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| EXEL > SEC Filings for EXEL > Form 10-K on 21-Feb-2013 | All Recent SEC Filings |
21-Feb-2013
Annual Report
Some of the statements under in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
These statements are based on our current expectations, assumptions, estimates
and projections about our business and our industry and involve known and
unknown risks, uncertainties and other factors that may cause our company's or
our industry's results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied in, or contemplated by, the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan,"
"focus," "assume," "goal," "objective," "will," "may" "should," "would,"
"could," "estimate," "predict," "potential," "continue," "encouraging" or the
negative of such terms or other similar expressions identify forward-looking
statements. Our actual results and the timing of events may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include those discussed in "Item 1A. Risk Factors" as
well as those discussed elsewhere in this Annual Report on Form 10-K. These and
many other factors could affect our future financial and operating results. We
undertake no obligation to update any forward-looking statement to reflect
events after the date of this report.
Overview
We are a biotechnology company committed to developing small molecule therapies
for the treatment of cancer. We are focusing our proprietary resources and
development and commercialization efforts exclusively on COMETRIQ™
(cabozantinib), our wholly-owned inhibitor of multiple receptor tyrosine
kinases. On November 29, 2012, the FDA approved COMETRIQ for the treatment of
progressive, metastatic MTC in the United States. COMETRIQ is being evaluated in
a variety of other cancer indications through a broad development program,
including two ongoing phase 3 pivotal trials in metastatic CRPC and two
additional phase 3 pivotal trials in metastatic hepatocellular cancer and
metastatic renal cell cancer that we plan to initiate in 2013. We believe
COMETRIQ has the potential to be a high-quality, broadly-active and
differentiated anti-cancer agent that can make a meaningful difference in the
lives of patients. Our objective is to develop COMETRIQ into a major oncology
franchise, and we believe that the approval of COMETRIQ for the treatment of
progressive, metastatic MTC provides us with the opportunity to establish a
commercial presence in furtherance of this objective.
We have also established a portfolio of other novel compounds that we believe
have the potential to address serious unmet medical needs. Many of these
compounds are being advanced by partners as part of collaborations, at no cost
to us but with significant retained economics to Exelixis in the event these
compounds are commercialized. As disclosed on ClinicalTrials.gov (NCT01689519),
a phase 3 clinical trial for one of these compounds, GDC-0973 (XL518), which we
out-licensed to Genentech, was initiated on November 1, 2012.
Our Strategy
We believe that the available clinical data demonstrate that COMETRIQ has the
potential to be a broadly active anti-cancer agent, and our objective is to
build COMETRIQ into a major oncology franchise. The initial regulatory approval
of COMETRIQ to treat progressive, metastatic MTC provides a niche market
opportunity that allows us to gain commercialization and marketing experience at
relatively low cost while providing a solid foundation for potential expansion
into larger cancer indications.
We intend to advance COMETRIQ through an extensive development program exploring
multiple cancer indications including, but not limited to, prostate,
hepatocellular, renal, breast and non-small-cell-lung cancers. We intend to
focus our internal efforts on cancers for which we believe COMETRIQ has
significant therapeutic and commercial potential in the near term, while
utilizing our CRADA with the NCI-CTEP and ISTs to generate additional data to
allow us to prioritize future late stage trials in a cost-effective fashion. We
believe that this staged approach to building value represents the most rational
and effective use of our personnel and financial resources.
Collaborations
We have established collaborations with leading pharmaceutical and biotechnology
companies, including Bristol-Myers Squibb, Sanofi, Genentech, GlaxoSmithKline,
Merck (known as MSD outside of the United States and Canada), and Daiichi Sankyo
for various compounds and programs in our portfolio. Pursuant to these
collaborations, we have out-licensed compounds or programs to a partner for
further development and commercialization, generally have no further unfunded
cost obligations related to such compounds or programs and may be entitled to
receive research funding, milestones and royalties or a share of profits from
commercialization. As disclosed on ClinicalTrials.gov (NCT01689519), a phase 3
clinical trial for one of these compounds, GDC-0973 (XL518), which we
out-licensed to Genentech, was initiated on November 1, 2012. In addition,
several other out-licensed compounds are in multiple phase 2 studies. These
partnered compounds potentially could be of significant value to us if their
development progresses successfully.
With respect to our partnered compounds, we are eligible to receive potential
milestone payments under our collaborations totaling approximately $3.1 billion
in the aggregate on a non-risk adjusted basis, of which 10% are related to
clinical development milestones, 44% are related to regulatory milestones and
46% are related to commercial milestones.
Certain Factors Important to Understanding Our Financial Condition and Results
of Operations
Successful development of drugs is inherently difficult and uncertain. Our
business requires significant investments in research and development over many
years, often for products that fail during the research and development process.
Our long-term prospects depend upon our ability, particularly with respect to
cabozantinib, and the ability of our partners to successfully commercialize new
therapeutics in highly competitive areas such as cancer treatment. Our financial
performance is driven by many factors, including those described below.
Limited Sources of Revenues
COMETRIQ was approved by the FDA for the treatment of progressive, metastatic
MTC in the United States in November 2012. We commercially launched COMETRIQ in
January 2013. We currently estimate that there are between 500 and 700 first and
second line metastatic MTC patients in the United States each year who will be
eligible for COMETRIQ, and as a result we only expect to generate limited
revenues from the sale of COMETRIQ in the near term. Prior to the approval of
COMETRIQ, we had no pharmaceutical product that had received marketing approval,
and as of December 31, 2012, we have generated no revenues from the sale of such
products. We expect that all of our other near-term revenues, such as research
and development funding, license fees and milestone payments and royalty
revenues, will be generated from collaboration agreements with our partners. Our
reliance on collaboration revenues is directly reflected in the decrease of our
revenues in 2012 compared to 2011 due primarily to the October 2011 acceleration
of $99.1 million of license revenue as a result of the termination of our 2008
collaboration agreement with Bristol Myers-Squibb for XL281, or the 2008
Agreement, and the December 2011 acceleration of $53.1 million in license
revenue as a result of the termination in of our 2009 collaboration with Sanofi
for the discovery of inhibitors of PI3K. Additionally, milestones under
collaboration agreements may be tied to factors that are outside of our control,
such as significant clinical or regulatory events with respect to compounds that
have been licensed to our partners.
Clinical Development of Cabozantinib
We have focused our proprietary resources and development efforts on the
development of cabozantinib. However, the product candidate may fail to show
adequate safety or efficacy in clinical testing. Furthermore, predicting the
timing of the initiation or completion of clinical trials is difficult, and our
trials may be delayed due to many factors, including factors outside of our
control. The future development path of cabozantinib depends upon the results of
each stage of clinical development. We expect to incur increased expenses for
the development of cabozantinib as it advances in clinical development.
Liquidity
As of December 31, 2012, we had $634.0 million in cash and investments, which
included short- and long-term restricted cash and investments of $12.2 million
and $28.0 million and short- and long-term unrestricted investments of $3.2
million and $83.7 million that we are required to maintain on deposit with
Silicon Valley Bank or one of its affiliates pursuant to covenants in our loan
and security agreement with Silicon Valley Bank. In August 2012, we completed
concurrent registered underwritten public offerings in which we sold $287.5
million aggregate principal amount of the 2019 Notes and 34.5 million shares of
common stock at a price of $4.25 per share, generating aggregate net proceeds of
$416.1 million. In February 2012, we raised $65.0 million in net proceeds from a
public offering of 12.7 million shares of our common stock at a price of $5.17
per share. We anticipate that our current cash and cash equivalents, short- and
long-term investments and funding that we expect to receive from existing
collaborators will enable us to maintain our operations for a period of at least
12 months following the end of 2012. However, our future capital requirements
will be substantial, and we may need to raise additional capital in the future.
Our capital requirements will depend on many factors, and we may need to use
available capital resources and raise additional capital significantly earlier
than we currently anticipate.
Our minimum liquidity needs are also determined by financial covenants in our
loan and security agreement with Silicon Valley Bank as well as other factors,
which are described under "- Liquidity and Capital Resources - Cash
Requirements."
Our ability to raise additional funds may be severely impaired if cabozantinib
fails to show adequate safety or efficacy in clinical testing.
2019 Notes
On August 14, 2012, we issued and sold $287.5 million aggregate principal amount
of the 2019 Notes for net proceeds of $277.7 million. The 2019 Notes mature on
August 15, 2019, unless earlier converted, redeemed or repurchased and bear
interest at a rate of 4.25% per annum, payable semi-annually in arrears on
February 15 and August 15 of each year, beginning February 15, 2013. Subject to
certain terms and conditions, at any time on or after August 15, 2016, we may
redeem for cash all or a portion of the 2019 Notes. The redemption price will
equal 100% of the principal amount of the 2019 Notes to be redeemed plus accrued
and unpaid interest, if any, to, but excluding, the redemption date. Upon the
occurrence of certain circumstances, holders may convert their 2019 Notes prior
to the close of business on the business day immediately preceding May 15, 2019.
On or after May 15, 2019, until the close of business on the second trading day
immediately preceding August 15, 2019, holders may surrender their 2019 Notes
for conversion at any time. Upon conversion, we will pay or deliver, as the case
may be, cash, shares of our common stock or a combination of cash and shares of
our common stock, at our election. The initial conversion rate of 188.2353
shares of common stock per $1,000 principal amount of the 2019 Notes is
equivalent to a conversion price of approximately $5.31 per share of common
stock and is subject to adjustment in connection with certain events. If a
"Fundamental Change" (as defined in the indenture governing the 2019 Notes)
occurs, holders of the 2019 Notes may require us to purchase for cash all or any
portion of their 2019 Notes at a purchase price equal to 100% of the principal
amount of the Notes to be purchased plus accrued and unpaid interest, if any,
to, but excluding, the Fundamental Change purchase date. In addition, if certain
bankruptcy and insolvency-related events of defaults occur, the principal of,
and accrued and unpaid interest on, all of the then outstanding notes shall
automatically become due and payable. If an event of default other than certain
bankruptcy and insolvency-related events of defaults occurs and is continuing,
the Trustee by notice to us or the holders of at least 25% in principal amount
of the outstanding 2019 Notes by notice to us and the Trustee, may declare the
principal of, and accrued and unpaid interest on, all of the then outstanding
2019 Notes to be due and payable.
In connection with the convertible debt offering, $36.5 million of the proceeds
were deposited into an escrow account which contains an amount of permitted
securities sufficient to fund, when due, the total aggregate amount of the first
six scheduled semi-annual interest payments on the 2019 Notes. The amount held
in the escrow account is classified on our Consolidated Balance Sheets as
Short-term restricted cash and investments and Restricted cash and investments
of $12.2 million and $24.3 million, respectively, as of December 31, 2012. We
have pledged our interest in the escrow account to the Trustee as security for
our obligations under the 2019 Notes.
Deerfield Facility
On June 2, 2010, we entered into a note purchase agreement with Deerfield
pursuant to which, on July 1, 2010, we sold to Deerfield an aggregate of $124.0
million initial principal amount of our secured convertible notes due June 2015
for an aggregate purchase price of $80.0 million, less closing fees and expenses
of approximately $2.0 million. On August 6, 2012, the parties amended the note
purchase agreement to permit the issuance of the 2019 Notes and modify certain
optional prepayment rights. The amendment became effective upon the issuance of
the 2019 Notes and the payment to Deerfield of a $1.5 million consent fee. The
outstanding principal amount of the Deerfield Notes bears interest in the annual
amount of $6.0 million, payable quarterly in arrears. In January 2013, we made a
mandatory prepayment of $10.0 million on the Deerfield Notes. We will be
required to make additional mandatory prepayments on the Deerfield Notes on an
annual basis in 2014 and 2015 equal to 15% of specified payments from our
collaborative arrangements received during the prior fiscal year, subject to a
maximum annual prepayment amount of $27.5 million. There is a required minimum
prepayment amount of $10.0 million due in January 2014. There is no minimum
prepayment due in 2015. We may also prepay all or a portion (not less than $5.0
million) of the principal amount of the Deerfield Notes at an optional
prepayment price based on a discounted principal amount (during the first three
years of the term, subject to a prepayment premium) determined as of the date of
prepayment, plus accrued and unpaid interest, plus in the case of a prepayment
of the full principal amount of the Deerfield Notes (other than prepayments upon
the occurrence of specified transactions relating to a change of control or a
substantial sale of assets), all accrued interest that would have accrued
between the date of such prepayment and the next anniversary of the note
purchase agreement. Pursuant to the amendment of the note purchase agreement,
any optional prepayment of the Deerfield Notes made on or prior to July 2, 2013
will be determined as if such prepayment occurred as of July 3, 2013. In lieu of
making any optional or mandatory prepayment in cash, subject to certain
limitations (including a cap on the number of shares issuable under the note
purchase agreement), we have the right to convert all or a portion of the
principal amount of the Deerfield Notes into, or satisfy all or any portion of
the optional prepayment amounts or mandatory prepayment amounts (other than the
$10.0 million mandatory prepayment required in January 2014 and any optional
prepayments made prior to July 3, 2013) with shares of our common stock.
Additionally, in lieu of making any payment of accrued and unpaid interest in
respect of the Deerfield Notes in cash, subject to certain limitations, we may
elect to satisfy any such payment with shares of our common stock. The number of
shares of our common stock issuable upon conversion or in settlement of
principal and interest obligations will be based upon the discounted trading
price of our common stock over a specified trading period. Upon certain changes
of control of our company, a sale or transfer of assets in one transaction or a
series of related transactions for a purchase price of more than $400
million or a sale or transfer of more than 50% of our assets, Deerfield may
require us to prepay the notes at the optional prepayment price, plus accrued
and unpaid interest and any other accrued and reimbursable expenses, or the Put
Price. Upon an event of default, Deerfield may declare all or a portion of the
Put Price to be immediately due and payable.
We also entered into a security agreement in favor of Deerfield which provides
that our obligations under the Deerfield Notes will be secured by substantially
all of our assets except intellectual property. The note purchase agreement and
the security agreement include customary representations and warranties and
covenants made by us, including restrictions on the incurrence of additional
indebtedness.
Loan Agreement with Silicon Valley Bank
On May 22, 2002, we entered into a loan and security agreement with Silicon
Valley Bank for an equipment line of credit. On December 21, 2004, December 21,
2006 and December 21, 2007, we amended the loan and security agreement to
provide for additional equipment lines of credit and on June 2, 2010, we further
amended the loan and security agreement to provide for a new seven-year term
loan in the amount of $80.0 million. The principal amount outstanding under the
term loan accrues interest at 1.0% per annum, which interest is due and payable
monthly. We are required to repay the term loan in one balloon principal
payment, representing 100% of the principal balance and accrued and unpaid
interest, on May 31, 2017. We are required to repay any advances under an
equipment line of credit in 48 equal monthly payments of principal and interest.
We have the option to prepay all, but not less than all, of the amounts advanced
under the term loan, provided that we pay all unpaid accrued interest thereon
that is due through the date of such prepayment and the interest on the entire
principal balance of the term loan that would otherwise have been paid after
such prepayment date until the maturity date of the term loan. We have the
option to prepay without penalty any advance under an equipment line of credit
other than advances under a single equipment line of credit, which has a 1.0%
prepayment penalty, provided that we pay all unpaid accrued interest thereon
that is due through the date of such prepayment. In accordance with the terms of
the loan and security agreement, we are required to maintain an amount equal to
at least 100%, but not to exceed 107%, of the outstanding principal balance of
the term loan and all equipment lines of credit under the loan and security
agreement on deposit in one or more investment accounts with Silicon Valley Bank
and certain other designated financial institutions as support for our
obligations under the loan and security agreement (although we are entitled to
retain income earned or the amounts maintained in such accounts). Any amounts
outstanding under the term loan during the continuance of an event of default
under the loan and security agreement will, at the election of Silicon Valley
Bank, bear interest at a per annum rate equal to 6.0%. If one or more events of
default under the loan and security agreement occurs and continues beyond any
applicable cure period, Silicon Valley Bank may declare all or part of the
obligations under the loan and security agreement to be immediately due and
payable and stop advancing money or extending credit to us under the loan and
security agreement.
Restructurings
We implemented restructurings in March 2010 and December 2010 as a consequence
of our decision to focus our proprietary resources and development efforts on
the development and commercialization of cabozantinib. We implemented additional
restructurings in March 2011 and May 2012, which, together with the 2010
restructurings, we refer to as the Restructurings. The aggregate reduction in
headcount from the Restructurings is 422 employees.
During the three years ended December 31, 2012, we recorded aggregate
restructuring charges of $52.1 million in connection with the Restructurings, of
which $21.2 million related to termination benefits, $28.6 million related to
facility charges, $2.2 million net related to the impairment of excess equipment
and other assets, and a minor amount of legal and other fees. Asset impairment
charges were partially offset by cash proceeds of $2.6 million from the sale of
such assets.
Our March 2010 restructuring charge was primarily related to termination
benefits and facility related charges resulting from the closure of our facility
in San Diego, California, and one of our South San Francisco facilities, which
took into consideration a sublease that commenced in September 2010. The
December 2010 restructuring charge was primarily related to termination benefits
resulting from additional reductions in our workforce. Our 2011 restructuring
charge was primarily facility-related charges that relate to portions of two
additional buildings in South San Francisco and took into consideration our
entry into two sublease agreements the majority of one of these buildings in
July 2011 as well as charges relating to the short-term exit of the second floor
of another building in December 2011. The 2012 restructuring charge was
primarily related to termination benefits in May 2012 and the December 2012
determination to extend disuse of most of the remaining space in one building
for the remainder of the lease term.
We expect to pay accrued facility charges of $19.2 million, net of cash received
from our subtenants, through 2017, or the end of our lease terms of the
buildings. With respect to our Restructurings, we expect to incur additional
restructuring charges of $3.2 million relating to certain of our South San
Francisco facilities that we have planned to exit at a future date and which
remained in use as of December 31, 2012. These charges will be recorded through
the end of the building lease terms,
the latest of which ends in 2017.
During the three years ended December 31, 2012, the Restructurings resulted in
aggregate cash expenditures of $28.7 million, net of $2.6 million in cash
received in connection with the sale of excess equipment and other assets. Net
cash expenditures for the Restructurings were $5.3 million, $9.3 million, and
$14.1 million during the years ended December 31, 2012, 2011 and 2010,
respectively.
The restructuring charges that we expect to incur in connection with the
Restructurings are subject to a number of assumptions, and actual results may
materially differ. We may also incur other material charges not currently
contemplated due to events that may occur as a result of, or associated with,
the Restructurings.
Critical Accounting Estimates
Our consolidated financial statements and related notes are prepared in
accordance with U.S. generally accepted accounting principles which require us
to make judgments, estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. We have based our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Our senior management has discussed the development, selection
and disclosure of these estimates with the Audit Committee of our Board of
Directors. Actual results may differ from these estimates under different
assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the financial statements.
We believe the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
Revenue Recognition
Historically, our revenues were derived from three primary sources: license
fees, milestone payments and collaborative agreement reimbursements.
Revenues from license fees and milestone payments primarily consist of upfront
license fees and milestone payments received under various collaboration
agreements. We initially recognize upfront fees received from third party
collaborators as unearned revenues and then recognize these amounts on a ratable
basis over the expected term of the research collaboration. Therefore, any
changes in the expected term of the research collaboration will impact revenue
recognition for the given period. Often, the total research term is not
contractually defined and an estimate of the term of our total obligation must
be made. For example, under the 2008 Agreement with Bristol-Myers Squibb, we
originally estimated our term to be through August 2013, which was the estimated
term of our performance obligations for XL281. We estimated that this would be
the period over which we would be obligated to perform services and therefore
the appropriate term with which to ratably recognize any license fees. During
the fourth quarter of 2010, this estimate was extended to April 2014 as a result
of the decision with Bristol-Myers Squibb to complete additional phase 1 trial
programs for XL281. On July 8, 2011, we received written notification from
Bristol-Myers Squibb of its decision to terminate the 2008 Agreement in its
entirety. As a result of the termination of the 2008 Agreement, the estimated
research term was revised to end on October 8, 2011. Accordingly, we accelerated
the remaining deferred revenue balance through the revised end of the research
term and recognized $109.9 million in revenue during the third quarter ended
September 30, 2011 and the remaining $10.4 million in revenue during the fourth
quarter ended December 31, 2011. License fees are classified as license revenues
in our Consolidated Statements of Operations.
Although milestone payments are generally non-refundable once the milestone is
achieved, we recognize milestone revenues on a straight-line basis over the
expected research term of the arrangement. This typically results in a portion
of a milestone being recognized on the date the milestone is achieved, with the
balance being recognized over the remaining research term of the agreement. In
certain situations, we may receive milestone payments after the end of our
period of continued involvement. In such circumstances, we would recognize 100%
of the milestone revenues when the milestone is achieved. Milestones are
classified as contract revenues in our Consolidated Statements of Operations.
Collaborative agreement reimbursement revenues consist of research and
development support received from collaborators and are recorded as earned based
on the performance requirements by both parties under the respective contracts.
. . .
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