Exelixis, Inc. — Form 10-K summary
Period and scope: The supplied filing is for fiscal 2018, which ended December 28, 2018 (presented in many tables as December 31), with fiscal 2017 as the main comparison. This does not match the request metadata of “2017 Q4.” The filing provides unaudited fourth-quarter 2018 data, but not a standalone fourth-quarter 2017 comparison.
Business context
Exelixis is an oncology-focused biotechnology company. Its principal commercial driver is CABOMETYX (cabozantinib), marketed in the U.S. for advanced renal cell carcinoma (RCC) during 2018; the FDA approved it for previously treated hepatocellular carcinoma (HCC) in January 2019. COMETRIQ is approved for medullary thyroid cancer (MTC). Exelixis also receives collaboration revenue and royalties from partnered products, including COTELLIC and, following a January 2019 approval in Japan, MINNEBRO.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $853.8 million | $452.5 million | +89% |
| Net product revenue | $619.3 million | $349.0 million | +77% |
| Collaboration revenue | $234.5 million | $103.5 million | +127% |
| Operating expenses | $415.0 million | $286.6 million | +45% |
| Operating income | $438.9 million | $165.9 million | +164% |
| Net income | $690.1 million | $154.2 million | +348% |
| Diluted earnings per share | $2.21 | $0.49 | — |
| Operating cash flow | $415.7 million | $165.6 million | — |
- CABOMETYX revenue was $599.9 million, up 85%; COMETRIQ revenue was $19.3 million, down 23%. CABOMETYX growth primarily reflected higher sales volume following its RCC indication expansions.
- Collaboration revenue included $164.4 million of milestone revenue, up from $57.5 million. Ipsen royalties on cabozantinib sales outside the U.S. and Japan rose to $32.3 million from $3.8 million.
- Gross margin was 96%, versus 96% in 2017. Operating margin was approximately 51%.
- R&D expense rose 62% to $182.3 million, mainly from clinical trial activity, increased staffing and pipeline collaborations. SG&A rose 29% to $206.4 million, reflecting organizational growth and commercial preparations for the HCC launch.
- Cash and investments totaled $851.6 million at year-end, versus $457.2 million a year earlier. Working capital was $791.5 million. Operating cash flow increased; investing activities used $297.9 million, principally reflecting investment purchases and $33.3 million of property and equipment purchases. Financing activities provided $9.7 million.
- The company reported no outstanding debt borrowings at year-end; reported long-term obligations of $29.4 million mainly included deferred revenue and lease liabilities. Total liabilities were $134.8 million and stockholders’ equity was $1.287 billion.
Fourth-quarter 2018 data reported in the filing
For the quarter ended December 31, 2018, revenue was $228.6 million, gross profit $168.9 million, operating income $111.6 million and net income $360.1 million ($1.20 basic and $1.15 diluted per share). The unusually high quarterly net income included the tax benefit described below.
Material changes and unusual items
- FY2018 net income included a $244.1 million income tax benefit from releasing substantially all of the valuation allowance against deferred tax assets. It is not a recurring operating item. The company continued to maintain a $58.1 million valuation allowance against California state deferred tax assets.
- Beginning in 2019, management expected an effective tax rate of approximately 21%–23%, which it said would reduce net income and earnings per share relative to results benefiting from the valuation-allowance release.
- Exelixis adopted ASC Topic 606 in 2018. The change reduced reported FY2018 revenue by $35.9 million versus the amount that would have been reported under the prior method; it also materially changed the timing of collaboration revenue recognition. The adoption increased opening accumulated earnings by $258.5 million.
- Debt repayments in 2017 eliminated interest expense in 2018. The filing reports no interest expense in FY2018, compared with $8.7 million in FY2017.
- The Ipsen royalty rate moved from 2%–12% on initial sales to 22%–26% after the cumulative sales threshold was reached in 2018. Exelixis expected higher royalty revenue in 2019 as a result.
Outlook, development and risks
- Management expected 2019 R&D expense to increase as cabozantinib trials and pipeline work expanded, and SG&A to grow modestly. It expected gross margin to remain broadly stable.
- The company said current cash resources, together with expected product and collaboration revenue, were expected to support operations for at least 12 months after filing. It also noted that growth plans or adverse business developments could require additional capital.
- Key development programs included phase 3 studies of cabozantinib in differentiated thyroid cancer (COSMIC-311), first-line HCC with atezolizumab (COSMIC-312), and first-line RCC with nivolumab (CheckMate 9ER). Exelixis was evaluating cabozantinib across more than 75 ongoing or planned trials.
- XL092, an internally discovered oral tyrosine kinase inhibitor, entered clinical development after the FDA accepted its IND in January 2019. Timing and results of the planned phase 1 trial remained uncertain.
- Important risks include intense competition, especially from immune checkpoint inhibitor combinations; clinical-trial failure or delay; dependence on Ipsen and Takeda for commercialization abroad; reliance on third-party manufacturers; reimbursement and drug-pricing pressure; and patent or generic-entry challenges. The company also identified foreign-exchange exposure on ex-U.S. royalties and potential Brexit-related supply and market disruption.
- Exelixis reported no material legal proceedings. The filing reported effective disclosure and internal financial-reporting controls and an unqualified audit opinion.
Most important facts for investors to verify
- Confirm the requested period: this summary covers the FY2018 Form 10-K, not a 2017 Q4 filing.
- Assess how much FY2018 earnings growth came from recurring product and collaboration operations versus the $244.1 million tax benefit and milestone timing.
- Track CABOMETYX sales, market share, pricing, rebates and reimbursement, and whether the January 2019 HCC approval adds durable revenue amid competition.
- Monitor trial milestones and safety/efficacy results for COSMIC-311, COSMIC-312 and CheckMate 9ER, along with the early development of XL092.
- Review collaboration dependence and the variability of milestones, royalties and partner performance; also note that Merck notified Exelixis after year-end that it would terminate its PI3K-delta program.
- Check liquidity and cash generation against planned higher R&D investment, and evaluate the prospective 21%–23% tax rate and potential dilution or financing needs.