EXEL

Exelixis, Inc. 10-Q Summary: Quarter Ended March 31, 2004

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2004. Exelixis, Inc. is a biotechnology company focused on developing pharmaceutical products for cancer and other serious diseases using comparative genomics and model system genetics. The company has incurred net losses since inception and relies on collaborations with major pharmaceutical and agrochemical companies for revenue and funding.

Key Financial Metrics

Note: Total Debt includes current and long-term capital lease obligations, notes payable, bank obligations, and a convertible promissory note of $85 million.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by approximately 3% ($0.4 million) compared to Q1 2003. This was primarily due to the conclusion of the collaboration with Protein Design Labs in May 2003, partially offset by increased revenues from compound deliveries under combinatorial chemistry collaborations.
• Increased Expenses: Operating expenses rose to $40.5 million from $35.6 million.
  • R&D Expenses: Increased 13% to $34.2 million, driven by higher personnel costs (merit increases), increased lab supplies for drug discovery, and facility expansion costs.
  • Restructuring Charge: A one-time charge of $537,000 was recorded in Q1 2004 related to a restructuring plan initiated in late 2003 (reduction in force and closure of the Tübingen, Germany facility). No such charge existed in Q1 2003.
• Cash Flow: Net cash used in operating activities increased significantly to $29.0 million from $15.4 million, reflecting the higher net loss and changes in deferred revenue and accounts payable.

Guidance, Outlook, and Risks

Outlook and Pipeline:

• Management anticipates current cash and funding from collaborators will support operations for at least the next two years.
• XL119: Phase 3 clinical trial expected to begin in Q2 2004; FDA granted orphan drug designation in March 2004.
• XL647: IND filed in February 2004; Phase 1 trial expected in Q2 2004.
• XL999: IND filing anticipated in Q2 2004.
• XL784: Phase 1 completed; development path in renal disease planned for 2004.

Risks and Contingencies:

• Capital Needs: The company expects to incur substantial losses for several years and may need to raise additional capital, which could be dilutive or restrictive.
• Collaboration Dependence: Substantially all revenues are derived from collaborations. Several key agreements (e.g., with Bristol-Myers Squibb, Dow AgroSciences, Bayer CropScience) have expiration dates in 2004 or 2005, creating revenue uncertainty.
• Regulatory and Clinical Risk: Clinical trials may fail to demonstrate safety or efficacy, and regulatory approval is uncertain and lengthy.
• Manufacturing: The company lacks internal manufacturing capabilities and relies entirely on third-party contractors for clinical supplies.

Investor Verification Checklist

• Liquidity Runway: Verify the sufficiency of the $207 million in liquid assets against the projected burn rate of ~$29 million per quarter.
• Collaboration Renewals: Monitor the status of expiring agreements with Bristol-Myers Squibb, Dow AgroSciences, and Bayer CropScience scheduled for 2004.
• Clinical Milestones: Track the initiation of the Phase 3 trial for XL119 and Phase 1 trials for XL647 and XL999 in the second quarter of 2004.
• Debt Obligations: Review the $85 million convertible promissory note and other debt covenants for potential refinancing needs or conversion triggers.
• Restructuring Completion: Confirm that the $1.5 million cumulative restructuring charge is fully accounted for and that no further charges are expected.