Business context and reporting period
Exelixis, Inc. is a clinical-stage biotechnology company developing cancer therapies. This filing is its Form 10-K for fiscal 2011, a 52-week year ended December 30, 2011 (presented on a calendar-year basis as December 31, 2011), with 2010 comparisons. It is not a 2010 Q4 filing; the 2011 fourth-quarter figures are unaudited supplementary data.
The company focused its proprietary development resources on cabozantinib (XL184), an inhibitor of MET, VEGFR2 and RET. It had no approved products and generated no product-sale revenue; substantially all revenue came from collaborations, licenses and milestones.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $289.6 million | $185.0 million |
| Operating expenses | $200.1 million | $276.4 million |
| Operating income (loss) | $89.5 million | $(91.4) million |
| Net income (loss) | $75.7 million | $(92.3) million |
| Net income (loss) per diluted share | $0.58 | $(0.85) |
| Research and development expense | $156.8 million | $210.7 million |
| Net cash used in operating activities | $159.2 million | $101.0 million |
| Cash, cash equivalents, marketable securities, long-term investments and restricted investments | $283.7 million | $256.4 million |
| Working capital | $136.5 million | $(16.5) million |
| Debt outstanding, book value | $181.5 million | $208.5 million |
Revenue rose 57%, while R&D expense fell 26%. The 2011 net profit was largely driven by non-cash acceleration of deferred collaboration revenue following agreement terminations, rather than product sales. The company reported a 30.9% operating margin, but that figure is substantially affected by this revenue recognition. Bristol-Myers Squibb and Sanofi represented 59% and 39% of 2011 revenue, respectively.
Cash flow was negative despite reported profit: operating cash use increased to $159.2 million, primarily reflecting a $244.5 million reduction in deferred revenue and lower collaboration funding. Investing activities used $51.5 million and financing activities provided $187.5 million, including $179.4 million net proceeds from a March 2011 stock offering. Of the $283.7 million liquidity total at year-end, $85.3 million was maintained with Silicon Valley Bank under collateral covenants; restricted cash and investments were $4.2 million.
Debt included $124.0 million initial principal of secured convertible Deerfield notes (carrying value $91.4 million at year-end) and an $80.0 million Silicon Valley Bank term loan. The bank loan requires a compensating balance tied to the outstanding obligations and has a balloon repayment due in May 2017. The Deerfield notes carry annual interest of $6.0 million and specified collaboration-revenue-based mandatory prepayments beginning in 2013.
Unaudited 2011 Q4 results were revenue of $94.3 million, operating income of $51.6 million and net income of $46.3 million. The 2010 Q4 comparison was revenue of $40.8 million and net loss of $17.9 million.
Material changes versus the prior comparable period
- Revenue increased by $104.6 million, mainly because Exelixis accelerated recognition of deferred license revenue after Bristol-Myers Squibb terminated its XL281 collaboration and Sanofi’s PI3K discovery collaboration ended. The filing identifies $99.1 million of accelerated revenue related to Bristol-Myers Squibb and $53.1 million related to Sanofi; Sanofi also owed a $15.3 million termination payment, received in January 2012.
- R&D expense declined by $53.9 million, reflecting workforce reductions, lower laboratory and facility costs, transfer of XL147 and XL765 development to Sanofi, and wind-down of other programs. Cabozantinib trial activity partly offset these reductions.
- Restructuring expense was $10.1 million in 2011 versus $32.7 million in 2010. The company reported $42.9 million of aggregate charges across the 2010 and 2011 plans and expected further facility-related charges and payments.
- Cash used in operations increased despite the reported profit, underscoring the difference between recognized collaboration revenue and cash receipts. Year-end stockholders’ equity improved to $90.6 million from a deficit of $228.3 million, supported by net income and equity issuance.
- In February 2012, after year-end, the company raised approximately $65 million net from a public stock offering. Shares outstanding increased during 2011, including shares issued in a public offering and to settle the final GlaxoSmithKline loan installment.
Outlook, management commentary and principal risks
- Cabozantinib’s Phase 3 EXAM trial in medullary thyroid cancer met its primary progression-free-survival endpoint: median progression-free survival was 11.2 months versus 4.0 months for placebo (hazard ratio 0.28; p<0.0001). The company began a rolling NDA submission in December 2011, expected to complete filing in the first half of 2012, and anticipated a possible launch in the second half of 2012, subject to review and approval.
- The COMET-2 Phase 3 prostate cancer trial, with pain response as its primary endpoint, began in December 2011. The company planned to start COMET-1, with an overall-survival endpoint, in the first half of 2012. FDA agreement on a Special Protocol Assessment for COMET-2 was not reached; the FDA raised concerns about blinding, the assumed pain benefit, toxicity, evidence of anti-tumor activity and survival, and recommended an overall-survival endpoint.
- Management expected the existing liquidity, anticipated collaborator funding and the February 2012 offering proceeds to fund operations for at least 12 months after the filing date. It nevertheless expected further net losses and negative operating cash flow for the foreseeable future, and stated that future funding needs depended on clinical progress, costs, partner receipts and financing availability.
- Additional cabozantinib activity was reported in exploratory trials, including pain and bone-lesion responses in prostate cancer. These interim findings are not equivalent to confirmatory pivotal-trial results. The company also reported objective responses in 12 of 13 tumor types studied to date.
- Key risks include dependence on cabozantinib’s clinical and regulatory success; trial delay, failure, toxicity or unfavorable interpretation; reliance on third-party trial and manufacturing providers; intense competition; uncertain reimbursement and commercialization capability; high cash burn and financing needs; debt covenants and potential equity dilution; and revenue concentration in a small number of collaborators.
- Exelixis had discontinued development of unpartnered programs other than cabozantinib and was seeking external opportunities for some compounds. It had no material legal proceedings, and management and the auditor reported effective internal controls; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether the company completed the medullary thyroid cancer NDA, obtained FDA approval, and achieved the anticipated timing of any launch.
- Subsequent COMET-1 and COMET-2 enrollment, safety, efficacy and survival results, including how the trials addressed FDA feedback on COMET-2.
- How much of reported revenue and profit reflects accelerated deferred revenue versus cash received, and the company’s continuing reliance on Bristol-Myers Squibb and Sanofi.
- Available unrestricted liquidity after required bank collateral, operating cash burn, financing proceeds, and compliance with Deerfield and Silicon Valley Bank covenants and repayment terms.
- The extent of dilution from equity offerings, option and warrant exercises, and any stock settlement or conversion of debt obligations.