EXEL

Exelixis, Inc. 10-K Summary (Fiscal Year Ended Jan 2, 2009)

Business Context and Reporting Period

Exelixis, Inc. is a biopharmaceutical company focused on discovering and developing small molecule drugs for cancer and other serious diseases. The company utilizes an integrated drug discovery platform and maintains a pipeline of compounds in various stages of clinical development. The reporting period covers the 53-week fiscal year ended January 2, 2009 (referred to as 2008 in the text for convenience).

Key Financial Metrics

Debt and Liquidity: As of December 31, 2008, the company had $117.7 million in total debt, primarily consisting of an $85.0 million convertible loan from GlaxoSmithKline (GSK) and bank equipment lines of credit. The company maintains a $150.0 million credit facility with Deerfield Entities, of which $0 was drawn down as of year-end.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4% to $117.9 million, driven by a $195.0 million upfront payment from a new collaboration with Bristol-Myers Squibb (BMS) and milestone achievements. This offset a decline in research and development service revenues due to the conclusion of the GSK collaboration term and the sale of the Artemis subsidiary.
• Increased Net Loss: Net loss widened significantly to $162.9 million from $86.4 million. This was primarily due to increased R&D expenses ($32.0 million increase) and the absence of one-time gains recognized in 2007 from the sale of the plant trait business ($18.8 million) and the Artemis subsidiary ($18.1 million).
• Restructuring: In November 2008, the company implemented a restructuring plan reducing its workforce by approximately 10% (78 employees), resulting in a $2.9 million charge.
• Collaboration Shifts: The GSK collaboration development term concluded in October 2008, accelerating $18.5 million in deferred revenue recognition. Conversely, a major new collaboration with BMS was signed in December 2008.

Guidance, Outlook, and Risks

Strategy and Outlook: Management is focusing on cost control and operating independently of capital markets for a substantial period. The strategy prioritizes the development of XL184 (co-developed with BMS) and seeks to fund discovery costs through collaborations. The company anticipates negative operating cash flow for the foreseeable future.

Key Risks and Contingencies:

• Liquidity and Debt Covenants: The company must maintain specific "working capital" ($25.0 million) and "cash and investments" ($50.0 million) levels to comply with GSK loan covenants. Additionally, the BMS collaboration requires "cash reserves" of at least $80.0 million to maintain co-development rights; falling below this threshold could force the company to opt out of co-development in favor of milestone payments.
• Debt Repayment: The GSK loan of $102.2 million (principal and interest) becomes due in three annual installments starting October 27, 2009. Repayment may be made in cash or stock, but stock repayment is subject to market price restrictions.
• Clinical Development: Success depends on the safety and efficacy of product candidates, particularly XL184 in Phase 3 trials. Failure in clinical trials would prevent commercialization and revenue generation.

Investor Verification Checklist

• Verify the company's ability to meet the $80.0 million "cash reserves" threshold required to maintain co-development rights with Bristol-Myers Squibb for XL184.
• Confirm the status of the $102.2 million GSK loan repayment plan due in October 2009 and the potential for dilution if repaid via stock issuance.
• Monitor the progress of the Phase 3 clinical trial for XL184, the company's most advanced asset.
• Review the impact of the November 2008 restructuring on future operating expenses and R&D timelines.
• Assess the company's reliance on collaboration revenue, noting that BMS, GSK, and Genentech accounted for 100% of significant revenue sources in 2008.