S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on April 14, 2008

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

CODEXIS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   8731   71-0872999

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

200 Penobscot Drive, Redwood City, CA 94063

(650) 421-8100

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Alan Shaw, Ph.D.

President and Chief Executive Officer

Codexis, Inc.

200 Penobscot Drive, Redwood City, CA 94063

(650) 421-8100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Patrick A. Pohlen

Latham & Watkins LLP

140 Scott Drive, Menlo Park, CA 94025

Telephone: (650) 328-4600

Facsimile: (650) 463-2600

 

Douglas T. Sheehy

Vice President and General Counsel

Codexis, Inc.

200 Penobscot Drive

Redwood City, CA 94063

Telephone: (650) 421-8100

Facsimile: (650) 421-8102

 

John A. Fore

Michael S. Russell

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

Telephone: (650) 493-9300

Facsimile: (650) 493-6811

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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, please check the following box and list the Securities Act registration statement 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, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨

  Accelerated filer  ¨

Non-accelerated filer (Do not check if a smaller reporting company)  ¨

  Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed Maximum

Aggregate Offering Price(1)

 

Amount of

Registration Fee

Common Stock, $0.0001 par value

  $100,000,000   $3,930

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

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 of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 14, 2008

                 Shares

LOGO

Codexis, Inc.

Common Stock

 

 

Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price will be between $                 and $                 per share. We intend to apply to list our common stock on The Nasdaq Global Market under the symbol “CDXS.”

We are selling                  shares of our common stock.

The underwriters have an option to purchase a maximum of                  additional shares from us to cover over-allotments of shares.

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 9.

 

     Price to Public    Underwriting
Discounts and
Commissions
   Proceeds to
Codexis

Per Share

   $                     $                     $                 

Total

   $      $      $  

Delivery of the shares of common stock will be made on or about                 , 2008.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse    Goldman, Sachs & Co.
Piper Jaffray      
RBC Capital Markets
   Thomas Weisel Partners LLC

The date of this prospectus is                 , 2008.


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LOGO

 

The Codexis Biocatalyst Solution

Beginning Biocatalyst

Not suitable for industrial use

Proprietary Optimization

Rapidly evolve beneficial traits

Optimized Biocatalyst

Optimized for specific application at commercial scale production levels

Pharmaceuticals

Biofuels

Carbon Management

Water Treatment

Chemicals

Current and Target Markets

CODEXIS

Bringing Life to Chemistry™


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TABLE OF CONTENTS

 


 

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or such other dates as are stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Dealer Prospectus Delivery Obligation

Until                     , 2008 (25 days after commencement of this offering), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors,” before making an investment decision. Unless otherwise indicated herein, “Codexis, Inc.,” “Codexis,” “the Company,” “we,” “us” and “our” refer to Codexis, Inc. and its subsidiaries.

Our Company

We are a leading developer of proprietary biocatalysts that we believe have the potential to revolutionize chemistry-based manufacturing processes across a variety of industries. We have focused our biocatalyst development efforts on large and rapidly growing markets, including pharmaceuticals and biofuels. We have used our technology platform to enable biocatalyst-based commercial scale drug manufacturing processes and delivered biocatalysts and drug products to some of the world’s leading pharmaceutical companies. In addition to our commercial success in the pharmaceutical industry, we have a research collaboration with Shell to apply our technology platform to the biofuels market. We are also pursuing funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals.

Biocatalysts are enzymes or microbes that catalyze chemical reactions that can enable the production of products used in everyday life. Our proprietary technology platform allows us to rapidly evolve and optimize biocatalysts to perform specific and desired chemical reactions for commercial scale industrial applications. We believe we can use our technology platform to improve industrially relevant characteristics of any biocatalyst, enabling manufacturing processes that are faster, less complex, less capital intensive and lower cost than conventional chemistry-based processes. In addition, we believe that our technology platform can enable the production of products that are currently impossible to produce economically at commercial scale.

Our pharmaceutical customers have included Arch Pharmalabs Limited, Bristol-Myers Squibb Co., Dr. Reddy’s Laboratories Ltd., Merck & Co., Inc., Pfizer Inc., Ranbaxy Laboratories Limited, Schering-Plough Corporation and Teva Pharmaceutical Industries Ltd. In 2007, after exceeding performance targets under an initial one-year research agreement, we entered into a new, five-year collaborative research agreement with Equilon Enterprises LLC dba Shell Oil Products US, or Shell, to develop biocatalysts for use in producing biofuels from renewable sources of non-food sustainable plant materials, commonly known as cellulosic biomass. In the year ended December 31, 2007, we generated $25.3 million in revenues from various sources including collaborative research and development funding, product sales and government grants.

The Biocatalysis Opportunity — Industry Overview

Many industries, from pharmaceuticals to energy to chemicals, use conventional chemical reactions in manufacturing processes. However, conventional chemistry-based manufacturing often requires highly complex, energy-intensive processes that use extreme environments in terms of temperature and pressure, as well as hazardous reagents to effect chemical reactions. These processes often require equipment that is expensive to build and operate, and frequently generate high volumes of waste, some of it hazardous to health or the environment, that must be treated, contained and disposed of.

Biocatalysts can enable superior alternatives to conventional chemistry in industrial applications. For example, biocatalysts can operate at or near room temperature and pressure and therefore can enable significant cost savings by using less complex manufacturing equipment. Biocatalyst-enabled processes can produce the same or higher quality products than conventional chemistry-based manufacturing, while reducing the risks associated with extreme manufacturing environments, without generating nearly the same level of waste.

 

 

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Despite the potentially significant advantages of biocatalysts, naturally occurring biocatalysts have not achieved their full potential in industrial applications. Naturally occurring biocatalysts often require alteration of their composition in order to perform adequately under industrial manufacturing conditions or at productivity levels that would make their use in commercial scale applications economical. Some companies and researchers have tried to improve the performance of naturally occurring biocatalysts or even produce novel biocatalysts using various other methods and technologies, but to date few have had success. Moreover, for certain industrial applications, there are no known naturally occurring biocatalysts that catalyze the relevant reactions.

Our Approach to Biocatalysis

Our proprietary technology platform has the potential to dramatically transform the commercial and industrial application of biocatalysts. Our platform uses advanced biotechnology methods, bioinformatics and years of accumulated know-how to significantly expedite the process of developing customized enzymes and microbes. In the case of enzymes, we start with a diverse set of genes that encode for variations of an enzyme and recombine, or shuffle, these genes to produce new variants of the enzyme. We then evaluate these new variants to identify enzymes that exhibit improved characteristics under conditions that resemble the desired manufacturing process. ProSAR, our bioinformatics software technology, allows us to identify and quantify the potential value of beneficial mutations and distinguish them from detrimental mutations. The genes that code for improved enzyme variants are put back through this process until a highly efficient enzyme is produced that meets or exceeds targeted performance characteristics. This enzyme can then be incorporated into the actual manufacturing process, where it can reduce or eliminate costly chemical-based steps and the resulting wastes. We have also used our technology platform to improve enzymes in engineered microbes to make fermentation products. We also have a complementary technology for directed evolution of microbes, called Whole Genome Shuffling, that allows us to recombine, or shuffle, the entire genome of two or more cells to produce new variants of the microbe. Our biocatalysts can significantly improve the manufacturing of pharmaceuticals, and we believe that our technology platform may enable us to develop biocatalysts for use in producing advanced biofuels and in providing solutions to other important bioindustrial markets.

Our Target Markets and Solutions

Pharmaceuticals

We initially focused our biocatalyst development efforts on the pharmaceutical industry. Over the last several years, pharmaceutical companies that develop branded drugs, which we refer to as innovators, have struggled with declining operating margins resulting in large part from patent expirations for their key products. As a result, innovators are increasingly looking for opportunities to improve their operating margins by reducing their manufacturing costs and outsourcing the manufacturing of active pharmaceutical ingredients, or APIs, and components used in the manufacture of APIs, commonly known as intermediates. The rise in patent expirations has also led to rapid growth of the generics industry. Because generics manufacturers compete primarily on price, these companies are also pursuing opportunities that reduce their manufacturing costs and provide them with access to low cost sources of intermediates and APIs.

Our products and services address the needs of both innovator and generics manufacturers. For example, we have developed four enzymes that enabled significant improvements in the manufacturing process for, and reduced the cost of two key intermediates used in, the production of atorvastatin, which is the API in Lipitor. We supply Pfizer with one of these intermediates, and we supply generic atorvastatin manufacturers with the other intermediate. We are currently developing intermediates or APIs for the generic equivalents of several branded pharmaceutical products including Singulair, Nexium and Crestor. We have also developed tools, which we call our Codex Biocatalyst Panels, that allow innovators to screen our biocatalysts across their product pipelines and portfolios to identify desired biocatalytic activity that can then be incorporated into their drug manufacturing processes. In February 2007, Merck became the first customer for this product. Once a

 

 

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useful biocatalyst is identified, either through the use of our Codex Biocatalyst Panels by our customers or our in-house screening services, we can supply that biocatalyst through and to commercial scale, or we can provide further biocatalytic screening and optimization, if needed.

Biofuels

In 2006, we began exploring the application of our technology platform in biofuels. Due to underlying economic, political and environmental concerns surrounding petroleum, the world is seeking renewable alternative fuel solutions. First generation biofuel manufacturers use biocatalysts to produce biofuels such as ethanol and biodiesel at commercial scale. However, these fuels do not provide an optimal solution to the petroleum dependence problem for several reasons. For many of these manufacturers, margins are volatile as costs of key commodity inputs such as corn and natural gas are highly variable, often outpacing changes to ethanol prices. In addition, there are ethical concerns with the diversion of food crops and fertile acreage to fuel production, which has also resulted in higher food and animal feed prices.

We believe that our technology platform may enable the development of biocatalysts that can be used to produce commercially viable non-ethanol biofuel alternatives to petroleum-based fuels from cellulosic biomass. As we work on this long term goal, we also intend to work on the conversion of biomass to sugars, which could also be used for near term opportunities, such as cellulosic ethanol. Shell has the right, but not the obligation, to commercialize any technology that we may develop under the research collaboration. If Shell chooses to commercialize any biofuels products that may be developed through our collaboration, we believe that Shell, which is an affiliate of one of the world’s largest distributors of biofuels, has the resources and the infrastructure to commercialize these products on a global scale. We believe that the use of biocatalysts to transform cellulosic biomass into biofuels that have characteristics similar to current petroleum-based gasoline could address the limitations of alcohol-based fuels and could ultimately transform the liquid transportation fuels industry.

Additional Bioindustrial Opportunities

We are pursuing funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals. We believe that our technology platform, together with the knowledge and experience gained from our efforts in the pharmaceutical market and in our biofuels research program, will allow us to capitalize on these opportunities. We will target collaborators that are industry leaders, allowing us to leverage their competitive strengths and resources in pursuit of these opportunities.

Competitive Strengths

Our key competitive strengths are:

 

   

Proprietary and Disruptive Technology Platform.    Our proprietary platform is potentially disruptive because it addresses the significant limitations of current approaches used to develop biocatalysts and ultimately enables biocatalytic-based processes that have substantial advantages over conventional chemistry. Our technology platform allows us to quickly develop biocatalysts suitable for commercial scale and enables the development of biocatalysts with improved performance characteristics that are rarely present in naturally occurring biocatalysts.

 

   

Multiple Major Target Markets.    We currently use our technology platform to produce biocatalysts that are used at commercial scale in both the generic and innovator pharmaceutical markets. We are working with our collaborator, Shell, to develop biocatalysts for use in producing biofuels from cellulosic biomass sources. We are also pursuing funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals.

 

   

Partnerships with Global Industry Leaders.    We believe that our technology platform has been validated through the delivery of drug manufacturing processes or products to numerous leading

 

 

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pharmaceutical companies, including Arch, Merck, Pfizer and Schering-Plough. In biofuels, after an initial one-year research agreement in which we exceeded performance targets, we entered into a new, five-year research collaboration with Shell in 2007.

 

   

Capital-Efficient Business Model.    We have adopted a business model that leverages our collaborators’ engineering, manufacturing and commercial expertise, their distribution infrastructure and their ability to fund commercial scale production facilities. If our collaborators choose to utilize our technology to commercialize new products, we believe that this capital-efficient business model will allow us to expand into new markets without having to finance or operate large industrial facilities.

 

   

Diversified and Visible Revenue Base.    Our 2007 revenues were derived from the innovator and generic pharmaceuticals and biofuels markets, and consisted primarily of collaborative research and development funding, product sales and government grants. Revenues from our expected sales of generic intermediates and APIs, as well as the revenues that we expect to recognize from our five-year biofuels collaborative research agreement with Shell, should provide a high degree of visibility into our aggregate revenues for the foreseeable future.

Strategy

Our objective is to be the leading provider of optimized biocatalytic solutions across a wide range of industries. Key elements of our strategy are as follows:

 

   

Expand into new bioindustrial markets.    We believe that we can deploy our technology platform to transform manufacturing processes throughout various bioindustrial markets. We have a research collaboration with Shell to develop biocatalysts for use in producing commercially viable fuels from cellulosic biomass. We intend to leverage our intellectual property developed under this research collaboration to pursue other funded collaborations in non-fuel bioindustrial markets, including carbon management, water treatment and chemicals.

 

   

Continue growing our pharmaceutical business.    We plan to launch several new intermediates and APIs for the generic equivalents of branded pharmaceutical products, including Singulair, Nexium and Crestor, beginning in 2008. We will also continue to aggressively market our Codex Biocatalyst Panels to pharmaceutical companies to demonstrate the capabilities of our technology platform in an effort to integrate our products and services earlier and more deeply into drug development and manufacturing processes.

 

   

Enter into additional strategic collaborations.    We have grown our business by collaborating with market leaders that have funded the development of and application of our technology platform in the pharmaceutical and biofuels markets. We are pursuing additional collaborations that will allow us to continue to leverage our collaborators’ competitive strengths and financial resources in our target markets.

 

   

Continue enhancing our technology platform.    We intend to continue to advance our technology platform by expanding our capabilities in microbe development and by increasing the quality of our biocatalyst libraries. Improvements in either of these areas can be applied to the development of new products in our current and target markets.

 

   

Further develop our supply chain.    We will continue to evaluate whether to invest in our own manufacturing capabilities or to establish long term supply contracts with additional contract manufacturers. We may also opportunistically seek to secure specialty manufacturing assets and expand existing relationships for the supply of our enzymes and key pharmaceutical APIs and intermediates.

 

   

Expand our business through acquisition of new technologies, products or businesses.    We will continue to evaluate opportunities to acquire or license new technologies, products or businesses that

 

 

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complement or expand our capabilities. We may pursue licensing and acquisition opportunities in the carbon management, water treatment and chemical markets as we seek to expand into these markets.

Corporate Information

We were incorporated in Delaware in January 2002 as a wholly owned subsidiary of Maxygen, Inc. In March 2002, we licensed our core enabling technology from Maxygen and commenced operations. In September 2002, we raised our first outside funding from venture capital investors. Our principal executive offices are located at 200 Penobscot Drive, Redwood City, CA 94063, and our telephone number is (650) 421-8100. Our website address is www.codexis.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.

Our logo, “Codexis,” “Codex,” “Codex Biocatalyst Panel,” “Bringing Life to Chemistry” and other trademarks or service marks of Codexis, Inc. appearing in this prospectus are the property of Codexis, Inc. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply relationships with, or endorsement or sponsorship of us by, these other companies.

 

 

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The Offering

 

Common stock offered to the public

         shares (or          shares if the underwriters exercise their over-allotment option in full).

 

Common stock to be outstanding after this offering

         shares (or          shares if the underwriters exercise their over-allotment option in full).

 

Proposed Nasdaq Global Market symbol

“CDXS”

 

Use of proceeds

We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire other businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. Please see “Use of Proceeds.”

 

Risk factors

See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

The number of shares of common stock to be outstanding after this offering is based on 35,716,889 shares outstanding as of December 31, 2007 and excludes:

 

   

9,032,075 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2007 at a weighted average exercise price of $1.94 per share;

 

   

491,513 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2007 at a weighted average exercise price of $3.95 per share; and

 

   

                 shares of common stock reserved for issuance under our 2008 Incentive Award Plan, which will become effective in connection with the consummation of this offering (plus an additional                  shares of common stock reserved for future grant or issuance under our 2002 Stock Plan as of December 31, 2007, which shares will be added to the shares to be reserved under our 2008 Incentive Award Plan upon the effectiveness of the 2008 Incentive Award Plan).

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the conversion of all outstanding shares of our preferred stock into 32,330,100 shares of common stock in connection with the consummation of this offering;

 

   

no exercise of the underwriters’ over-allotment option; and

 

   

the filing of our amended and restated certificate of incorporation, which will occur in connection with the consummation of this offering.

We refer to our Series A, Series B, Series C, Series D and Series E preferred stock collectively as “redeemable convertible preferred stock” for financial reporting purposes and in the financial tables included in this prospectus, as more fully explained in Note 2 to our consolidated financial statements. In other parts of this prospectus, we refer to our Series A, Series B, Series C, Series D and Series E preferred stock collectively as “preferred stock.”

 

 

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Summary Consolidated Financial Data

The following table sets forth a summary of our historical consolidated financial data for the periods ended or as of the dates indicated. You should read this table together with our consolidated financial statements and the accompanying notes, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The summary consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

The following table also sets forth summary unaudited pro forma and pro forma as adjusted consolidated financial data, which gives effect to the transactions described in the footnotes to the table. The unaudited pro forma and pro forma as adjusted consolidated financial data is presented for informational purposes only and does not purport to represent what our consolidated results of operations or financial position actually would have been had the transactions reflected occurred on the dates indicated or to project our financial condition as of any future date or results of operations for any future period.

 

     Years Ended December 31,  
     2005     2006     2007  
     (in thousands,
except per share data)
 

Consolidated Statements of Operations Data:

      

Revenues:

      

Product

   $ 2,265     $ 2,544     $ 11,418  

Related party collaborative research and development

           863       8,481  

Collaborative research and development

     9,363       8,403       4,733  

Government grants

     156       317       701  
                        

Total revenues

     11,784       12,127       25,333  

Cost and operating expenses:

      

Cost of product revenues

     2,233       1,806       8,319  

Research and development

     13,454       17,939       36,870  

Selling, general and administrative

     7,276       11,198       18,487  
                        

Total cost and operating expenses

     22,963       30,943       63,676  
                        

Loss from operations

     (11,179 )     (18,816 )     (38,343 )

Interest income

     245       742       1,491  

Interest expense and other

     (413 )     (724 )     (2,533 )
                        

Loss before provision (benefit) for income taxes

     (11,347 )     (18,798 )     (39,385 )

Provision (benefit) for income taxes

     243       (127 )     (408 )
                        

Net loss

     (11,590 )     (18,671 )     (38,977 )
                        

Net loss per share of common stock, basic and diluted(1)

   $ (7.69 )   $ (10.99 )   $ (15.53 )
                        

Shares used in computing net loss per share of common stock, basic and diluted(1)

     1,508       1,699       2,510  
                        

Pro forma net loss per share of common stock, basic and diluted (unaudited)(1)

       $ (1.29 )
            

Shares used in computing the pro forma net loss per share of common stock, basic and diluted (unaudited)(1)

         29,116  
            

 

(1) Please see Note 2 of our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share of common stock, the pro forma basic and diluted net loss per share of common stock and the number of shares used in the computation of the per share amounts.

 

 

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     December 31, 2007
     Actual     Pro Forma(1)    Pro Forma
As Adjusted(2)(3)
           (unaudited)    (unaudited)
     (in thousands)

Consolidated Balance Sheet Data:

       

Cash, cash equivalents and marketable securities

   $ 84,070     $ 84,070   

Working capital

     58,919       60,404   

Total assets

     113,101       113,101   

Preferred stock warrant liability

     1,485       —     

Current and long-term financing obligations

     17,407       17,407   

Redeemable convertible preferred stock

     132,746       —     

Stockholders’ (deficit) equity

     (87,468 )     46,763   

 

(1) The pro forma data gives effect to (i) conversion of all of our outstanding shares of redeemable convertible preferred stock into shares of common stock, and (ii) conversion of all of our warrants for redeemable convertible preferred stock into warrants for common stock and the related reclassification of preferred stock warrant liability to stockholders’ equity upon the completion of this offering.

 

(2) The pro forma as adjusted balance sheet data gives effect to the sale of              shares of common stock in this offering at the initial public offering price of $             per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(3) Each $1.00 increase or decrease in the assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, our cash, cash equivalents and marketable securities, working capital, total assets and stockholders’ deficit by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may harm our business. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our common stock may decline and you may lose all or part of your investment.

Risks Relating to Our Business

We have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

Our company has been in existence since 2002. Our operations to date have been primarily limited to organizing and staffing our company, developing our technology platform and establishing arrangements with customers, contract manufacturers and collaborators. Consequently, any assessments of our current business and predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our business will be harmed.

Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.

Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this prospectus:

 

   

our ability to achieve or maintain profitability;

 

   

our ability to manage our growth;

 

   

our ability to remediate a material weakness and implement effective internal controls;

 

   

actions that could cause us to lose our licenses from Maxygen;

 

   

our ability to maintain rights we have under our agreement with Maxygen;

 

   

our relationships with collaborators;

 

   

our dependence on key customers;

 

   

our dependence on a limited number of contract manufacturers of our biocatalysts and suppliers for our pharmaceutical intermediates;

 

   

our ability to develop and successfully commercialize products for the pharmaceuticals market;

 

   

our ability to commercialize our technology in the biofuels and other bioindustrial markets;

 

   

our ability to develop or obtain commercial scale expression systems for cellulases;

 

   

risks associated with the international aspects of our business;

 

   

potential issues related to our ability to accurately report our financial results in a timely manner;

 

   

our dependence on and the need to attract and retain key personnel, including management;

 

   

our ability to prevent the theft or misappropriation of our biocatalysts, the genes that code for our biocatalysts, know-how or technologies;

 

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our ability to obtain, protect and enforce our intellectual property rights;

 

   

our reliance on third parties to enforce patents for which we hold a license;

 

   

potential advantages that our competitors may have in securing funding or developing products; and

 

   

potential product liability claims, including claims relating to our use of hazardous materials.

Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

We have a history of net losses, and we may not achieve or maintain profitability.

We have incurred net losses since our inception, including losses of $11.6 million, $18.7 million and $39.0 million in 2005, 2006 and 2007, respectively. As of December 31, 2007, we had an accumulated deficit of $94.2 million. We expect to incur losses and negative cash flow from operating activities for the next several years. To date, we have derived a substantial portion of our revenues from research and development agreements with our collaborators and expect to derive a substantial portion of our revenue from these sources for at least the next several years. Our existing agreements generally have fixed terms and may be terminated under certain conditions. Accordingly, our ability to derive revenue from collaborations following the expiration or termination of these arrangements is uncertain, and will depend in large part on our ability to either extend existing collaborations or enter into new collaborative arrangements. This in turn will be largely dependent on our ability to address the needs of current and potential future collaborators. In addition, some of our collaboration agreements provide for milestone payments and future royalty payments, the payment of which are uncertain as they are dependent on our and our collaborators’ abilities and willingness to successfully develop and commercialize products. We expect to spend significant amounts to fund the development of additional pharmaceutical and potential bioindustrial products, including biofuels. As a result, we expect that our operating expenses will exceed revenues for the next several years and we do not expect to achieve profitability during that period, if ever. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We may continue to encounter difficulties managing our growth, which could adversely affect our business.

Our business has grown rapidly and we expect this growth to continue. Overall, we have grown from approximately 40 employees at the end of 2002 to approximately 230 employees as of December 31, 2007. Currently we are working simultaneously on multiple projects targeting several markets. Furthermore, we are conducting our business across several countries, including activities in the United States, Singapore, Hungary, Germany and India. These diversified, global operations place increased demands on our limited resources and require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technicians, scientists and other personnel. As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various customers, collaborators, suppliers and other third parties. Our ability to manage our operations, growth, and various projects effectively will require us to make additional investment in our infrastructure to continue to improve our operational, financial and management controls and our reporting systems and procedures and to attract and retain sufficient numbers of talented employees, which we may be unable to do. As a result, we may be unable to manage our expenses in the future, which may negatively impact our gross margins or operating expenses in any particular quarter. In addition, we may not be able to successfully improve our management information and control systems, including our internal control over financial reporting, to a level necessary to manage our growth and to remediate an existing material weakness in our internal control, and we may discover additional deficiencies in existing systems and controls that we may not be able to remediate in an efficient or timely manner.

 

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We and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. If we fail to remediate this material weakness or are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

In connection with the audit of our consolidated financial statements for 2005, 2006 and 2007, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. The material weakness we identified comprises (i) our lack of policies and procedures, with the associated internal controls, to appropriately address complex, non-routine transactions and (ii) the lack of a sufficient number of qualified personnel to timely account for such transactions in accordance with U.S. generally accepted accounting principles. The evidence of this material weakness included: improper revenue recognition for certain complex revenue arrangements; incorrect application of accounting standards for, and untimely communication of information relating to, certain stock option grants; the failure to identify pre-existing accounting issues and control deficiencies at two acquired companies and the incorrect assessment of fair value of certain acquired tangible assets; the improper recording of cumulative foreign currency translation adjustments, resulting in part from our selection of the incorrect functional currency for a foreign subsidiary; and the lack of effective inventory management processes, primarily relating to the segregation of research and development materials from commercial inventories. The material weakness resulted in the recording of numerous audit adjustments, and significantly delayed our financial statement close process, for the three year period ended December 31, 2007.

We have not yet been able to remediate this material weakness. However, we plan to take significant steps intended to address the underlying causes of the material weakness in the immediate future, primarily through the hiring of additional accounting and finance personnel with technical accounting and financial reporting experience, and the development and implementation of formal policies, improved processes and documented procedures. We do not know the specific timeframe needed to remediate all of the control deficiencies underlying this material weakness. In addition, we expect to incur significant incremental costs associated with this remediation, primarily due to the hiring of additional finance and accounting personnel, the retention of third-party experts and contractors, and the procurement, implementation and validation of robust accounting and financial reporting systems. If we fail to enhance our internal controls to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002, we may be unable to accurately report our financial results, or report them within the timeframes required by law or exchange regulations. We cannot assure you that we will be able to remediate this material weakness in a timely manner, if at all, or that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered, a risk that is significantly increased in light of the complexity of our business and multinational operations, and the emerging need for complex inter-subsidiary transactions. If our efforts to remediate the weakness identified are not successful or if other deficiencies occur, our ability to accurately and timely report our financial position, results of operations or cash flows could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock by The Nasdaq Global Market, or other material effects on our business, reputation, results of operations, financial condition or liquidity.

If we lose our licenses from Maxygen, we may be unable to continue our business.

We have licensed our core enabling intellectual property rights and technology from Maxygen, Inc., or Maxygen, under our March 2002 license agreement with Maxygen, which was subsequently amended in September 2002, October 2002, and August 2006. We rely heavily on this technology to develop the optimized biocatalysts that are central to our business. Under the terms of the license agreement, we are obligated, among other things, to pay Maxygen a significant percentage of certain types of consideration we receive in connection with our biofuels research collaboration with Shell. During 2006 and 2007, as a

 

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result of consideration received in connection with this collaboration, we were obligated to pay Maxygen $0.6 million and $7.8 million, respectively. Maxygen has the right to terminate our rights under the agreement with respect to fuels, but not with respect to chemicals or pharmaceuticals, if we breach our royalty obligations to Maxygen and do not cure such breach within 60 days after we receive notice. Maxygen also has the right to terminate our license if we breach any third party agreements under which Maxygen sublicensed rights under the agreement, and fail to cure such breach within the time period specified in such third party agreement. Maxygen also has the right to terminate our license with respect to any family of related patent applications if we fail to pay our share of costs for obtaining and maintaining a patent licensed to us by Maxygen more than three times within any three year period. If the agreement were terminated, then we would lose our rights to utilize the technology and intellectual property covered by that agreement to develop, manufacture and commercialize many of our products. This would have a material adverse impact on our financial condition, results of operations and growth prospects and could prevent us from continuing our business.

We are dependent on our collaborators, and our failure to successfully manage these relationships could prevent us from developing and commercializing many of our products and achieving or sustaining profitability.

Our ability to maintain and manage collaborations with key industry leaders in our markets is fundamental to the success of our business. We currently have license agreements, collaborative research agreements, supply agreements, and/or distribution agreements with numerous parties. We may have limited or no control over the amount or timing of resources that any collaborator may devote to our partnered products or collaborative efforts. Any of our collaborators may fail to perform their obligations as expected. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing, or sale of these products. Moreover, disagreements with a collaborator could develop and any conflict with a collaborator could reduce our ability to enter into future collaboration agreements and negatively impact our relationships with one or more existing collaborators. If any of these events occur, or if we fail to maintain our agreements with our collaborators, we may not be able to commercialize our existing and potential products, grow our business, or generate sufficient revenue to support our operations. Our collaboration opportunities could be harmed if:

 

   

we do not achieve our research and development objectives under our collaboration agreements in a timely manner or at all;

 

   

we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators;

 

   

we disagree with our collaborators as to rights to intellectual property we develop, or their research programs or commercialization activities;

 

   

we are unable to manage multiple simultaneous collaborations;

 

   

our collaborators become competitors of ours or enter into agreements with our competitors;

 

   

our collaborators become less willing to expend their resources on research and development or commercialization efforts due to general market conditions or other circumstances beyond our control; or

 

   

consolidation in our target markets limits the number of potential collaborators.

Additionally, our business could be negatively impacted if any of our collaborators or suppliers undergoes a change of control or were to otherwise assign the provisions of any of our agreements. For example, under our license agreement with Shell, Shell may assign the agreement without our consent in connection with a change of control. If Shell or any of our other collaborators were to assign these

 

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agreements to a competitor of ours or to a third party who is not willing to work with us on the same terms or commit the same resources as the current collaborator, our business could be harmed.

Our future success is heavily dependent on our collaborative research agreement with Shell.

Our current business plan for biofuels is heavily dependent on our collaborative research agreement with Shell, which will continue to be critical to our success in researching and developing successful biocatalysts for producing biofuel products. Shell’s efforts in commercializing those products profitably will be critical to the success of our business plan for biofuels. If we are unable to successfully execute on the development of products for Shell, our ability to expand into other bioindustrial areas may be significantly impaired, which will materially and adversely affect our ability to grow our business.

A delay or failure in Shell’s performance under the collaborative research agreement or license agreement with us would have a material adverse effect on our business and financial condition. We cannot control Shell’s performance or the resources it devotes to our programs. For example, although Shell has agreed to fund a specified number of our full-time employee equivalents in the performance of activities under the collaborative research agreement, Shell has the right under various circumstances to decrease the number of our full-time employee equivalents that it supports. Any such reduction would have a material impact on our revenue and business plan for biofuels. Moreover, disputes may arise between us and Shell, which could delay the programs on which we are working or could prevent us from commercially exploiting our technology platform and any developments resulting from the collaborative research agreement. If that were to occur, we may have to use funds, personnel, equipment, facilities and other resources that we have not budgeted to undertake certain activities on our own. Performance issues, program delay or termination or unbudgeted use of our resources may have a material adverse effect on our business and financial condition. Even if we successfully develop commercially viable technologies, our ability to derive revenues from those technologies will be dependent upon Shell’s willingness and ability to commercialize them. Disagreements with Shell could also result in expensive arbitration or litigation, which may not be resolved in our favor. Shell could merge with or be acquired by another company or experience financial or other setbacks unrelated to our research collaboration agreement that could adversely affect us.

We have agreed to work exclusively with Shell until November 2012 in the field of converting cellulosic biomass into fermentable sugars that can be converted into fuels as well as the conversion of these sugars into fuels and related products. However, Shell is not required to work exclusively with us, and could develop or pursue alternative technologies that it decides to use for commercialization purposes instead of the technology developed under our collaborative research agreement with Shell. For example, Shell is currently working with Iogen to develop cellulosic ethanol and CHOREN Industries to develop biodiesels, and it recently announced a collaboration with Virent Energy Systems to develop biogasoline. If Shell does not pursue the commercialization of any cellulosic sugars, biofuels or related products that may be developed under our collaborative research agreement, our exclusive arrangement would prevent us from pursuing these opportunities with others and could place us at a significant competitive disadvantage in the biofuels market.

We cannot guarantee that our relationship with Shell will continue. Shell can terminate its collaborative research agreement with us after November 1, 2009 for any or no reason by providing us with six months’ notice, and its license agreement with us for any or no reason by providing us with six months’ notice. Each party also has the right to terminate the license agreement and the collaborative research agreement in the case of an uncured breach by the other party, and to terminate the collaborative research agreement if that party believes the other party has assigned the collaborative research agreement to a direct competitor of the terminating party. If our collaboration with Shell were to fail, we would likely need to find another collaborator to provide the financial assistance and infrastructure necessary for us to develop and commercialize our products and execute our strategy with respect to biofuels. Failure to maintain this relationship would have a material adverse effect on our business, financial condition and prospects.

 

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Our failure to enter into new collaborations in our target markets could prevent us from developing and commercializing many of our products and achieving or sustaining profitability.

In addition to our existing collaborations, we will need to enter into, maintain and manage additional collaborations in our target markets to continue to grow our business. Because we do not currently and may never possess the resources necessary to independently develop and commercialize all of the potential products that may result from our technologies, the growth and success of our business depends on our ability to continue to enter into, and derive additional revenue from, collaboration agreements to develop and commercialize potential products in our various target markets. If we are unable to enter into additional collaboration agreements on terms satisfactory to us, we may not be able to commercialize our existing and potential products, grow our business, or generate sufficient revenue to support our operations.

We are dependent on a limited number of customers.

Our current revenues are derived from a limited number of key customers. For the year ended December 31, 2007, our top five customers accounted for approximately 65% of our revenues, with Shell and Pfizer accounting for approximately 33% and 13%, respectively. We expect a limited number of customers to continue to account for a significant portion of our revenues for the foreseeable future. This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business from one or a combination of our significant customers could adversely affect our revenues, financial condition and results of operations.

Our dependence on contract manufacturers for biocatalyst production exposes our business to risks.

We have limited internal capacity to manufacture biocatalysts and are unable to do so for commercial scale production. As a result, we are dependent upon the performance and capacity of third party manufacturers for the commercial scale manufacturing of our biocatalysts.

We currently rely primarily on one Italian contract manufacturer, CPC Biotech srl, or CPC, to manufacture substantially all of our commercial enzymes used in our pharmaceutical business. Our pharmaceutical business, therefore, faces risks of difficulties with, and interruptions in, performance by CPC, the occurrence of which could adversely impact the availability, launch and/or sales of our enzymes in the future. The failure of CPC or any other manufacturers that we may use to supply manufactured product on a timely basis or at all, or to manufacture our enzymes or other biocatalysts in compliance with our specifications or applicable quality requirements, or to manufacture our enzymes or other biocatalysts in volumes sufficient to meet demand would adversely affect our ability to achieve development milestones under our collaborations or sell our pharmaceutical products, could harm our relationships with our collaborators or customers and could negatively affect our revenues and operating results.

We do not currently have a long-term supply contract with CPC, which is under no obligation to manufacture our enzymes and could elect to discontinue the manufacture of our enzymes at any time and without cause. If CPC does not expand its facilities to match our growing demand or if we are unable to contract with other manufacturers on commercially reasonable terms or at all, we will not have enough capacity to meet our current demand projections. If we require additional manufacturing capacity and are unable to obtain it in sufficient quantity, we may not be able to increase our pharmaceutical sales, or we may be required to make very substantial capital investments to build that capacity or to contract with another manufacturer on terms that may be less favorable than the terms we currently have with CPC. If we choose to build our own additional manufacturing capacity, it could take a year or longer before that facility is able to produce commercial volumes of our biocatalysts. In addition, if we contract with other manufacturers, we may experience delays of several months in qualifying them, which could harm our relationships with our collaborators or customers and could negatively affect our revenues or operating results.

 

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We plan to evaluate whether to invest in our own manufacturing capabilities or to establish long-term supply contracts with additional contract manufacturers. However, we cannot guarantee that we will be able to acquire, develop or contract for internal manufacturing capabilities on commercially reasonable terms, or at all. Any resources we expend on acquiring or building internal manufacturing capabilities could be at the expense of other potentially more profitable opportunities.

We are primarily dependent on contract manufacturers to manufacture our pharmaceutical products.

We currently rely on a small number of collaborators and contract manufacturers to manufacture our pharmaceutical intermediates. For example, our collaborator Arch Pharmalabs Limited, or Arch, supplies us and our customers with intermediates manufactured using our proprietary biocatalysts.

Our pharmaceutical business faces risks of difficulties with, and interruptions in, performance by Arch, the occurrence of which could adversely impact the availability, launch and/or sales of our products in the future. The failure of Arch to supply intermediates on a timely basis or at all, or to manufacture our products in compliance with our specifications or applicable quality requirements, or to manufacture the product in volumes sufficient to meet demand would adversely affect our ability to commercialize our pharmaceutical products and could negatively affect our revenues and operating results. If Arch does not expand its facilities to match our growing demand, or experiences delays related to the construction of new facilities or the expansion of existing facilities, or if we are unable to contract with other suppliers on commercially reasonable terms or at all, we will not have enough capacity to meet our current demand projections.

We intend to use Arch as the primary supplier for our planned launch of APIs. We will rely on Arch to deliver materials on a timely basis and to comply with applicable regulatory requirements, which may include current Good Manufacturing Practices, or cGMP, and will be dependent on Arch to timely manufacture and deliver sufficient quantities of materials produced under cGMP conditions to enable us to bring products to market in a timely manner. Failure by Arch, or any other contract manufacturer that we rely on to manufacture APIs, to comply with applicable regulations could adversely affect the production and commercialization of API products, which could lead to lost sales. We also rely, to a lesser extent, on other contract manufacturers to supply our pharmaceutical intermediates. The failure of these manufacturers to supply intermediates, or to manufacture products in compliance with our specifications or in sufficient volumes, would have similar negative effects on our revenues and operating results.

If we are unable to develop and commercialize new products for the generic pharmaceutical market, our business and prospects will be harmed.

We plan to launch several new intermediates and APIs for generic drugs in non-regulated markets, and plan to launch these same products in the regulated markets when the patent protection for each branded product expires. This effort is subject to numerous risks, including the following:

 

   

we may be unable to successfully develop the biocatalysts or manufacturing processes for our intermediates and APIs in a timely and cost-effective manner, if at all;

 

   

we may face difficulties in transferring the developed technologies to Arch, or other contract manufacturers that we may use, for commercial scale production;

 

   

Arch, or other contract manufacturers that we may use, may be unable to scale their manufacturing operations to meet the demand for these products and we may be unable to secure additional manufacturing capacity; and

 

   

generics manufacturers may not be willing to purchase these products from us on favorable terms, if at all.

 

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If one or more of these risks were to materialize, our future business, results of operations and financial condition could be materially adversely affected, and we may be unable to grow our business.

We will face numerous risks relating to any pharmaceutical products that we commercialize.

The commercialization of pharmaceutical intermediates and APIs will expose us to a number of risks, including risks related to product liability litigation, unexpected safety or efficacy concerns, product recalls or withdrawals, changes in laws or regulations relating to the generics industry, negative publicity affecting doctor or patient confidence in the products, and pressure from existing or new competitive products. In addition, our existing and potential innovator customers may view us as competitors and be less willing to do business with us. Moreover, we may be subject to claims alleging that our pharmaceutical products violate the patent or other intellectual property rights of third parties, particularly in connection with any generic products on which the patent covering the branded drug is expiring. These claims could give rise to litigation, which may be costly and time-consuming and could divert management’s attention. If we are unsuccessful in our defense of any such claims, we may lose our right to develop or manufacture the products, be required to pay monetary damages, or be required to enter into license agreements and pay substantial royalties. The occurrence of any of these events could have a material adverse effect on our business, results of operation, financial condition and cash flows.

Our business could be adversely affected if the clinical trials being conducted by our innovator customers who sell branded drugs fail or if the processes used by those customers to manufacture their final pharmaceutical products fail to be approved.

Our biocatalysts are used in the manufacture of intermediates and APIs which are then used in the manufacture of final pharmaceutical products by our customers who sell branded drugs, which we refer to as innovators. In order to sell these pharmaceutical products in markets that provide effective patent protection, which we refer to as regulated markets, the products must be approved by the FDA in the United States, and similar regulatory bodies in other regulated markets, prior to commercialization. If these customers experience adverse events in their clinical trials, fail to receive regulatory approval for the drugs, or decide for business or other reasons to discontinue their clinical trials or drug development activities, our revenues will be negatively impacted. The process of producing these drugs, and their generic equivalents, is also subject to regulation by the FDA in the United States and equivalent regulatory bodies in other regulated markets. If any pharmaceutical process that uses our biocatalysts does not receive approval by the appropriate regulatory body or if customers decide not to pursue approval, our business could be adversely affected.

Our business could be adversely affected if customers do not adopt our processes.

Historically, pharmaceutical companies have been reluctant to use biocatalysts in the manufacture of their intermediates or APIs because naturally occurring biocatalysts were not economically viable for production at commercial scale. For example, naturally occurring biocatalysts are often not stable enough to be used in industrial settings. Additionally, the activity and productivity of these biocatalysts are often too limited to be effective in commercial scale manufacturing and often result in incomplete reactions and insufficient product yields. Although our biocatalysts have been developed to address these problems, we may still encounter reluctance by pharmaceutical companies to adopt processes that use our biocatalysts. If customers decide not to adopt processes using our biocatalysts over other methods of producing the intermediates or APIs for their drugs, our revenues will be negatively impacted.

Moreover, we believe that the lower manufacturing costs enabled by our technology platform is one of the principal reasons pharmaceutical companies have purchased and will continue to purchase our products and processes. If we are unable to maintain the cost advantages provided by our technology platform, customers may be less willing to acquire our products and processes, which would also negatively impact our revenues.

 

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If we fail to fund research in certain areas, we will lose rights to develop products in those areas using technology licensed from Maxygen.

Under our license agreement with Maxygen, we can extend the scope of our license into several additional areas related to hydrogen, coal and natural gas-based fuels if we meet certain funding thresholds for research in those fields by September 2009. If we do not meet the funding requirements in any of those areas, we would lose our rights to use the licensed technology and intellectual property to develop products or pursue collaborations in that area, which could have a material adverse effect on our ability to grow our business and revenues.

We may need additional licenses from Maxygen to pursue certain future business opportunities in the chemical market.

Under our license agreement with Maxygen, we obtained exclusive rights to manufacture certain types of chemicals for specified purposes within particular fields. Should we desire to work on any chemicals that are outside the scope of these license rights, we may need to seek additional rights from Maxygen. Maxygen has no obligation to grant such rights to us and may choose not to license such rights to us on favorable terms, if at all. If we are unable to obtain rights to those additional areas, we may not be able to develop products or services or pursue collaborations in those areas, which could limit our ability to expand into the chemicals market.

Our government grants are subject to uncertainty, which could harm our business and results of operations.

We have received grants funded by various agencies of the federal government and foreign governments to complement and enhance our own resources. Funds available under these grants and contracts must be applied by us toward the research and development programs specified by the granting agencies rather than for all our programs generally. Moreover, revenues from such sources are uncertain because these agreements and grants generally have fixed terms and may be terminated, modified or recovered by the granting agency under certain conditions.

We may also be subject to audits by the government agencies as part of routine audits of our activities funded by our government grants. As part of an audit, these agencies may review our performance, cost structures and compliance with applicable laws, regulations and standards. If any of our costs are found to be allocated improperly, the costs may not be reimbursed and any costs already reimbursed for such contract may have to be refunded. Accordingly, an audit could result in an adjustment to our revenue and results of operations.

If we are unable to successfully commercialize our technology in biofuels and other bioindustrial markets, our business may fail to generate sufficient revenue, which would adversely affect our operating results.

We expect to derive a significant portion of our future revenue from the development of bioindustrial products, including biocatalysts for the production of biofuels, that we may develop with our collaborators, and by licensing our proprietary technology. In order to develop a viable biofuels business, we will need to demonstrate that we can develop biocatalysts that can be used to produce biofuels from cellulosic biomass. We do not know when we will be able to demonstrate these capabilities, if at all. If we are able to develop this technology, Shell has the right, but not the obligation, to commercialize this technology. If Shell decides to commercialize our technology, Shell will need to build a demonstration facility, design, finance and construct commercial scale biofuel facilities, and operate commercial scale facilities at costs that are competitive with traditional petroleum-based fuels and other alternative fuel technologies that may be developed.

 

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In addition to biofuels, we expect to invest a significant amount of our future research and development efforts in other bioindustrial areas, including carbon management, water treatment and chemicals. We do not currently have any, and may be unable to secure, funded collaborations in these areas. Even if we are able to enter into collaborations in one or more of these areas, we and our collaborators may be unable to develop commercially viable solutions to these problems. Moreover, because we have limited financial and managerial resources, we will be required to prioritize our application of resources to particular development and commercialization efforts. Any resources we expend on one or more of these efforts could be at the expense of other potentially profitable opportunities. If we focus our efforts and resources on one or more of these areas and they do not lead to commercially viable products, our revenues, financial condition and results of operations could be adversely affected.

Production and commercialization of cellulosic biofuels and other chemicals derived from cellulose may not be feasible.

Production and commercialization of cellulosic biofuel products, and other chemicals derived from cellulose, may not be feasible for a variety of reasons. For example, the development of technology for converting sugar into a commercially viable non-ethanol biofuel alternative to petroleum-based fuels is still in its infancy, and we do not know whether this can be done commercially or at all. To date there has been a lack of significant private and government funding for research and development. Furthermore, there have been very few, if any, well-directed research and development public policies emphasizing investment in the research and development of, and providing incentives for the commercialization of, and transition to, biofuels.

Substantial development of infrastructure will be required for the biofuels industry to grow. Areas requiring expansion include, but are not limited to, additional rail capacity, additional storage facilities for biofuels, increases in truck fleets capable of transporting biofuels within localized markets, expansion of refining and blending facilities to handle biofuels, and growth in the fleet of vehicles capable of using biofuels. Substantial investments required for infrastructure changes and expansions may not be made on a timely basis or at all. Any delay or failure in making the changes to or expansion of infrastructure could harm demand or prices for potential biofuel products and impose additional costs that would hinder the commercialization of biofuels.

Currently, we believe that there are no commercial scale cellulosic biofuel production plants in operation in the United States. There can be no assurance that anyone will be able or willing to develop and operate biofuel production plants at commercial scale or that any biofuel facilities can be profitable.

Additionally, it is likely that different biocatalysts will be required to produce biofuels and other chemicals from cellulosic biomass. Therefore, different biocatalysts may be needed to be developed for use in different geographic locations to convert the biomass available in each locale into sugars that can be used in the production of these biofuels and chemicals. This will make the development of biofuels and other chemicals derived from cellulose more expensive.

Finally, if existing tax credits, subsidies and other incentives in the United States and foreign markets are phased out or reduced, the overall cost of commercialization of cellulosic ethanol will increase.

We will have to develop or acquire rights to a commercial scale expression system for enzymes that convert cellulosic biomass to sugars.

In order to commercialize cellulosic biofuels, we will need access to an expression system that is capable of producing the necessary biocatalysts at commercial scale. Because we do not currently have access or rights to a commercial expression system for enzymes that convert cellulosic biomass to sugars, we will need to buy, license or develop this type of expression system. We may not be able to license the systems on commercially reasonable terms or at all, particularly since Danisco (which purchased Genencor International) and Novozymes are major sources of expression systems and also potential competitors of

 

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ours. If we cannot license the system on commercially reasonable terms, we would be required to attempt to develop such a system on our own, which may be difficult, costly and time consuming, in part because of the broad, existing intellectual property rights owned by Danisco, Novozymes and others. We cannot be certain whether we would be successful in developing such a system.

Fluctuations in the price of and demand for petroleum-based fuels may reduce demand for biofuels.

Biofuels are anticipated to be marketed as an alternative to petroleum-based fuels. Therefore, if the price of oil falls, any revenues that we generate from biofuel products could decline, and we may be unable to produce products that are a commercially viable alternative to petroleum-based fuels.

The royalties that we may earn under our agreements with Shell are indexed to the price of oil and generally increase as the price of oil increases. However, the index is set based on average prices between November 2007 and the date of first commercial sale. Therefore, if prices remain high during this period and subsequently fall, our revenues would be negatively impacted.

Our approach to the biofuels and chemical markets may be limited by the scarcity or cost of non-food sustainable biomass sources.

Our approach to the biofuels and chemical markets will be dependent upon the availability and price of the cellulosic biomass which we need to use to produce biofuels and other chemicals derived from cellulose. If the availability of cellulosic biomass decreases or its price increases, this will reduce our potential profit margins, especially if market conditions do not allow us to pass along increased costs to our customers. At certain levels, prices may make these products uneconomical to use and produce.

The price and availability of cellulosic biomass may be influenced by general economic, market and regulatory factors. These factors include weather conditions, farming decisions, government policies and subsidies with respect to agriculture and international trade, and global demand and supply. The significance and relative impact of these factors on the price of cellulosic biomass is difficult to predict, especially without knowing what types of cellulosic biomass materials we may need to use.

We face risks associated with our international business.

Significant portions of our operations are conducted outside of the United States and we expect to continue to have significant foreign operations in the foreseeable future. International business operations are subject to a variety of risks, including:

 

   

changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products or repatriate profits to the United States;

 

   

the imposition of tariffs;

 

   

the imposition of limitations on, or increase of, withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

 

   

the imposition of limitations on genetically-engineered products or processes and the production or sale of those products or processes in foreign countries;

 

   

currency exchange rate fluctuations;

 

   

uncertainties relating to foreign laws and legal proceedings;

 

   

economic or political instability in foreign countries;

 

   

difficulties in staffing and managing foreign operations; and

 

   

the need to comply with a variety of U.S. laws applicable to the conduct of overseas operations, including export control laws and the Foreign Corrupt Practices Act.

 

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We manufacture many of our pharmaceutical intermediates in India, which has stringent local regulations that make it difficult for money earned in India to be taken out of the country without being subject to Indian taxes. While our Indian subsidiary can make use of some of the funds we earn in India, these regulations may limit the amount of profits we can repatriate from operations in India.

If we engage in any acquisitions, we will incur a variety of costs and may potentially face numerous other risks that could adversely affect our business operations.

We have made acquisitions in the past, and if appropriate opportunities become available, we expect to acquire additional businesses, assets, technologies, or products to enhance our business in the future. In connection with any future acquisitions, we could:

 

   

issue additional equity securities which would dilute current stockholders’ percentage ownership;

 

   

incur substantial debt to fund the acquisitions; or

 

   

assume significant liabilities.

Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. We do not have extensive experience in managing the integration process and we may not be able to successfully integrate any businesses, assets, products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. The integration process could divert management time from focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions may also require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, if we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.

We must rely on our suppliers, contract manufacturers and customers to deliver timely and accurate information in order to accurately report our financial results in the time frame and manner required by law.

We need to receive timely, accurate and complete information from a number of third parties in order to accurately report our financial results on a timely basis. We rely on the third parties that sell pharmaceutical products that are manufactured using our biocatalysts to provide us with complete and accurate information regarding revenue, costs of revenue and payments owed to us on a timely basis. In addition, we rely on suppliers and contract manufacturers to provide us with timely and accurate information regarding our inventories, and current and former collaborators to provide us product sales and cost saving information in connection with royalties owed to us. Any failure to receive timely information from one or more of these third parties could require that we estimate a greater portion of our revenues and other operating statistics for the period based on prior history, which could cause our reported financial results to be incorrect. Moreover, if the information that we receive is not accurate, our financial statements may be materially incorrect and may require restatement, and we may not receive the full amount of revenue that we are entitled to under these arrangements. Although we typically have audit rights with these parties, performing such an audit could be harmful to our collaborative relationships, expensive and time-consuming and may not be sufficient to reveal any discrepancies.

 

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If we lose key personnel or are unable to attract and retain additional personnel, it could delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.

The loss of any key scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing and commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the biofuels area, or due to the competition for, or availability of, personnel with the qualifications or experience necessary for our biofuels business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our collaborators in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technologies or acquired through strategic or other transactions, especially in the new end markets that we seek to penetrate. These activities will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business. Additionally, under our agreements with Shell, we are required to meet certain hiring targets and failure to meet such targets is considered a breach of the agreements, which could give Shell a right to terminate the agreements. Furthermore, we conduct a substantial portion of our generic pharmaceutical business in India and believe that to expand our position in the generics market, we will need to employ and retain people who have or can cultivate strong relationships with contract manufacturers and/or customers in India.

Our ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights through costly litigation or administrative proceedings.

Our success depends in part on our ability to obtain patents and maintain adequate protection of our intellectual property for our technologies and products and potential products in the United States and other countries. We have adopted a strategy of seeking patent protection in the United States and in foreign countries with respect to certain of the technologies used in or relating to our products and processes. As such, we own or have licensed rights to approximately 230 issued patents and approximately 165 pending patent applications in the United States and in various foreign jurisdictions. Of the licensed patents and patent applications, most are owned by Maxygen or the California Institute of Technology and exclusively licensed to us for use in certain fields. We own approximately 15 issued patents and approximately 75 pending patent applications in the United States and in various foreign jurisdictions directed to our enabling technologies and to our methods and products used in the production of pharmaceuticals such as atorvastatin, montelukast and azetidinone compounds, and we intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.

Numerous patents in our portfolio involve complex legal and factual questions and, therefore, enforceability cannot be predicted with any certainty. Issued patents and patents issuing from pending applications may be challenged, invalidated, or circumvented. Additional uncertainty may result from an inconsistent policy in the United States that has emerged regarding the scope of legal claims allowed in biotechnology patents. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth of the claims upheld in our and other

 

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companies’ patents. Given that the degree of future protection for our proprietary rights is uncertain, we cannot ensure that: (i) we were the first to make the inventions covered by each of our pending applications, (ii) we were the first to file patent applications for these inventions, and (iii) the proprietary technologies we develop will be patentable.

In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. Moreover, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause harm to our business.

Our commercial success also depends in part on not infringing patents and proprietary rights of third parties, and not breaching any licenses or other agreements that we have entered into with regard to our technologies, products and business. We cannot ensure that patents have not been issued to third parties that could block our ability to obtain patents or to operate as we would like. There may be patents in some countries that, if valid, may block our ability to commercialize products in those countries if we are unsuccessful in circumventing or acquiring the rights to these patents. There also may be claims in patent applications filed in some countries that, if granted and valid, may also block our ability to commercialize products or processes in these countries if we are unable to circumvent or license them.

The biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights, and we believe that the various bioindustrial markets will also be characterized by this type of litigation. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, may cause us to spend significant amounts of money. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop selling, incorporating or using our products that use the subject intellectual property;

 

   

obtain from the third party asserting its intellectual property rights a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or

 

   

redesign those products or processes that use any allegedly infringing technology, which may result in significant cost or delay to us, or which could be technically infeasible.

We are aware of a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. We cannot assure you that if this third party intellectual property is asserted against us that we would ultimately prevail.

If any of our competitors have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference proceedings declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to the patents for these inventions in the United States. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, an interference may result in loss of certain claims. Any litigation or proceedings could divert our management’s time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management time, and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.

 

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We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries, including India, where we manufacture pharmaceutical intermediates through our collaborators, do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or bioindustrials technologies, which could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property in such countries may be inadequate.

If our biocatalysts, or the genes that code for our biocatalysts, are stolen, others could use these biocatalysts or genes to produce competing products.

Third parties, including our contract manufacturers, customers and those involved in shipping our biocatalysts often have custody or control of our biocatalysts. If our biocatalysts, or the genes that code for our biocatalysts, were stolen or misappropriated, they could be used by other parties who may be able to reproduce these biocatalysts for their own commercial gain. If this were to occur, it would be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection.

Under our license with Maxygen, there are limitations on our ability to enforce Maxygen’s patents to which we hold a license, which could have a material adverse effect on our business.

Our core enabling technology is licensed from Maxygen. Under our agreement with Maxygen, Maxygen has the first right to enforce many of the patents that we licensed, particularly those directly related to gene shuffling technology. If Maxygen declines to enforce these patent rights, we can enforce these rights after a delay of up to six months, or Maxygen can deny us the ability to enforce if Maxygen concludes that such enforcement may have a material adverse impact on Maxygen or one or more other licensees of Maxygen’s technology. Some portions of the technology licensed to us by Maxygen are owned by third parties that retain the right to enforce the patents. If Maxygen or these third parties fail to enforce their patent rights, our business could be materially adversely affected. Maxygen also has the right to control the defense of patent infringement claims made by third parties alleging infringement related to gene shuffling technology. If Maxygen does not provide a timely and adequate defense to these claims, we could be forced to stop using the licensed technology, redesign our products and/or obtain a license from the party claiming infringement, which may not be available on commercially reasonable terms or at all. If Maxygen were to become acquired or controlled by a competitor of ours or a third party who is not willing to work with us on the same terms or commit the same resources as Maxygen, our business could be harmed.

Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, third parties could reverse

 

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engineer our biocatalysts and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

If we lose key management personnel, it could harm our business.

Our business involves complex, global operations across a variety of markets and requires a management team that is knowledgeable in the many areas in which we operate. The loss of any key members of our management, including our chief executive officer Alan Shaw, or the failure to attract or retain other key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy.

Competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.

The biocatalysis industry and each of our target markets are characterized by rapid technological change. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. We are aware that other companies, including Verenium Corporation (previously Diversa Corporation), Royal DSM N.V. and DuPont, have alternative methods for obtaining and generating genetic diversity or use mutagenesis techniques to produce genetic diversity. Academic institutions such as the California Institute of Technology, the Max Planck Institute and the Center for Fundamental and Applied Molecular Evolution (FAME), a jointly sponsored initiative between Emory University and Georgia Institute of Technology, are also working in this field. Technological development by others may result in our products and technologies, as well as products developed by our customers using our biocatalysts, becoming obsolete.

We face intense competition in the pharmaceuticals market. There are a number of companies who compete with us throughout the various stages of a pharmaceutical product’s lifecycle. Many large pharmaceutical companies have internal capabilities to develop and manufacture intermediates and APIs. These companies include many of our large innovator and generic pharmaceutical customers, such as Merck, Pfizer and Teva. There are also many large, well-established fine chemical manufacturing companies, such as DSM, BASF and Lonza Group Ltd, that compete to supply pharmaceutical intermediates and APIs to our customers. We also face increasing competition from generic pharmaceutical manufacturers in low cost centers such as India and China.

In addition to competition from companies manufacturing APIs and intermediates, we face competition from companies that sell biocatalysts for use in the pharmaceutical market. There is competition from large industrial enzyme companies, such as Novozymes A/S and Amano Enzyme Inc., whose industrial enzymes (for detergents, for example) are occasionally used in pharmaceutical processes. There is also competition in this area is from several small companies with product offerings comprised primarily of naturally occurring biocatalysts or that offer biocatalyst optimization services.

We expect the biofuels industry to be extremely competitive, with competition coming from ethanol producers as well as other providers of alternative and renewable fuels. Significant competitors include companies such as Novozymes, who has partnered with BP p.l.c. to produce biofuels, and Danisco A/S/Genencor, which is marketing cellulases to convert biomass into sugar. DuPont, Iogen Corp., Verenium, Virent Energy Systems, Inc. and Amyris are also attempting to develop non-ethanol biofuels. DuPont has announced plans to develop and market biobutanol in collaboration with BP, and Virent is collaborating with Shell to develop biogasoline directly from sugars. Other potential competitors such as Range Fuels Inc. are focused on developing non-biocatalytic thermochemical processes to convert biomass into fuels.

 

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Some or all of these competitors or other competitors, as well as academic, research and government institutions, are developing or may develop technologies for, and are competing or may compete with us in, the production of alternative fuels or biofuels.

We will face competition from a variety of companies focusing on developing biocatalytic routes to chemicals, including DuPont, DSM and Metabolix.

Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Many of our competitors have substantially greater production, financial, research and development, personnel and marketing resources than we do. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. As more companies develop new intellectual property in our markets, the possibility of a competitor acquiring patent or other rights that may limit our products or potential products increases, which could lead to litigation.

Our lack of resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and market share, adversely affect our results of operations and financial position, and prevent us from obtaining or maintaining profitability.

We may need substantial additional capital in the future in order to expand our business.

Our future capital requirements may be substantial, particularly as we continue to develop our biocatalysis business and expand our biocatalyst discovery and development process. Although we believe that we have sufficient cash on hand to fund our operations and meet our obligations until we become cash flow positive, our current plans and assumptions may change and our need for additional capital will depend on many factors, including the financial success of our pharmaceutical business, whether we are successful in obtaining payments from customers, whether we can enter into additional collaborations, the progress and scope of our collaborative and independent research and development projects performed by our customers and collaborators, the effect of any acquisitions of other businesses or technologies that we may make in the future, whether we decide to develop an internal manufacturing capability, and the filing, prosecution and enforcement of patent claims.

If our capital resources are insufficient to meet our capital requirements, we will have to raise additional funds to continue the development of our technology and products and complete the commercialization of products, if any, resulting from our technologies. If future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we were permitted to raise additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

 

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The terms of our loan and security agreement with General Electric Capital Corporation and Oxford Finance Corporation may restrict our ability to engage in certain transactions.

In September 2007, we entered into a loan and security agreement with General Electric Capital Corporation, or GE, and Oxford Finance Corporation, or Oxford. Pursuant to the terms of the loan and security agreement, we cannot engage in certain transactions, including disposing of certain assets, transferring capital to foreign subsidiaries, declaring dividends, acquiring or merging with another entity or leasing additional real property unless certain conditions are met or unless we receive prior approval of GE and Oxford. If GE and Oxford do not consent to any of these actions that we desire to take, we could be prohibited from engaging in transactions which could be beneficial to our business and our stockholders.

Business interruptions could delay us in the process of developing our products and could disrupt our sales.

Our headquarters is located in the San Francisco Bay Area near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We are also vulnerable to other types of natural disasters and other events that could disrupt our operations, such as riot, civil disturbances, war, terrorist acts, flood or infections in our laboratory or production facilities and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, we do not carry insurance for earthquakes and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our cash flows and success as an overall business. Furthermore, Shell may terminate our collaborative research agreement if a force majeure event interrupts our collaboration activities for more than ninety days.

Ethical, legal and social concerns about genetically engineered products and processes could limit or prevent the use of our products, processes, and technologies and limit our revenues.

Some of our products and processes are genetically engineered or involve the use of genetically engineered products or genetic engineering technologies. If we and/or our collaborators are not able to overcome the ethical, legal, and social concerns relating to genetic engineering, our products and processes may not be accepted. Any of the risks discussed below could result in expenses, delays, or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:

 

   

public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and processes, which could influence public acceptance of our technologies, products and processes;

 

   

public attitudes regarding, and potential changes to laws governing ownership of genetic material, which could harm our intellectual property rights with respect to our genetic material and discourage collaborators from supporting, developing, or commercializing our products, processes and technologies; and

 

   

governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of genetic research and derivative products.

The subject of genetically modified organisms has received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically altered products.

The biocatalysts that we develop have significantly enhanced characteristics compared to those found in naturally occurring enzymes or microbes. While we produce our biocatalysts only for use in a controlled industrial environment, we do not know what effect, if any, would result if our biocatalysts were released

 

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into the natural environment. Any adverse effect resulting from such a release could have a material adverse effect on our business and financial condition, and we may have exposure to liability for any resulting harm.

Stringent laws and required government approvals may be time consuming and costly, and could delay our introduction of products, and changes to existing regulations and policies may present technical, regulatory and economic barriers, all of which may significantly reduce demand for biofuels.

In order to achieve and maintain market acceptance, our biofuels business will need to meet a significant number of regulations and standards, including regulations imposed by the U.S. Department of Transportation, the U.S. Environmental Protection Agency, various state agencies and others. As these regulations and standards evolve, and if new regulations or standards are implemented, we and our collaborators may be required to modify our proposed facilities and processes, or develop and support new facilities or processes, and this will increase our costs. Any failure to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay our production of biofuels and the provision of related services could harm our biofuels business.

The market for biofuels is heavily influenced by foreign, federal, state and local government regulations and policies concerning the petroleum industry. For example, in 2007, the U.S. Congress passed an alternative fuels mandate that calls for 9 billion gallons of liquid transportation fuels sold in 2008 to come from alternative sources, including biofuels, a mandate that grows to 36 billion gallons by 2022. In the U.S. and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. Any reduction in mandated requirements for fuel alternatives and additives to gasoline may cause demand for biofuels to decline and deter investment in the research and development of biofuels. Market uncertainty regarding future policies may also affect our ability to develop new biofuels products or to license our technologies to third parties. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our biofuels business, financial condition and operating results. Our other potential bioindustrials products may be subject to additional regulations.

We use hazardous materials in our business. Any claims relating to improper handling, storage, or disposal of these materials could be time consuming and costly and could adversely affect our business and results of operations.

Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive, and biological materials. Our operations also produce hazardous waste products. We cannot eliminate entirely 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 may be sued for any 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. In addition, compliance with applicable environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts.

We may be sued for product liability.

The design, development, manufacture and sale of our products involve an inherent risk of product liability claims and the associated adverse publicity. We could also be named in product liability claims that are brought against our customers that use our products, particularly those customers in the pharmaceutical market. Insurance coverage is expensive and may be difficult to obtain, and may not be available in the future on acceptable terms, or at all. Although we currently maintain product liability insurance for our products in amounts we believe to be commercially reasonable, if the coverage limits of these insurance policies are not adequate, a claim brought against us, whether covered by insurance or not,

 

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could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, this insurance may not provide adequate coverage against potential losses. If claims or losses exceed our liability insurance coverage, we may go out of business.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards, or NOLs, to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this public offering, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. The existing NOLs of some of our subsidiaries currently may be subject to limitations arising from ownership changes prior to, or in connection with, their acquisition by us. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.

Risks Relating to this Offering

We are subject to anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law that could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders.

Provisions in our amended and restated certificate of incorporation and our bylaws, both of which will become effective upon the completion of this offering, may delay or prevent an acquisition of us. Among other things, our amended and restated certificate of incorporation and bylaws will provide for a board of directors which is divided into three classes, with staggered three-year terms and will provide that all stockholder action must be effected at a duly called meeting of the stockholders and not by a consent in writing, and will further provide that only our board of directors, the chairman of the board of directors, our chief executive officers or president may call a special meeting of the stockholders. These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management team. Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advanced notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer to acquire our company may be considered beneficial by some stockholders.

Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.

When this offering is completed, our officers, directors and existing stockholders who hold at least 5% of our stock will together control approximately     % of our outstanding common stock. As of December 31, 2007, Maxygen, Biomedical Sciences Investment Fund Pte Ltd and Shell owned 25%, 14% and 13% of our outstanding common stock, respectively, as calculated on an as-converted basis. If these officers, directors, and principal stockholders or a group of our principal stockholders act together, they

 

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will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership could depress our stock price.

Our share price may be volatile and you may be unable to sell your shares at or above the offering price.

The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

   

actual or anticipated fluctuations in our financial condition and operating results;

 

   

our cash and short-term investment position;

 

   

actual or anticipated changes in our growth rate relative to our competitors;

 

   

actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;

 

   

announcements of technological innovations by us, our collaborators or our competitors;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

the entry into, modification or termination of collaborative arrangements;

 

   

additions or losses of customers;

 

   

additions or departures of key personnel;

 

   

competition from existing products or new products that may emerge;

 

   

issuance of new or updated research or reports by securities analysts;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

   

changes in laws, regulations and policies applicable to our business and products;

 

   

announcement or expectation of additional financing efforts;

 

   

sales of our common stock by us or our stockholders;

 

   

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

general market conditions in our industry; and

 

   

general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such

 

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as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. After this offering, we will have              outstanding shares of common stock. Of these shares, all of the shares offered under this prospectus will be freely tradable without restriction under the federal securities laws unless purchased by our affiliates, and              shares are currently restricted under securities laws or as a result of lock-up agreements but will be able to be resold after the offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of 33,124,426 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. As of December 31, 2007, our three largest stockholders collectively hold 52% of our outstanding common stock, as calculated on an as-converted basis. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline.

We also intend to register all              shares of common stock that we may issue under our 2008 Incentive Award Plan. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180-day lock-up periods under the lock-up agreements described in the “Underwriting” section of this prospectus.

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

 

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Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price will be substantially higher than the tangible book value per share of shares of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of approximately $            per share in the price you pay for shares of our common stock as compared to its tangible book value, assuming an initial public offering price of $            per share. To the extent outstanding options to purchase shares of common stock are exercised, there will be further dilution. For further information on this calculation, see “Dilution” elsewhere in this prospectus.

We have broad discretion in the use of net proceeds from this offering and may not use them effectively.

Although we currently intend to use the net proceeds from this offering in the manner described in “Use of Proceeds” elsewhere in this prospectus, we will have broad discretion in the application of the net proceeds. Our failure to apply these funds effectively could affect our ability to continue to develop and sell our products and grow our business, which could cause the value of your investment to decline.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as related rules implemented by the Securities and Exchange Commission and The Nasdaq Stock Market, imposes various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more expensive for us to maintain director and officer liability insurance.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, commencing in 2009, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. We may not be able to remediate the material weakness in our internal control over financial reporting prior to the time of this testing. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we are unable to remediate the material weakness in our internal control over financial reporting in a timely manner, our stock price could decline, and we could face sanctions, delisting or investigations by The Nasdaq Global Market, or other material effects on our business, reputation, results of operations, financial condition or liquidity.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties are contained principally in the section entitled “Risk Factors.”

Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus.

This prospectus also contains estimates and other information concerning our current and target markets that are based on industry publications, surveys and forecasts, including those generated by IMS Health, Datamonitor and the U.S. Energy Information Association. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates and information. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause actual results to differ materially from those expressed in these publications, surveys and forecasts.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $             million from the sale of              shares of common stock offered in this offering, based on an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $             million.

We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire other businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time.

The expected use of net proceeds of this offering represents our current intentions based upon our present plan and business conditions. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, we will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this offering.

Until we use the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. We cannot predict whether the proceeds invested will yield a favorable return.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. In addition, in certain circumstances, we are prohibited by various borrowing arrangements from paying cash dividends without the prior written consent of the lenders. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of December 31, 2007:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect:

 

   

the filing of a restated certificate of incorporation to authorize              shares of common stock and              shares of undesignated preferred stock;

 

   

the conversion of all outstanding preferred stock warrants to common stock warrants and the related conversion of all of our outstanding shares of preferred stock into 32,330,100 shares of common stock;

 

   

the reclassification of the preferred stock warrant liability to stockholders’ equity upon the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect the pro forma adjustments described above and our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering of              shares at a price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     Actual     Pro Forma     Pro Forma
As Adjusted
           (unaudited)     (unaudited)
     (In thousands, except share and per share amounts)

Cash, cash equivalents and marketable securities

   $ 84,070     $ 84,070     $             
                      

Long-term debt, including current portion

   $ 17,407     $ 17,407     $  

Preferred stock warrant liability

     1,485          

Redeemable convertible preferred stock, $0.0001 par value; 33,204,886 shares authorized, 32,269,494 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted

     132,746          

Stockholders’ equity (deficit):

      

Common stock, $0.0001 par value; 62,000,000 shares authorized, 3,386,789 issued and outstanding, actual; 62,000,000 shares authorized, 35,716,889 shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding, pro forma as adjusted

           4    

Additional paid-in-capital

     6,187       140,414    

Accumulated other comprehensive income

     537       537    

Accumulated deficit

     (94,192 )     (94,192 )  
                      

Total stockholders’ equity (deficit)

     (87,468 )     46,763    
                      

Total capitalization

   $ 64,170     $ 64,170     $  
                      

 

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Each $1.00 increase or decrease in the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, our cash, cash equivalents and marketable securities, working capital, total assets and stockholders’ deficit by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock shown as issued and outstanding in the table is based on the number of shares of our common stock outstanding as of December 31, 2007 and excludes:

 

   

9,032,075 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2007 at a weighted average exercise price of $1.94 per share;

 

   

491,513 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2007 at a weighted average exercise price of $3.95 per share; and

 

   

             shares of our common stock reserved for future issuance under our 2008 Incentive Award Plan, which will become effective in connection with the consummation of this offering (including              shares of common stock reserved for future grant or issuance under our 2002 Stock Plan, which shares will be added to the shares to be reserved under our 2008 Incentive Award Plan upon the effectiveness of the 2008 Incentive Award Plan).

 

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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.

Our pro forma net tangible book value at December 31, 2007 was $38.5 million, or $1.07 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 on December 31, 2007, after giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock as if the conversion occurred on December 31, 2007. Our pro forma as adjusted net tangible book value at December 31, 2007, after giving effect to the sale of             shares of common stock in this offering at an assumed initial public offering price of $             per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, would have been approximately $             million, or $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors, or approximately         % of the assumed initial public offering price of $             per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $             

Pro forma net tangible book value per share at December 31, 2007

   $ 1.07   

Increase in pro forma net tangible book value per share attributable to this offering

     
         

Pro forma as adjusted net tangible book value per share after this offering

     
         

Dilution per share to new investors

      $  
         

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) our pro forma as adjusted net tangible book value by $             million, the pro forma as adjusted net tangible book value per share by $             per share and the dilution in the pro forma net tangible book value to new investors in this offering by $             per share, assuming the number of shares offered by us, as set forth on the cover pages of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table shows, as of December 31, 2007, the number of shares of common stock purchased from us, 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 at an assumed initial public offering price of $             per share, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
     Number    Percent     Amount    Percent    

Existing stockholders

           %   $                      %   $             

New investors

            

Total

      100.0 %   $      100.0 %   $  

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $            , $             and $            , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

 

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The above discussion and tables are based on 35,716,889 shares of common stock issued and outstanding as of December 31, 2007 which reflects the automatic conversion of all of our preferred stock into an aggregate of 32,330,100 shares of our common stock and excludes:

 

   

shares of common stock issuable upon the exercise of 9,032,075 options outstanding at a weighted average exercise price of $1.94 per share;

 

   

shares of common stock issuable upon exercise of 491,513 warrants outstanding at a weighted average exercise price of $3.95 per share; and

 

   

            shares of common stock reserved for issuance under our 2008 Incentive Award Plan, which will become effective upon the completion of this offering (plus an additional             shares of common stock reserved for future grant or issuance under our 2002 Stock Plan as of December 31, 2007, which shares will be added to the shares to be reserved under our 2008 Incentive Award Plan upon the effectiveness of the 2008 Incentive Award Plan).

If the underwriters exercise their over-allotment option in full, the following will occur:

 

   

the number of shares of our common stock held by existing stockholders would decrease to approximately         % of the total number of shares of our common stock outstanding after this offering; and

 

   

the number of shares of our common stock held by new investors would increase to approximately         % of the total number of shares of our common stock outstanding after this offering.

To the extent that outstanding options or warrants are exercised, you will experience further dilution. If all of our outstanding options and warrants were exercised, our pro forma net tangible book value as of December 31, 2007 would have been $40.4 million, or $0.89 per share, and the pro forma, as adjusted net tangible book value after this offering would have been $             million, or $             per share, causing dilution to new investors of $             per share.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

We derived the statements of operations data for 2005, 2006 and 2007 and the balance sheet data as of December 31, 2006 and 2007 from our audited consolidated financial statements appearing elsewhere in this prospectus. The statement of operations data for 2003 and 2004 and the balance sheet data as of December 31, 2003, 2004 and 2005 have been derived from our audited consolidated financial statements not included in this prospectus.

 

     Years Ended December 31,  
     2003     2004     2005     2006     2007  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenues:

          

Product

   $     $     $ 2,265     $ 2,544     $ 11,418  

Related party collaborative research and development

                       863       8,481  

Collaborative research and development

     8,442       4,873       9,363       8,403       4,733  

Government grants

                 156       317       701  
                                        

Total revenues

     8,442       4,873       11,784       12,127       25,333  

Cost and operating expenses:

          

Cost of product revenues

                 2,233       1,806       8,319  

Research and development

     12,658       12,891       13,454       17,939       36,870  

Selling, general and administrative

     3,053       5,187       7,276       11,198       18,487  
                                        

Total cost and operating expenses

     15,711       18,078       22,963       30,943       63,676  
                                        

Loss from operations

     (7,269 )     (13,205 )     (11,179 )     (18,816 )     (38,343 )

Interest income

     301       240       245       742       1,491  

Interest expense and other

           (128 )     (413 )     (724 )     (2,533 )
                                        

Loss before provision (benefit) for income taxes

     (6,968 )     (13,093 )     (11,347 )     (18,798 )     (39,385 )

Provision (benefit) for income taxes

                 243       (127 )     (408 )
                                        

Net loss

     (6,968 )     (13,093 )     (11,590 )     (18,671 )     (38,977 )

Accretion of redeemable convertible preferred stock(1)

     (1,250 )     (1,250 )                  
                                        

Net loss attributable to common stockholders

   $ (8,218 )   $ (14,343 )   $ (11,590 )   $ (18,671 )   $ (38,977 )
                                        

Net loss attributable to common stockholders per share of common stock, basic and diluted(2)

   $ (8.22 )   $ (13.38 )   $ (7.69 )   $ (10.99 )   $ (15.53 )
                                        

Shares used in computing net loss per share of common stock, basic and diluted(2)

     1,000       1,072       1,508       1,699       2,510  
                                        

Pro forma net loss per share of common stock, basic and diluted (unaudited)(2)

           $ (1.29 )
                

Shares used in computing pro forma net loss per share of common stock, basic and diluted (unaudited)(2)

             29,116  
                

 

(1) During 2003 and 2004, we recorded accretion to increase the preferred stock to its redemption value due to the voting majority held by a certain stockholder which could effect a liquidation of the preferred stock, pursuant to EITF Topic D-98. In 2005, the probability of the liquidation of the preferred stock was reduced and accordingly we no longer recorded the related accretion subsequent to December 31, 2004.

 

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(2) Please see Note 2 of our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share of common stock, the pro forma basic and diluted net loss per share of common stock and the number of shares used in the computation of the per share amounts.

 

     December 31,  
     2003     2004     2005     2006     2007  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash, cash equivalents and marketable securities

   $ 11,380     $ 16,734     $ 7,005     $ 32,246     $ 84,070  

Working capital

     10,682       12,837       2,781       22,722       58,919  

Total assets

     20,298       23,276       21,380       46,364       113,101  

Current and long-term financing obligations

           2,306       4,017       4,073       17,407  

Redeemable convertible preferred stock

     26,529       27,779       37,750       77,513       132,746  

Total stockholders’ deficit

     (8,665 )     (12,984 )     (34,774 )     (52,766 )     (87,468 )

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are a leading developer of proprietary biocatalysts that we believe have the potential to revolutionize chemistry-based manufacturing processes across a variety of industries. Biocatalysts are enzymes or microbes that catalyze chemical reactions that can enable the production of products used in everyday life. Our proprietary technology platform allows us to rapidly evolve and optimize biocatalysts to perform specific and desired chemical reactions for commercial scale industrial applications. We believe we can use our technology platform to improve industrially relevant characteristics of any biocatalyst, enabling manufacturing processes that are faster, less complex, less capital intensive and lower cost than conventional chemistry-based processes. In addition, we believe that our technology platform can enable the production of products that are currently impossible to economically produce at commercial scale.

We were incorporated in Delaware in January 2002 as a wholly-owned subsidiary of Maxygen, Inc. In March 2002, we licensed our core enabling technology from Maxygen and commenced operations. From 2002 until 2005, our operations focused on organizing and staffing our company and developing our technology platform. During this period, we funded our activities principally from the proceeds of a venture capital equity financing in 2002 and a strategic equity investment by our collaborator Pfizer, Inc. in 2004. We also relied on borrowings under our financing arrangements and revenues from numerous research and development collaborations, including those with Bristol-Myers Squibb Company, Cargill, Inc., Chevron Corporation, Eli Lilly and Company, Hercules, Inc., Lonza A G, Matrix Pharmaceuticals Inc., Merck & Co., Inc., Novozymes A/S, Pfizer, Rio Tinto Group, Royal DSM N.V., Sandoz International GmbH, and Schering-Plough Corporation. In 2005, we recognized our first revenue from the sales of products. Since 2005, we have continued to generate revenue, to enter into collaborations in the pharmaceuticals market, and began our research collaboration with Equilon Enterprises LLC dba Shell Oil Products US, or Shell, in the biofuels market.

To date, we have generated revenues primarily from collaborative research and development funding, sales of our products and government grants. Our total revenue has grown significantly, rising five-fold over the last four years, and more than doubling over the last two years, from $12.1 million in 2006 to $25.3 million in 2007. Most of our revenue since inception has been derived from collaborative research and development arrangements, which accounted for 80%, 76% and 52% of our revenues in 2005, 2006 and 2007, respectively. Our product sales have grown over five-fold over the last three years, from $2.3 million in 2005 to $11.4 million in 2007. Notwithstanding our revenue growth, we have continued to experience significant losses as we have invested heavily in our own product pipeline, research and development capacity for our collaborations, and administrative infrastructure in connection with growth in our business. As of December 31, 2007, we had an accumulated deficit of $94.2 million. We incurred net losses of $11.6 million, $18.7 million and $39.0 million in 2005, 2006 and 2007, respectively.

We initially targeted the pharmaceutical industry as the first market for our products and services. In this market, we have historically entered into collaborations, which have involved complex service and intellectual property agreements under which we research and develop optimized biocatalysts for innovators in connection with their drug development efforts. In these collaborations, we typically receive up-front payments, milestone payments, payments based upon the number of full-time employee

 

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equivalents, or FTEs, engaged in related research and development activities and licensing fees and royalties.

Our pharmaceutical product offerings include biocatalysts, pharmaceutical intermediates and Codex Biocatalyst Panels. Our pharmaceutical customers incorporate our biocatalysts into the manufacturing processes used to produce their drugs. Our intermediates are complex chemical substances that have been manufactured by, or on behalf of, us using our biocatalysts. Drug manufacturers use intermediates to produce the active pharmaceutical ingredients, or APIs, used in their drugs. We believe that major pharmaceutical manufacturers are increasingly willing to outsource portions of their own internal manufacturing and to purchase intermediates that are difficult or expensive to manufacture. Codex Biocatalyst Panels are plates embedded with genetically diverse variants of our proprietary biocatalysts, which allow our customers to screen our biocatalysts at their facilities and evaluate whether a biocatalyst produces a desired activity that is applicable to a particular pharmaceutical manufacturing process. We view Codex Biocatalyst Panels, which we began selling in 2007, as a way to build early and broad awareness of the power and utility of our technology platform, and we plan to increase our efforts to expand Codex Biocatalyst Panels sales.

Our pharmaceutical service offerings include screening and optimization services. We use our screening services to test our customers’ pharmaceutical materials against our existing libraries of biocatalysts to determine whether our biocatalysts produce detectible activity. We use our optimization services to optimize desired biocatalysts identified through our screening services and our customers’ use of Codex Biocatalyst Panels. These services, in turn, can lead to sales of biocatalysts to our pharmaceutical customers.

We provide our biocatalysts, Codex Biocatalyst Panels, screening and optimization services and intermediates to our innovator customers and provide intermediates to our generics customers. We plan to launch several new intermediates and APIs in non-regulated markets for purchase by manufacturers of generic forms of drugs and intend to sell these same intermediates and APIs for use in the regulated markets when the patent protection for each product expires. We sell our products primarily to generics manufacturers through our small direct sales and business development force in the United States, United Kingdom and Germany.

In the biofuels market, we entered into a research agreement with Shell in 2006. The goal of this initial research collaboration was to develop biocatalysts to break down sustainable non-food cellulosic biomass. In connection with this collaboration, we received up-front payments, research and development service payments and a milestone payment.

Based on the success of this initial collaboration, in 2007, we entered into a new, expanded multiyear research collaboration with Shell. We received an up-front fee and are currently receiving FTE payments under this collaboration. This up-front fee is refundable under certain conditions, such as a change in control in which we are acquired by a competitor of Shell. This refundability lapses ratably over a five-year period beginning on November 1, 2007, on a straight-line basis. We are eligible for milestone payments upon the achievement of certain technical goals beginning in 2009, as well as additional milestones in each of the subsequent years of the agreement. We will also be eligible for royalty payments if Shell produces fuel products at commercial scale that are manufactured using our intellectual property or intellectual property that was developed by us and Shell under the research collaboration.

Under the terms of our license agreement with Maxygen, we are obligated to pay Maxygen a significant portion of certain types of consideration we receive in connection with our biofuels research collaboration with Shell. The actual fees payable to Maxygen will depend on the amount, timing and type of consideration we receive, including payments from the sale of our equity securities and payments in connection with the research and development and/or sale of fuel products made with a biocatalyst developed using the licensed technology. In the case of consideration received from the sale of our equity

 

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securities to Shell, we are obligated to pay Maxygen a significant portion of any excess paid above $3.97 per share, the price per share of our Series D preferred stock. With regard to FTE funding, we are only obligated to pay Maxygen to the extent the consideration received exceeds specified amounts which were based on historical FTE rates we charged to our pharmaceutical collaborators. During 2006 and 2007, as a result of consideration received from Shell in connection with our biofuels research collaboration, we were obligated to pay Maxygen $0.6 million and $7.8 million, respectively. During 2007, amounts owed to Maxygen in connection with Shell’s FTE funding were less than 5% of the total FTE payments we received from Shell.

Our strategy for collaborative arrangements is to retain substantial participation in the future economic value of our technology while receiving current cash payments to offset research and development costs and working capital needs. These agreements are complex and have multiple elements that cover a variety of present and future activities. In addition, certain elements of these agreements are intrinsically difficult to separate and treat as separate units for accounting purposes, especially exclusivity payments. Consequently, we expect to recognize these exclusivity payments over the term of the exclusivity period.

We rely heavily on contract manufacturing organizations, or CMOs, to manufacture our biocatalysts and intermediates at commercial scale. Arch Pharmalabs Limited, or Arch, of Mumbai, India manufactures all of our commercialized drug products for sale to generic API manufacturers. CPC Biotech, srl, or CPC, of Naples, Italy provides all of our commercial scale enzyme production for use by our innovator collaborators in their internal manufacturing as well as by us for the manufacture of our own intermediates. We have recently established a subsidiary in Hungary to manufacture certain microbes at commercial scale, but that capability will not be fully operational until 2009, at the earliest.

We intend to maintain a capital-efficient business model, so we actively seek CMOs who are willing to invest in capital equipment to manufacture our products at commercial scale. As a result, we are heavily dependent on the availability of manufacturing capacity at, and the reliability of, our CMOs. We also pursue collaborations with industry leaders that allow us to leverage our collaborators’ engineering, manufacturing and commercial expertise, their distribution infrastructure and their ability to fund commercial-scale production facilities. We believe that, if our collaborators choose to utilize our technology to commercialize new products, this capital-efficient business model will allow us to expand into new markets without having to finance or operate large industrial facilities.

In addition to our organic growth, we have expanded through the acquisition of technologies and of businesses. In February 2005, we acquired Jülich Fine Chemicals GmbH in Jülich, Germany, and have operated it as a wholly-owned subsidiary since then. In July 2007, we acquired BioCatalytics, Inc. in Pasadena, California. Prior to our acquisition of these businesses, both had been engaged in the sale of research enzymes and services for the pharmaceutical and fine chemical industries.

Revenue, Cost of Product Revenues

Revenue

Our revenues comprise collaborative research and development revenues, product revenues and government grants.

 

   

Collaborative research and development revenues include license, access and exclusivity fees, FTE payments, milestones, royalties, and optimization and screening fees. We report our collaborative research and development revenues under two categories, the first consisting of revenues from related parties who own more than 10% of our outstanding capital stock and the second from all other collaborators. Related party collaborative research and development revenues consisted of revenues from Shell in 2006 and 2007.

 

   

Product revenues consist of sales of biocatalysts, intermediates and Codex Biocatalyst Panels.

 

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Government grants consist of payments from government entities. The terms of these grants generally provide us with cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. Historically, we have received government grants from Germany and the United States and expect to receive additional grants from other governments in the future.

Cost of Product Revenue

Cost of product revenues includes both internal and third-party fixed and variable costs including amortization of purchased technology, materials and supplies, labor, facilities and other overhead costs associated with our product revenues.

Research and Development Expenses

Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities. These costs include license and royalty fees payable to Maxygen for consideration that we receive in connection with our biofuels collaboration, our direct and research-related overhead expenses, which include salaries and other personnel-related expenses, facility costs, supplies, depreciation of facilities, and laboratory equipment, as well as research consultants and the cost of funding research at universities and other research institutions, and are expensed as incurred. License and royalty fees payable to Maxygen may fluctuate depending on the timing and type of consideration received from Shell in connection with our biofuels research collaboration. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred. Our research and development efforts devoted to our internal product and process development projects increased significantly in 2007 as compared to 2006, from 31 projects in 2006 to 46 in 2007. Our internal research and development projects are typically completed in 12 to 24 months, and generally the costs associated with any single internal project during these periods were not material.

As more fully described in Note 2 of the accompanying financial statements, we do not track fully burdened research and development costs by project. However, we do estimate, based on FTE efforts, the percentage of research and development efforts (as measured in hours incurred, which approximates costs) undertaken for projects funded by our collaborative partners and government grants and projects funded by us. To approximate research and development expenses by funded category, the number of hours expended in each category has been divided by the total number of hours expended on all categories of research and development with the resulting fractions then multiplied by the total cost of research and development effort, with the products then added to project-specific external costs. In the case where a collaborative partner is sharing the research and development costs, the expenses for that project are allocated proportionately between the collaborative projects funded by third parties and internal projects. We believe that presenting our research and development expenses in these categories will provide our investors with meaningful information on how our resources are being used.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation expenses (including stock-based compensation), hiring and training costs, consulting and service provider expenses (including patent counsel related costs), marketing costs, occupancy-related costs, depreciation and amortization expense and travel and relocation expenses.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and

 

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disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We follow the revenue recognition criteria outlined in the SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21. When evaluating multiple element arrangements, we consider whether the components of each arrangement represent separate units of accounting as defined in EITF 00-21. Application of the standard requires subjective determinations and requires management to make judgments about the fair values of each individual element and whether it is separable from other aspects of the contractual relationship. Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective and reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their respective fair values. Applicable revenue recognition criteria are then applied to each of the units.

Revenue is recognized when the four basic revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) products have been delivered, transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured.

Our primary sources of revenues consist of collaborative research and development agreements, product revenues and government grants. Collaborative research and development agreements typically provide us with multiple revenue streams, including up-front fees for licensing, exclusivity and technology access, fees for FTE services and the potential to earn milestone payments upon achievement of contractual criteria and royalty fees based on future product sales or cost savings by our customers.

For each source of collaborative research and development revenues, product revenues and grant revenues, we apply the above revenue recognition criteria in the following manner:

 

   

Up-front payments received in connection with collaborative research and development agreements, including license fees and exclusivity fees, are deferred upon receipt and recognized as revenue over the periods specified in the agreement.

 

   

Revenue related to FTE services is recognized as research services are performed over the related performance periods for each contract. Under these agreements, we are required to perform research and development activities. The payments received under each agreement are not refundable and are based on a contractual reimbursement rate per FTE working on the project. When up-front payments are combined with FTE services in a single unit of accounting, we recognize the up-front payments using the proportionate performance method of revenue recognition based upon the actual amount of research and development labor hours incurred relative to the amount of the total expected labor hours to be incurred by us, up to the amount of cash received. In cases where the planned levels of research services fluctuate substantially over the research term, we are required to make estimates of the total hours required to perform our obligations.

 

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Revenues related to milestones that are determined to be substantive and at risk are generally recognized upon achievement of the incentive milestone event and when collectibility is reasonably assured. Milestone payments are triggered either by the results of our research efforts or by events external to us, such as our collaboration partner achieving a revenue target. Fees associated with milestones for which performance was not at risk at the inception of the arrangement or that are determined not to be substantive are included in a separate unit of accounting within the arrangement, or if the EITF 00-21 criteria to account for each element have not been met, to the single unit of accounting within the arrangement.

 

   

Revenues related to royalties based on product sales or cost savings of our customers are recorded as revenue as reported to us by the customer and when collectible. Royalties are generally reported in the quarter following the underlying sales or cost savings realized.

 

   

Product revenues are recognized once passage of title and risk of loss has occurred and contractually specified acceptance criteria have been met, provided all other revenue recognition criteria have been met.

 

   

Revenues from government grants are recognized in the period during which the related costs are incurred, provided that the conditions under which the government grants were provided have been met and we have only perfunctory obligations outstanding.

Stock-Based Compensation

Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations, and complied with the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment to SFAS Statement No. 123, or SFAS 148. Under APB 25, compensation expense for employees is based on the intrinsic value of the option, determined as the excess, if any, of the fair value of the common stock over the exercise price of the option on the date of grant. Historically, our stock options have been granted with exercise prices at or above the estimated fair value of our common stock on the date of grant. Accordingly, no stock-based employee compensation expense was recorded under APB 25 during 2005.

Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, or SFAS 123(R), which requires compensation expense related to share-based transactions, including the awarding of employee stock options, to be measured and recognized in the financial statements based on the estimated fair value of the awards granted. SFAS 123(R) revises SFAS 123, as amended, and supersedes APB 25. We adopted SFAS 123(R) using the prospective transition method, as options granted prior to January 1, 2006 were measured using the minimum value method for the pro forma disclosures previously required by SFAS 123. In accordance with the prospective transition method, we continued to account for non-vested employee share-based awards outstanding at the date of adoption using the intrinsic value method in accordance with APB 25. All awards granted, modified or settled after the SFAS 123(R) adoption date have been accounted for using the measurement, recognition and attribution provisions of SFAS 123(R).

The adoption of SFAS 123(R) increased loss before provision for income taxes and net loss for the year ended December 31, 2006 by approximately $32,000 each, and increased net loss per share of common stock by $0.02. We are using the straight-line method to allocate stock-based compensation expense to reporting periods subsequent to the adoption of SFAS 123(R).

We account for stock options issued to non-employees in accordance with the provisions of SFAS 123(R) and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, or EITF 96-18. In accordance with SFAS 123(R) and EITF 96-18, stock options issued to nonemployees are accounted for at their

 

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estimated fair value determined using the Black-Scholes option-pricing model. The fair value of the options granted to nonemployees is remeasured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

In connection with determining the fair value of warrants to purchase our preferred stock under the provisions of FASB Staff Position No. 150-5, Issuer’s Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable, or FSP 150-5, we reassessed the fair value of the common stock with respect to options granted between January 1, 2007 through July 17, 2007. Based upon the reassessed fair value of our common stock, we determined the intrinsic value of our stock options and the related stock compensation expense under SFAS 123(R), and determined that at each option grant date during this period, the fair value of our common stock was less than the relevant exercise prices of the stock options granted. The following table summarizes the options granted from January 1, 2007 through the date of this prospectus with their exercise prices, the reassessed fair values for purposes of SFAS 123(R) compensation expense, and the intrinsic value per share:

 

Date of Issuance

   Number of
Shares
Subject to
Options
Granted
   Exercise
Price
per Share
   Reassessed
Fair Value
of
Common
Stock
per Share
   Intrinsic
Value
 

January 26, 2007

   1,719,800    $ 1.63    $ 1.41    $ (0.22 )

February 26, 2007

   5,000      1.63      1.41      (0.22 )

April 16, 2007

   40,000      1.63      1.46      (0.17 )

April 19, 2007

   415,600      1.63      1.46      (0.17 )

June 19, 2007

   652,100      1.63      1.30      (0.33 )

July 17, 2007

   133,000      1.63      1.27      (0.36 )

August 28, 2007

   1,263,175      4.47      4.47       

September 24, 2007

   10,000      4.47      4.47       

October 25, 2007

   864,550      4.57      4.57       

December 11, 2007

   183,600      5.79      5.79       

January 29, 2008

   1,093,950      7.00      6.26      (0.74 )
             
   6,380,775         
             

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

Under SFAS No. 123(R), we estimated the fair value of our stock option grants on or after January 1, 2006 using the Black-Scholes option-pricing model. The estimated expected term, as well as the estimated volatility rate, were calculated based on selected companies in similar markets, due to a lack of historical information regarding the volatility of our stock price and expected term of the options. We will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for our common stock becomes available. The risk-free rate assumption was based on U.S. treasury instruments whose terms were consistent with the terms of our stock options. The expected dividend assumption was based on our history and expectation of dividend payouts. The fair value of the stock options granted was based on the following assumptions:

 

     Years Ended December 31,  
     2006     2007  

Weighted average expected term (years)

   6.1     6.0  

Weighted average expected volatility

   65.0 %   48.0 %

Range of risk-free rates

   4.2 %   4.3 %

Expected dividend yield

   0.0 %   0.0 %

 

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As a result of our Black-Scholes fair value calculations and the allocation of value to the vesting periods using the straight-line vesting attribution method, we recognized a total $0.1 million in stock-based compensation expense during 2006, of which $32,000 was attributable to employee stock options and $32,000 was attributable to non-employee stock options. Furthermore, $0.1 million was recorded as a selling, general and administrative expense while $3,000 was recorded as a research and development expense. We recognized a total of $1.3 million in stock-based compensation expense during 2007, of which $1.0 million was attributable to employee stock options and $0.3 million was attributable to non-employee stock options. Furthermore, $0.8 million was recorded as a selling, general and administrative expense while $0.5 million was recorded as a research and development expense.

Common Stock Valuations

The fair values of the common stock underlying stock options granted during 2005, 2006 and 2007 were estimated by the board of directors with input from management based upon several factors, including progress and milestones attained in our business, projected sales and earnings for multiple future periods, and the probabilities of various financing and liquidation events, including winding up and dissolution. In determining the fair market value of our common stock as of the date of each option grant, our board of directors made a reasonable estimate of the then current value of our common stock. In the absence of a public trading market for our common stock, our board of directors was required to estimate the fair value of our common stock. Our board of directors considered numerous objective and subjective factors in determining the fair value of our common stock at each option grant date, including but not limited to the following factors: (i) prices of preferred stock issued by us primarily to outside investors in arm’s-length transactions, and the rights, preferences and privileges of the preferred stock relative to the common stock, (ii) our performance and the status of research and product development efforts, (iii) our stage of development and business strategy and (iv) the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of Codexis, given then-prevailing market conditions.

All stock options were granted with exercise prices at or above the then-current fair market value of our common stock as determined by our board of directors. Although, as described below, some of those values have been reassessed in connection with the preparation of our audited consolidated financial statements, we believe that the determinations of the value of our common stock were fair and reasonable at the time they were made. The board of directors utilized methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (AICPA Practice Guide).

For our contemporaneous and retrospective valuations performed between December 2006 and January 2008, the board of directors used the probability-weighted expected return method, or the PWERM, which is consistent with the allocation methods outlined in the AICPA Practice Guide. The PWERM analyzes the returns afforded to common equity holders under multiple future scenarios. Under the PWERM, share value is based upon the probability-weighted present value of expected future net cash flows (distributions to shareholders), considering each of the possible future events and giving consideration for the rights and preferences of each share class. The PWERM requires a five step process: (i) for each possible future event, standard valuation methodologies, such as the application of revenue and earnings multiples from a relevant peer group, are used to estimate a range of future distribution values over a range of event dates; (ii) for each combination of value and date, the value is allocated between the share classes; (iii) the expected return for each class is then discounted back to the present; (iv) the probability for each possible event is estimated; and (v) the probability-weighted return, expressed in terms of a per-share value, is determined for each class. Although this method is complex to implement, the board of directors believes that this method’s forward-looking analysis of potential future outcomes makes it the most suitable for this analysis.

 

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The PWERM-derived fair value calculated at each valuation date was then allocated to the shares of redeemable and/or convertible preferred stock, warrants to purchase shares of preferred stock, and common stock, using a contingent claim methodology. This methodology treats the various components of our capital structure as a series of call options on the proceeds expected from the sale of the company or the liquidation of our assets at some future date. The anticipated timing of a liquidity event utilized in these valuations was based on the then-current plans and estimates of our board of directors and management regarding the likely success of an initial public offering. Estimates of the volatility of our stock were based on the limited information available on the volatility of the capital stock of comparable publicly-traded companies.

We granted stock options with exercise prices between $1.63 and $5.79 per share during 2007. In connection with the preparation of our 2007 consolidated financial statements, we also performed retrospective valuations of our common stock solely for the purpose of determining the liability associated with outstanding warrants to purchase our preferred stock as of March 31, 2007 and June 30, 2007. The estimated fair value of our common stock resulted in valuations between $1.41 and $5.79 per share during 2007. No single event caused the valuation of our common stock to increase or decrease from January 2007 to December 2007; rather it has been a combination of the following factors that led to the initial decrease and subsequent increase in the fair value of the underlying common stock:

January to June 2007:    In February 2007, we introduced our Codex Biocatalyst Panels and Merck became the first customer for this product. In April 2007, we hired a Vice President and General Counsel, a key executive position. The fair value of our common stock as of March 30, 2007 was estimated at $1.46 per share and as of June 30, 2007, it was reassessed to be $1.27. The fair value of our common stock decreased during this period because our cash resources decreased significantly, which outweighed other increases in the value of our business.

July 2007 to August 2007:    In July 2007, we acquired BioCatalytics, Inc., which produces custom and off-the-shelf enzymes used in chemical process manufacturing. On July 17, 2007, the fair value of our common stock was estimated to be unchanged from the $1.27 per share estimate as of June 30, 2007. As a result, we valued the common stock consideration issued in the BioCatalytics acquisition at $1.27 per share.

Between July 17, 2007 and August 28, 2007, a number of achievements significantly increased the fair value of our common stock. We negotiated and substantially finalized a $15 million loan agreement with General Electric Capital Corporation and Oxford Finance Corporation to be used as short-term capital to sustain operations. We also began discussions with Shell and other potential investors regarding a Series E preferred stock financing, in which we expected to raise over $40.0 million at a price per share of $8.50. We also received indications from Shell that they were interested in entering into a second research collaboration relating to biofuels and commenced negotiations, although we had not yet settled on the material terms of the research collaboration. In addition, we began discussions regarding an initial public offering of our common stock in August 2007. As a result of these achievements, on August 28, 2007, the fair value of our common stock was estimated to be $4.47.

September 2007 to December 2007:    During this period we entered into the $15 million loan agreement with General Electric Capital Corporation and Oxford Finance Corporation. It was also during this period that the amended and restated collaborative research agreement with Shell began to take shape, although several material terms remained under negotiation until the agreement was finalized in November 2007. We continued discussions regarding an initial public offering of our common stock, and, for purposes of PWERM calculations, we deemed the probability of an IPO to have significantly increased.

In October 2007, we closed a round of preferred equity financing, led by Shell, which raised approximately $55 million. During this period, we also introduced four new Codex Biocatalyst Panels which further bolstered our business prospects and expanded on the success of the first panel introduced in February 2007. In October 2007, we announced the opening of our newest research facility located in Singapore.

 

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During this period, even though significant losses were recognized for 2007, revenues increased by nearly 110% from 2006 to 2007. However, operating expenses also increased significantly by approximately 100% from 2006. The fair value of our common stock as of October 25, 2007 and December 11, 2007 was estimated to be $4.57 per share and $5.79 per share, respectively, which were the values used for accounting purposes and for common stock option grants made contemporaneously with those dates.

January 2008:    In January 2008, we appointed a new President for Codexis Pharmaceuticals, opened a new European facility in Hungary, and introduced a new product. Also, our board of directors selected investment banks to act as managing underwriters for a potential initial public offering of our stock. As a result of these events, on January 31, 2008, the estimated fair value of our common stock increased to $6.26 per share.

Estimation of Fair Value of Warrants to Purchase Preferred Stock

Our outstanding warrants to purchase shares of our preferred stock are subject to the requirements in FSP 150-5, which require us to classify these warrants as current liabilities and to adjust the value of these warrants to their fair value at the end of each reporting period. Warrants issued in connection with debt arrangements resulted in an aggregate expense attributable to an increase of $155,000 and $1.3 million in the fair value of the warrant liability due to quarter-end remeasurements was recognized as interest expense and other in the consolidated statements of operations during 2006 and 2007. Upon the closing of this initial public offering and the conversion of the underlying preferred stock to common stock, all outstanding warrants to purchase shares of preferred stock will automatically convert to warrants to purchase shares of our common stock and, as a result, will no longer be subject to FSP 150-5. The then-current aggregate fair value of these warrants will be reclassified from liabilities to additional paid-in capital, a component of stockholders’ equity, and we will cease to record any related periodic fair value adjustments. Accordingly, we estimated the fair value of these warrants on an “as-if converted” basis at the respective balance sheet dates based on the estimated fair value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying common stock. In the case of a warrant, in which certain terms were variable and based on the outcome of future events, we estimated the probability of each possible outcome and weighted the pricing model accordingly. These estimates, especially the market value of the underlying common stock, the probability of future outcomes and the expected volatility, are highly judgmental and could differ materially in the future.

Impairment of Goodwill and Intangible Assets and Other Long-lived Assets

We assess impairment of long-lived assets, including goodwill, in accordance with SFAS No. 144, Impairment of Long-Lived Assets, on at least an annual basis and test long-lived assets for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

Recoverability is assessed based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized in the consolidated statements of operations when the carrying amount is not recoverable and exceeds fair value, which is determined on a discounted cash flow basis.

 

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We make estimates and judgments about future undiscounted cash flows and fair value. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant exercise of judgment involved in determining the cash flows attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated future cash flows could be reduced significantly in the future. As a result, the carrying amount of our long-lived assets could be reduced through impairment charges in the future. Changes in estimated future cash flows could also result in a shortening of estimated useful life of long-lived assets including intangibles for depreciation and amortization purposes.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2007, we had federal and state net operating loss carryforwards of $58.3 million and $55.3 million, respectively. We also had federal and state tax credit carryforwards of $1.0 million and $1.0 million, respectively. The aggregate federal and state net operating loss will begin to expire in 2013, if not utilized. The federal tax credit carryforward will expire at various dates beginning in 2022, if not utilized. The state tax credit carryforwards do not expire. As of December 31, 2007, we had foreign net operating loss carryforwards of $4.6 million, which do not expire.

Under the Internal Revenue Code, substantial changes in our ownership, including as a result of this offering or prior equity financings subsequent to our incorporation by Maxygen, may limit, or may have already limited, the amount of future taxable income which may be offset by available net operating loss and tax credit carryforwards. We could have an annual limitation on the amount of our taxable income which may be offset by net operating loss and tax credit carryforwards in future years. The annual limitation may result in the expiration of net operating losses and credits before utilization. In any event, utilization of our net operating loss and tax credit carryforwards depends upon our having taxable income.

Effective January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes, or FIN 48. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. Upon adoption, there was no adjustment to accumulated deficit as all of our deferred tax assets were subject to a valuation allowance. As a result of the implementation of FIN 48, we recognized a $0.1 million increase in the liability for unrecognized tax benefits, which was accounted for as a $0.1 million adjustment to deferred tax assets (fully offset by a valuation allowance). We recognize interest and penalties in income tax expense. Total interest and penalties recognized in the consolidated statement of operations and balance sheet was $49,000. The total unrecognized tax benefits, that, if recognized, would impact our effective tax rate is $0.3 million. We are not subject to examination by U.S. federal or state tax authorities for years before 2002 and foreign tax authorities for years before 2006.

 

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Results of Operations

Years Ended December 31, 2006 and 2007

The following table shows the amounts and percentage relationships of the listed items from our consolidated statements of operations for the periods presented, showing period-over-period changes (in thousands).

 

     2006     2007     Increase/
(Decrease)
    % Increase/
(Decrease)
 

Revenues:

        

Product

   $ 2,544     $ 11,418     $ 8,874     349 %

Related party collaborative research and development

     863       8,481       7,618     883 %

Collaborative research and development

     8,403       4,733       (3,670 )   (44 )%

Government grants

     317       701       384     121 %
                              

Total revenues

     12,127       25,333       13,206     109 %

Cost and operating expenses:

        

Cost of product revenues

     1,806       8,319       6,513     360 %

Research and development

     17,939       36,870       18,931     105 %

Selling, general and administrative

     11,198       18,487       7,289     65 %
                              

Total cost and operating expenses

     30,943       63,676       32,733     105 %
                              

Loss from operations

     (18,816 )     (38,343 )     (19,527 )   105 %

Interest income

     742       1,491       749     101 %

Interest expense and other

     (724 )     (2,533 )     (1,809 )   249 %
                              

Loss before provision (benefit) for income taxes

     (18,798 )     (39,385 )     (20,587 )   109 %

Provision (benefit) for income taxes

     (127 )     (408 )     (281 )   302 %
                              

Net loss

   $ (18,671 )   $ (38,977 )   $ (20,306 )   108 %
                              

Revenues.    From 2006 to 2007, revenues increased $13.2 million, or 109%, from $12.1 million to $25.3 million due primarily to increases in revenues from collaborative research and development projects and product sales.

Product revenues increased $8.9 million, or 349% from $2.5 million to $11.4 million in 2006 and 2007, respectively. This increase was primarily due to a $4.2 million increase in sales of our ATS-8 intermediate to Indian manufacturers of generic atorvastatin, $0.1 million in sales of our new Codex Biocatalyst Panels, $1.7 million of additional sales from our new BioCatalytics subsidiary, and a $2.9 million increase in sales of our other biocatalyst and intermediate products.

Related party collaborative research and development revenues increased $7.6 million, or 883%, from $0.9 million to $8.5 million in 2006 and 2007, respectively. This increase was primarily due to the expanded research collaboration with Shell that represented a $7.6 million increase over the prior year.

Collaborative research and development revenues decreased $3.7 million, or 44%, from $8.4 million to $4.7 million in 2006 and 2007, respectively. This decrease was primarily due to the reallocation of our research resources to related party collaborative research and development projects.

Government grant revenues increased $0.4 million, or 121%, from $0.3 million to $0.7 million in 2006 and 2007, respectively. This increase was due to a $0.3 million grant received from the National Institutes of Health and an additional $0.1 million grant received from the German government.

 

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Our top five customers accounted for 71% and 65% of total revenues for 2006 and 2007, respectively. In 2006, Pfizer accounted for 36% of our revenues and Schering-Plough accounted for 11% of our revenues. In 2007, Shell accounted for 33% of our revenues and Pfizer accounted for 13% of our revenues.

Customers in the United States accounted for 66% and 61% of revenues, and customers outside the United States accounted for 34% and 39% of revenues in 2006 and 2007, respectively. Revenues for 2006 and 2007 by geography were as follows (in thousands):

 

     2006    2007    Increase/
(Decrease)
   % Increase/
(Decrease)
 

United States

   $ 7,974    $ 15,458    $ 7,484    94 %

Europe

     2,437      3,343      906    37 %

Asia

     1,716      6,532      4,816    281 %
                           

International

     4,153      9,875      5,722    138 %
                           

Total

   $ 12,127    $ 25,333    $ 13,206    109 %
                           

Cost of Product Revenues.    Cost of product revenues was $1.8 million for 2006 compared to $8.3 million in 2007, an increase of $6.5 million. The increase was primarily attributable to the increase in product sales, an increase in amortization of intangible assets and an inventory fair value adjustment related to our BioCatalytics acquisition. Cost of product revenues as a percentage of product revenues increased 2% from 2006 to 2007 from 71% to 73% due to higher margin product sales to former BioCatalytics’ customers since July 2007 and the introduction of Codex Biocatalyst Panels during 2007.

Research and Development.    Research and development expenses were $17.9 million in 2006 compared to $36.9 million in 2007, an increase of $19.0 million. The increase was primarily due to increased royalty costs of $7.3 million due to Maxygen in connection with amounts received from Shell relating to our biofuels research collaboration, increased compensation (including stock-based compensation), and benefit, hiring and training costs of $6.8 million attributable to an increase in employee headcount in our research and development functions. Also reflecting this increased research activity were the expenses incurred for lab supplies, outside services and consultants of $2.2 million, plus higher occupancy related costs of $0.9 million and depreciation and amortization expense of $0.4 million. Travel and relocation expenses were also higher by $0.8 million as our research functions expanded in Europe and Asia. Also higher were expenses for equipment and supplies by $0.3 million, and travel by $0.3 million. Included in the above amounts were $3.5 million of additional research and development expenses that we incurred after opening our new research facility in Singapore in October 2007. Research and development expenses included stock-based compensation expense of $0 and $0.5 million during 2006 and 2007, respectively.

Selling, General and Administrative.    Selling, general and administrative expenses were $11.2 million for 2006, compared to $18.5 million for 2007, an increase of $7.3 million or 65%. The increase was primarily due to increased compensation including stock-based compensation of $2.8 million attributable to higher employee headcount. We incurred higher costs for consultants and outside advisory services of $1.5 million as we prepared to become a public company, including consulting costs associated with preparation for Sarbanes-Oxley compliance. We also incurred higher professional fees of $1.0 million in 2007 mainly for legal costs connected with negotiating our collaboration agreements and other contracts during the year. Expenses related to promotional marketing materials and travel increased $0.6 million. Selling, general and administrative expenses included stock-based compensation expense of $0.1 million and $0.8 million during 2006 and 2007, respectively.

Interest Income.    Interest income was $0.7 million in 2006 compared to $1.5 million in 2007, an increase of $0.7 million, or 101%. The increase resulted from the higher average cash and investment balances on hand during 2007 compared to 2006. These higher cash and investment balances resulted from cash received in connection with the issuance of the Series E preferred stock, as well as from the $20.0 million up-front payment made by Shell when we entered into our new five-year research collaboration.

 

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Interest Expense and Other.    Interest expense and other was $0.7 million in 2006, compared to $2.5 million in 2007. Interest expense and other in 2007 included the increase in the fair value of our Series D preferred stock warrants, which resulted in $1.3 million of expense, interest expense on our outstanding financing obligations, and losses from foreign currency transactions.

Provision (benefit) for Income Taxes.    The tax benefit for 2006 and 2007, respectively, primarily consisted of foreign tax withheld at source on royalties earned overseas and other taxes attributable to foreign operations.

Years Ended December 31, 2005 and 2006

The following table shows the amounts and the percentage relationships of the listed items from our consolidated statements of operations for the periods presented, showing period-over-period changes (in thousands).

 

     2005     2006     Increase/
(Decrease)
    % Increase/
(Decrease)
 

Revenues:

        

Product

   $ 2,265     $ 2,544     $ 279     12 %

Related party collaborative research and development

           863       863     NM  

Collaborative research and development

     9,363       8,403       (960 )   (10 )%

Government grants

     156       317       161     103 %
                              

Total revenue

     11,784       12,127       343     3 %

Cost and operating expenses:

        

Cost of product revenues

     2,233       1,806       (427 )   (19 )%

Research and development

     13,454       17,939       4,485     33 %

Selling, general and administrative

     7,276       11,198       3,922     53 %
                              

Total cost and operating expenses

     22,963       30,943       7,980     34 %
                              

Loss from operations

     (11,179 )     (18,816 )     (7,637 )   68 %

Interest income

     245       742       497     203 %

Interest expense and other

     (413 )     (724 )     (311 )   75 %
                              

Loss before provision (benefit) for income taxes

     (11,347 )     (18,798 )     (7,451 )   65 %

Provision (benefit) for income taxes

     243       (127 )     (370 )   NM  
                              

Net loss

   $ (11,590 )   $ (18,671 )   $ (7,081 )   61 %
                              

Revenues.    Revenues increased $0.3 million, or 3%, from $11.8 million to $12.1 million in 2005 and 2006, respectively.

Product revenues increased $0.3 million, or 12%, from $2.3 million to $2.5 million in 2005 and 2006, respectively. This increase was primarily due to an increase in sales from Jülich.

Related party collaborative research and development revenues increased from $0 to $0.9 million, due to our entering into a research collaboration with Shell in 2006.

Collaborative research and development revenues decreased $1.0 million, or 10%, from $9.4 million to $8.4 million in 2005 and 2006, respectively. This decrease was primarily due to the termination of a collaboration in early 2006.

Government grant revenues increased $161,000, or 103%, from $156,000 to $317,000 in 2005 and 2006. This increase was due to an increase in a grant from the German government received in 2006.

 

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Our top five customers accounted for 70% and 71% of total revenues for 2005 and 2006, respectively. In 2005, Pfizer accounted for 34% of our revenues and Cargill accounted for 17% of our revenues. In 2006, Pfizer accounted for 36% of our revenues and Schering-Plough accounted for 11% of our revenues.

Customers in the United States accounted for 56% and 66% of revenues, and customers outside the United States accounted for 44% and 34% of revenues in 2005 and 2006, respectively. Revenues for 2005 and 2006 by geography were as follows (in thousands):

 

     2005    2006    Increase/
(Decrease)
    % Increase/
(Decrease)
 

United States

   $ 6,614    $ 7,974    $ 1,360     21 %

Europe

     3,201      2,437      (764 )   (24 )%

Asia

     1,969      1,716      (253 )   (13 )%
                            

International

     5,170      4,153      (1,017 )   (20 )%
                            

Total

   $ 11,784    $ 12,127    $ 343     3 %
                            

Cost of Product Revenues.    Cost of product revenues was $2.2 million for 2005 compared to $1.8 million in 2006, a decrease of $0.4 million. This decrease resulted from recognition of a $0.1 million inventory fair value step up related to our Jülich acquisition in 2005 and lower cost of product in our Jülich subsidiary. Cost of product revenues as a percentage of product revenues decreased 28% from 2005 to 2006, from 99% to 71%, due to higher margin product sales to the Jülich customer base and net sales recognition in India for approximately $0.2 million of net revenue with no corresponding cost of product revenue.

Research and Development.    Research and development expenses were $13.5 million for 2005, compared to $17.9 million in 2006, an increase of $4.4 million or 33%. The increase was primarily due to higher compensation and employee benefit costs of $2.7 million reflecting increased headcount in research and development functions. Additionally, there were increased royalty costs of $0.6 million paid to Maxygen in connection with amounts received from Shell relating to our biofuels research collaboration. Moreover, spending on lab equipment increased by $0.6 million also corresponding with the increased research activity in 2006. Stock-based compensation expense included in research and development was immaterial in both 2005 and 2006.

Selling, General and Administrative.    Selling, general and administrative expenses were $7.3 million in 2005, compared to $11.2 million in 2006, an increase of $3.9 million or 53%. The increase was primarily due to higher compensation (including stock-based compensation) and hiring costs of $1.9 million attributable to increased staffing levels in sales and administrative functions, higher equipment costs of $0.2 million and higher travel costs of $0.2 million as our operations grew to include European facilities. Professional fees were also higher by $0.5 million as we incurred greater costs in connection with negotiating certain contracts. Selling, general and administrative expenses included stock-based compensation expense of $0.1 million in both 2005 and 2006.

Interest Income.    Interest income was $0.2 million in 2005 compared to $0.7 million in 2006, an increase of $0.5 million or 203%. The increase resulted from the higher average cash and investment balances on hand during 2006 compared to 2005. These higher cash and investment balances resulted from cash received in connection with the issuance of our Series D preferred stock in August and October of 2006.

Interest Expense and Other.    Interest expense and other was $0.4 million in 2005, compared to $0.7 million in 2006. This increase was due to the interest expense on our outstanding financing obligations, and a $0.7 million charge we incurred for the embedded beneficial conversion feature related to the bridge financing we raised in 2006.

Provision (benefit) for Income Taxes.    The tax provision for 2005 consisted primarily of foreign tax withheld at source on royalties received from overseas and other taxes attributable to foreign operations.

 

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The tax benefit in 2006 is due to fewer taxes withheld on royalties and the benefit recorded for a higher loss in Germany.

Liquidity and Capital Resources

Since inception, we have funded our operations to date primarily through the sale of equity securities, borrowings under financing arrangements, collaborative research and development revenues, product sales and government grants. As of December 31, 2007, our cash, cash equivalents and marketable securities totaled $84.1 million.

Operating Activities

We have historically experienced negative cash flow from operations as we continue to invest in our infrastructure and our technology platform, and expand our business. Our cash flows from operations will continue to be affected principally by the extent to which we spend on increasing personnel, primarily in research and development, in order to grow our business. The timing of hiring of skilled research and development personnel in particular affects cash flows as there is a lag between the hiring of research and development personnel and the generation of collaboration or product revenues and cash flows from those personnel. Our primary source of cash flows from operating activities is cash receipts from our customers. Our largest uses of cash from operating activities are for employee related expenditures, rent payments, inventory purchases to support our revenue growth and non-payroll research and development costs, which include payments made to Maxygen in connection with our biofuels research collaboration with Shell.

Our operating activities used cash in the amount of $6.1 million in 2007, primarily due to our net loss of $39.0 million and an increase in accounts receivable of $3.1 million, partially offset by an increase in deferred revenues of $16.4 million, an increase in accounts payable and accrued liabilities of $14.0 million and a decrease of $0.9 million in prepaids and other assets. These changes resulted primarily from the significant growth in our business, the timing of shipments and payments to vendors, our efforts to manage and monitor the balances of trade receivables and the increase in deferred revenues due to the timing of revenue recognition under our revenue recognition policy. We also had non-cash charges of $6.6 million, comprised primarily of $2.1 million in depreciation and amortization on property and equipment, $1.2 million in amortization of intangible assets and deferred costs, $1.3 million in stock-based compensation expense, $1.3 million related to the increase in the fair value of the preferred stock warrants during the period, and $0.5 million for preferred stock issued in exchange for services.

Our operating activities used cash in the amount of $13.3 million in 2006, primarily due to our net loss of $18.7 million, partially offset by an increase in our accounts payable and accrued liabilities of $2.3 million. These changes resulted primarily from the growth in our business and the timing of payments to our vendors. We also had non-cash charges of $2.7 million, comprised primarily of $1.8 million in depreciation on property and equipment, $0.7 million in amortization of intangible assets and a beneficial conversion feature related to the preferred stock warrant issued in connection with convertible debt.

Our operating activities used cash in the amount of $4.4 million in 2005, primarily due to our net loss of $11.6 million and an increase in accounts receivable of $2.5 million due to our growth in our business, partially offset by an increase in deferred revenues of $4.1 million due to the increase in shipments to customers late in the year, and a net increase in accounts payable and accrued liabilities of $2.3 million. We also had non-cash charges for depreciation and amortization expense of $2.5 million.

Investing Activities

Our investing activities used cash of $39.6 million in 2007, primarily from net purchases of marketable securities of $28.9 million, the purchase of property and equipment of $8.2 million to support the growth in our business, the $1.3 million increase in restricted cash and net payments of $1.2 million for

 

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the BioCatalytics acquisition. Restricted cash comprises deposits securing letters of credit, primarily those associated with our facility leases. The capital expenditures consisted primarily of laboratory equipment, computer and test equipment, and software purchases.

Our investing activities provided cash of $0.2 million in 2006, primarily from proceeds of sale of marketable securities of $1.5 million, partially offset by the purchase of property and equipment of $1.1 million and the increase in restricted cash of $0.2 million. These capital expenditures consisted primarily of computer and test equipment and software purchases.

Our investing activities provided cash of $3.4 million in 2005 primarily due to the net sale of marketable securities of $9.8 million which were partially offset by the net payments of $4.1 million made in connection with our acquisition of Jülich and purchases of property, plant and equipment of $2.0 million to support growth in our business. The capital expenditures consisted primarily of computer and test equipment and software purchases.

Financing Activities

Our financing activities provided cash of $68.4 million in 2007. The primary source of these funds was the issuance and sale of approximately 6.1 million shares of Series E preferred stock and the exercise of warrants to purchase approximately 0.4 million shares of Series D preferred stock, for an aggregate net consideration of $54.8 million from various investors. We also borrowed a net amount of $14.7 million under a new loan and security agreement with General Electric Capital Corporation and Oxford Finance Corporation, which commenced in September 2007. The loan and security agreement provides for $15.0 million in borrowings, and is secured by certain assets and bears interest at 9.4% per annum. The loan is to be repaid over 42 months, from the date of funding, through monthly cash payments of principal and interest following six months of interest only payments. The loan and security agreement contains financial and non-financial covenants. As of December 31, 2007, we were in compliance with the covenants under the agreement.

Our financing activities provided cash of $39.7 million in 2006 mostly through the issuance of 10.1 million shares of Series D preferred stock for a net amount of $35.5 million, and $4.2 million from a bridge financing agreement. The balance from the bridge financing plus accrued interest thereon was converted into shares of Series D preferred stock in August 2006.

Our financing activities provided cash of $1.0 million in 2005, principally from net borrowings under new and existing credit facilities.

Contractual Obligations and Commitments

The following summarizes the future commitments arising from our contractual obligations at December 31, 2007 (in thousands):

 

     Total    2008    2009    2010    2011    2012 and
beyond

Loans payable

   $ 21,316    $ 6,098    $ 6,255    $ 5,980    $ 2,983    $

Lines of credit

     217      217                    

Capital leases

     165      80      67      18          

Operating leases

     11,723      2,591      3,064      2,943      1,553      1,572
                                         

Total

   $ 33,421    $ 8,986    $ 9,386    $ 8,941    $ 4,536    $ 1,572
                                         

The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases primarily relates to our leased facilities in Redwood City, California, and Jülich, Germany.

 

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Off-Balance Sheet Arrangements

As of December 31, 2007, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We currently do not expect our adoption of SFAS 157 to have a significant impact on our consolidated results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115, or SFAS 159. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. This statement does not establish requirements for recognizing and measuring dividend income, interest income or interest expense. SFAS 159 is effective for periods beginning after November 15, 2008. We are currently reviewing this new standard to determine the effects, if any, on our consolidated results of operations or financial position.

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Agreements, or EITF 07-1, which defines collaborative agreements as contractual arrangements that involve a joint operating activity. These arrangements involve two or more parties who are both active participants in the activity and that are exposed to significant risks and rewards dependent on the commercial success of the activity. EITF 07-1 provides that a company should report the effects of adoption as a change in accounting principle through retrospective application to all periods and requires the parties to determine who is the principal party of an arrangement, and therefore the party to report revenues and expenses under the collaboration as well as specific additional disclosures on a company’s financial statements. EITF 07-1 is effective for periods beginning after December 15, 2008. We are currently reviewing this new standard to determine the effects, if any, on our consolidated results of operations or financial position.

In June 2007, the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, or EITF 07-3. EITF 07-3 provides clarification surrounding the accounting for nonrefundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. EITF 07-3 is effective for interim and annual reporting periods beginning after December 15, 2007. EITF 07-3 is effective for periods beginning after December 15, 2007. We currently do not expect our adoption of EITF 07-3 to have a significant impact on our consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or SFAS 141(R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for periods beginning after December 15, 2008. We are currently evaluating the

 

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potential impact of the adoption of SFAS 141(R) on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, or SFAS 160. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for periods beginning after December 15, 2008. We are currently evaluating the potential impact of the adoption of SFAS 160 on our consolidated financial position, results of operations or cash flows.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

We had unrestricted cash, cash equivalents and marketable securities totaling $32.2 million and $84.1 million at December 31, 2006 and 2007, respectively. These amounts were invested primarily in money market funds, commercial paper, corporate debt obligations, asset-backed securities, and U.S. government debt securities and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have material exposure to changes in the fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates fell by 10% in 2007, our interest income would have declined approximately $137,000, assuming consistent investment levels.

Our loan and security agreement with General Electric Capital Corporation and Oxford Finance Corporation provides for a fixed rate of interest, and therefore is not subject to fluctuations in market interest rates.

Foreign Currency Risk

As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. For example, we operate a research facility in Singapore at which we purchase materials for that facility and pay our employees at that facility in Singapore dollars. In addition, we purchase products for resale in the United States from foreign companies and have agreed to pay them in currencies other than the U.S. dollar. As a result, our expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses increase when translated into U.S. dollars. Although it is possible to do so, we have not hedged our foreign currency since the exposure has not been material to our historical operating results. Although substantially all of our sales are denominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products outside the U.S. The effect of a 10% adverse change in exchange rates on foreign denominated receivables as of December 31, 2007, would have been a $0.3 million foreign exchange loss recognized as a component of interest and other expenses of our consolidated statement of operations. We may consider hedging our foreign currency as we continue to expand internationally.

Controls and Procedures

In connection with the audit of our consolidated financial statements for 2005, 2006 and 2007, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal

 

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control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness comprises (i) our lack of policies and procedures, with the associated internal controls, to appropriately address complex, non-routine transactions and (ii) the lack of a sufficient number of qualified personnel to timely account for such transactions in accordance with U.S. generally accepted accounting principles.

The following issues were identified during the audit, and collectively gave rise to the conclusion that we had an underlying material weakness:

 

   

we had inadequate policies to address the increasingly complex revenue arrangements that we enter into, which resulted in our improper assessment of the applicability of gross versus net accounting in two complex transactions;

 

   

while we had fairly valued our common stock for purposes of establishing exercise prices for stock options throughout the audited periods, we did not correctly and timely identify all data required to properly evaluate the accounting impact of stock option grants made to employees and consultants and did not recognize all requirements under applicable accounting standards;

 

   

in connection with two acquisitions, we did not identify pre-existing accounting issues and control deficiencies at the acquired companies and failed to conduct a post-acquisition integration process that effectively standardized reporting or identified these pre-existing issues, and we failed to identify and correct an erroneous pre-acquisition assessment of the fair value of tangible assets, including equipment and inventory;

 

   

we improperly recorded foreign currency cumulative translation adjustments, resulting in part from our selection of the incorrect functional currency for one of our foreign subsidiaries; and

 

   

we did not have in place an effective inventory management process with adequate controls over management of inventory quantities and valuation, which primarily related to the segregation of research and development materials from commercial inventories.

These deficiencies in the design and operation of our internal controls resulted in the recording of numerous audit adjustments, and significantly delayed our financial statement close process, for the three year period ended December 31, 2007. We have not yet been able to remediate this material weakness. However, we have taken initial remediation steps including hiring technical accounting and SEC reporting managers in 2008 as well as contracting with a technical accounting advisory firm. We plan to take significant additional steps intended to remediate this material weakness, primarily through the hiring of additional accounting and finance personnel, and the development and implementation of formal policies, improved processes and documented procedures. We cannot currently estimate the specific time frame needed to remediate this material weakness. In addition, we expect to incur significant incremental costs associated with this remediation, primarily due to the hiring of additional accounting and finance personnel, the retention of third-party experts and contractors, and the procurement, implementation and validation of robust accounting and financial reporting systems. If we fail to enhance our internal control over financial reporting to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or exchange regulations. We will be required to meet the requirements of Section 404 of the Sarbanes-Oxley Act beginning with our fiscal year ending December 31, 2009. The remedial actions that we plan to take will be subject to continued management review, supported by confirmation and testing, as well as audit committee oversight. While we expect to remediate this material weakness, we cannot assure you that we will be able to do so in a timely manner, if at all, or that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered, which could impair our ability to report our financial position, results of operations or cash flows in an accurate or timely manner.

 

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BUSINESS

Company Overview

We are a leading developer of proprietary biocatalysts that we believe have the potential to revolutionize chemistry-based manufacturing processes across a variety of industries. We have already demonstrated commercial success in the pharmaceutical industry, and we currently have a research collaboration with Shell to apply our technology platform to the biofuels market. We are pursuing funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals.

Biocatalysts are enzymes or microbes that catalyze chemical reactions that can enable the production of products used in everyday life. Our proprietary technology platform allows us to rapidly evolve and optimize biocatalysts to perform specific and desired chemical reactions for commercial scale industrial applications.

We have focused our biocatalyst development efforts on large and rapidly growing markets, including pharmaceuticals and biofuels. We have enabled biocatalyst-based commercial scale drug manufacturing processes and delivered biocatalysts and drug products to some of the world’s leading pharmaceutical companies. Our pharmaceutical customers have included Arch Pharmalabs Limited, Bristol-Myers Squibb Co., Dr. Reddy’s Laboratories Ltd., Merck & Co., Inc., Pfizer Inc., Ranbaxy Laboratories Limited, Schering-Plough Corporation and Teva Pharmaceutical Industries Ltd. In 2007, after exceeding performance targets under an initial one-year research agreement, we entered into a new, five-year collaborative research agreement with Shell to develop biocatalysts for use in producing biofuels from renewable sources of sustainable non-food plant materials, commonly known as cellulosic biomass.

Our management team has decades of operating experience and technical expertise across several different industries, including the pharmaceutical and bioindustrial markets. Our investors include leading global companies in several different markets, including Shell, Chevron Corporation, Pfizer and The General Electric Company.

The Biocatalysis Opportunity — Industry Overview

Biocatalysts have the potential to revolutionize conventional chemistry-based manufacturing processes across a variety of industries. Many industries, from pharmaceuticals to energy to chemicals, use manufacturing processes dependent upon conventional chemical reactions. Biocatalysts can enable superior manufacturing process alternatives to conventional chemistry-based approaches.

While conventional chemistry dominates manufacturing today, this approach has several drawbacks. Conventional chemistry-based manufacturing often requires highly complex, energy-intensive processes that use extreme environments in terms of temperature and pressure, as well as hazardous reagents to effect chemical reactions. These processes often require equipment that is expensive to build and operate, and frequently generate high volumes of waste, some of it hazardous to health and the environment, that must be treated, contained and disposed of. Biocatalyst enabled manufacturing processes are able to address a number of these drawbacks of conventional chemistry-based manufacturing. For example, biocatalysts can operate at or near room temperature and pressure and often use manufacturing equipment that is less complex and less expensive to build and operate. Biocatalyst-enabled processes can produce the same or higher quality products than conventional chemistry-based manufacturing, while reducing the risks associated with extreme manufacturing environments without generating nearly the same level of waste.

Despite their potentially significant advantages, naturally occurring biocatalysts have not achieved their full potential in industrial applications. Naturally occurring biocatalysts are often not stable enough to be used in industrial settings, where conditions may differ significantly from those in the biocatalysts’ natural environments. The activity and productivity of these biocatalysts is also often too limited to be cost-

 

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effective in commercial scale manufacturing. In addition, the activity of natural biocatalysts are typically inhibited by the end product of the reactions they facilitate. This characteristic of natural biocatalysts, which is referred to as product inhibition, results in limited product yields in industrial settings. Moreover, for certain industrial applications there are no known naturally occurring biocatalysts that catalyze the relevant reaction.

Because of these limitations, naturally occurring biocatalysts often require alteration of their composition in order to perform adequately under industrial manufacturing conditions or at productivity levels that would make their use in commercial scale applications economical. Some companies and researchers have tried to improve the performance of naturally occurring biocatalysts or even produce novel biocatalysts by directing their evolution through biotechnology techniques such as the random mutation of genes in an effort to randomly find a biocatalyst having the desired characteristics. However, these early biotechnology techniques have had only limited success. For example, many of these techniques do not identify and remove mutations that exhibit undesirable characteristics. The end result is an evolved biocatalyst that may have some desired characteristics, but may also have undesirable characteristics. As a result, we believe there is a significant opportunity for novel technologies that address the limitations of naturally occurring biocatalysts as well as the limitations of other biotechnology techniques.

Our Approach to Biocatalysis

Our proprietary technology platform has the potential to dramatically transform the commercial and industrial application of biocatalysts. We believe we can use our technology platform to improve industrially relevant characteristics of any biocatalyst, including reduced product inhibition and improved stability, activity, product yield, and tolerance to industrial conditions. In addition, we can develop and optimize biocatalysts much more quickly than alternative approaches. Perhaps most importantly, we believe that our technology platform can enable the production of products that are currently impossible to economically produce at commercial scale.

Our proprietary technology platform uses advanced biotechnology methods, bioinformatics and years of accumulated know-how to significantly expedite the process of developing optimized biocatalysts. Key components of our technology platform include:

 

   

Gene shuffling — we use our gene shuffling technology to manipulate the genetic code for a biocatalyst to obtain improved industrially relevant characteristics. Starting with a diverse set of genes with various characteristics, we recombine, or shuffle, these gene sequences to produce new variants of the enzyme.

 

   

Whole Genome Shuffling — we use Whole Genome Shuffling to manipulate the genome of a microbe to obtain improved industrially relevant characteristics. Starting with mutational variants of the microbe, we recombine, or shuffle their genomes, to produce new microbe variants. We use protoplast fusion, which fuses two or more cells into one cell, followed by regeneration of normal cells, causing shuffling of their genomes.

 

   

High-throughput screening methods — we evaluate our biocatalyst libraries of mutated genes or microbes produced by gene shuffling and identify variant biocatalysts that exhibit improved characteristics under conditions that resemble the desired manufacturing process. These improved variants can then be put through the process, and new mutations can be tested, until a highly efficient biocatalyst is produced that meets or exceeds targeted performance characteristics.

 

   

ProSAR — we use bioinformatic software tools that allow us to quantify the effect of specific mutations in an improved biocatalyst variant. The ability of ProSAR to identify and quantify the potential value of beneficial mutations alongside detrimental mutations is, we believe, a distinguishing factor of our technology platform.

 

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Experience and accumulated knowledge — we have significant experience and accumulated knowledge in applying all of these methods and tools, which we believe significantly enhances our technology advantage.

In the pharmaceutical market, we have used our technology platform to significantly improve commercial scale drug manufacturing processes and to produce and deliver products to both innovator pharmaceutical manufacturers, who produce patented drugs, and generic pharmaceutical companies. These customers have used our processes and products to reduce their costs, simplify their production processes, decrease their environmental impact and increase their efficiency and product yield.

For example, we have developed four enzymes that enabled significant improvements in the manufacturing process for a key intermediate used in the production of atorvastatin, which is the active pharmaceutical ingredient, or API, in Lipitor, the world’s best-selling prescription drug. Manufacturers have historically used a complex, expensive, capital intensive and hazardous chemistry-based process to produce this key intermediate, called ATS-8. As a result, they have long sought alternate ways to make the drug, including through enzymes. However, none of the naturally occurring enzymes that we tested showed the required activity and stability necessary to manufacture ATS-8. Using our technology platform, we were able to significantly improve the activity and stability of a number of these naturally occurring enzymes. In one case, we increased the performance of one of these enzymes, which previously showed less than 1% of the required activity and stability, to improve the performance of the biocatalytic reaction by approximately 4,000 times. With the improved enzymes, we were able to replace several steps in the conventional manufacturing process. While one of those steps required temperatures below at least -70 degrees Celsius, our process runs at or near room temperature and eliminates the need for expensive and energy intensive cryogenic equipment. Our process also greatly reduces the waste generated by the conventional chemistry-based processes and generates a biodegradable waste from two of the steps. In addition, the conventional chemistry-based process produces an impurity that is costly to eliminate, and which reduces valuable product yield. Our process, on the other hand, produces products with a purity level that eliminates the need for the purification step, resulting in additional cost savings and higher product yields. In 2006, we received a Presidential Green Chemistry Challenge Award from the United States Environmental Protection Agency for our development of two biocatalytic steps for ATS-8.

More recently, we have begun to explore the potential of our technology platform in the biofuels market with Shell. In 2007, after exceeding performance targets under an initial one-year research agreement, we entered into a five-year collaborative research agreement with Shell to develop biocatalysts for use in producing biofuels from renewable sources of sustainable non-food plant materials, commonly known as cellulosic biomass. We believe that there may be significant commercial opportunities for us to pursue funded collaborations in several other bioindustrial markets, including in carbon management, water treatment and chemicals.

Competitive Strengths

Our key competitive strengths are:

Proprietary and Disruptive Technology Platform.    Our proprietary technology platform uses advanced biotechnology tools, bioinformatics and years of accumulated know-how to rapidly and systematically develop biocatalysts optimized for commercial scale industrial applications. Our technology platform is potentially disruptive because it:

 

   

often provides substantial advantages over conventional chemistry, enabling processes that are less complex, expensive, capital-intensive and hazardous, and more efficient in terms of energy, materials use and product yield;

 

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has substantial advantages over processes using naturally occurring biocatalysts, allowing us to quickly develop biocatalysts which are stable and generate the desired activity and product yields at commercial scale; and

 

   

enables the development of optimized biocatalysts with improved performance characteristics that are rarely present in naturally occurring biocatalysts or other currently available technologies, potentially including the production of a commercially viable non-ethanol biofuel alternative to petroleum-based fuels.

Multiple Major Target Markets.    We believe we can apply our technology platform to exploit significant commercial opportunities in a number of major and growing markets. We currently use our technology platform to produce biocatalysts that are used at commercial scale in both the generic and innovator pharmaceutical markets. We are working with Shell to develop biocatalysts for use in producing biofuels from cellulosic biomass sources. We also are pursuing funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals.

Partnerships with Global Industry Leaders.    We believe that our strategic collaborations and partnerships with leading pharmaceutical companies validate our technology platform, and will enable us to maximize the potential of our technology. We have delivered drug manufacturing processes, or products that we have made with them, to leading manufacturers of branded pharmaceuticals, including Merck, Pfizer and Schering-Plough, and generic pharmaceutical companies, including Arch. In biofuels, after an initial one-year research agreement in which we exceeded performance targets, we entered into a new, five-year collaborative research agreement with Shell, an affiliate company of one of the leading global energy companies and one of the world’s largest distributors of biofuels, to develop biocatalysts for use in producing commercially viable fuels made from cellulosic biomass.

Capital-Efficient Business Model.    We have adopted a business model that leverages our collaborators’ engineering, manufacturing and commercial expertise, their distribution infrastructure and their ability to fund commercial scale production facilities. In the pharmaceuticals market, we are working with Arch, a leading independent producer of intermediates and generic APIs in India, where they manufacture intermediates produced using our proprietary biocatalysts for sale in the generic marketplace. In our biofuels research collaboration with Shell, we are developing biocatalysts that can be used to produce fuels from cellulosic biomass. If we are successful in these efforts and Shell decides to commercialize biofuels products resulting from our research collaboration, we will need to rely on Shell to design and build the production facilities to scale the technology to commercial volumes, and distribute the final fuel product through its worldwide distribution system. If our collaborators choose to utilize our technology to commercialize new products, this capital-efficient business model will allow us to expand into new markets without having to finance or operate large industrial facilities. This model also allows us to focus our efforts on what we do best: applying our proprietary technology platform to new opportunities.

Diversified and Visible Revenue Base.    Our revenue stream is diversified across various industries, which should mitigate our exposure to cyclical downturns or regional fluctuations in any one market. Our 2007 revenues were derived from the innovator and generic pharmaceuticals and biofuels markets, and consisted primarily of collaborative research and development revenues, product sales and government grants. Revenues from our expected sales of generic intermediates and APIs, as well as the revenues that we expect to recognize from our five-year biofuels collaborative research agreement with Shell, should provide a high degree of visibility into our aggregate revenues for the foreseeable future. We intend to further diversify our revenue by pursuing funded collaborations in other bioindustrial markets, such as carbon management, water treatment and chemicals.

 

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Strategy

Our objective is to be the leading provider of optimized biocatalytic solutions across a wide range of industries. Key elements of our strategy are as follows:

Expand into new bioindustrial markets.    We believe that we can deploy our technology platform to transform manufacturing processes throughout various bioindustrial markets. We have a research collaboration with Shell to develop biocatalysts for use in producing commercially viable fuels from cellulosic biomass. We will have the right to use the intellectual property developed in this collaboration in all fields other than fuels and related products. We intend to leverage our intellectual property developed under this research collaboration to pursue other funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals.

Continue growing our pharmaceutical business.    Beginning in 2008, we plan to launch several new intermediates and APIs for the generic equivalents of branded pharmaceutical products including Singulair, Nexium and Crestor. We will also continue to aggressively market our Codex Biocatalyst Panels to pharmaceutical companies to demonstrate the capabilities of our technology platform in an effort to integrate our products and services earlier and more deeply into drug development and manufacturing processes.

Enter into additional strategic collaborations.    We have grown our business by collaborating with market leaders that have helped fund the development and application of our technology platform in the pharmaceutical and biofuels markets. Our collaborators have provided us access to marketplace expertise, industrial infrastructure, engineering capabilities and capital resources. We are pursuing additional collaborations that will allow us to continue to leverage our collaborators’ competitive strengths and financial resources in our target markets.

Continue enhancing our technology platform.    We intend to continue to advance our technology platform by continued investment in our research and development capabilities. To date, our most significant advances have come in the area of our gene shuffling technology for enzyme applications. We are expanding our capabilities in microbe development by metabolic engineering, synthetic biology and Whole Genome Shuffling. We also intend to further increase the quality of our biocatalyst libraries to allow us to more rapidly identify products with desired characteristics. Improvements in either of these areas can be applied in the development of new products in our current and target markets.

Further develop our supply chain.    To increase our biocatalyst manufacturing capacity and establish secondary supply sources, we will continue to evaluate whether to invest in our own manufacturing capabilities or to establish long term supply contracts with additional contract manufacturers. We may also opportunistically seek to secure specialty manufacturing assets and expand existing relationships for the supply of our enzymes and key pharmaceutical APIs and intermediates.

Expand our business through acquisition of new technologies, products or businesses.    In the past, we have expanded our business by acquiring companies with synergistic business plans and licensing new technology. For example, we acquired Jülich Fine Chemicals in 2005 and BioCatalytics in 2007, and we licensed technology from the California Institute of Technology and from the University of California at Los Angeles. We will continue to evaluate opportunities to acquire or license new technologies, products or businesses that complement or expand our capabilities. We may pursue licensing and acquisition opportunities in the carbon management, water treatment and chemical markets as we seek to expand into these markets.

 

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Pharmaceutical Market Opportunity

Industry Overview

The pharmaceutical industry represents a significant market opportunity for us. In 2006, according to IMS Health, global spending on prescription drugs exceeded $600 billion. The pharmaceutical market can be divided into two categories: patent-protected, or branded drugs, and generic drugs which are not patent protected. We refer to companies that focus on the research, development and commercialization of branded drugs as innovators.

Both innovator and generic companies are under significant pressure to reduce manufacturing costs. In the regulated markets, or markets that provide effective patent protection, innovators enjoy a period of premium pricing protected by their patents and have historically been less concerned about their manufacturing costs. As a result, innovators often implement expensive, inefficient manufacturing processes early in the lifecycles of their products, only to find later that costs become more critical as operating margins decrease across their product portfolios. Once an innovator’s patents in a regulated market expire, generic drugs can enter the market, and pricing rapidly drops to a small fraction of the innovator’s branded pricing. The number of products losing patent protection has grown rapidly over the last decade. According to Datamonitor, generic competition is expected to eliminate $63 billion from top innovators’ U.S. sales between 2007 and 2012 as more than three dozen drugs lose patent protection. While the generic companies have benefited from patent expirations, these companies compete primarily on price, and therefore low cost manufacturing processes are critical to their success. Prior to the expiration of patents, there are also substantial opportunities for generic manufacturers in countries that do not provide the same level of patent protection as regulated markets, which we refer to as the non-regulated markets. While these markets represent huge opportunities for generics companies, competition and the need for access to low-cost sources of intermediates and APIs are intense. Increasing pressures on innovator profitability and intense cost competition among generics manufacturers present opportunities for companies that can lower drug production costs.

Opportunities in the Innovator Market

As noted above, innovators are increasingly looking for opportunities to reduce their manufacturing costs and improve their operating margins. One cost-saving trend among innovators is outsourcing the manufacture of their APIs, as well as pharmaceutical intermediates to be converted to APIs. In addition, innovators have also invested in new technologies to improve their manufacturing productivity and efficiency. We expect the demand for products and services that reduce manufacturing costs for products at all stages of the drug lifecycle, from preclinical and clinical development through commercial scale manufacturing, will continue to increase.

Another strategy innovators can use to reduce manufacturing costs is to adopt processes that obviate the need for costly purification of their intermediates or APIs. The chemical structure of many small molecule drugs has two or more configurations, which are mirror-image arrangements of the same number and type of atoms that are not superimposable, similar to a person’s left and right hands. While the two or more configurations have the same chemical structures, there can be differences in their therapeutic safety and efficacy profiles. For example, one form of thalidomide is efficacious and safe, but the other causes horrible birth defects. To avoid developing a drug containing enantiomers with detrimental effects, pharmaceutical companies are increasingly seeking to introduce new drugs containing only the desired enantiomer. The production of the pure configurations via conventional chemistry-based processes is rarely possible. These processes typically require late-stage purification steps that reduce product yield and can significantly increase costs. Because of the high costs associated with these purification steps, significant opportunities exist for alternatives that can produce pure configurations using more efficient and less costly methods.

 

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Opportunities in the Generics Market

Generics manufacturers are also increasingly pursuing opportunities to reduce their manufacturing costs. The rise in patent expirations, as well as support by some governments for lower-cost alternatives to branded drugs, have led to strong growth in the generics industry in the regulated markets. According to IMS Health, patients currently fill over 60% of prescriptions in the United States with generic drugs. However, because generics manufacturers compete primarily on price, they are even more cost sensitive than innovators. Lower manufacturing costs for intermediates and APIs is the key factor that helps generics companies compete and win market share.

Prior to the expiration of patents on a branded drug, generics manufacturers also have significant opportunities to commercialize the generic equivalents of branded drugs in the non-regulated markets. Innovators typically do not sell their products in the non-regulated markets, because those countries either have economies that cannot support branded drug pricing or have legal systems that do not provide effective patent protection. As a result, these markets are dominated by generic products. Non-regulated countries represent some of the fastest growing pharmaceutical markets in the world. While these markets represent huge opportunities for generics companies, competition and the need for access to low-cost sources of intermediates and API is intense.

Our Solution for the Pharmaceutical Market

Our technology platform enables us to add value throughout the pharmaceutical drug lifecycle, for both innovator and generic pharmaceutical manufacturers, by improving the efficiency and productivity of manufacturing processes. We optimize and use biocatalysts that perform chemical transformations at a lower cost with more direct and clean transformations than is possible with conventional chemical reactions or naturally occurring biocatalysts.

Our technology platform allows our pharmaceutical customers to reduce their manufacturing costs by eliminating the need for late-stage purification in existing production processes, and eliminating the need for complex manufacturing equipment for drug products that have yet to reach the commercial stage. By reducing manufacturing costs, we allow innovators to increase their margins during the important period when a drug has patent protection, and we allow generics manufacturers to compete more effectively on price. We achieve these results in a number of ways, including:

 

   

reducing the use of raw materials and intermediate products;

 

   

performing reactions at or near room temperature and pressure;

 

   

using water as a primary solvent;

 

   

eliminating the need for certain costly manufacturing equipment;

 

   

reducing energy requirements; and

 

   

eliminating hazardous inputs and harmful emission by-products.

In addition, our technology platform may allow our innovator pharmaceutical customers to bring some drugs to market more rapidly increasing the useful commercial life of a patented drug after regulatory approval. We also enable our customers to improve product purity in a much more cost effective manner than is possible with traditional chemical synthesis.

Products and Services

The pharmaceutical industry product lifecycle begins with the discovery of new chemical entities and continues through preclinical and clinical development, product launch and, ultimately, patent expiration and the transition from branded to generic products. During this lifecycle, the production process for a

 

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product evolves from the preclinical development stage, when manufacturers are focused more on speed to market and safety and efficacy than cost, to the production of small batches for clinical trials, and finally to commercial scale manufacturing.

Our products and services enable us to add value throughout the drug lifecycle, from preclinical development to clinical development and commercialization. The following chart summarizes our product and service offerings and indicates the stages of the product lifecycle in which our offerings are used:

 

Product or Service   Preclinical
Development
       Clinical
Development
       Commercial
Scale
Manufacturing
    

Codex Biocatalyst Panels

  ü       ü            

Biocatalyst Screening Services

  ü       ü            

Biocatalyst Optimization Services

  ü       ü       ü    

Biocatalysts

  ü       ü       ü    

Intermediates

          ü       ü    

Codex Biocatalyst Panels.    We sell Codex Biocatalyst Panels to customers who are engaged in preclinical and clinical drug development to allow them to screen and identify possible biocatalytic manufacturing processes for their drug candidates. Our Codex Biocatalyst Panels are plates embedded with genetically diverse variants of our proprietary biocatalysts, which allow our customers to determine whether a biocatalyst produces a desired activity that is applicable to a particular process.

Our Codex Biocatalyst Panels:

 

   

allow innovators to rapidly and inexpensively screen and identify possible biocatalytic manufacturing processes for many of their drug candidates in-house, without the risks of disclosing the composition of their proprietary molecules before they have received patent protection; and

 

   

generate data that we can use to rapidly optimize biocatalysts for a particular reaction, if necessary, reducing the time required to generate a manufacturing process capable of supporting clinical trials with inexpensively produced, pure drugs.

We believe that our Codex Biocatalyst Panels will help build early and broad awareness of the power and utility of our technology platform, and will lead to further sales of our biocatalyst optimization services and biocatalysts. If our customers incorporate a biocatalytic manufacturing process early in a product’s lifecycle, they can reduce their manufacturing costs throughout that lifecycle, and we can increase our potential revenue if our technology is used throughout the lifecycle of the product. For example, Merck, a leading pharmaceutical innovator, was the first customer for our Codex Biocatalyst Panels and, while conventional manufacturing process development for clinical supplies can require months, Merck used our Codex Biocatalyst Panels to move from initial screening to generating the first kilogram quantities of biocatalyst in a matter of weeks. After determining that biocatalysts in our panels showed initial activity against their product pipeline and portfolio, Merck purchased biocatalyst optimization services and biocatalysts from us.

Biocatalyst screening services.    If a customers prefers, rather than subscribing to our Codex Biocatalyst Panels to use for their own screening, they can send us their materials to test against our existing libraries of biocatalysts. If we detect desired activity in a specific biocatalyst, we can supply the customer with this biocatalyst or perform optimization services to improve the performance of the biocatalyst.

Our screening services:

 

   

allow innovators to rapidly and inexpensively screen and identify possible biocatalytic manufacturing processes through access to our extensive biocatalyst libraries; and

 

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generate data that we can use to rapidly optimize biocatalysts for a particular reaction, if necessary, reducing the time required to generate a manufacturing process capable of supporting clinical trials with inexpensively produced, pure drugs.

We have provided screening services to numerous innovator and generic pharmaceutical manufacturers.

Biocatalyst optimization services.    We work with our innovator customers during preclinical and clinical development to customize proprietary biocatalysts, resulting in optimized biocatalysts that have been evolved specifically to perform a desired process according to a highly selective set of specifications.

Our biocatalyst optimization services:

 

   

allow innovators to improve the manufacturing process as their drug candidates progress through preclinical and clinical development, deferring or reducing the need for significant manufacturing investment until the likelihood of commercial success is more certain; and

 

   

enable manufacturing processes that are highly efficient, inexpensive, require relatively little energy, reduce the need for hazardous reagents, and reduce waste. For example, our activities with Pfizer have included developing an optimized biocatalytic manufacturing process for a key intermediate that eliminates three chemical steps.

Once an innovator uses our processes in later stages of the manufacturing process for its Phase III clinical trials, it must continue to use the same process for commercial launch unless it receives approval from the U.S. Food and Drug Administration, or FDA, to change its manufacturing process, which is typically cost- and risk-prohibitive. Accordingly, once an innovator incorporates our products or processes into a product in Phase III clinical trials, if it receives FDA approval and is launched, we expect to enjoy relatively predictable and significant revenue for the patent life of the approved drug.

Biocatalysts.    We supply varying quantities of our proprietary biocatalysts to pharmaceutical companies, from small to moderate quantities while they are optimizing their production processes, to larger quantities during later-stage clinical development and commercial scale drug production. For example, we have supplied Merck with enzymes for the manufacture of several intermediates for drug candidates at various stages of clinical development.

Our biocatalysts:

 

   

enable innovators to manufacture products more efficiently during preclinical and clinical development using optimized biocatalytic processes, with relatively low investment;

 

   

eliminate the need for innovators to invest in the development of complex chemical synthesis routes during the development stage;

 

   

allow innovators to achieve higher product purity during the development stage prior to investing in expensive late-stage clinical trials;

 

   

reduce the risk of adverse effects arising from impurities; and

 

   

allow the removal of entire steps from synthetic chemical production routes during commercial scale production, reducing raw material costs, energy requirements and the need for capital expenditures.

Intermediates and APIs.    We can supply intermediates and APIs to our customers throughout the drug lifecycle.

Our supply of intermediates have the following uses and benefits:

 

   

lowers capital investment for innovators through outsourcing of manufacturing; and

 

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provides a source of less expensive, more pure products to innovator and generics manufacturers.

In the innovator market, we are preparing to supply Pfizer with significant quantities of an intermediate in the scale-up and manufacture of a product candidate for upcoming clinical trials.

We also develop and, in partnership with Arch, manufacture and sell generic intermediates in the non-regulated markets. Our biocatalysts enable us to reduce our manufacturing costs, which enables us to compete on price, a top priority in the generics market. Our generics product portfolio and pipeline includes intermediates and APIs for infectious disease, cardiovascular and central nervous system indications, with expansion planned to a number of other therapeutic categories. For example, we developed a novel process for the manufacture of two key intermediates in the production of atorvastatin. We plan to sell this intermediate to manufacturers who will market the generic version of Lipitor in the United States and Europe once the composition of matter patents for Lipitor expire in those markets.

We have a well-developed product selection process for identifying high-volume intermediates and APIs for the generics market that we believe will enjoy the most dramatic cost savings from the application of our technology platform. This selection process is a cross-disciplinary effort, involving input from personnel in our research, marketing and operations departments, which has allowed us to establish a robust pipeline of generic intermediates and APIs. Starting in 2008, we plan to launch several new intermediates and APIs in non-regulated markets for purchase by manufacturers of generic forms of drugs, whose branded equivalents are extremely profitable in the regulated markets. We plan to launch these same intermediates and APIs in the regulated markets when the patent protection for each branded equivalent drug product expires. To help increase our product pipeline, we established in 2008 a research and development center in Hungary for microbe improvement and fermentation development. We expect that this enhanced capability will allow us to launch new pharmaceutical products through fermentation, such as antibiotics.

The following table is a representative list of some of the products for which we sell or plan to sell generic intermediates or APIs:

 

Generic Name   Brand Name        Indication        Our Product        Non-regulated
Market
Launch Date
       Expected
Regulated
Market
Launch Date
    
atorvastatin   Lipitor        lowers
cholesterol
       intermediate        2006        2012     
levetiracetam   Keppra        anti-seizure        API        2008*        2010     
duloxetine   Cymbalta        anti-depressant        API        2008*        2013     
montelukast   Singulair        asthma/allergies        intermediate        2008*        2013     
esomeprazole   Nexium        ulcers        API        2009*        2015     
rosuvastatin   Crestor        lowers
cholesterol
       API        2009*        2015     

 

(*) Expected launch date.

Biofuels Market Opportunity

Industry Overview — Need for Petroleum Replacement

The world currently depends on petroleum to help fuel growth, both in the transportation market and as a key ingredient in many everyday products. However, underlying economic, political and environmental concerns surrounding petroleum have increased the desire to find renewable alternatives to this limited commodity.

 

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Demand for petroleum is increasing.    The United States, Europe and Japan have historically been the major consumers of petroleum. Developing economies such as India and China are all experiencing tremendous levels of economic growth. China and India alone last year saw GDP growth rates estimated at 11.4% and 8.5%, respectively. This economic growth has created new sources of demand for petroleum. Since 1998, China, India and the Middle East accounted for 51% of the global oil demand growth, with the United States, Europe and Japan only accounting for 16% of global growth over the same period.

 

   

Dependence on imported petroleum.    According to the U.S. Energy Information Association, or EIA, in 2006, the top five net oil exporting countries in the world were Saudi Arabia, Russia, the United Arab Emirates, Norway and Iran. The political and economic instability in some of these countries and their surrounding regions adds further uncertainty to the supply of oil. As a result, countries that have been net importers of oil are beginning to pursue approaches that provide for greater independence from these suppliers.

 

   

New petroleum reserves more expensive to develop.    The cost to replace known reserves is increasing significantly. Petroleum companies are now developing fields in the deep waters of the Gulf of Mexico and in the tar sands in Canada that previously would have not been economically attractive to exploit.

 

   

Rising petroleum prices.    Worldwide petroleum prices in dollars have risen 242% over the last five years, from $29.03 per barrel at the beginning of January 2003, to $99.32 per barrel at the end of March 2008, according to the EIA. Inflation-adjusted prices for petroleum have recently reached a new record, exceeding the prices reached in the 1973 oil crisis.

 

   

Limited supply of petroleum.    Growth in demand for petroleum has outpaced growth in supply. The supply growth has come mostly from non-OPEC producing countries, in particular Russia. However, this growth is expected to flatten. While OPEC producing countries may have the reserves, political instability in these regions has hindered their ability to increase production levels as well.

 

   

Environmental concerns.    Environmental concerns over the by-products of petroleum consumption, including greenhouse gas emissions, have led to a global search for environmentally friendly solutions to the world’s growing fuel needs.

Industry Challenges and Opportunities

According to the EIA, of the 86 million barrels per day of global petroleum demand in 2006, approximately 45% was refined into gasoline for use in automobiles. There is enormous potential to replace a substantial portion of petroleum-based liquid transportation fuels with high-quality, energy-rich fuels produced through biocatalytic transformation of renewable carbon sources. For instance, in 2007, the U.S. Congress passed an alternative fuels mandate that calls for 9 billion gallons of liquid transportation fuels sold in 2008 to come from alternative sources, including biofuels, a mandate that grows to 36 billion gallons by 2022. First generation biofuels manufacturers use biocatalysts to produce biofuels such as ethanol and biodiesel at commercial scale. However, these fuels do not provide an optimal solution to the petroleum dependence problem for a number of reasons, including:

 

   

high exposure to rising commodity and energy prices;

 

   

increases in food and animal feed prices resulting from the diversion of food crops, such as corn and soybeans, to fuel production;

 

   

ethical issues associated with diverting food crops and fertile acreage to fuel production; and

 

   

energy inefficiency of production, due to the large amount of fertilizer, labor and equipment required to grow food crops and the energy required to produce biofuels from food crops.

 

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Because of the limitations of first generation biofuels, many companies are now working to make fuels from cellulosic biomass rather than from commercial food crops. Cellulosic biomass is found in virtually all plant material, including sustainable non-food crops such as switch grass and wood chips, and agricultural plant wastes such as corn stover and sugar cane bagasse. Cellulosic biomass is comprised of, among other things, cellulose and hemi-cellulose, which are long chains of five and six carbon sugars that are linked together. To access these sugars, biofuels producers break apart cellulosic materials such as wood chips or grasses through a variety of processes that help to expose the hemicelluloses and cellulose to agents that break them down. Once exposed, these long chains can be broken down into individual sugar units which can be transformed into fuels.

While fuels produced from cellulosic biomass would represent significant advances over first generation biofuels, there have been several challenges in their development. These challenges include converting cellulose and hemicellulose into sugar, which is a more complicated process than converting corn starch and sugarcane into sugar. Solving those challenges will require cellulosic biofuels manufacturers to develop innovative, robust biocatalysts that will have greater product yield and be more cost efficient, and will react quickly and sustainably under optimal conditions. To date, no companies have successfully done this economically and at commercial scale.

Even if effective methods to produce ethanol and biodiesel from cellulosic biomass are found, these methods will not be able to overcome all of the limitations of ethanol and biodiesel, including:

 

   

engine and fuel system modifications that may be required to utilize biofuels in ground and air transportation;

 

   

the limited energy content of ethanol, which has only about 70% of the energy content of a gallon of gasoline, resulting in lower miles per gallon; and

 

   

the inability to use existing gasoline distribution infrastructure to transport and dispense high concentration ethanol.

We believe that the use of biocatalysis to transform cellulosic biomass into biofuels with performance characteristics similar to current petroleum-based gasoline could address the limitations of alcohol-based fuels and could ultimately transform the liquid transportation fuels industry.

Our Solutions for the Biofuels Market

We believe that our technology platform may enable the development of biocatalysts that can be used to produce commercially viable non-ethanol biofuel alternatives to petroleum-based fuels from cellulosic biomass. As we work on this long term goal, we also intend to work on the conversion of biomass to sugars, which could be used for near term opportunities such as cellulosic ethanol.

Leveraging the knowledge and expertise we have gained through our success in the pharmaceutical market, we believe that our technology platform will enable the development of a manufacturing process for cellulosic biofuels that:

 

   

minimizes the costs associated with next generation biofuels by eliminating exposure to volatile commodity prices;

 

   

does not rely on diverting food resources for the production of biofuels;

 

   

uses biomass that can be grown on acreage that is not suitable for the production of food;

 

   

increases the speed at which biomass is converted into biofuels;

 

   

increases the product yield of biofuels produced from cellulosic biomass;

 

   

provides producers with more flexibility in designing processes to convert cellulosic biomass to biofuels, thereby reducing the costs associated with designing and running production facilities; and

 

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enables the production of new types of cellulosic biofuels that could be alternatives to petroleum-based fuels rather than supplements to them.

In November 2006, we entered into an initial research agreement with Shell, an affiliate company of one of the leading global energy companies and one of the world’s largest distributors of biofuels. After exceeding the performance targets of this initial project, we entered into a new, five-year collaborative research agreement in November 2007. During the term of this collaborative research agreement, we will work exclusively with Shell on the conversion of cellulosic biomass into fuels.

Under the terms of our collaborative research agreement, we own all intellectual property developed under the research collaboration and have granted Shell exclusive license rights to use the intellectual property in the manufacture of fuels and related products. We retain all rights to use the intellectual property developed in the research collaboration in all areas outside of the collaboration. If Shell commercializes fuels, or related products that result from this research collaboration, we will receive production-based royalties.

Our research collaboration is focused on the development of biocatalysts for use in producing commercially viable fuels from cellulosic biomass, which Shell will have the right, but not the obligation, to commercialize. We are not aware of any naturally occurring biocatalysts that enable the commercial manufacture of cellulosic biofuels. Therefore, we are using our technology platform to try to develop novel enzymes that will economically enable the conversion of cellulosic biomass to sugar and microbes that will enable the conversion of sugars into optimal biofuels, going beyond alcohols and their limitations. If we produce these biocatalysts, we will work to improve their characteristics and the economics of the process. Ultimately, we believe we can use our technology platform to develop a suite of biocatalysts robust enough to convert a wide variety of biomass sources found throughout the world into fuels.

If Shell chooses to commercialize any biofuels products developed through our collaboration, we believe that Shell has the resources and the infrastructure to commercialize the products that we may develop on a global scale. If this were to occur, the combination of our technology platform with Shell’s global manufacturing and distribution network could provide a complete “field to wheels” solution, from securing reliable sources of cellulosic biomass, to converting that biomass into biofuels, to delivery and distribution of refined biofuels to consumers at the pump.

Additional Bioindustrial Opportunities

We are pursuing funded collaborations in several other bioindustrial markets, including carbon management, water treatment and chemicals. We believe that our technology platform, together with the knowledge and experience gained from our efforts in the pharmaceutical market and in our biofuels research program, will allow us to capitalize on these opportunities. We will target collaborators that are industry leaders, allowing us to leverage their competitive strengths and resources in pursuit of these opportunities.

Carbon management

According to the EIA, the global emission level of carbon dioxide is projected to rise from 27 billion metric tons in 2004 to 34 billion metric tons in 2015 and 43 billion metric tons in 2030. Of the approximately six billion tons of carbon dioxide generated by the United States alone each year, approximately 39% is produced by the electric power industry. Furthermore, the share of global carbon dioxide emissions by the electric power industry could potentially increase in the future as growing demand for power increases alongside an exponentially growing population. By 2030, the EIA estimates, China and India will account for 31% of the world’s carbon dioxide emissions, driven largely by their use of coal in generating electricity. As such, the need for an environmentally viable method to manage carbon dioxide emissions represents a significant opportunity.

 

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We are exploring opportunities to apply our technology platform to the management of carbon dioxide emissions from point sources such as coal-fired power plants. It may be possible, for example, to combine biocatalytic solutions to separate carbon dioxide from other exhaust gases and direct them to separate sequestration mechanisms.

Water Treatment

Water treatment is another example of a potential major market opportunity for novel biocatalytic solutions. According to a United Nations study published in March 2007, approximately 80% of all diseases in the developing world are caused by unsafe water and poor sanitation. In addition, many industrial manufacturing operations generate large quantities of waste water, which must be treated in order to avoid contamination of our fresh water resources and our oceans. There are many sources and types of water pollution, and when different types of pollution mix together it presents complex and challenging remediation problems downstream.

The market for biocatalysis in water treatment is in a very early stage of development. However, new interest in biocatalytic water treatment has been sparked in part by concerns about possible chemical contamination of drinking water from industrial and other sources. For example, a U.S. government report released in 2006 examined the potential of biocatalysts in the treatment of groundwater and drinking water in both civilian and military applications (including the removal of hazardous industrial chemicals, and chemical and biological warfare agents). The report concluded that biocatalyst-embedded water filters held significant promise for the treatment of agents, pesticides, or other chemical contaminants in drinking water systems, as well as for the decontamination of pipes and other equipment with contaminant residue.

Chemicals

There are also significant market opportunities in the chemical industry for companies that can help reduce or eliminate petroleum dependency, as well as costly and wasteful manufacturing processes. According to the EIA, in 2006, approximately 18% of each barrel of crude petroleum were used as the raw starting material for chemicals used in a variety of products, including carpets, upholstery, food packaging, vitamins, preservatives, paints, adhesives, inks, aspirin and a multitude of plastics and rubbers.

We believe that fermentable sugars produced from cellulosic biomass will serve as an alternate source of carbon for use in the manufacture of many chemicals. This potential market may provide an opportunity to leverage our funded work with Shell into a separate business in the non-fuels chemicals industry. In addition, our technology platform could be applied to develop biocatalytic pathways for the conversion of sugar or other feedstocks, rather than petroleum-derived hydrocarbons, into commercially important chemicals. To pursue certain opportunities in the chemicals market, we will need to license from Maxygen additional rights to apply gene shuffling technology in that market.

Strategic Collaborations

Our strategic collaborations allow us to expand into new markets and to service our existing customers, while operating our business with maximum capital efficiency. By collaborating with companies such as Arch and Shell, we are able to leverage both our technology platform and our collaborators’ strengths in production and distribution. This allows us to focus our capital on key areas such as research and development.

Arch

Arch Pharmalabs Limited, or Arch, of Mumbai, India manufactures intermediates produced using our biocatalytic processes for sale in the generic marketplace. Arch has extensive expertise in chemical process development and scale-up, and is a leading producer of intermediates and generic APIs in India.

 

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In October 2005, we entered into a technology transfer and supply agreement with Arch. Under the terms of the agreement, Arch agreed to manufacture and supply ATS-8 for us and on our behalf. We granted to Arch, under certain of our patent rights and technology, a non-exclusive, royalty-free license, with no right to grant sublicense rights, solely to manufacture ATS-8 for and on behalf of us. We also agreed to transfer technology that is necessary or useful for the manufacture of ATS-8. Arch also agreed to purchase exclusively from us quantities of certain of our enzymes and an earlier intermediate, used in the production of ATS-8, known as ATS-5, sufficient to enable Arch to fulfill our orders for ATS-8. Subsequently, we transferred our ATS-5 related technology to Arch for the sole purposes of manufacturing ATS-5 for our resale to Pfizer and others and for Arch’s use in the manufacture of ATS-8 manufactured for us and on our behalf. In 2006, we broadened our relationship with Arch by entering into an enzyme license and supply agreement, a supply agreement and a master services agreement with Arch.

Under our enzyme license and supply agreement with Arch, Arch agreed to pay us certain material transfer fees in exchange for transfer of enzymes and ATS-5 to Arch. Under the supply agreement, we agreed to pay certain manufacturing costs as well as a percentage of the profits we earn on our sales of ATS-8. Additionally, we agreed to pay Arch certain transfer fees in exchange for the transfer of ATS-8 and ATS-5 by Arch to us or on our behalf. We also agreed to pay Arch up to $1.5 million for certain chemical process and manufacturing method development services as Arch delivers them over the course of the master services agreement. Under our enzyme license and supply agreement with Arch, we retain rights to all intellectual property in our technology and enzymes, and Arch has assigned to us all rights in any inventions developed by Arch solely or jointly with us or with a third party prior to or during the term of the agreement that relate to our technology, our enzymes and ATS-8.

We can terminate our enzyme license and supply agreement Arch for any or no reason by providing Arch with six months written notice. Each party also has the right to terminate the agreement in the case of a breach by the other party if such breach is uncured within 45 days, and we can terminate these agreements immediately in the case of a breach by Arch of certain covenants contained in these agreements. The master services agreement will expire on August 1, 2010, and may be terminated by us for any or no reason by providing Arch with 60 days notice, or by either party in the case of a breach by the other party if such breach is uncured within 60 days.

Shell

We collaborate with Shell to develop commercially viable fuels from cellulosic biomass. If Shell decides to commercialize any biofuel products developed through our collaborative research agreement, we believe that, as an affiliate company of one of the leading global energy companies and one of the world’s largest distributors of biofuels, Shell has the resources and infrastructure to commercialize the technologies that we may develop on a global scale.

In November 2006, we entered into a research agreement with Shell. After exceeding performance targets under that agreement, we entered into a new collaboration under an amended and restated collaborative research agreement in November 2007. Under the terms of the amended and restated agreement, we agreed to use our proprietary technology platform to discover and develop biocatalysts for use in converting cellulosic biomass into biofuels and related products. We received an up-front payment of $20 million upon signing the amended and restated collaborative research agreement. We have agreed to work exclusively with Shell until November 2012 in the field of converting cellulosic biomass into fermentable sugars that can be converted into fuels and related products. However, Shell is not required to work exclusively with us, and could develop or pursue alternative technologies that it decides to use for commercialization purposes instead of the technology developed under our research collaboration. This up-front fee is refundable under certain conditions, such as a change in control in which we are acquired by a competitor of Shell. This refundability lapses ratably over a five-year period beginning November 1, 2007 on a straight-line basis.

 

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We agreed to devote to the research collaboration a number of our FTEs to be funded by Shell which will grow over time. Beginning in August 2008, Shell can elect to reduce the number of funded FTEs under certain conditions, although the number of FTEs it can reduce is limited until November 2009. We are also eligible for milestone payments upon the achievement of certain technical goals beginning in 2009, as well as additional milestones in each of the subsequent years of the agreement.

Shell purchased approximately $3.0 million of our Series D preferred stock in November 2006 and approximately $30.5 million of our Series E preferred stock in November 2007. In addition, in November 2007, Shell exercised a warrant issued in November 2006 to purchase 428,571 shares of our Series D preferred stock for $3.0 million.

Shell can terminate the amended and restated collaborative research agreement after November 1, 2009, for any or no reason by providing us with six months’ notice. We will have the right to terminate the amended and restated collaborative research agreement upon 90 days’ notice if Shell decides to fund less than a certain number of our FTEs in the performance of activities under the amended and restated collaborative research agreement. Each party also has the right to terminate the amended and restated collaborative research agreement in the case of a breach by the other party if such breach is uncured within 60 days. Each party also can terminate the amended and restated collaborative research agreement if such party believes the other party has assigned the amended and restated collaborative research agreement to a direct competitor of such party in the field of converting biomass into fermentable sugars that can be converted into fuels and related products.

Under our agreements with Shell, we retain rights to all intellectual property in our technology. While we will own all rights in any inventions arising under the research activities conducted under the amended and restated collaborative research agreement, Shell will have an exclusive license to these inventions. If we acquire technology from third parties for the purpose of these research activities, we will own the intellectual property while Shell will be granted an exclusive license in the field of use for the research and commercial use, with a right to sub-license.

In November 2006, we also entered into a license agreement with Shell, which was amended and restated in November 1, 2007. Under the terms of the amended and restated license agreement, we granted to Shell, under certain of our patent rights and technology, a worldwide, exclusive, royalty-bearing license, including the right to grant sublicenses, to manufacture, have manufactured, use, sell, offer for sale and import any product for use in the field of converting biomass into biofuels and related products.

With respect to biomass converted into sugars, Shell agreed to pay us a royalty per gallon of fuel product made from those sugars. With respect to sugars converted into fuel, Shell agreed to pay us a royalty per gallon of fuel product. In each case these royalties are contingent upon the fuel product being covered by or using our intellectual property or intellectual property that was developed under the amended and restated collaborative research agreement.

Shell can terminate the amended and restated license agreement for any or no reason by providing us with six months notice. Each party also has the right to terminate the amended and restated license agreement in the case of a breach by the other party if such breach is uncured within 60 days.

Technology

We are innovators in the directed evolution of enzymes and microbes to enable industrial biocatalytic reactions and fermentations via enzyme engineering, metabolic pathway engineering and fermentation microbe improvement. Our technology platform has enabled commercially viable products and processes for the manufacture of pharmaceutical intermediates, and we are in the process of applying our technology platform in connection with the development of biofuels.

 

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Our approach to developing commercially viable biocatalytic processes begins by conceptually designing the most economical manufacturing process for a targeted product. We then develop optimized biocatalysts to enable that design, using our directed evolution technology, including screening and validating biocatalysts under relevant conditions. Typical design criteria include stability in the desired reaction conditions, biocatalyst activity and productivity (yield), ease of product isolation, product purity and cost. Previous approaches to biocatalytic process development typically involved designing and engineering around shortcomings of available enzymes, involving, for example, enzyme immobilization (for stability and/or reuse), special equipment and costly product isolation and purification methods. We circumvent the need for such costly process design features by optimizing the biocatalyst for fitness in the desired process environment. As a result, we enable and develop cost-efficient processes that typically are relatively simple to run in conventional manufacturing equipment. This also allows for the efficient technical transfer of our process to our manufacturing partners.

The successful embodiment of our platform technologies in commercial manufacturing processes requires well-integrated expertise in a number of technical disciplines. In addition to those directly involved in practicing our directed evolution technologies, such as molecular biology, enzymology, microbiology, cellular engineering, metabolic engineering, bioinformatics, biochemistry, and high throughput analytical chemistry, our process development projects also involve integrated expertise in organic chemistry, chemical process development, chemical engineering, and fermentation process development and engineering. Our tightly integrated, multi-disciplinary approach to biocatalyst and process development is a critical success factor for our company.

Enzyme Optimization Overview

The enzyme optimization process starts by identifying genes that code for enzymes known to have the desired type of chemical reactivity for a desired reaction. Typically, we identify gene sequences in published databases and then synthesize candidate genes having those sequences. Using a variety of biotechnology tools, we diversify these genes by introducing mutations, giving rise to changes in the enzymes for which they encode. The methods for diversifying such genes, and types of diversity being tested, often vary over the course of a biocatalyst optimization program. For finding initial diversity, methods typically include random mutagenesis and site-directed mutagenesis. We also test mutational variations that distinguish closely related enzymes among different organisms. Once we have identified potentially beneficial mutations, we test combinations of these mutations in libraries made using one or more of our gene shuffling methodologies. Shuffling, which recombines genes, allows us to rapidly combine beneficial mutations in the individual genes in the shuffled library, and isolate and discard detrimental mutations. Using high throughput enzyme production and screening methods, we produce and evaluate libraries of recombined enzymes and identify variant enzymes that exhibit improved performance characteristics, such as stability, activity and selectivity, under conditions that resemble those of the desired process.

The next step in our optimization process involves our software tool, protein sequencing activity register, which we call ProSAR, which we initially licensed from Maxygen and have further customized to our specific needs. ProSAR aids in the identification of specific gene and enzyme mutations responsible for beneficial, neutral or detrimental performance characteristics. Earlier directed evolution methods did not separately evaluate individual mutations in libraries of variants resulting from multiple mutations. Our ProSAR bioinformatics tools, combined with efficient gene synthesis and high quality library generation methods, has led to a significant increase in the efficiency and speed of enzyme improvement and optimization.

For enzyme applications, the best variants identified in testing are manufactured for confirmation in the desired chemical process at laboratory scale. The gene that codes for the best performing enzyme is then used as the starting gene for a next round of shuffling and screening. Biocatalysts are rapidly

 

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optimized until the desired performance characteristics have been achieved and the economic objectives for the desired process have been met.

Codex Biocatalyst Panels

Our Codex Biocatalyst Panels were initially developed to speed our own internal process for identifying enzymes with desired characteristics for further optimization. Each Codex Biocatalyst Panel is comprised of enzyme variants that catalyze one type of reaction. We assemble, on one or more microtiter plates, variants of a parent enzyme that we have developed for stability in industrial environments and diversified for activity over a variety of suitable chemical structures. Then, either we or our innovator pharmaceutical customers can use the Codex Biocatalyst Panels to screen a new chemical structure against the assembled variants to rapidly identify variants that react with the new chemical structure. For some new structures, a variant on the panel could enable production of the desired product. We can also analyze the data from the panel screen using ProSAR techniques to identify the mutations that are beneficial for the reaction of the new structure and further optimize the enzyme as needed using the enzyme optimization techniques described above.

Microbe Optimization using Gene Shuffling

For fermentation microbes, we enhance metabolic pathways by using gene shuffling to improve one or more enzymes in a series of reactions that make a desired product. We optimize the enzyme as described above using either in vitro or in vivo screening. For fermentation applications, the microbes containing the improved gene(s) are directly evaluated in laboratory scale fermenters.

The metabolic pathway may naturally exist in the microbe, but productivity or selectivity improvements are needed to economically produce more of the desired natural product. In one example, our scientists, while we were still an operating division of Maxygen, used our gene shuffling technology to improve the selectivity of the fermentation organism that Pfizer uses to make doramectin, a veterinary drug. Optimization of a key gene by gene shuffling resulted in reduced production of what was previously a major by-product, and increased the yield of the desired product, providing for a simpler process to isolate the product from the by-product.

We can also produce a new metabolic pathway to produce a desired product using our gene shuffling technology in combination with synthetic biology, a type of metabolic engineering in which new genes are introduced into a microbe. For example, DSM inserted two genes from other organisms into a Penicillium fungus to create a new metabolic pathway to an intermediate called 7-ADCA, which is the central building block of a type of antibiotic called semi-synthetic cephalosporins. Previously, four wasteful conventional chemical steps were needed to convert a penicillin molecule made by the Penicillium into 7-ADCA. Our scientists, while we were still an operating division of Maxygen, used our gene shuffling technology to improve the characteristics of both inserted enzymes to provide adequate productivity to enable an economically practical fermentation to produce 7-ADCA eliminating the four wasteful conventional chemical steps, at lower cost, with less energy than the conventional chemical process. This enabled DSM to build a new fermentation plant that produces 7-ADCA.

We expect to use our gene shuffling technology to optimize microbes in connection with our efforts to develop biofuels through our biofuels research collaboration.

Microbe Optimization using Whole Genome Shuffling

In addition to our gene optimization technology for enzymes, we have another complimentary technology in our platform for directed evolution of fermentation microbes called Whole Genome Shuffling. Whole Genome Shuffling allows us to improve the performance of a fermentation microbe by shuffling unidentified mutations in unidentified genes across the genome. We start with a diversity of mutational

 

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variants of a fermentation organism, generated by conventional means such as random mutagenesis. Our Whole Genome Shuffling involves introducing the entire genome of two or more such cells into a single cell, in which the genetic machinery of the combined cell recombines, or shuffles, the genomes. In one method, this is accomplished by protoplast fusion, in which the cell walls are removed to leave the cells’ contents contained only by their cell membranes. The cell membranes of these protoplasts in the diverse population are induced to fuse together into fusants containing the genome of two or more of the parent cells. From these fusants, we regenerate normal cells, each with one copy of a hybridized genome. Microbial colonies are then grown and screened for their performance in the fermentative production of the desired product. This process can be repeated, including with the introduction of new mutations, until the desired performance in the fermentation process is achieved. One of our collaborators is operating a fermentation process for a generic pharmaceutical product using microbes we developed by Whole Genome Shuffling. We expect to use our Whole Genome Shuffling technology in connection with the development of biocatalysts for use in producing biofuels through our biofuels research collaboration.

License Agreement with Maxygen

In March 2002, we licensed our core enabling technology from Maxygen and commenced operations. The license agreement was amended in September 2002, October 2002, and August 2006.

Under the terms of this license agreement, Maxygen granted us a worldwide, exclusive, license, with a right to sublicense, under certain Maxygen intellectual property related to the use of shuffling technology in a variety of fields of use. This license includes the right to develop, make, have made, use, import, have imported, offer for sale, sell, otherwise commercialize or distribute biocatalysts for the manufacture of generic and branded pharmaceuticals, certain classes of chemicals and certain applications related to energy and biofuels. Under the license agreement, Maxygen also provided us with certain biological materials to facilitate use of the gene shuffling technology. We can use the licensed Maxygen shuffling technology in a wide variety of organisms including algae, bacteria, cyanobacteria, fungi and yeasts, but we are restricted from using the technology in land plants. Our license is exclusive with respect to bacteria, yeast and fungi, but is nonexclusive with respect to algae and cyanobacteria.

The license agreement also specifically excludes us from certain activities. Under the terms of this license agreement, we cannot utilize the licensed Maxygen shuffling technology for drug discovery or for the manufacture of protein-based therapeutics, such as antibodies.

Our license from Maxygen can be extended to several additional fields, including applications related to hydrogen, coal and natural gas, provided that we, or a collaborator, meet certain threshold levels of research funding related to such fields of use. We are also able to negotiate rights to commodity or fine chemicals that are not currently included in the license agreement.

Under the terms of our license agreement, we are obligated, among other things, to pay Maxygen a significant portion of certain types of consideration we receive in connection with the development and commercialization of energy products using the licensed technology. The actual fees payable to Maxygen will depend on the amount, timing and type of consideration we receive, including payments from the sale of our equity securities and payments in connection with the research and development and/or sale of energy products made with a biocatalyst developed using the licensed technology. In the case of consideration received from the sale of our equity securities, we are obligated to pay Maxygen a significant portion of any excess paid above $3.97 per share, the price per share of our Series D preferred stock. With regard to FTE funding, we are only obligated to pay Maxygen to the extent the consideration received exceeds specified amounts which were based on historical FTE rates we charged our pharmaceutical collaborators. We are also obligated to pay certain fees to Maxygen related to the prosecution and maintenance of the patents licensed from Maxygen. Further, in the event that any subsidiary or affiliate of ours develops and/or sells any energy applications using the Maxygen technology, we are obligated to transfer to Maxygen a percentage of the value of the subsidiary or affiliate that is attributable to the

 

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Maxygen technology and give Maxygen an option to acquire a percentage of the other consideration that we invest in such affiliate or subsidiary.

The rights granted under our license from Maxygen also are subject to rights granted by Maxygen to Novo Nordisk A/d on September 17, 1997, as amended. Maxygen assigned its rights in this agreement to us.

In exchange for this license, we issued a total of 999,000 shares of common stock and six million shares of Series A preferred stock to Maxygen. As of December 31, 2007, Maxygen owned approximately 25% of our outstanding common stock.

Intellectual Property

Our success depends in large part on our proprietary products and technology under which we seek protection from patent, copyright, trademark and trade secret laws. Such protection is also maintained using confidential disclosure agreements. We own or have licensed rights to approximately 230 issued patents and approximately 165 pending patent applications in the United States and in various foreign jurisdictions. Of the licensed patents and patent applications, most are owned by Maxygen or the California Institute of Technology and exclusively licensed to us for use in certain fields. We own approximately 15 issued patents and approximately 75 pending patent applications in the United States and in various foreign jurisdictions directed to our enabling technologies and to our methods and products used in the production of pharmaceuticals such as atorvastatin, montelukast and azetidinone compounds.

We will continue to file and prosecute patent applications and maintain trade secrets as is consistent with our business plan in an ongoing effort to protect our intellectual property. It is possible that our current patents, or patents which we may later acquire, may be successfully challenged or invalidated in whole or in part. It is also possible that we may not obtain issued patents from our pending patent applications or other inventions we seek to protect. We sometimes permit certain intellectual property to lapse or go abandoned under appropriate circumstances. Due to uncertainties inherent in prosecuting patent applications, sometimes patent applications are rejected and we subsequently abandon them. It is also possible that we may develop proprietary products or technologies in the future that are not patentable or that the patents of others will limit or altogether preclude our ability to do business. In addition, any patent issued to us may provide us with little or no competitive advantage, in which case we may abandon such patent or license it to another entity.

Our registered and pending U.S. trademarks include Codexis, Codex, Codex Biocatalyst Panel, and Bringing Life to Chemistry. The Codexis and Codexis design marks have been registered or are pending in selected foreign countries.

Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology or products that are similar to ours or that compete with ours. Patent, trademark, and trade secret laws afford only limited protection for our technology platform and products. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties have in the past attempted, and may in the future attempt, to operate under aspects of our intellectual property or products or to obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected technology and products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products or technology is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our technology platform and products do not infringe patents held by others or that they will not in the future.

Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement, invalidity, misappropriation, or other claims. Any such litigation could result in substantial

 

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costs and diversion of our resources. Moreover, any settlement of or adverse judgment resulting from such litigation could require us to obtain a license to continue to make, use or sell the products or technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.

Competition

Overview

We are a leader in the field of directed molecular evolution of biocatalysts. We are aware that other companies, including Verenium (previously Diversa), DSM, and DuPont, have alternative methods for obtaining and generating genetic diversity or use mutagenesis techniques to produce genetic diversity. Academic institutions such as the California Institute of Technology, the Max Planck Institute and the Center for Fundamental and Applied Molecular Evolution (FAME), a jointly sponsored initiative between Emory University and Georgia Institute of Technology, are also working in this field. This field is highly competitive and companies and academic and research institutions are actively seeking to develop technologies that could be competitive with our technologies.

We are aware that other companies, organizations and persons have described technologies that appear to have some similarities to our patented proprietary technologies. We monitor publications and patents that relate to directed molecular evolution to be aware of developments in the field and evaluate appropriate courses of action in relation to these developments.

We also face differing forms of competition in our various markets, as set forth below:

Pharmaceuticals

Our primary competitors in the pharmaceutical market are companies using conventional, non-biocatalytic processes to manufacture pharmaceutical intermediates and APIs that compete in the marketplace with our biocatalytically manufactured products. The market for the manufacture and supply of APIs and intermediates is large with many established players. These companies include many of our large innovator and generic pharmaceutical customers, such as Merck, Pfizer, and Teva, who have significant internal research and development efforts directed at developing processes to manufacture APIs and intermediates. The processes used by these companies include classical conventional organic chemistry reactions, chemo catalysis reactions catalyzed by chemical catalysts, or biocatalytic routes using commercially available enzymes, or combinations thereof. Our manufacturing processes must compete with these internally developed routes. Additionally, there are many large well-established fine chemical manufacturing companies that compete to supply pharmaceutical intermediate and APIs to our customers, such as DSM, BASF and Lonza. Finally, we face increasing competition from generic pharmaceutical manufacturers in low cost centers such as India and China.

In addition to competition from companies manufacturing APIs and intermediates, we face competition from companies that sell biocatalysts for use in the pharmaceutical market. The market for supplying biocatalysts for use in pharmaceutical manufacturing is quite fragmented. There is competition from large industrial enzyme companies, such as Novozymes and Amano, whose industrial enzymes (for detergents, for example) are occasionally used in pharmaceutical processes. There is also competition in this area is from several small European companies with relatively limited product offerings comprised primarily of naturally occurring biocatalysts. In addition to these biocatalyst supply companies, there is a separate group of small companies, also predominately in Europe, that offer biocatalyst optimization services.

We believe that the principal advantages of our biocatalyst products in the pharmaceutical market are the breadth of our product offerings and the performance characteristics of our biocatalysts including, for example, activity, stability, and activity on a range of substrates, when compared to traditional chemistry-based manufacturing processes naturally occurring biocatalysts. We believe that our directed evolution

 

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technology provides substantially superior results, in shorter time frames, than companies offering competing biocatalyst development services.

Bioindustrials

There is increasing interest and activity in the bioindustrial market directed towards developing bio-based manufacturing processes for products that have traditionally been derived from fossil fuel sources, such as transportation fuels and chemicals.

Currently, most biofuels being produced at commercial scale are ethanol derived from sugar and starch food sources, such as sugar cane and corn, and biodiesel produced from vegetable oils, such as soy oil. These markets are well-established with multiple companies, such as The Archer Daniels Midland Company, Cargill and a number of smaller companies producing ethanol in the United States.

Many established companies, such as Novozymes, who has partnered with BP p.l.c. to produce biofuels, Danisco/Genencor, which is marketing cellulases to convert biomass into sugar, Iogen and Verenium, are actively developing biocatalysts to convert cellulosic biomass into fermentable sugars, the first step in the production of many biofuels. Although no company is currently converting cellulosic biomass into fermentable sugars at commercial scale, many of our competitors have been active in this area for many years, have invested significant resources in this effort, and have extensive patent portfolios regarding the relevant biocatalysts and related processes. In addition, several companies are focused on developing non-biocatalytic, thermochemical processes to convert biomass into fermentable sugars. Our routes from cellulosic biomass to fermentable sugars will need to be cost-competitive with all of these alternative sources and routes.

There are also many companies active in the area of producing non-ethanol biofuels from fermentable sugars. For example, DuPont has announced plans to develop and market biobutanol in collaboration with BP, while other companies such as Amyris are working on biocatalytic routes to a commercially viable non-ethanol biofuel alternative to petroleum-based fuels. Virent Energy Systems and Shell also recently announced a joint collaboration to develop biogasoline directly from sugars. Other potential competitors such as Range Fuels Inc. are focused on developing non-biocatalytic thermochemical processes to convert biomass into fuels. New companies are being founded in this area at an increasing rate. Many of these companies are actively developing and applying for intellectual property rights, including patent rights, in this space.

Our ability to remain competitive in this area will depend on our ongoing technical success in identifying and developing novel biocatalytic routes to fuel products that are cost-competitive not only with other biofuels but with petroleum-based fuels. Several of our competitors, including Amyris, utilize synthetic biology techniques to develop their products. Because these techniques have been in the public domain for many years, we are able to use these techniques together with our gene and genome directed evolution technologies. We believe that one of our principal advantages, particularly in the bioindustrial space, is that our directed evolution technology may enable us to develop new, more efficient — and therefore more cost-effective — biocatalysts and processes in less time than our competitors.

We will face competition from a variety of companies focusing on developing biocatalytic routes to chemicals, including DuPont, DSM and Metabolix.

Operations

We have facilities located throughout the world, including in Redwood City, California; Pasadena, California; Jülich, Germany; Singapore; and Hungary. As of December 31, 2007, we employed approximately 230 people worldwide, with approximately 70% of our employees located in Redwood City, California.

 

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Our corporate headquarters is located in Redwood City, California and provides general administrative support to our business and is the center of our manufacturing and research and development operations. We expect most of our biofuels research to occur in Redwood City. In 2007, we established a research and development capability in Singapore to reduce our pharmaceutical research and development costs and to take advantage of the highly educated and skilled labor force in Singapore. In 2008, we established our Hungary facilities to create a research and development center for microbial biocatalyst improvement and fermentation development and to reduce our research and development costs. Similar to Singapore, Hungary also has a highly educated and skilled work force. Our facilities in Hungary will pursue opportunities in both our pharmaceutical and bioindustrial markets. Our facilities in Jülich, Germany and Pasadena, California perform research and development and small-scale manufacturing operations for our pharmaceutical business.

Our research and development operations include efforts directed towards biocatalyst evolution, bioprocess development, cellular engineering, biocatalyst screening, metabolites, strain improvement and fermentation development. We conduct enzyme evolution, enzyme production development, microbial bioprocess development, cellular engineering and microbial evolution primarily at our corporate headquarters in Redwood City. We also conduct biocatalyst enzyme evolution research in Redwood City and Singapore. Our facility in Hungary collaborates with our Redwood City facility in research and development activities relating to microbe improvement and is our center for fermentation development. Our Pasadena site conducts our research and development activities in enzyme screening, metabolites, and enzymes.

Our primary manufacturing operations are located in Redwood City, Pasadena and Jülich. However, we have limited internal manufacturing capacity and expect to rely on third-party manufacturers for commercial production of our enzymes for the foreseeable future. Our in-house manufacturing is dedicated to producing both our Codex Biocatalyst Panels and enzymes for use by our customers in pilot scale production. We also supply initial commercial quantities of enzymes for use by our collaborators to produce pharmaceutical intermediates and manufacture enzymes that we sell. We produce enzymes primarily at our Redwood City headquarters, although we manufacture some enzyme products in our Pasadena location. Finally, we manufacture small quantities of chemicals, using our enzymes at our facility in Germany.

We rely on an Italian contract manufacturer, CPC Biotech srl, or CPC, to manufacture substantially all of the commercial enzymes used in our pharmaceutical business. We also rely on Arch, headquartered in Badlapur, India, to manufacture our pharmaceutical intermediates as well as to provide sales support for these products in India. In addition to CPC and Arch, we contract with other technical suppliers in the United Kingdom, Germany, Slovakia and India.

We continue to evaluate whether to develop internal capabilities to manufacture biocatalysts at commercial scale. Among the factors we consider are the costs associated with developing and maintaining such capabilities, the time required to develop such capabilities, potential locations for manufacturing sites, including proximity to existing customers, taxes associated with manufacturing activities and local incentives.

Facilities

Our corporate headquarters are located in Redwood City, California, where we occupy approximately 87,000 square feet of office and laboratory space. The term of the lease expires in January 2011 for one part of our facilities, in May 2012 for another part and March 2013 for the third part. We have one option to extend the lease for an additional term of five years for each part, provided that we provide notice to the landlord at least nine months prior to the expiration of the initial term of the lease for each part. We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.

 

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In Pasadena, California, we occupy approximately 9,832 square feet of office and laboratory space. The term of the lease expires in February 2011. We have an option to extend the lease for an additional term of one year. We believe that the facilities that we currently lease in Pasadena are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.

In Jülich, Germany, we occupy approximately 600 square meters of office and laboratory space. The term of the lease expires in September 2013. We believe that the facilities that we currently lease in Germany are adequate for our needs for the immediate future and that, should it be needed, the current space can be expanded and additional space can be leased to accommodate any future growth.

In Singapore, we occupy approximately 1,867 square meters of office and laboratory space within Singapore Science Park III. The term of the lease expires in July 2010. We have an option to extend the lease for an additional term of three years. We believe that the facilities that we currently lease in Singapore are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.

We do not currently have a lease for the facilities that we are using for our operation in Hungary. We do not anticipate having difficulty leasing suitable research and development facilities to accommodate our expected growth in Hungary.

Employees

As of December 31, 2007, we employed approximately 230 full-time employees. Of the full-time employees, approximately 120 were engaged in research and development, approximately 80 were engaged in manufacturing and operations, and approximately 30 were engaged in general and administrative activities. We plan to continue to expand our research and development activities. To support this growth, we will need to expand managerial, research and development, operations, finance and other functions. None of our employees are represented by a labor union, and we consider our employee relations to be good.

Legal Proceedings

We are not currently a party to any material litigation.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information about our executive officers and directors, as of March 31, 2008.

 

Name

   Age   

Position

Alan Shaw

   45    President and Chief Executive Officer, Director

Robert S. Breuil

   46    Senior Vice President, Finance and Chief Financial Officer

Nicholas Green

   43    President, Pharmaceuticals

John Grate

   55    Chief Technology Officer and Senior Vice President,
Technology and Innovation

Douglas T. Sheehy

   41    Vice President, General Counsel and Secretary

David Walshaw

   47    Vice President, Operations

Thomas R. Baruch(1) (2) (3)

   69    Chairman, Board of Directors

Russell J. Howard

   57    Director

Bernard J. Kelley(1) (2)

   66    Director

Bruce Pasternack(1) (3)

   60    Director

William P. Rothwell

   54    Director

Dennis P. Wolf(2) (3)

   55    Director

 

(1) Member of the Compensation Committee.

 

(2) Member of the Audit Committee.

 

(3) Member of the Nominating and Corporate Governance Committee.

Alan Shaw, Ph.D. has served as President of Codexis since inception and Chief Executive Officer since 2002. He has been a member of our board of directors since 2002. Prior to Codexis, Dr. Shaw was Head of New Business Development for Clariant and Managing Director for Lancaster Synthesis and prior to Clariant’s acquisition of BTP plc, Chief Operating Officer of Archimica, the pharmaceutical chemicals division of BTP plc. From 1994 to 1999, he was with Chiroscience Group plc, most recently as Managing Director of the pharmaceutical services unit, Chirotech Technology Limited, and a member of the board of directors of Chiroscience Ltd. Earlier in his career, Dr. Shaw held various scientific and management positions for over 15 years at Imperial Chemical Industries PLC (ICI)/Zeneca. Dr. Shaw serves on the board of directors of BIO, the biotechnology industry trade association, and is past chair of the BIO Industrial and Environmental Section. He holds a B.S. in chemistry from Teesside University, England and a Ph.D., in chemistry from the University of Durham, England. Dr. Shaw is a Fellow of the Royal Society of Chemistry (FRSC, C.Chem.) and the Chartered Institute of Marketing (FCIM, Chartered Marketer).

Nicholas Green has served as President, Pharmaceuticals of Codexis since January 2008. Prior to Codexis, Mr. Green was Chief Executive Officer and Managing Director for Shasun Pharma Solutions, Ltd. From 2003 to 2006, he was President and Chief Executive Officer for Rhodia Pharma Solutions. He has also held operating management positions with chemical and life sciences companies including Clariant Life Sciences, NIPA Biocides and Hodgson Chemicals. He holds a B.S. in chemistry from London University, Queen Mary College, and an M.B.A. from Huddersfield University.

 

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Robert S. Breuil has served as Senior Vice President, Finance and Chief Financial Officer of Codexis since January 2006. Prior to Codexis, Mr. Breuil was Chief Financial Officer and Vice President, Corporate Development for Aerogen, Inc. from 2002 to 2005. Prior to Aerogen, Mr. Breuil held a number of senior financial management positions at ALZA Corporation from 1994 to 2002, most recently as Controller of ALZA Pharmaceuticals. He served on active duty as an aviator with the U.S. Navy from 1983 to 1991 and retired as a Commander from the U.S. Naval Reserve in 2000. He holds a B.S. in electrical engineering from the U.S. Naval Academy and an M.B.A. from the Stanford University Graduate School of Business.

John Grate, Ph.D., has served as Chief Technology Officer and Senior Vice President, Technology and Innovation of Codexis since December 2007. From July 2005 to December 2007, Dr. Grate served as Senior Vice President, Research and Development, and Chief Technology Officer of Codexis, and from September 2002 to July 2005, Dr. Grate served as the Vice President Research and Development and Chief Technology Officer. Prior to his employment with Codexis, Dr. Grate was an independent consultant and a member of Codexis’ Industrial Advisory Board. Previously, Dr. Grate held various R&D leadership positions in his 20 years at Catalytica, Inc. He was founding Vice President of Research and Development for the subsidiary Catalytica Pharmaceuticals, Inc. until its acquisition by Royal DSM N.V. in early 2001. Dr. Grate is a registered U.S. Patent Agent. He holds a B.S. in chemistry from Miami University (Ohio) and a Ph.D., in chemistry from the University of California, San Diego.

Douglas T. Sheehy has served as Vice President, General Counsel and Secretary of Codexis since April 2007. Prior to Codexis, Mr. Sheehy spent five years at CV Therapeutics, Inc. in various positions, most recently as Executive Director, Legal — Corporate Law. Prior to that, Mr. Sheehy spent six years as an attorney with the law firms of Gunderson Dettmer LLP and Brobeck Phleger & Harrison LLP. Mr. Sheehy holds a B.A. in history from Dartmouth College and a J.D. from American University.

David Walshaw has served as Vice President, Operations of Codexis since January 2006. From January 2005 to January 2006, Mr. Walshaw served as our Director of Operations, and from June 2004 to January 2005, Mr. Walshaw served as our Head of Manufacturing & Supply Chain Management. Prior to joining Codexis, Mr. Walshaw held a variety of positions at Avecia, most recently as General Manager of Avecia’s Early Phase Development business. Mr. Walshaw is a graduate of the Royal Society of Chemistry (GRSC) from Huddersfield University.

Thomas R. Baruch has served as a director of Codexis since 2002. Mr. Baruch is the founder and a managing director of CMEA Ventures, a venture capital firm that was established in 1989 as an affiliated fund of New Enterprise Associates. Mr. Baruch is currently on the board of directors of one public company, Entropic Communications, Inc. and several private companies, including Cnano, Inc., Intermolecular, Inc. and Wildcat Discovery Technologies, Inc. Before starting CMEA Ventures, Mr. Baruch was a founder and chief executive officer of Microwave Technology, Inc., a semiconductor manufacturer. Prior to his employment with Microwave Technology, Inc., Mr. Baruch managed a dedicated venture fund at Exxon Corp, and was president of the Exxon Materials Division. Earlier in his career, Mr. Baruch worked as a patent attorney. He is a registered patent attorney and is also a member of the board of trustees of Rensselaer Polytechnic Institute and the board of trustees of the Berkeley Institute of Synthetic Biology. Mr. Baruch holds a B.S. in engineering from Rensselaer Polytechnic Institute and a J.D. from Capital University.

Russell J. Howard, Ph.D., has served as a director of Codexis since inception. Dr. Howard has served as the chief executive officer and a director of Maxygen, Inc since June 1998. From August 1994 to June 1991, Dr. Howard was the President and Scientific Director of Affymax Research Institute. He holds a B.S. in chemistry and biochemistry, a B.S. in biochemistry (Hons.) and a Ph.D. in biochemistry from the University of Melbourne.

Bernard J. Kelley has served as a director of Codexis since April 2004. From 1993 to 2002, Mr. Kelley was the President of the Merck Manufacturing Division, a division of Merck & Co., Inc., and he served as a

 

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member of the Merck Management Committee from 1995 to 2002. Mr. Kelley currently serves on the board of directors, compensation and audit committees of MAP Pharmaceuticals, Inc., a biotechnology company, and previously served on the board of directors of Aegis Analytical Corporation, an enterprise software company, from 2004 to 2006. He holds a B.S. in engineering from the U.S. Naval Academy.

Bruce Pasternack has served as a director of Codexis since August 2007. Mr. Pasternack is currently a venture partner of CMEA Ventures. From June 2005 to May 2007, Mr. Pasternack served as the President and Chief Executive Officer of Special Olympics, Inc. Prior to his employment with Special Olympics, Inc., Mr. Pasternack spent more than 28 years at Booz Allen Hamilton Inc., where his last position was Senior Vice President and Managing Partner of its San Francisco office. From 1973 to 1976, he served as Associate Administrator for Policy and Programs at the Federal Energy Administration, and Staff Director of the President’s Energy Resources Council. From 1968 to 1972, he was a systems engineer at General Electric. Mr. Pasternack is a director of Quantum Corporation, BEA Systems, Inc. and Symyx Technologies, Inc., and a member of the board of trustees of The Cooper Union, and has previously served on the board of directors of the Special Olympics, Inc. He holds a B.E. from The Cooper Union and an M.S.E. from the University of Pennsylvania.

William P. Rothwell, Ph.D., has served as a director of Codexis since December 2007. Dr. Rothwell is Vice President of Innovation and Chemicals Technology for Shell Global Solutions (US) Inc., an affiliate of Royal Dutch Shell plc. He joined an affiliate of Shell in 1980 and was appointed to the position of General Manager of Shell Chemicals’ global ethylene oxide/glycols business in 2002. He was chairman of the board of Ethylene Glycols (Singapore) Private Limited, a seventy percent Shell-owned joint venture, from 2002 to late 2006. He is also a director of Shell Global Solutions (US) Inc. He holds undergraduate degrees in mathematics and chemistry from Michigan State University and a Ph.D. in physical chemistry from the Massachusetts Institute of Technology.

Dennis P. Wolf has served as a director of Codexis since December 2007. Mr. Wolf most recently served as Executive Vice President and CFO of MySQL AB. Prior to MySQL, Mr. Wolf held financial management positions for public high technology companies including Apple Computer, Inc., Centigram Communications, Inc., Credence Systems Corporation, Omnicell, Inc., Redback Networks Inc. and Sun Microsystems, Inc. Mr. Wolf is a director of Quantum Corporation, and has been a director and chair of the audit committee for public companies including Komag, Inc., and Vitria Technology, Inc. He holds a B.A. from the University of Colorado and an M.B.A. from the University of Denver.

Board Composition

Our board of directors may establish the authorized number of directors from time to time by resolution. Eight directors are authorized and we currently have seven directors, of which three are designated by the current holders of our preferred stock, three are designated by the current holders of our preferred and common stock, and one also serves as our Chief Executive Officer. Each of the members of our board of directors, except Alan Shaw and Russell Howard, is an independent director as defined under the applicable rules and regulations of the Securities and Exchange Commission, or the SEC, and The Nasdaq Stock Market. Dr. Howard has indicated that he will resign from our board of directors in connection with the consummation of this offering.

Under the terms of our amended and restated certificate of incorporation and the voting agreement among us and the holders of our preferred stock, the members of our board of directors are to be designated as follows: Equilon Enterprises LLC dba Shell Oil Products US, or Shell, Biomedical Sciences Investment Fund Pte Ltd, CMEA Ventures Life Sciences 2000, L.P., Pequot Private Equity Fund III, L.P. and Maxygen, Inc., each have the right to designate one member; one member shall be our Chief Executive Officer; and the remainder shall be designated with the consent of the parties holding a majority of the outstanding common and preferred stock. Upon the consummation of this offering, all of these provisions will terminate, except that for a ten-year period Shell will have the right to designate one board member for

 

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so long as: Shell holds at least 50% of the total number of shares of common stock issued upon conversion of the preferred stock purchased by Shell, and at least 5% of our fully diluted number of shares of common stock outstanding, and the collaborative research agreement between us and Shell has not expired or been terminated. The designee of Shell will be subject to the reasonable approval of a majority of the members of the board of directors other than the Shell representative.

In accordance with our amended and restated certificate of incorporation to take effect following the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. After the completion of this offering, our directors will be divided among the three classes as follows:

 

   

the Class I directors will be                 ,                  and                 , and their terms will expire at the annual meeting of stockholders to be held in 2009;

 

   

the Class II directors will be                 ,                  and                 , and their terms will expire at the annual meeting of stockholders to be held in 2010; and

 

   

the Class III directors will be                 ,                  and                 , and their terms will expire at the annual meeting of stockholders to be held in 2011.

Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consists of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control at our company.

Board Committees

Our board of directors has the following committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors.

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee appoints the independent registered public accounting firm; evaluates the independent registered public accounting firm’s qualifications, independence and performance; determines the engagement of the independent registered public accounting firm; reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly consolidated financial statements; approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting firm on our engagement team as required by law; reviews our consolidated financial statements and our management’s discussion and analysis of financial condition and results of operations to be included in our annual and quarterly reports to be filed with the SEC, reviews our critical accounting policies and estimates; and annually reviews the audit committee charter and the committee’s performance. The current members of our audit committee are Thomas Baruch, Bernard Kelley and Dennis Wolf. Dennis Wolf serves as the chairman of the committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and The Nasdaq Stock Market. Our board of directors has determined that Dennis Wolf is an audit committee financial expert as defined

 

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under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of The Nasdaq Stock Market. Each of the members of our audit committee, except Thomas Baruch, qualifies as an independent director under the applicable rules and regulations of the SEC and The Nasdaq Stock Market relating to audit committee independence. Within one year from the date of effectiveness of our initial public offering registration statement, our board of directors intends to replace Mr. Baruch as a member of our audit committee with a person who will meet these heightened independence standards. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and The Nasdaq Stock Market.

Compensation Committee

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves corporate goals and objectives relevant to compensation of our Chief Executive Officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensation committee also recommends to our board of directors the issuance of stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The current members of our compensation committee are Thomas Baruch, Bernard Kelley and Bruce Pasternack. Bruce Pasternack serves as the chairman of the committee. Each of the members of our compensation committee is an independent or outside director under the applicable rules and regulations of the SEC, The Nasdaq Stock Market and the Internal Revenue Code of 1986, as amended relating to Compensation Committee independence. The compensation committee operates under a written charter.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and reporting and making recommendations to our board of directors concerning governance matters. The current members of our nominating and corporate governance committee are Thomas Baruch, Bruce Pasternack and Dennis Wolf. Thomas Baruch serves as the chairman of the committee. Each of the members of our nominating and corporate governance committee is an independent director under the applicable rules and regulations of the SEC and The Nasdaq Stock Market relating to nominating and corporate governance committee independence. The nominating and corporate governance committee operates under a written charter.

There are no family relationships among any of our directors or executive officers.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time during the prior three years been an officer or employee of ours. None of our executive officers currently serves or in the prior three years has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Code of Business Conduct and Ethics

We will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.codexis.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

 

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Director Compensation

In June 2007, our board of directors adopted an Independent Director Compensation Plan pursuant to which those directors designated as independent directors by the board of directors for purposes of the Independent Director Compensation Plan, prior to the consummation of this offering and as contemplated by the Plan, are entitled to receive an annual cash retainer of $35,000, paid in semi-annual installments beginning June 30, 2007, and the reimbursement of any actual out-of-pocket expenses. In addition, the Independent Director Compensation Plan provides for the grant of an annual option to purchase 25,000 shares of our common stock, to be granted at the first board of directors meeting of each year, beginning in 2008. These options vest as to 1/4th of the total number of shares subject to the option on the first anniversary of the vesting commencement date, and 1/48th of the total number of shares subject to the option shall vest monthly thereafter until all shares are vested, subject to the continued service of the director on the board of directors. During the fiscal year ended December 31, 2007, Mr. Kelley, Mr. Pasternack and Mr. Wolf were the only directors designated as independent directors by our board of directors for purposes of the Independent Director Compensation Plan.

On January 26, 2007, we granted Mr. Kelley an option to purchase 25,000 shares of our common stock, which vests as to 1/4th of the total number of shares subject to the option on the first anniversary of the vesting commencement date, and as to 1/48th of the shares subject to the option on each monthly anniversary thereafter. On June 19, 2007, we granted Mr. Kelley an option to purchase 7,500 shares of our common stock, which option was fully vested as of the date of grant.

On August 28, 2007, Mr. Pasternack was appointed to our board of directors. In connection with his appointment, Mr. Pasternack received an option to purchase 25,000 shares of our common stock, which vests as to 1/4th of the total number of shares subject to the option on the first anniversary of the vesting commencement date, and as to 1/48th of the shares subject to the option on each monthly anniversary thereafter.

On December 11, 2007, Mr. Wolf was appointed to our board of directors. In connection with his appointment, Mr. Wolf received an option to purchase 25,000 shares of our common stock, which vests as to 1/4th of the total number of shares subject to the option on the first anniversary of the vesting commencement date, and as to 1/48th of the shares subject to the option on each monthly anniversary thereafter.

Following the completion of this offering, each non-employee director shall receive an annual cash retainer of $                 per year. Such directors shall also receive an additional annual cash retainer of $                 per year for being a member of our compensation committee, except that the chairperson of our compensation committee shall receive an additional annual cash retainer of $                 per year. Non-employee directors shall also receive an additional annual cash retainer of $                 per year for being a member of our nominating and corporate governance committee, except that the chairperson of our nominating and corporate governance committee shall receive an additional annual cash retainer of $                 per year. Non-employee directors shall also receive an additional annual cash retainer of $                 per year for being a member of our audit committee, except that the chairperson of our audit committee shall receive an additional annual cash retainer of $                 per year.

 

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The following table sets forth information regarding compensation earned by our non-employee directors during the fiscal year ended December 31, 2007.

 

Name

   Fees Earned
or
Paid in
Cash
   Option
Awards
(1)
   Total

Thomas R. Baruch

     —        —        —  

Russell J. Howard

     —        —        —  

Bernard J. Kelley

   $ 35,000    $ 13,097    $ 48,097

Bruce Pasternack

     12,082      4,901      16,983

William P. Rothwell

     —        —        —  

Dennis P. Wolf

     1,918      984      2,902

 

(1) Amount reflects the total compensation expense for the year ended December 31, 2007 calculated in accordance with Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment,” or SFAS No. 123(R). The valuation assumptions used in determining such amounts are described in Note 11 to our financial statements included in this prospectus. The grant date fair value of Mr. Kelley’s option to purchase 25,000 shares of our common stock granted on January 26, 2007 is $15,733, the grant date fair value of Mr. Kelley’s option to purchase 7,500 shares of our common stock granted on June 19, 2007 is $4,638, the grant date fair value of Mr. Pasternack’s option to purchase 25,000 shares of our common stock granted on August 28, 2007 is $59,215 and the grant date fair value of Mr. Wolf’s option to purchase 25,000 shares of our common stock granted on December 11, 2007 is $68,707, in each case, as computed in accordance with SFAS No. 123(R) using the valuation assumptions set forth in Note 11 to our financial statements included in this prospectus. As of December 31, 2007, Mr. Kelley had outstanding option awards to purchase an aggregate of 57,500 shares and each of Mr. Pasternack and Mr. Wolf had outstanding option awards to purchase an aggregate of 25,000 shares.

Executive Compensation

Compensation Discussion and Analysis

Our executive compensation program is designed to attract talented individuals to lead, manage and operate all aspects of our business and reward and retain those individuals who continue to meet our high expectations over time. Our executive compensation program combines short- and long-term components, cash and equity, and fixed and contingent payments in the amounts and proportions that we believe are most appropriate to incentivize and reward our executive officers for achieving our objectives. Our executive compensation program also is intended to make us competitive in our industry, where there is considerable competition for talented executives.

Our named executive officers for 2007 were Alan Shaw, Ph.D., President and Chief Executive Officer; Robert S. Breuil, Senior Vice President, Finance and Chief Financial Officer; John Grate, Ph.D., Chief Technical Officer and Senior Vice President, Technology and Innovation; Douglas T. Sheehy, Vice President, General Counsel and Secretary; and David Walshaw, Vice President, Operations.

Objectives and Philosophy of Our Executive Compensation Program

Our compensation program for our named executive officers is designed to achieve the following objectives:

 

   

attract, engage and retain individuals of superior ability, experience and managerial talent enabling us to be an employer of choice in our highly-competitive and dynamic industry;

 

   

motivate and reward executives whose knowledge, skills and performance ensure our continued success;

 

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encourage and inspire our executives to achieve key corporate performance objectives by linking base salary increases and incentive award opportunities to the achievement of individual and company-wide short and long term goals; and

 

   

align the interests of our executives and stockholders by motivating executives to increase stockholder value, by providing a significant portion of total compensation opportunities for our executive officers in the form of direct ownership in our company through stock options and other equity awards.

Components of Our Executive Compensation Program

The components of our executive compensation program consist primarily of base salary, annual cash incentive bonus, equity awards and broad-based benefits programs. We combine short-term compensation components (such as base salaries and annual cash incentive bonuses) and long-term compensation components (such as equity incentive compensation) to provide an overall compensation structure that is designed to both attract and retain key executives as well as provide incentive for the achievement of short- and long-term corporate objectives.

The compensation committee of our board of directors is responsible for evaluating and administering our compensation programs and practices for our executive officers. Our compensation committee uses its judgment and experience and the recommendations of the Chief Executive Officer to determine the appropriate mix of short- and long-term compensation elements for each named executive officer. Short- and long-term compensation elements are balanced to encourage each executive officer to use his or her time and talents to accomplish both our short- and long-term corporate objectives. Our Chief Executive Officer, Chief Financial Officer, General Counsel and Vice President of Human Resources each attend our compensation committee meetings to provide input on factors that may influence our compensation committee members’ considerations of compensation programs and individual compensation, including individual performance, financial, legal and compensation parity considerations. Each such executive officer is not present at the meetings at the time that his or her own compensation is being reviewed by the committee. Our compensation committee analyzes each of the primary elements of our compensation program to ensure that our executives’ overall compensation is competitive with executive officers in similar positions at comparable companies in our labor market and to ensure internal compensation parity among our executive officers. Our compensation committee recommends and our board of directors approves equity incentive compensation for our employees, including our executive officers.

Our compensation committee determines compensation for our executive officers, including our named executive officers, in large part based upon our financial resources, as well as competitive market data. With regard to annual base salaries and annual cash incentive bonus opportunity targets for 2007, we referenced publicly available compensation data and comprehensive compensation data from the 2006 Radford Biotechnology Survey, focusing upon companies with between 50 and 149 employees. This Radford Biotechnology Peer Group includes the following companies:

 

 

454 Life Sciences

 

Acadia Pharmaceuticals, Inc.

 

Acorda Therapeutics, Inc.

 

Acusphere, Inc.

 

Adeza Biomedical Corp. (acquired by Cytyc Corp.)

 

Affymax, Inc.

 

Alexza Pharmaceuticals, Inc.

 

Alk-Abello A/S

 

Allen Institute for Brain Science

 

Allos Therapeutics, Inc.

 

Alnylam Pharmaceuticals, Inc.

 

Alphavax, Inc.

 

Altus Pharmaceuticals Inc.

 

Ambit Biosciences

 

Amicus Therapeutics Inc.

 

Anadys Pharmaceuticals, Inc.

 

Anesiva, Inc.

 

Angiotech Pharmaceutical, Inc.

 

Anika Therapeutics, Inc.

 

Aradigm Corporation

 

Archemix Corp.

 

Ariad Pharmaceuticals, Inc.

 

Artes Medical, Inc.

 

ARYX Therapeutics, Inc.

 

Aspen Medical Products, Inc.


 

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AtheroGenics, Inc.

 

AVANIR Pharmaceuticals

 

AVANT Immunotherapeutics, Inc.

 

Avecia Biotechnology Inc.

 

AVEO Pharmaceuticals, Inc.

 

AVI Biopharma, Inc.

 

Axcan Pharma

 

Barrier Therapeutics, Inc.

 

BattelleCRO

 

BioCryst Pharmaceuticals, Inc.

 

BioForm Medical, Inc.

 

BioNumerik Pharmaceuticals, Inc.

 

Cell Therapeutics, Inc.

 

Cerus Corporation

 

ChemoCentryx, Inc.

 

Cirrus Pharmaceuticals, Inc.

 

Coley Pharmaceutical Group, Inc.

 

CollaGenex Pharmaceuticals, Inc.

 

Columbia Laboratories, Inc.

 

CombinatoRx

 

Conceptus, Inc.

 

Conor Medsystems, LLC

 

Corus Pharma Inc.

 

CoTherix, Inc.

 

CTI Clinical Trial and Consulting Services

 

Curis, Inc.

 

Cytogen Corporation

 

Cytokinetics, Incorporated

 

Cytori Therapeutics, Inc.

 

Depomed, Inc.

 

diaDexus, Inc.

 

Discovery Laboratories, Inc.

 

DURECT Corporation

 

Dusa Pharmaceuticals, Inc.

 

Dyax Corp.

 

Dynavax Technologies Corporation

 

EPIX Pharmaceuticals

 

Favrille, Inc.

 

Fibrogen, Inc.

 

FivePrime Therapeutics, Inc.

 

Fluidigm Corporation

 

Genelabs Technologies, Inc.

 

Genomic Health, Inc.

 

Genta Incorporated

 

Genvec, Inc.

 

Geron Corporation

 

Globeimmune, Inc.

 

GPC Biotech AG

 

GTC Biotherapeutics, Inc.

 

HemCon Medical Technologies, Inc.

 

Hollis-Eden Pharmaceuticals, Inc.

 

Icagen, Inc.

 

Idaho Technology Inc.

 

Immunicon Corporation

 

In Vitro Technologies

 

Infinity Pharmaceuticals, Inc.

 

Ingenuity Systems, Inc.

 

Inotek Pharmaceuticals Corporation

 

Insmed Incorporated

 

Introgen Therapeutics, Inc.

 

Inverness Medical Innovations, Inc.

 

Iomai Corporation

 

IsoTis, Inc.

 

JM Hyde Consulting, Inc.

 

Johnson Matthey Pharma Services

 

Kalypsys, Inc.

 

Kirkegaard & Perry Laboratories, Inc. (KPL)

 

Kosan Biosciences Incorporated

 

Kyowa Pharmaceutical, Inc.

 

La Jolla Pharmaceutical Company

 

Laureate Pharma, Inc.

 

Lineberry Research Associates (acquired by Constella Group)

 

MacroGenics, Inc.

 

Maxygen, Inc.

 

Mayne Pharma (USA) (acquired by Hospira, Inc.)

 

MiddleBrook Pharmaceuticals, Inc. (formerly Advances Pharmaceutical)

 

Merrimack Pharmaceuticals, Inc.

 

Metabasis Therapeutics, Inc.

 

Metabolex, Inc.

 

Momenta Pharmaceuticals, Inc.

 

Myogen

 

NEOPHARM, Inc.

 

Neose Technologies, Inc.

 

Neuropace, Inc.

 

Northstar Neuroscience, Inc.

 

Novacea, Inc.

 

Novavax, Inc.

 

Novozymes A/S

 

Nuvelo, Inc.

 

Onyx Pharmaceuticals, Inc.

 

Organogenesis, Inc.

 

Ovation Pharmaceuticals, Inc.

 

Palatin Technologies, Inc.

 

Paratek Pharmaceuticals, Inc.

 

Penwest Pharmaceuticals Co.

 

Peregrine Pharmaceuticals, Inc.

 

Perlegen Sciences, Inc.

 

Pharmacopeia, Inc.

 

Pharmacyclics, Inc.

 

Pharsight Corporation

 

Plexxikon Inc.

 

Portola Pharmaceuticals, Inc.

 

PR Pharmaceuticals, Inc.

 

Praecis Pharmaceutical Incorporated

 

Prologue Research, International, Inc.

 

PTC Therapeutics, Inc.

 

Raven Biotechnologies, Inc.

 

RenaMed Biologics, Inc.

 

Renovis, Inc.

 

Replidyne, Inc.

 

Rinat Neuroscience Corporation

 

Sangamo BioSciences, Inc.

 

Sangart, Inc.

 

Santen Pharmaceutical Co., Ltd.

 

Savient Pharmaceuticals, Inc.

 

Schering-Plough Biopharma

 

SCYNEXIS, Inc.


 

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Seattle Genetics, Inc.

 

Senomyx, Inc.

 

Sequenom, Inc.

 

SGX Pharmaceuticals, Inc.

 

Sigma-Tau Pharmaceuticals, Inc.

 

Sirna Therapeutics, Inc.

 

Skyepharma PLC

 

Solexa, Inc.

 

Sunesis Pharmaceuticals, Inc.

 

SuperGen, Inc.

 

Synta Pharmaceuticals Corp.

 

Targacept, Inc.

 

TargeGen, Inc.

 

Tercica, Inc.

 

Therion Biologics Corporation

 

Third Wave Technologies, Inc.

 

Threshold Pharmaceuticals, Inc.

 

Titan Pharmaceuticals, Inc.

 

Transgenomic, Inc.

 

Trimeris, Inc.

 

Trubion Pharmaceuticals, Inc.

 

Unigene Laboratories, Inc.

 

U.S. Genomics, Inc.

 

Vermillion, Inc. (formerly Ciphergen Biosystem)

 

Virxsys Corporation

 

Vitae Pharmaceuticals, Inc.

 

Vivus, Inc.

 

World Heart Corporation

 

XDX Inc.

 

Xencor, Inc.

 

Xenogen Corporation

 

Xenoport, Inc.

 

ZARS Pharma, Inc.


 

With regard to annual base salaries and annual cash incentive bonus opportunity targets for 2008, we referenced publicly available compensation data and comprehensive compensation data from the 2007 Radford Global Life Sciences Survey, focusing upon the 48 biotechnology and pharmaceutical companies in Northern California with revenues of less than $100 million and fewer than 500 employees. The Radford Global Life Sciences Peer Group includes the following companies:

 

 

Affymax, Inc.

 

Agraquest, Inc.

 

Alexza Pharmaceuticals, Inc.

 

Amyris Biotechnologies, Inc.

 

Anesiva, Inc.

 

Aradigm Corporation

 

ARYX Therapeutics, Inc.

 

BioMarin Pharmaceutical, Inc.

 

Cell Genesys, Inc.

 

Cerus Corporation

 

Cytokinetics, Inc.

 

Depomed, Inc.

 

diaDexus, Inc.

 

Dow Pharmaceutical Sciences, Inc.

 

DURECT Corporation

 

Dynavax Technologies Corporation

 

FivePrime Therapeutics, Inc.

 

Genelabs Technologies, Inc.

 

Genomic Health, Inc.

 

Geron Corporation

 

Ingenuity Systems, Inc.

 

InterMune, Inc.

 

Jazz Pharmaceuticals, Inc.

 

Kosan Biosciences Incorporated

 

Maxygen, Inc.

 

Metabolex, Inc.

 

Monterey Bay Aquarium Research Institute

 

Novacea, Inc.

 

Nuvelo, Inc.

 

Onyx Pharmaceuticals, Inc.

 

Perlegen Sciences, Inc.

 

Pharmacyclics, Inc.

 

Pharsight Corporation

 

Plexxicon Inc.

 

Questcor Pharmaceuticals, Inc.

 

Raven Biotechnologies, Inc.

 

Renovis, Inc.

 

Rigel Pharmaceuticals, Inc.

 

Sangamo BioSciences, Inc.

 

Stem Cells, Inc.

 

Sunesis Pharmaceuticals, Inc.

 

SuperGen, Inc.

 

Tercica, Inc.

 

Theravance, Inc.

 

Threshold Pharmaceuticals, Inc.

 

VaxGen, Inc.

 

Xenoport, Inc.

 

XOMA(US) LLC


 

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Our compensation committee also considered data from Compensia, Inc., an executive compensation advisory services firm with respect to our equity incentive compensation. From Compensia, we obtained data on recently public life science companies and we provided Compensia information on certain of our business peers. The Compensia Peer Group included the following companies:

 

 

Accentia BioPharmaceuticals, Inc.

 

Achillion Pharmaceuticals, Inc.

 

Acorda Therapeutics, Inc.

 

Adams Respiratory Therapeutics, Inc.

 

Alexza Pharmaceuticals, Inc.

 

Allion Healthcare, Inc.

 

Altus Pharmaceuticals Inc.

 

Amicus Therapeutics Inc.

 

Biodel Inc.

 

Coley Pharmaceutical Group, Inc.

 

Cytokinetics, Inc.

 

Dyadic International, Inc.

 

Genomic Health, Inc.

 

Hansen Medical, Inc.

 

Helicos BioSciences Corporation

 

Insulet Corporation

 

Jazz Pharmaceuticals, Inc.

 

Luna Innovations, Inc.

 

Maxygen, Inc.

 

Metabolix, Inc.

 

NeurogesX, Inc.

 

NUCRYST Pharmaceuticals Corp.

 

Oculus Innovative Sciences, Inc.

 

Optimer Pharmaceuticals, Inc.

 

Orexigen Therapeutics, Inc.

 

Pharmasset, Inc.

 

Response Genetics, Inc.

 

SGX Pharmaceuticals, Inc.

 

Sirtris Pharmaceuticals, Inc.

 

Sunesis Pharmaceuticals, Inc.

 

Symyx Technologies, Inc.

 

Thermage, Inc.

 

Threshold Pharmaceuticals, Inc.

 

TomoTherapy Incorporated (acquired by Indevsus Pharmaceuticals, Inc.)

 

Valera Pharmaceuticals, Inc.

 

Verenium Corporation

 

ViaCell, Inc.

 

Volcano Corporation

 

XenoPort, Inc.


 

In 2007, we retained Compensia to conduct a review of our stock option grant competitiveness and practices, and to propose to our compensation committee an appropriate equity strategy for our company based on the Compensia Peer Group. Our compensation committee adopted Compensia’s proposal for equity grants, as described further below in the section entitled “Equity Incentive Compensation.”

We believe that the practices of the companies in the Radford Biotechnology Peer Group, the Radford Global Life Sciences Peer Group and the Compensia Peer Group provide us with appropriate compensation benchmarks because many of these companies have similar organizational structures and tend to compete with us for executives.

Our compensation committee has adopted a market-competitive compensation philosophy, which targets keeping the base salaries and annual cash incentive bonus opportunity approximately equal to the 50th percentile of such compensation at the companies within the Radford Biotechnology Peer Group with respect to 2007 annual base salary and individual target bonus percentages, the Radford Global Life Sciences Peer Group with respect to 2008 annual base salary and individual target bonus percentages, and the Compensia Peer Group with respect to equity incentive compensation. For employee benefits, we target compensation at the 75th percentile of such compensation at the companies within our peer group, comprised of technology and biotechnology companies in the 2007 Radford Benefits Exchange Report with between 200 and 749 employees. We target a higher percentile for employee benefits because we believe that superior benefits make us an attractive employer within all levels of the workforce. We work within the general framework of this market-competitive philosophy to determine each component of an executive’s compensation package based on numerous factors, including:

 

   

the demand for the particular skill sets we need within the marketplace;

 

   

performance goals and other expectations for the position and the individual;

 

   

the individual’s background and relevant expertise, including training and prior relevant work experience;

 

   

the individual’s role with us and the compensation paid to similar persons in the peer group of companies that we review; and

 

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comparison to other executives within our company having similar levels of expertise and experience.

During 2007, our compensation committee reviewed all aspects of our executive compensation program, including base salaries, annual cash incentive bonus and equity compensation targets for each of our executive officers. To ensure that top talent could be retained and attracted, in 2007 the compensation committee approved adjustments to each aspect of our executive compensation program to reflect competitive pressures and ensure internal equity among executives with similar levels of responsibility and authority.

Each of the primary elements of our executive compensation program is discussed in more detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation programs are designed to be flexible and complementary and to collectively serve all of the executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation policy, each individual element of our executive compensation program, to a greater or lesser extent, serves each of our objectives as set forth above.

Annual Cash Compensation

Base Salary

For 2007, base salaries were set at levels which were intended to be competitive with similar positions at companies in the Radford Biotechnology Peer Group. The base salaries of all executive officers are reviewed annually and adjusted to reflect individual roles and performance, and the competitive market. Our compensation committee also reviews each executive’s annual base salary in comparison with other executives who are at the same level at our company and seeks parity among executives with similar levels of responsibility and authority. Our compensation committee believes that a competitive base salary is a necessary element of any compensation program designed to attract and retain talented and experienced executives. We also believe that competitive base salaries can motivate and reward executives for their overall performance.

In December 2006, our compensation committee considered base salary market data at the 50th percentile for companies in the Radford Biotechnology Peer Group and approved an increase of between five and ten percent in the base salaries for 2007 for Dr. Shaw, Mr. Breuil, Dr. Grate and Mr. Walshaw, as set forth in the following table, based on market data and strong individual and corporate performance during 2006. Dr. Shaw and Mr. Walshaw received a larger salary increase than other executive officers based upon their extraordinary individual contributions to our company in 2006. Mr. Sheehy’s base salary was approved by our compensation committee in April 2007, upon the commencement of his employment. The following table sets forth the base salaries for 2007 for each of our named executive officers and the amount such salary increased over 2006 for each of Dr. Shaw, Mr. Breuil, Dr. Grate and Mr. Walshaw:

 

Name of Executive Officer

   Increase     2007 Base Salary Rate

Alan Shaw, Ph.D.

   10 %   $ 385,000

Robert S. Breuil

   5       288,750

John Grate, Ph.D.

   5       252,000

Douglas T. Sheehy

         220,000

David Walshaw

   10       220,000

In January 2008, our compensation committee considered base salary market data at the 50th percentile for companies in the Radford Global Life Sciences Peer Group to determine the market competitiveness of our executive officer base salary compensation. The analysis revealed that base salaries for all of our named executive officers, except Mr. Breuil, were significantly below the 50th percentile of companies in the Radford Global Life Sciences Peer Group. Therefore, our compensation committee approved an increase of between nine and eighteen percent in the base salaries for 2008 for each of our

 

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named executive officers, as set forth in the table below. In 2008, all of our named executive officers except Mr. Breuil remain below the 50th percentile, ranging between $15,000 and $59,000 below the 50th percentile of companies in the Radford Global Life Sciences Peer Group. Our compensation committee determined these base salary amounts to be appropriate in light of the stage of our company and the total compensation of each of the named executive officers, including annual cash incentive bonus opportunity and equity incentive compensation. Our compensation committee approved a base salary for Mr. Breuil which is $18,000 above the 50th percentile of the companies in the Radford Global Life Sciences Peer Group, reflecting his significant individual contributions to our company during 2007 and the critical nature of his skills and expertise for our company at our stage of development. Other than Mr. Breuil, the differences in the base salary increases for our executive officers was attributable to the amount by which the executive’s 2007 base salary was below the 50th percentile of the companies in the Radford Global Life Sciences Peer Group and the adjustments to the executive’s annual cash incentive opportunities that is described below under the heading “Annual Cash Incentive Bonuses.” Each named executive officer’s 2008 base salary and the percentage salary increase in 2008 is listed in the table below.

 

Name of Executive Officer

   Increase     2008 Base Salary Rate

Alan Shaw, Ph.D.

   10 %   $ 425,000

Robert S. Breuil

   11       320,000

John Grate, Ph.D.

   9       275,000

Douglas T. Sheehy

   18       260,000

David Walshaw

   14       250,000

Annual Cash Incentive Bonuses

Our compensation philosophy with respect to annual cash incentive bonuses is consistent with our overall compensation program philosophy. The annual cash incentive bonus is directed at tying individual compensation to both corporate and individual performance while maintaining market-competitive compensation. Performance, as measured against individual and corporate goals, affects the level of bonus payment.

Annual Cash Incentive Bonuses for 2007

In August 2007, our compensation committee ratified the 2007 Executive Incentive Compensation Plan under which each of our named executive officers was eligible to receive a cash bonus for performance in 2007. The amount of each executive’s bonus was determined equally based on corporate performance and individual performance, in each case, as measured against targets set by our compensation committee. Our compensation committee equally weighted each component to encourage executives to strive for individual excellence while maintaining focus on the teamwork necessary for the company’s financial success.

The corporate performance component of the bonus is measured based upon our company’s achievement of financial goals established by our compensation committee. For 2007, our compensation committee established equally weighted goals related to net revenue, contribution margin (revenue less cost of goods) and year-end cash (book value of unrestricted cash and securities). The compensation committee set each goal at a level it believed would require substantial effort and significant growth to achieve.

The individual performance component of the bonus is measured by our Chief Executive Officer’s, or in the case of our Chief Executive Officer’s performance, our compensation committee’s, assessment of the overall performance of each of our executives using individual goals established for each executive by our compensation committee. These individual goals, and the target bonus amounts, are established based on our Chief Executive Officer’s and our compensation committee’s evaluation of each executive’s position within the company, the corporate goals over which that executive has control or influence and the market practices of the companies in the Radford Biotechnology Peer Group for 2007 annual cash incentive

 

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bonuses. Individual performance goals are set to be difficult to achieve and require above what our compensation committee has determined to be average performance in order to meet the minimum standard. Examples of individual performance goals for 2007 for our named executive officers include designing and implementing corporate processes and controls in preparation for our initial public offering, delivering certain products for launch, supporting company financings, and securing strategic collaborators for pharmaceutical and biofuels projects. Since our Chief Executive Officer, or with respect to our Chief Executive Officer’s performance, our compensation committee, assesses the overall performance of the executive, an executive’s performance with respect to any one performance goal may not have a material impact on the individual’s assessed achievement level. Instead, the achievement level is determined by assessing whether a majority of performance goals were met or exceeded and is subject to upward and downward discretion by the Chief Executive Officer or compensation committee.

Under the 2007 Executive Incentive Compensation Plan, no bonus was payable if our company achieved less than 90% of any single corporate performance goal. No bonus was payable with respect to the individual performance component if our Chief Executive Officer, or with respect to our Chief Executive Officer’s performance, our compensation committee, determined that an executive did not achieve a majority of the executive’s individual performance goals. For the corporate performance component, the percentage of each executive’s target bonus paid directly correlates to the assessed performance at levels between 90% and 120%. For the individual performance component, the percentage of each executive’s target bonus paid directly correlates to the individual’s assessed performance at levels of at least 90%. Under the 2007 Executive Incentive Compensation Plan, our Chief Executive Officer, or with respect to our Chief Executive Officer’s performance, our compensation committee, had the discretion to determine the individual performance level with no maximum limit. The formula for the bonus paid to each of our named executive officers, except our Chief Executive Officer, is as follows:

 

Bonus = (Base Salary x % target x corporate performance x 50%) +
     (Base Salary x % target x individual performance x 50%)

With respect to the calculation of our Chief Executive Officer’s bonus, our compensation committee determined that his bonus should be based solely upon his achievement of individual performance goals, which were the same as the three corporate performance goals relating to net revenue, contribution margin and year-end cash. Our compensation committee believes that our corporate performance is indicative of our CEO’s overall performance. Our compensation committee may exercise its discretion to provide him with an individual performance factor that is greater than the corporate performance factor used in the calculation of the other named executive officers’ bonus calculations since the corporate performance factor is capped at 120%. The formula for the bonus paid to our Chief Executive Officer is as follows:

 

Bonus = (Base Salary x % target x individual performance)

 

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In April 2007, the compensation committee approved the individual bonus targets, as a percentage of 2007 base salary, set forth in the following table for each of our named executive officers using data from the Radford Biotechnology Peer Group and anecdotal evidence regarding executive compensation. Differences in the level of bonus opportunity were set to directly correlate to the named executive officer’s role and responsibilities for our company. In January 2008, our Chief Executive Officer and with respect to our Chief Executive Officer’s performance, our compensation committee, determined the individual performance factor for each of our named executive officers, ranging from 120% to 150%, with differences between executives caused by the amount by which individual performance exceeded expectations. The corporate performance factor for 2007 was 120% based on the company’s overachievement of each of the net revenue, contribution margin and year-end cash goals. Based on his strong performance during 2007, our compensation committee waived the pro-ration of Mr. Sheehy’s annual cash incentive bonus that otherwise would have applied based on his April 2, 2007 hire date. However, to reflect his start date in April 2007, our compensation committee reduced his individual performance factor to 120%. Our named executive officers received the following annual cash incentive bonus payments for 2007:

 

Name of Executive Officer

   2007 Bonus Target
(as % of 2007

Base Salary)
   2007 Individual
Performance Factor
   2007 Annual Cash
Incentive Bonus Payment

Alan Shaw, Ph.D.

   45%    150%    $ 259,875

Robert S. Breuil

   35       145         133,908

John Grate, Ph.D.

   35       140         114,660

Douglas T. Sheehy

   30       120         79,200

David Walshaw

   30       150         89,100

Annual Cash Incentive Bonuses for 2008

In 2008, our compensation committee considered annual cash incentive bonus data for companies in the Radford Global Life Sciences Peer Group to evaluate the competitiveness of our annual cash incentive bonus compensation for our named executive officers. The analysis revealed that our 2007 annual cash incentive bonus compensation targets were below the 50th percentile of the companies in the Radford Global Life Sciences Peer Group for Dr. Shaw and Mr. Breuil. Our compensation committee approved the increase in bonus target percentages for 2008 to enable us to be at the 50th percentile of the Radford Global Life Sciences Peer Group with respect to annual cash incentive bonus targets for Dr. Shaw and Mr. Breuil, and increased Dr. Grate’s annual cash incentive target to increase his total compensation opportunity to a more market-competitive level and to maintain internal compensation parity. Our compensation committee did not adjust the annual cash incentive bonus targets for Mr. Sheehy and Mr. Walshaw since each was already at the 50th percentile of the companies in the Radford Global Life Sciences Peer Group and each received significant base salary increases as described above under the heading “Annual Cash Compensation — Base Salary.” The table below sets forth the annual cash incentive bonus target for each of our named executive officers.

 

Name of Executive Officer

   2008 Bonus Target
(as % of 2008
Base Salary)

Alan Shaw, Ph.D.

   50%

Robert S. Breuil

   40   

John Grate, Ph.D.

   40   

Douglas T. Sheehy

   30   

David Walshaw

   30   

In March 2008, our compensation committee approved the 2008 Executive Incentive Compensation Plan under which each of our named executive officers is eligible to receive a cash bonus for performance in 2008. The amount of each executive’s bonus is determined based upon corporate and individual performance, in each case, as measured against targets set by our compensation committee.

 

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Under the 2008 Executive Incentive Compensation Plan, the corporate performance component of the bonus is measured based upon our company’s achievement of three equally weighted financial goals established by our compensation committee, relating to net revenue, contribution margin (revenue less cost of goods) and year-end cash (book value of unrestricted cash and securities).

The individual performance component of the bonus is measured by our Chief Executive Officer’s, or in the case of our Chief Executive Officer’s performance, our compensation committee’s, assessment of the overall performance of each of our executives using individual goals established for each executive by our compensation committee. These individual goals, and the target bonus amounts, are established based on our Chief Executive Officer’s and our compensation committee’s evaluation of each executive’s position within the company, the corporate goals over which that executive has control or influence and the market practices of the companies in the Radford Global Life Sciences Peer Group. Individual performance goals are set to be difficult to achieve and require above what our compensation committee has determined to be average performance in order to meet the minimum standard. Achievement against the goals set by the compensation committee is determined by assessing whether a majority of performance targets were met or exceeded and is subject to upward and downward discretion by the Chief Executive Officer or compensation committee.

Under the 2008 Executive Incentive Compensation Plan, no bonus is payable if our company achieves less than 80% of any single corporate performance goal, or if the executive’s achievement of his individual goals is less than 90%. The maximum corporate performance component achievement level is 120%, and there is a direct correlation between actual achievement and the corporate performance factor. Similarly, the maximum individual performance component achievement level is 150%, with a direct correlation between individual achievement and the individual performance factor. The formula for the bonus paid to each executive under the 2008 Executive Incentive Compensation Plan is as follows:

 

Bonus = (Base Salary x % target x corporate performance x 50%) +
     (Base Salary x % target x individual performance x 50%)

Equity Incentive Compensation

We believe that our long-term performance is best facilitated through a culture of executive ownership that encourages long-term investment by our executive officers in our equity, thereby better aligning the executives’ interests with the interests of our stockholders. To encourage this ownership culture, we typically make an initial equity award of stock options to new employees and periodic grants at other times, as approved by our board of directors. Our compensation committee recommends and our board of directors approves all equity grants to our employees including our executive officers. These grants have an exercise price that is at least equal to the fair market value of our common stock on the date of grant, as determined by our board of directors. Grants of options in 2007 were typically subject to a four-year vesting schedule with 1/4th of the grant vesting upon the first anniversary of the vesting commencement date and the remainder of the shares vesting at a rate of 1/48th of the total shares subject to the option on each monthly anniversary of the vesting commencement date, subject to the continued service of the executive officer. Vesting commencement dates generally correlate to the date of hire, date of promotion or date of grant.

The size of the initial stock option award is determined based on the executive’s position with us and takes into account the executive’s base salary and other compensation as well as an analysis of the grant and compensation practices of the peer companies that we review in connection with establishing our overall compensation policies. The initial stock option awards are intended to provide the executive with an incentive to build value in the organization over an extended period of time while remaining consistent with our overall compensation philosophy.

 

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In 2007, we considered a number of factors in determining the amount of periodic equity incentive awards, if any, granted to our executives, including:

 

   

the number of shares subject to, and exercise price of, outstanding options, both vested and unvested, held by our executives;

 

   

the vesting schedule of the unvested stock options held by our executives;

 

   

the amount and percentage of our total equity on a diluted basis held by our executives individually and as a group; and

 

   

the periodic equity incentive award practices of peer companies that we review in connection with establishing our overall compensation policies.

In August 2006, our compensation committee approved the Executive Equity Performance Plan which provides members of our management team with the opportunity to attain proposed target equity ownership levels, over a three-year period, based upon corporate and individual performance. Our compensation committee approved target equity ownership levels for each of our executive officers based upon the experience and judgment of its members who are familiar with the compensation practices of companies in our industries.

In 2007, we retained Compensia to review the market competitiveness of our stock option grant practices, and to help our compensation committee develop an equity strategy for our company. Our compensation committee managed Compensia’s review. Compensia recommended an equity strategy, adopted by our compensation committee in August 2007, that targets keeping our equity incentive compensation at the 50th percentile of the companies in the Compensia Peer Group.

In order to ensure that the stock options we granted in 2007 were issued with per share exercise prices no less than the fair market value of our common stock, our board of directors considered what it determined to be all relevant factors related to the fair market value of our common stock, including our financial condition, anticipated expenses, valuations of comparable companies, financing prospects, current and potential strategic relationships, competitive developments and related matters, the aggregate liquidation preference of the Company’s preferred stock, and valuations of our common stock performed in August 2006, August 2007, October 2007 and December 2007.

As a privately owned company, there has been no market for our common stock. Accordingly, in 2007, we had no program, plan or practice pertaining to the timing of stock option grants to executive officers coinciding with the release of material non-public information. The compensation committee intends to adopt a formal policy regarding the timing of grants in connection with this offering.

Termination-Based Compensation

Our compensation committee provides our executives with termination protection when it determines that such protection is necessary to attract or retain an executive and to promote internal equity among executives with the same level of responsibility and authority within our company.

In connection with his offer letter agreement, we provided Mr. Breuil with severance benefits termination protection in the event he was terminated for any reason other than cause, as defined in his offer letter agreement, for a period of three months after the start of his employment and through the 12-month anniversary of an option grant he was entitled to receive after the company secured additional financing. Mr. Breuil was eligible for severance benefits in the amount of $137,500 payable over six months and continued health and insurance benefits for six months. Our compensation committee provided these benefits to Mr. Breuil to encourage him to accept a full-time position with our company and to compensate him for a similar benefit offered by his prior employer. The severance benefits provided for in Mr. Breuil’s offer letter agreement terminated in August 2007. For a further description of these arrangements, see the section below entitled “Offer Letter Agreements.”

 

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We have entered into change in control agreements with Dr. Shaw, Mr. Breuil, Dr. Grate and Mr. Sheehy, which provide severance payments and benefits in the event the executive is terminated without cause or resigns with good reason within 12 months following certain transactions or changes in our control stockholders or, in certain circumstances, where the executive is terminated without cause or resigns with good reason within a short period prior to certain transactions or changes in our control stockholders.

The severance payments and benefits that are payable under the change in control agreements are further described below in the section entitled “Potential Payments Upon Termination and Change in Control — Change in Control Agreements.”

Other Compensation

All of our executive officers are eligible to participate in certain benefit plans and arrangements offered to employees generally, including health, dental, life and disability insurance and our 401(k) plan. We currently pay in excess of 90% of the monthly premium, with respect to coverage for the employee only portion of coverage for all employees, including our named executive officers, for medical, dental, vision, life and long-term disability insurance. Should medical insurance premium rates increase, employees, including named executive officers, may be required to contribute to the cost of increased premiums to retain coverage. Consistent with our market-competitive compensation philosophy, we intend to continue to maintain these benefit plans and arrangements for our employees, including our executive officers. Our compensation committee in its discretion may revise, amend or add to any executive’s benefits and perquisites if it deems it advisable. We currently do not believe it is necessary for the attraction or retention of management talent to provide the officers with a substantial amount of compensation in the form of perquisites.

Tax Considerations

Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our Chief Executive Officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, our board of directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

 

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2007 Summary Compensation Table

The following table summarizes the compensation that we paid to our Chief Executive Officer, Chief Financial Officer and each of our three other most highly compensated executive officers during the year ended December 31, 2007. We refer to these officers in this prospectus as our named executive officers.

 

Name and Principal Position

   Year    Salary    Option
Awards

(1)
   Non-Equity
Incentive Plan
Compensation

(2)
   All Other
Compen-
sation

(3)
   Total

Alan Shaw, Ph.D., President and Chief Executive Officer

   2007    $ 385,000    $ 243,780    $ 259,875    $ 1,326    $ 889,981

Robert S. Breuil, Senior Vice President, Finance and Chief Financial Officer

   2007      288,750      83,791      133,908      1,469      507,918

John Grate, Ph.D., Chief Technical Officer and Senior Vice President, Technology and Innovation

   2007      252,000      48,498      114,660      3,643      418,801

Douglas T. Sheehy, Vice President, General Counsel and Secretary(4)

   2007      164,522      32,826      79,200      549      277,097

David Walshaw, Vice President, Operations

   2007      220,000      45,952      89,100      1,098      356,150

 

(1) The amounts included in the “Option Awards” column represent the compensation cost that was recognized by us in the year ended December 31, 2007 determined in accordance with Statement of Financial Accounting Standards No. 123(R), “Share Based Payment,” or SFAS No. 123(R). The valuation assumptions used in determining such amounts are described in Note 11 to our consolidated financial statements included in this prospectus.

 

(2) Amounts reflect bonus payments made pursuant to the Executive Incentive Compensation Plan.

 

(3) Amounts reflect payments of group term life insurance premiums.

 

(4) Mr. Sheehy joined Codexis as Vice President, General Counsel and Secretary on April 2, 2007.

 

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Grants of Plan-Based Awards in 2007 Table

All options granted to our named executive officers are incentive stock options, to the extent permissible under the Code. The exercise price per share of each option granted to our named executive officers was determined to be equal to the fair market value of our common stock by our board of directors on the date of the grant. All options were granted under our 2002 Stock Plan, as amended, as described below in the section entitled “Employee Benefit and Stock Plans — 2002 Stock Plan, as amended.”

The following table shows information regarding grants of equity awards during the year ended December 31, 2007 to each of our named executive officers.

 

Name

   Grant Date    Vesting
Commence-
ment Date
   Estimated Future
Payouts Under
Non-Equity
Incentive Plan
Awards($)(1)
   All Other
Option
Awards;
Number of
Securities
Underlying
Options

(#)(3)
   Exercise
or Base
Price of
Option
Awards
($/Share)
   Grant
Date Fair
Value of
Option
Awards
(4)
         Thres-
hold
    Target         

Alan Shaw, Ph.D.

   1/26/2007    8/23/2006         217,125    1.63    $ 36,637
   1/26/2007    12/31/2006         217,125    1.63      136,637
   8/28/2007    8/28/2007         337,500    4.47      782,190
   10/25/2007    10/25/2007         174,000    4.57      376,292
         77,962     173,250         

Robert S. Breuil

   1/26/2007    1/3/2006         62,250    1.63      39,174
   1/26/2007    12/31/2006         62,250    1.63      39,174
   8/28/2007    8/28/2007         108,000    4.47      250,301
   10/25/2007    10/25/2007         108,000    4.57      233,561
         45,478     101,062         

John Grate, Ph.D.

   1/26/2007    8/23/2006         44,375    1.63      27,925
   1/26/2007    12/31/2006         44,375    1.63      27,925
   8/28/2007    8/28/2007         82,500    4.47      191,202