Exelixis, Inc. — Form 10-Q Summary
Period: The supplied filing is for the three months ended March 31, 2019, filed May 1, 2019. The request metadata says “2018 Q1,” but the filing itself reports first-quarter 2019 and compares it with first-quarter 2018.
Business context
Exelixis is an oncology-focused biotechnology company. Its principal commercial product is CABOMETYX (cabozantinib), approved in the U.S. for advanced renal cell carcinoma (RCC) and previously treated hepatocellular carcinoma (HCC). The company also sells COMETRIQ and receives collaboration revenue, royalties and milestone payments. It reported one operating segment.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $215.5 million | $213.7 million | +1% |
| Net product revenue | $179.6 million | $134.3 million | +34% |
| Collaboration revenue | $35.9 million | $79.4 million | -55% |
| Operating expenses | $130.9 million | $97.4 million | +34% |
| Operating income | $84.6 million | $116.3 million | -27% |
| Net income | $75.8 million | $115.9 million | -35% |
| Diluted EPS | $0.24 | $0.37 | Lower |
| Operating cash flow | $161.6 million | $71.8 million | Higher |
- CABOMETYX revenue was $175.9 million, up 36%; management attributed growth mainly to a 26% increase in units sold and, to a lesser extent, higher average selling price. COMETRIQ revenue fell 31% to $3.7 million.
- Collaboration revenue declined mainly because milestone revenue was $10.0 million versus $66.5 million a year earlier. Ipsen cabozantinib royalties rose to $14.0 million from $4.4 million.
- Gross margin was 96% in both periods. Research and development expense rose 68% to $63.3 million, primarily reflecting expanded clinical trials; selling, general and administrative expense increased 11% to $60.1 million.
- The income-tax provision was $14.9 million versus $2.5 million; the effective tax rate was 16.4% versus 2.1%. The prior-year rate was largely offset by a valuation allowance, substantially released at year-end 2018.
- Cash, cash equivalents and investments totaled $1.019 billion at March 31, 2019, up from $851.6 million at December 31, 2018. Operating cash flow was $161.6 million; investing activities used $107.7 million and financing activities provided $5.2 million.
- Total liabilities were $156.8 million, including lease liabilities and deferred revenue. The filing does not report outstanding borrowings or other financial debt.
Material changes and outlook
- Revenue growth was modest despite strong product sales, as the prior-year quarter included substantially more collaboration milestone revenue. Q1 2019 milestone revenue included recognition of $9.4 million related to an expected Takeda milestone for a Japanese RCC regulatory submission.
- Management said cash resources, expected product and collaboration revenue, and available short-term investments were expected to fund operations for at least 12 months after filing. This depends on assumptions about sales and expenses; the company noted it could need debt or equity financing to support development and pipeline expansion.
- Management expected R&D expense to increase in 2019 as cabozantinib trials and pipeline work expand, modest SG&A increases to support organizational growth, and no significant change in gross margin during the remainder of 2019. No numerical full-year revenue or earnings guidance is provided.
- At quarter-end, cabozantinib was being evaluated in more than 75 ongoing or planned trials. CheckMate 9ER completed enrollment in April 2019; Takeda submitted a Japanese RCC application in April; and COSMIC-313 was initiated in May.
- A May 2019-effective Takeda amendment increased potential development, regulatory and first-sale milestones for specified indications by $12 million to $102 million and potential sales-based milestones by $3 million to $86 million, while capping certain pharmacovigilance reimbursements at $1 million annually.
- An April 1 lease amendment expanded headquarters space by 37,544 square feet and surrendered 2,703 square feet. Contractual base rent for the entire premises over the remaining lease term was approximately $34.6 million.
Risks and contingencies
Key risks include dependence on CABOMETYX sales and on successful clinical development and regulatory approvals; competition, including immunotherapy combinations; payer coverage, reimbursement and pricing pressure; variability in milestone and royalty revenue; clinical-trial failure or delays; reliance on collaboration partners and third-party manufacturers; and intellectual-property, regulatory and data-security risks. Management also noted that expanding R&D and pipeline efforts could affect liquidity. The company reported no material legal proceedings, no material off-balance-sheet arrangements and no material changes in internal control during the quarter.
Investor verification priorities
- Confirm CABOMETYX demand, HCC launch contribution, pricing, and the trend in discounts and allowances, which management expected to rise as a percentage of gross sales during 2019.
- Track the sources and timing of collaboration revenue, especially milestone recognition and Ipsen royalties, and distinguish recurring royalties from episodic milestones.
- Assess clinical and regulatory progress, particularly CheckMate 9ER, COSMIC-311, COSMIC-312 and COSMIC-313, and the commercial implications of any results or approvals.
- Monitor R&D spending, operating cash generation and management’s cash-runway assumptions against the stated expectation of funding operations for at least 12 months after filing.
- Review the effects of the tax valuation-allowance release on comparisons of net income and the Takeda amendment and expanded lease commitments on future cash flows.