Exelixis, Inc. 10-Q Summary: Quarter Ended October 1, 2010
Business Context and Reporting Period
This report covers the quarterly period ended October 1, 2010 (referred to as September 30, 2010 in financial tables). Exelixis, Inc. is a biopharmaceutical company focused on discovering and developing small molecule drugs for cancer. The company's most advanced drug candidate is XL184, an inhibitor of MET, VEGFR2, and RET. Following the termination of its 2008 collaboration with Bristol-Myers Squibb (BMS) regarding XL184 in June 2010, Exelixis regained full rights to develop and commercialize the compound, assuming full funding responsibility.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2010 | Nine Months Ended Sept 30, 2010 | Balance Sheet (Sept 30, 2010) |
|---|---|---|---|
| Total Revenues | $54.5 million | $144.3 million | - |
| Net Loss (Attributable to Exelixis) | $(8.6) million | $(74.5) million | - |
| Operating Expenses | $58.7 million | $221.6 million | - |
| Cash and Cash Equivalents | - | - | $95.3 million |
| Total Investments (Marketable & Long-term) | - | - | $159.2 million |
| Total Debt (Current & Long-term) | - | - | $233.0 million |
| Accumulated Deficit | - | - | $(1,164.2) million |
Note: Debt includes $124.0 million in principal of secured convertible notes issued to Deerfield Entities in July 2010 and an $80.0 million term loan from Silicon Valley Bank.
Material Changes vs. Prior Period
- Revenue Composition: Total revenues remained relatively flat for the three-month period ($54.5M vs. $55.0M in 2009) but increased 34% for the nine-month period ($144.3M vs. $107.7M in 2009). The nine-month increase was driven by collaboration agreements with sanofi-aventis and increased reimbursement revenue from BMS.
- Collaboration Reimbursements: A significant shift occurred in the presentation of BMS collaboration funds. In 2009, net payments were often expenses (cost-sharing). In 2010, the company recorded $18.1 million in collaboration reimbursement revenue for the quarter, including a $17.0 million transition payment from BMS upon the termination of the XL184 co-development rights.
- Restructuring Charges: The company recorded a $0.3 million restructuring charge in the third quarter of 2010, following a larger $16.1 million charge in Q1 and $9.4 million in Q2 related to a 40% workforce reduction and facility exits.
- Debt Structure: Total debt increased significantly from $79.6 million at year-end 2009 to $233.0 million at September 30, 2010, due to the new Deerfield convertible notes and Silicon Valley Bank term loan.
Guidance, Outlook, and Risks
Outlook and Strategy: Management is focusing resources on XL184, with a Phase 3 registration trial for medullary thyroid cancer currently enrolling. The company expects to submit a New Drug Application (NDA) for XL184 in the second half of 2011, assuming positive results. The company anticipates maintaining operations for at least 12 months following the filing date based on current cash, investments, and expected collaboration funding.
Recent Transactions (Subsequent Events): On October 8, 2010, Exelixis entered into new agreements with BMS:
- TGR5 License: BMS to pay $35.0 million upfront for XL475 (subject to HSR clearance).
- ROR Collaboration: BMS to pay $5.0 million upfront for ROR antagonist discovery.
- XL139 Opt-out: Exelixis exercised an option to opt-out of XL139 co-development for a $20.0 million payment.
Risks and Contingencies:
- Liquidity Covenants: The company must maintain specific cash balances to comply with covenants for loans from GlaxoSmithKline (GSK), Deerfield, and Silicon Valley Bank. Specifically, $80.0 million of cash is restricted as collateral for the SVB loan.
- Debt Repayment: A $37.0 million payment was made to GSK in October 2010, with a remaining balance of $35.7 million due in October 2011. Repayment may be made in cash or stock, but stock repayment is subject to market price restrictions and could cause dilution.
- Development Risk: Clinical trials for XL184 and other candidates carry inherent risks of failure, which could delay commercialization and impact future revenue.
Investor Verification Checklist
- Cash Runway: Verify the impact of the October 2010 BMS transactions ($60M+ potential upfront) on the company's ability to fund XL184 Phase 3 trials without further dilution.
- Debt Covenants: Monitor compliance with the $80M cash collateral requirement for the Silicon Valley Bank loan and the working capital covenants for the GSK loan.
- XL184 Clinical Data: Track enrollment and data readouts from the randomized discontinuation trial and the Phase 3 medullary thyroid cancer trial, as these are critical for the 2011 NDA timeline.
- Restructuring Costs: Confirm the total cash outflow for the 2010 restructuring plan, estimated at $24.8 million total, with $14.3 million expected in 2010.
- Revenue Recognition: Review the amortization schedule for the new BMS upfront payments, which management estimates will be recognized ratably over approximately 42 months.