Exelixis, Inc. — Form 10-Q summary
Period clarification: The request metadata says 2017 Q2, but the supplied filing is Exelixis’s 2018 second-quarter Form 10-Q, for the quarter ended June 29, 2018 (financial statements refer to June 30 by convention). The filing was signed August 1, 2018.
Business context
Exelixis is a biotechnology company focused on cancer medicines. Its principal products are CABOMETYX and COMETRIQ, both cabozantinib products, and COTELLIC, commercialized with Genentech. CABOMETYX sales growth and collaboration revenues were central to results. The company reports one operating segment.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $186.1 million | $99.0 million | $399.8 million | $179.9 million |
| Net product revenue | $145.8 million | $88.0 million | $280.1 million | $156.9 million |
| Collaboration revenue | $40.3 million | $11.0 million | $119.7 million | $23.0 million |
| Operating income | $85.8 million | $27.1 million | $202.1 million | $47.3 million |
| Net income | $87.5 million | $17.7 million | $203.4 million | $34.4 million |
| Diluted EPS | $0.28 | $0.06 | $0.65 | $0.11 |
- Q2 revenue increased 88%; net income rose to $87.5 million from $17.7 million. For the first half, revenue rose 122% and net income was $203.4 million versus $34.4 million.
- Q2 CABOMETYX revenue was $141.1 million, up 75%; COMETRIQ revenue was $4.7 million, down 34%. Management attributed CABOMETYX growth primarily to higher unit volume and COMETRIQ’s decline to lower sales volume.
- Q2 gross margin was 96% (97% a year earlier); operating margin was approximately 46%, versus 27%; net margin was approximately 47%, versus 18%. The filing says gross margin is not expected to change significantly during the rest of 2018.
- Q2 R&D expense increased 51% to $42.5 million; SG&A increased 28% to $51.9 million. For the first half, R&D was $80.2 million and SG&A was $105.9 million.
Cash, liquidity and balance sheet
- At June 30, 2018, cash, cash equivalents and investments totaled $595.9 million, including $594.3 million available for operations; unrestricted cash and cash equivalents alone were $248.4 million. Available-for-operations cash and investments were $452.0 million at December 31, 2017.
- Six-month operating cash flow was $146.6 million, versus $74.4 million in 2017. Investing activities used $91.8 million, while financing activities provided $6.9 million. Cash, cash equivalents and restricted cash ended the period at $250.0 million.
- Total assets were $911.2 million and total liabilities $136.2 million. Current assets were $686.3 million against current liabilities of $99.9 million. The balance sheet showed no debt; the $20.6 million build-to-suit lease financing obligation is a lease-related liability.
- Receivables rose to $167.2 million from $81.2 million at year-end. Management said $71.0 million of recognized collaboration milestone revenue was included in receivables and expected to be collected later.
Material changes and accounting comparability
- Revenue comparisons are affected by adoption of ASC Topic 606 on January 1, 2018. Prior-year figures remain under the former guidance and were not restated. Adoption reduced opening accumulated deficit by $258.5 million, largely from changed timing of recognition for Ipsen and Takeda collaboration consideration; it did not affect product sales revenue.
- Under Topic 606, reported collaboration revenue for Q2 2018 was $54.1 million lower than it would have been without adoption; the corresponding first-half difference was $22.8 million. As a result, reported 2018 collaboration revenue and earnings comparisons do not reflect the same recognition timing as 2017.
- Collaboration revenue included significant milestones: $25 million from Ipsen following a cumulative sales threshold, $46 million recognized in the first half related to a $50 million EU first-line RCC approval milestone, and $20 million from Daiichi Sankyo following a Japanese regulatory filing.
- Ipsen’s cabozantinib sales passed the threshold that increased Exelixis’s royalty rate from 2%–12% to a tiered 22%–26% on annual net sales. The company also began new collaborations with StemSynergy and Invenra, with upfront research and development payments expensed.
- The company relocated its offices and research facilities to Alameda in June. Property and equipment increased to $64.7 million from $25.7 million at year-end, partly reflecting facilities placed in service.
Outlook, commentary and risks
- Management expected available cash and operating revenues to fund operations for at least 12 months from the filing date, while cautioning that this depends on product sales, expenses and other assumptions. No specific revenue or earnings guidance was provided.
- Management expected R&D spending to increase in 2018 as cabozantinib development expands; the program included more than 70 ongoing or planned trials. The company also expected to pursue discovery, licensing and acquisition opportunities.
- The FDA accepted the application for cabozantinib in previously treated advanced HCC and assigned a January 14, 2019 action date. The pivotal CELESTIAL trial had met its overall-survival endpoint; results were published in July 2018.
- Key risks include dependence on CABOMETYX commercial performance and partner execution; clinical and regulatory uncertainty; competition, including immune checkpoint combinations and potential generic cabozantinib; pricing, reimbursement and policy pressures; manufacturing and supply-chain reliance; and the ability to sustain profitability while increasing development and pipeline investment.
- Genentech’s phase 3 IMblaze370 study of COTELLIC with atezolizumab in colorectal cancer did not meet its primary endpoint. Exelixis said it expected an overall U.S. COTELLIC commercialization profit in 2018. The filing reported no material legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the reporting period: this is a 2018 Q2 filing, not a 2017 Q2 filing.
- Assess revenue growth in light of Topic 606’s substantial effect on collaboration revenue timing and opening equity.
- Track CABOMETYX U.S. sales, Ipsen and Takeda royalties and milestones, and collection timing for collaboration receivables.
- Monitor the January 14, 2019 HCC regulatory decision, ongoing cabozantinib trials, and competitive or generic-entry developments.
- Evaluate whether rising R&D and operating expenses, commercial discounts and rebates, and pipeline investments remain supportable by product and collaboration cash generation.