Business context and reporting period
Exelixis, Inc. is a biotechnology company focused on developing cancer therapies. It is directing its proprietary resources primarily to cabozantinib (XL184), while partners advance certain other programs. The filing covers the quarter and nine months ended September 30, 2011; this differs from the request metadata, which identifies 2010 Q3. Unless noted, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $128.3 | $54.5 | $196.3 | $144.3 |
| Operating income (loss) | $79.7 | ($4.2) | $38.0 | ($77.3) |
| Net income (loss) | $77.9 | ($8.6) | $29.4 | ($74.5) |
| Diluted earnings (loss) per share | $0.59 | ($0.08) | $0.23 | ($0.69) |
Q3 revenue included a $109.9 million acceleration of previously deferred Bristol-Myers Squibb (BMS) license revenue following notice that BMS would terminate its collaboration. The company expected to recognize another $10.4 million in Q4 2011. The resulting reported profit is therefore not a measure of recurring operating performance. No product sales or gross-margin figure was reported.
For the first nine months, research and development expense was $126.1 million, down 25% year over year; general and administrative expense was $26.1 million, down 5%. Restructuring charges were $6.2 million versus $25.8 million in the prior-year period. Interest expense was $12.2 million, compared with $5.4 million.
Cash used in operating activities was $130.1 million, versus $122.3 million in the first nine months of 2010. Investing activities used $88.8 million and financing activities provided $187.7 million, including $179.4 million net proceeds from a public offering of 17.3 million shares. Cash and cash equivalents were $66.2 million at September 30, down from $97.4 million at year-end 2010.
Cash, marketable securities, long-term investments and restricted cash totaled $313.1 million. Of this, $4.2 million was restricted and approximately $93.6 million was held as collateral under Silicon Valley Bank arrangements. Current assets were $244.9 million and current liabilities $166.6 million. Book debt, including the Deerfield financing, was approximately $210.0 million, compared with $208.5 million at December 31, 2010; the Deerfield instrument’s fair value could not practicably be determined. Stockholders’ equity was $3.1 million, versus a deficit of $228.3 million at year-end.
Material changes and unusual items
- BMS’s termination of the 2008 agreement became effective October 8, 2011; cabozantinib rights had already reverted to Exelixis in 2010. XL281 rights also reverted, but the company planned to wind down its remaining XL281 work. The company did not expect further cost-sharing or reimbursement revenue under the BMS agreement after Q4 2011.
- sanofi-aventis substantially completed the transfer of XL147 and XL765 development activities by June 2011. Exelixis expected no further reimbursements for those programs and reduced related headcount.
- The company sold its remaining 19.9% interest in Artemis/TaconicArtemis, recording a $2.2 million gain and expecting approximately $3.0 million in proceeds.
- Exelixis elected to repay its final GlaxoSmithKline loan installment in shares: 5,537,906 shares were issued October 27, 2011 to satisfy a $36.9 million obligation, including accrued interest.
- Restructuring plans reduced headcount by a net 402 employees. The company had recorded $38.9 million in aggregate charges and anticipated additional charges of $3.7 million plus up to $15 million for further facility exits. Facility-related costs could continue through 2017.
Outlook, management commentary and risks
Management said available cash, investments and expected collaborator funding should support operations for at least 12 months from the filing date, while expecting continued net losses and negative operating cash flow. Future capital needs depend substantially on cabozantinib development costs, collaborator receipts, financing choices and debt covenants. The company warned that inadequate funding could force delays or reductions in trials or commercialization plans.
On October 24, 2011, after quarter-end, Exelixis reported that the Phase 3 EXAM trial in medullary thyroid cancer met its primary endpoint: median progression-free survival was 11.2 months with cabozantinib versus 4.0 months with placebo (hazard ratio 0.28; p<0.0001). The company planned to seek FDA permission for a rolling NDA submission, expected to complete filing in the first half of 2012, and anticipated a potential launch in the second half of 2012, subject to FDA review and approval. It also targeted starting one pivotal prostate cancer trial by year-end 2011 and two additional trials in 2012. These are plans, not assured outcomes.
Key risks include clinical efficacy and safety uncertainty, regulatory and manufacturing delays, competition, dependence on collaborators and the loss of collaboration funding. Deerfield notes had $124 million initial principal and $6 million annual interest; mandatory prepayments were scheduled for 2013–2015 and could create dilution if settled in shares. Silicon Valley Bank required collateral of at least 100% of covered obligations, limiting the practical availability of some cash. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q3 2011, notwithstanding the request’s 2010 Q3 metadata.
- Assess how much of reported 2011 profit and revenue arose from the one-time BMS deferred-revenue acceleration, and whether the expected $10.4 million Q4 recognition occurred.
- Verify the subsequent FDA pathway, NDA submission timing and regulatory outcome for cabozantinib, as well as follow-up survival and safety data from EXAM.
- Monitor operating cash burn, the usable portion of the $313.1 million liquidity total, collateral and covenant requirements, and future financing or dilution.
- Review the Deerfield repayment and conversion terms, the Silicon Valley Bank balloon maturity, and restructuring cash costs and charges.
- Check the filing’s inconsistent outlook wording: one passage says NDA completion in the first half of 2011, while other passages specify the first half of 2012; the latter appears consistent with the stated late-2011 filing date and launch outlook.