Exelixis, Inc. — Form 10-Q summary
Period: Quarter and six months ended June 30, 2017; filed August 2, 2017. The request metadata says “2016 Q2,” but the filing itself reports 2017 Q2.
Business context
Exelixis is a biopharmaceutical company focused on oncology. Its commercial products include CABOMETYX and COMETRIQ, both based on cabozantinib, and COTELLIC, marketed with Genentech. CABOMETYX was approved in the U.S. for previously treated advanced renal cell carcinoma (RCC); COMETRIQ is approved for medullary thyroid cancer. Exelixis licensed cabozantinib rights outside the U.S. and Japan to Ipsen and in Japan to Takeda.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $99.0 million | $36.3 million | $179.9 million | $51.7 million |
| Net product revenue | $88.0 million | $31.6 million | $156.9 million | $40.7 million |
| Operating income (loss) | $27.1 million | $(25.1) million | $47.3 million | $(74.3) million |
| Net income (loss) | $17.7 million | $(34.8) million | $34.4 million | $(94.1) million |
| Diluted earnings (loss) per share | $0.06 | $(0.15) | $0.11 | $(0.41) |
| Operating cash flow | Not separately presented for quarter | $74.4 million | $131.1 million |
Q2 revenue increased 173% year over year; six-month revenue increased 248%. CABOMETYX net sales were $80.9 million in Q2 and $143.2 million for six months, reflecting its launch in April 2016 and increased units sold. COMETRIQ sales declined 49% in Q2 and 41% for six months, primarily as customers shifted to CABOMETYX. Collaboration revenue was $11.0 million in Q2 and $23.0 million for six months, including amortized Ipsen and Takeda payments, royalties, and development reimbursements.
Gross margin was 97% in Q2 and 96% for six months, versus 95% and 94% in the comparable periods. Operating expenses were $71.9 million in Q2 and $132.6 million for six months. Six-month R&D was $51.4 million, approximately flat year over year; SG&A was $75.0 million, up 6%. Q2 R&D and SG&A increased 23% and 14%, respectively.
Cash and cash equivalents were $135.2 million at June 30. Cash and investments totaled $380.3 million, including $4.7 million of restricted investments, down from $479.6 million at December 31, 2016. Operating cash flow was positive, but below prior year, principally because the first half of 2016 included Ipsen’s $200 million upfront payment; higher product revenue and Takeda’s $50 million upfront payment partly offset the decline. Investing activities provided $81.2 million and financing activities used $172.1 million, mainly for debt repayments.
Exelixis repaid its $80 million Silicon Valley Bank term loan in March and Deerfield Notes in June. No debt remained at June 30. The Deerfield repayment totaled $123.8 million and resulted in a $6.2 million extinguishment loss. Total current assets were $402.2 million and current liabilities were $97.7 million. Management said available resources, product revenue, and collaboration revenue were expected to fund operations for at least 12 months after filing.
Material changes, outlook, and risks
- Development and regulatory plans: Management planned to submit an sNDA in Q3 2017 seeking CABOMETYX approval for previously untreated advanced RCC, based on CABOSUN results confirmed by an independent review. A planned second interim analysis of the CELESTIAL phase 3 HCC trial was anticipated in the second half of 2017. More than 45 cabozantinib trials were ongoing or planned.
- Collaborations: A BMS collaboration included phase 3 first-line RCC and phase 2 HCC combination studies; BMS initiated the phase 3 CheckMate 9ER trial in July. A Roche combination trial began enrollment in June. Takeda’s $50 million upfront payment is recognized over an estimated four-year development period; additional milestones and royalties are possible.
- Genentech dispute: The parties settled their arbitration in June without a settlement payment. A July amendment, effective July 1, revised COTELLIC U.S. revenue and cost-sharing mechanics and confirmed Exelixis’s co-promotion rights for current and future combinations.
- Facilities and commitments: A 10-year Alameda lease was signed, with a planned 2018 headquarters move and $24.1 million of lease payments over the term. Construction costs of $14.5 million were recorded as construction-in-progress with a corresponding lease obligation.
- Key risks: Results and future revenue depend heavily on CABOMETYX commercial performance, market access and reimbursement, competition and drug pricing, and successful clinical and regulatory development. CABOSUN was not originally designed as a registrational trial, and approval was not assured. Clinical-trial failure, reliance on collaboration and manufacturing partners, and the possibility of future funding needs could adversely affect results. Management cautioned that recent profitability may not continue.
- Accounting and unusual items: Exelixis disclosed an immaterial historical debt-accounting error: reported 2016 net loss was overstated by $2.2 million for Q2 and $4.3 million for the first half; cash-flow totals were unaffected. The company planned prospective correction. Adoption of revenue standard ASC 606 in 2018 was not expected to materially affect product-sales revenue but could change collaboration-revenue timing and reduce deferred revenue through a transition adjustment.
Most important facts for investors to verify
- Whether CABOMETYX sales growth, pricing, payer access, and discounts and allowances support continued revenue growth; management expected discounts and allowances as a share of gross product revenue to rise in the remainder of 2017.
- FDA progress and outcome for the planned first-line RCC sNDA, and clinical results from CELESTIAL and combination trials.
- How the Genentech amendment affects COTELLIC collaboration revenue, cost allocations, and Exelixis’s share of U.S. profits or losses.
- Cash use and operating-cost trends after debt repayment, including the impact of ongoing trials, pipeline investment, and the Alameda move.
- The effect of the disclosed 2016 error and the expected ASC 606 transition on reported comparisons and collaboration revenue timing.