EXELIXIS, INC. annual report, FY2015

Business context and reporting period

Exelixis is a single-segment oncology biopharmaceutical company focused primarily on cabozantinib. Although the request identifies “2014 Q4,” this filing is the Form 10-K for fiscal 2015, ended January 1, 2016 (reported in the filing as calendar 2015). The comparison is fiscal 2014, ended January 2, 2015, a 53-week year; fiscal 2015 had 52 weeks.

Cabozantinib was marketed as COMETRIQ for progressive metastatic medullary thyroid cancer (MTC) in the U.S. and EU. The FDA had not yet approved it for advanced renal cell carcinoma (RCC) at year-end. Cobimetinib, partnered with Genentech, was approved in 2015 as COTELLIC in combination with vemurafenib for advanced melanoma.

Financial performance and position

Product gross margin was 89%, compared with 92% in FY2014. The filing reports no company-wide positive profit margin; Exelixis remained loss-making. Year-end cash and investments included $81.6 million of compensating-balance investments and $2.7 million of long-term restricted investments; management identified $169.0 million as available for operations.

Material changes versus prior period

• Revenue rose 48%, principally due to higher COMETRIQ shipments and a $2.6 million one-time revenue catch-up associated with changing U.S. revenue recognition from sell-through to sell-in. FY2015 also included a $3.0 million Merck milestone; FY2014 had no license or contract revenue.
• Net loss narrowed by $98.8 million. R&D expense fell 49% to $96.4 million, mainly as spending on terminated prostate cancer trials and other clinical activities declined. SG&A increased 13% to $57.3 million, including $16.6 million of COTELLIC collaboration losses and higher commercial preparation and stock-based compensation.
• Operating cash use declined by $93.8 million. Financing included $145.6 million net proceeds from a July 2015 equity offering; shares outstanding increased to 228.0 million at year-end from 195.9 million.
• Working capital improved substantially, partly because the Deerfield notes’ maturity was extended to 2018 and the 2019 notes were classified as long-term at year-end, rather than the $97.4 million current portion shown in 2014.

Outlook, commentary and risks

• RCC opportunity: METEOR met its primary PFS endpoint: median PFS was 7.4 months with cabozantinib versus 3.8 months with everolimus in the primary analysis. A later interim analysis showed a statistically significant OS improvement, but this filing does not provide the OS medians or hazard ratio. The FDA granted priority review; the PDUFA date was June 22, 2016. The EU application received accelerated assessment.
• HCC and other trials: CELESTIAL, a Phase 3 trial in previously treated advanced HCC, was ongoing; top-line results were anticipated in 2017. Management expected R&D expense to be roughly flat in 2016, with lower trial costs offset by medical-affairs spending, and expected SG&A to increase to prepare for a possible RCC launch.
• International license: On February 29, 2016, after fiscal year-end, Exelixis entered a cabozantinib collaboration with Ipsen for territories outside the U.S., Canada and Japan. Terms include a $200 million upfront payment, potential milestones, and tiered royalties of 2%, 12%, then 22%–26%. The upfront payment was a subsequent event, not FY2015 revenue.
• Liquidity and debt: Management expected available cash, short-term investments and product revenue to fund operations for at least 12 months from the filing date, but warned that additional capital might be needed. Debt principal obligations included $80 million due to Silicon Valley Bank in 2017, Deerfield notes due in 2018 (with principal and in-kind interest projected at about $125 million), and $287.5 million of 4.25% convertible notes due in 2019. Deerfield notes bore 15% interest from July 2015, half payable in cash and half in kind.
• Key risks: Continued losses and negative operating cash flow; dependence on cabozantinib and approval and commercial uptake in RCC; competition, including approved nivolumab in RCC; trial and safety uncertainty; commercialization and expense-allocation dependence on Genentech for COTELLIC and on Ipsen internationally; third-party manufacturing and distribution concentration; and substantial debt, covenant and dilution exposure. The 2014 Phase 3 prostate cancer trials failed their primary endpoints. Diplomat Specialty Pharmacy accounted for 83% of FY2015 revenue.
• No material legal proceedings or material off-balance-sheet arrangements were reported. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

1. Regulatory outcomes and commercial uptake for cabozantinib in RCC, including the full METEOR OS results and any resulting label and launch economics.
2. Whether the $200 million Ipsen upfront payment was received and how milestones, royalties, shared development costs and the Sobi transition proceed.
3. Cash available for operations after restricted and compensating balances, ongoing cash burn, and capacity to meet 2017–2019 debt obligations.
4. COMETRIQ sell-in revenue estimates, inventory write-downs ($1.2 million in FY2015), and reliance on Diplomat as customer and distribution channel.
5. COTELLIC U.S. commercialization costs: Exelixis recorded $16.6 million of collaboration losses and disclosed that some allocated expenses remained under discussion with Genentech.
6. CELESTIAL results expected in 2017, the status of other cabozantinib trials, and the effects of competition and reimbursement on future revenue and margins.