Business context and reporting period
Exelixis, Inc. is a cancer-focused biopharmaceutical company whose development and commercialization efforts center primarily on cabozantinib; its partner Genentech leads development of cobimetinib. This Form 10-Q covers the second quarter and six months of fiscal 2015. The filing’s cover states the quarter ended July 3, 2015; financial statements present periods through June 30, 2015. The request metadata’s “2014 Q2” does not match the filing.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share figures.
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Net product revenue | $8.0 | $17.4 | $6.6 quarter; $11.5 six months |
| Gross margin | 91% | 92% | 93% in both periods |
| Research and development expense | $24.5 | $46.8 | $51.0 quarter; $105.8 six months |
| Selling, general and administrative expense | $12.8 | $22.3 | $16.5 quarter; $31.2 six months |
| Operating loss | $31.3 | $54.0 | $61.7 quarter; $126.7 six months |
| Net loss | $43.4 | $78.5 | $73.4 quarter; $148.0 six months |
| Net loss per share, basic and diluted | $0.22 | $0.40 | $0.38 quarter; $0.77 six months |
Revenue was from COMETRIQ sales. Quarterly revenue increased 22% year over year and six-month revenue increased 52%; the six-month increase included a one-time $2.6 million recognition of previously deferred U.S. sales after a change to sell-in revenue recognition. Gross margin declined modestly as product sales increased and less product cost had been expensed as R&D before approval.
For the six months, operating cash use was $71.9 million, investing activities provided $57.6 million, financing activities used $4.1 million, and cash and cash equivalents decreased by $18.4 million to $61.9 million. At June 30, cash and investments totaled $167.0 million, but only $76.6 million was identified as available for operations; $81.6 million was required as compensating-balance collateral and other amounts were restricted.
Debt carrying value was $371.2 million: $191.6 million for the 2019 convertible notes, $99.6 million for Deerfield secured convertible notes, and $80.0 million for the Silicon Valley Bank term loan. The filing separately states total consolidated indebtedness through maturity of $492.4 million. Stockholders’ deficit was $188.2 million; accumulated deficit was $1.85 billion.
Material changes versus prior comparable periods
- Operating expenses and losses narrowed substantially year over year, primarily as R&D and personnel costs fell following termination of the COMET-1 and COMET-2 prostate cancer trials and workforce reductions. Six-month R&D expense fell 56% and SG&A fell 28%.
- COMETRIQ revenue grew, although the six-month comparison was boosted by the $2.6 million revenue-recognition transition adjustment.
- On July 1, 2015, the company extended the $100 million Deerfield notes’ maturity to July 1, 2018, after a $4 million principal payment. Beginning July 2, the notes carry 15% annual interest: 7.5% payable in cash and 7.5% in kind.
- On July 29, the company sold 28.75 million shares at $5.40 per share, receiving $145.5 million net proceeds. This is a subsequent event, not cash on the June 30 balance sheet.
Outlook, management commentary, risks and unusual items
- After quarter-end, the phase 3 METEOR trial in advanced renal cell carcinoma (RCC) met its primary progression-free-survival endpoint: cabozantinib reduced the risk of progression or death by 42% versus everolimus (hazard ratio 0.58; p<0.0001). Interim overall-survival results favored cabozantinib but were not statistically significant under the prespecified threshold; final analysis was anticipated in 2016. The company expected U.S. and EU regulatory filings in early 2016.
- Enrollment continued in the phase 3 CELESTIAL trial in advanced liver cancer, with top-line results expected in 2017. Management expected R&D expense not to increase in the second half of 2015 compared with the first half, while anticipating higher SG&A for possible product launches and increased non-cash stock compensation.
- Genentech’s cobimetinib NDA review date was extended from August 11 to November 11, 2015, to allow review of supplemental data. Exelixis shares U.S. commercialization costs and is entitled to a tiered U.S. profit share and ex-U.S. royalties.
- Management expected available resources, product revenue and the July equity offering proceeds to support operations for at least 12 months after the second quarter. It also warned that losses and negative operating cash flow were expected to continue, future capital needs would be substantial, and additional financing might be needed earlier than expected.
- Key financial risks include debt service and covenants, the 15% Deerfield interest rate, the SVB collateral requirement and its $80 million loan balloon due in 2017. The company reported no material off-balance-sheet arrangements and no material legal proceedings. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
- Unusual items include the one-time revenue-recognition adjustment and, following METEOR results, the vesting on July 20 of approximately 7.0 million performance-based options, expected to result in $9.7 million of stock-based compensation expense in the third quarter.
Important facts for investors to verify
- Review the complete METEOR data and final overall-survival analysis, as well as the timing and outcome of RCC regulatory filings.
- Assess cash genuinely available for operations against clinical and commercialization spending, debt payments, SVB collateral requirements and Deerfield’s revised interest cost.
- Separate underlying COMETRIQ sales growth from the one-time $2.6 million revenue-recognition adjustment; also monitor reliance on the U.S. specialty pharmacy, which accounted for most revenue.
- Track cobimetinib’s extended FDA review, commercial prospects and Exelixis’s related cost-sharing obligations, along with CELESTIAL results and competing therapies.
- Consider dilution from the July share offering, convertible debt, options and warrants, and the potential effect of financing needs on existing shareholders.