Exelixis, Inc. 10-Q Summary: Quarter Ended June 27, 2008
Business Context and Reporting Period
Exelixis, Inc. is a biopharmaceutical company focused on discovering and developing small molecule therapies for cancer and other serious diseases. This report covers the quarterly period ended June 27, 2008 (referred to as June 30, 2008 in financial tables). The company operates primarily through internal research and development and strategic collaborations with major pharmaceutical partners, including GlaxoSmithKline (GSK), Bristol-Myers Squibb (BMS), and Genentech.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $30,412 | $58,355 |
| Net Loss | $(45,124) | $(86,398) |
| Net Loss Per Share (Basic/Diluted) | $(0.43) | $(0.82) |
| Research & Development Expenses | $68,869 | $134,842 |
| General & Administrative Expenses | $10,228 | $18,919 |
| Cash and Cash Equivalents (End of Period) | $75,047 | $75,047 |
| Total Cash, Equivalents, and Marketable Securities | $161,775 | $161,775 |
| Convertible Loans (GSK) | $85,000 | $85,000 |
| Notes Payable and Bank Obligations | $42,864 | $42,864 |
Note: Total Cash, Equivalents, and Marketable Securities includes $22,376 in investments held by Symphony Evolution, Inc. and excludes restricted cash.
Material Changes vs. Prior Period
- Revenue Increase: Total revenues increased 4% for the three months and 2% for the six months compared to the prior year. This was driven by milestone payments from BMS ($20.0 million selection milestone for XL139) and Genentech ($3.0 million milestone for XL518), and an acceleration of revenue recognition from GSK due to the conclusion of their collaboration term.
- Expense Growth: R&D expenses increased 22% (three months) and 27% (six months) year-over-year. This was primarily due to increased clinical trial activities, including the initiation of a Phase 3 trial for XL184 and Phase 2 trials for XL184, XL647, and XL820.
- Net Loss Expansion: Net loss increased significantly due to higher operating expenses outpacing revenue growth. The six-month net loss widened from $52.8 million in 2007 to $86.4 million in 2008.
- Cash Flow: Net cash used in operating activities increased to $107.2 million for the six months ended June 30, 2008, compared to $4.5 million in the prior year period, largely driven by the increased net loss and a decrease in deferred revenues.
Guidance, Outlook, and Risks
Collaboration Updates:
- GlaxoSmithKline (GSK): The six-year collaboration concluded on October 27, 2008. GSK has selected XL880 and must select one additional compound by late October 2008. Exelixis submitted data for XL184; if selected, Exelixis earns a $55.0 million milestone (creditable against the GSK loan). If not, GSK may select from other candidates for a potential $27.5 million milestone.
- Bristol-Myers Squibb (BMS): BMS exercised its option to develop XL139, triggering a $20.0 million milestone payment received in February 2008. Exelixis opted to co-develop and co-commercialize XL139 in the U.S.
- Genentech: Genentech exercised its option to further develop XL518, triggering a $3.0 million milestone.
- Deerfield Facility: In June 2008, Exelixis entered a $150.0 million credit facility with Deerfield Entities. No funds have been drawn as of the report date. The facility requires a $3.8 million transaction fee and a $3.4 million annual commitment fee.
- Liquidity: Management anticipates current cash, marketable securities, and the Deerfield facility will fund operations for at least 12 months. However, substantial additional funding will be required for future clinical development.
- Financial Covenants: The company must maintain working capital of at least $25.0 million and cash/investments of at least $50.0 million to comply with GSK loan covenants.
- SEI Repurchase Option: Exelixis has an option to repurchase three compounds (XL647, XL784, XL999) from Symphony Evolution, Inc. (SEI). The repurchase price increases over time (25% compounded annually on the $80 million investment). Failure to exercise this option or secure funding for it could result in the loss of these assets.
- Clinical Trial Risks: The company faces standard risks regarding the safety and efficacy of its product candidates, including XL184 (Phase 3) and XL647 (Phase 2).
Investor Verification Checklist
- GSK Compound Selection: Verify the outcome of GSK's decision on XL184 (expected late October 2008), as this determines the receipt of a $55.0 million milestone and the future of the collaboration.
- SEI Repurchase Economics: Assess the current repurchase price for the SEI compounds and the company's ability to fund the transaction or find a partner to avoid losing the assets.
- Deerfield Facility Utilization: Monitor whether Exelixis draws down on the $150 million Deerfield facility, which would incur interest and require the issuance of additional warrants.
- Cash Burn Rate: Review the sustainability of the current cash position given the $107 million operating cash burn in the first half of 2008 and the need to fund Phase 3 trials.
- Financial Covenants: Confirm continued compliance with GSK loan covenants regarding working capital and cash balances.