EXEL

Exelixis, Inc. 10-Q Summary: Quarter Ended September 30, 2003

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2003. Exelixis, Inc. is a biotechnology company focused on developing proprietary human therapeutics, primarily in cancer, using an integrated discovery platform. The company generates revenue through collaborative research agreements, license fees, and government grants. As of October 31, 2003, there were 71,081,745 shares of common stock outstanding.

Key Financial Metrics

Note: Debt includes capital lease obligations, notes payable, bank obligations, and a $55 million convertible promissory note.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 19% in Q3 2003 compared to Q3 2002, driven primarily by a new corporate collaboration with SmithKlineBeecham (GSK). This was partially offset by the conclusion of the Protein Design Labs collaboration in May 2003.
• Expense Increases: Research and Development (R&D) expenses rose to $32.3 million in Q3 2003 from $28.8 million in Q3 2002. Increases were due to higher personnel costs (15% increase) and lab supplies (13% increase) to support clinical and preclinical programs.
• Restructuring Charge: The company recorded a one-time restructuring charge of $606,000 in Q3 2003 related to a worldwide reorganization of R&D, including the closure of its Tübingen, Germany location. No such charge existed in the prior year.
• Capital Raise: In June and July 2003, Exelixis completed a follow-on public offering, raising approximately $74.6 million in net proceeds. This significantly improved liquidity compared to the prior year.

Guidance, Outlook, and Risks

• Clinical Pipeline: The most advanced program, XL119 (bile duct tumors), has completed Phase 2 and reached an agreement with the FDA for a Phase 3 registration trial, with initiation targeted for the first half of 2004. The proprietary compound XL784 has completed Phase 1 dosing.
• Restructuring Outlook: The company expects to incur an additional $1.5 million in restructuring expenses through Q1 2004. Management anticipates the net impact of the restructuring will not significantly affect future financial position or liquidity.
• Liquidity: Management believes current cash, investments, and collaborator funding are sufficient to meet anticipated needs for at least the next two years. However, the company expects to continue incurring net losses and negative operating cash flow for the foreseeable future.
• Key Risks:
  • Collaboration Dependency: Substantially all revenue is derived from collaborations. The departure of the Chief Scientific Officer (effective end of 2003) and potential termination of key agreements (e.g., Bayer, BMS) pose risks.
  • Regulatory Uncertainty: Clinical trials are lengthy and uncertain; failure to demonstrate safety/efficacy could delay or prevent approval.
  • FIN 46 Compliance: The company is evaluating whether its joint ventures (Genoptera and Agrinomics) are Variable Interest Entities (VIEs) requiring consolidation, with completion expected in Q4 2003.

Investor Verification Checklist

• Collaboration Renewals: Verify the status of key agreements with Bayer, Bristol-Myers Squibb, and SmithKlineBeecham, noting expiration dates and termination clauses.
• XL119 Phase 3 Initiation: Confirm the timeline for the start of the Phase 3 trial for XL119, as delays could impact future revenue milestones.
• Restructuring Costs: Monitor actual restructuring expenses against the estimated additional $1.5 million liability through Q1 2004.
• FIN 46 Impact: Review the Q4 2003 filing to determine if the Genoptera or Agrinomics joint ventures require consolidation, which could alter the balance sheet.
• Key Personnel: Track the transition of the Chief Scientific Officer role and the retention of other key scientific staff.