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Maxygen Inc (NASDAQ:MAXY)

Q3 2008 Earnings Call

November 4, 2008 4:30 pm ET

Executives

Michele Boudreau - Director of IR

Russell Howard - CEO

Larry Briscoe - CFO

Analysts

Marshall Urist - Morgan Stanley

Han Li - Stanford Group

Davis Bu - Goldman Sachs

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Maxygen Incorporated Earnings Call. My name is Stacy, and I will be your conference moderator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Michele Boudreau, Director of Investor Relations. Please proceed.

Michele Boudreau

Thank you. Our discussions during this conference call will include forward-looking statements regarding our business prospects and financial condition. Actual results could differ materially from those projected in the forward-looking statement. The factors that could cause actual results to differ are discussed in Maxygen's 2007 annual report on Form 10-K, included under the caption Risk Factors, and then our reports on Form 10-Q and Form 8-K.

These reports are available on our website at www.maxygen.com in the investor's SEC filing section. Our discussions during this conference call will also include a projection of our operating cash utilization for 2009. Operating cash utilization is a non-GAAP financial measure that is defined as net loss, adjusted to include the capital expenditures and exclude the impact of stock compensation expense, depreciation, goodwill, and restructuring charges.

I'll now turn the call over to Russell Howard, Maxygen's Chief Executive Officer.

Russell Howard

Good afternoon, and thank you for joining us. I'll start today's call by recapping business highlights for the quarter and then review the recently announced changes to our strategy. I'll then turn the call over to Larry Briscoe, our CFO, to discuss the quarterly financials. After that, we'll open up the call for Q&A.

Maxygen's accomplishments during the third quarter 2008 included a $120 million hemophilia agreement with Bayer, of which we received $90 million upfront, the receipt of our $3.4 million government grant to continue work on our vaccine programs, and the signing of a MAXY-4 collaboration agreement with Astellas Pharma.

In spite of these very solid achievements during the quarter, Maxygen's market value remained essentially flat, compared to beginning of the quarter. It is our belief, however that these achievements have added value to our company. Astellas is now providing funds and commercial experience to the MAXY-4 program for rheumatoid arthritis. In addition, they plan to take the drug forward in transplantation, an area in which they are leaders and experts, thus opening up a second multi-billion dollar market opportunity for the program.

In October, we reached a decision point regarding investment in MAXY-G34 in the absence of a partner. Phase III manufacturing required an immediate commitment of expenditure with steadily increasingly investments over the coming months, with a CMO for process transfer and Phase III manufacturing scale up.

In addition, we were faced with the commitment to begin design and implementation of our Phase IIb trial for MAXY-G34 with the CRO, in order that we would be able to study on time and prepare for mid 2009 beginning.

In other words, from October onwards, we were facing steadily increasing cost for MAXY-G34, and we've decided to defer these activities until we have a partner to share the risk and reward. As a consequence of refocusing the organization, and as a result of decreased effort of MAXY-G34, Maxygen announced in October that it was reducing its headcount by approximately 30%.

This will reduce spending, and balance our need for cash utilization with asset preservation. Our goal now is to work with Lazard to secure a maximum value of the company's assets for our shareholders, through strategies, such as sale of the company, sale of the individual company assets, or merger.

We believe the above decisions, which you'll appreciate were difficult, were the wisest course of action given the current environment and its impact on the pharmaceutical and biotechnology industry.

We will continue our efforts to find a partner from MAXY-G34, and we'll continue to share emerging data from the Phase IIa study with interested parties.

In the meantime, we are ramping up the Phase IIa study for MAXY-G34 and plan to share some of the data at next week's Rodman & Renshaw Conference in New York City.

I'll now turn the call over to Larry, who will review the financials for the quarter.

Larry Briscoe

Thanks, Russell. Maxygen reported GAAP net income of $79.9 million, or $2.15 per share, for the third quarter of 2008, compared to a GAAP net loss of $14.7 million, or $0.40 per share, in the third quarter of 2007. The difference is primarily due to a $90 million payment we received from Bayer at the beginning of the quarter.

Revenue for the third quarter was $92.1 million, compared to $1 million for the same period in 2007. Technology and license revenue includes the Bayer payment, and revenues from the Codexis biofuel's license.

Collaborative research and development revenues include approximately 160,000, representing an amortized portion of the $10 million upfront payment from Astellas, and roughly 200,000 [OSTE] payments from the Astellas deal.

Total expenses were $13.6 million during the quarter, compared with $17.5 million in the comparable period 2007. The reduced expenditure was due to lower CRO and CMO expenses relating to MAXY-7, offset somewhat by increased spending on MAXY-G34 and MAXY-4.

Our cash, cash equivalents, and marketable securities, as of June 30, totaled $212.8 million, compared to $122.4 million at the end of Q2.

We expect to have approximately $200 million in cash at the end of the fourth quarter. In addition due to the recently announced slowdown of MAXY-G34 and reduction in force in Q1'09, we are projecting operating cash utilization for 2009 at approximately $17 million. Operating cash utilization is a non-GAAP financial measure that is defined as net loss adjusted to include capital expenditures and to exclude the impact of stock compensation expense, depreciation, and restructuring charges.

I will now turn the call back over to Russell for some closing comments.

Russell Howard

Thanks, Larry. We expect to end this year with approximately $200 million in cash and no debt. In addition to this significant cash asset, which we are conscious of preserving, we have a substantial list of assets, including the MAXY-4 partnership with Astellas, the MAXY-G34 program, a fully funded vaccine discovery program, a potential $30 million milestone payment from Bayer, a MolecularBreeding platform for generating autoimmune disease therapeutics, 25% ownership in Codexis, a revenue stream from our biofuels license to Codexis, and widely cited intellectual property estate. Our work with Lazard to create value from these assets is ongoing, and we look forward to advising you in the future on the outcome.

Thank you for your time today, and I am happy to take questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Marshall Urist with Morgan Stanley. Please proceed.

Marshall Urist - Morgan Stanley

Yes, hi guys. Good evening.

Russell Howard

Hi.

Marshall Urist - Morgan Stanley

Could you just give us an update on where things are with Lazard? Have you guys actually reached out and started talking to people yet, and then, if you can give us some idea of when you think, that, if not if you could give us some idea of when that might happen?

Larry Briscoe

Yes, Marshall, it's Larry. We are just starting that process, and it's commencing this week. Exactly how it will play out remains to be seen in terms of what kind of response we get to the initial outreach.

Marshall Urist - Morgan Stanley

Okay. Got you. So the plan is to pursue a full sale first, and then consider asset sales later?

Larry Briscoe

Yes, a single transaction would currently be the most desirable, although it’s a bit complicated. There is pretty big difference in the asset categories, which I would say are cash, therapeutic assets, and Codexis ownership.

Marshall Urist - Morgan Stanley

Great. Absolutely. All right, cool. Thanks, guys.

Russell Howard

Thanks.

Operator

Your next question comes from the line of Han Li, with Stanford Group. Please proceed.

Han Li - Stanford Group

Yes, good afternoon. Question for Russell. Can you give us or walk us through the original timeline for G34 development? What's your plan, or do you think that it would take from Phase IIb all the way to be already filing than the timeframe.

Russell Howard

The plan that we've described, until a couple of weeks ago, was that we would be looking going into the BLA in 2012, end of ‘11 beginning of ’12, so, 2012 was our described time.

The plan was that from today, we would be working to design the 2b. We would be begin the 2b sometime in Q3, in 2009, go through the 2b. It would be several 2bs, probably, in a plan to be approved by the FDA and then a couple of Phase 3s, with the idea of a BLA submission at the beginning of 12.

Since we have now delayed the process transfer and scale up work for Phase 3 manufacture of MAXY-G34, we can anticipate that that plan for the BLA would be delayed. I can't tell you how much it would be delayed because of a couple of things.

One is, once you have failed to make a commitment for a manufacturing slot with a manufacturing partner, you now don't have any control over when you could get another slot, were you to want one with that same partner.

So if we were to partner MAXY-G34 in the future, we have no idea whether that partner would want to do the manufacture themselves at a timeline that I can't get set, but it obviously has a certain minimum time required, or whether we would go back to our CMO and see if there was a slot that we could insert ourselves into and proceed.

Suffice to say, the timeline is delayed. The interesting aspect about the timeline now would be, if you are considering developing the drug for differentiation versus breadth of label, you might have different times for that, and that determination will only come after a meeting with the FDA.

We have now collected most of the Phase IIa; most of the data except a couple of cycles of the 100 microgram, like the five and six cycles and some late collected immunology data. We really have the clinical data that we are going to talk about very soon.

It is our anticipation that with that data we would talk with a partner and also talk to the FDA. If we go to the FDA, I have no idea on the plan that they'll come back to us with, or whether we do a differentiation pathway, whether we do a breadth of label pathway. They could have different timelines.

Han Li - Stanford Group

Okay. You mentioned you are going to present the Phase IIa data sometime in the next few weeks. Can we safely say that you already have a single dose that you are pretty clear and straightforward that you are going to bring to the Phase IIb, assuming that if you advance into that stage.

Russell Howard

We are anticipating sharing data this next week, on November the 11th at the Rodman & Renshaw Conference in New York where I'll be giving the data in a format obviously suitable for an investor presentation. It’s not a scientific presentation. It will be in summary form and at that time you will see the doses that one could make a judgment that's suitable for taking forward in a plan to submit to the FDA in the beginning of next year.

Han Li - Stanford Group

Okay. And could you remind us where you are at regarding appealing the Amgen patent just issued not a long ago?

Russell Howard

We've got several different plans of how we could fight and eventually remove that overhang of the Amgen patent. When those arrows are released, you'll hear about it publicly, but we are still working on that.

Han Li - Stanford Group

Okay. As the patent stands, what's the expiration date on the Amgen patent?

Russell Howard

It would be 2015. It would be the same as the time of the origin on your last patent.

Han Li - Stanford Group

All right. Thank.

Russell Howard

If you now put together your first question and that question, I've advised that our time for BLA is going to be later than Q1 of 2012, and I can't tell you how much later, whether its one quarter or three years later.

You'll see that that time obviously is running up against 2015, beyond which the Amgen patent would have no impact on us, I believe.

Han Li - Stanford Group

Got it. All right. Thank you very much and good luck.

Operator

Your next question comes from the line of Davis Bu with Goldman Sachs. Please proceed.

Davis Bu - Goldman Sachs

Hi, just a couple of quick questions. First on MAXY-4, has Astellas begun the transplant program or can you give us a sense of where that is?

Russell Howard

At the moment, Davis, the programs for RA and transplantation are indistinguishable. As we advised earlier, what we plan to do in 2008 was to identify the right lead from a combination of pharmacokinetic properties in animals and pharmacodynamic properties, chose the right one or two molecules, and then take those forward.

We are exactly on track for that. We're doing in vivo studies. They had begun before the Astellas deal was signed, and they are continuing. We're on track by the end of this year to have a chosen subset of molecules that will then be taken forward into additional preclinical studies which would involve manufacturing process, optimization, [scala], toxicology, et cetera.That's the program.

Davis Bu - Goldman Sachs

Great. And just to wrap up, G34 as well, I assume now that any sort of discussions about the G34 partnering program are kind of wrapped up in your larger plans, but prior to the past couple of weeks, can you give us a sense of the interest level that you are getting in G34, and what the bottlenecks might have been?

Russell Howard

I wouldn't assume anything's wrapped, Davis, and basically we have been engaging discussions on G34, and we will continue those discussions. We could look at selling the company in total, or selling the company in pieces, or selling one piece and selling the rest of the company. All sorts of scenarios are available, provided the increased value in return for shareholders. We are now engaged at the beginning stages with Lazard, looking at feedback from people who represented with different scenarios, and we will respond appropriately.

Davis Bu - Goldman Sachs

Okay, great. Thanks.

Operator

With no further questions in the queue, I would like to turn the call back to management for closing remarks.

Russell Howard

Well, thank you, everyone. You will appreciate from my closing comments that we have a series of what we regard as very valuable assets, and its our job over the next few weeks and months to capture value from those assets for shareholders, and we will be working very hard with Lazard to achieve that goal. Thank you.

Operator

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.

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