EXEL

Exelixis, Inc. 10-Q Summary: Quarter Ended June 30, 2006

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2006. Exelixis, Inc. is a biotechnology company focused on discovering and developing small molecule therapeutics for cancer and other serious diseases. The company operates primarily through internal research and development and strategic collaborations with major pharmaceutical partners. As of July 28, 2006, there were 84,174,584 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 21% ($7.1 million) for the three months ended June 30, 2006, compared to the same period in 2005. This was primarily due to the conclusion of the Genoptera collaboration in June 2005, which included a one-time termination fee of $11.5 million. This decrease was partially offset by new funding from Bristol-Myers Squibb ($2.5 million) and Sankyo ($0.5 million).
• Increased Operating Expenses: Research and development (R&D) expenses increased 30% ($10.8 million) for the quarter. Drivers included a $5.7 million increase in consulting/professional fees due to advancing clinical trials (XL999, XL784, XL880) and a $2.9 million increase in stock-based compensation following the adoption of SFAS 123R.
• Net Loss Expansion: Net loss increased significantly to $23.99 million for the quarter (from $9.7 million in 2005) and $51.1 million for the six-month period (from $37.1 million in 2005), driven by higher R&D spend and the loss of prior-year termination fees.
• Debt Repayment: In May 2006, the company repaid in full a $30.0 million convertible promissory note to PDL BioPharma, Inc.

Guidance, Outlook, and Risks

• Liquidity Outlook: Management anticipates that current cash, marketable securities, investments held by Symphony Evolution, Inc. (SEI), and expected collaborator funding will sustain operations for at least 12 months following June 30, 2006. However, substantial additional funding will be required to support the aggressive development of the pipeline.
• Financial Covenants: The company must maintain working capital of at least $25.0 million and cash/investments of at least $50.0 million to comply with covenants in its loan agreement with GlaxoSmithKline. As of June 30, 2006, working capital was $102.3 million and cash/investments were $181.2 million.
• Key Collaborations:
  • Bristol-Myers Squibb (BMS): Received $17.5 million upfront and $10.0 million annual funding for LXR research.
  • Sankyo: Received $20.0 million upfront and $3.8 million funding for MR research.
  • Helsinn: Received a $4.0 million milestone payment in June 2006 for XL119 clinical trial materials.
  • Symphony Evolution (SEI): Received an additional $40.0 million funding tranche in June 2006 for the development of XL784, XL647, and XL999.
• Risks: Significant risks include the failure of clinical trials, the inability to raise additional capital, reliance on partners for commercialization, and the potential need to repurchase assets from SEI if GlaxoSmithKline selects specific compounds for development. The company has no approved products and expects to incur losses for the foreseeable future.

Investor Verification Checklist

• Verify the status and enrollment rates of Phase 2 and Phase 3 clinical trials for key compounds (XL119, XL999, XL784, XL880, XL647).
• Monitor cash burn rate against the $192.2 million total liquidity position to assess runway beyond the 12-month projection.
• Review the terms of the GlaxoSmithKline loan agreement regarding financial covenants and potential acceleration of debt.
• Assess the likelihood and financial impact of exercising repurchase options for compounds licensed to Symphony Evolution, Inc.
• Track the recognition of deferred revenue from new collaborations (BMS, Sankyo) to understand future revenue visibility.