Business Context and Reporting Period
Exelixis, Inc. is a biopharmaceutical company focused on cancer therapies, primarily cabozantinib (COMETRIQ) and partnered cobimetinib. This is the Form 10-Q for the quarter ended October 2, 2015; the statements present periods as of and ended September 30, 2015. The request metadata says 2014 Q3, but the filing itself is for 2015 Q3.
Cabozantinib was marketed for medullary thyroid cancer (MTC) and under development in more than 40 trials. The Phase 3 METEOR trial in advanced renal cell carcinoma (RCC) met its progression-free-survival endpoint, and the company began a rolling U.S. NDA submission in October 2015. Cobimetinib was partnered with Genentech; its U.S. approval for advanced melanoma followed on November 10, 2015, after the reporting period.
Financial Results and Position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $9.9 | $6.3 | $27.2 | $17.8 |
| Net product revenue | $6.9 | $6.3 | $24.2 | $17.8 |
| Operating expenses | $45.6 | $57.9 | $117.1 | $196.0 |
| Operating loss | $(35.8) | $(51.6) | $(89.8) | $(178.3) |
| Net loss | $(47.6) | $(62.6) | $(126.1) | $(210.6) |
| Net loss per share | $(0.22) | $(0.32) | $(0.62) | $(1.09) |
| Product gross margin | 79% | 91% | 88% | 92% |
Q3 revenue included a $3.0 million Merck milestone. Nine-month revenue increased 53% year over year; product revenue rose 36%. The nine-month 2015 product revenue included a one-time $2.6 million adjustment from changing U.S. COMETRIQ revenue recognition from sell-through to sell-in. Q3 product revenue increased 9% despite lower shipment volume, partly offset by higher average selling price.
Research and development expense fell 40% in Q3 and 51% for the nine-month period, mainly reflecting lower clinical-trial costs after the termination of the COMET-1 and COMET-2 prostate-cancer trials and reduced METEOR costs. Q3 SG&A increased 80%, primarily due to marketing and stock-based compensation, including expense associated with performance-based options vesting after METEOR results. Product gross margin declined, partly due to inventory write-downs of $0.9 million in Q3 and $1.1 million year to date.
For the nine months, operating cash use was $106.2 million, versus $185.4 million in 2014; investing activities provided $26.1 million and financing activities provided $145.3 million, largely from the July equity offering. Cash and cash equivalents at September 30 were $145.6 million. Total cash and investments were $282.1 million, of which $197.8 million was available for operations; $81.6 million was held as required compensating balances and $2.7 million was long-term restricted. Total assets were $363.2 million, total liabilities $437.5 million, and stockholders’ deficit $74.2 million.
Debt carrying value totaled $377.9 million: $196.4 million for the 2019 convertible notes, $101.5 million for the Deerfield notes, and $80.0 million for the Silicon Valley Bank term loan. The filing separately cites $492.4 million of total consolidated indebtedness through maturity, excluding trade payables. Deerfield notes were extended to July 2018 and, beginning July 2015, bear 15% annual interest, half paid in cash and half paid in kind. The $80.0 million bank term loan is due in a balloon payment in May 2017; the $287.5 million face amount of 2019 notes matures in August 2019.
Material Changes, Outlook, and Risks
- Management expected available operating cash, short-term investments, and product revenue to fund operations for at least 12 months after Q3 2015, but said future capital needs remained substantial and could arise sooner. The forecast depends on COMETRIQ and COTELLIC commercialization, cabozantinib partnering, trial outcomes, and spending.
- Management expected R&D expense to increase in Q4 2015 as work shifted toward RCC regulatory filings, and SG&A to increase with commercial preparations for potential cabozantinib and cobimetinib launches.
- For METEOR, median PFS was 7.4 months with cabozantinib versus 3.8 months with everolimus (HR 0.58; p<0.001). Interim overall-survival results favored cabozantinib, but had not met the prespecified statistical-significance threshold; final OS analysis was expected in 2016. The company expected to complete the U.S. NDA by year-end 2015 and file in Europe in early 2016.
- CELESTIAL, the Phase 3 cabozantinib trial in advanced liver cancer, remained in enrollment; top-line results were expected in 2017. Management noted that earlier Phase 3 prostate-cancer trials failed their primary endpoints, illustrating clinical-development risk.
- Key risks include continued losses and negative operating cash flow, substantial debt service and dilution potential, bank collateral and covenant requirements, dependence on successful product launches and regulatory approvals, competition (including nivolumab in RCC), clinical and manufacturing uncertainties, and reliance on Genentech for cobimetinib development and commercialization. The company also cited possible need for additional capital and uncertainty around partnering cabozantinib internationally.
- No material legal proceedings or material off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the reporting-period mismatch: the supplied metadata says 2014 Q3, whereas this filing covers 2015 Q3.
- Track the RCC NDA review, final METEOR overall-survival results, and CELESTIAL progress against management’s stated timelines.
- Assess whether operating cash runway assumptions remain valid, particularly the amount of cash available after required bank compensating balances and the pace of cash burn.
- Review debt maturities, Deerfield’s 15% interest terms and potential mandatory prepayments, bank collateral covenants, and possible equity dilution or refinancing needs.
- Separate recurring product performance from the $2.6 million revenue-recognition transition adjustment and the $3.0 million Merck milestone; monitor COMETRIQ shipments, gross margin, and inventory write-downs.
- Evaluate the economics and costs of the Genentech cobimetinib collaboration, commercial uptake, and the company’s profit-share and royalty receipts as they develop.