Exelixis, Inc. 10-Q Summary: Quarter Ended July 2, 2010
Business Context and Reporting Period
This report covers the quarterly period ended July 2, 2010 (fiscal Q2 2010). Exelixis, Inc. is a biopharmaceutical company focused on discovering and developing small molecule drugs for cancer and other serious diseases. The company's strategy centers on advancing its lead clinical compounds: XL184 (MET/VEGFR2/RET inhibitor), XL147 (PI3K inhibitor), and XL765 (PI3K/mTOR inhibitor). During the quarter, the company regained full rights to XL184 following the termination of its collaboration with Bristol-Myers Squibb regarding that specific compound.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenues | $47.6 million | $89.8 million |
| Net Loss (Attributable to Exelixis) | $(22.6) million | $(65.9) million |
| Loss Per Share (Basic & Diluted) | $(0.21) | $(0.61) |
| Cash and Cash Equivalents | $157.2 million | $157.2 million (Ending Balance) |
| Total Investments (Short & Long Term) | $145.0 million | $145.0 million (Ending Balance) |
| Total Debt Outstanding | $236.1 million | $236.1 million (Ending Balance) |
| Working Capital | $12.8 million | $12.8 million (Ending Balance) |
Note: Working capital is calculated as Current Assets ($234.8M) minus Current Liabilities ($222.0M). Total liquidity (cash + investments) stands at approximately $308.6 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 74% year-over-year for the quarter and 70% for the six-month period. This was driven primarily by the May 2009 collaboration with sanofi-aventis and increased collaboration reimbursement revenue from Bristol-Myers Squibb.
- Restructuring Charges: The company recorded a restructuring charge of $9.4 million in Q2 2010 (following a $16.1 million charge in Q1). This was primarily due to facility exit costs related to the sublease of its South San Francisco building, partially offset by adjustments to termination benefits.
- Debt Financing: In June 2010, Exelixis secured significant new financing: an $80 million term loan from Silicon Valley Bank and $80 million in proceeds from the sale of $124 million in secured convertible notes to Deerfield Entities. Total debt increased from $79.6 million at year-end 2009 to $236.1 million.
- Operating Expenses: Research and Development (R&D) expenses remained relatively flat for the quarter ($54.2M vs $55.0M prior year) due to headcount reductions from the March 2010 restructuring, which offset a 74% increase in clinical trial expenses for XL184 and other programs.
Guidance, Outlook, and Risks
Outlook and Strategy: Management expects to continue incurring net losses and negative operating cash flow for the foreseeable future. The company anticipates its current cash, investments, and expected collaboration funding will support operations for at least 12 months. A primary focus is advancing XL184, for which the company now bears 100% of development costs following the Bristol-Myers Squibb termination. The company plans to initiate a Phase 3 registration trial for XL184 in recurrent glioblastoma by the end of 2010.
Key Risks and Contingencies:
- Liquidity and Debt Covenants: The company must maintain specific cash balances to comply with covenants in its agreements with GlaxoSmithKline, Deerfield Entities, and Silicon Valley Bank. Specifically, $80 million of the new SVB loan proceeds must be maintained as a compensating balance.
- Debt Repayment: Significant debt obligations exist, including a $72 million loan from GlaxoSmithKline (installments due Oct 2010 and 2011) and the new Deerfield notes. Repayment may require cash or the issuance of common stock, which could be dilutive.
- Clinical Uncertainty: Success depends on the safety and efficacy of product candidates in clinical trials. Failure to achieve milestones or regulatory approval would severely impact revenue prospects.
- Restructuring Costs: The company expects total cash expenditures of approximately $24.8 million related to the 2010 restructuring plan, with payments extending through 2015.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the $80 million compensating balance requirement for the Silicon Valley Bank loan and the minimum cash covenants for GlaxoSmithKline and Deerfield.
- XL184 Funding: Assess the company's ability to fund the full development of XL184 independently, given the loss of cost-sharing with Bristol-Myers Squibb.
- GlaxoSmithKline Loan: Confirm the strategy for repaying the $72 million GSK loan due in October 2010, particularly the potential for stock issuance versus cash payment.
- Restructuring Liability: Monitor the $11.2 million restructuring liability and the timeline for facility exit costs versus sublease income.
- Cash Burn Rate: Evaluate the net cash used in operating activities ($78.5 million for the six months) against the $308.6 million liquidity position to validate the 12-month runway estimate.