are sold, leased or transferred between PIONEER and one of its Affiliates, Sublicensees, or Agents or between two of its Affiliates, Sublicensees, or Agents or any PIONEER Licensed Product is used by PIONEER or one of its Affiliates, Sublicensees, or Agents, the money or monetary equivalent of such PIONEER Licensed Product(s) shall be the higher of [*******]. PIONEER Licensed Product(s) used in testing, clinical or feeding trials, or as marketing samples to develop or promote the PIONEER Licensed Product(s) shall not be included as PIONEER Licensed Product(s) -10- used, sold, leased, or transferred; provided the PIONEER Licensed Product(s) are supplied to the user at no cost. For purposes of determining Net Sales, sales of PIONEER Licensed Products shall not be discounted due to any product "bundling" unless PIONEER and its Affiliates, Agents and Sublicensees do not offer the PIONEER Licensed Product outside of a "bundle". In the case of discounts on "bundles" of products or services which include PIONEER Licensed Products, PIONEER may with notice to MAXYGEN calculate the Net Sales for the applicable PIONEER Licensed Product by discounting the bona fide list price of a PIONEER Licensed Product by no more than the average percentage discount of all products of PIONEER and/or its Affiliates, Agents or Sublicensees in a particular "bundle", calculated as follows: Average percentage discount on a = (1 - A/B) x 100 particular "bundle" where A equals the total discounted price of a particular "bundle" of products, and B equals the sum of the undiscounted bona fide list prices of each unit of every product in such "bundle". PIONEER shall provide MAXYGEN documentation, reasonably acceptable to MAXYGEN, establishing such average discount with respect to each "bundle". 1.22 "Patent Rights" means (i) all patents and patent applications that claim an invention conceived and reduced to practice by MAXYGEN and/or PIONEER during the Research Term and in -11- connection with the R&D Program or conceived in connection with the R&D Program and reduced to practice within twelve (12) months after the end of the Research Term, and (ii) any divisions, continuations, continuations-in-part, and patents that issue therefrom, reissues, reexaminations, extensions or other governmental actions that extend any of the subject matter of the patent applications or patents in (i) above, and any substitutions, confirmations, registrations or revalidations of any of the foregoing, in each case, which is owned or Controlled, in whole or part, by license, assignment or otherwise by MAXYGEN or PIONEER during the term of this Agreement. (a) "MAXYGEN Patent Rights" means Patent Rights owned or Controlled solely by MAXYGEN. (b) "PIONEER Patent Rights" means Patent Rights owned or Controlled solely by PIONEER. (c) "Joint Patent Rights" shall mean Patent Rights owned or Controlled by both PIONEER and MAXYGEN. 1.23 [*******] 1.24 "PIONEER Crop" means [*******]. 1.25 "PIONEER Material" or "MAXYGEN Material" means the tangible assays or biological materials, and protocols for using the same, provided by PIONEER or MAXYGEN, respectively, to the -12- other in order so that the recipient can perform its obligations under the R&D Program. All improvements to such assays, and derivatives and progeny of any such biological materials, whether made by the recipient or the provider, shall be considered to be owned by the provider of the original materials. By way of illustration and without limitation, improvements to an assay provided by PIONEER to MAXYGEN, whether made by MAXYGEN or PIONEER, would be considered PIONEER Materials and owned by PIONEER. 1.26 "PIONEER Licensed Product" means any product that is, or is derived from, Plant cells, Plant parts, Plants or seeds of a PIONEER Crop that: (a) [*******], or (b) is identified or produced utilizing MAXYGEN Intellectual Property or Joint Intellectual Property. It is understood and agreed that a PIONEER Licensed Product includes, without limitation, (i) a Plant, (ii) macro, micro, and molecular parts of a Plant, including, without limitation, seeds and DNA contained therein, and (iii) extracts from a Plant, whether in unprocessed or processed form, including [*******] in each case, that is or is from such a PIONEER Crop. 1.27 "PIONEER Product Technology" means such specific technologies, tools, assays and/or methods as the parties may agree in writing to have MAXYGEN develop in the R&D Program in accordance with an agreed upon written Work Plan, to facilitate PIONEER's development and testing of PIONEER Licensed Products, in each case, which is designated in writing by the RDSC as PIONEER Product Technology pursuant to (P)2.2A. -13- 1.28 "Plant" means a monocotyledonous or dicotyledonous plant that may or may not currently represent a commercial crop, excluding any organisms that are not monocots or dicots, whether unicellular or multicellular, and whether or not such organism can perform photosynthesis. 1.29 "Product Premium" means with respect to a particular PIONEER Licensed Product, the difference between the Product Price of the PIONEER Licensed Product and the Product Price of the applicable Benchmark Product in the same geographic market and time period. It is understood and agreed that the Product Premium shall also include any other consideration (e.g., technology access fees, up-front payments, and licensing fees) which PIONEER and its Affiliates, Agents and Sublicensees receive for the sale of a PIONEER Licensed Product as compared to the applicable Benchmark Product. 1.30 "Product Price" means average, actual price of a PIONEER Licensed Product or Benchmark Product, as the case may be, sold in a particular geographic market during a particular time period. 1.31 "R&D Program" means the research and development program to be conducted by MAXYGEN and PIONEER pursuant to Section 2 and as described in the Work Plan. 1.32 "R&D Steering Committee" or "RDSC" means the committee created pursuant to Section 2 hereof. -14- 1.33 "Research Data" means all data, inventions, and any other information obtained, developed, conceived and reduced to practice, or derived in the course of performance of the R&D Program. 1.34 "Research Materials" mean all tangible property, including without limitation, assays, invented, obtained, discovered, developed, or derived, or the function or utility of which is discovered or determined, in the course of performance of the R&D Program. It is understood and agreed that the Research Materials shall not include any PIONEER Materials or MAXYGEN Materials, and that any assay and/or biological materials developed solely by PIONEER or solely by MAXYGEN for use in the R&D Program shall be deemed to be PIONEER Materials or MAXYGEN Materials, respectively. It is understood and agreed that all Gene Variants shall be Research Materials. 1.35 "Research Results" means all Research Data and Research Materials collectively, including without limitation, all Enabling Technology. A. "MAXYGEN Research Results" means Research Results invented or developed solely by MAXYGEN. B. "PIONEER Research Results" means Research Results invented or developed solely by PIONEER. C. "Joint Research Results" means Research Results invented or developed jointly by both parties. -15- 1.36 "Research Term" shall mean the period commencing on the Effective Date and, unless extended by written agreement of the parties pursuant to (P)2.1E(b) or sooner terminated as provided herein, terminating on the fifth anniversary of the Effective Date. 1.37 "Shuffle," "Shuffled" and "Shuffling" mean the recombination and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity using intellectual property and/or tangible property owned or Controlled by MAXYGEN. 1.38 "Shuffled Gene" means (i) any Gene Variant that meets the applicable activity criteria established by the RDSC, which PIONEER selects to commercially develop, and which the RDSC designates pursuant to (P)2.1D(f), (ii) any PIONEER SGD, and (iii) any MAXYGEN SGD. 1.39 "Shuffled Gene Derivative" means any modified form of a Shuffled Gene, which modification is developed from or made to the Shuffled Gene by any means, including without limitation, any codon modified variant, splice variant, mutation, derivative or variant of a Shuffled Gene, and any fragment(s) of the preceding. (a) "MAXYGEN Shuffled Gene Derivative" or "MAXYGEN SGD" means a Shuffled Gene Derivative which modification is developed or made by MAXYGEN or its Affiliates or Sublicensees. -16- (b) "PIONEER Shuffled Gene Derivative" or "PIONEER SGD" means a Shuffled Gene Derivative which modification is developed or made by PIONEER or its Affiliates or Sublicensees. 1.40 "Shuffling Technology" means techniques, methodologies, processes, materials and/or instrumentation useful for Shuffling, and generally applicable screening techniques, methodologies, or processes of using the resulting genetic material to identify potential usefulness. It is understood and agreed that specific assays developed for screening Gene Variants for a particular biological or chemical activity are not included in Shuffling Technology. 1.41 "Sublicensee" means an entity to whom PIONEER or MAXYGEN, as the case may be, has granted a license or sublicense to make, have made, import, use, sell, offer for sale, or otherwise exploit Licensed Products. 1.42 "Sublicense Payments" shall mean all consideration (other than pass- through royalties on Net Sales of PIONEER Licensed Products by Sublicensees due to MAXYGEN pursuant to (P)4.3A)received by PIONEER or MAXYGEN, as the case may be, and their respective Affiliates and Agents from Sublicensees in respect of any grant of rights to propagate, use or sell or otherwise distribute Licensed Products (including, without limitation, technology access fees, milestone fees, payments for the sale of or right to sell Licensed Products, and license and/or sublicense fees, whether such consideration is in cash, payment in kind, exchange or another form). Notwithstanding the above, Sublicense Payments shall not -17- include any amounts received by MAXYGEN or PIONEER, as the case may be, from a third party for [*******]. 1.43 "Trait" means a characteristic of a PIONEER Crop associated with one or more genes sourced from any organism in any manner, that is manipulated or tracked by PIONEER or its Affiliates or Sublicensees as part of the PIONEER Licensed Product development process. 1.44 "Trait Categories" means, as shown in Appendix B, the areas of interest from which the projects to be conducted pursuant to the R&D Program will be selected and for which licenses under this Agreement will be granted. In particular, the areas include, for the PIONEER Crops: [*******]. 1.45 "Work Plan" means a written plan approved by the R&D Steering Committee describing the activities to be carried out during each 12 month period of the R&D Program, as modified from time to time by the parties. The Work Plan for the twelve (12) month period starting on the Effective Date is attached hereto as Appendix A. 1.46 The listed Appendices are: A. Appendix A - Work Plan for 1998-1999; and B. Appendix B - Trait Categories in PIONEER Crops. -18- SECTION 2. R&D PROGRAM. ----------------------- 2.1 Implementation of the R&D Program. --------------------------------- A. Basic Provisions of Program. --------------------------- (a) The primary objective of the R&D Program shall be the development of genes encoding enhanced or new Traits for PIONEER Crops within the applicable Trait Categories in order to develop new PIONEER Licensed Products. MAXYGEN and PIONEER shall use their reasonable efforts to conduct the research activities set forth in the Work Plan, and to provide PIONEER Materials and MAXYGEN Materials as set forth therein. (b) In carrying out the R&D Program, MAXYGEN shall devote an average of [*******] FTEs per year for each of the five years of the Research Term ("Staffing Level"), and PIONEER shall pay MAXYGEN for the services of such FTEs as set forth herein. At the request of PIONEER, MAXYGEN will in good faith consider and discuss proposed increases or decreases to the Staffing Level; provided, however, that the Staffing Level shall remain at [*******] FTEs, unless the parties, in their sole discretion, agree in writing to different staffing levels. Any increase or decrease to the Staffing Level agreed to by the parties shall be reflected in the relevant Work Plan and budget associated with such Work Plan. -19- (c) MAXYGEN and PIONEER shall each use reasonable efforts to perform such tasks as are set forth to be performed by the respective party in the relevant Work Plan, and to provide such facilities, materials, equipment, and assay methods, as are necessary to perform the research activities set forth in the Work Plans. (d) It is understood and agreed that MAXYGEN shall not be obligated to utilize on average per year more than [*******] FTEs in the R&D Program. It is further understood that PIONEER shall be responsible for the expense of its own research activities in the R&D Program that are not performed at MAXYGEN. B. Collaborative Efforts and Reports. --------------------------------- (a) The parties agree that the successful execution of the R&D Program will require the collaborative use of both parties' areas of expertise. The parties shall keep the RDSC fully informed about the status of the portions of the R&D Program they respectively perform. Without limiting the foregoing, each party shall furnish to the RDSC quarterly written reports within 30 days after the end of each quarterly period, describing the progress of its activities in connection with the R&D Program in reasonable detail, including: (i) a detailed accounting of the FTEs used, (ii) a reasonably detailed synopsis of the screening and testing of Gene Variants and Shuffled Genes, and the development of Shuffled Genes and PIONEER Licensed Products, and (iii) a description of -20- Intellectual Property arising from the R&D Program. It is understood and agreed that reports regarding the development and commercialization of PIONEER Licensed Products outside the scope of the R&D Program shall be subject to (P)5.3 below, and that reports regarding the development and commercialization of MAXYGEN Licensed Products outside the scope of the R&D Program shall be subject to (P)5.4 below. (b) MAXYGEN and PIONEER shall cooperate in the performance of the R&D Program and, subject to any confidentiality obligations to third parties, shall exchange information and materials as necessary to carry out the R&D Program, pursuant to the provisions of this Agreement. Each party will attempt to accommodate any reasonable request of the other party to send or receive personnel for purposes of discussing the R&D Program. Such visits and access will be at agreed times, have defined purposes, be of agreed limited duration and be scheduled in advance. The requesting party will bear the travel and lodging costs of any such personnel. It is understood that any such visiting personnel may be subject to reasonable restrictions to protect intellectual property outside the R&D Program and the rights of third parties, which may include sequestration from research projects outside of the R&D Program. (c) During the Research Program and for a period of three (3) years thereafter, MAXYGEN and PIONEER shall maintain -21- records of the R&D Program (or cause such records to be maintained) in sufficient detail and good scientific manner as will properly reflect all work done in the R&D Program and results achieved in the performance of the R&D Program; provided, that laboratory notebooks relating to activities conducted during and in connection with the R&D Program shall be retained, at a minimum, for the term of the Agreement. Each party shall use reasonable efforts to provide to the other pertinent Research Data generated by or on behalf of such party in connection with the R&D Program as the other party may reasonably request. Such Research Data shall include, without limitation: all results obtained as a result of activities conducted pursuant to (P)2.1D(d) and (e), and all results with respect to (i) any Gene Variants which had activity meeting the applicable criteria established by the RDSC, (ii) all results of all assays in which Gene Variants or protein pools, as the case may be, demonstrated such activity, and (iii) the levels of such activity. It is understood that nothing herein shall require, or be construed to require, MAXYGEN to disclose to PIONEER any Shuffling Technology, except to the extent necessary for filing patent applications claiming Shuffled Genes. -22- C. Work Plans. ---------- (a) For each 12-month period during the Research Term after the period covered by the initial Work Plan of Appendix A, a Work Plan shall be prepared by MAXYGEN and PIONEER and approved by the RDSC no later than 60 days before the end of the then current 12-month period. Absent agreement by the parties, MAXYGEN and PIONEER shall continue to conduct research activities within the scope of the projects set forth in the previous Work Plan, within the bounds of the then currently available FTEs. (b) Each Work Plan shall, without limitation, set forth specific, jointly-defined research and development objectives, research projects within applicable Trait Categories for PIONEER Crops, research projects relating to Enabling Technology and/or PIONEER Product Technology and resource allocations, and shall be designed to facilitate the earliest practical development and identification of new Shuffled Genes associated with applicable Trait Categories for PIONEER Crops. (c) The RDSC shall have the authority to redirect the activities to be conducted in the R&D Program within and among the Trait Categories, and to reallocate the FTEs in support of such activities. (d) If the RDSC is unable to agree as to the terms of a Work Plan for any given 12-month period by the date provided -23- in subsection (a), above, then the matter shall be addressed as provided in Section 13, below. (e) MAXYGEN shall have no obligation to conduct any research in the R&D Program in any Trait Category or PIONEER Crop except as expressly described in (P)2.6A or (P)2.6B below. D. Activities. ---------- (a) Selection of Genes for Shuffling. Either party may propose -------------------------------- genes to be Shuffled in the R&D Program, and the final selection of the Genes which will be Shuffled will be made by the RDSC. PIONEER may also propose the Shuffling of genes that PIONEER has licensed from a third party which PIONEER does not have the right to sublicense to MAXYGEN for the development and commercialization of MAXYGEN Licensed Products. At such time as either party proposes a gene for Shuffling, it shall inform the RDSC, to the extent it is able to do so without breaching any confidentiality obligations, of all rights which it has to use and sublicense such gene, and any restrictions or limitations thereon, and any information of which it is aware with respect to third party patent applications or patents which may relate to the use of the gene in the R&D Program and/or the development or commercialization of Licensed Products; provided, neither party shall have any obligation to provide the RDSC with any document which would result in a breach of the attorney/client privilege with respect thereto. The RDSC shall have the sole authority to -24- select the Genes which will be Shuffled in the R&D Program. While the RDSC may consider [*******] for both PIONEER and MAXYGEN, the primary criteria that the RDSC shall use to select Genes for Shuffling shall be [*******]. It is understood and agreed that where there is more than one gene which could be Shuffled for a particular purpose, unless there are material issues relating to [*******], the RDSC shall select for Shuffling a Gene for which the proposing party has the right to sublicense. It is further understood and agreed that the RDSC shall use all reasonable efforts to identify and select for Shuffling in each Trait Category at least [*******]. Unless otherwise agreed in writing, the RDSC shall accept or decline to accept a proposed gene as a Gene within ninety (90) days of date of receipt of the information described above. If the RDSC cannot agree on a particular Gene, the matter shall be resolved as provided for in Section 13.1A. (b) [*******] for Shuffled Genes. At such time as the RDSC selects a ---------------------------- Gene to be Shuffled in the R&D Program or within thirty (30) days thereafter, the RDSC shall prepare a written description of [*******] which a Gene Variant therefrom must meet to be considered for designation as a Shuffled Gene. Such [*******] shall in all cases reflect a reasonable commercial level of activity relevant for PIONEER Licensed Products and may be amended from time-to-time by the RDSC. -25- (c) Preparation of Gene Libraries and Protein Pools. MAXYGEN shall ----------------------------------------------- use its Shuffling Technology to prepare libraries of Gene Variants, and prepare crude or purified protein pools from expression of such libraries as set forth in the Work Plan. (d) Screening. Except in those cases where MAXYGEN provides PIONEER --------- [*******], for screening by PIONEER, MAXYGEN shall initially screen the Gene Variant libraries as set forth in the Work Plan. PIONEER shall be responsible for screening to identify optimized function in the applicable PIONEER Crop. (e) Gene Variant Pools. In the event that MAXYGEN provides to PIONEER ------------------ pools of Gene Variants for screening by PIONEER, PIONEER agrees that, notwithstanding any other provision of this Agreement, that PIONEER will not: (i) transfer such Gene Variants to any third party (except PIONEER shall have the license rights set forth in (P)3.1B with regard to Gene Variants which become Shuffled Genes); (ii) sequence any Gene Variant provided to PIONEER (except PIONEER shall have the license rights set forth in (P)3.1B with regard to Gene Variants which become Shuffled Genes); or (iii) use the Gene Variants except for screening in connection with the R&D Program during the Research Term (except PIONEER shall have the license rights set forth in (P)3.1B with regard to Gene Variants which become Shuffled Genes). Notwithstanding the above, if PIONEER wishes to conduct or have conducted any of the prohibited -26- activities in (i)-(iii) above in order to facilitate the conduct of the R&D Program (e.g., to sequence Gene Variants in order to facilitate the transfer of such Gene Variant(s) into another construct for enhanced expression), then PIONEER shall notify the RDSC, providing a written description of the activities it wishes to undertake and an explanation why it wishes to undertake such activities. [*******] shall have the authority to authorize PIONEER to conduct any or all of the foregoing for a particular purpose, and shall provide any such authorization in writing. At the end of the Research Term, PIONEER shall promptly return to MAXYGEN any remaining Gene Variants (i.e., those which have not been designated Shuffled Genes), and provide MAXYGEN written confirmation that all such Gene Variants have been returned. In the event of any conflict between this (P)2.1D(e) and any other provision of this Agreement, the terms of this (P)2.1D(e) shall govern. (f) Selection of Shuffled Genes. [*******] PIONEER may notify MAXYGEN --------------------------- that PIONEER wishes to have designated as Shuffled Genes one or more of the Gene Variants which meet the [*******] established by the RDSC, with notice to the RDSC identifying the particular Gene Variant(s). The RDSC shall have the sole authority to determine which Gene Variants shall be designated as Shuffled Gene(s), and shall make all such designations in writing, however, the RDSC shall not unreasonably withhold the designation of Gene Variants as Shuffled Genes as requested by PIONEER. -27- (g) Transfer of Clones; Limited Use. Following the selection of a ------------------------------- Shuffled Gene, MAXYGEN shall transfer to PIONEER a DNA clone containing the applicable Shuffled Gene. Except in connection with the practice of the rights granted PIONEER in (P)3.1B and as clarified in (P)3.1D(a), PIONEER shall not without the express prior written consent of MAXYGEN, (i) transfer any of the Shuffled Genes or protein pools or DNA clones supplied to PIONEER to any Affiliate, Sublicensee or third party, (ii) sequence any Shuffled Gene or protein(s) provided by MAXYGEN, or (iii) permit any other person or entity to obtain or use any of the protein pools or DNA clones supplied to PIONEER for any purpose. E. Additional Research Activities. ------------------------------ (a) In the event that prior to the end of the Research Term, the parties agree that the FTEs involved in the R&D Program cannot be productively used to conduct research on the Trait Categories, then PIONEER shall have the right to propose to MAXYGEN additional research activities to be conducted in connection with the R&D Program in new trait categories. If MAXYGEN does not have prior obligations to a third party with respect to such research activities, or have a prior intention to conduct activities relating to the proposed activities on its own behalf or with a third party, it shall notify PIONEER, and in such case, the parties shall negotiate in good faith the terms on which such research activities could be conducted in connection with the R&D Program. Such research activities will only be initiated if the parties reach written agreement on the terms -28- thereof, including without limitation, milestone payments and royalties on resulting products. (b) If it appears that one or more research projects regarding the Shuffling of Genes in the Trait Categories will not be completed by the end of the Research Term and the RDSC agrees that such research projects are near completion, PIONEER may with notice to MAXYGEN at least sixty (60) days prior to the end of the Research Term extend the Research Term with respect to such research projects for a period of [*******], or such other period as PIONEER and MAXYGEN may agree in writing (the "Extension Period"). In any such event, PIONEER shall provide FTE funding for such projects during the Extension Period equal to the average level of FTE support provided in the R&D Program for such research projects in the six (6) month period prior to the [*******] anniversary of the Effective Date, such funding to be paid to MAXYGEN on the [*******] anniversary of the Effective Date. F. Research Results. Research Results shall be treated as described ---------------- below: (a) Gene Variants. The treatment of Research Results which are Gene ------------- Variants shall depend on whether the Gene which is Shuffled to produce the applicable Gene Variant(s) is (x) [*******] ("a PIONEER Gene"), or (y) is [*******] (a "Non-PIONEER Gene"). -29- (i) If [*******], then MAXYGEN may not use the Gene Variants resulting from such Shuffling for any purpose except the conduct of the R&D Program (except such Gene Variants which become Shuffled Genes), without the prior written consent of PIONEER. (ii) If [*******], then MAXYGEN shall not use the Gene Variants resulting from such Shuffling for any purpose except the conduct of the R&D Program (except such Gene Variants which become Shuffled Genes), for a period of [*******] (the "Non-Use Period"). Notwithstanding the above, at the suggestion of a third party, during the Non-Use Period, MAXYGEN may [*******], in connection with research conducted with or on behalf of a third party. It is understood and agreed that, subject to subparagraph (iii) below, MAXYGEN shall be free to Shuffle any one or more genes not Shuffled in the R&D Program on its own behalf or on behalf of a third party outside the R&D Program, subject to the limitations in (P)2.6A. (iii) Notwithstanding (ii) above, during the R&D Program, PIONEER may propose to the RDSC the Shuffling in the R&D Program of [*******]. In such event, PIONEER shall present to the RDSC a detailed written explanation why [*******]. If the RDSC agrees, then the RDSC shall describe in writing the set of all other similar Non-PIONEER Genes (the "Non-PIONEER Gene Set") which relate to the PIONEER proposal, and, except in connection with the -30- R&D Program, MAXYGEN shall not conduct any Shuffling of [*******] during the applicable Non-Use Period. Any Gene Variants resulting from the Shuffling of any Genes in the Non-PIONEER Genes shall be treated as provided in (ii) above. (iv) PIONEER shall not have any right to use any of the Gene Variants (except such Gene Variants which become Shuffled Genes) for any use outside the R&D Program. (v) The identities of all Genes Shuffled in the R&D Program is Confidential Information of PIONEER, which shall not be disclosed except pursuant to Sections 6 or 7 below, or as otherwise agreed by PIONEER and MAXYGEN. (b) Shuffled Genes. Gene Variants which have become Shuffled Genes -------------- shall be subject to the exclusive licenses set forth in (P)3.1B and (P)3.2B, and neither MAXYGEN nor PIONEER shall disclose or use such Shuffled Genes except pursuant to such licenses. (c) Enabling Technology. Except for use in connection with the R&D ------------------- Program or as expressly permitted pursuant to the licenses in (P)3.1B and C and 3.2B and C, PIONEER or MAXYGEN shall not have any right to use or disclose Enabling Technology to any third party. -31- (d) PIONEER Product Technology. Except for use in connection with the -------------------------- R&D Program, MAXYGEN shall have no right to use or disclose any PIONEER Product Technology to any third party. (e) Shuffling Technology. Except disclosure to MAXYGEN in connection -------------------- with the R&D Program or to the extent necessary to file patent applications claiming Shuffled Gene(s), PIONEER shall have no right to use or disclose any Shuffling Technology to any third party. (f) Research Materials. Except as set forth in (P)2.1F(a) through ------------------ (e) above, all Research Materials shall be treated as follows. Ownership of such Research Materials shall depend on whether PIONEER or MAXYGEN or the parties jointly made, conceived and/or reduced to practice, or otherwise developed such Research Materials. Except for use in connection with the R&D Program or as expressly permitted pursuant to the licenses in (P)3.1B and (P)3.2B, PIONEER or MAXYGEN, as the case may be, shall have the sole right to use and disclose as it deems appropriate, any Research Materials made, conceived and reduced to practice or otherwise developed solely by its respective employees and consultants. Any such Research Materials made, conceived and/or reduced to practice or otherwise developed jointly by employees and/or consultants of MAXYGEN and PIONEER may be used and disclosed by either party outside the R&D Program, pursuant to the licenses granted in (P)3.1B and (P)3.2B. (g) Research Results. ---------------- (i) Research Results that relate directly and/or specifically to Gene Variants, Shuffled Genes, Research -32- Materials subject to (f) above which are solely owned by one party, PIONEER Product Technology and/or Enabling Technology, shall not be used except in connection with the R&D Program and as expressly permitted pursuant to the licenses in (P)3.1B and 3.2B. All such Research Results shall be treated as Confidential Information of the party(ies) making such Research Results and shall not be disclosed except as otherwise expressly provided in this Agreement. (ii) Research Results not subject to subparagraph (g)(i) above may be disclosed and used by either party without accounting to the other party hereto. 2.2 R&D Steering Committee. ---------------------- A. Establishment and Functions of RDSC. ----------------------------------- (a) MAXYGEN and PIONEER hereby agree to the establishment of the RDSC. The RDSC will act on behalf of the two companies and will be responsible for the planning and monitoring of the R&D Program and for setting forth specific research and development objectives, selecting research projects within applicable Trait Categories for PIONEER Crops, and determining resource allocation for the R&D Program. (b) The RDSC shall be responsible for approving the conduct of any research relating to (i) any Enabling Technology pursuant to (P)2.7, and (ii) any PIONEER Product Technology. The RDSC will identify the research activities that constitute the -33- development of Enabling Technology and PIONEER Product Technology. In each case, the RDSC will prepare written project descriptions setting forth the specific starting materials and goals for research relating to Enabling Technology and PIONEER Product Technology, and include descriptions of such activities as appropriate in the Work Plans. (c) In planning and monitoring the R&D Program, the RDSC shall assign tasks and responsibilities taking into account each party's respective specific capabilities and expertise in order to avoid duplication and enhance efficiency and synergies. B. RDSC Membership. --------------- (a) MAXYGEN and PIONEER shall each appoint, in its sole discretion, three members to the RDSC, including a Co-Chair designated by PIONEER and a Co-Chair designated by MAXYGEN. Substitutes or alternates for the Co-Chairs or other RDSC members may be appointed at any time by notice to the other party. (b) MAXYGEN shall, in consultation with PIONEER, appoint a full- time Project Coordinator, who is one FTE. This Project Coordinator shall be a MAXYGEN member of the RDSC or shall otherwise participate in RDSC meetings on behalf of MAXYGEN. -34- C. Meetings. -------- The RDSC shall meet at least quarterly, with such meetings alternating between Santa Clara, California and Des Moines, Iowa, unless the parties agree otherwise. The first such meeting shall be held in Santa Clara, California within thirty (30) days after the Effective Date. Any additional meetings shall be held at places and on dates selected by the Co-Chairs of the RDSC. RDSC members may agree that participation in any such meeting will be in person, by telephone, or by televideo conference. In addition, the RDSC may act without a formal meeting by a written memorandum signed by the Co-Chairs of the RDSC. Subject to the obligations set forth in Section 5, representatives of each party may, in addition to the members of the RDSC and the MAXYGEN Project Coordinator, attend RDSC meetings as nonvoting observers at the invitation of either party only with the prior approval of the other party, which consent shall not be unreasonably withheld. D. Minutes. ------- The RDSC shall keep accurate minutes of its meetings that record all decisions and all actions recommended or taken. Draft minutes shall be delivered to the Co-Chairs of the RDSC within 20 days after each meeting. The party hosting the meeting shall be responsible for the preparation and circulation of the draft minutes. Draft minutes shall be edited by the Co- Chairs and shall be issued in final form only with their approval and agreement as -35- evidenced by their signatures on the minutes. Minutes of the RDSC meetings shall be Confidential Information. E. Quorum; Voting; Decisions. ------------------------- At each RDSC meeting, at least two members appointed by each party shall constitute a quorum and decisions shall be made by unanimous vote. If the RDSC is unable to reach agreement on any matter, it shall be referred for resolution to the Chief Executive Officer of MAXYGEN and the Vice President & Director, Trait and Technology Development of PIONEER, or their respective successors. Such persons shall meet promptly in person or by telephone and endeavor to reach agreement. If such persons are unable to unanimously resolve any dispute, such dispute shall be settled pursuant to Section 13 below. F. Expenses. -------- MAXYGEN and PIONEER shall each bear all expenses of their respective RDSC members related to their participation on the RDSC and attendance at RDSC meetings. 2.3 Third Party Licenses. -------------------- A. Responsibility. -------------- (i) In the event that it is necessary for MAXYGEN to acquire any third party license specifically for the conduct of the R&D Program, PIONEER will be responsible for the -36- payment of any amounts due to third parties for the license of intellectual property necessary solely for the performance of the R&D Program and the costs of negotiating and preparing any such license. Notwithstanding the above, it is understood that MAXYGEN shall be responsible for all payments due to third parties for the acquisition of licenses to intellectual property necessary for the practice of Shuffling Technology per se and the costs of negotiating and --- -- preparing such licenses. (ii) If PIONEER is not able to grant to MAXYGEN a sublicense to any Gene(s) which are Shuffled in the R&D Program for use in development or commercialization of MAXYGEN Licensed Products, MAXYGEN will be responsible for acquiring licenses to such Genes as needed for its own commercialization activities. Notwithstanding the above, with respect to any gene(s) to which PIONEER obtains license rights from a third party after the Effective Date, which gene(s) PIONEER wishes to Shuffle in the R&D Program, PIONEER shall use reasonable efforts to acquire from such other third party the right to sublicense such Gene and Shuffled Genes based thereon to MAXYGEN for use pursuant to (P)3.2B. Other than the rights granted in Section 3, PIONEER will be responsible for acquiring, at its own expense, its own licenses to all other technologies needed for development and commercialization of PIONEER Licensed Products and MAXYGEN will be responsible for acquiring, at its own expense, its own licenses to all other technologies needed for development and commercialization of -37- MAXYGEN Licensed Products. With respect to any gene(s) licensed from a third party, PIONEER shall use reasonable efforts to acquire the right to sublicense, without additional payments, provided if PIONEER is unable to acquire such sublicense rights without additional charge, MAXYGEN shall be responsible for paying any amounts due to acquire and practice such sublicenses. B. Infringement Claims. In the event that during the Research Term ------------------- PIONEER or MAXYGEN receives a written notice of an allegation of actual or possible patent infringement from a third party based on the use of a particular Gene which has been or is planned to be Shuffled in the conduct of the R&D Program, such party shall promptly notify the other providing an explanation of the circumstances. 2.4 Capital Expenditures. In the event that the conduct of the R&D -------------------- Program can be facilitated by the purchase of specialized capital equipment, the RDSC shall determine whether such equipment shall be purchased. If the RDSC approves any such purchase, PIONEER will purchase or pay to MAXYGEN the full cost (including costs for taxes, shipping, etc.) for such purchases and PIONEER shall own such equipment. MAXYGEN shall have no obligation to purchase any such equipment unless PIONEER provides reimbursement therefore. Unless otherwise agreed, any capital equipment purchased under this paragraph 2.4 shall be subject to the following: (i) any such equipment may not be used outside the R&D Program, (ii) individual items of equipment may not cost less than -38- $5,000, and (iii) budgets for equipment must be presented by the RDSC to PIONEER on or before March 30 of the applicable year. 2.5 Post Research Term Cooperation. At least three (3) months prior to ------------------------------ the expiration of the Research Term, the parties shall meet to agree on mechanisms for coordinating and managing activities (e.g., patent prosecution, publication review) that will occur after the expiration of the Research Term which would otherwise be addressed by the RDSC. 2.6 Research Exclusivity. -------------------- A. During the Research Term, MAXYGEN will not collaborate with any entity nor undertake any research activities not for the direct benefit of PIONEER with the intent of using Shuffling Technology to [*******] ("the Exclusive Trait Areas"). B. During the Research Term, MAXYGEN will conduct non-exclusive research in connection with the R&D Program in the following Trait Categories: [*******]. C. It is understood and agreed that, subject to its obligation to conduct research pursuant to (P)2.6B, MAXYGEN may conduct research on its own behalf and with third parties with respect to any gene and/or Plant, except with regard to the Exclusive Trait Areas for which PIONEER retains exclusivity, including without limitation, research with respect to the Trait Categories and PIONEER Crops subject to (P)2.6B. -39- 2.7 Enabling Technology. ------------------- A. The parties anticipate that the development of products within the Trait Categories may be significantly enhanced by the application of Shuffling Technology in the area of Enabling Technology. Unless mutually agreed in writing, application of Shuffling Technology for development of Enabling Technology will only be undertaken pursuant to the R&D Program and relating to at least one Trait Category upon mutual agreement of the parties and inclusion in the Work Plan. It is understood that any effort to develop Enabling Technology shall be undertaken on a case-by-case basis, based on a written project description which describes the specific starting materials and goals and the successful outcome(s). B. At such time as a party proposes that a project be conducted for the development of Enabling Technology, it shall inform, to the extent it is able to do so without breaching any confidentiality obligations, the RDSC of all rights which it has with respect to the underlying technology on which such Enabling Technology will be based or will require, including without limitation, any rights it has to use and sublicense such underlying technology, and any restrictions or limitations thereon, and any information of which it is aware with respect to third party patent applications or patents which may relate to the use of the proposed Enabling Technology in the R&D Program and/or for the development -40- or commercialization of Licensed Products; provided, neither party shall have any obligation to provide the RDSC with any document which would result in a breach of the attorney/client privilege with respect thereto. The RDSC shall have the sole authority to authorize the conduct and scope of projects in the R&D Program intended to produce Enabling Technology. If the RDSC cannot agree on a particular Enabling Technology project, the matter shall be resolved as provided for in (P)13.1A. C. Prior to such time as the RDSC approves the conduct of research relating to any Enabling Technology, the parties shall negotiate in good faith the rights, if any, which (i) PIONEER shall have to use such Enabling Technology other than [*******], and/or (ii) MAXYGEN shall have to use such Enabling Technology other than [*******]. In the event the parties fail to reach agreement on such rights, the only rights that PIONEER and MAXYGEN shall have to use the applicable Enabling Technology are those set forth in (P)3.1C and (P)3.2C below, respectively. D. Prior to commencing research with respect to any Enabling Technology, the parties shall agree on an appropriate royalty or other value capture mechanism therefore. 2.8 Rice. Immediately following the execution of this Agreement, and ---- until July 1, 1999, unless MAXYGEN earlier enters into an agreement with a third party regarding the use of Shuffling Technology with respect to rice for those projects which PIONEER -41- wishes to conduct with MAXYGEN, MAXYGEN and PIONEER will negotiate in good faith the terms of a further agreement regarding the use of Shuffling Technology for agreed research projects with respect to rice, and corresponding license rights. It is understood and agreed that neither party shall be obligated to enter into any such agreement, and that MAXYGEN shall be free to enter into an agreement with a third party with respect to rice at any time prior to or after July 1, 1999. 2.9 Shuffling Technology. During the Research Term, MAXYGEN shall use -------------------- reasonable efforts to continue to develop and improve its Shuffling Technology; provided, however, PIONEER acknowledges that technology development is inherently an uncertain activity and agrees that MAXYGEN shall not have breached its commitment under this paragraph in the event that any third party develops or invents methods or technology relating to the creation of genetic diversity. SECTION 3. LICENSE RIGHTS. -------------------------- 3.1 To PIONEER. ---------- A. Research License. Subject to the terms and conditions of this ---------------- Agreement, MAXYGEN agrees to grant, and hereby grants to PIONEER a non- exclusive, nontransferable, non-sublicensable, royalty-free, worldwide license under MAXYGEN's -42- interest in the Intellectual Property and MAXYGEN Materials solely to conduct the R&D Program. B. Commercial Licenses. ------------------- (a) Subject to the terms and conditions of this Agreement, MAXYGEN agrees to grant, and hereby grants, to PIONEER, worldwide, royalty- bearing licenses, with the right to sublicense as set forth in (P)3.1(B)(b) below, under MAXYGEN's interest in the Intellectual Property (whether solely or jointly owned by MAXYGEN) as follows: (i) an exclusive license to make, have made, and use Shuffled Genes (excluding any MAXYGEN SGD) and Enabling Technology together with Shuffled Genes (excluding any MAXYGEN SGD), in each case, in the PIONEER Crops, to develop, make, have made, use, import, offer for sale, sell, and have sold PIONEER Licensed Products; and (ii) a non-exclusive license to make, have made, and use Research Results subject to (P)2.1F(f) and (g) in the PIONEER Crops, to develop, make, have made, use, import, offer for sale, sell, and have sold PIONEER Licensed Products. (b) Sublicenses. PIONEER shall have the right to sublicense ----------- the rights granted in (P)3.1B(a) with respect to the PIONEER Crops and Trait Categories for which it has licenses as set forth in (P)3.1B(a). Following the execution of any sublicense, PIONEER shall provide to MAXYGEN the -43- identity of the Sublicensee and a description of the PIONEER Licensed Products and rights sublicensed to the Sublicensee and the territory of such sublicense. Each sublicense granted by PIONEER shall be consistent with all the terms and conditions of this Agreement, and subordinate thereto, and PIONEER shall remain responsible to MAXYGEN for the financial obligations arising under this Agreement based upon the activities of each such Sublicensee. No Sublicensee may grant further sublicenses of such rights, or assign such sublicense, without MAXYGEN's prior written consent. Upon termination of this Agreement, or of any license to PIONEER hereunder, for any reason, any applicable sublicenses granted by PIONEER hereunder shall survive, subject to the terms and conditions hereof. C. Enabling Technology. ------------------- (i) It is understood that the license set forth in (P)3.1B includes a license, with the right to grant sublicenses, to make, have made and use the Enabling Technology to develop, make, have made, use, offer for sale, sell and have sold PIONEER Licensed Products incorporating Shuffled Genes (excluding MAXYGEN SGD) in the applicable Trait Categories in the PIONEER Crops in accordance with such license, but does not include a license to [*******] (ii) In the event that PIONEER and MAXYGEN mutually agree in writing pursuant to (P)2.7D upon an appropriate -44- royalty or other value capture mechanism for other uses of Enabling Technology by PIONEER [*******], MAXYGEN will grant to PIONEER a nonexclusive, royalty- bearing, worldwide license for such uses of the applicable Enabling Technology. D. No Other Products. ----------------- (a) It is understood and agreed that pursuant to the licenses granted in (P)3.1B that PIONEER may conduct such activities (e.g., the sequencing and mutagenesis of Shuffled Genes) as it reasonably deems appropriate to develop Shuffled Genes including PIONEER SGDs (but excluding MAXYGEN SGDs) and PIONEER Licensed Products based thereon. (b) Except in connection with the development or commercialization of PIONEER Licensed Products, PIONEER and its Affiliates and Sublicensees shall not develop or commercialize, or authorize the development or commercialization of, any gene (or genetic element) which is based on or derived from any Gene Variant, Shuffled Gene (or Enabling Technology, as the case may be), or any Plant or product derived therefrom which contains or is made with the use of such a gene (or genetic element), regardless of whether such gene (or genetic element) is made or obtained through synthesis, or mutation of a starting gene (or genetic element). Except in connection with the development or commercialization of PIONEER Licensed Products, PIONEER will not itself, or through any third party, use any MAXYGEN Intellectual -45- Property, Joint Intellectual Property and/or Research Results or structure- function data relating to any Gene Variants, including without limitation, consensus sequences or structural motifs, to reverse engineer, reconstruct, synthesize or otherwise modify or copy any Gene Variant or Shuffled Gene or any other gene or product with similar biological activities, or to attempt the same. (c) If a dispute arises between the parties which the parties are unable to resolve regarding whether or not a product sold by PIONEER or its Affiliates or Agents or Sublicensees is a PIONEER Licensed Product, the dispute shall be settled by binding arbitration pursuant to (P)13.2 herein; provided, however, PIONEER shall bear the burden of proof in establishing that such product is not a PIONEER Licensed Product subject to this Agreement. 3.2 To MAXYGEN. ---------- A. Research License. Subject to the terms and conditions of this ---------------- Agreement, PIONEER agrees to grant, and hereby grants, to MAXYGEN (i) a non- exclusive, nontransferable, non-sublicensable, royalty-free, worldwide license under PIONEER's interest in the Intellectual Property and PIONEER Materials, and (ii) a non-exclusive, nontransferable, non-sublicensable, royalty-free, worldwide license under any patents, trade secrets and other intellectual property owned or Controlled by PIONEER that are -46- necessary or useful for the conduct of the R&D Program, in each case, solely to conduct the R&D Program. B. Commercial License. ------------------ (a) Subject to the terms and conditions of this Agreement, PIONEER agrees to grant, and hereby grants, to MAXYGEN, a worldwide, royalty- bearing license under PIONEER's interest in the Intellectual Property (whether solely or jointly owned by PIONEER), as follows: (i) an exclusive license to make, have made, and use Shuffled Genes (excluding any PIONEER SGD) and Enabling Technology together with Shuffled Genes (excluding any PIONEER SGD) in each case, in MAXYGEN Crops, to develop, make, have made, propagate, have propagated, use, import, offer for sale, sell and have sold MAXYGEN Licensed Products, including the right to grant sublicenses; and (ii) a non-exclusive license to make, have made, and use Research Results subject to (P)2.1F(f) and (g) in MAXYGEN Crops, to develop, make, have made, use, import, offer for sale, sell and have sold MAXYGEN Licensed Products, including the right to grant sublicenses. (b) Subject to the terms and conditions of this Agreement, PIONEER agrees to grant, and hereby grants, to MAXYGEN, a worldwide, royalty- bearing license under PIONEER's interest in -47- the Intellectual Property (whether solely or jointly owned by PIONEER) as follows: (i) an exclusive license to make, have made, sell, offer to sell, import and use Shuffled Genes (excluding PIONEER SGDs) in Plants other than PIONEER Crops and MAXYGEN Crops, and for uses other than in Plants, and to develop, make, have made, use, import, offer for sale, sell and have sold MAXYGEN Licensed Products derived therefrom, including the right to grant sublicenses; and (ii) a non-exclusive license to make, have made, sell, offer to sell, import and use Research Results subject to (P)2.1F(f) and (g) in Plants other than PIONEER Crops and MAXYGEN Crops, and for uses other than in Plants, and to develop, make, have made, use, import, offer for sale, sell and have sold MAXYGEN Licensed Products derived therefrom, including the right to grant sublicenses. (c) It is understood that the license to MAXYGEN set forth in (P)3.2B(a) does not convey any license to use Shuffled Genes or PIONEER SGDs or MAXYGEN SGDs (i) [*******] or (ii) [*******]. It is further understood that MAXYGEN shall not have the right to use or license any Shuffled Gene or any PIONEER SGD or any MAXYGEN SGD which is Jointly Developed in the R&D Program to any third party for use in [*******], so long as [*******], but shall have the right to [*******] -48- (d) Sublicenses. MAXYGEN shall have the right to sublicense ----------- the rights granted in (P)3.2B(a) and (b). Following the execution of any sublicense, MAXYGEN shall provide to PIONEER the identity of the Sublicensee and a description of the MAXYGEN Licensed Products and rights sublicensed to the Sublicensee and the territory of such sublicense. Each sublicense granted by MAXYGEN shall be consistent with all the terms and conditions of this Agreement, and subordinate thereto, and MAXYGEN shall remain responsible to PIONEER for the financial obligations arising under this Agreement based upon the activities of each such Sublicensee. No Sublicensee may grant further sublicenses of such rights, or assign such sublicense, without PIONEER's prior written consent. Upon termination of this Agreement, or of any licenses granted to MAXYGEN hereunder, for any reason, any applicable sublicenses granted by MAXYGEN hereunder shall survive, subject to terms and conditions herein. C. Enabling Technology. ------------------- (i) It is understood that the licenses set forth in (P)3.2B(a) include a license, with the right to grant and authorize sublicenses, under PIONEER's interest in the Enabling Technology to make, have made, sell, have sold, import, use, and have used MAXYGEN Licensed Products incorporating Enabling Technology, together with Shuffled Genes (excluding [*******]) in -49- the MAXYGEN Crops in accordance with such license, but does not include a license to [*******] (ii) In the event that PIONEER and MAXYGEN mutually agree in writing pursuant to (P)2.7D upon an appropriate royalty or other value capture mechanism for other uses of Enabling Technology by MAXYGEN [*******], PIONEER will grant to MAXYGEN a nonexclusive, royalty-bearing, worldwide license for such uses of the applicable Enabling Technology. 3.3 Third Party Rights. ------------------ A. Overlapping Rights. It is understood that MAXYGEN is in the ------------------ business of Shuffling DNA on behalf of third parties, and that MAXYGEN will grant such third parties rights after the Effective Date to acquire licenses for genes derived from Shuffling that are similar to PIONEER's rights under this Section 3. Notwithstanding the licenses granted PIONEER above, it is possible that a third party may acquire rights from MAXYGEN with respect to one or more genes of which MAXYGEN is a sole or joint owner; accordingly, MAXYGEN's grant of rights in this Section 3 is limited to the extent that (i) a third party (either alone or jointly with MAXYGEN) has filed a patent application with respect to such gene prior to the filing by PIONEER (either alone or jointly with MAXYGEN) of a patent application with respect to such a gene or (ii) MAXYGEN has, prior to identification of the nucleotide sequence of a gene in the R&D Program granted a third party a -50- license or other rights with respect to such a gene, and subject to any such grant of rights to a third party. B. Limited Liability. It is understood and agreed that, even if ----------------- MAXYGEN complies with its obligations under this Agreement, genes derived through Shuffling activities that are provided to third parties in the course of MAXYGEN's other business activities may result in third party patent applications and patents, including patent applications and patents owned by such third parties, or owned jointly by MAXYGEN and such third parties, which could conflict with patent applications and patents owned by PIONEER, or jointly owned by PIONEER and MAXYGEN hereunder. MAXYGEN will use its reasonable efforts to avoid such conflict and, unless PIONEER is damaged as a proximate result of a material breach by MAXYGEN of the terms of (P)2.6 or any of the representations and warranties in Section 11, then MAXYGEN shall have no liability under this Agreement with respect to any such conflict. 3.4 Assignments. Each party shall have the further right to assign its ----------- rights in the licenses granted herein (or any part thereof) to one or more of its Affiliates; provided, however, that the party making such assignment shall be responsible for the obligations of such Affiliates. -51- 3.5 Retained Rights. --------------- A. MAXYGEN. MAXYGEN shall retain all rights under its interest in ------- the Shuffling Technology assigned to MAXYGEN pursuant to (P)7.3, and in the MAXYGEN Intellectual Property and Joint Intellectual Property that are not expressly granted to PIONEER in (P)3.1A, and to any intellectual property and/or tangible materials developed by it or on its behalf after the Research Term or outside the scope of this Agreement. It is understood that MAXYGEN may, among other things, grant to third parties (i) licenses under its interest in such Intellectual Property for the use of Shuffled Genes (excluding PIONEER SGDs) in MAXYGEN Crops and other plants, and (ii) licenses under its interest in intellectual property developed outside the R&D Program for any use; provided, however, that during the term of this Agreement, MAXYGEN shall not grant any license under such Intellectual Property which conflicts with the licenses granted to PIONEER herein. Notwithstanding the exclusive licenses granted to PIONEER in (P)3.1A, MAXYGEN shall retain the right to use all Shuffled Genes for its own research purposes (i.e., to develop, improve and validate its technology and intellectual property). B. PIONEER. PIONEER shall retain all rights under its interest in ------- the PIONEER Product Technology assigned to PIONEER pursuant to (P)7.3, and in the PIONEER Intellectual Property and Joint Intellectual Property that are not expressly granted to MAXYGEN in (P)3.1B, and to any intellectual property and/or tangible materials developed by it or on its behalf after the Research Term -52- or outside the scope of this Agreement. It is understood that PIONEER may, among other things, grant to third parties licenses under its interest in such Intellectual Property for the use of Shuffled Genes (excluding MAXYGEN SGDs) to which it retains license rights in the PIONEER Crops; provided, however, that during the term of this Agreement, PIONEER shall not grant any license under such Intellectual Property which conflicts with the licenses granted to MAXYGEN herein. It is understood and agreed that nothing in this Agreement grants (or shall be construed to grant) to PIONEER any licenses to intellectual property or materials developed by or on behalf of third parties outside of the R&D Program. 3.6 Other Rights. ------------ A. MAXYGEN Covenant. In furtherance of the licenses granted to ---------------- PIONEER in (P)3.1B, MAXYGEN agrees that, to the extent necessary for PIONEER to practice the license granted in (P)3.1B, for so long as PIONEER is not in default with respect to any payment due to MAXYGEN hereunder by more than thirty (30) days, MAXYGEN shall not bring any claim or action against PIONEER, or its Affiliates or Sublicensees, based on or asserting that the making, using, selling, importing or offering for sale or import of a PIONEER Licensed Product in accordance with the license set forth in (P)3.1, infringes [*******]; provided, however, if any amounts are due from MAXYGEN to third parties as a result of the practice of such third party patent rights by PIONEER and its Affiliates and Sublicensees pursuant to the foregoing covenant, PIONEER or its -53- Affiliates or Sublicensees shall pay to MAXYGEN or the third party, as agreed by PIONEER and MAXYGEN, any amounts due to such third party; provided it is understood that MAXYGEN shall be solely responsible for any amounts due to third parties for the practice of the Shuffling Technology per se. This covenant does --- -- not extend to any infringement by PIONEER or its Affiliates or Sublicensees of a claim of a U.S. or foreign patent owned or Controlled by MAXYGEN outside the scope of the specific covenant described above [*******]. B. PIONEER Covenant. In furtherance of the licenses granted to ---------------- MAXYGEN in (P)3.2, PIONEER agrees that, to the extent necessary for MAXYGEN to practice the license granted in (P)3.2B, for so long as MAXYGEN is not in default with respect to any payment due to PIONEER hereunder by more than thirty (30) days, PIONEER shall not bring any claim or action against MAXYGEN, or its Affiliates or Sublicensees, based on or asserting that the manufacture, use, sale, offer for sale or import of a MAXYGEN Licensed Product in accordance with the license set forth in (P)3.2 infringes [*******]; provided, however, if any amounts are due from PIONEER to third parties as a result of the foregoing covenant, MAXYGEN or its Affiliates or Sublicensees shall pay to PIONEER or the third party, as agreed by MAXYGEN and PIONEER, any amounts due to such third party as a result of the practice of such third party patent rights by MAXYGEN and its Affiliates and Sublicensees. This covenant does not extend to any infringement by MAXYGEN or its Affiliates or Sublicensees of a claim of a U.S. or foreign patent -54- owned or Controlled by PIONEER outside the scope of the specific covenant described above [*******]. SECTION 4. PAYMENTS. -------------------- 4.1 Payments Due Upon Execution of this Agreement. Within [*******] --------------------------------------------- days after the Effective Date, PIONEER shall pay to MAXYGEN a non-refundable license fee of [*******]. 4.2 Equity Investment. In conjunction with the execution of this ----------------- Agreement, PIONEER will enter into a Stock Purchase Agreement of even date herewith. 4.3 Royalties to MAXYGEN. -------------------- A. PIONEER Licensed Products. In consideration of the licenses ------------------------- granted above, PIONEER shall pay to MAXYGEN a royalty on Net Sales of PIONEER Licensed Products (except PIONEER Licensed Products subject to (P)4.3B below) at the rate of: (a) Where the Product Premium of the PIONEER Licensed Product ranges from [*******] to [*******] compared to the applicable Benchmark Product in the same geographic area, [*******] percent of Net Sales of the applicable PIONEER Licensed Product. (b) Where the Product Premium of the PIONEER Licensed Product ranges from [*******] to [*******] compared to the applicable Benchmark Product, [*******] percent of Net Sales of the applicable PIONEER Licensed Product. -55- (c) Where the Product Premium of the PIONEER Licensed Product is [*******] compared to the applicable Benchmark Product, [*******] percent of Net Sales of the applicable PIONEER Licensed Product. (d) In cases where PIONEER and its Agents, Affiliates and Sublicensees do not sell a Benchmark Product corresponding to a particular PIONEER Licensed Product, and believe that the applicable Product Price of the Benchmark Product is lower than the Product Price of a comparable Benchmark Product sold by PIONEER would be due to generally higher PIONEER prices, then PIONEER may notify MAXYGEN and provide a written explanation of its position. In such event, the parties shall determine in good faith the Product Price of the applicable Benchmark Product which will be used to determine the applicable Price Premium; provided, however, such royalty shall be no less than [*******] of Net Sales of the applicable PIONEER Licensed Product. In the event that the parties are unable to agree on the royalty due, such matter shall be submitted by either party to binding arbitration pursuant to Section 13. (e) In cases where there is no Benchmark Product because no comparable product exists, the parties shall determine in good faith the royalty rate which will be applied prior to commercialization of the applicable PIONEER Licensed Product; provided, however, such royalty shall be in the range of [*******] -56- to [*******] of Net Sales of the applicable PIONEER Licensed Product. In the event that the parties are unable to agree on the royalty due, such matter shall be submitted by either party to binding arbitration pursuant to Section 13. (f) In any country where there are no Patent Rights covering the applicable PIONEER Licensed Product, if a competitor of PIONEER is marketing a product in commercially material quantities as a result of an unauthorized use of MAXYGEN Shuffling Technology, which product would be within the definition of a PIONEER Licensed Product if marketed by PIONEER, then PIONEER shall notify MAXYGEN providing a written description of the product and the identity of the party who is making and selling such product. MAXYGEN shall use such reasonable efforts to inform PIONEER within ninety (90) days of receipt of such information, whether it believes such product was made via an unauthorized use of Shuffling Technology. If such product was made with the unauthorized use of Shuffling Technology, then PIONEER's royalty obligations hereunder in such country for the corresponding PIONEER Licensed Product with respect to sales thereof occurring in such country after the date of PIONEER's notice to MAXYGEN shall be reduced by [*******] for so long as commercially material sales of such other product continue in such country. (g) Notwithstanding the foregoing provisions of this (P)4.3, no royalties shall be due to MAXYGEN with regard to -57- PIONEER Licensed Products which do not incorporate and are not made with [*******], and are identified or produced using only [*******]. B. [*******]. The royalty paid to MAXYGEN for any PIONEER Licensed Product based on or a Shuffled Gene imparting [*******] and the value capture strategy which will be the basis for payments to MAXYGEN will be determined in good faith by MAXYGEN and PIONEER prior to commercialization of the first applicable PIONEER Licensed Product; provided, however, such royalty shall be no less than [*******] of Net Sales of the applicable PIONEER Licensed Product. In the event that the parties are unable to agree on the royalty due, such matter shall be submitted by either party to binding arbitration pursuant to Section 13. C. Royalty Offset. [*******] percent [*******] of all milestone -------------- payments paid by PIONEER to MAXYGEN pursuant to (P)4.4 below, are creditable against the royalties due under (P)4.3 on PIONEER Licensed Products that contain a Shuffled Gene within the same Trait Category for which the applicable milestone payment was made. The milestone payments may offset up to a maximum of [*******] percent [*******] of the royalties due to MAXYGEN from PIONEER with respect to the applicable PIONEER Licensed Product(s) per year. All unexpended milestone payment credits are to be carried forward and applied against royalties until the full credit is taken by PIONEER. -58- D. Enabling Technology - Payments. ------------------------------ (a) [*******]. (b) PIONEER shall pay to MAXYGEN additional amounts, to be determined in good faith by MAXYGEN and PIONEER prior to MAXYGEN granting a license, as set forth in (P)3.1 (C), for PIONEER Licensed Products which do not contain a Shuffled Gene, but are, or incorporate, or are identified, or made with the use of Enabling Technology. Unless otherwise agreed, such payments shall be agreed by the parties at such time as the work plan for the research on the applicable Enabling Technology is established; provided, such royalty shall be no more than [*******] of Net Sales of the applicable PIONEER Licensed Product. In the event that the parties are unable to agree on the royalty due (or other value capture mechanism) for a particular PIONEER Licensed Product and/or use of Enabling Technology within one hundred and twenty (120) days after first negotiating such royalty, such matter may be submitted by either party to binding arbitration pursuant to Section 13. E. Sublicense Payments. ------------------- (a) In addition to royalties due pursuant to (P)4.3.A on Net Sales by Sublicensees, PIONEER shall pay to MAXYGEN [*******] of any and all Sublicense Payments collected by PIONEER pursuant to this Agreement from any Agent or Sublicensee. -59- (b) If PIONEER or its Affiliates wishes to grant a third party a sublicense under the MAXYGEN's interest in the MAXYGEN Intellectual Property or Joint Intellectual Property, or rights under the MAXYGEN's interest in the MAXYGEN Intellectual Property or Joint Intellectual Property with regard to a PIONEER Licensed Product, in exchange for any consideration in a form other than cash or a cash equivalent (e.g., a license under other intellectual property owned or Controlled by PIONEER), then PIONEER shall notify MAXYGEN and the fair market value of the non-cash consideration received by PIONEER and its Affiliates for such rights or product, as the case may be, shall be agreed by PIONEER and MAXYGEN, or if the parties are unable to agree on such fair market value, either party may submit such matter to arbitration pursuant to Section 13 below, in order to determine the fair market value of such consideration. 4.4 Milestone Payments. ------------------ A. Payments to MAXYGEN for [*******]. In addition to the other --------------------------------- payments contemplated herein, PIONEER shall pay to MAXYGEN the following amounts, in each case within 30 days following the occurrence of the specific event. The full payment amounts set forth below shall only be paid with respect to [*******] to reach the applicable milestone. The specific events are: -60- (i) Once PIONEER (i) obtains successful test results at a level agreed upon by the parties in the Work Plan, [*******] that are based in whole or in part on such Shuffled Gene, or (b) elects to pursue further development of a plant or seed based in whole or part on a Shuffled Gene after [*******], [*******]; and (ii) Upon [*******] regulatory approval in any country that allows commercial sale of PIONEER Licensed Product, [*******]; and (iii) Upon [*******] commercial sale in any country of PIONEER Licensed Product, [*******]. B. Payments to MAXYGEN for [*******]. Should PIONEER achieve any of --------------------------------- the milestone events in (P)4.4A with respect to [*******] containing a Shuffled Gene [*******], after PIONEER has paid the applicable milestone payment for [*******] containing a Shuffled Gene expressing a Trait [*******] in accordance with (P)4.4A, PIONEER shall pay MAXYGEN additional milestone payments at [*******] set forth in subparagraph 3.2C(a) above. [*******]. -61- 4.5 Payments to PIONEER. ------------------- A. Direct Sales of MAXYGEN Licensed Products. ----------------------------------------- (i) At the present time, it is not foreseen that MAXYGEN shall be selling MAXYGEN Licensed Products that are developed, made or sold as a part of MAXYGEN's day-to-day business, and that MAXYGEN shall be sublicensing under the licenses granted in this Agreement. However, if during the life of this Agreement, MAXYGEN or its successor company shall exercise the licenses granted in a means other than by sublicensing to third parties, MAXYGEN or its successor company shall enter into negotiations in good faith with PIONEER to establish a royalty rate for MAXYGEN Licensed Products made from the use of Shuffled Genes to be paid to PIONEER in consideration of the licenses granted above. MAXYGEN shall inform PIONEER of its intent to sell MAXYGEN Licensed Products at least 6 months prior to its sale of the first such product, in order to allow time to negotiate the royalty rate that shall be due on Net Sales. Such royalty rate shall be based on Product Premiums as set forth in (P)4.3A, and in no event shall the royalty rate applied to MAXYGEN Licensed Products and due to PIONEER exceed the royalty rate applied to PIONEER Licensed Products and due to MAXYGEN in (P)4.3A. (ii) Notwithstanding the foregoing (P)4.5A(i), no royalties shall be due to PIONEER with regard to MAXYGEN Licensed -62- Products which do not incorporate and are not made with [*******], and are identified or produced using only [*******]. B. Sublicense Payments. ------------------- MAXYGEN shall pay to PIONEER [*******] of any and all Sublicense Payments collected by MAXYGEN pursuant to this Agreement from any Sublicensee for the use of Shuffled Genes or [*******]. C. Non-PIONEER Genes. Notwithstanding (P)4.5A and B above, no ----------------- royalties or Sublicense Payments shall be due to PIONEER with regard to MAXYGEN Licensed Products which incorporate or are made with the use of [*******], or are identified or produced using only [*******]. 4.6 Royalty Term. The royalties due hereunder shall be payable on a ------------ country-by-country and Licensed Product-by-Licensed Product basis in each country until the date which is: (i) the expiration of the last to expire of the patents within the Patent Rights licensed from the other party hereto covering the applicable Licensed Product, or the manufacture, use or sale of the Licensed Product in such country, or (ii) if there are never any Patent Rights covering the applicable Licensed Product or the manufacture, use or sale of such Licensed Product in a particular country, until [*******] years following the first commercial sale of such Licensed Product in such country. -63- 4.7 Timing. Royalty payments on sales of Licensed Products made during ------ each party's fiscal quarter by each of the parties and any fees due from their Sublicensees sales, shall be due to the other party within 30 days after the end of each fiscal quarter, at which time a written report showing total sales of Licensed Products made by a party hereto and its Affiliates, Agents and Sublicensees stated separately for each, and the calculation of Net Sales based thereon, including details on deductions for all qualified costs set forth in (P)1.21, stated separately on a country-by-country and Licensed Product-by- Licensed Product basis, accompanied by sufficient information to enable the licensor to verify the accuracy of the royalty calculations made by PIONEER, and a detailed explanation of the methodology used to determine the royalty payment, by Licensed Product. Notwithstanding the above, if PIONEER is unable to meet the foregoing obligation to provide quarterly reports and royalty payments, and requests the right to make semi-annual or annual royalty payments, the parties agree to discuss in good faith such a request. 4.8 Currency. Royalties due hereunder shall be paid in U.S. Dollars. As to -------- sales occurring in a currency other than U.S. Dollars, the amount due shall first be calculated in the currency in which sale occurred and then converted to U.S. Dollars at the closing selling rate for U.S. Dollars, as quoted in the Wall Street Journal for the last business day of the fiscal quarter for which royalty payments are due. -64- 4.9 Payment Method; Late Payments. All payments due under this Agreement ----------------------------- shall be made by bank wire transfer in immediately available funds to a bank account designated by the party to which such royalties are due. In the event that the due date of any payment subject to Section 4 hereof is a Saturday, Sunday or national holiday, such payment may be paid on the following business day. Any late payments shall bear interest to the extent permitted by applicable law at the prime rate (as reported by the Bank of America, San Francisco, California (or its successor), on the date such payment is due) plus an additional two percent (2%) (on an annualized basis), calculated on the number of days such payment is delinquent. The rights provided in this Section 4.9 shall in no way limit any other remedies available to the party to which such royalties are due. 4.10 Records; Inspection. The parties shall keep, and shall require their ------------------- Sublicensees to keep, for four years from the date of each payment of royalties hereunder, complete and accurate records of sales of Licensed Products by it and its Affiliates, Agents and Sublicensees in sufficient detail to allow the accruing royalties to be determined accurately. Both parties shall have the right during such four year period, but no more than twice every year, to appoint an independent certified public accountant reasonably acceptable to the other party to audit such records, during normal business hours and upon reasonable advance notice, solely for the purpose of verifying the accuracy of the royalty -65- calculation made. Such inspection shall be at the auditing party's sole expense unless it reveals an underpayment by the other party of at least [*******] percent [*******] of the amount due, in which case the reasonable costs of such inspection shall be reimbursed by the audited party together with payment for any unpaid amounts that are discovered shall be paid promptly, together with interest thereon from the date such payments were due at the prime rate (as reported by the Bank of America, San Francisco, California (or its successor), plus an additional two percent (2%) on an annualized basis. 4.11 Tax Matters. All royalty amounts and other payments required to be ----------- paid by MAXYGEN or PIONEER to the other pursuant to this Agreement shall be paid with deduction for withholding for or on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed by a jurisdiction other than the United States ("Withholding Taxes"). The party paying such taxes shall provide the other party a certificate evidencing payment of any Withholding Taxes hereunder. 4.12 Technology Enhancement Funding. In addition to the other payments to ------------------------------ MAXYGEN provided herein, PIONEER will pay to MAXYGEN non-refundable technology enhancement funding of [*******] per year for each year of the R&D Program (including any extension thereof), to perform research to further enhance the Shuffling Technology. Such payments shall be used by MAXYGEN to [*******]. The first -66- such payment shall be due within [*******] days of the Effective Date, and each additional annual payment shall be due on the successive anniversaries of such date. 4.13 FTE Payments. ------------ A. In addition to the payment due pursuant to the other paragraphs of this Section 4, PIONEER will pay to MAXYGEN, for the [*******] FTEs set forth in (P)2.1A(b), a non-refundable amount of [*******] per year during [*******] of the Research Term, commencing as of the Effective Date. B. Payments due pursuant to (P)4.13 above shall be made in advance, on or before the first day of each calendar quarter, with the first and last payments prorated in the event that the Effective Date is not the first day of a calendar quarter. In the event that the parties agree to a different Staffing Level for any given calendar quarter as set forth in (P)2.1A(b), the payment set forth in this (P)4.13 shall be pro-rated accordingly based on a level of funding of [*******] per year per FTE. 4.14 PIONEER Activities. PIONEER shall fund its own activities under the ------------------ R&D Program. -67- SECTION 5. COMMERCIALIZATION. ----------------------------- 5.1 Due Diligence. PIONEER shall actively pursue commercialization of ------------- each Shuffled Gene with commercially reasonable diligence with the same level of efforts it makes with its own intellectual property of comparable commercial potential and patent protection and include: (a) [*******] within [*******] years of the date of delivery of the applicable Shuffled Gene to PIONEER. This [*******] year limitation only applies if any necessary and effective assays developed by MAXYGEN and/or PIONEER for measuring efficacy of the Shuffled Gene are available at the date of delivery of the applicable Shuffled Gene. If such assays are not available at the date of delivery of the Shuffled Gene, the start of the [*******] year limitation will not begin until the assays are available. This diligence activity shall be satisfied when [*******]; and (b) [*******] within [*******] years of initial demonstration of [*******] in the first PIONEER Crop containing the applicable Shuffled Gene (assuming [*******] continue to demonstrate the commercial level of efficacy). If reasonable freedom-to-operate concerns arise during this period regarding the Shuffled Gene and/or the other construct components involved [*******], and PIONEER must substitute other construct components, then the start of the [*******] year limitation will begin when the -68- new constructs are created. This diligence obligation shall be satisfied when [*******]; and (c) [*******] within [*******] years of [*******] (assuming [*******] continue to demonstrate the commercial level of efficacy). The ultimate number of individual hybrids or varieties carrying the applicable Shuffled Gene will vary considerably depending upon the Trait and the breadth of geographies where markets exist. This diligence obligation is determined to be met when [*******]; and (d) [*******] within [*******] years of first [*******] (assuming [*******] continue to demonstrate the commercial level of efficacy). It is recognized and accepted that the time to [*******] may vary widely among PIONEER Licensed Products, depending upon the Trait and PIONEER Crop, and that [*******] are continuing to change. If [*******] change during the [*******] year limitation, then the term to meet this diligence obligation shall be reasonably extended, as agreed by the parties, to reflect the change in the [*******]. This diligence obligation is determined to be met when [*******]; and (e) [*******] within [*******] years of [*******] (assuming [*******] continue to demonstrate the commercial level of efficacy). -69- It is recognized and accepted that the efficacy of each Shuffled Gene will typically be tested and demonstrated in the field in one PIONEER Crop before PIONEER may wish to begin developing the Shuffled Gene in additional PIONEER Crops. Therefore, the commercialization due diligence targets identified above will not start for additional PIONEER Crops until selected events containing the specific Shuffled Gene are [*******] in the first PIONEER Crop. 5.2 Lack of Diligence/Reversion Rights. The rights and licenses granted to ---------------------------------- PIONEER herein with respect to Shuffled Genes shall terminate on a PIONEER Crop by Trait basis (as defined in (P)10.1) and such rights will revert to MAXYGEN if: (a) [*******]; and (b) [*******]. 5.3 PIONEER Development Reports. PIONEER shall keep MAXYGEN apprised of --------------------------- the status of the development and commercialization of each Shuffled Gene and PIONEER Licensed Product by providing MAXYGEN with a written report within thirty (30) days after the end of each calendar half-year detailing such activities with respect to each applicable Shuffled Gene and PIONEER Licensed Product during the term of this Agreement, and at MAXYGEN's request, once per year the director of PIONEER's development activities with regard to any particular PIONEER Licensed Product shall meet with MAXYGEN to discuss the status and stage of such development. The -70- reports described in this (P)5.3 shall describe all Shuffled Genes that have been put into PIONEER Crops or tested in [*******], and all PIONEER Licensed Products for which PIONEER has sought or obtained regulatory approval, or which PIONEER has licensed to a Sublicensee for development or commercialization and shall also contain sufficient other information to allow MAXYGEN to monitor PIONEER's compliance with this Agreement, including without limitation, PIONEER's obligations with respect to the accomplishment of the milestones set forth in (P)4.4. All reports and information provided under this (P)5.3 shall be deemed Confidential Information of PIONEER. 5.4 MAXYGEN Development Reports. MAXYGEN shall keep PIONEER apprised of --------------------------- the status of the development and commercialization of each Shuffled Gene and MAXYGEN Licensed Product by providing PIONEER with a written report within thirty (30) days after the end of each calendar year detailing such activities with respect to each applicable Shuffled Gene and MAXYGEN Licensed Product during the term of this Agreement. All reports and information provided under this (P)5.4 shall be deemed Confidential Information of MAXYGEN. 5.5 Technology Enhancement Funding Reporting. Within 60 days of the ---------------------------------------- Effective Date and on each anniversary of the Effective Date during the period in which PIONEER is providing to MAXYGEN technology enhancement funding, MAXYGEN will provide to PIONEER a -71- written summary indicating the activities relating to Shuffling Technology it intends to fund in the course of the next year with funding paid pursuant to (P)4.12. In addition, within 60 days after the first anniversary of the Effective Date and on each anniversary of the Effective Date thereafter during the period in which PIONEER is providing to MAXYGEN technology enhancement funding, MAXYGEN will provide to PIONEER a written summary indicating the results of the MAXYGEN research funded from the technology enhancement funding and how such results are being applied to the R&D Program. SECTION 6. TREATMENT OF CONFIDENTIAL INFORMATION. ----------------------------------------------------- 6.1 Confidentiality. --------------- A. General. ------- (a) MAXYGEN and PIONEER each recognize that the other party's Confidential Information constitutes highly valuable and proprietary confidential information. For the purposes hereof, PIONEER Material is PIONEER Confidential Information and MAXYGEN Material is MAXYGEN Confidential Information. Subject to the terms and conditions of Section 8, MAXYGEN and PIONEER each agree that, except as required by applicable law or regulation (including the filing and prosecution of patent applications) or judicial or administrative order, during the term of this Agreement and for five years thereafter: -72- (i) it will keep confidential, and will cause its employees, consultants, Affiliates, licensees and sublicenses to keep confidential, all Confidential Information of the other party that is disclosed to it, or to any of its employees, consultants, Affiliates and Agents, under or in connection with this Agreement; and (ii) neither it nor any of its respective employees, consultants, Affiliates or Agents shall use Confidential Information of the other party for any purpose whatsoever except as expressly permitted in this Agreement. (b) Notwithstanding subsection (a), above: (i) either party may disclose the other party's Confidential Information to its Sublicensees or academic collaborators or subcontractors, to the extent reasonably necessary in granting permitted sublicenses or otherwise exercising license rights expressly granted to it under the terms of this Agreement and the rights set forth in (P)2.1F, provided that prior to any such disclosure such entities execute a written confidentiality agreement providing protections similar to those contained herein; (ii) either party may disclose the other party's Confidential Information to the extent reasonably necessary in prosecuting or defending litigation, complying with applicable governmental regulations or court orders or otherwise submitting -73- information to tax or other governmental authorities; provided that, if a party is required to make any such disclosure of the other party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other party of such disclosure and, will use its reasonable efforts to secure confidential treatment of such Confidential Information (whether through protective orders or otherwise); and (iii) the parties will reasonably cooperate with each other in the making of reasonable disclosures of Confidential Information to actual and potential Agents, investment bankers, investors and potential investors of each party; provided, however, that such disclosures shall only be made under the terms of a confidentiality agreement providing protections similar to those contained herein. B. Restricted Access. ----------------- (a) Disclosure of a party's Confidential Information to any of the officers, employees, consultants or Agents of the other shall be made only if and to the extent necessary to carry out rights and responsibilities under this Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities and shall only be made to persons who are bound to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement. -74- (b) Following termination or expiration of the term of this Agreement, each party will return all the Confidential Information disclosed to it by the other party pursuant to this Agreement, including all copies and extracts of documents, within 60 days of the request of the disclosing party; provided that a party may retain Confidential Information of the other party relating to any license or right to use Intellectual Property that survives such termination and one copy of all other Confidential Information may be retained in confidential and inactive archives solely for the purpose of establishing the contents thereof and to determine the continuing obligations of each party. C. Employee Confidentiality Agreements. ----------------------------------- MAXYGEN and PIONEER each represent that all of its employees and all of the employees of its Affiliates, and any consultants to such party or its Affiliates, participating in the R&D Program or who shall otherwise have access to Confidential Information of the other party are bound by written agreements to maintain such information in confidence and not to use such information except as expressly permitted herein. Each party agrees to enforce confidentiality obligations to which its employees and consultants (and those of its Affiliates) are obligated. 6.2 Publicity. Except as expressly provided herein, neither party may --------- disclose the existence or terms of this Agreement without the prior written consent of the other party; provided, however, -75- that either party may make such a disclosure to the extent required by law and that either party may make a disclosure of the existence and terms of this Agreement to its attorneys, advisers, investors, prospective investors, lenders and other financing sources, and to strategic partners or licensees for Licensed Products under circumstances that reasonably ensure the confidentiality thereof. Notwithstanding the foregoing, the parties may agree upon a press release to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement; thereafter, PIONEER and MAXYGEN may each disclose to third parties the information contained in such press release and Q&A without the need for further approval by the other. In addition, MAXYGEN may, following consultation with PIONEER and with the prior written consent of PIONEER, (i) make public statements regarding PIONEER Licensed Products by announcing the achievement of milestones and fees therefor, and (ii) make public statements regarding the overall success rate(s) achieved by and/or for its customers with the use of its technology, including a general description of activities undertaken in connection with the R&D Program, and success of such activities, provided it may not disclose PIONEER's identity; provided, if PIONEER has not approved a particular proposed disclosure within thirty (30) days of submission by MAXYGEN of such proposed disclosure, then MAXYGEN shall be free to make the proposed disclosure. Once a particular disclosure has been made, MAXYGEN shall be free to make further -76- disclosures which do not materially differ therefrom without any further review from PIONEER. PIONEER is free to make public statements, press releases, and the like, with respect to PIONEER Licensed Products. 6.3 Publication. A party wishing to publish or otherwise publicly ----------- disclose the Research Results shall first submit a draft of the proposed manuscripts to the RDSC for review at least ninety (90) days prior to any submission for publication or other public disclosure. To avoid loss of patent rights as a result of premature public disclosure of patentable information, the RDSC shall notify the submitting party in writing within thirty (30) days after receipt of such a proposed disclosure whether either party desires to file a patent application on any invention disclosed in such proposed disclosure. In the event that the reviewing party desires to file such a patent application, the submitting party shall withhold publication or disclosure of such proposed disclosure until the earlier of (i) the date a patent application is filed thereon, or (ii) the date the parties determine after consultation that no patentable invention exists. Further, if the proposed disclosure contains Confidential Information of the reviewing party that is subject to nondisclosure obligations under this Section 6, the submitting party agrees to remove such Confidential Information upon request of the reviewing party. -77- SECTION 7. INTELLECTUAL PROPERTY RIGHTS. -------------------------------------------- 7.1 Disclosure of Inventions. Each party shall promptly inform the ------------------------ RDSC of all Research Results relevant to consideration of the progress of each project towards its pre-agreed goals, in accordance with a procedure established by the RDSC; provided, MAXYGEN shall have no obligation to disclose any Shuffling Technology to the RDSC or PIONEER, except to the extent necessary in patent filings claiming Shuffled Genes. 7.2 Ownership. --------- A. MAXYGEN Intellectual Property Rights. ------------------------------------ MAXYGEN shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any Research Results developed or invented solely by employees or consultants of MAXYGEN. B. PIONEER Intellectual Property Rights. ------------------------------------ PIONEER shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any Research Results developed or invented solely by employees or consultants of PIONEER. -78- C. Joint Intellectual Property Rights. ---------------------------------- PIONEER and MAXYGEN shall jointly own all Joint Research Results. D. PIONEER Materials. PIONEER shall remain the sole owner of all ----------------- PIONEER Materials. E. MAXYGEN Materials. MAXYGEN shall remain the sole owner of all ----------------- MAXYGEN Materials. 7.3 Assignment of Shuffling Technology and PIONEER Product Technology. ----------------------------------------------------------------- A. Notwithstanding (P)7.2, PIONEER agrees to assign, and hereby assigns, to MAXYGEN all right, title and interest in Joint Intellectual Property and PIONEER Intellectual Property claiming Shuffling Technology. B. Notwithstanding (P)7.2, MAXYGEN agrees to assign, and hereby assigns, to PIONEER all right, title and interest in Joint Intellectual Property and MAXYGEN Intellectual Property claiming PIONEER Product Technology. C. MAXYGEN and PIONEER agree to timely execute such documents as are necessary to result in (i) MAXYGEN's sole ownership of patent applications and patents claiming Shuffling Technology as set forth in (P)7.3A and (ii) PIONEER's sole ownership -79- of patent applications and patents claiming PIONEER Product Technology as set forth in (P)7.3B. 7.4 Inventorship. Inventorship of patentable inventions shall be ------------ determined by the Patent Coordinators by applying the standards embodied in United States patent law. SECTION 8. PROVISIONS CONCERNING THE FILING, PROSECUTION ------------------------------------------------------------ AND MAINTENANCE OF PATENT RIGHTS. --------------------------------- The following provisions relate to the filing, prosecution and maintenance of Patent Rights claiming inventions made in connection with the R&D Program. 8.1 Filing of Patents. ----------------- A. Primary Responsibilities. In consultation with the Patent ------------------------ Coordinators, the RDSC will coordinate the determination of what patents will be filed on Research Results. Unless the RDSC agrees otherwise in writing, the parties shall have the following responsibilities for patent filing, prosecution and maintenance (including the defense of interferences, oppositions and similar proceedings) (collectively, "Patent Activities"): (a) DNA Shuffling. MAXYGEN will be responsible, at its sole ------------- expense, for Patent Activities for all inventions made by MAXYGEN or PIONEER or jointly by the parties in connection with the R&D Program relating to Shuffling Technology. -80- (b) Plant Transformation, PIONEER Product Testing and Product --------------------------------------------------------- Development. PIONEER will be responsible, at its sole expense, for Patent - ----------- Activities with respect to all inventions made by MAXYGEN or PIONEER or jointly by the parties in connection with the R&D Program relating to PIONEER Product Technology, methods of plant transformation, PIONEER product testing and development of PIONEER Licensed Products. (c) Gene Libraries. MAXYGEN will be responsible, at its sole expense, -------------- for Patent Activities with respect to inventions made solely by MAXYGEN in connection with the R&D Program relating to the Gene Libraries produced by Shuffling. PIONEER will be responsible, at its sole expense, for Patent Activities with respect to inventions made solely by PIONEER (if any) relating to the Gene Libraries produced by Shuffling. In the case of joint inventions made in connection with the R&D Program relating to the Gene Libraries, Patent Activities shall be conducted by outside counsel acceptable to both parties with equal control and joint responsibility for costs incurred in connection with the applicable Patent Activities. (d) Shuffled Genes, Proteins Encoded by such Genes, Transgenic Plants ----------------------------------------------------------------- Containing Shuffled Genes, and Uses Thereof. PIONEER will be responsible, at - ------------------------------------------- its sole expense, for Patent Activities with respect to inventions made by MAXYGEN or PIONEER or jointly by the parties in connection with the R&D Program relating -81- to Shuffled Genes (excluding MAXYGEN SGDs), proteins encoded by Shuffled Genes (excluding MAXYGEN SGDs), transgenic plants containing Shuffled Genes (excluding MAXYGEN SGDs), and uses thereof in the PIONEER Crops; however, if a patent application or patent solely claims uses of such Shuffled Genes (other than PIONEER SGDs), proteins, or transgenic plants outside of PIONEER Crops, then MAXYGEN will be responsible, at its sole expense, for such Patent Activities. (e) Screening Assays and Inventions not Covered in Other Groups. ----------------------------------------------------------- PIONEER will be responsible, at its sole expense, for Patent Activities with respect to inventions made solely by PIONEER in connection with the R&D Program relating to screening assays and inventions not otherwise covered in the subsections of (P)8.1A above. MAXYGEN will be responsible, at its sole expense, for Patent Activities with respect to inventions made solely by MAXYGEN in connection with the R&D Program relating to screening assays and inventions not covered in this (P)8.1A above. In the case of joint inventions made in connection with the R&D Program relating to screening assays and inventions not covered in (P)8.1(A) above, Patent Activities shall be conducted by outside counsel acceptable to both parties with equal control and joint responsibility for costs incurred in connection with the applicable Patent Activities. B. Cooperation. In each case above, the party responsible for ----------- Patent Activities for the applicable patent -82- applications shall use reasonable efforts to obtain patent coverage that is as broad as possible to cover all potential commercial applications thereof, and shall assure that the other party will have the opportunity to provide meaningful and substantive review and comment with respect thereto. Except as otherwise expressly provided herein, applications filed on joint inventions shall be written and filed by outside counsel acceptable to both parties, but under the control of the responsible party. Each party shall be kept informed of all substantive matters relating to the preparation and prosecution of all patent applications claiming or disclosing inventions made in connection with the R&D Program. Each party shall promptly provide the other with copies of all patent prosecution and maintenance documentation and correspondence so that the other shall be currently and promptly informed of the continuing prosecution and maintenance of patent applications and patents claiming or disclosing inventions made in connection with the R&D Program. Each party shall have the right to review and comment upon such documentation and correspondence, as well as all specifications, claims and responses to office actions prior to their submission to the relevant government patent office. C. Elective Termination of Prosecution and Maintenance of Patent ------------------------------------------------------------- Rights. If at any time the party responsible for Patent Activities pursuant to - ------ (P)8.1A above (the "Responsible Party") does not wish to file or wishes to discontinue the prosecution or maintenance of any Jointly Invented Patent Rights claiming -83- inventions made in connection with the R&D Program filed in any country, on a country-by-country basis, it shall promptly give notice of such intention to the other party. The latter shall have the right, but not the obligation, to assume responsibility for the prosecution of any such Patent Rights in the applicable country at its own expense, by giving notice to the Responsible Party of such intention within 30 days. 8.2 Expenses. Except as otherwise expressly provided above, the -------- Responsible Party will bear the costs of Patent Activities with respect to all Patent Rights for which it has responsibility pursuant to (P)8.1. 8.3 Patent Coordinators. MAXYGEN and PIONEER shall each appoint a patent ------------------- coordinator ("Patent Coordinator") who shall serve as such party's primary liaison with the other party on matters relating to patent filing, prosecution, maintenance and enforcement. Each party may replace its Patent Coordinator at any time by notice in writing to the other party. The initial Patent Coordinator from MAXYGEN is [*******] and from PIONEER is [*******]. -84- SECTION 9. LEGAL ACTION. -------------------------- 9.1 Actual or Threatened Infringement. --------------------------------- A. Notice. In the event either party becomes aware of any actual or ------ threatened commercially material infringement or use of any Patent Rights (collectively, an "Infringement"), that party shall promptly notify the other party and provide it with full details. The parties will meet to discuss the appropriate course of action, and may collaborate in pursuing such course or action. B. Primary Responsibility. Notwithstanding the foregoing, if the ---------------------- parties do not otherwise agree on a course of action, PIONEER shall have primary responsibility for the prosecution, prevention or termination of any Infringement of PIONEER's sole Patent Rights hereunder, at PIONEER's expense and with the sharing of recoveries as specified below and MAXYGEN shall have primary responsibility for the prosecution, prevention or termination of any Infringement of MAXYGEN's Patent Rights, at MAXYGEN's expense and with the sharing of recoveries as specified below. If either party which has primary responsibility as described above determines that it is necessary or desirable for the other to join any such suit, action or proceeding, the second party shall execute all papers and perform such other acts as may be reasonably required in the circumstances, at the responsible party's expense. -85- C. Jointly-Owned Patents. In the event of an Infringement of Patent --------------------- Rights owned jointly by MAXYGEN and PIONEER, the parties shall agree which party will have the rights and responsibilities of abating such an Infringement, and how the expenses of abating any such Infringement shall be shared. In the event the responsible party becomes involved in any action or proceeding relating to the applicable Patent Rights, the responsible party shall use patent counsel reasonably acceptable to the other party, and shall keep the other party fully informed as to the status of such matters. In the event only one party wishes to pursue in such proceeding, it shall have the right to proceed alone, at its expense, and may retain any recovery, subject to (P)9.1D below, and the other party agrees, at the request and expense of the party initiating such action, to cooperate and join in any proceedings in the event that a third party asserts that the co-owner of such Joint Invention is necessary or indispensable to such proceedings. D. Costs. PIONEER shall bear the cost of any proceeding or suit ----- under this (P)9.1 brought by PIONEER and MAXYGEN shall bear the cost of any such proceeding or suit brought by MAXYGEN. In each such case, the responsible party shall have the right first to reimburse itself out of any sums recovered in such suit or in its settlement for all reasonable costs and expenses, including reasonable attorney's fees, related to such suit or settlement. The remainder is next to be used to reimburse the other -86- party for its costs and expenses so incurred. Any remaining amounts or any non- monetary recovery shall be kept by the responsible party. E. Separate Counsel. Each party shall always have the right to be ---------------- represented by counsel of its own selection and at its own expense in any suit instituted under this Section by the other party for an Infringement. F. Standing. If either party lacks standing and the other party has -------- standing to bring any such suit, action or proceeding as specified above, then the responsible party may request the other party to do so at the responsible party's expense. The party with standing is under no obligation to comply with such request, but rather is free to refuse such request. G. Cooperation. In any action under this (P)9.1, each party shall ----------- fully cooperate with and assist the other as reasonably requested. No suit regarding MAXYGEN or Joint Intellectual Property may be settled by PIONEER without MAXYGEN's consent. No suit regarding PIONEER or Joint Intellectual Property may be settled by MAXYGEN without PIONEER's consent. With respect to Joint Intellectual Property, no suit shall be settled by either party without the other party's consent, which consent shall not be unreasonably withheld. -87- 9.2 Defense of Claims Asserted by Third Parties. ------------------------------------------- A. Infringement Claims Against MAXYGEN. If any action, suit or ----------------------------------- proceeding is brought against MAXYGEN or any officer, director, employee, Affiliate or Agent of MAXYGEN alleging the infringement of intellectual property rights of a third party by reason of (i) the making or use of any Gene or Gene Variants in the conduct of the R&D Program (except to the extent covered by (P)9.2B(i)), or (ii) the discovery, development, manufacture, use, sale, importation or offer for sale of a PIONEER Licensed Product by PIONEER or its Affiliates, Agents or Sublicensees, PIONEER shall indemnify, defend and hold harmless MAXYGEN and its officers, directors, employees, Affiliates and agents from all liabilities arising out of or in connection with any such action, suit or proceeding. MAXYGEN shall have the right to separate counsel at its own expense in any such action, suit or proceeding. The parties will cooperate with each other in the defense of any such suit, action or proceeding. PIONEER shall not compromise, settle or otherwise dispose of any such suit, action or proceeding without MAXYGEN's prior consent, provided that MAXYGEN shall not unreasonably withhold its consent to any settlement which does not have a material adverse effect on MAXYGEN or MAXYGEN's business. B. Infringement Claims Against PIONEER. If any action, suit or ----------------------------------- proceeding is brought against PIONEER or any officer, director, employee, Affiliate or agent of PIONEER alleging the -88- infringement of intellectual property rights of a third party by reason of (i) the use of Shuffling Technology in the conduct of the R&D Program or in the development and commercialization of a PIONEER Licensed Product; and (ii) the discovery, development, manufacture, use, sale, importation or offer for sale of an MAXYGEN Licensed Product by MAXYGEN or its Affiliates, agents or Sublicensees, MAXYGEN shall indemnify, defend and hold harmless PIONEER and its officers, directors, employees, Affiliates and agents from all liabilities arising out of or in connection with any such action, suit or proceeding. PIONEER shall have the right to separate counsel at its own expense in any such action, suit or proceeding. The parties will cooperate with each other in the defense of any such suit, action or proceeding. MAXYGEN shall not compromise, litigate, settle or otherwise dispose of any such suit, action or proceeding without PIONEER's advice and prior consent, provided that PIONEER shall not unreasonably withhold its consent to any settlement which does not have a material adverse effect on PIONEER or PIONEER's business. C. Notice. In the event a suit or proceeding subject to this (P)9.2 ------ is brought against either party that party shall promptly notify the other party and provide it with details. SECTION 10. TERMINATION AND DISENGAGEMENT. -------------------------------------------- 10.1 Term. This Agreement shall be effective as of the Effective Date and, ---- unless otherwise terminated earlier pursuant to -89- the other provisions of this Section 10, shall continue in full force and effect on a Licensed Product-by-Licensed Product and country-by-country basis until the date that is the later of: (i) PIONEER has completed its payment obligations for the R&D Program, or (ii) both PIONEER and MAXYGEN have completed all royalty obligations due under any license acquired hereunder in such country. 10.2 Material Breach. --------------- A. In the event either party has materially breached or defaulted in the performance of any of its obligations hereunder, the other party may terminate the licenses granted to the other party with respect to the applicable Licensed Products on a Crop-and-Trait Category by Crop-and-Trait Category ("Crop-and-Trait Specific") basis [*******] or, in cases where Crop-and-Trait Category basis does not apply, on a Licensed Product-by-Licensed Product basis. If more than one Licensed Product is being commercially developed or exploited by the breaching party or its Affiliates or Sublicensees hereunder, and a breach only relates to a particular Licensed Product, the other party shall be entitled to terminate the licenses only with respect to the applicable Licensed Product. A material breach of this Agreement by a party shall be deemed to have occurred: (a) upon the failure of a party to pay, when due, any amount due hereunder to the other party, effective thirty (30) -90- days after receiving notice from the non-breaching party of such failure to pay; or (b) upon the material breach by a party of the provisions of Section 5 effective sixty (60) days after receiving notice from the non- breaching party of such breach; or (c) upon breach of any material obligation or condition by a party, effective sixty (60) days after receiving written notice from the non- breaching party of such breach. B. The foregoing notwithstanding, if the default or breach is cured or shown to be non-existent within the 30-day or 60-day notice period described above, the notice shall be deemed automatically withdrawn and of no effect. 10.3 Bankruptcy. ---------- A. If either party (the "Insolvent Party") files for protection under bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within 60 days of the filing thereof, then the other party may, at its sole election upon notice to the Insolvent Party, terminate the entire Agreement by notice to such party. -91- B. All rights and licenses granted under or pursuant to this Agreement shall be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses or rights to "intellectual property" as defined under Section 101(52) of the U.S. Bankruptcy Code. The parties agree that each party, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code, subject to performance by the licensee of its preexisting obligations under this Agreement. C. Notwithstanding Section B. above, the parties agree that under this Agreement PIONEER has not been granted and shall not receive any right or license to practice any Shuffling Technology, and the provisions of (P)10.3B above do not apply to any intellectual property and materials relating thereto. 10.4 Limited Cause Termination. ------------------------- A. If PIONEER or MAXYGEN or a third party does not demonstrate that Shuffled Genes or other genes created or developed through the use of MAXYGEN Shuffling Technology can be [*******], as shown by [*******], within thirty-six (36) months after the Effective Date, PIONEER shall have the right to terminate this Agreement on six (6) months notice to MAXYGEN; provided that such notice shall be deemed automatically withdrawn if MAXYGEN makes such a demonstration prior to the effective date of such termination. All payments due to MAXYGEN on or before the effective date of -92- termination shall be paid by PIONEER prior to early termination under this clause. B. If prior to the end of the Research Term all research activities to be conducted in the R&D Program have been successfully completed or terminated by written agreement of the parties, and PIONEER and MAXYGEN are unable to agree on new research activities in new trait categories to be conducted in the R&D Program and the terms thereof as provided in (P)2.1E(a), then PIONEER shall have the right to terminate the R&D Program on six (6) months notice to MAXYGEN. All payments due to MAXYGEN on or before the effective date of termination shall be paid by PIONEER prior to early termination under this clause. 10.5 Effect of Termination. --------------------- A. Accrued Obligations. Termination of this Agreement, for any ------------------- reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. B. Return of Confidential Information and Materials. Upon any ------------------------------------------------ termination of this Agreement, PIONEER and MAXYGEN shall -93- promptly return to the other party all Confidential Information received from the other party hereto (except one copy of which may be retained by legal counsel for archival purposes and ensuring compliance with Section 6) and other pertinent obligations under this Agreement, and all PIONEER Materials and MAXYGEN Materials shall be returned to the owner thereof. C. Licenses. -------- (i) In the event that PIONEER terminates the licenses to MAXYGEN for a MAXYGEN Licensed Product pursuant to (P)10.2, the licenses granted to MAXYGEN in Section 3 shall terminate solely with respect to such MAXYGEN Licensed Product, and the licenses to MAXYGEN with respect to other MAXYGEN Licensed Products shall remain in full force and effect, subject to all applicable terms and conditions of this Agreement. (ii) In the event that MAXYGEN terminates the licenses to PIONEER for a PIONEER Licensed Product, or for a PIONEER Crop and Trait Category, pursuant to (P)10.2, the licenses granted to PIONEER in Section 3 shall terminate solely with respect to such PIONEER Licensed Product, or PIONEER Crop and Trait Category, as the case may be, and the licenses to PIONEER with respect to other PIONEER Licensed Products, or other PIONEER Crops and Trait Categories, as the case may be, shall remain in full force and effect, subject to all applicable terms and conditions of this Agreement. -94- (iii) In the event PIONEER terminates the Agreement pursuant to (P)10.3(A), the licenses granted to MAXYGEN in Section 3 shall terminate. (iv) In the event MAXYGEN terminates the Agreement pursuant to (P)10.3(A), the licenses granted to PIONEER in Section 3 shall terminate. (v) In the event that PIONEER terminates the Agreement pursuant to (P)10.4A, all licenses granted to PIONEER and MAXYGEN in Section 3 shall terminate. (vi) Except as expressly provided in this (P)10.5(C), in the event of any termination of one or more licenses (but not the entire Agreement) under (P)10.2 or (P)10.3, the remaining licenses granted pursuant to (P)3.1 and (P)3.2, and the covenants in (P)3.6B solely to the extent they relate to the surviving licenses, shall remain in effect. 10.6 Surviving Provisions. Paragraphs 2.1B(c), 2.1F, 2.5, 3.3, 3.4, 3.5, -------------------- 4.7, 4.9, 4.10, 4.11, 10.5 and 10.6, and Sections 6, 7, 8, 9, 11, 12, 13 and 14 of this Agreement shall survive the expiration or termination of this Agreement for any reason. -95- SECTION 11. REPRESENTATIONS AND WARRANTIES. --------------------------------------------- 11.1 Mutual Representations. MAXYGEN and PIONEER each represents and ---------------------- warrants as follows: A. Organization. ------------ It is a corporation duly organized, validly existing and is in good standing under the laws of the jurisdiction first set forth above, is qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the performance of its obligations hereunder requires such qualification and has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted, to own, lease and operate its properties and to execute, deliver and perform this Agreement. B. Authorization. ------------- The execution, delivery and performance by it of this Agreement have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders or (b) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to it or any provision of its charter documents. -96- C. Binding Agreement. ----------------- This Agreement is a legal, valid and binding obligation of it enforceable against it in accordance with its terms and conditions. D. Inventor's Assignment of Rights. ------------------------------- It requires that every employee and consultant that is an inventor of a patentable invention is under an obligation to assign their rights to it, and that it actively requires the signing of such assignment. E. Warranty Disclaimer. The parties acknowledge that the research ------------------- activities contemplated hereunder are experimental, and that the R&D Program may not be successful. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION AND EXTENDS NO WARRANTY OF ANY KIND WITH RESPECT TO ANY CONFIDENTIAL INFORMATION, PATENT RIGHTS, KNOW-HOW, SHUFFLING TECHNOLOGY, SHUFFLED GENES, LICENSED PRODUCTS, OR OTHER TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON- INFRINGEMENT, AND VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING, WITH RESPECT TO ANY AND ALL OF THE FOREGOING. F. Limited Liability. EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER ----------------- MAXYGEN NOR PIONEER WILL BE LIABLE TO THE OTHER -97- WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (i) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS OR (ii) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES. SECTION 12. ADDITIONAL INDEMNIFICATION. ----------------------------------------- 12.1 Indemnification of MAXYGEN by PIONEER. PIONEER shall indemnify, ------------------------------------- defend and hold harmless MAXYGEN, its Affiliates and their respective directors, officers, employees, and Agents and their respective successors, heirs and assigns (the "MAXYGEN Indemnitees"), against any liability, damage, loss or expense (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon the MAXYGEN Indemnitees, or any of them, in connection with any claims, suits, actions, demands or judgments of third parties (except those subject to (P)9.2A, which shall be governed by the terms thereof), including without limitation personal injury and product liability matters (except to the extent such claims, suits, actions, demands or judgments result from a willful material breach of this Agreement, gross negligence or willful misconduct on the part of a MAXYGEN Indemnitee) arising directly out of or in connection with (i) any actions of PIONEER in the performance of the R&D Program, or (ii) the development, testing, production, manufacture, promotion, import, sale or use by any person of any PIONEER Licensed Product manufactured or sold by -98- PIONEER or by an Affiliate, licensee, Sublicensee, distributor or Agent of PIONEER. 12.2 Indemnification of PIONEER by MAXYGEN. MAXYGEN shall indemnify, ------------------------------------- defend and hold harmless PIONEER, its Affiliates and their respective directors, officers, employees, and Agents and their respective successors, heirs and assigns (the "PIONEER Indemnitees"), against any liability, damage, loss or expense (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon the PIONEER Indemnitees, or any of them, in connection with any claims, suits, actions, demands or judgments of third parties (except those subject to (P)9.2B, which shall be governed by the terms thereof), including, without limitation, personal injury and product liability matters (except to the extent such claims, suits, actions, demands or judgments result from a willful material breach of this Agreement, gross negligence or willful misconduct on the part of a PIONEER Indemnitee) arising out of or in connection with (i) any actions of MAXYGEN in the performance of the R&D Program, or (ii) the development, testing, production, manufacture, promotion, import, sale or use by any person of any MAXYGEN Licensed Product manufactured or sold by MAXYGEN or by an Affiliate, agent, licensee, Sublicensee, distributor or Agent of MAXYGEN. 12.3 Procedure. A party (the "Indemnitee") that intends to claim --------- indemnification under this Section 12 shall promptly notify -99- the other party (the "Indemnitor") in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its Affiliates, Sublicensees or their directors, officers, employees, agents, consultants or counsel intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel mutually satisfactory to the parties. The indemnity agreement in this Section 12 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is made without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 12. At the Indemnitor's request, the Indemnitee under this Section 12, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification and provide full information with respect thereto. -100- SECTION 13. DISPUTE RESOLUTION. --------------------------------- 13.1 Informal Dispute Resolution. --------------------------- A. Senior Officials. The parties recognize that a bona fide dispute ---------------- as to certain matters may from time to time arise during the term of this Agreement which relates to either party's rights or obligations hereunder. In the event of the occurrence of such a dispute, either party may, by notice to the other party, have such dispute referred to the Chief Executive Officer of MAXYGEN and the Vice President, Trait and Technology Development of PIONEER, or their successors or counterparts, for resolution by good faith negotiations within 30 days after such notice is received. B. Interim Conduct. If the parties are unable to reach agreement --------------- with respect to the next Work Plan as provided above, they shall continue to work at the Staffing Level then prevailing, in a manner consistent with and in furtherance of the then current Work Plan, notwithstanding the expiration of the then-current Work Plan. If the parties are unable to reach any agreement with respect to a Work Plan by the expiration of the then-current Work Plan pursuant to (P)13.1(A) above, then such dispute shall be resolved as described in (P)13.2 below. In addition, any dispute relating to the financial obligations of either party to the other shall be subject to (P)13.2 below. -101- 13.2 Arbitration. Any dispute under this Agreement relating to the Work ----------- Plans or the conduct of R&D Program or the payments due under this Agreement and/or the financial obligations of the parties hereunder, which is not settled by mutual consent pursuant to (P)13.1 above, shall be finally settled by binding arbitration, conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association by three (3) independent, neutral arbitrators appointed in accordance with said rules; provided, unless otherwise agreed by the parties any dispute relating to the establishment of a royalty rate to be arbitrated pursuant to (P)4.3A, (P)4.3B or (P)4.3E shall be resolved by a single independent, neutral arbitrator. Any arbitration shall be held in San Francisco, California. The arbitrators shall determine what discovery shall be permitted, consistent with the goal of limiting the cost and time which the parties must expend for discovery; provided the arbitrators shall permit such discovery as they deem necessary to permit an equitable resolution of the dispute. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof. Except as otherwise expressly provided in this Agreement, the costs of the arbitration, including administrative and arbitrator(s)' fees, shall be shared equally by the parties and each party shall bear its own costs and attorneys' and witness' fees incurred in connection with the arbitration. A disputed performance or suspended performances pending the -102- resolution of the arbitration must be completed within a reasonable time period following the final decision of the arbitrator(s). The arbitrators shall be directed that any arbitration subject to this Section shall be completed within one (1) year from the filing of notice of a request for such arbitration. The arbitration proceedings and the decision shall not be made public without the joint consent of the parties and each party shall maintain the confidentiality of such proceedings and decision unless otherwise permitted by the other party. Any decision which requires a monetary payment shall require such payment to be payable in United States dollars, free of any tax or other deduction. The parties agree that the decision shall be the sole, exclusive and binding remedy between them regarding any and all disputes, controversies, claims and counterclaims presented to the arbitrators. Any award may be entered in a court of competent jurisdiction for a judicial recognition of the decision and an order of enforcement. SECTION 14. MISCELLANEOUS. ---------------------------- 14.1 Notices. All notices shall be in writing mailed via certified mail, ------- return receipt requested, or overnight express mail, courier providing evidence of delivery, addressed as follows, or to such other address as may be designated by notice so given from time to time: -103- If to PIONEER: PIONEER HI-BRED INTERNATIONAL, INC. 7300 NW 62/nd/ Avenue Johnson, Iowa 50131-1004 Attention: Vice President, Trait and Technology Development with a copy to: PIONEER HI-BRED INTERNATIONAL, INC. 800 Capital Square 400 Locust Street Des Moines, Iowa 50309-234 Attention: General Counsel If to MAXYGEN: MAXYGEN, INC. 3410 Central Expressway Santa Clara, California 95051 Attention: Chief Executive Officer Notices shall be deemed given as of the date received. 14.2 Governing Law and Jurisdiction. This Agreement, and any arbitration ------------------------------ relating hereto, shall be governed by and construed in accordance with the laws of the State of California, without regard to the application of principles of conflicts of law. 14.3 Venue. The exclusive venue of any dispute arising out of or in ----- connection with the performance of or any breach of this Agreement which is not subject to arbitration pursuant to (P)13.2, shall be the state courts or U.S. district court located in or for MAXYGEN's principal place of business, and the parties hereby irrevocably consent to the personal jurisdiction of such courts. Notwithstanding the above, this (P)14.3 shall be terminated and have no further force and effect if MAXYGEN is acquired by or merges with a third party having assets of Five hundred million U.S. dollars ($500,000,000) or more prior to the merger with or acquisition of MAXYGEN. -104- 14.4 Binding Effect. This Agreement shall be binding upon and inure to the -------------- benefit of the parties and their respective legal representatives, successors and permitted assigns. 14.5 Headings. Section and subsection headings are inserted for -------- convenience of reference only and do not form a part of this Agreement. 14.6 Counterparts. This Agreement may be executed simultaneously in two or ------------ more counterparts, each of which shall be deemed an original. 14.7 Amendment; Waiver. This Agreement may be amended, modified, superseded ----------------- or canceled, and any of the terms may be waived, only by a written instrument executed by each party or, in the case of waiver, by the party or parties waiving compliance. The delay or failure of any party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same. No waiver by any party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement. 14.8 No Agency or Partnership. Nothing contained in this Agreement shall ------------------------ give either party the right to bind the other, or -105- be deemed to constitute the parties as agents for the other or as partners with each other or any third party. 14.9 Assignment and Successors. Except as expressly provided herein, this ------------------------- Agreement may not be assigned by either party without the consent of the other, except that each party may, without such consent, assign this Agreement and the rights, obligations and interests of such party, in whole or in part, to any of its Affiliates, to any purchaser of all or substantially all of its assets in the line of business to which this Agreement pertains, or to any successor corporation resulting from any merger or consolidation of such party into such successor corporation. 14.10 Force Majeure. Neither PIONEER nor MAXYGEN shall be liable for ------------- failure of or delay in performing obligations set forth in this Agreement, and neither shall be deemed in breach of its obligations, if such failure or delay is due to natural disasters or any causes beyond the reasonable control of PIONEER or MAXYGEN, as the case may be, and notice of such prevention of performance promptly provided by the nonperforming party to the other party. Such excuse shall be continued so long as the condition constituting force majeure continues and the nonperforming party takes reasonable efforts to remove the condition. In event of such force majeure, the party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder. -106- 14.11 Interpretation. The parties hereto acknowledge and agree that: -------------- (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto and not in a favor of or against any party, regardless of which party was generally responsible for the preparation of this Agreement. 14.12 Integration: Severability. This Agreement is the sole agreement ------------------------- with respect to the subject matter hereof and supersedes all other agreements and understandings between the parties with respect to same, including but not limited to the Confidentiality Agreement between MAXYGEN and PIONEER dated July 27, 1998. If any provision of this Agreement is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, it is the intention of the parties that the remainder of this Agreement shall not be affected. 14.13 Approvals. Each party shall be responsible, at its expense, for --------- obtaining any approvals from the governmental entities which may be required under applicable law for the development, growth or sale of Licensed Products sold by it or on its behalf. -107- 14.14 Export Controls. This Agreement is made subject to any --------------- restrictions concerning the export of Licensed Products or Research Results or Intellectual Property ("Technology") from the United States that may be imposed upon or related to either party to this Agreement from time to time by the Government of the United States. Neither party will export, directly or indirectly, any Technology to any countries for which the United States Government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the license or written approval to do so from the Department of Commerce or other agency of the United States Government when required by applicable statute or regulation. -108- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed this 23/rd/ day of December, 1998 by their duly authorized representatives. PIONEER HI-BRED INTERNATIONAL, INC. By: /s/ Anthony Cavalieri --------------------- Anthony Cavalieri Vice President MAXYGEN, INC. By: /s/ Russell Howard ------------------ Russell Howard President and CEO -109- APPENDIX A ---------- [*******] [Appendix A contains the initial work plan for this Agreement, which details the specific projects to be undertaken in the R&D Program, timelines for the specified research activities, and technical information related to the conduct of the specified research.] APPENDIX B ---------- [*******] [Appendix B identifies the specific crops and trait categories that are the subject of this Agreement.] EX-10.13 6 AGREEMENT BETWEEN MAXYGEN AND GIST-BROCADES Exhibit 10.13 AGREEMENT This Agreement is made and entered into on this 15th day of March, 1999 ("Effective Date"), by and between: 1. MAXYGEN INC., a company incorporated under the laws of the State of Delaware and established at 3410 Central Expressway, Santa Clara, California, 95051, United States of America ("Maxygen"), of the one part; and 2. GIST-BROCADES B.V., a company incorporated under the laws of The Netherlands and established at Wateringseweg 1, 2611 XT Delft, The Netherlands ("GB"), of the other part; hereinafter sometimes individually referred to as "Party" and collectively as "Parties". WITNESSETH ---------- WHEREAS, GB is interested in having carried out research into new enzyme compositions; and WHEREAS, Maxygen possesses know-how, expertise and facilities to perform the aforementioned research. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and conditions herein contained, the Parties hereto have agreed and do by these presents agree as follows: ARTICLE I. DEFINITIONS In addition to the terms defined elsewhere in this Agreement the following terms shall, as used herein, have the following respective meanings: (a) "Affiliate", shall mean: i) any entity in which a Party to this Agreement, directly or indirectly: - owns at least half the capital or business assets; - has the power to exercise at least half the voting rights; or - has the power to appoint at least half the members of the supervisory board, board of directors or bodies legally representing the entity; * CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AND THE NON-PUBLIC INFORMATION HAS BEEN FILED SEPARATELY WITH THE SEC. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ii) entities which directly or indirectly have in or over a Party to this Agreement the rights or powers listed in (i); and iii) entities in which an entity referred to in (ii) directly or indirectly has the rights or powers listed in (i); (b) "Commencement Date", shall mean: the Effective Date; (c) "Cost Savings", shall mean: the cost savings in [*******] in the Field, achieved by GB, a third party sublicensee appointed by GB or an Affiliate of GB, generated through the use of GB Products. The methodology for calculating GB's production costs in the Field prior to and after implementation of the Results is attached as Annex 1. This cost difference shall be the basis for calculating the royalty due to Maxygen under Article 11. The Annex in addition provides for a methodology for calculating cost differences in the event GB on its own account achieves any decrease in production costs in the Field after implementation of the Research Results or Patent Rights; (d) "Field", shall mean: [*******]; (e) "Force Majeure", shall mean: the event that either Party is prevented from or is unable to perform any of its obligations under this Agreement due to any act of God; fire; casualty; flood; war; strike; lockout; failure of public utilities; injunction or any act, exercise, assertion or requirement of governmental authority, including any governmental law, order, or regulation permanently or temporarily prohibiting or reducing the level of research and development work hereunder; epidemic; destruction of production facilities; riots; insurrection; or any other cause beyond the reasonable control of a Party; (f) "FTE", shall mean: the equivalent of one full year of work on a full time basis by a scientist or other professional possessing skills and experience necessary to carry out the Study by Maxygen, determined in accordance with Maxygen's normal policies and procedures. Maxygen's current standard FTE rate equals a total of [*******] hours per year. This rate is subject to reasonable fluctuations; (g) "GB Information", shall mean: any and all patented and non-patented data, organisms, know-how, instructions, strains and other information in the field of [*******], specifically (i) vectors and plasmids for expression in [*******], (ii) bioassays and HPLC methods, and (iii) information on the kinetics of [*******] owned or controlled by GB as of the Effective Date or acquired by GB thereafter, not being the Research Results or Patent Rights, disclosed, either directly or indirectly, by GB to Maxygen; 2 (h) "GB Know-How", shall mean: Know-How owned or controlled exclusively by GB; (i) "GB Patent Rights", shall mean: Patent Rights owned or controlled exclusively by GB; (j) "GB Products", shall mean: Targets for use in the Field; (k) "GB Research Results", shall mean: Research Results invented or developed solely by GB; (1) "Joint Know-How", shall mean: Know-How owned or controlled by both Maxygen and GB; (m) "Joint Patent Rights", shall mean: Patent Rights owned or controlled by both Maxygen and GB; (n) "Joint Research Results", shall mean: Research Results invented or developed jointly by Maxygen and GB; (o) "Know-How", shall mean: all non-patented Research Results which are owned or controlled, in whole or in part, by license, assignment or otherwise, by Maxygen and/or GB during the term of this Agreement. It is understood that Know-How does not include the Maxygen Technology, GB Information or inventions within the Patent Rights; (p) "Maxygen Know-How", shall mean Know-How owned or controlled exclusively by Maxygen; (q) "Maxygen Products", shall mean: Targets for all uses outside the Field. Maxygen Products shall additionally include [*******]; (r) "Maxygen Patent Rights", shall mean: Patent Rights owned or controlled exclusively by Maxygen; (s) "Maxygen Research Results", shall mean: Research Results invented or developed solely by Maxygen; (t) "Maxygen Technology", shall mean: any and all patented and non- patented data, organisms, know-how, instructions, strains and other information in the field of Shuffling Technology, owned or controlled by Maxygen as of the Effective Date or acquired by Maxygen thereafter, not being the Research Results or Patent Rights, including without limitation the Maxygen patents listed in Annex 2; 3 (u) "Patent Rights", shall mean (i) all patents and patent applications claiming inventions conceived and reduced to practice during the term of the Study and derived from the Research Results, (ii) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of the patent applications or patents in (i) above, and (iii) any substitutions, confirmations, registrations or revalidations of any of the foregoing, in each case which are owned or controlled, in whole or in part, by license, assignment or otherwise by Maxygen and/or GB during the term of this Agreement; (v) "Products", shall mean: GB Products and Maxygen Products; (w) "Protocol", shall mean: Annex 3, attached to and forming an integral part of this Agreement, said Annex containing provisions in respect of the Study; (x) "Research Data", shall mean all data, inventions, improvements, discoveries, instructions, processes, formulas and other information (including, without limitation, chemical, physical and analytical, safety, manufacturing and quality control data and information) obtained, developed, conceived and reduced to practice, or created, discovered or derived in the course of the performance of the Study; (y) "Research Materials", shall mean: all tangible property, including without limitation, assays, invented, obtained, discovered, developed or derived, or the function or utility of which is discovered or determined, in the course of the performance of the Study; (z) "Research Results", shall mean: all Research Data and Research Materials collectively, including the Know-How but excluding GB Information and Maxygen Technology; (aa) "Shuffle", "Shuffled" and "Shuffling", shall mean: the recombination and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity; (bb) "Shuffled Gene", shall mean: (i) any gene variant identified in the Study using Maxygen Technology, and (ii) any and all modified forms of any such gene variants, and any fragments or derivatives or variants of the preceding, made by GB or its Affiliates; (cc) "Shuffling Technology", shall mean: techniques, methodologies, processes, materials and/or instrumentation useful for Shuffling, and the screening of resulting genetic material to identify potential usefulness; 4 (dd) "Study", shall mean research on behalf of and for GB, into developing the Targets utilizing the Maxygen Technology on genes provided by GB; (ee) "Study Management Committee", shall mean a committee to oversee the Study, sometimes referred to as the "Research Management Committee"; (ff) "Targets", shall mean: the following specific enzyme compositions encoded by Shuffled Genes developed in the Study: - [*******]; - [*******]; - additional enzymes to be provided by GB involved in the [*******]. These additional enzymes shall only be deemed to be part of the Study if and when, to be decided by the Study Management Committee, the development of the above mentioned two (2) enzymes does not fully occupy the time and/or costs allocated under this Agreement to Maxygen and the Study Management Committee agrees to make such enzymes part of the Study. ARTICLE II. STUDY 2.1 As of the Commencement Date, Maxygen shall ensure that the Study will be carried out in accordance with the Protocol, such that the same will be completed within a period of three (3) consecutive years or such longer period as mutually agreed upon by the Parties (the "Study Term"). 2.2 The Parties shall, through the Study Management Committee, review the Study one and a half (1.5) years after the Commencement Date. If at such moment in time the progress of the Study is not deemed to be successful, the Parties shall discuss reorienting the Study for the remaining term of the Study. 2.3 Should the Research Results at any time give rise to a mutual wish to expand the Study or should the Parties wish to extend the duration of the Study after completion thereof, the Parties shall discuss on the terms and conditions therefor and decide on any expansion or extension of the Study. ARTICLE III. CONTRIBUTION BY MAXYGEN 3.1 Maxygen shall have the Study performed under the responsibility and scientific supervision of Dr. [*******] or such other senior scientific employee of Maxygen that is reasonably satisfactory to GB. 5 3.2 Maxygen shall have the Study performed by [*******] FTE's per year, consisting of scientists having training and experience relevant to the Study. These scientists shall be reasonably approved by the Study Management Committee. 3.3 Maxygen shall furnish suitable equipment and the know-how of its scientific staff for the work to be performed in connection with the Study, provided, however, that Maxygen shall be under no obligation to purchase equipment for the Study and Maxygen herewith declares to avail at present of all equipment necessary to perform the Study. ARTICLE IV. CONTRIBUTION BY GB 4.1 GB shall test those mutants resulting from the work performed by Maxygen under this Agreement which pass both the primary and the secondary screening as described in the Protocol, and provide Maxygen with a written report on the Research Results obtained within the period of time as stated in the Protocol. 4.2 GB shall provide Maxygen with the know-how of its scientific staff connected with the work to be performed under this Agreement, as required by Maxygen to proceed with the Study, and shall furnish Maxygen assistance insofar as necessary for the performance of the Study. 4.3 GB shall provide Maxygen with the necessary genes as required by Maxygen to conduct the Study. These materials remain the property of GB, shall not be supplied to third parties and shall he used by Maxygen solely for the purposes of this Agreement. ARTICLE V. PRICE AND PAYMENT 5.1 In consideration of Maxygen's services rendered under this Agreement, GB shall pay a total amount of [*******], being [*******] per year. Said latter amount is based upon GB's support of [*******] FTE scientists per year, each FTE to cost [*******] per year. The aforementioned amounts shall include any and all costs, overhead and any and all applicable taxes. 5.2 GB shall pay the fee referred to in Article 5.1 at the rate of [*******] in advance of each calender quarter the Study is being performed. However, the last aforedescribed quarterly payment shall not be paid in advance but upon receipt of the final report referred to in Article 7.2. Maxygen shall send invoices for the attention of the GB Study leader, being Mr. [*******] or his replacement, one (1) month in advance of each payment, each invoice to mention the GB internal payment number, which for 1999 is [*******]. GB 6 shall timely provide the [*******] for the following years of the Study. Payment shall be made by GB within thirty (30) days upon receipt of the relevant invoice by banktransfer in accordance with the following wire instructions: Bank of America Palo Alto Commercial Bldg. #1493 530 Lytton Avenue Palo Alto, CA 94301 Bank Operating Account: Maxygen, Inc. Contact Bank Person: Loretta Greco Telephone: 1-650-8534683 Account Number: [*******] Routing Transit Number: [*******] ARTICLE VI. STUDY MANAGEMENT COMMITTEE 6.1 Promptly following the Commencement Date, the Parties shall establish the Study Management Committee (SMC). The SMC shall have the responsibility for monitoring the progress of the Study, establishing milestones, facilitating the transfer of GB Information, Maxygen Technology and Research Results, approving the reports written by Maxygen and GB as described in this Agreement, approving applications for Patent Rights, amending the Protocol, approving the scientists performing the Study, adjusting the allocation of effort on work undertaken in the Study as necessary, and all other issues that arise between the Parties. 6.2 The SMC shall comprise two (2) members for Maxygen and two (2) members for GB, each member to have appropriate knowledge and ongoing familiarity with the Study. The SMC shall meet within forty-five (45) days or within a longer period of time mutually agreed upon after every report provided by Maxygen to GB under Articles 7.1 and 7.2, alternatively at Maxygen's and GB's address or any other mutually agreed upon place, and at such specific times as shall be mutually agreed upon by the Parties. Each Party shall pay its own travel costs. The meetings of the SMC may be held by telephone if agreed by the members. The SMC shall act by unanimous vote. In the event however that the GB and Maxygen members cannot resolve an issue, the issue shall be submitted to the Manager Technology DSM Anti Infectives of GB and the CEO of Maxygen for resolution. If resolution is not achieved, Article 25 shall apply. For each meeting of the SMC a secretary shall be appointed, alternatively a Maxygen and GB member of the SMC. The secretary shall provide within two (2) weeks of every meeting of the SMC draft minutes of the meeting to the other members of the SMC, which minutes shall be deemed approved by the SMC if no comments have been received thereon within two (2) weeks. 7 ARTICLE VII. REPORTING REQUIREMENT 7.1 Every six (6) months a progress report shall be written under the supervision of Maxygen and shall be submitted to GB. 7.2 Maxygen shall present to GB the detailed Maxygen Research Results in a final report written by Maxygen, said report to be completed within three (3) months of the completion of the Study. Notwithstanding the above, Maxygen has no obligation to disclose detailed Shuffling methodology. 7.3 Without prejudice to the above, Maxygen shall have its key scientists performing the Study meet with representatives of GB in order for such persons to inform themselves on the progress being made with Maxygen's activities to be performed under this Agreement and the status of the same unless this would conflict with a pre-arranged visit by another client. Said meetings shall be made subject to at least five (5) business days notice and shall occur not more than once in any reporting period. 7.4 GB shall have the right to have a certified public accountant reasonably acceptable to Maxygen audit Maxygen's time reporting system to verify if Maxygen has applied the agreed upon number of FTEs to the Study. If this audit reveals inaccuracies, Maxygen agrees to correct the situation and make up the difference. ARTICLE VIII. SECRECY 8.1 Maxygen shall maintain the secrecy of the GB Information and GB shall maintain the secrecy of the Maxygen Technology. The receiving Party shall not disclose the same to any persons other than those of its employees or consultants necessarily involved in the Study. Maxygen and GB shall obtain undertakings from all such persons they provide the GB Information, respectively Maxygen Technology to, prior to his or her receipt of such G3 Information or Maxygen Technology, to maintain the secrecy thereof and not to use the same in any way or at any time except as provided for in Sections 8.2 and 6.3 and to conduct the Study. In addition, Maxygen and GB shall maintain the secrecy of the Research Results and the Patent Rights and shall not disclose the same to any persons other than those of their - employees or consultants necessarily involved in the Study; and - Affiliates or sublicensees as necessary for the purpose of this Agreement. The Party providing the Research Results and the Patent Rights will obtain from each such person, prior to his or her receipt of the Research Results and the Patent Rights, 8 undertakings to maintain the secrecy thereof and not to use the same in any way or at any time except as provided for in Sections 8.2 and 8.3. 8.2 The obligations contained in Section 8.1 shall not apply to GB Information, Maxygen Technology, Research Results or Patent Rights which: (a) the receiving Party can establish by competent proof was/were in its lawful possession at the time of disclosure thereof by the disclosing Party and was/were not acquired, directly or indirectly, from the disclosing Party; (b) was/were known to the public or generally available to the public prior to the date of disclosure thereof by the disclosing Party to the receiving Party; (c) become(s) known to the public or generally available to the public subsequent to the date of disclosure thereof by the disclosing Party to the receiving Party through no breach of this Agreement, nor any act or failure to act on the part of the receiving Party; or (d) is/are disclosed or made available to the receiving Party at any time by a third party who did not acquire such GB Information or Maxygen Technology, directly or indirectly, from the disclosing Party. 8.3 The obligations set forth under Section 8.1 shall, furthermore, not apply to: - GB Information, Maxygen Technology, the Research Results or the Patent Rights which a Party is required to disclose in prosecuting or defending litigation, to comply with applicable regulations or for conducting clinical trials, provided that the disclosing Party shall have given its prior written consent thereto, said consent not to be unreasonably withheld or delayed; and - Research Results published or disclosed according to the following procedure. A Party wishing to publish or otherwise publicly disclose its Research Results shall first submit a draft of the proposed manuscript to the Study Management Committee for review by the other Party at least sixty (60) days prior to any submission for publication or other public disclosure. To avoid loss of patent rights as a result of premature public disclosure of patentable information, the reviewing Party shall notify the submitting Party in writing within thirty (30) days after receipt of such proposed disclosure whether the reviewing Party desires that a patent application be filed on any invention disclosed in such proposed disclosure. In the event that the reviewing Party desires such filing, the submitting Party 9 shall withhold publication or disclosure of such proposed disclosure until the earlier of (i) the date a patent application is filed thereon, or (ii) the date the Parties determine after consultation that no patentable invention exists, or (iii) sixty (60) days after receipt by the submitting Party of the reviewing Party's written notice of the reviewing Party's desire to file such patent application. Further, if the proposed disclosure contains information that the reviewing Party reasonably deems as likely to be harmful to its commercial interests, the submitting Party agrees to remove such information upon request of the reviewing Party. ARTICLE IX. OWNERSHIP OF RESEARCH RESULTS AND PATENT RIGHTS 9.1 Maxygen shall have the sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any Maxygen Research Results and Maxygen Patent Rights. GB shall have the sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any GB Research Results and GB Patent Rights. Maxygen and GB shall jointly own all Joint Research Results and Joint Patent Rights. 9.2 Notwithstanding Article 9.1, Maxygen agrees to assign, and hereby assigns, to GB all right, title and interest in [*******]. Notwithstanding Article 9.1, GB agrees to assign, and hereby assigns, to Maxygen all right, title and interest in [*******]. Maxygen and GB agree to execute such documents as are necessary to result in (i) Maxygen's exclusive ownership of [*******], and (ii) GB's exclusive ownership of [*******]. 9.3 For the sake of clarity, it is understood by the Parties that Maxygen shall retain all right, title and interest in and to the Maxygen Technology and GB shall retain all right, title and interest in and to the GB Information. 9.4 In respect of the Research Results owned by the Parties, each Party shall have the exclusive right to file for worldwide Patent Rights for its Research Results and to enforce those Patent Rights. Rights to file for and to enforce Patent Rights to Research Results shall be in accordance with the assignments of Research Results as stated in Article 9.2. Inventorship of patentable inventions shall be determined in accordance with the standards embodied in United States patent law. The Parties agree that, 10 notwithstanding such inventorship, rights to Research Results and Patent Rights, as between the Parties, shall be determined as set forth in this Agreement. The Party prosecuting Patent Rights shall incur all expenses associated therewith and all costs of defending any of the said rights and shall be entitled to retain all monetary recoveries related thereto. The Party responsible for filing for Patent Rights shall use reasonable efforts to obtain patent coverage that is as broad as possible to cover all potential commercial applications thereof, and shall assure that the other Party will have the opportunity to provide meaningful and substantive review and comment with respect thereto. Each Party shall be kept informed of all substantive matters relating to the preparation and prosecution of all patent applications on the Research Results and shall be provided with copies of all patent prosecution and maintenance documentation and correspondence so that the other Party shall be currently and promptly informed of the continuing prosecution and maintenance of the Patent Rights. Each Party shall have the right to review and comment upon such documentation and correspondence, as well as all specifications, claims and responses to office actions prior to their submission to the relevant government patent office. Further, each Party shall fully cooperate with and assist the other as reasonably requested in enforcing and defending Patent Rights. At the request of either Party, the Study Management Committee shall reasonably consider a recommendation that, for commercial reasons, there be no filing for Patent Rights on Research Results. ARTICLE X. LICENSES FOR MAXYGEN AND GB 10.1 GB herewith grants to Maxygen (i) a non-exclusive, nontransferable, nonsublicensable, royalty-free, worldwide license under GB's interest in the Research Results and Patent Rights, and (ii) a non-exclusive, nontransferable, nonsublicensable, royalty-free, worldwide license under the GB Information necessary for the conduct of the Study, in each case solely to conduct the Study. 10.2 GB herewith grants Maxygen a worldwide, royalty-free exclusive license under GB's interest in the Research Results and Patent Rights to make, have made, use, have used, sell, have sold, import, have imported, export and have exported the Maxygen Products and Shuffled Genes encoding Maxygen Products. Should GB indicate its wish to use the Research Results and/or Patent Rights for making, using or selling Maxygen Products, the Parties shall in good faith negotiate on the terms and conditions for such GB use. 11 10.3 Maxygen herewith grants to GB a non-exclusive, nontransferable, nonsublicensable, royalty-free, worldwide license under (i) Maxygen's interest in the Research Results and Patent Rights, and (ii) any assay technology owned or controlled by Maxygen determined by the Study Management Committee as necessary for the performance by GB of its activities in the Study, in each case solely to conduct the Study. 10.4 Maxygen herewith grants GB a worldwide exclusive license under Maxygen's interest in the Research Results and Patent Rights to make, have made, use, have used, sell, have sold, import, have imported, export and have exported the GB Products and Shuffled Genes encoding GB Products. This license shall be royalty-bearing in accordance with Article 11. This license shall be nonsublicensable without Maxygen's prior written consent, which shall not be unreasonably withheld, except to a third-party manufacturer appointed by GB to manufacture GB Products for sale by GB or an Affiliate of GB. 10.5 In furtherance of the license granted to GB in Article 10.4, Maxygen agrees that, to the extent necessary for GB to practice the license granted in Article 10.4, for so long as GB is not in default with respect to any payment due to Maxygen hereunder, Maxygen shall not bring any claim or action against GB, its Affiliates, licensees, agents or customers based on or asserting that the manufacture, use, sale, offer for sale, import or export of a GB Product in accordance with the license set forth in Article 10.4 violates or infringes any Maxygen patents related to GB Products, uses of GB Products and Shuffled Genes encoding GB Products. 10.6 In the event GB wishes to discontinue any of its Patent Rights, GB shall promptly inform Maxygen thereof in writing. Maxygen may within four (4) weeks indicate in writing its interest in such Patent Right in which case the same shall be transferred to Maxygen at no cost. In the event Maxygen wishes to discontinue any of its Patent Rights, Maxygen shall promptly inform GB thereof in writing. GE may within four (4) weeks indicate in writing its interest in such Patent Right in which case the same shall be transferred to GB at no cost. ARTICLE XI. ROYALTIES 11.1 Following the first commercial use of a GB Product by GB, a third party sublicensee appointed by GB or an Affiliate of GB, GB shall compile records of the Cost Savings in accordance with Article 11.2 and shall pay to Maxygen a royalty of [*******] percent [*******] of the Cost Savings per year during the term of this Agreement as indicated in Article 26.1. In the event that GB or a GB Affiliate receives any payments, including without limitation up-front fees, royalties, milestones and rebates, from a GB Affiliate or a third party sublicensee appointed by GB or an Affiliate of GB, related to the use, manufacture or sale of a GB Product or a Shuffled Gene encoding a GB Product, 12 Maxygen shall in addition to any royalties due to it pursuant to the previous paragraph of this Article 11.1, be entitled to receive [*******] percent [*******] of such payments. Maxygen shall be entitled to an accounting of all such payments in accordance with Articles 11.2 and 11.3. 11.2 Within sixty (60) days after the end of each six (6) calendar month period during the term of the Agreement, GB shall render a written report to Maxygen setting forth for the preceding six (6) calendar months a calculation of the Cost Savings and a calculation of the royalty payments due for those six (6) months. Unless otherwise set forth elsewhere in this Agreement, all royalties and payments due to Maxygen under this Agreement shall be computed on a six (6) monthly basis as set forth above and shall be submitted with the report required in this Article 11.2. Maxygen shall treat these reports as confidential as provided under Article 8, whether or not they are marked as such. 11.3 GB will keep and maintain complete and accurate books and records as are required accurately to determine the baseline variable costs as identified in paragraph 4 of Annex 1 and royalties payable to Maxygen for two (2) years following the date on which such royalties were paid or reported. Maxygen shall have the right, at its own expense and through a certified public accountant reasonably acceptable to GB, to examine such books and records during regular business hours during the life of this Agreement and for two (2) years after its termination; provided, however, that the accountant shall report to Maxygen only as to the amount of Cost Savings and the accuracy of the royalty statements and payments. If such examination reveals an underpayment, then GB shall promptly make up such underpayment and if such underpayment is more than five percent (5%) of the amount due, GB shall also reimburse Maxygen for the reasonable costs of such examination. 11.4 All payments hereunder shall be made by bank transfer into the bank account stated in Article 5.2. Where required to do so by applicable law or treaty, GB shall withhold taxes required to be paid to a taxing authority on account of such income to Maxygen, and GB shall furnish Maxygen with satisfactory evidence of such withholding and payment in order to permit Maxygen to obtain a tax credit or other relief as may be available under the applicable law or treaty. GB shall cooperate with Maxygen in obtaining exemption from withholding taxes where available under applicable laws and treaties. 11.5 All payments shall be in United States Dollars and shall be made on the dates set forth herein. All late payments shall bear interest at a rate to be determined according to the LIBOR one (1) year rate valid on the date late payment commences. The monies due to Maxygen calculated hereunder shall first be determined in the currency of 13 the country where GB, its licensees, Affiliates or third parties appointed by GB have achieved the Cost Savings and then converted into its equivalent United States Dollars at the average monthly conversion rate for such foreign currency based on the conversion rates as published in The Wall Street Journal for the ----------------------- last month of the accounting period in a report made under Article 11.2. ARTICLE XII. EXCLUSIVITY; DUE DILIGENCE 12.1 Maxygen agrees that during the Study Term it will not perform for or otherwise collaborate in research programs with third parties in the Field. Maxygen will give GB notice and a reasonable opportunity to negotiate rights to expand the Field during the Study Term to potentially include [*******]. In such event, if GB and Maxygen agree on terms, the Field shall include those additional compounds covered by such agreement. 12.2 GB shall actively pursue commercialization of each Shuffled Gene as described in Annex 1 and 3 and with commercially reasonable diligence at the same level of effort it makes with its own intellectual property of comparable potential, stage or development and patent protection. Such efforts shall include the commercialization of a GB Product within [*******] of delivery of a Shuffled Gene, said period to be extended if GB indicates a justifiable reason. Diligence with respect to a particular Shuffled Gene or GB Product shall be considered diligence with respect to all other Shuffled Genes or GB Products which resulted from Shuffling of the same starting gene provided that such GB Product of the gene catalyses the same reaction of compounds in the Field. 12.3 If GB fails to satisfy the diligence obligations in Article 12.2 with respect to a Shuffled Gene or GB Product or discontinues the commercial sale of any GB Product prior to the termination of this Agreement, the rights and licenses granted GB in this Agreement with respect to the applicable Shuffled Gene or GB Product shall terminate and such rights shall revert to Maxygen. However, in the event more than one (1) GB Product is derived from the same Shuffled Gene, and the commercial sale of other GB Products are continued, only the rights with respect to the discontinued GB Product shall revert to Maxygen. 12.4 GB shall keep Maxygen apprised of the status of the development and commercialization of each Shuffled Gene or GB Product by providing Maxygen during the term of this Agreement with a written report within thirty (30) days after the end of each six (6) month period detailing such activities with respect to each applicable Shuffled Gene or GB Product. These reports shall contain sufficient information to allow Maxygen to monitor GB's compliance with this Agreement. In addition, Maxygen shall have access rights, at its own expense and through two (2) mutually recognized independent scientific experts reasonably acceptable to GB, to all pertinent data generated 14 by or on behalf of GB with respect to the development of Shuffled Genes or GB Products, during regular business hours during the life of this Agreement, provided, however, that the scientific experts shall report to Maxygen only as to the accuracy and sufficiency of the GB reports referred to above. Maxygen shall treat these reports and information as confidential as provided under Article 8, whether or not they are marked as such. 12.5 For the sake of clarity, it is understood by the Parties that if and when GB has commercialized a Shuffled Gene or GB Product as described in this Article 12, it shall not be obliged in any way to further improve the Shuffled Gene or the GB Product derived therefrom. ARTICLE XIII. PUBLICITY Neither Party shall use the name of the other, its direct or indirect Affiliates or of any member of its staff, in any publication, news release or other public announcement without the prior written approval of an authorized representative of such Party, except as may be required by applicable law or regulation. ARTICLE XIV. INDEPENDENT CONTRACTOR In the performance of all obligations under this Agreement: (a) Maxygen shall be deemed to be and shall be an independent contractor, and as such, Maxygen shall not be entitled to any benefits applicable to employees of GB; (b) Neither Party is authorized or empowered to act as agent for the other for any purpose and shall not on behalf of the other enter into any contract, warranty or representation as to any matter. Neither Party shall be bound by the acts or conduct of the other Party. ARTICLE XV. GUARANTEES; LIABILITY; INDEMNIFICATION 15.1 To Maxygen's knowledge Maxygen Technology does not infringe on any valid claim of an issued patent held by a third party. Maxygen will be responsible for securing any licenses needed to use the Maxygen Technology in the conduct of the Study. GB will be responsible for securing any licenses needed for genes used in the conduct of the Study. 15.2 The Parties acknowledge that the research activities contemplated hereunder are experimental, and that the Study may not be successful. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION AND EXTENDS NO WARRANTY OF ANY KIND WITH RESPECT TO ANY CONFIDENTIAL INFORMATION, PATENT RIGHTS, KNOW-HOW, SHUFFLING TECHNOLOGY, SHUFFLED GENES, PRODUCTS OR OTHER TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND VALIDITY OF TECHNOLOGY OR 15 PATENT CLAIMS, ISSUED OR PENDING, WITH RESPECT TO ANY AND ALL OF THE FOREGOING. 15.3 EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER MAXYGEN NOR GB WILL BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (i) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS OR (ii) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES. 15.4 Except as expressly provided herein, GB shall indemnify, defend and hold harmless Maxygen, its Affiliates and their respective directors, officers, employees and agents and their respective successors, heirs and assigns (the "Maxygen Indemnitees") , against any and all liability, damage, loss or expense (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon the Maxygen Indemnitees, or any of them, in connection with any claims, suits, actions, demands or judgments of third parties, including without limitation the infringement of intellectual property rights of a third party, personal injury and product liability matters (except to the extent such claims, suits, actions, demands or judgments result from a wilful material breach of this Agreement, gross negligence or wilful misconduct on the part of a Maxygen Indemnitee) arising directly out of or in connection with or directly caused by (i) any actions of GB in the performance of the Study as described in Article 4.1, (ii) the use, development outside the Study, testing, production, manufacture, promotion, import, export or sale of any GB Product by GB or by an Affiliate, third party licensee, sublicensee, distributor or agent of GB, (iii) the use by any person of any GB Product manufactured or sold by GB or by an Affiliate, third party licensee, sublicensee, distributor or agent of GB, or (iv) the use by Maxygen or GB of any gene or GB Information in the conduct of the Study. 15.5 Except as expressly provided herein, Maxygen shall indemnify, defend and hold harmless GB, its Affiliates and their respective directors, officers, employees and agents and their respective successors, heirs and assigns (the "GB Indemnitees") , against any and all liability, damage, loss or expense (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon the GB Indemnitees, or any of them, in connection with any claims, suits, actions, demands or judgments of third parties, including without limitation personal injury and product liability matters (except to the extent such claims, suits, actions, demands or judgments result from a wilful material breach of this Agreement, gross negligence or wilful misconduct on the part of a GB Indemnitee) arising directly out of or in connection with or directly caused by (i) any actions of Maxygen in the performance of the Study, (ii) the use, development outside the Study, testing, production, manufacture, promotion, import, export or sale of any Maxygen Product by Maxygen or by an Affiliate, third party licensee, sublicensee, 16 distributor or agent of Maxygen or (iii) the use by any person of any Maxygen Product manufactured or sold by Maxygen or by an Affiliate, third party licensee, sublicensee, distributor or agent of Maxygen; provided, however, that notwithstanding anything to the contrary the foregoing indemnity obligation shall expressly exclude any and all liability, damage, loss or expense incurred by a GB Indemnitee in connection with any claims, suits, actions, demands or judgments relating to the infringement of intellectual property rights of a third party. In addition, Maxygen shall indemnify, defend and hold harmless GB Indemnitees against any and all liability, damage, loss or expense (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon the GB Indemnitees, or any of them, in connection with any claims, suits, actions, demands or judgments of third parties (except to the extent such claims, suits, actions, demands or judgments result from a wilful material breach of this Agreement, gross negligence or wilful misconduct on the part of a GB Indemnitee) arising directly out of or in connection with a breach by Maxygen of Article 15.1. ARTICLE XVI. FORCE MAJEURE 16.1 Any obligation of either Party under this Agreement shall be suspended for as long as and to the extent that the performance of such obligation is prevented by any Force Majeure situation. 16.2 The Party whose performance is thus suspended shall, however, use all reasonable efforts to resume performance of the obligations under this Agreement and after the Force Majeure situation shall have ceased, to accelerate the progress of the work affected by that Force Majeure. ARTICLE XVII. ASSIGNMENT The benefit or burden of this Agreement may not be assigned by either Party without the prior written consent of the other Party hereto, which consent shall not be unreasonably withheld. ARTICLE XVIII. FORCE AND EFFECT The Parties undertake and agree to do all things and to sign all documents that may be necessary in order to give full force and effect to the reasonable intention of the present Agreement. ARTICLE XIX. SEVERABILITY The Parties agree that no provision of this Agreement which may be deemed unenforceable shall in any way invalidate any other provision of this Agreement, all of which shall remain in full force and effect. 17 ARTICLE XX. ENTIRE AGREEMENT This Agreement contains the entire Agreement between the Parties and may not be altered, amended, modified, or otherwise changed except by the consent in writing of both Parties. ARTICLE XXI. SUCCESSORS AND ASSIGNS This Agreement shall inure to the benefit of and be binding upon the respective Parties hereto and their respective heirs, executors, administrators, successors and/or permitted assigns. ARTICLE XXII. PARAGRAPH HEADINGS The paragraph headings in this Agreement have been incorporated for the sole purpose of more convenient reference but not for any interpretation of the clauses to which they refer. ARTICLE XXIII. WAIVERS The failure of either Party hereto at any time to take action against the other Party for breach of its obligations hereunder or the failure of either Party to terminate this Agreement for cause as herein provided for, shall not affect either Party's right to require full compliance with the terms of this Agreement at any time thereafter, and the waiver by either Party of a breach of any provision of this Agreement shall not constitute a waiver of any subsequent breach thereof nor nullify the effectiveness of such provision nor the right of such Party to demand redress for its respective losses, damages and claims. ARTICLE XXIV. NOTICES All notices shall be in writing mailed via certified mail, return receipt requested, overnight express mail, courier providing evidence of delivery, or by telefax with the original copy sent via certified mail, return receipt requested, addressed as follows, or to such other address as may be designated by notice so given from time to time: If to GS: Gist-Brocades B.V. Wateringseweg 1 2611 XT Delft The Netherlands Attention: Legal Counsel DSM Anti-Infectives with a copy to the Manager Technology DSM Anti-Infectives If to Maxygen: Maxygen, Inc. 18 3410 Central Expressway Santa Clara, California 95051 United States of America Attention: Chief Executive Officer Notices shall be deemed given as of the date received. ARTICLE XXV. SETTLEMENT OF DISPUTES 25.1 Any disputes arising in connection with or deriving from the present Agreement, which cannot be settled in an amicable way, shall be finally settled by Arbitration under the Rules of the International Chamber of Commerce by one or more Arbitrators appointed in accordance with the said Rules. The Arbitration shall take place in the place of domicile of the Party sued. 25.2 This Agreement is subject to the Laws of the State of California. ARTICLE XXVI. TERM AND TERMINATION 26.1 This Agreement shall be effective as from the Commencement Date and will remain in force for the longer of the following events: ten (10) years as of the first commercial use by GB, a third party sublicensee appointed by GB or an Affiliate of GB, of a GB Product, or the life of the last-to-expire valid claim in the patents listed as Maxygen Technology. 26.2 Without prejudice to the above, the Agreement may be terminated by written notice on any of the following events: (a) by either Party in the event of the liquidation or receivership of the other Party or in the event of suspension of payment if an administrator is appointed at the other Party; or (b) by either Party in the event of a material breach by the other Party of any of its obligations hereunder which, if it can be remedied, remains unremedied on the expiry of ninety (90) days after receipt by the Party in breach of written notice from the other Party specifying the breach and the action required to remedy the same. 26.3 The following provisions shall survive the expiration or termination of this Agreement for any reason: Articles 4.3, 8, 9, 11.2, 11.3, 13, 15, 17, 21, 25 and 26. Upon the expiration of this Agreement pursuant to Article 26.1, the licenses as granted under Articles 10.2 and 10.4 shall remain in force with the proviso that such licenses shall be fully paid-up and non-exclusive. 19 26.4 Expiration or termination of this Agreement shall not affect the rights of either Party against the other in respect of the period up to date of termination. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed in duplicate by their respective duly authorized representatives as of the date first written above. MAXYGEN INC. GIST BROCADES B.V. By: /s/ Russell Howard By: /s/ ---------------------------------- ----------------------------- By: By: /s/ ---------------------------------- ----------------------------- 20 Annex 1 [*******] [Annex 1 details the Cost Savings Calculation and Commercialization Procedure used for determining royalties under this Agreement.] Annex 2 [*******] [Annex 2 identifies Maxygen Patents and Applications that are licensed to GB under this Agreement.] Annex 3 [*******] [Annex 3 details the specific research activities to be conducted under this Agreement, timelines for conducting such activities, and technical information related to the activities to be conducted.] EX-10.14 7 COLLABORATION AGREEMENT EFFECTIVE JUNE 18, 1999 Exhibit 10.14 COLLABORATION AGREEMENT BETWEEN MAXYGEN, INC. AND ZENECA LIMITED June 18, 1999 * CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AND THE NON-PUBLIC INFORMATION HAS BEEN FILED SEPARATELY WITH THE SEC. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. COLLABORATION AGREEMENT This COLLABORATION Agreement (the Agreement), effective as of June 18, 1999 (the "Effective Date"), is made by and between Zeneca Limited , a corporation organized under the laws of the United Kingdom, with a principal place of business at 15 Stanhope Gate, London W1Y 6LN, United Kingdom (hereinafter "Zeneca"), and Maxygen, Inc., a Delaware corporation, with a principal place of business at 515 Galveston Drive, Redwood City, California 94063 (hereinafter "Maxygen"). BACKGROUND A. WHEREAS Maxygen has valuable intellectual property rights and expertise in the rearrangement of DNA to produce, discover and optimize genes utilizing proprietary technologies; and B. WHEREAS Zeneca has expertise in the genetic modification of plants to produce products for the global [*******] markets; and C. WHEREAS Zeneca and Maxygen wish to enter into this Agreement in order to perform research together to discover and develop new genes that can be used to produce improved agricultural and other products to be commercialized by the Parties; and D. WHEREAS Zeneca, AstraZeneca Holdings B.V., a subsidiary of Zeneca, and Maxygen have entered into a Stock Purchase Agreement, pursuant to which AstraZeneca Holdings B.V., shall purchase shares of Maxygen preferred stock with an option to purchase additional shares of Maxygen common and/or preferred stock. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the parties hereby agree as follows: 1. DEFINITIONS The following capitalized terms shall have the meanings indicated for purposes of this Agreement: 1.1 "Affiliate" means any corporation, firm, limited liability --------- company, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. As used in this Section, control means ownership, directly or through one or more Affiliates, of fifty percent (50%) or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, or fifty percent (50%) or more of the equity interests in the case of any other type of legal entity, status as a general partner in any partnership, or any other arrangement whereby a Party controls or has the right to control the Board of Directors or equivalent governing body of a corporation or other entity, or if such level of ownership or control is prohibited in any country, any entity owned or controlled by or owning or controlling at the maximum control or ownership right permitted in the country where such entity exists. 1.2 "Agricultural Applications" means propagation of any Plant and -------------------------- any use of any Plant parts and substances derived directly or indirectly therefrom for purposes of [*******]. 1.3 "Class A Shuffled Gene" means any Shuffled Gene which results --------------------- is or derived from the Shuffling in the Research Program of [*******]. 1.4 "Class B Shuffled Gene" means a Shuffled Gene that is not a ------------------ Class A Shuffled Gene. 1.5 "Class A Zeneca Product"means a product commercialized by ---------------------- Zeneca or its Affiliates or Sublicensees which incorporates or is made through the use of one or more Class A Shuffled Genes. 1.6 "Class B Zeneca Product" means a product commercialized by Zeneca ---------------------- or Affiliates or Sublicensees which incorporates or is made through the use of at least one Shuffled Gene, but which does not incorporate and is not made through the use of any Class A Shuffled Gene. 1.7 "Collaborator" means a Third Party which has not received a ------------ Naked Sublicense, to which Zeneca sublicenses rights to make, use, import or sell a Zeneca Product. As used in this Agreement, Collaborator shall also include a Third Party to whom Zeneca or an Affiliate of Zeneca has granted the right to distribute the applicable Zeneca Product. 1.8 "Consumer Price Index" or "CPI" means the Consumer Price Index, -------------------- All Urban Consumers, as published by the U.S. Bureau of Labor Statistics. 1.9 "Control", "Controls", or "Controlled" means possession of the ------------------------------------ ability to grant the licenses or sublicenses in one or more Crops as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. 1.10 "Core Country" means each of the United States, Canada, Japan, ------------ and any country in the European Union for which patent protection can be obtained through the European Patent Office. 1.11 "Crop" means [*******]. ---- 1.12 "Downstream Income" means all income or other consideration or ----------------- value and payments received by or due to Zeneca and its Affiliates and, subject to Section 4.6.2(c), received by or due to Zeneca or its Affiliates from Collaborators, in each case, reasonably attributable to the use or sale of any Zeneca Agricultural Product (other than Net Sales Income 2 and payments from Third Parties which have received a Naked Sublicense), including, without limitation, technology access fees from growers and payments for the sale of or right to sell Zeneca Agricultural Products, in each case, whether such consideration is in cash, payment in kind, exchange or another form. 1.13 "Enabling Technology" means (i) [*******] in one or more Plant ------------------- types which has been modified by application of Shuffling Technology pursuant to the Research Plan, and (ii) [*******], in each case, as the Research Committee may agree in writing to develop in the Research Program to facilitate the development of Zeneca Agricultural Products, and which is designated by written agreement by the Research Committee as Enabling Technology. 1.14 "FTE" means a full time scientist who is an employee of Maxygen --- (or in the case of less than a full-time dedicated scientist, a full-time, equivalent scientist year), dedicated to research under the Research Program consisting of an average of [*******] per year. All such FTE's shall be educated to Ph.D., MS or BS level (or otherwise appropriately trained) in an appropriate discipline, unless otherwise agreed. 1.15 "GAAP" means generally accepted accounting principles, as ---- applied in the United States. 1.16 "Gene" means a polynucleotide sequence encoding a protein, ---- optionally together with its regulatory sequences, which is selected for Shuffling in the Research Program by the Research Committee pursuant to Section 2.5.1. Each Gene shall be designated by the Research Committee as (i) a Zeneca Starting Gene or (ii) a Maxygen Starting Gene or (iii) an Other Starting Gene. 1.17 [*******] 1.18 "Gene Variant" means any altered form of a Gene made in ------------ connection with the Research Program which meets the applicable criteria established by the Research Committee. 1.19 "Know-How" means all ideas, inventions, data, instructions, -------- processes and formulae, including, without limitation, biological, chemical, toxicological, physical and analytical, safety, manufacturing and quality control data and information, in each case, which are developed or made or the utility of which is determined or discovered by Maxygen and/or Zeneca or an Affiliate or a Third Party on behalf of such a Party during the Research Term and in connection with the Research Program. Know-How does not include any Shuffling Technology or any inventions included in the Program Patent Rights. 1.20 "Materials" means any chemical or biological substances, --------- including any: (i) organic or inorganic chemical element or compound; (ii) gene; (iii) vector or construct, plasmid, phage or virus; (iv) host organism, including bacteria and Plant cells; (v) eukaryotic or prokaryotic cell line or expression system; (vi) protein, including any peptide or amino acid sequence, enzyme, antibody or protein conferring targeting properties and any fragment of a 3 protein or peptide or enzyme; (vii) genetic material, including any genetic control element (e.g., promoters), gene, Gene Variant or Shuffled Gene; or (viii) assay or reagent. 1.21 "Maxygen Improvement" means any improvement to Maxygen ------------------- Materials (e.g., improved assays, and/or derivatives and progeny of biological materials which are Maxygen Materials), other than Nucleic Acid Sequence Libraries, Gene Variants or Shuffled Genes, and any improvement to Shuffling Technology whether made by Zeneca or Maxygen in the course of the Research Program. 1.22 "Maxygen Materials" means all Materials provided by Maxygen to ----------------- Zeneca in order that Zeneca can perform its obligations under the Research Program or which Maxygen owns and Controls and uses internally in connection with the Research Program. It is understood and agreed that all Nucleic Acid Sequence Libraries, Gene Variants and Shuffled Genes shall be Maxygen Materials. 1.23 "Maxygen Product" means any product sold by Maxygen or its --------------- Affiliates or Sublicensees which incorporates or is made through the use of a Class B Shuffled Gene, or is derived from a Plant which incorporates or is made through the use of a Class B Shuffled Gene. 1.24 "Maxygen Starting Gene" means a Gene which (i) as of the date --------------------- that the Research Committee selects such Gene for Shuffling, is [*******] which is owned or Controlled by Maxygen independent of the conduct of the Research Program, or (ii) the Research Committee designates as a Maxygen Starting Gene as set forth in Section 2.5.1(c). 1.25 "Naked Sublicense" means a license or sublicense granted by ---------------- Zeneca to a Third Party in which such Third Party receives only forbearance from suit from Zeneca with respect to the use of a Shuffled Gene to make, use, import or sell a Zeneca Product. It is understood and agreed that a Naked Sublicense shall not include a license or other right to use any other intellectual property or technology owned or Controlled by Zeneca or its Affiliates (e.g., germplasm) or forbearance from suit with respect to use of such intellectual property or technology. 1.26 "Net Sales Income" means the gross sales price invoiced by ---------------- Zeneca, a Zeneca Affiliate or a Collaborator to purchasers of a Zeneca Product less trade and cash discounts and returns actually granted to purchasers and less taxes withheld, customs and freight charges. Net Sales Income shall be calculated using Zeneca's standard accounting procedures in accordance with United States GAAP, as consistently applied by Zeneca. All sales of Zeneca Agricultural Products between Zeneca and any of its Affiliates shall be disregarded for purposes of computing Net Sales Income. All sales of Zeneca Agricultural Products between Zeneca or its Affiliates and Collaborators shall also be disregarded for purposes of computing Net Sales Income, unless such sale is the result of an arms-length sale of such Zeneca Agricultural Product. A "sale" shall include any transfer or other disposition for consideration, and Net Sales Income shall include all consideration received by Zeneca or its 4 Affiliates and Collaborators in respect of any sale of Zeneca Agricultural Products, whether such consideration is in cash, payment in kind, exchange or another form as detailed in Section 4.6.3. In the case of discounts on "bundles" of products or services which include Zeneca Agricultural Products, Zeneca may with notice to Maxygen calculate the Net Sales Income by discounting the bona fide list price of a Zeneca Agricultural Product by no more than the average percentage discount of all products of Zeneca and/or its Affiliates and Collaborators in a particular "bundle", calculated as follows: Average percentage discount on a = (1 - A/B) x 100 particular "bundle" where A equals the total discounted price of a particular "bundle" of products, and B equals the sum of the undiscounted bona fide list prices of each unit of every product in such "bundle". Zeneca shall provide Maxygen documentation, reasonably acceptable to Maxygen, establishing such average discount with respect to each "bundle". If Zeneca cannot so establish the average discount of a bundle, the Net Sales Income shall be based on the undiscounted list price of the Zeneca Agricultural Product in the bundle. If a Zeneca Agricultural Product in a bundle is not sold separately and no bona fide list price exists for such Zeneca Agricultural Product, the Parties shall negotiate in good faith an imputed list price for such Zeneca Agricultural Product, and Net Sales Income with respect thereto shall be based on such imputed list price. 1.27 "Non-Ag Applications" means any use of a Shuffled Gene other ------------------- than for an Agricultural Application. 1.28 "Nucleic Acid Sequence Library" means with respect to a ----------------------------- particular Gene, the set of variants produced by the Shuffling of such Gene in connection with the Research Program, excluding Gene Variants and Shuffled Genes. 1.29 [*******]. 1.30 [*******]. 1.31 "Other Starting Gene" means a Gene which is neither a Zeneca ------------------- Starting Gene nor a Maxygen Starting Gene. 1.32 "Output Trait" means each of (i) [*******], (ii) [*******], and ------------ (iii) [*******]. 1.33 "Party" means Zeneca or Maxygen, and the "Parties" means Zeneca ----- and Maxygen. 1.34 "Patent Rights" means (i) the Program Patent Rights and (ii) ------------- any other United States or foreign patent or patent application claiming a Zeneca Product or Maxygen 5 Product or a method or process for the manufacture or use thereof, and any division, continuation, continuation-in-part, reissue, reexamination, extension or other governmental action that extends the subject matter of such patent or patent application, substitution, confirmation, registration or revalidation of the foregoing, in each case, that is owned or Controlled by Zeneca or Maxygen or their respective Affiliates, or jointly by Zeneca and Maxygen, during the term of this Agreement. 1.35 "Phenotypic Effect" means the particular [*******] agreed upon ----------------- by the Research Committee [*******]. 1.36 "Plant" means a monocotyledonous or dicotyledonous plant. ----- 1.37 "Program Materials" means all Materials which are developed or ----------------- made or the utility of which is determined or discovered during the Research Term and in connection with the Research Program, excluding the Maxygen Materials and Maxygen Improvements and the Zeneca Materials and Zeneca Improvements. It is understood and agreed that Program Materials do not include any Shuffling Technology. 1.38 "Program Patent Rights" means (i) all United States and foreign --------------------- patent applications and patents that claim an invention conceived and reduced to practice by Maxygen and/or Zeneca or an Affiliate or a Third Party on the behalf of such Party during the Research Term and in connection with the Research Program, and (ii) any divisions, continuations, continuations-in-part, and patents that issue therefrom, reissues, reexaminations, extensions or other governmental actions that extend any of the subject matter of the patent applications or patents in (i) above, and any substitutions, continuations, confirmations, registrations or revalidations of any of the foregoing, in each case, which is owned in whole or part, by assignment or otherwise by Maxygen or Zeneca during the term of this Agreement. It is understood and agreed that Program Patent Rights do not include any Shuffling Technology, any Zeneca Improvements or any Maxygen Improvements. 1.39 "Program Technology" means all Program Patent Rights, Know-How ------------------ and Program Materials, in each case, which is necessary or useful for the development, testing, use, manufacture or sale of Zeneca Products or Maxygen Products. It is understood that the Program Technology does not include any Shuffling Technology or Zeneca Proprietary Technology. 1.40 "Project" means those research activities undertaken in the ------- Research Program with respect to one or more Gene(s) with the goal of producing a [*******] as agreed in writing by the Parties. 1.41 "Regulatory Approval" means all approvals (including pricing ------------------- and reimbursement approvals), licenses, registrations and authorizations of all agencies necessary for the manufacture, distribution, use or sale of a Zeneca Agricultural Product in the applicable country. 1.42 "Research Committee" shall have the meaning set forth in ------------------ Section 2.2. 6 1.43 "Research Plan" means a written plan approved by the Research ------------- Committee describing the activities to be carried out during each twelve (12) month period of the Research Program, as modified from time to time by the Parties. 1.44 "Research Program" means the research and development program ---------------- to be conducted by Maxygen and Zeneca pursuant to Article 2 and as described in the applicable Research Plan. 1.45 "Research Results" means Know-How relating to Nucleic Acid ---------------- Sequence Libraries, Gene Variants, Shuffled Genes, Enabling Technology and/or Program Materials. 1.46 "Research Term" shall have the meaning set forth in Section 2. ------------- 10. 1.47 "Shuffle", "Shuffled" and "Shuffling" means the recombination ----------------------------------- and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity using intellectual property and/or tangible property owned or Controlled by Maxygen during the Research Term. 1.48 "Shuffled Gene" means (i) any Gene Variant which the Research ------------- Committee designates as such pursuant to Section 2.5.5, and (ii) any Shuffled Gene Derivative. 1.49 "Shuffled Gene Derivative" means any modified form of a ------------------------ Shuffled Gene, which modification is developed from or made to the Shuffled Gene by a Party or its Affiliates or Sublicensees by any means, including without limitation, any codon modified variant, splice variant, mutation, derivative or variant of a Shuffled Gene, and any fragment(s) of the preceding. 1.50 "Shuffling Technology" means techniques, methodologies, -------------------- processes, materials and/or instrumentation useful for Shuffling, and generally applicable screening techniques, methodologies, or processes of using the resulting genetic material which are applicable to identifying genetic diversity producing by Shuffling. It is understood and agreed that the specific assays developed for screening Gene Variants for specific biological or chemical activity and screens and screening methods developed by Zeneca independently of the Research Program are not included in Shuffling Technology. 1.51 "Staffing Level" shall have the meaning set forth in Section -------------- 2.1.4. 1.52 [*******]. 1.53 "Stock Purchase Agreement" means that certain Stock Purchase ------------------------ Agreement entered by Zeneca, AstraZeneca Holdings B.V. and Maxygen in conjunction with this Agreement. 1.54 "Sublicensee" means (i) with respect to Maxygen, a Third Party ----------- which receives a Naked Sublicense or a Collaborator, and (ii) with respect to Zeneca, a Third Party which receives a Naked Sublicense or a Collaborator. 7 1.55 "Third Party" means any party other than Zeneca or Maxygen or ----------- an Affiliate of either of them. 1.56 "Trait" means a characteristic or property within one or more ----- Trait Categories attributable in whole or part to the expression or modulation of expression of one or more genetic elements. 1.57 "Trait Categories" means, as shown in Exhibit A, the areas of ---------------- Crop/technology interest from which the Projects to be conducted pursuant to the Research Program will be selected. In particular, the areas for the applicable Crops include: [*******]. It is understood and agreed that each Trait Category includes multiple possible Phenotypic Effects. 1.58 "Trait Effect" means a particular Phenotypic Effect resulting ------------ from the use of one or more Shuffled Genes (with or without any Enabling Technology). 1.59 "Zeneca Agricultural Product" means any Zeneca Product used for --------------------------- an Agricultural Application. 1.60 "Zeneca Improvement" means any improvement to Zeneca Materials ------------------ (e.g., improved assays, and/or derivatives and progeny of biological materials which are Zeneca Materials), other than Nucleic Acid Sequence Libraries, Gene Variants and Shuffled Genes, whether made by Zeneca or Maxygen in the course of the Research Program. 1.61 "Zeneca Materials" means all Materials provided by Zeneca to ---------------- Maxygen in order that Maxygen can perform its obligations under the Research Program or which Zeneca owns and Controls and uses internally in connection with the Research Program. 1.62 "Zeneca Non-Agricultural Product" means any Zeneca Product ------------------------------- other than a Zeneca Agricultural Product. 1.63 [*******]. 1.64 "Zeneca Product" means any product sold or intended to be sold -------------- by Zeneca or its Affiliates or Sublicensees which incorporates or is made through the use of a Shuffled Gene, or is derived from a Plant which incorporates or is made through the use of a Shuffled Gene. 1.65 "Zeneca Starting Gene" means a Gene which (i) as of the date -------------------- that the Research Committee selects such Gene for Shuffling, is [*******] which is owned or Controlled by Zeneca independent of the conduct of the Research Program, or (ii) the Research Committee designates as a Zeneca Starting Gene as set forth in Section 2.5.1(c). 1.66 "Zeneca Proprietary Technology" means all technology owned or ----------------------------- Controlled by Zeneca as of the Effective Date or developed or acquired thereafter independently of the Research Program, which Zeneca has the right to contribute to the Research Program and 8 which Zeneca uses or makes available for the conduct of the Research Program (including without limitation, for the Shuffling of Zeneca Starting Genes or [*******]) or the design, development, testing, use, manufacture or sale of Zeneca Products, including all such United States and foreign patents and patent applications (including, without limitation, all reissues, extensions, substitutions, confirmations, registrations, revalidations, additions, continuations, continuations-in-part, and divisions thereof) and other proprietary information, data and know-how. 2. RESEARCH PROGRAM 2.1 Collaborative Research. Subject to the terms and conditions ---------------------- set forth herein, Zeneca and Maxygen will diligently conduct mutually agreed collaborative research pursuant to a Research Plan with the primary objective of creating Shuffled Genes useful for the development of Zeneca Products. The Parties may also agree to conduct research directed to development of Enabling Technologies and GeneSwitch Technology. 2.1.1 Areas of Research. ----------------- (a) Research Areas. With respect to Gene(s), research -------------- may be conducted for the purpose of identifying Shuffled Gene(s) having Trait Effects within the following Trait Categories in the indicated Crops: (i) [*******]; (ii) [*******]; (iii) [*******]; (iv) [*******]; (v) [*******]; (vi) [*******]; (vii) [*******] (viii) [*******]. In the case of [*******], it is understood and agreed that the research activities, if any, conducted in these areas shall be in the areas of specific Reserved Projects identified by the Parties as set forth in Section 2.1.1(b). A table illustrating the areas of potential research in the Research Program is attached as Exhibit A. (b) Output Trait Reserved Projects. ------------------------------ 9 (i) By the Effective Date, Maxygen and Zeneca shall agree in writing upon [*******] clearly defined Projects within the scope of each of the [*******] Output Traits of [*******], and each such agreed upon Project shall be deemed a "Reserved Project." At any time after the Effective Date during the Research Term, Zeneca may request a revision or modification of any of the Reserved Projects, in which event Maxygen and Zeneca shall promptly confer and attempt in good faith to agree upon and describe in writing a new Reserved Project to replace each Reserved Project so identified by Zeneca. It is understood and agreed that there shall not at any time be more than [*******] Reserved Projects for any particular Output Trait. (ii) In connection with the definition of each Reserved Project, the Parties shall discuss and must agree in writing on (a) [*******], technical feasibility, freedom to operate risks, research activities and goals, and successful outcomes, as illustrated in the initial Reserved Project descriptions agreed in writing by the Parties as of the Effective Date. A mutually agreed written description of all of the foregoing shall be required for any definition of a Reserved Project. (iii) It is understood by the Parties that there shall be no obligation to conduct research activities in any Reserved Project, except as agreed in the Research Plan. Before work is commenced on any Reserved Project, the Research Committee shall agree in writing to the commercialization rights each Party shall have to any Shuffled Genes resulting from the conduct of such Reserved Projects, including without limitation, specific Non Ag Applications and extraction rights and value capture strategy. (iv) It is understood and agreed that neither Party shall, without the unanimous consent of the Research Committee, be obligated to conduct research activities in the Research Program directed to [*******], other than with respect to Reserved Projects. Neither Party shall have any obligation to agree to any changes proposed by the other Party to the then current list of Reserved Projects. (v) Unless otherwise expressly provided herein, during the Research Term, Maxygen shall not to enter into any contract with any Third Party to Shuffle any Gene intended to provide [*******] which are the focus of any Reserved Project. (vi) It is understood and agreed that, at such time as the Research Program commences with respect to a particular Reserved Project, it shall be treated as a Project for all purposes of this Agreement. (c) Enabling Technology and [*******]. Any research -------------------------------- conducted in the Research Program relating to any Enabling Technology and/or [*******] shall be for use in Plants agreed upon by the Research Committee on a case-by-case basis in accordance with the provisions of Section 2.8. 10 2.1.2 Research Plan. ------------- (a) At least annually, the Research Committee will prepare and agree upon a written plan (the Research Plan) which will include (i) a general overview and timetable for each Party's research activities and appropriate resources and budgets for such research during the next year, and (ii) a preliminary and non-binding plan for research activities to be conducted by the Parties in the subsequent year which shall include, without limitation, staffing and resource allocations. Each Research Plan shall set specific objectives for such year, which objectives will be updated or amended, as appropriate, by the Research Committee as research progresses, and shall set forth specific research activities within applicable Trait Categories for the Crops and Enabling Technology and [*******] as appropriate. (b) A preliminary Research Plan has been agreed to by the Parties as of the Effective Date, and the Parties will use their reasonable best efforts to have the Research Committee agree on a formal Research Plan within forty-five (45) days of the Effective Date. No Research Plan will include staffing or funding for any Project, including without limitation any Reserved Project, except with the written consent of the Research Committee. (c) The Research Committee shall review the Research Plan on an ongoing basis, but in no event less than quarterly, and may, in its discretion, make changes that are consistent with this Agreement to the Research Plan then in effect. 2.1.3 Efforts. Zeneca and Maxygen shall each use reasonable ------- efforts to conduct the Research Program in a professional manner and within the time schedules contemplated therein. The activities conducted in connection with the Research Program will be overseen and administered by the Research Committee pursuant to Section 2.2 below. 2.1.4 Staffing. In carrying out the Research Program, Maxygen -------- shall devote an average of [*******] FTEs per year (the "Staffing Level") for each year of the Research Term, at a rate of [*******] for each FTE, which amount shall be CPI adjusted on the annual anniversary of the Effective Date, applying the most recent published CPI figure, using 1999 as the base year. It is understood and agreed that Maxygen shall not be obligated to utilize an average per year of more than [*******] FTEs in the Research Program or conduct any activities in the Research Program for which Zeneca fails to provide funding in accordance with Section 4.3. It is anticipated that each Project will utilize on average about [*******] per year, except as the Research Committee may otherwise agree. At the request of Zeneca, Maxygen will in good faith consider and discuss proposed increases or decreases to the Staffing Level; provided, however, that the Staffing Level shall remain at the level of FTEs specified above, unless the Parties agree in writing to different staffing levels. Any increase or decrease to the Staffing Level agreed to by the Parties shall be reflected in the relevant Research Plan and the budget associated with such Research Plan. 11 2.2 Research Committee. Promptly after the Effective Date, Zeneca ------------------ and Maxygen will each appoint three (3) representatives to a research committee of six (6) persons (the "Research Committee"). 2.2.1 Membership. A Maxygen representative will serve as ---------- chairperson of the Research Committee for the initial twelve (12) months. Thereafter, the chair will rotate between a Zeneca member and a Maxygen member every twelve (12) months. A Party may change any of its appointments to the Research Committee at any time with written notice to the other Party. From time to time, the Research Committee may establish subcommittees to oversee particular activities. It is understood that each Party will designate at least one business representative to the Research Committee. 2.2.2 Responsibilities. Generally, it will be Zeneca who ---------------- proposes Projects for the Research Committee to consider for inclusion in the Research Plan, although either Party may propose such Projects. The Research Committee will agree on and may, in its discretion, modify the research to be performed under this Agreement in a manner consistent with this Agreement. The Research Committee will oversee, review, direct and supervise all operational and scientific aspects of the Research Program. The Research Committee shall be responsible for: (i) establishing the Research Plan; (ii) monitoring and reporting research progress and ensuring open and frequent exchange between the Parties with respect to Research Program activities; (iii) approving allocations of tasks and resources required to carry out the goals of the Research Program; (iv) approving all plans and annual budgets for the various Projects within the Research Program; (v) defining Phenotypic Effects, the scope of Projects and the Genes which will be Shuffled for each Project; (vi) redirecting, as it deems appropriate, the activities to be conducted in the Research Program within and among the Trait Categories, and reallocating the FTEs in support of such activities; (vii) designating Gene Variants as Shuffled Genes; (viii) determining whether to acquire licenses from Third Parties with respect to intellectual property necessary or useful for the conduct of the Research Program; 12 (ix) discussing patent matters relating to the Program Technology; (x) performing such other functions as appropriate to further the purposes of this Agreement, as determined by the Parties; (xi) determining the financial terms of value sharing for commercialization of products based on or resulting from Enabling Technology or [*******], as set forth in Section 2.8.3, and based on or resulting from [*******] as set forth in Section 2.8.4; and (xii) determining the financial terms of value sharing for commercialization of products based on or resulting from Reserved Projects which become Projects. 2.2.3 Meetings. The Research Committee will meet on a quarterly -------- basis alternating between the corporate offices of Maxygen and Zeneca, or at such other sites as the Research Committee may agree, and will otherwise communicate regularly by telephone, electronic mail, facsimile and/or video conference. Attendance at meetings shall be at the respective expense of the participating Parties. If personal attendance is not possible, voting by proxy is permissible. Each Party recognizes the importance of the Research Committee in the success of the Research Program and will use diligent efforts to cause all of its representatives of such committee to attend all meetings of such committee, and at least two representatives from each Party shall be required to attend each Research Committee meeting in person or by telephone. With the prior approval of the Research Committee, other full-time personnel of the Parties and consultants approved by the other Party may attend, but not vote at, Research Committee meetings. The Parties agree to use good faith reasonable efforts to ensure that the Chief Executive Officer of Maxygen and Zeneca's Agrochemicals Research Director meet at least annually to discuss the Research Program. 2.2.4 Minutes. The Research Committee shall keep accurate ------- minutes of its meetings that record all decisions and all actions recommended or taken. The Party hosting the meeting shall be responsible for the preparation and circulation of the draft minutes. Draft minutes shall be delivered to the Research Committee within twenty (20) days after each meeting. Draft minutes shall be edited by each Party's Research Committee representatives within twenty (20) days of receipt thereof and shall be adopted in final form with their approval and agreement as evidenced by their signatures on the minutes. Minutes of the Research Committee meetings shall be treated as Confidential Information of each Party in accordance with the provisions of Article 9 hereof. 2.2.5 Decision Making; Disputes. All decisions of the Research ------------------------- Committee will be made by unanimous approval and recorded in writing. If the Research Committee is unable to resolve after thirty (30) days a dispute regarding any issue presented to it or arising in it, the matter shall be resolved pursuant to Article 12. If the Research Committee 13 does not agree upon whether a specific Project should become part of and be conducted in the Research Program, then such Project shall not be the target of research activities in the Research Program, and such matter shall not be subject to dispute resolution as set forth in Sections 12.3 and/or 12.4. 2.3 Research Program Expenses ------------------------- 2.3.1 Zeneca Funding. Zeneca shall be responsible for paying to -------------- Maxygen Research Funding for the Research Program as set forth in Section 4.3. 2.3.2 Zeneca Expenses. Zeneca shall be responsible for the --------------- expense of its own participation in the Research Program. 2.3.3 Third Party Technology. ---------------------- (a) Maxygen shall be responsible for all payments due to Third Parties for the acquisition and maintenance of licenses to intellectual property necessary for the practice of Shuffling Technology per se in the Research Program, and the costs of negotiating and preparing such licenses. In the event that it is necessary to acquire any license to any other intellectual property or technology from a Third Party for the conduct of the Research Program, the Research Committee will set a budget and agree upon responsibilities of the Parties in conjunction with obtaining such a license, or shall determine not to proceed with such Project. (b) If Zeneca is not able to grant to Maxygen a sublicense to any Gene(s) which are Shuffled in the Research Program for use in development or commercialization of a Maxygen Product, Maxygen will be responsible for acquiring licenses to such Genes as needed for its own commercialization activities. Notwithstanding the above, with respect to any gene(s) to which Zeneca obtains license rights from a Third Party, which gene(s) Zeneca wishes to Shuffle in the Research Program, Zeneca shall use reasonable efforts to acquire from such other Third Party the right to sublicense such Gene and Shuffled Genes based thereon to Maxygen for use pursuant to Article 3. 2.3.4 Research Program Subcontracts. With the prior approval of ----------------------------- and budgeting by the Research Committee, Maxygen may enter into agreements with Third Parties for the performance of activities in furtherance of the Research Program. Zeneca shall have the right to review and comment on such agreements prior to execution, and shall have the right to veto the acceptance of the best draft achievable of such agreements. If the Research Committee approves such funding, Zeneca shall be responsible for directly paying to the Third Party all compensation required to be paid pursuant to such Agreement and/or for reimbursing Maxygen for reasonable out of pocket costs not exceeding the budget agreed by the Research Committee incurred in entering into such agreements. 2.3.5 Capital Expenditures. In the event that the conduct of the -------------------- Research Program can be facilitated by the purchase of specialized capital equipment, the Research Committee shall determine whether such equipment shall be purchased. If the Research 14 Committee approves any such purchase, Zeneca shall be responsible for purchasing such equipment, unless otherwise agreed. Title to such equipment shall be vested in Zeneca and Maxygen shall not use such equipment for the benefit of any other party without Zeneca's prior written consent. 2.4 Records; Reports ---------------- 2.4.1 Records. The Parties shall maintain records that will ------- properly reflect all work done and results achieved in the performance of the Research Program (including all data in the form required under any applicable governmental regulations and as directed by the Research Committee), including laboratory records sufficient to establish the dates of first conception and reduction to practice of any inventions within the Program Technology; provided, Maxygen shall have no obligation to disclose any Shuffling Technology to the Research Committee or Zeneca; and further provided that (i) Zeneca shall be under no obligation to disclose any proprietary Zeneca protocols or proprietary assays or the like to the Research Committee or Maxygen, and (ii) Maxygen shall be under no obligation to disclose any proprietary Maxygen protocols or the like to the Research Committee or Zeneca. Upon request, during ordinary business hours during the term of the Research Program, the Parties shall provide each other access to such records relating to any Shuffled Gene. After the term of the Research Program, the Parties shall continue to provide access to each other as is reasonably required for the progression of patent related activities initiated as a result of Research Committee decisions pursuant to this Agreement. 2.4.2 Reports. During the Research Term, the Research Committee ------- shall periodically, and not less often than quarterly, request, and the Parties shall have the obligation to prepare and provide to the Research Committee, written reports summarizing the progress of the research performed by or sponsored by the Parties pursuant to the Research Plan during the preceding half-year. The Parties shall also periodically, and not less than quarterly, provide a written report (which may be provided as part of the report described in the preceding sentence) summarizing Program Technology made by either Party, with significant discoveries or advances being communicated at any time during the Research Term as soon as practical after such information is obtained or its significance is appreciated. 2.4.3 Research Program Expenditures. During the Research Term, ----------------------------- Maxygen shall provide Zeneca with a quarterly accounting report regarding Research Program expenditures by Maxygen in the preceding quarter. Maxygen shall keep records of all expenses incurred in connection with the Research Program, and annually during the Research Program within sixty (60) days following the end of each twelve months from the Effective Date shall provide Zeneca with a report describing the number of FTEs utilized in the Research Program during the preceding twelve months. During the term of the Research Program and for thirty-six (36) months thereafter, Zeneca shall have the right to audit such records no more than once per twelve month period during ordinary business hours, at mutually agreed times, to verify Maxygen's expenditures in connection with the Research Program. 15 2.5 Activities ---------- 2.5.1 Selection of Genes for Shuffling. -------------------------------- (a) Proposed Genes. Either Party may propose genes to be -------------- Shuffled in the Research Program, and the final selection of Genes will be made by the Research Committee. At such time as either Party proposes a gene for Shuffling, it shall inform the Research Committee, to the extent it is able to do so without breaching any confidentiality obligations, of all rights which it has to use and sublicense such gene, and any restrictions or limitations thereon, and any information of which it is aware with respect to Third Party patent applications or patents which may relate to the use of the gene in the Research Program and/or the development or commercialization of Zeneca Products and, if applicable, Maxygen Products; provided, neither Party shall have any obligation to provide the Research Committee with any document which would result in a breach of the attorney/client privilege with respect thereto. At such time, to the extent that Maxygen may do so without compromising its confidentiality obligations to Third Parties, Maxygen shall additionally inform Zeneca of any obligations or restrictions on commercialization of products for Agricultural Applications with respect to any Plant other than a Crop as a result of any exclusivity granted by Maxygen to a Third Party with respect to Shuffling. (b) Selection of Genes. The Research Committee shall ------------------ have the sole authority to select the Genes for use in the Research Program. The Research Committee shall consider in the selection of Genes: commercialization issues for each of Zeneca and Maxygen, technical feasibility and freedom to operate risks for the commercialization of Zeneca Products and Maxygen Products. It is understood and agreed that where there is more than one gene which could be Shuffled for a particular purpose, [*******] the Research Committee shall select for Shuffling in the Research Program a gene(s) for which sublicense rights are available for both of Zeneca and Maxygen. It is further understood and agreed that the Research Committee shall use all reasonable efforts to identify and select for Shuffling in each Trait Category at least [*******] for which sublicense rights are available for Maxygen. Unless otherwise agreed in writing, the Research Committee shall accept or decline to accept a proposed gene as a Gene within ninety (90) days of date of receipt of the information described in Sections 2.5.1(a) and (b) above. (c) Types of Genes. At the time a Gene is selected for -------------- the Research Program, and prior to use of the Gene for Shuffling in the Research Program, the Research Committee shall determine in writing if it is a Zeneca Starting Gene, a Maxygen Starting Gene or an Other Starting Gene. In the event that either Party desires to propose a Gene for Shuffling in the Research Program which Gene is not [*******], but which Gene the proposing Party desires to have designated as a Zeneca Starting Gene or Maxygen Starting Gene, as the case may be, then the Party may request the Research Committee to consider designation of such Gene as a Zeneca Starting Gene or Maxygen Starting Gene, as the case may be. If the Party has a proprietary interest in the Gene which the Research Committee agrees is sufficient to justify the designation of such Gene as a Zeneca Starting Gene or Maxygen Starting Gene, then 16 the Research Committee may, in its discretion, elect to designate such Gene a Zeneca Starting Gene or Maxygen Starting Gene. Patent counsel for each of the Parties may advise the Research Committee on various factors which the Research Committee may want to consider in making such determination. 2.5.2 Activity Criteria for Gene Variants and Shuffled Genes. ------------------------------------------------------ At such time as the Research Committee selects a Gene to be Shuffled in the Research Program or within thirty (30) days thereafter, the Research Committee shall prepare a written description of the activity criteria required of Gene Variant(s) and Shuffled Gene(s), respectively. Such criteria shall in all cases reflect a reasonable commercial level of activity, including regulatory requirements, relevant for Zeneca Agricultural Products and may be amended from time-to-time by the Research Committee. 2.5.3 Preparation of Variants and Protein Pools. Maxygen shall ----------------------------------------- use its Shuffling Technology to prepare Nucleic Acid Sequence Libraries, and prepare crude or purified protein pools from expression of such libraries. Maxygen and/or Zeneca shall be responsible for preparation of expression constructs in appropriate non-Plant organism(s), non-plant cell culture(s) and in planta, all as agreed by the Research Committee and set forth in the Research Plan. 2.5.4 Screening. Maxygen shall carry out screening of Nucleic --------- Acid Sequence Libraries, using high throughput screening including the use of robotics and advanced data reduction techniques, as set forth in the Research Plan. Maxygen shall not be under any obligation to share the design of Maxygen proprietary screens or other proprietary tests with the Research Committee or Zeneca. Maxygen shall provide Gene Variants and/or clones for such Gene Variants and/or protein pools to Zeneca for screening in Zeneca proprietary screens as set forth in Section 2.5.6 below. Where the Research Committee determines that Zeneca has more efficient or effective proprietary primary screens the Research Committee may decide to provide Zeneca with protein pools from Nucleic Acid Sequence Libraries for such screening. 2.5.5 Selection of Shuffled Genes. At any time during the --------------------------- Research Program, Zeneca may notify Maxygen that Zeneca wishes to have one or more of the Gene Variants designated as a Shuffled Gene(s). Zeneca shall not be obligated to consider Gene Variants which do not meet the criteria established by the Research Committee. The Research Committee shall have the sole authority to determine which Gene Variants shall be designated as Shuffled Gene(s), and shall make all such designations in writing. The Research Committee shall not unreasonably withhold the designation of Gene Variants as Shuffled Genes as requested by Zeneca. 2.5.6 Transfer of Gene Variants, Protein Pools and Clones; ---------------------------------------------------- Limited Use. Maxygen shall transfer to Zeneca those Gene Variants that have - ----------- been selected by the Research Committee as potential Shuffled Genes, which Zeneca shall use solely for research activities approved in advance by the Research Committee for the purpose of determining whether such Gene Variant should be nominated as Shuffled Genes. No more than [*******] such Gene Variants will be transferred to Zeneca per Project, unless determined otherwise by the Research Committee. In addition, at the direction of the Research Committee, Maxygen shall provide to 17 Zeneca protein pools obtained from the expression of Gene Variants, which Zeneca shall use solely for research activities approved in advance by the Research Committee for the purpose of determining whether such Gene Variants should be nominated as Shuffled Genes. Zeneca shall provide a summary of the results of all research activities using such Gene Variants to the Research Committee. Zeneca shall not be under any obligation to share the design of any Zeneca proprietary screens or other proprietary tests with the Research Committee. Except in connection with the practice of the rights granted to Zeneca in Section 3.1 hereof, Zeneca shall not without the express prior written consent of Maxygen, (i) transfer any of the Gene Variants or protein pools or DNA clones supplied to Zeneca to any Third Party, (ii) use the data and information obtained from the research activities conducted using such Gene Variants (including without limitation any sequence information regarding the Gene Variants or the proteins expressed by such Gene Variants) for any purpose other than the purpose of determining whether such Gene Variant should be nominated as Shuffled Genes, (iii) permit any Third Party to obtain or use any of the Gene Variants, protein pools or DNA clones supplied to Zeneca for any purpose, or (iv) use any data relating to any Gene Variants, including without limitation consensus sequences or structural motifs, to reverse engineer, reconstruct, synthesize or otherwise modify or copy any Gene Variant or any other gene or product with similar biological activities, or to attempt the same. 2.6 Use of Materials and Technology ------------------------------- 2.6.1 Gene Variants. ------------- (a) [*******]. It is understood and agreed that nothing in this Section 2.6.1 shall limit Maxygen's license rights granted in Section 3.2 and that subject to the provisions of Section 2.7 and Article 9, Maxygen shall be free to Shuffle any one or more genes not Shuffled in the Research Program on its own behalf or on behalf of a Third Party outside the Research Program; provided, however, it is understood and agreed that nothing in this Agreement grants to Maxygen a license under patents owned or Controlled by Zeneca to Shuffle genes, other than pursuant to Section 3.2.1 in connection with the Research Program. (b) Zeneca shall not, without the prior written consent of Maxygen, have any right to use any of the Gene Variants for any use outside the Research Program. For the avoidance of doubt, Zeneca shall have the licenses set forth in Section 3.1 with respect to Shuffled Genes. (c) The identities of all Genes Shuffled in the Research Program is Confidential Information of Zeneca, which shall not be disclosed except pursuant to Article 9 below, or as otherwise agreed by Zeneca and Maxygen. 2.6.2 Shuffled Genes. Gene Variants which have become Shuffled -------------- Genes shall be subject to the exclusive licenses set forth in Section 3.1.2 and Section 3.2.2, and neither Maxygen nor Zeneca shall disclose or use such Shuffled Genes except as permitted by the terms of this Agreement. 18 2.6.3 Enabling Technology and Gene Switch Technology. Except ---------------------------------------------- for use in connection with the Research Program or as expressly permitted pursuant to Sections 2.8, 3.1.2, and 3.2.2, Maxygen shall not have any right to use or disclose Enabling Technology or [*******] to any Third Party. 2.6.4 Zeneca Proprietary Technology. Except for use in ----------------------------- connection with the Research Program, Maxygen shall have no right to use or disclose any Zeneca Proprietary Technology to any Third Party. 2.6.5 Shuffling Technology. Zeneca shall have no right to use -------------------- or disclose any Shuffling Technology to any Third Party. 2.6.6 Program Materials. Except as set forth in Section 2.6.1 ----------------- through 2.6.5 above, all Program Materials shall be treated as follows. Ownership of such Program Materials shall depend on whether Zeneca or Maxygen or the Parties jointly made, conceived and/or reduced to practice, or otherwise developed such Program Materials. Except for use in connection with the Research Program or as expressly permitted pursuant to the licenses in Section 3.1.2 and Section 3.2.2, Zeneca or Maxygen, as the case may be, shall have the sole right to use and disclose, as it deems appropriate, any such Program Materials made, conceived and reduced to practice or otherwise developed solely by its respective employees and consultants. Any such Program Materials made, conceived and/or reduced to practice or otherwise developed jointly by employees and/or consultants of Maxygen and Zeneca may be used and disclosed by either Party outside the Research Program, pursuant to the licenses granted in Section 3.1.2 and Section 3.2.2. Notwithstanding the foregoing, (i) all Maxygen Improvements shall be owned by Maxygen and may be exploited by Maxygen without restraint and without any compensation to Zeneca, and (ii) all Zeneca Improvements shall be owned by Zeneca and may be exploited by Zeneca without restraint and without any compensation to Maxygen. 2.6.7 Research Results. ---------------- (a) Research Results that relate directly and/or specifically to Nucleic Acid Sequence Libraries, Gene Variants and Shuffled Genes, or to [*******] or Enabling Technology, shall not be used by the other Party, except in connection with the Research Program or as permitted pursuant to the licenses in Section 3.1.2 and 3.2.2. Program Materials subject to Section 2.6.6 above which are solely owned by one Party, shall not be used by the other Party, except in connection with the Research Program or as permitted pursuant to the licenses in Section 3.1.2 and 3.2.2. Unless agreed to the contrary by the Research Committee (e.g., by the authorization to file a patent application or to obtain regulatory approval), all such Research Results shall be treated as Confidential Information of the Party(ies) developing or generating such Research Results and shall not be disclosed except as otherwise expressly provided in this Agreement. (b) Research Results not subject to Subsection 2.6.7(a) above may be disclosed and used by either Party, without accounting to the other Party hereto. 19 2.7 Research Exclusivity -------------------- 2.7.1 Exclusive and Co-Exclusive Trait Categories. During the ------------------------------------------- Research Term, Maxygen (i) will conduct research exclusively with Zeneca in the Trait Categories of [*******] and (ii) may only conduct research with Zeneca and up to [*******] other [*******] in the Trait Categories of [*******]. 2.7.2 Non-Exclusive Trait Categories. ------------------------------ (a) During the Research Term, Maxygen may conduct research with Zeneca on a non-exclusive basis in connection with the Research Program in the following Trait Categories: [*******]. In the case of [*******], it is understood and agreed that the research activities, if any, conducted in these areas shall be in the specific Reserved Projects identified by the Parties as set forth in Section 2.1.1(b). (b) In addition, during the Research Term, subject to the provisions of this Section 2.7.2(b) and the payment of additional amounts for Research Program funding as set forth in Section 4.3.1(b) with the agreement of the Research Committee on the specific Projects which would be conducted, the Research Program may be expanded to include one or more Projects (i) in the Trait Category of [*******], and (ii) for [*******]. It is understood and agreed that, unless otherwise agreed in writing, Zeneca's and Maxygen's commercial and financial rights and obligations with respect to the Projects subject to this Section 2.7.2(b), Shuffled Genes and any corresponding Products resulting from the conduct of such Projects shall be the same as those resulting from other Projects conducted in NE Trait Categories. It is further understood and agreed that with respect to any Project conducted with regard to [*******], the value sharing with respect to Zeneca Products resulting therefrom shall be determined pursuant to Section 2.8.4. (c) It is understood and agreed that Maxygen may enter into research arrangements with one or more Third Parties for particular projects within the Trait Categories in which Maxygen may conduct non-exclusive research pursuant to this Section 2.7.2, so long as Maxygen retains during the Research Term the right to conduct with Zeneca other Projects within the same Trait Categories. It is further agreed that in the Trait Categories in which Maxygen may conduct nonexclusive research with Third Parties, that Maxygen will not [*******]. (d) For the avoidance of doubt, it is understood that with respect to the co-exclusive Trait Categories described in Section 2.7.1 and the non-exclusive Trait Categories described in Section 2.7.2(a) above, Maxygen must retain for Zeneca the right to [*******]. (e) It is further understood that at the time the Research Committee agrees to conduct a Project in a Trait Category in which Maxygen may conduct non-exclusive research outside the Research Program, the Research Committee may, but shall not be required 20 to, agree upon additional specific activities which Maxygen will not conduct with Third Parties during the Research Term; provided, however, that if the Research Committee does not agree on such activities, such matter shall not be subject to the dispute resolution procedures set forth in Article 12. 2.7.3 Other Permitted Research Activities. Maxygen shall have ----------------------------------- no obligation to conduct any research in the Research Program in any Trait Category or Crop except in the areas expressly described in Sections 2.7.1 or Section 2.7.2, or as agreed in writing by the Research Committee. It is understood and agreed that, subject to Section 3.5, Maxygen may conduct research on its own behalf and with Third Parties with respect to any gene and/or Plant, except during the Research Term with regard to those Trait Categories in the applicable Crops for which Zeneca has research exclusivity as provided in Section 2.7.1 with respect to Trait Categories with the designations "E" or "NA" in Exhibit A or as expressly prohibited in Section 2.7.2(c). 2.7.4 Definition of Projects. Prior to the time as the Research ---------------------- Committee agrees to conduct a particular Project, the Research Committee shall define the applicable [*******]. It is understood and agreed that the [*******] shall be specifically and precisely defined and, in each case, the relevant criteria shall include [*******] and other relevant criteria as determined by the Research Committee. It is further understood and agreed that, on a case-by- case basis, the Research Committee may agree to define a Project based on [*******], as well as on the basis of [*******]. The initial Projects which will be conducted in the Research Program, unless otherwise agreed by the Research Committee, have been agreed in writing by the Parties as of the Effective Date. In connection with the definition of each Project, the Research Committee shall discuss and must agree on (a) staffing levels, duration, starting materials (e.g., Genes), technical feasibility, freedom to operate risks, research activities and goals, and successful outcomes, and (b) specific product definitions and extraction rights, in each case, to the extent not previously agreed in writing. 2.8 Enabling Technology/[*******]. The Parties anticipate that the ----------------------------- development of Zeneca commercial products may be significantly enhanced by the use of Shuffling to develop Enabling Technology or [*******]. It is understood that the Research Committee may agree to include the optimization of Enabling Technology and/or [*******] within the Research Plan, together with or independently of any other part of the Research Program. 2.8.1 Case-by-Case Basis. Unless mutually agreed in writing by ------------------ the Research Committee, application of Shuffling Technology for development of Enabling Technology and [*******] will only be undertaken on a case-by-case basis in connection with the Research Program upon mutual agreement of the Parties and inclusion in the Research Plan. Such Project plan shall include the specific starting materials, goals, and the successful outcome(s). 2.8.2 Preliminary Disclosures. At such time as Zeneca proposes ----------------------- that a Project be conducted for the development of Enabling Technology or [*******], it shall inform 21 the Research Committee of all rights which Zeneca has with respect to the underlying technology on which such development will be based or will require the use of, including without limitation, any rights it has to use and sublicense such underlying technology, and any restrictions or limitations thereon, and any information of which it is aware with respect to Third Party patent applications or patents which may relate to the use of the proposed Enabling Technology. The Research Committee shall have the sole authority to authorize the conduct and scope of Projects in the Research Program intended to produce Enabling Technology. 2.8.3 Negotiation of Value Capture Mechanisms. Prior to --------------------------------------- approving any Project relating to Enabling Technology and/or [*******], the Research Committee shall agree upon the Parties' respective commercialization rights (including without limitation, definitions of products for which royalties or other payment will be due, permitted fields of commercialization, extraction rights, if any), and an appropriate royalty and/or other value capture mechanism for any use of such Enabling Technology or [*******]. In the event the Parties fail to reach agreement on all of the foregoing for the applicable Enabling Technology or [*******] before the initiation of such research, the proposed Project shall not become part of the Research Plan or Research Program, such matter shall not be subject to the dispute resolution procedures in Sections 12.3 and/or 12.4, and no research shall be conducted thereon pursuant to this Agreement. Unless otherwise specifically agreed in writing, it is understood that all commercial rights to [*******] shall be and remain vested in Zeneca subject to the payment of agreed value sharing to Maxygen. 2.8.4 [*******] Projects. Prior to approving any Project ------------------ relating to [*******], the Research Committee shall agree upon appropriate value sharing mechanisms. It is understood and agreed that Maxygen shall be entitled to share in the value created by the conduct of a Project with respect to any [*******], and that such value may be captured by Zeneca or its Affiliates or Sublicensees through the sale of Zeneca Agricultural Products and/or [*******] and/or other mechanisms. Where the applicable [*******], Net Sales Income with respect to the related Zeneca Agricultural Products shall also include Net Sales Income with respect to [*******] (applying mutatis mutandi the definition in --------------- Section 1.26) and Downstream Income may include, without limitation, consideration received by Zeneca and its Affiliates and Sublicensees for [*******]. Where the [*******], the Research Committee shall determine in good faith the consideration to be paid to Maxygen with respect to the value share for such applications, which consideration shall take into account the extent such [*******] is used with or for Zeneca Agricultural Products. In the event the Parties fail to reach agreement on all of the foregoing for [*******] before the initiation of the applicable Project, such matter shall not be subject to the dispute resolution procedures in Sections 12.3 and/or 12.4, the proposed Project shall not become part of the Research Plan or Research Program. 2.9 Possible Expansion of Research Program. In the last quarter of each -------------------------------------- year during the Research Term, the Research Committee shall discuss, without obligation to agree, possible expansion of the Research Program. 22 2.10 Term and Termination of Research Program. The term of the ---------------------------------------- Research Program shall commence on the Effective Date and, unless terminated earlier due to the termination of the Agreement pursuant to Sections 11.2 or 11.3, or extended by mutual agreement of the Parties, or pursuant to Section 4.3.4, shall terminate on the fifth anniversary of the Effective Date (the "Research Term"). 3. LICENSE GRANTS 3.1 To Zeneca --------- 3.1.1 Research License. Subject to the terms and ---------------- conditions of this Agreement, Maxygen agrees to grant, and hereby grants to Zeneca a non-exclusive, non-transferable and non-sublicensable (other than to Zeneca Affiliates and, pursuant to Section 2.3.4, Third Parties as agreed by the Research Committee), royalty-free, worldwide license under Maxygen's interest in the Program Technology, Maxygen Materials and Maxygen Improvements, solely to conduct the Research Program. 3.1.2 Commercial Licenses. Subject to the terms and ------------------- conditions of this Agreement, including without limitation Section 3.1.3, Maxygen agrees to grant, and hereby grants, to Zeneca, a worldwide, royalty- bearing license, with the right to sublicense as set forth in Section 3.1.4 below, under Maxygen's interest in the Program Technology (whether solely or jointly owned by Maxygen), Maxygen Improvements and the Maxygen Materials, as follows: (a) an exclusive license to develop, make, have made, propagate and have propagated, use, import, offer for sale, sell and have sold Class A Zeneca Products for [*******] and Class B Zeneca Products for [*******]; and (b) an exclusive license to develop, make, have made, propagate and have propagated, use, import, offer for sale, sell and have sold Class A Zeneca Products for [*******]. 3.1.3 Exclusions and Limitations. It is understood -------------------------- that until [*******] from the date that the applicable Shuffled Gene is designated by the Research Committee or such earlier date as the Parties may agree in writing, the licenses to Zeneca set forth in Sections 3.1.1 and 3.1.2 do not convey any license with respect to the use of any Shuffled Gene(s) for [*******]. After such time, provided that Maxygen acquires the right to grant such license rights, the licenses in Section 3.1.2 shall be expanded to include the right to use Shuffled Genes for such purposes in [*******]. 3.1.4 Acknowledgement. Zeneca hereby acknowledges --------------- that, pursuant to Section 3.2.2(b) and subject to the requirements of Section 3.2.3(b), Maxygen has exclusive rights with respect to the use of Class B Shuffled Genes in Plants other than [*******], subject to the value sharing obligations in Section 4.5.1(d). 23 3.1.5 Sublicenses. Zeneca shall have the right to ----------- sublicense the rights granted in Section 3.1.2. Following the execution of any sublicense, Zeneca shall provide to Maxygen the identity of the Sublicensee and a description of the Zeneca Products and rights sublicensed to the Sublicensee and the territory of such sublicense. Each sublicense granted by Zeneca shall be consistent with all the terms and conditions of this Agreement, and subordinate thereto. Zeneca shall remain responsible to Maxygen for all obligations arising under this Agreement based upon the activities of each such Sublicensee. No Sublicensee may grant further sublicenses of such rights, or assign such sublicense, without Maxygen's prior written consent. Upon termination of this Agreement, or of any license to Zeneca hereunder, for any reason, any applicable sublicenses granted by Zeneca hereunder shall survive provided the Sublicensee is not in breach of the terms of this Agreement and capable of meeting Zeneca's obligations hereunder, subject to the terms and conditions hereof. 3.1.6 Enabling Technology and [*******]. In the event --------------------------------- that Maxygen and Zeneca agree to conduct research activities in the Research Program relating to Enabling Technology and/or [*******] as set forth in Section 2.8, Maxygen shall grant to Zeneca appropriate licenses under Maxygen's interest in the Maxygen Materials, Maxygen Improvements and/or Program Technology needed for Zeneca to commercialize such Enabling Technology and/or [*******] as agreed by the Research Committee under Section 2.8.3. 3.1.7 Extraction. For the avoidance of doubt, Zeneca's ---------- right to commercialize Shuffled Genes for [*******] for Agricultural Applications shall include the right to commercialize Zeneca Agricultural Products obtained by extraction. Any other extraction rights for Zeneca Agricultural Products shall be as agreed by the Research Committee. 3.1.8 Stacking of Shuffled Genes for Agricultural ------------------------------------------- Applications. It is understood and agreed that the license to Zeneca in - ------------ Section 3.1.2 (a) shall include a license to introduce any Shuffled Gene resulting from the Research Program which is commercialized or intended to be commercialized for Agricultural Applications into [*******]. 3.1.9 "NA" Areas. --------- (a) Maxygen agrees that it shall not, during the Research Term, grant to any Third Party any commercial rights to exploit, or itself exploit, any product developed with the use of a Shuffled gene to confer [*******] (as illustrated by the boxes marked "NA" in Exhibit A), except as Maxygen and Zeneca may agree in writing. If any such Shuffled gene developed by Maxygen and a Third Party to confer another [*******] also confers commercially significant levels of [*******], then the Parties shall discuss in good faith possible modification of the restrictions of this subsection 3.1.9(a). (b) If a Shuffled Gene has been designated in the Research Program in a Project conducted in an NA Trait Category and Zeneca is diligently developing Zeneca Products based on such Shuffled Gene, Maxygen shall not grant to any Third Party any research rights or commercial rights to exploit any product developed with the use of a Shuffled 24 gene within the applicable Trait Category until [*******] from the date the applicable Shuffled Gene was designated. Thereafter Maxygen may conduct research in the applicable NA Trait Category itself or with a Third Party, and subject to the exclusive licenses granted Zeneca in Section 3.1.2, may commercialize and authorize Third Parties to commercialize products resulting from research in such Trait Categories. If no Shuffled Gene is designated from a Project conducted in a NA Trait Category in the Research Program, then Zeneca's research and commercial rights with respect to Zeneca Products based on Shuffled Genes from such Trait Category shall cease [*******] at the end of the Research Term. 3.1.10 No Other Products. ----------------- (a) It is understood and agreed that pursuant to the licenses granted to Zeneca in this Article 3 that Zeneca may conduct such activities (e.g., the sequencing and mutagenesis of Shuffled Genes) as it reasonably deems appropriate to develop Shuffled Genes and Zeneca Products based thereon. (b) Except in connection with the research, development or commercialization of Zeneca Products subject to this Agreement, Zeneca and its Affiliates and Sublicensees shall not develop or commercialize, or authorize the development or commercialization of, any gene (or genetic element) which is based on or derived from any Gene Variant, Shuffled Gene (or Enabling Technology or improvements to [*******] developed in the Research Program, as the case may be), or any Plant or product derived therefrom which contains or is made with the use of such a gene (or genetic element), regardless of whether such gene (or genetic element) is made or obtained through synthesis, or mutation of a starting gene (or genetic element). Except in connection with the research, development or commercialization of Zeneca Products subject to this Agreement, Zeneca will not itself, or through any Third Party, use any Maxygen Materials, Program Technology, and/or Research Results or structure-function data relating to any Gene Variants, including without limitation, consensus sequences or structural motifs, to reverse engineer, reconstruct, synthesize or otherwise modify or copy any Gene Variant or Shuffled Gene or any other gene or product with similar biological activities, or to attempt the same. (c) If a dispute arises between the Parties which the Parties are unable to resolve regarding whether or not a product sold by Zeneca or its Affiliates or Sublicensees is a Zeneca Product, the dispute shall be settled by dispute resolution pursuant to Article 12. Zeneca shall bear the burden of proof in establishing that any such product is not a Zeneca Product subject to this Agreement, except with respect to a question of whether such product contains a Shuffled Gene created and identified in the Research Program where the DNA sequence of such Shuffled Gene is known to Maxygen during the term of the Research Program. 3.2 To Maxygen ---------- 3.2.1 Research License. Subject to the terms and conditions ---------------- of this Agreement, Zeneca agrees to grant, and hereby grants, to Maxygen a non- exclusive, non- 25 transferable and non-sublicensable (except to Maxygen Affiliates and, pursuant to Section 2.3.4, Third Parties as agreed by the Research Committee), royalty- free, worldwide license under Zeneca's interest in the Zeneca Proprietary Technology, Program Technology, Zeneca Improvements and the Zeneca Materials, solely to conduct the Research Program. 3.2.2 Commercial License. Subject to the terms and conditions ------------------ of this Agreement, Zeneca agrees to grant, and hereby grants, to Maxygen, a worldwide, royalty-bearing license, with the right to sublicense as set forth in Section 3.2.4 below, under Zeneca's interest in the Program Technology (whether solely or jointly owned by Zeneca), Zeneca Proprietary Technology, Zeneca Improvements and Zeneca Materials as follows: (a) an exclusive license, subject to the restrictions of Section 3.2.3(a), to make, have made, and use Class B Shuffled Genes to develop, make, have made, propagate, have propagated, use, import, offer for sale, sell and have sold Maxygen Products for [*******]; (b) an exclusive license, subject to the restrictions of Section 3.2.3(b), to make, have made, and use Class B Shuffled Genes to develop, make, have made, propagate, have propagated, use, import, offer for sale, sell and have sold Maxygen Products for [*******]; and (c) In the event that Maxygen and Zeneca agree to conduct research activities in the Research Program relating to Enabling Technology as set forth in Section 2.8, Zeneca shall grant to Maxygen such licenses as are necessary under Zeneca's interest in the Zeneca Proprietary Technology, Zeneca Materials, Zeneca Improvements, Program Technology, and Research Results for Maxygen to develop, make, have made, propagate, have propagated, use, import, offer for sale, sell and have sold Maxygen Products containing or produced using such Enabling Technology, as agreed by the Research Committee pursuant to Section 2.8. 3.2.3 Right of Negotiation; Detriment to Zeneca Products. -------------------------------------------------- (a) [*******]. Any commercialization of a Maxygen Product --------- intended for [*******] (a "[*******] Product") pursuant to Maxygen's license under Section 3.2.2(b) (including the grant of any sublicense of such rights pursuant to Section 3.2.4) shall be subject to a first right of negotiation [*******], as follows: If Maxygen intends to develop, directly or indirectly, in a [*******] Product for a particular indication, Maxygen shall give written notice to Zeneca describing the potential [*******] Product. For a period of [*******] from the earlier of (i) such notice, or (ii) the date that Zeneca provides Maxygen notice that [*******] wishes to initiate negotiations with respect to the potential [*******] Product, [*******] shall have [*******] right to negotiate with Maxygen [*******] license to any such [*******] Product, unless during such [*******] period [*******] notifies Maxygen in writing that it does not desire rights to commercialize such [*******] Product. In the event that Maxygen and [*******] have not agreed in writing upon mutually acceptable terms for 26 commercialization of the applicable [*******] Product within the period described above, or any longer time period the Parties may agree, Maxygen shall thereafter be free to commercialize such [*******] Product, subject to its value sharing obligations set forth in Section 4.5.1(d), on its own or with any Third Parties. For the purpose of this Section 3.2.3(a), [*******]. (b) Detriment to Zeneca Products. Prior to commencing the ---------------------------- commercialization of any Maxygen Product utilizing Class B Shuffled Genes [*******] under the license under Section 3.2.2(b) (including the grant of any sublicense of such rights pursuant to Section 3.2.4), Maxygen shall notify Zeneca and to the extent Maxygen may do so without violating its confidentiality obligations to Third Parties, Maxygen shall provide Zeneca information regarding its plans for regulatory approval regarding Maxygen Products made with the use of such Class B Shuffled Gene for Zeneca's review. Within [*******] of such notice, Zeneca shall provide to Maxygen a written explanation of any [*******] and the Parties shall discuss in good faith Zeneca's concerns. Maxygen agrees to use commercially reasonable efforts to cooperate with Zeneca to avoid or reduce such [*******]; provided, in the event that Zeneca believes that the plans for development or commercialization of a particular Maxygen Product would have an adverse material impact on a Zeneca Agricultural Product, the matter may be submitted to dispute resolution pursuant to Article 12. 3.2.4 Sublicenses. Maxygen shall have the right to sublicense ----------- the rights granted in Section 3.2.2. Following the execution of any sublicense, Maxygen shall provide to Zeneca the identity of the Sublicensee and a description of the Maxygen Products and rights sublicensed to the Sublicensee and the territory of such sublicense. Each sublicense granted by Maxygen shall be consistent with all the terms and conditions of this Agreement, and subordinate thereto. Maxygen shall remain responsible to Zeneca for all obligations arising under this Agreement based upon the activities of each such Sublicensee. No sublicensee may grant further sublicenses of such rights, or assign such sublicense, without Zeneca's prior written consent. Upon termination of this Agreement, or of any licenses granted to Maxygen hereunder for any reason, any applicable sublicenses granted by Maxygen hereunder shall survive provided the sublicensee is not in breach of the terms of this Agreement and is capable of meeting Maxygen's obligations hereunder, subject to terms and conditions herein. 3.3 Retained Rights --------------- 3.3.1 Maxygen. Subject to the other provisions of this ------- Agreement, including but not limited to the provisions of Section 2.6, Maxygen shall retain all rights under its interest in the Shuffling Technology, Maxygen Materials, Maxygen Improvements, and Maxygen's interest in Program Technology not expressly granted to Zeneca in Section 3.1, and to any other intellectual property and/or tangible materials developed by it or on its behalf after the Research Term or outside the scope of this Agreement. Notwithstanding the exclusive license granted to Zeneca in Section 3.1, Maxygen shall retain the right to use all Shuffled Genes in its own research to develop, improve and validate its technology and intellectual property relating to Shuffling Technology. Except as expressly permitted by Section 3.2 or Article 6, it is further understood that Maxygen shall not have the right to [*******]. Except as expressly 27 provided by this Agreement, it is understood and agreed that nothing in this Agreement grants (or shall be construed to grant) to Zeneca any licenses to intellectual property or materials developed by or on behalf of Maxygen or Third Parties outside of the Research Program. 3.3.2 Zeneca. Subject to the other provisions of this Agreement, ------ including but not limited to the provisions of Section 2.6, Zeneca shall retain all rights under its interest in the Zeneca Proprietary Technology, and in the Zeneca Materials and Zeneca Improvements, and to any intellectual property and/or tangible materials developed by it or on its behalf after the Research Term or outside the scope of this Agreement. Except as expressly provided by this Agreement, it is understood and agreed that nothing in this Agreement grants (or shall be construed to grant) to Maxygen any licenses to intellectual property or materials developed by or on behalf of Zeneca or Third Parties outside of the Research Program. 3.3.3 No Conflict. It is understood that either Party may, among ----------- other things, grant to Third Parties licenses under its interest in such Program Technology; provided, however, that during the term of this Agreement, neither Party shall grant any license under any Program Technology which conflicts with the licenses granted to the other Party hereto. 3.4 Third Party Rights. ------------------ 3.4.1 Overlapping Rights. It is understood that Maxygen is in ------------------ the business of Shuffling genes on behalf of Third Parties, and that Maxygen may grant such Third Parties rights after the Effective Date to acquire licenses for genes derived from Shuffling in those fields which are not otherwise constrained by Zeneca's prevailing rights with respect to this Agreement, and the formally recorded agreements of the Research Committee. Notwithstanding the licenses granted Zeneca above, it is possible that a Third Party may acquire rights from Maxygen with respect to one or more genes of which Maxygen is a sole or joint owner; accordingly, Maxygen's grant of rights in this Article 3 is limited to the extent that (i) a Third Party (either alone or jointly with Maxygen) has filed a patent application with respect to such gene prior to the filing by Zeneca (either alone or jointly with Maxygen) of a patent application with respect to such a gene or (ii) Maxygen has, prior to identification of the nucleotide sequence of a Gene Variant in the Research Program granted a Third Party a license or other rights with respect to such a Gene Variant. 3.4.2 Limited Liability. It is understood and agreed that, even ----------------- if Maxygen complies with its obligations under this Agreement, genes derived through Shuffling activities that are provided to Third Parties in the course of Maxygen's other business activities may result in Third Party patent applications and patents, including patent applications and patents owned by such Third Parties, or owned jointly by Maxygen and such Third Parties, which could conflict with patent applications and patents owned by Zeneca, or jointly owned by Zeneca and Maxygen hereunder. Maxygen will use its reasonable efforts to avoid such conflict and, unless Zeneca is damaged as a result of a material breach by Maxygen of the terms of Section 3.1.2, then Maxygen shall have no liability under this Agreement with respect to any such conflict. 28 3.5 No Unauthorized Use. Maxygen hereby covenants that it will not ------------------- practice the Zeneca Proprietary Technology, except as expressly permitted in this Agreement. Zeneca hereby covenants that it will not practice the Program Technology or Shuffling Technology, except as expressly permitted in this Agreement. Notwithstanding the above, nothing in this Agreement shall prohibit either Party from using outside the scope of this Agreement information which is in the public domain, unless the use of such information would infringe issued, valid patent rights owned or Controlled by the other Party hereto. 3.6 No Implied Licenses. No rights or licenses with respect to any ------------------- intellectual property owned by Maxygen or Zeneca are granted or shall be deemed granted hereunder or in connection herewith, other than those rights expressly granted in this Agreement. 4. CONSIDERATION 4.1 High Technology Patent Enhancement Funding. In partial ------------------------------------------ consideration for the license and rights in high-technology patents granted Zeneca herein and access to the Program Technology which relates to high- technology patents during the Research Term, Zeneca shall pay to Maxygen a fee of [*******] as soon as possible after the Effective Date and in no event later than [*******] business days after the Effective Date and on or before each anniversary of the Effective Date during the Research Term, Zeneca shall pay to Maxygen the amount of [*******]. Such amounts shall not be refundable nor creditable against other amounts due Maxygen under this Agreement, and shall be paid in addition to any amounts due from Zeneca for Patent Activities pursuant to Article 7. 4.2 Purchase of Maxygen Stock. AstraZeneca Holdings B.V. shall ------------------------- purchase shares of Maxygen preferred stock from Maxygen, pursuant to the terms and conditions of the Stock Purchase Agreement. 4.3 Research Program Funding. ------------------------ 4.3.1 Research Program Funding Commitments. ------------------------------------ (a) Minimum Research Program Payments. Zeneca agrees to --------------------------------- pay to Maxygen funding for the conduct of the Research Program of not less than [*******] per year for a total of not less than [*******] over the Research Term. Maxygen shall have no obligation to expend any amount or incur any expense in connection with the Research Program except amounts paid by Zeneca to Maxygen pursuant to this Section 4.3. (b) Additional Research Funding. If pursuant to Section --------------------------- 2.7.2(b) the Research Committee agrees to conduct Projects in the Research Program in the Trait Categories of (i) [*******], or (ii) [*******], Zeneca shall pay to Maxygen additional Research Program funding. Unless otherwise agreed, the funding for each such Project would utilize an average of [*******] FTEs per Project per year, at the then current FTE funding rate. [*******]. 29 4.3.2 FTE Rate. Zeneca shall pay to Maxygen funding for the -------- Research Program on an FTE basis, based on the average annual number of Maxygen FTEs which will be involved in the Research Program, as described in Section 2.1.4. It is understood and agreed that Zeneca shall not be obligated to pay to Maxygen more than [*******] in Research Program funding in any year during the Research Term, and further agreed that if increases in the CPI result in increases in the FTE funding rate then Zeneca may with notice to the Research Committee at least one hundred and eighty (180) days prior to the start of the next twelve (12) month period of the Research Program, elect to (i) increase its Research Program funding to maintain the same number of FTEs, or (ii) reduce the number of FTEs, as necessary, to limit its annual Research Program funding to [*******]. 4.3.3 Timing of Payments. ------------------ (a) The first year of the Research Program shall commence on the Effective Date and each subsequent year of the Research Program shall commence on the anniversary of the Effective Date. With respect to the first year of the Research Program, [*******] of Zeneca's funding shall be paid to Maxygen quarterly, in advance. The first payment of [*******] shall be paid to Maxygen as soon as practicable but in no case later than [*******] business days after the Effective Date. The remainder of the Zeneca funding for the first year of the Research Program shall be paid by Zeneca to Maxygen during the year within [*******] days following receipt of a quarterly invoice following Maxygen's expenditure of or incurring the obligation to pay the invoiced amounts (provided that the invoice is received by Zeneca at least [*******] days prior to the end of the month in which the invoice is sent) up to an aggregate total of [*******] for the first year. With respect to each subsequent year of the Research Program, the amounts to be paid to Maxygen annually in connection with the Research Program pursuant to Section 4.3.1 shall be paid in equal quarterly installments, in advance following receipt of an invoice. It is understood and agreed that such invoices for the second and subsequent years may be provided by Maxygen annually with respect to payments due under this Section 4.3.3(a). The initial payment for the first quarter of the first year of the Research Program shall be made within [*******] business days after the Effective Date, and except with respect to the amounts to be paid pursuant to invoices, subsequent payments shall be made on or before the applicable quarterly anniversaries of the Effective Date. Such payments shall be made without withholding for taxes or any other charge and shall be non-refundable and non-creditable against other payments due Maxygen under this Agreement. (b) Notwithstanding Section 4.3.3(a) above, if in the period from the Effective Date until the first anniversary of the Effective Date, in any [*******] day period, an amount greater than or equal to [*******] budgeted in the applicable Research Plan for such period has not been expended or costs incurred for the Research Program, then Research Program payments due from Zeneca for the subsequent quarter of the first year of the Research Program shall be reduced by the applicable unexpended amount. Thereafter, if in any period from an anniversary of the Effective Date until the next anniversary of the Effective Date, an amount greater than or equal to [*******] budgeted in the applicable Research Plan for such period has not been expended or costs incurred for the Research Program, then Research 30 Program payments due from Zeneca for the subsequent year of the Research Program shall be reduced by the applicable unexpended amount, on an equal pro rata basis. The provisions in this Section 4.3.3(b) shall not reduce Zeneca's obligation to pay at least [*******] to Maxygen in Research Program payments, or Maxygen's obligations to perform research pursuant to Section 4.3.4(b). 4.3.4 Carry Forward. ------------- (a) In the event the amounts budgeted for any single quarterly period or annual period are not expended on or incurred for the Research Program during that quarter or year, the remainder shall be carried forward to be expended on activities to be conducted by Maxygen in connection with the Research Program during the subsequent periods, or any extension of the Research Program subject to Section 4.3.4(b) below. (b) It is understood and agreed that it is the intent of the parties to expend the Research Program payments subject to Section 4.3.1 during the initial five (5) years of the Research Term. Neither Party shall unreasonably seek to delay expenditure of such funds. In the event that Maxygen's representatives on the Research Committee propose delays in the expenditure of the Research Program funds, such that the funds are not entirely expended by the fifth anniversary of the Effective Date, Zeneca may elect to (i) terminate the Research Program as of the fifth anniversary of the Effective Date, in which event the unexpended Research funds paid by Zeneca shall be returned to it, or (ii) continue the Research Program until the remaining Research Program funds paid by Zeneca are fully expended. In the event that Zeneca's representatives on the Research Committee propose delays in the expenditure of spending of the Research Program Funds, such that the funds are not entirely expended by the fifth anniversary of the Effective Date, Maxygen may elect to (x) terminate the Research Program as of the fifth anniversary of the Effective Date, in which event the unexpended Research funds paid by Zeneca shall be returned to it and any funds not previously obligated to be paid shall become not due, or (y) continue the Research Program until the remaining Research funds paid by Zeneca are fully expended. In no event shall the Research Program be continued beyond [*******] after the Effective Date. In the event that any Research Program funds paid by Zeneca remain unexpended as of [*******] after the Effective Date, such amounts shall be returned to Zeneca. [*******]. 4.3.5 Annual Report. Within forty-five (45) days of each ------------- anniversary of the Effective Date during the Research Term and at least fourteen (14) days prior to the Research Committee meeting at which such report will be discussed, Maxygen shall provide to the Research Committee a report summarizing the expenditures made by Maxygen in connection with the Research Program in the preceding year. 4.3.6 Invoices. It is understood and agreed that any invoices -------- which Maxygen is required to provide Zeneca under this Article 4 may be provided annually or on a more frequent basis, at Maxygen's election and Zeneca shall pay the invoiced amount(s) on or before the applicable specified due date(s), and not later than thirty-three (33) days from the invoice date, provided that the invoice is received by Zeneca at least three (3) days prior to the end of the month in which the invoice is sent. 31 4.4 Milestone Payments. ------------------ 4.4.1 Milestones Based on Trait Effects. Subject to Section --------------------------------- 4.4.2 below, within thirty (30) days following the occurrence of the relevant events specified below with respect to [*******] Zeneca Agricultural Product achieving such event which has a particular Trait Effect, on a Trait Effect-by- Trait Effect basis, Zeneca shall pay to Maxygen the applicable amount specified below: Milestones Amount (U.S.$) --------------------------- -------------- [*******] [*******] It is understood and agreed that the milestones due in Section 4.4.1 above are to be paid based on the achievement of the foregoing milestones with respect to any Zeneca Agricultural Product having a specific Trait Effect, and that the obligation to pay milestone payments shall exist for [*******] Zeneca Agricultural Product having a particular Trait Effect, regardless whether such Zeneca Agricultural Product also has one or more other Trait Effects for which milestone payments have previously been paid. By way of illustration and without limitation, if Shuffled Genes conferring the Trait Effect of [*******] were incorporated into a Plant which had previously been modified with the use of one or more Shuffled Genes to confer the Trait Effect of [*******] for which the milestone payments described above were paid, then the foregoing milestones would also be paid with respect to such Zeneca Agricultural Product. By way of further illustration, and without limitation, the above milestones will be due with respect to such Zeneca Agricultural Product having a particular Trait Effect but not [*******]. 4.4.2 Milestone Adjustment. In the event that Zeneca believes -------------------- that the sales of Zeneca Agricultural Products having a particular Trait Effect will be so low that the payment of the milestone payments in Section 4.4.1 will make the commercialization of such Zeneca Agricultural Products commercially impracticable it shall notify Maxygen, providing a detailed written explanation of its position, and in such event, the parties shall negotiate in good faith revised milestone payment amounts or a rescheduling of the payments of the amounts in Section 4.4.1 above with respect to such Trait Effect, which shall reflect the potential commercial value of such Trait Effect; provided, the provisions of Section 4.4.1 shall remain in effect unless and until such other terms are agreed in writing. 4.4.3 Milestone Credits. [*******] of all milestone payments ----------------- paid by Zeneca to Maxygen with respect to milestones C and D pursuant to Section 4.4.1 (the "Creditable Milestone Payments") shall be creditable against the royalties due under Section 4.5 and Downstream Income (pursuant to Section 4.6.2), in each case, on Zeneca Agricultural Products that have the same Trait Effect for which the applicable milestone payment was made, and on any Naked Sublicense payments due pursuant to Section 4.6.1 as a result of payments received by Zeneca from a Naked Sublicense relating to Zeneca Agricultural Products that have 32 the same Trait Effect for which the applicable milestone payment was made, according to the following schedule: (i) Until [*******], Zeneca may offset [*******]of the Creditable Milestone Payments made by Zeneca with respect to such Zeneca Agricultural Product having the applicable Trait Effect, against up to a maximum of [*******] of the total of (a) all royalties (pursuant to Section 4.5), and Downstream Income (pursuant to Section 4.6.2), in each case, and (b) any Naked Sublicense payments due pursuant to Section 4.6.1 as a result of payments received by Zeneca from a Naked Sublicense due to Maxygen from Zeneca with respect to the applicable Zeneca Agricultural Product(s) in any year. All unexpended credits for Creditable Milestone Payments may be carried forward until the full credit available under this Section 4.4.3 is taken by Zeneca; and (ii) In each year in the period from [*******] until [*******], Zeneca may offset [*******] of the remaining unapplied Creditable Milestone Payments made by Zeneca with respect to such Zeneca Agricultural Product having the applicable Trait Effect, against up to a maximum of [*******] of the total of (a) all royalties (pursuant to Section 4.5), and Downstream Income (pursuant to Section 4.6.2), in each case, and (b) any Naked Sublicense payments due pursuant to Section 4.6.1 as a result of payments received by Zeneca from a Naked Sublicense due to Maxygen from Zeneca with respect to the applicable Zeneca Agricultural Product(s) in any year. All unexpended credits for Creditable Milestone Payments may be carried forward until the full credit available under this Section 4.4.3 is taken by Zeneca. (iii) Following [*******], Zeneca may offset [*******] remaining unapplied Creditable Milestone Payments made by Zeneca with respect to such Zeneca Agricultural Product having the applicable Trait Effect, against up to a maximum of [*******] of the total of (a) all royalties (pursuant to Section 4.5), and Downstream Income (pursuant to Section 4.6.2), in each case, and (b) any Naked Sublicense payments due pursuant to Section 4.6.1 as a result of payments received by Zeneca from a Naked Sublicense due to Maxygen from Zeneca with respect to the applicable Zeneca Agricultural Product(s) in any year. All unexpended credits for Milestone Payments may be carried forward until the full credit is taken by Zeneca. 4.4.4 Infringement Due to [*******]. If a Third Party brings ----------------------------- suit against Zeneca alleging that [*******], and a court of competent jurisdiction determines in a final judgment, which judgment is not timely appealed or is unappealable, that such Third Party patent was infringed in the Research Program and issues a permanent injunction prohibiting the sale of a Zeneca Product as a result of such infringement, [*******]. Such remaining milestone credits shall be applied as described in Section 4.4.3. 33 4.5 Royalties --------- 4.5.1 Royalty Rate. ------------ (a) Zeneca Agricultural Products. In consideration of the ---------------------------- licenses granted above, except as otherwise expressly provided in this Section 4.5.1, Zeneca shall pay to Maxygen on a Zeneca Agricultural Product-by-Zeneca Agricultural Product basis a royalty on aggregate worldwide Net Sales Income of Zeneca Agricultural Products by Zeneca and its Affiliates and, subject to Section 4.5.1(e) below, Collaborators, as follows: Aggregate Net Sales Income ($U.S.) Royalty Rate ------------------------ ----------------------------- [*******] [*******] Notwithstanding the above, in the event that Zeneca believes that contribution of Shuffled Genes to the value of a particular Zeneca Agricultural Product is de minimus such that the payment of the royalty payments above with -- ------- respect to such Zeneca Agricultural Product is commercially unjustifiable it shall notify Maxygen, providing a detailed written explanation of its position, and in such event, the parties shall negotiate in good faith royalty rates with respect to such Zeneca Agricultural Product which shall reflect the potential commercial value of such Zeneca Agricultural Product attributable to the Shuffled Gene; provided, the above provisions of Section 4.5.1(a) shall remain in effect unless and until such other terms are agreed in writing. (b) Zeneca Non-Ag Products. In cases where Zeneca wishes ---------------------- to sell a Zeneca Non-Agricultural Product, the royalty and/or other value capture mechanism shall reflect the customary standards in the applicable industry for products of comparable value. Prior to the first sale of such a Product for such an application the Parties shall determine in good faith the value sharing mechanism which will be applied to Zeneca's income from the applicable Zeneca Non-Agricultural Product. In the event that the Parties are unable to agree on the royalty due, such matter shall be submitted by either Party to dispute resolution pursuant to Article 12. (c) Enabling Technology and [*******]. In cases where --------------------------------- Zeneca wishes to sell a product containing or made with the use of Enabling Technology and/or [*******] but no Shuffled Gene, Zeneca shall be obligated to pay Maxygen that consideration agreed pursuant to the provisions of Section 2.8.3. (d) Maxygen Products. With respect to Maxygen Products ---------------- used for [*******], it is understood and agreed the applicable value capture mechanism shall be the payment to Zeneca of royalties on the sales of such Maxygen Product on the terms specified for Zeneca Agricultural Products in Section 4.5, and Downstream Income and Payments from Naked 34 Sublicenses, except as the Parties may otherwise agree in writing. For purposes of determining the amounts due to Zeneca pursuant to this Section 4.5.1(d), Section 4.6.1(b), and Section 4.6.2(b), with respect to Maxygen Products, the definitions in Sections 1.7, 1.12, 1.25 and 1.26 shall be applied mutatis ------- mutandi to Maxygen and Maxygen Products. In cases where Maxygen wishes to sell a - ------- Maxygen Product for [*******], the royalty and/or other value capture mechanism shall reflect the customary standards in the applicable industry for products of comparable value, subject to Section 3.2.3(a). With respect to Maxygen Products for [*******], prior to the first sale of such a Product for such an application the Parties shall determine in good faith the value sharing mechanism which will be applied to Maxygen's income from the applicable Maxygen Product. In the event that the Parties are unable to agree on the royalty due, such matter shall be submitted by either Party to dispute resolution pursuant to Article 12. (e) Royalties on Net Sales Income of Collaborators. It is ---------------------------------------------- understood and agreed that neither Party shall have any obligation to pay the other Party royalties on Net Sales Income of its Collaborators unless such Party or its Affiliates receives payments from such Collaborators with respect to such Net Sales Income. 4.5.2 Computation of Royalties. Nothing herein contained shall ------------------------ obligate either Party to pay the other Party more than one royalty on any Zeneca Product or Maxygen Product, as the case may be. In the event that a Zeneca Product or Maxygen Product, as the case may be, incorporates or is made using more than one (1) Shuffled Gene only one (1) royalty shall be due; provided such royalty shall be at the highest applicable royalty rate. 4.5.3 Royalty Term. The royalties due hereunder shall be payable ------------ on a country-by-country and Zeneca Product-by-Zeneca Product basis, or in the case of Maxygen Products, on a Maxygen Product-by-Maxygen Product basis, in each country until the date which is: (i) the expiration of the last to expire of the patents within the Patent Rights covering the applicable Zeneca Product or applicable Maxygen Product, or the manufacture, use or sale of the Zeneca Product or applicable Maxygen Product in such country, or (ii) if there are no issued patents within the Patent Rights covering the Zeneca Product or applicable Maxygen Product or the manufacture, use or sale of the Zeneca Product or applicable Maxygen Product in a country, until [*******] years following the first commercial sale of such Zeneca Product or applicable Maxygen Product in such country. 4.6 Other Payments 4.6.1 Naked Sublicense Payments. ------------------------- (a) In addition to royalties due pursuant to Section 4.5.1, and any amounts due pursuant to Section 4.6.2(a), Zeneca shall pay to Maxygen [*******] of any and all consideration received by Zeneca or its Affiliates pursuant to any Naked Sublicense. 35 (b) In addition to royalties due pursuant to Section 4.5.1, and any amounts due pursuant to Section 4.6.2(b), Maxygen shall pay to Zeneca [*******] of any and all consideration received by Maxygen or its Affiliates pursuant to any Naked Sublicense. 4.6.2 Downstream Income. ----------------- (a) In addition to royalties due pursuant to Section 4.5.1, and any amounts due pursuant to Section 4.6.1(a), Zeneca shall pay to Maxygen [*******] of any and all Downstream Income. (b) It addition to royalties due pursuant to Section 4.5.1(d), and any amounts due pursuant to Section 4.6.1(b), Maxygen shall pay to Zeneca [********] of any and all Downstream Income. (c) It is understood and agreed that neither Party shall have any obligation to pay to the other Party any portion of Downstream Income received by its Collaborators unless the commercializing Party or its Affiliates receives payments from such Collaborators with respect to such consideration. 4.6.3 Consideration Other Than Cash. If either Party or its ----------------------------- Affiliates wishes to grant a third party a sublicense under the other Party's interest in the Program Intellectual Property, in exchange for any consideration in a form other than cash or a cash equivalent (e.g., a license under other intellectual property owned or Controlled by a Third Party), it shall have the right to do so, provided before accepting consideration the Party wishing to grant the sublicense shall notify the other Party and the fair market value of the non-cash consideration received by the granting Party and its Affiliates for such rights or product, as the case may be, shall be agreed by the Parties, or if the Parties are unable to agree on such fair market value, either Party may submit such matter to dispute resolution pursuant to Article 12 below, in order to determine the fair market value of such consideration. 4.7 Third Party Royalties. --------------------- 4.7.1 Zeneca shall be responsible for the payment of any royalties, license fees and milestone and other payments due to any other Third Party(ies) under licenses or similar agreements necessary for the development, manufacture, propagation, use, import or sale of Zeneca Products developed, made and/or commercialized by Zeneca or its Affiliates or Sublicensees. 4.7.2 Maxygen shall be responsible for the payment of any royalties, license fees and milestone and other payments due to any other Third Party(ies) under licenses or similar agreements necessary for the development, manufacture, propagation, use, import or sale of Maxygen Products developed, made and/or commercialized by Maxygen or its Affiliates or Sublicensees. 36 4.8 Withholding Taxes. Any income or other tax that one Party is ----------------- required to withhold and pay on behalf of the other Party with respect to the payments payable under this Agreement shall be deducted from and offset against said payments prior to remittance to that other Party; provided, however, that in regard to any tax so deducted, the withholding Party shall give or cause to be given to the other Party such assistance as may reasonably be necessary to enable that other Party to claim exemption therefrom or credit therefor, and in each case shall furnish the other Party with proper evidence of the taxes paid on its behalf. 4.9 Non-Ag Applications. In the event that either Zeneca or Maxygen, ------------------- in its discretion, elects to commercialize one or more Shuffled Genes for Non-Ag Applications by licensing rights thereto to an Affiliate or Third Party, such Party shall be obligated to negotiate an arms-length agreement containing reasonable and customary terms with respect to the granting of such license. 4.10 Acknowledgement. It is understood and agreed that where Zeneca --------------- has the right to commercialize a Zeneca Agricultural Product in [*******], or Maxygen has the right to commercialize a Maxygen Product in [*******], unless otherwise agreed in writing, the consideration due the other Party with respect thereto shall be the same as required with respect to commercialization of the applicable Product in or derived from [*******]. 4.11 Equity Purchase Option. At each anniversary of the Effective ---------------------- Date, instead of paying to Maxygen the amount of one million dollars ($1,000,000) pursuant to Section 4.1, and at the discretion of Zeneca, Zeneca may elect to have AstraZeneca Holdings B.V. pay to Maxygen three million dollars ($3,000,000) for the purchase of shares of Maxygen stock at a price equal to one hundred and fifty percent (150%) of the then fair market value (i.e., pay to Maxygen $3,000,000 for shares of Maxygen stock having a fair market value of $2,000,000) on terms and conditions set forth in the Stock Purchase Agreement. 5. BOOKS AND RECORDS 5.1 Reports and Payments. 5.1.1 Zeneca Products. After the first commercial sale of a --------------- Zeneca Product, Zeneca shall make quarterly written reports to Maxygen for the preceding calendar quarter, stating in each such report, separately for Zeneca and each of its Affiliates, and to the extent necessary to substantiate the amounts due to Maxygen under this Agreement, for each of Zeneca's Collaborators, in each case, on a country-by-country and Zeneca Product-by-Zeneca Product basis: (i) the quantity and description of each Zeneca Product sold; (ii) the Net Sales Income for each Zeneca Product, and the calculation of royalties due thereon, accompanied by sufficient information to enable Maxygen to verify the accuracy of the royalty calculations made by Zeneca, and a detailed explanation of the methodology used to determine the royalty payment; 37 (iii) separately for Zeneca and each Affiliate and Collaborator, all Downstream Income relating thereto; and (iv) separately for each Naked Sublicense, all payments relating thereto. In the event that research is conducted regarding Enabling Technology and/or [*******] in the Research Program, such reports shall also contain the information necessary to substantiate Zeneca's payment obligations as agreed by the Research Committee pursuant to Section 2.8.3 with respect to products sold by Zeneca, its Affiliates and its Sublicensees that contain or are made through the use of such Enabling Technology and/or [*******]. Concurrently with the making of any such reports, Zeneca shall pay to Maxygen all royalties due pursuant to Section 4.5 and any Downstream Income and payments from any Naked Sublicense, together with all royalties due to Maxygen for (i) Zeneca Products in [*******], (ii) Zeneca Products for [*******], (iii) use of Enabling Technology, or (iv) use of [*******], or improvements thereof, developed in the Research Program. If no royalties are due, Zeneca shall so report. 5.1.2 Maxygen Products. After the first commercial sale of a ---------------- Maxygen Product, Maxygen shall make quarterly written reports to Zeneca for the preceding calendar quarter, and in such report shall provide with respect to Maxygen Products information as required from Zeneca pursuant to Section 5.1.1 with regard to Zeneca Products. In the event that research is conducted regarding Enabling Technology in the Research Program and Maxygen has the right to commercialize products utilizing the same, such reports shall also contain the information described above with respect to products sold by Maxygen, its Affiliates and its Sublicensees that contain or are made through the use of such Enabling Technology to the extent necessary to substantiate the amounts due to Zeneca under this Agreement. Concurrently with the making of such reports, Maxygen shall pay to Zeneca all royalties due and any Downstream Income and payments from any Naked Sublicense. If no royalties are due, Maxygen shall so report. 5.2 Payment Method; Late Payments. All amounts due either Party ----------------------------- hereunder shall be paid in U.S. dollars by wire transfer in immediately available funds to a bank account designated by the receiving Party. Any payments or portions thereof due hereunder which are not paid on the date such payments are due under this Agreement shall bear interest at a rate equal to the lesser of prime rate as reported by the Citibank, New York, New York (or its successor in interest), plus two percent (2%), or the maximum rate permitted by law, calculated on the number of days such payment is delinquent, compounded monthly. This Section 5.2 shall in no way limit any other remedies available to either Party. 5.3 Currency Conversion. Royalties and Naked Sublicense payments and ------------------- Downstream Income subject to this Agreement shall first be determined in the currency earned 38 and then converted to its equivalent in United States currency. The buying rates of exchange for converting the currencies involved into the currency of the United States quoted by the Financial Times (or its successor in interest) on the last business day of the quarterly period in which the royalties and Naked Sublicense payments and Downstream Income were earned shall be used to determine any such conversion. 5.4 Restrictions on Payment. The obligation to pay royalties under ----------------------- this Agreement shall be waived and excused to the extent that statutes, laws, codes or government regulations in a particular country prevent such royalty payments; provided, however, in such event, if legally permissible, the paying Party shall pay the royalties owed to the receiving Party by depositing such amounts in a bank account in such country that has been designated by the receiving Party and promptly report such payment to the receiving Party. 5.5 Records; Inspection. Each Party and its Affiliates shall keep ------------------- (and cause its Sublicensees to keep) complete, true and accurate books of account and records for the purpose of determining the royalty, Downstream Income and Naked Sublicense payments payable under Article 4. Such books and records shall be kept reasonably accessible for three (3) years following the end of the calendar year to which they pertain. Such records will be open for inspection during such three (3) year period by a representative or agent of the receiving Party reasonably acceptable to the paying Party, which approval shall not be unreasonably withheld, for the purpose of verifying the statements provided pursuant to Section 5.1. Such inspections may be made no more than once each calendar year, at reasonable times mutually agreed by Zeneca and Maxygen. The inspecting Party's representative or agent will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection and may only disclose to the inspecting Party the amount of any variance or error. The inspecting Party shall bear the costs and expenses of inspections conducted under this Section 5.5, unless a variation or error producing an underpayment in amounts payable exceeding [*******] percent [*******] of the amount payable for any quarter is established in the course of any such inspection, whereupon all costs relating to the inspection and any unpaid amounts that are discovered will be paid by the paying Party, together with interest on such unpaid amounts at the rate specified in Section 5.2 above. 6. DILIGENCE 6.1 Commercially Reasonable Efforts. Zeneca will actively pursue ------------------------------- commercialization of each Shuffled Gene with the same level of efforts it makes with its own intellectual property of comparable commercial potential and patent protection. Such determination may take account of a variety of commercial, technical, regulatory, ethical and competitive judgments. Such diligence shall include: [*******] 39 Notwithstanding the foregoing, Zeneca shall not be required to satisfy the specific obligations in Section 6.1.1 and 6.1.2 if it is unable to achieve such obligations due to [*******]. 6.2 Commercial Development Committee -------------------------------- 6.2.1 Following the designation of any Shuffled Gene by the Research Committee, Zeneca and Maxygen shall form a Commercial Development Committee ("CDC") comprising two representatives from each Party, of which one from each shall have commercial and one technical responsibilities. The CDC shall meet twice annually, at mutually agreed times and places. Each Party shall be responsible for all costs incurred by their representatives in attending such meetings. 6.2.2 The agenda of each CDC meeting shall include a written summary by Zeneca of Zeneca's development and commercialization activities with respect to each Shuffled Gene and Zeneca Product, including without limitation a description of all Shuffled Genes put into Crops, or tested, or used in field trials, and all Zeneca Agricultural Products and Zeneca Non-Agricultural Products sold commercially or in development as well as a report on anticipated future developmental activities and time lines. Zeneca agrees to meet reasonable requests by Maxygen for additional information regarding development and commercialization of Zeneca Products. It is expressly acknowledged and agreed that the CDC is a disclosure mechanism only, and that Zeneca shall retain full discretion with respect to the development and commercialization of all Zeneca Products. By agreement of Zeneca, other Maxygen or Zeneca employees may be invited to CDC meetings . 6.2.3 Zeneca shall inform Maxygen at the CDC meetings if Zeneca is not progressing the development of any Shuffled Gene and provide an explanation of Zeneca's rationale for not so progressing such development. 6.2.4 Zeneca agrees to make good faith reasonable efforts to make available, on request, the member of Zeneca's senior management responsible for overseeing Zeneca's development and/or commercialization activities with regard to each Zeneca Product for meetings with Maxygen, in England or such other place as the Parties may agree, to discuss the status and stage of such development. 6.3 Lack of Diligence. In the event that Zeneca (i) fails to use ----------------- or continue to use diligent efforts to [*******] as set forth in Section 6.1 above and does not cure such failure within [*******] after written notice from Maxygen thereof, or (ii) notifies Maxygen that it will not conduct further commercialization with respect to a particular Shuffled Gene, then Zeneca's rights under this Agreement with respect to such Shuffled Gene (and all corresponding Zeneca Products) shall [*******] on a Shuffled Gene-by Shuffled Gene basis; provided, however, that if Zeneca demonstrates a legitimate, commercially reasonable, environmental, health or regulatory justification for such failure, then such rights shall not [*******]. In the event of such a [*******] of Zeneca's rights, Zeneca shall grant to Maxygen [*******] licenses with the right to grant sublicenses with respect to the Program Technology and all other intellectual property 40 owned or Controlled by Zeneca and its Affiliates, to commercialize the applicable Shuffled Gene (and corresponding Zeneca Products), In return, Maxygen shall pay to Zeneca consideration to be agreed with respect to the applicable Zeneca Products, which consideration shall reflect the [*******] of the license rights. 7. INTELLECTUAL PROPERTY 7.1 Ownership of Research Results. Subject to Section 7.2 below, (i) ----------------------------- title to all inventions and intellectual property made solely by Maxygen employees or its agents in connection with the Research Program without inventive contribution by Zeneca employees or its agents shall be owned by Maxygen; (ii) title to all inventions and intellectual property made solely by Zeneca employees or its agents in connection with the Research Program without inventive contribution by Maxygen employees or its agents shall be owned by Zeneca; and (iii) title to all inventions and intellectual property made jointly by employees or the agents of Zeneca and Maxygen in connection with the Research Program, shall be jointly owned by Maxygen and Zeneca. Inventorship and rights of ownership of the Program Technology (whether or not patentable) shall be determined in accordance with United States laws of inventorship or the law of California, as applicable. 7.2 Assignment ---------- 7.2.1 Notwithstanding Section 7.1, Zeneca agrees to assign, and hereby assigns, to Maxygen all Zeneca's right, title and interest in all Shuffling Technology invented, developed or made in the Research Program and all Maxygen Improvements. 7.2.2 Notwithstanding Section 7.1, Maxygen agrees to assign, and hereby assigns, to Zeneca all right, title and interest in all Zeneca Improvements. 7.2.3 Maxygen and Zeneca agree to timely execute such documents as are necessary assign title to Zeneca Improvements, Shuffling Technology and/or Maxygen Improvements as set forth in Section 7.2.1 and 7.2.2. 7.3 Filing of Patents ----------------- 7.3.1 Responsibilities. The Research Committee will coordinate ---------------- the determination of what patents will be filed on Research Results and countries in which patent applications will be filed. Unless Zeneca and Maxygen agree otherwise in writing, the Parties shall have the responsibilities for patent filing, prosecution and maintenance (including the defense of interferences, oppositions and similar proceedings) (collectively, "Patent Activities") as set forth in this Section 7.3.1. In the event that the responsible Party elects to perform any of such Patent Activities in-house, the non-responsible Party agrees to waive all causes of action for professional negligence that the non-responsible Party may have against the individuals conducting such Patent Activities; provided, however, that the responsible Party shall be responsible to ensure the use of reasonable care of patent attorneys in the conduct of such Patent Activities by the responsible Party's in-house counsel, and nothing herein shall waive, or be 41 construed to waive, claims against the responsible Party based on negligence of the responsible Party's in-house counsel. (a) DNA Shuffling. Maxygen will be responsible, at its sole ------------- expense, for Patent Activities for all inventions made by Maxygen or Zeneca or jointly by the Parties in connection with the Research Program relating to Shuffling Technology or Maxygen Materials or Maxygen Improvements. (b) Zeneca Agricultural Products. Zeneca will be responsible, at ---------------------------- its sole expense, for Patent Activities with respect to all inventions made by Maxygen or Zeneca or jointly by the Parties in connection with the Research Program relating to Zeneca Proprietary Technology, Zeneca Materials or Zeneca Improvements, Zeneca Product testing and development of Zeneca Products. (c) Nucleic Acid Sequence Libraries. Maxygen will be responsible, ------------------------------- at its sole expense, for Patent Activities with respect to inventions made by Maxygen in connection with the Research Program relating to the gene libraries produced by Shuffling. (d) Shuffled Genes, Proteins Encoded by Such Genes, Gene ---------------------------------------------------- Variants, Transgenic Plants Containing Shuffled Genes, and Uses Thereof. Zeneca - ----------------------------------------------------------------------- will be responsible, at its sole expense, for Patent Activities with respect to inventions made by Maxygen or Zeneca or jointly by the parties in connection with the Research Program relating to Shuffled Genes, functional properties of Gene Variants provided to Zeneca hereunder, proteins encoded by Shuffled Genes, transgenic plants containing Shuffled Genes, and uses thereof in the Crops; however, if a patent application or patent claims uses of Class B Shuffled Genes, proteins, or transgenic plants solely for Non-Ag Applications, then Maxygen will be responsible, at its sole expense, for such Patent Activities. (e) Screening Assays and Inventions not Covered in Other Groups. ----------------------------------------------------------- Zeneca will be responsible, at its sole expense, for Patent Activities with respect to inventions made solely by Zeneca in connection with the Research Program relating to screening assays and inventions not otherwise covered in this Section 7.3.1. Maxygen will be responsible, at its sole expense, for Patent Activities with respect to inventions made solely by Maxygen in connection with the Research Program relating to screening assays and inventions not covered in this Section 7.3.1. In the case of joint inventions made in connection with the Research Program relating to screening assays and inventions not covered in this Section 7.3.1, Patent Activities shall be conducted by outside counsel acceptable to both Parties with equal control and joint responsibility for costs incurred in connection with the applicable Patent Activities. 7.3.2 Cooperation. The Party responsible for Patent Activities ----------- for the applicable patent applications pursuant to Section 7.3.1 shall use reasonable efforts to obtain patent coverage that is as broad as possible to cover all potential commercial uses thereof, in those countries specified by the Research Committee, and shall assure that the other Party will 42 have the opportunity to provide meaningful and substantive review and comment with respect thereto. Except as otherwise expressly provided herein, applications filed on joint inventions shall be written and filed by counsel reasonably acceptable to both Parties (which shall include in-house patent counsel), but under the control of the responsible Party. Each Party shall notify the other of its intention to file any patent application claiming an invention made in connection with the Research Program, and shall at the request of the other Party promptly provide the other with copies of all patent prosecution and maintenance documentation and correspondence so that the other shall be currently and promptly informed of the continuing prosecution and maintenance of patent applications and patents claiming or disclosing inventions made in connection with the Research Program. Each Party shall have the right to review and comment upon such documentation and correspondence, as well as all specifications, claims and responses to office actions prior to their submission to the relevant government patent office. 7.3.3 Elective Termination of Patent Activities. If at any time ----------------------------------------- the Party responsible for Patent Activities pursuant to Section 7.3.1 above (the "Responsible Party") does not wish to file or wishes to discontinue the prosecution or maintenance of any patent application or patent filed in any country, on a country-by-country basis, that either (i) is within the scope of Section 7.3.1(c) or (d), or (ii) is within the scope of Section 7.3.1(e) and claims a jointly-invented invention, it shall promptly give notice of such intention to the other Party. The latter shall have the right, but not the obligation, to assume responsibility for the prosecution of any such Patent Rights in the applicable country, at its own expense, by giving notice to the Responsible Party of such intention within thirty (30) days. 7.4 Patent Enforcement ------------------ 7.4.1 Notice. In the event either Party becomes aware of any ------ actual or threatened commercially material infringement or use of any Program Patent Rights (collectively, an "Infringement"), that Party shall promptly notify the other Party and provide it with full details. The Parties will meet to discuss the appropriate course of action, and may collaborate in pursuing such course or action. 7.4.2 Rights. If the Parties do not otherwise agree on a course ------ of action, Zeneca shall have the initial right (but shall not have an obligation) to conduct the prosecution, prevention or termination of any Infringement of Zeneca's solely-owned Patent Rights hereunder, at Zeneca's expense and with the sharing of recoveries as specified below, and Maxygen shall have the initial right (but shall not have an obligation) to conduct the prosecution, prevention or termination of any Infringement of Maxygen's solely- owned Patent Rights, at Maxygen's expense, and with the sharing of recoveries as specified below. If either Party which has the initial right as described above determines that it is necessary or desirable for the other Party to join any such suit, action or proceeding, the other Party shall execute all papers and perform such other acts as may be reasonably required in the circumstances, at the requesting Party's expense. 43 7.4.3 Jointly-Owned Patents. In the event of an Infringement of --------------------- Program Patent Rights owned jointly by Maxygen and Zeneca, the Parties shall agree which Party will have the rights and responsibilities of abating such an infringement, and how the expenses of abating any such Infringement shall be shared. In the event the responsible Party becomes involved in any action or proceeding relating to the applicable Program Patent Rights, the responsible Party shall use counsel reasonably acceptable to the other Party, and shall keep the other Party fully informed as to the status of such matters. Each Party shall have the right to be represented by counsel of its own selection and its own expense in any suit initiated under this Section by the other Party for an Infringement. In the event only one Party wishes to pursue in such proceeding, it shall have the right to proceed alone, at its expense, and may retain any recovery, subject to Section 7.4.4 below, and the other Party agrees, at the request and expense of the Party initiating such action, to cooperate and join in any proceedings in the event that a third party asserts that the co-owner of such Joint Invention is necessary or indispensable to such proceedings; provided, neither Party may enter into any settlement with respect to any of the jointly owned Program Patent Rights without the prior consent of other Party, which consent shall not be unreasonably withheld, and may not make any statement which admits that any of the jointly owned Program Patent Rights are invalid or unenforceable. 7.4.4 Costs. Zeneca shall bear the cost of any proceeding or ----- suit under this Section 7.4 brought by Zeneca and Maxygen shall bear the cost of any such proceeding or suit brought by Maxygen under this Section 7.4. In each such case, the responsible Party shall have the right first to reimburse itself out of any sums recovered in such suit or in its settlement for all reasonable costs and expenses, including reasonable attorney's fees, related to such suit or settlement. The remainder is next to be used to reimburse the other Party for its costs and expenses so incurred. Any remaining amounts or any non-monetary recovery shall be kept by the responsible Party. 7.4.5 Standing. If either Party lacks standing and the other -------- Party has standing to bring any such suit, action or proceeding as specified above, then the responsible Party may request the other Party to do so at the responsible Party's expense. The Party with standing is under no obligation to comply with such request, but rather is free to refuse such request. 7.4.6 Cooperation. In any action under this Section 7.4, each ----------- Party shall fully cooperate with and assist the other as reasonably requested. No suit regarding Maxygen Patent Rights may be settled by Zeneca without Maxygen's consent. No suit regarding Zeneca Patent Rights may be settled by Maxygen without Zeneca's consent. 7.4.7 Maxygen Initial Public Offering. Notwithstanding the ------------------------------- above, if Maxygen notifies Zeneca that it intends to make an initial public offering of Maxygen shares, then for a period of six (6) months from such notice Zeneca shall not commence any new action or proceeding against any Third Party with respect to any Maxygen patent without the prior written consent of Maxygen; provided, however, Zeneca may respond to and participate in any 44 patent infringement action or other similar proceeding which has commenced as of the date of such notice or which may be commenced by a Third Party during such six month period. 7.5 Allegations of Infringement by Third Parties. -------------------------------------------- 7.5.1 Zeneca. Zeneca shall be responsible for any threatened or ------ actual claims of infringement of Third Party patents or other Third Party intellectual property right arising out of or in connection with the manufacture, use, sale or importation of a Zeneca Product, except to the extent such claims are directed to the use of Shuffling per se in the Research Program. ------ Upon receiving notice of any such actual or threatened claims, the Parties shall promptly meet to discuss the course of action to be taken to resolve or defend any such infringement litigation. If Maxygen is named as a party to such claim, suit or proceeding but Zeneca is not named as a party, Zeneca may, at its own expense and through counsel of its own choice, seek leave to intervene in such claim, suit or proceeding. Maxygen agrees not to oppose such intervention. If Zeneca, and not Maxygen, is named as a party to such claim, suit or proceeding, Zeneca shall have the right to control the defense and settlement of such claim, suit or proceeding, at its own expense, using counsel of its own choice. If Maxygen shall, at any time, tender its defense to Zeneca in writing, then Zeneca shall defend Maxygen in such claim, suit or proceeding, at Zeneca's own expense and through counsel of its own choice, and Zeneca shall control the defense and settlement of any such claim, suit or proceeding. In no event shall Zeneca enter into any agreement which makes any admission regarding (i) wrongdoing on the part Maxygen, or (ii) the invalidity, unenforceability or absence of infringement of any Patent Rights owned or Controlled by Maxygen or any patent jointly owned by Maxygen and Zeneca, without the prior written consent of Maxygen, which consent shall not be unreasonably withheld. The Parties shall cooperate with each other in connection with any such claim, suit or proceeding and shall keep each other reasonably informed of all material developments in connection with any such claim, suit or proceeding. 7.5.2 Maxygen. Maxygen shall be responsible for any threatened ------- or actual claims of infringement of Third Party patents or other Third Party intellectual property right arising out of or in connection with the manufacture, use, sale or importation of a Maxygen Product, except to the extent such claims are directed to the use of Zeneca Proprietary Technology in the Research Program. Upon receiving notice of any such actual or threatened claims, the Parties shall promptly meet to discuss the course of action to be taken to resolve or defend any such infringement litigation. If Zeneca is named as a party to such claim, suit or proceeding but Maxygen is not named as a party, Maxygen may, at its own expense and through counsel of its own choice, seek leave to intervene in such claim, suit or proceeding. Zeneca agrees not to oppose such intervention. If Maxygen, and not Zeneca, is named as a party to such claim, suit or proceeding, Maxygen shall have the right to control the defense and settlement of such claim, suit or proceeding, at its own expense, using counsel of its own choice. If Zeneca shall, at any time, tender its defense to Maxygen in writing, then Maxygen shall defend Zeneca in such claim, suit or proceeding, at Maxygen's own expense and through counsel of its own choice, and Maxygen shall control the defense and settlement of any such claim, suit or proceeding. In no event shall Maxygen enter into any agreement which makes any admission 45 regarding (i) wrongdoing on the part Zeneca, or (ii) the invalidity, unenforceability or absence of infringement of any Patent Rights owned or Controlled by Zeneca or any patent jointly owned by Maxygen and Zeneca, without the prior written consent of Zeneca, which consent shall not be unreasonably withheld. The Parties shall cooperate with each other in connection with any such claim, suit or proceeding and shall keep each other reasonably informed of all material developments in connection with any such claim, suit or proceeding. 8. REPRESENTATIONS AND WARRANTIES 8.1 Legal Authority. Each Party represents and warrants to the other --------------- that it has the legal power, authority and right to enter into this Agreement and to perform its respective obligations set forth herein. 8.2 No Conflicts. Each Party represents and warrants that as of the ------------ date of this Agreement it is not a Party to any agreement or arrangement with any Third Party or under any obligation or restriction, including pursuant to its Certificate of Incorporation or Bylaws, which in any way limits or conflicts with its ability to fulfill any of its obligations under this Agreement, and shall not enter into any such agreement during the term of this Agreement. 8.3 Performance Warranty. Each Party warrants and guarantees the -------------------- performance of any and all rights and obligations of this Agreement by its Affiliate(s), and Zeneca further warrants to (i) make all payments due to Maxygen hereunder as a result of actions of Zeneca's Sublicensees and (ii) enforce with respect to its Sublicensees all restrictions and obligations of Zeneca in this Agreement. Zeneca agrees to cooperate with all reasonable requests by Maxygen for information or involvement in any such enforcement activities. 8.4 Disclaimer of Warranties. Maxygen and Zeneca each specifically ------------------------ disclaim that the Research Program will be successful, in whole or part. MAXYGEN AND ZENECA EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CONFIDENTIAL INFORMATION, PATENT RIGHTS OR KNOW-HOW, RESEARCH RESULTS, SHUFFLING TECHNOLOGY, PROGRAM TECHNOLOGY, GENE(S), GENE VARIANT(S), SHUFFLED GENE(S), MAXYGEN PRODUCTS, OR ZENECA PRODUCT(S), INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR VALIDITY OF ANY SHUFFLING TECHNOLOGY OR PROGRAM TECHNOLOGY, PATENTED OR UNPATENTED. 9. CONFIDENTIALITY 9.1 Confidential Information. Except as expressly provided herein, ------------------------ the Parties agree that, for the term of this Agreement and for five (5) years thereafter, the receiving Party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the purposes contemplated by this Agreement or the Stock Purchase 46 Agreement any confidential information of the other Party or any data, technical and economic information (including the economic terms hereof), commercialization, and research strategies and know-how and other information provided by the other Party (the Disclosing Party) during the Term of this Agreement or during the negotiation of this Agreement, or the Stock Purchase Agreement, or in connection with the transactions contemplated thereby, or any Program Technology and data, results and information developed pursuant to the Research Program and solely owned by the Disclosing Party (collectively, the "Confidential Information") furnished to it by the Disclosing Party pursuant to this Agreement, the Stock Purchase Agreement, or the transactions contemplated thereby. The foregoing restrictions shall not apply to any: (a) information that is or becomes part of the public domain through no fault of the non-Disclosing Party or its Affiliates; and (b) information that is obtained after the date hereof by the non-Disclosing Party or one of its Affiliates from any Third Party which is lawfully in possession of such Confidential Information and not in violation of any contractual or legal obligation to the Disclosing Party with respect to such Confidential Information; (c) information that is known to the non-Disclosing Party or one or more of its Affiliates prior to disclosure by the Disclosing Party, as evidenced by the non-Disclosing Party's written records; and (d) information that is necessary to be disclosed to any governmental authorities or pursuant to any regulatory filings, but only to the limited extent of such legally required disclosure; or (e) information which has been independently developed by the non-Disclosing Party without the aid or use of any Confidential Information, as shown by contemporaneous written records. 9.2 Permitted Disclosures. Confidential Information may be disclosed --------------------- to employees, agents, consultants and actual or bona fide potential Sublicensees of the non-Disclosing Party or its Affiliates, but only to the extent reasonably required to accomplish the purposes of this Agreement and only if the non- Disclosing Party obtains prior written agreement from such employees, agents, consultants and actual or potential bona fide Sublicensees to whom disclosure is to be made to hold in confidence and not make use of such information for any purpose other than those permitted by this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that such employees, agents, consultants and Sublicensees do not disclose or make any unauthorized use of the Confidential Information. Notwithstanding any other provision of this Agreement, each Party may disclose the terms of this Agreement to prospective investors (other than those which Maxygen has or plans to enter into a research arrangement) and/or lenders, investment bankers and other financial institutions of its choice solely for purposes of financing the business operations of such Party, and may disclose the terms of the Stock Purchase 47 Agreement to prospective investors and/or lenders, investment bankers and other financial institutions of its choice solely for purposes of financing the business operations of such Party. 9.3 Publicity. All publicity, press releases and other announcements --------- relating to this Agreement or the transaction contemplated hereby shall be reviewed in advance by, and shall be subject to the approval of, both Parties; provided, however, that either Party may disclose the terms of this Agreement only to the extent required to comply with applicable securities or other laws, in which case the disclosing Party shall use reasonable efforts to provide the non-disclosing Party the opportunity to review and comment on such disclosure prior to its submission. Notwithstanding the foregoing, the Parties shall use their reasonable best efforts to agree upon a press release to announce the existence and general subject matter of this Agreement by the later of (i) five (5) business days after the date that any required Hart-Scott-Rodino approval for the transaction is received, or (ii) thirty (30) days after the Effective Date. In addition, at such time that Zeneca makes written determination to [*******] for which a milestone payment is due pursuant to Section 4.4.1, Zeneca shall promptly notify Maxygen, and the Parties shall promptly make a joint press release announcing Zeneca's decision and that a milestone payment will be paid to Maxygen. Once a particular disclosure has been approved for disclosure, either Party may make disclosures which do not differ materially therefrom without any need for further consents. All such disclosures shall be copied to the other party for information. 9.4 Publication. The Parties shall cooperate in appropriate ----------- publication of the results of research and development work performed pursuant to this Agreement, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, it is agreed that prior to any public disclosure of such results, the Party proposing disclosure shall send the other Party a copy of the information to be disclosed, and shall allow the other Party thirty (30) days from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing Party which such Party desires to maintain as a trade secret. If such notification is not received during the thirty (30) day period, the Party proposing disclosure shall be free to proceed with the disclosure. If due to a valid business reason or a reasonable belief by the non-disclosing Party that the disclosure contains subject matter for which a patentable invention should be sought or Confidential Information of the non-disclosing party, then prior to the expiration of the thirty (30) day period, the non-disclosing Party shall so notify the disclosing Party, who shall then delete the Confidential Information of the non-disclosing Party and, at the request of the non-disclosing Party, delay public disclosure of the remainder of the disclosure for an additional period of up to sixty (60) days to permit the preparation and filing of a patent application on the subject matter to be disclosed or other action to be taken. The Party proposing disclosure shall thereafter be free to publish or disclose the information. The determination of authorship for any paper shall be in accordance with accepted scientific practice. 10. INDEMNIFICATION 48 10.1 Zeneca. Zeneca agrees to indemnify, defend and hold harmless ------ Maxygen and its Affiliates and Sublicensees and their respective employees, agents, officers, directors and permitted assigns (each a "Maxygen Indemnitee") from and against any claims, actions or suits by a Third Party resulting in any liabilities, damages, settlements, claims, penalties, fines, and reasonable costs or reasonable expenses incurred (including, without limitation, reasonable attorneys' fees and other expenses of litigation, and consequential and/or indirect damages, if any, of Third Parties awarded by the court in a final decision which is not appealed or is unappealable) (any of the foregoing, a "Claim") arising out of or resulting from (i) the use of any Zeneca Gene or the use or making of any Gene Variants and/or Shuffled Genes derived therefrom in the conduct of the Research Program (except to the extent subject to Section 10.2(i) or (v) below), (ii) negligence or willful misconduct by Zeneca in the Research Program, (iii) a breach of any of the representations or warranties of Zeneca hereunder, or (iv) the development or manufacture, use, promotion, marketing, sale or other distribution of any Zeneca Product by Zeneca or its Affiliates or Sublicensees, except, in each case, to the extent that such Claim arises out of or results from the negligence or misconduct of a Maxygen Indemnitee; provided, however, that notwithstanding the foregoing, with respect to Claims specifically arising out of or relating solely from matters in (i) above, Zeneca shall only be obligated to indemnify Maxygen Indemnitees against actual damages, if any, awarded to a Third Party or actual settlement amounts, as applicable. 10.2 Maxygen. Maxygen agrees to indemnify, defend and hold harmless ------- Zeneca and its Affiliates and Sublicensees and their respective employees, agents, officers, directors and permitted assigns (each a "Zeneca Indemnitee") from and against any claims, actions or suits by a Third Party resulting in any liabilities, damages, settlements, claims, penalties, fines, and reasonable costs or reasonable expenses incurred (including, without limitation, reasonable attorneys' fees and other expenses of litigation, and consequential and/or indirect damages, if any, of Third Parties awarded by a court in a final decision which is not appealed or is unappealable) (any of the foregoing, a "Claim") arising out of or resulting from (i) the use of Shuffling Technology per se in the conduct of the Research Program (i.e., not due to the Shuffling of - --- -- a particular Gene), (ii) the use of any Maxygen Gene or the use or making of any Gene Variants and/or Shuffled Genes derived therefrom in the conduct of the Research Program (except to the extent subject to Section 10.1(iv) above), (iii) the negligence or willful misconduct of Maxygen in the Research Program, (iv) a breach of any of the representations or warranties by Maxygen hereunder, or (v) the development or manufacture, use, promotion, marketing, sale or other distribution of any Maxygen Product by Maxygen or its Affiliates, except, in each case, to the extent that such Claim arises out of or results from the negligence or misconduct of a Zeneca Indemnitee; provided, however, that notwithstanding the foregoing, with respect to Claims specifically arising out of or resulting solely from matters in (i) or (ii) above, Maxygen shall only be obligated to indemnify Zeneca Indemnitees against actual damages, if any, awarded to a Third Party or actual settlement amounts, as applicable. 10.3 Procedure. A Party or person (the Indemnitee) that intends to --------- claim indemnification under this Article 10 shall promptly notify the other Party (the Indemnitor) in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its Affiliates, Sublicensees or their directors, officers, employees, agents or counsel intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel chosen by Indemnitor, with consent of Indemnitee, which consent shall not be unreasonably withheld. The Indemnitee shall not enter into negotiations or enter into any agreement with respect to the settlement of any Claim without the prior written approval of the Indemnitor, and the indemnity agreement in this Article 10 shall not apply to amounts paid in settlement of any loss, claim, 49 damage, liability or action if such settlement is made without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 10. At the Indemnitor's request, the Indemnitee under this Article 10, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification and provide full information with respect thereto. 11. TERM AND TERMINATION 11.1 Term. This Agreement shall be effective as of the Effective Date ---- and, unless otherwise terminated earlier pursuant to the other provisions of this Article 11, shall continue in full force and effect on a country-by-country basis and Zeneca Product-by-Zeneca Product, or Maxygen Product-by-Maxygen Product basis, as the case may be, until the date that neither Party has remaining royalty obligations to the other for such Zeneca Product or Maxygen Product, as applicable, in such country. Following the expiration of royalty obligations in any country within the Territory with respect to a particular Zeneca Product or Maxygen Product, as the case may be, Zeneca or Maxygen shall retain a non-exclusive fully paid license under the other Party's interest in the Know-How within the Program Technology to commercialize such Zeneca Product or Maxygen Product, as the case may be. 11.2 Termination for Cause. Either Party may terminate this Agreement --------------------- in the event the other Party has materially breached or defaulted in the performance of any of its obligations hereunder and such default has continued for sixty (60) days after written notice thereof was provided to the breaching Party by the non-breaching Party, or if a cure of such default cannot reasonably be effected within such sixty (60) day period, the defaulting Party has failed to deliver within such period a plan for curing such breach or default which is reasonably sufficient to effect a cure. It is understood and agreed that Maxygen may terminate this Agreement based upon the conduct of any Zeneca Sublicensee that would constitute a material breach of this Agreement if Zeneca undertook such conduct, unless Zeneca promptly and diligently acts (and continues to act) to enforce the restrictions and obligations set forth in this Agreement against such Sublicensee. Any termination shall become effective at the end of such sixty (60) day period unless the breaching Party has cured any such breach or default prior to the expiration of the sixty (60) day period, or has delivered to the other Party a plan for curing such breach is reasonably acceptable to the other Party. Notwithstanding the above, if Zeneca fails to timely pay any amounts due pursuant to Sections 4.4, 4.5 or 4.6 hereunder, which in the aggregate are greater than [*******], and at any time prior to such failure to pay Zeneca has previously failed [*******] within any immediately preceding three (3) year period to pay any amount due hereunder when due, then the period for cure of any such default following notice thereof shall be twenty (20) days and, unless payment is made within such period, the termination with respect to the applicable Zeneca Product shall become effective at the end of such period. If more than one Zeneca Product or Maxygen Product, as applicable, is being commercially developed or exploited by Zeneca or Maxygen (or their Affiliates and 50 Sublicensees) hereunder, and Maxygen or Zeneca breach or default in the performance of this Agreement in a manner relating only to a single Zeneca Product or Maxygen Product, as the case may be, developed or exploited by or under authority of such Party, then the other Party may only terminate the licenses granted to the breaching Party with respect to the applicable Zeneca Products or Maxygen Products, as the case may be, on a Zeneca Product-by-Zeneca Product basis or Maxygen Product-by-Maxygen Product basis. 11.3 Effect of Bankruptcy. If voluntary or involuntary proceedings by -------------------- or against a Party are instituted in bankruptcy under any insolvency law, or a receiver or custodian is appointed for such Party, or proceedings are instituted by or against such Party for corporate reorganization or the dissolution of such Party, which proceedings, if involuntary, shall not have been dismissed within sixty (60) days after the date of filing, or if such Party makes an assignment for the benefit of creditors, or substantially all of the assets of such Party are seized or attached and not released within sixty (60) days thereafter, the other Party may immediately terminate this Agreement effective upon notice of such termination. 11.4 Effect of Termination. --------------------- 11.4.1 Accrued Rights and Obligations. Termination of this ------------------------------ Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination, nor preclude either Party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. 11.4.2 Return of Confidential Information and Materials. Upon any ------------------------------------------------ termination of this Agreement, Zeneca and Maxygen shall promptly return to the other Party hereto all Confidential Information received from the other Party (except one copy of which may be retained by legal counsel for archival purposes and ensuring compliance with Article 9), and all Zeneca Materials and Maxygen Materials shall be returned to the owner thereof. 11.4.3 Licenses. -------- (a) In the event of any termination by Maxygen pursuant to Section 11.2, the licenses granted to Zeneca in Article 3 shall terminate concurrently. Notwithstanding the foregoing, if more than one Zeneca Product is being commercially developed or exploited by Zeneca or its Affiliates and Sublicensees hereunder, and Maxygen terminates the licenses to Zeneca as to a particular Zeneca Product pursuant to Section 11.2, then the license granted to Zeneca with respect to the applicable Zeneca Product shall terminate. In the event of any termination by Maxygen pursuant to Section 11.3, the licenses granted to Zeneca in Article 3 shall terminate concurrently. (b) In the event of any termination of this Agreement by Zeneca pursuant to Section 11.2, the licenses granted to Maxygen in Article 3 shall terminate 51 concurrently. Notwithstanding the foregoing, if more than one Maxygen Product is being commercially developed or exploited by Maxygen or its Affiliates and Sublicensees hereunder, and Zeneca terminates the licenses to Maxygen as to a particular Maxygen Product pursuant to Section 11.2, then the license granted to Maxygen with respect to the applicable Maxygen Product shall terminate. In the event of any termination by Zeneca pursuant to Section 11.3, the licenses granted to Maxygen in Article 3 shall terminate concurrently. 11.5 Survival. Sections 2.4.1, 2.4.3, 2.5.6, 2.6, 3.1.9(b), 3.1.10, -------- 3.3, 3.4, 3.5, 3.6, 4.8, 8.3, 8.4 and 11.4 and 11.5, and Article 5 (until all royalty and reporting obligations relating to the period prior to the date of expiration or termination have been satisfied) and Articles 7, 9, 10, 11, 12 and 13 shall survive the expiration or termination of this Agreement for any reason. 12. DISPUTE RESOLUTION 12.1 Acknowledgement. Notwithstanding any other provision of this --------------- Agreement, it is understood and agreed that the following matters shall not be subject to dispute resolution under this Article 12: (i) the selection of [*******] which will be the target of research activities in the Research Program, (ii) the selection of which Projects, including without limitation, Reserved Projects, will be conducted in the Research Program, (iii) the selection of Genes to be Shuffled in the Research Program, and (iv) the designation of Shuffled Genes. 12.2 Consultation. If an unresolved dispute arises out of or relates to ------------ this Agreement, or the breach thereof, either Party may refer such dispute to the Chief Executive Officer of Maxygen and Zeneca's Business Director for Agricultural Biotechnology for good faith resolution. If such dispute is not settled within forty-five (45) days of such referral, then either Party may thereafter initiate mediation in accordance with Section 12.3 and, where applicable, arbitration in accordance with Section 12.4. 12.3 Mediation. If a dispute arises out of or relates to this --------- Agreement, or the breach thereof, and if said dispute cannot be settled through negotiation or through consultation as set forth in Section 12.2, the Parties agree to try in good faith to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration, litigation, or some other dispute resolution procedure. 12.4 Arbitration. Any dispute, controversy or claim arising out of the ----------- performance of this Agreement, including termination thereof, or any alleged breach thereof which is not settled by mutual consent pursuant to Section 12.2 or 12.3 above, shall be finally settled by binding arbitration as set forth in Section 12.4.1 or 12.4.2 below. Any arbitration award may be entered in a court of competent jurisdiction for a judicial recognition of the decision and an order of enforcement. 52 12.4.1 Full Arbitration. Except as otherwise provided in Section ---------------- 12.4.2 below, arbitration of any dispute, controversy or claim shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association by three (3) independent, neutral arbitrators appointed in accordance with said rules. Any arbitration shall be held in Chicago, Illinois. The arbitrators shall determine what discovery shall be permitted, consistent with the goal of limiting the cost and time which the Parties must expend for discovery; provided the arbitrators shall permit such discovery as they deem necessary to permit an equitable resolution of the dispute. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof. Except as otherwise expressly provided in this Agreement, the costs of the arbitration, including administrative and arbitrators' fees, shall be shared equally by the parties and each Party shall bear its own costs and attorneys' and witness' fees incurred in connection with the arbitration. A disputed performance or suspended performances pending the resolution of the arbitration must be completed within a reasonable time period following the final decision of the arbitrators. The arbitrators shall be directed that any arbitration subject to this Section 12.4.1 shall be completed within one (1) year from the filing of notice of a request for such arbitration. The arbitration proceedings and the decision shall not be made public without the joint consent of the Parties and each Party shall maintain the confidentiality of such proceedings and decision unless otherwise permitted by the other Party. Any decision which requires a monetary payment shall require such payment to be payable in United States dollars, free of any tax or other deduction. The Parties agree that the decision shall be the sole, exclusive and binding remedy between them regarding any and all disputes, controversies, claims and counterclaims presented to the arbitrators. 12.4.2 Short Form Arbitration. If the Parties do not agree upon ---------------------- (i) the value sharing arrangements for commercialization of Zeneca Products or Maxygen Products for Non-Ag Applications under Section 3.4, or (ii) the financial value of non-financial consideration pursuant to Section 4.6.3, then such matters shall be determined by binding arbitration pursuant to this Section 12.4.2 by one (1) independent, neutral arbitrator that is mutually acceptable to the Parties and who is an expert in the appropriate industry (e.g., agriculture, pharmaceuticals, etc.) to which the applicable Zeneca Products or Maxygen Products or non-financial consideration, as the case may be, relate. If the Parties are unable to agree upon a mutually acceptable arbitrator, the arbitrator shall be an independent expert as described in the preceding sentence selected by the chief executive of the office of the American Arbitration Association encompassing Chicago, Illinois. For arbitration of disputes subject to this Section 12.4.2, each Party to the arbitration shall prepare and submit one written proposal setting forth its proposed royalty rate (or, in the case of commercialization in Non-Ag Applications, the financial terms, or in the case of non-financial consideration the fair market value thereof, all expressed in U.S. Dollars) for the commercialization at issue, together with a written explanation setting forth the reasons for its position. After the arbitrator has received proposals from both Maxygen and Zeneca, the arbitrator shall forward a copy of the other Party's proposal to each. No oral presentations shall be permitted. The arbitrator shall select the proposal of one of the Parties as his decision, and shall not have the authority to render any substantive decision other than to so select in its 53 entirety the proposal of one Party or the other. Except as otherwise expressly provided in this Agreement, the costs of the arbitration, including administrative and arbitrator's fees, shall be shared equally by the Parties and each Party shall bear its own costs and attorneys' fees incurred in connection with the arbitration. A disputed performance or suspended performances pending the resolution of the arbitration must be completed within a reasonable time period following the final decision of the arbitrator. The arbitrator shall be directed that any arbitration subject to this Section 12.4.2 shall be completed within four (4) months from the filing of notice of a request for such arbitration. The arbitration proceedings and the decision shall not be made public without the joint consent of the Parties and each Party shall maintain the confidentiality of such proceedings and decision unless otherwise permitted by the other Party. Any decision which requires a monetary payment shall require such payment to be payable in United States dollars, free of any tax or other deduction. The Parties agree that the decision shall be the sole, exclusive and binding remedy between them regarding determination of the matters presented to the arbitrator. 13. MISCELLANEOUS 13.1 Governing Law. This Agreement and any dispute arising from ------------- the performance or any breach hereof, including without limitation, any arbitration, shall be governed by and construed in accordance with the laws of the State of California, without reference to conflicts of laws principles. 13.2 Waiver. No failure on the part of Maxygen or Zeneca to ------ exercise and no delay in exercising any right under this Agreement, or provided by statute or at law or in equity or otherwise, shall impair, prejudice or constitute a waiver of any such right, nor shall any partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. 13.3 Assignment. This Agreement shall not be assignable by ---------- either Party to any Third Party hereto without the written consent of the other Party hereto; except either Party may assign this Agreement, without such consent, to (i) an Affiliate of such Party; or (ii) an entity that acquires all or substantially all of the business or assets of such Party (and or with respect to Zeneca, all or substantially all of Zeneca's Agrochemicals or Zeneca's agricultural biotechnology research and development business or assets) to which this Agreement pertains, whether by merger, reorganization, acquisition, sale, or otherwise. The terms and conditions of this Agreement shall be binding on and inure to the benefit of the permitted successors and assigns of the Parties. 13.4 Notices. All notices, requests and other communications ------- hereunder shall be in writing and shall be personally delivered or sent by internationally recognized express delivery service, registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other Parties hereto: 54 Zeneca: Zeneca Agrochemicals Fernhurst Haslemere Surrey GU27 3JE United Kingdom Attn: The Secretary With a copy to: Commercial Manager, Biotechnology Group Maxygen: Maxygen, Inc. 515 Galveston Drive Redwood City, CA 94063 United States of America Attn: Chief Executive Officer With a copy to: Chief Financial Officer Each Party providing notice, shall as a matter of courtesy, use reasonable efforts to transmit an electronic or facsimile copy of any such notice, but a failure to do so shall not constitute a failure to provide notice or a breach of this Agreement. 13.5 Force Majeure. Neither Party shall be liable to the other for ------------- failure or delay in the performance of any of its obligations under this Agreement for the time and to the extent such failure or delay is caused by earthquake, riot, civil commotion, war, hostilities between nations, governmental law, order or regulation, embargo, action by the government or any agency thereof, act of God, storm, fire, accident, labor dispute or strike, sabotage, explosion or other similar or different contingencies, in each case, beyond the reasonable control of the respective Party. The Party affected by Force Majeure shall provide the other Party with full particulars thereof as soon as it becomes aware of the same (including its best estimate of the likely extent and duration of the interference with its activities), and will use its best endeavors to overcome the difficulties created thereby and to resume performance of its obligations as soon as practicable. If the performance of any obligation under this Agreement is delayed owing to a force majeure for any continuous period of more than six (6) months, the Parties hereto shall consult with respect to an equitable solution, including the possible termination of this Agreement. 13.6 Independent Contractors. Both Parties hereto are independent ----------------------- contractors and are engaged in the operation of their own respective businesses, and neither Party hereto is to be considered the agent or partner of the other Party for any purpose whatsoever. Neither Party has any authority to enter into any contracts or assume any obligations for the other Party or make any warranties or representations on behalf of the other Party. 13.7 Advice of Counsel. Maxygen and Zeneca have each consulted ----------------- counsel of their choice regarding this Agreement, and each acknowledges and agrees that this Agreement 55 shall not be deemed to have been drafted by one Party or another and will be construed accordingly. 13.8 Severability. In the event that any provisions of this ------------ Agreement are determined to be invalid or unenforceable by a court of competent jurisdiction, the remainder of the Agreement shall remain in full force and effect without said provision. The Parties shall in good faith negotiate a substitute clause for any provision declared invalid or unenforceable, which shall most nearly approximate the intent of the Parties in entering this Agreement; provided, if the Parties are unable to agree on such a substitute clause and the deletion of the provision held invalid or unenforceable would produce material adverse financial consequences for one Party, such Party shall have the right to terminate the Agreement with one hundred eighty (180) days notice. 13.9 Patent Marking. To the extent commercially desirable, Zeneca -------------- agrees to use reasonable efforts to mark and have its Affiliates and Sublicensees mark all Zeneca Products they sell or distribute pursuant to this Agreement in accordance with the applicable statute or regulations in the country or countries of manufacture and sale thereof. 13.10 Compliance with Laws. Each Party shall furnish to the other -------------------- Party any information requested or required by that Party during the term of this Agreement or any extensions hereof to enable that Party to comply with the requirements of any U.S. or foreign federal, state and/or government agency. Each Party shall comply with all applicable U.S., foreign, state, regional and local laws, rules and regulations relating to its activities to be performed pursuant to this Agreement, including without limitation, the United States Foreign Corrupt Practices Act, United States export regulations and such other United States and foreign laws and regulations as may be applicable, and to obtaining all necessary approvals, consents and permits required by the applicable agencies of the government of the United States and foreign jurisdictions. 13.11 Entire Agreement. This Agreement together with the attached ---------------- Exhibit, the written Project descriptions referred to in Section 2.7.4, and the Stock Purchase Agreement entered by the Parties of even date herewith, constitute the entire agreement, both written or oral, with respect to the subject matter hereof, and supersede all prior or contemporaneous understandings or agreements, whether written or oral, between Zeneca and Maxygen with respect to such subject matter. 13.12 Headings. The captions to the several Sections and Articles -------- hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 13.13 Binding Effect. This Agreement shall be binding upon and -------------- inure to the benefit of the parties and their respective legal representatives, successors and permitted assigns. 56 13.14 Counterparts. This Agreement may be executed in two ------------ counterparts, each of which shall be deemed an original and which together shall constitute one instrument. 57 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their authorized representatives as of the Effective Date. ZENECA LIMITED MAXYGEN, INC. By: /s/ Lynton D. Boardman By: /s/ Isaac Stein ------------------------------ ------------------------------- Name: Lynton D. Boardman Name: Isaac Stein --------------------------- ---------------------------- Title: Assistant Secretary Title: Chairman --------------------------- ---------------------------- Zeneca Agrochemicals 58 Exhibit A [*******] [Exhibit A identifies the specific crops and trait categories that are the subject of this Agreement.] EX-16.2 8 LETTER RE CHANGE IN CERTIFYING ACCOUNTANT NOV. 22, [LETTERHEAD OF PRICEWATERHOUSECOOPERS] EXHIBIT 16.2 November 22, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have read the paragraph comprising Change in Independent Auditors included in the Form S-1 (Registration No. 333-89413) dated November 22, 1999, of Maxygen Inc. and are in agreement with the third through fifth sentences, as revised from the initial Form S-1 filing dated October 20, 1999, of the paragraph. We have no basis to agree or disagree with any other statements contained in that paragraph. Very truly yours, /s/ PricewaterhouseCoopers LLP EX-23.1 9 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data", "Change in Independent Auditors", and "Experts" and to the use of our report dated October 29, 1999, in Amendment No. 2 to the Registration Statement (Form S-1, No. 333-89413) and related Prospectus of Maxygen, Inc. for the registration of 6,325,000 shares of its common stock. /s/ Ernst & Young LLP Palo Alto, California December 14, 1999 -----END PRIVACY-ENHANCED MESSAGE-----