Exelixis, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2016, not 2015 Q3 as stated in the request metadata. It was signed November 3, 2016. Financial amounts below are in U.S. dollars; “Q3” means the three months ended September 30.
Business context and reporting period
Exelixis is a biopharmaceutical company focused on oncology. Its principal commercial products are CABOMETYX and COMETRIQ, both based on cabozantinib; it also shares U.S. profits and losses and receives ex-U.S. royalties from partnered product COTELLIC. CABOMETYX launched in the U.S. in April 2016 for advanced renal cell carcinoma (RCC), and received European Commission approval in September 2016. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $62.2 million | $9.9 million | $113.9 million | $27.2 million |
| Net product revenue | $42.7 million | $6.9 million | $83.5 million | $24.2 million |
| Operating income (loss) | $7.3 million | ($35.8 million) | ($67.0 million) | ($89.8 million) |
| Net loss | ($11.3 million) | ($45.5 million) | ($105.3 million) | ($120.2 million) |
| Net loss per share, diluted | ($0.04) | ($0.21) | ($0.44) | ($0.59) |
- Q3 revenue rose 531%; nine-month revenue rose 318%, primarily reflecting CABOMETYX sales and collaboration milestones. Nine-month CABOMETYX revenue was $48.8 million; COMETRIQ revenue was $34.6 million.
- Reported gross margin was 94% for Q3 and the nine-month period, versus 79% and 88%, respectively, in the comparable 2015 periods. The filing attributes the improvement mainly to CABOMETYX’s lower manufacturing costs; early-launch margins may not represent future results.
- R&D expense was $20.3 million in Q3 and $72.2 million year to date. SG&A was $32.5 million and $103.1 million, respectively; the increase versus 2015 chiefly reflects building the U.S. commercial organization and launch-related marketing and services.
- Cash provided by operations was $122.6 million for the nine months, compared with $106.2 million used in 2015. This reflected, in large part, Ipsen’s $200 million upfront payment and should not be read as recurring operating cash generation. Investing activities used $155.6 million, principally from investment purchases; financing provided $2.6 million. Cash and cash equivalents declined $30.4 million to $111.2 million.
- At September 30, cash and investments totaled $379.6 million, including $293.8 million available for operations, $81.6 million of required Silicon Valley Bank compensating balances, and $4.2 million of restricted investments. Trade and other receivables were $91.2 million.
- Total debt carrying value was $190.9 million. The $80 million Silicon Valley Bank term loan was classified current and matures in May 2017. Deerfield Notes had $109.8 million principal outstanding and mature in July 2018; qualifying collaboration receipts could trigger a mandatory prepayment of up to $27.5 million in January 2017 if elected by noteholders.
Material changes versus the prior comparable period
- The CABOMETYX launch drove substantial product-revenue growth; nine-month product revenue also included initial channel inventory build.
- SG&A increased sharply with commercialization investment, while R&D was broadly flat year to date and lower in Q3, partly because METEOR trial costs declined.
- Operating results improved substantially, including Q3 operating income, but the company remained loss-making for the first nine months. The nine-month net loss included a $13.8 million loss on extinguishment of debt.
- In August 2016, holders converted $285.3 million principal amount of 2019 convertible notes into 53.7 million common shares; related inducements and settlement accounting contributed to the extinguishment loss. At September 30, $2.2 million face amount remained. The filing reports that the residual notes were subsequently redeemed in November 2016.
- Stockholders’ deficit of $140.8 million at December 31, 2015 became positive equity of $32.0 million at September 30, 2016, largely reflecting the note conversions and share issuance.
Outlook, commentary, risks and unusual items
- Management expected available cash, short-term investments and product revenues to fund operations for at least 12 months from the filing date, while warning capital needs could arise earlier depending on business and clinical outcomes.
- Management said the strength of the CABOMETYX launch made its goal of becoming cash-flow positive increasingly achievable; this is commentary, not quantified guidance. It expects significant cabozantinib development costs and continued substantial operating expenses.
- CELESTIAL, the Phase 3 advanced liver cancer trial, continued without protocol changes after its first planned interim analysis; top-line results were expected in 2017. CABOSUN met its primary progression-free-survival endpoint, and the company planned to submit a supplemental application for first-line advanced RCC.
- Ipsen paid a $200 million upfront fee and Exelixis achieved a $60 million European RCC approval milestone, expected to be collected in November 2016. Both were being recognized over the agreement term rather than as immediate full revenue. The Ipsen agreement also provides potential additional milestones, sales-contingent payments and tiered royalties.
- Exelixis is in arbitration with Genentech over COTELLIC development, pricing, commercialization and cost/revenue allocations. Genentech counterclaimed for damages and interest. An adverse outcome could increase costs or require payments and materially affect results, cash flows or financial condition.
- The company identified an immaterial accounting error concerning the 2019 convertible notes: prior debt discount and interest expense accounting was incorrect. It concluded prior individual periods were not materially misstated and planned prospective correction. The disclosed error did not change historical net cash flows from operating, investing or financing activities, but affected reported debt, interest expense and losses.
- Key risks include dependence on CABOMETYX adoption and pricing/reimbursement, clinical and regulatory uncertainty in additional indications, competition, reliance on third-party manufacturers and distributors and partners, debt repayment obligations, and the Genentech dispute. The filing also notes potential dilution from equity awards and debt-related conversions.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is 2016 Q3, despite the request’s 2015 Q3 label.
- Track CABOMETYX demand, channel inventory, payer access, net pricing and the sustainability of the reported gross margin.
- Check actual cash collections of the $60 million Ipsen milestone and $15 million Daiichi Sankyo milestone, and distinguish milestone receipts from recurring product and royalty revenue.
- Monitor cash available for operations after required collateral balances, the May 2017 bank-loan maturity, and any January 2017 Deerfield prepayment election.
- Follow CELESTIAL results, the planned first-line RCC supplemental filing, and other clinical and regulatory developments.
- Review developments and financial exposure in the Genentech arbitration, and assess the impact of the prior-period accounting correction and continued share dilution.