EXEL

Exelixis, Inc. 2002 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Exelixis, Inc.
Reporting Period: Fiscal year ended December 31, 2002
Business Model: Biotechnology company focused on drug discovery and development using comparative genomics and model system genetics. The company targets cancer, inflammatory diseases, and metabolic disorders, while also maintaining significant agricultural collaborations.
Key Pipeline Assets:

• Rebeccamycin Analogue (XL 119): In-licensed from Bristol-Myers Squibb; Phase II trials (NCI-sponsored) well advanced for upper gastrointestinal tumors.
• XL 784: First proprietary small molecule from Exelixis platform; anti-angiogenesis target; expected to file Investigational New Drug (IND) application in 2003.

Key Financial Metrics (Year Ended Dec 31, 2002)

Note: The 2002 Net Loss includes a $1.3 million loss from discontinued operations (Genomica software business).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 8% year-over-year, driven by new collaborations with GlaxoSmithKline (GSK) and Bristol-Myers Squibb (BMS), and compound deliveries from chemistry collaborations. This offset the loss of revenue from the terminated Pharmacia collaboration.
• Expense Increase: R&D expenses rose 35% to $112.0 million due to increased personnel costs (34% increase), lab supplies (41% increase), and licensing/consulting fees (128% increase) to support clinical development of XL 119 and XL 784.
• Debt Expansion: Long-term obligations increased significantly due to a $25.0 million loan facility from GSK and a $30.0 million convertible note from Protein Design Labs (PDL).
• Accounting Changes: Adopted SFAS 142, eliminating goodwill amortization. Goodwill impairment tests in Q1 and Q4 2002 resulted in no impairment charges.

Guidance, Outlook, and Risks

Outlook:

• Management expects to continue incurring net losses and negative operating cash flow for the foreseeable future.
• Current cash, investments, and committed collaborator funding are projected to sustain operations for at least the next two years.
• Key milestones include filing the IND for XL 784 in 2003 and advancing the rebeccamycin analogue into company-sponsored trials pending FDA discussions.

• Collaboration Dependency: Substantially all revenue is derived from collaborations. Two collaborators (GSK and BMS) accounted for 39% and 25% of 2002 revenue, respectively. Termination or failure to meet milestones could severely impact revenue.
• Regulatory Uncertainty: No products are approved. Clinical trials for XL 119 and XL 784 face significant risk of failure or delay.
• Liquidity: While currently funded, future capital requirements are substantial. Additional financing may be required, potentially on dilutive or restrictive terms.
• Intellectual Property: Risks regarding patent validity, infringement claims, and the ability to protect proprietary technologies.

Investor Verification Checklist

• Cash Burn Rate: Verify the sustainability of the $222 million cash position against the $112 million annual R&D burn rate and upcoming clinical trial costs.
• Collaboration Terms: Review the specific milestone triggers and termination clauses in the GSK and BMS agreements, which represent the majority of revenue.
• Debt Covenants: Examine the terms of the $25 million GSK loan and $30 million PDL convertible note, including repayment schedules and conversion prices.
• Clinical Data: Monitor upcoming FDA communications regarding the rebeccamycin analogue and the results of toxicology studies for XL 784.
• Discontinued Operations: Confirm the final status of the Genomica software divestiture and any remaining lease obligations.