EXEL

Exelixis, Inc. 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2001. Exelixis, Inc. is a biotechnology company focused on discovering new drug therapies for cancer and other proliferative diseases using comparative genomics and model system genetics. The company generates revenue primarily through collaborative research agreements with major pharmaceutical and agricultural companies, including Bayer, Pharmacia, Bristol-Myers Squibb, Dow AgroSciences, and Aventis CropScience.

Key Financial Metrics

Note: Debt figures include capital lease obligations and notes payable. The line of credit balance was $0 at March 31, 2001, compared to $1.5 million at December 31, 2000.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 30% year-over-year, driven by additional license and contract revenues from existing collaborations and the acquisition of Agritope, Inc. (now Exelixis Plant Sciences).
• Expense Increase: Operating expenses rose significantly to $22.1 million from $13.2 million. Research and Development (R&D) expenses nearly doubled to $16.8 million due to increased staffing and internal self-funded research efforts.
• Widened Loss: The net loss increased to $12.7 million from $7.3 million, primarily due to the surge in R&D and amortization of goodwill ($1.05 million), partially offset by higher interest income ($1.9 million vs. $0.1 million).
• Cash Flow Shift: Operating activities shifted from providing $10.2 million in cash in Q1 2000 to using $0.6 million in Q1 2001, reflecting the funding of net operating losses.

Outlook, Risks, and Unusual Items

• Acquisition of Artemis: On May 14, 2001 (subsequent to the reporting period), Exelixis acquired Artemis Pharmaceuticals GmbH for approximately $28.0 million in stock and options. This acquisition expands the company's genetics and functional genomics capabilities.
• Guidance: Management expects to incur additional operating losses for the foreseeable future as it expands proprietary drug development. The company believes current cash and short-term investments ($108 million) plus collaborator funding will satisfy cash needs for at least the next two years.
• Risk Factors:
  • Profitability: The company has a history of net losses and an accumulated deficit of $142.8 million. Profitability is not guaranteed.
  • Collaboration Dependency: Substantially all revenues are derived from collaborations. Termination or failure to achieve milestones by partners (e.g., Pharmacia, Bayer) could severely impact revenue.
  • Capital Needs: Future capital requirements are substantial. Additional financing may be required, which could be dilutive or involve restrictive covenants.
• Unusual Items: The company recorded a $1.7 million reserve on promissory notes received from the sale of its Vinifera ownership interest. Stock compensation expense decreased year-over-year due to the accelerated amortization method prescribed by FIN 28.

Investor Verification Checklist

• Verify the status and renewal terms of the major collaboration agreements with Bayer, Pharmacia, and Bristol-Myers Squibb, noting specific termination clauses related to key personnel.
• Confirm the integration progress and financial impact of the Artemis Pharmaceuticals GmbH acquisition announced in May 2001.
• Monitor the burn rate of the $108 million cash position against the projected increase in R&D expenses.
• Review the terms of the new $12.0 million equipment lease line entered into in April 2001 and associated financial covenants.
• Assess the impact of the "synthetic repricing" of stock options granted in April 2001 on future stock compensation expenses.