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EXEL > SEC Filings for EXEL > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for EXELIXIS, INC.


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis contains forward-looking statements. These statements are based on Exelixis, Inc.'s ("Exelixis," "we," "our" or "us") 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 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," "objective," "will," "may," "could," "would," "estimate," "predict," "potential," "continue," "encouraging," "suggest," 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 Part II, Item 1A of this Form 10-Q, as well as those discussed elsewhere in this report.
This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission, or SEC, on February 21, 2013. Operating results are not necessarily indicative of results that may occur in future periods. 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 U.S. Food and Drug Administration, or FDA, approved COMETRIQ for the treatment of progressive, metastatic medullary thyroid cancer, or MTC, in the United States, where it became commercially available in late January 2013. Cabozantinib is being evaluated in a variety of other cancer indications through a broad development program, including two ongoing phase 3 pivotal trials in metastatic castration-resistant prostate cancer, or CRPC, and two additional phase 3 pivotal trials in metastatic hepatocellular cancer, or HCC, and metastatic renal cell cancer, or RCC, that we plan to initiate later 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 us in the event these compounds are commercialized. As disclosed on ClinicalTrials.gov (NCT01689519), a phase 3 clinical trial for one of these compounds, cobimetinib (GDC-0973/XL518), which we out-licensed to Genentech, Inc. (a wholly- owned member of the Roche Group), or 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 cabozantinib 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 cabozantinib has significant therapeutic and commercial potential in the near term, while utilizing our Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute's Cancer Therapy Evaluation Program, or NCI-CTEP, and investigator sponsored trials, or 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.


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Collaborations
We have established collaborations with leading pharmaceutical and biotechnology companies, including Bristol-Myers Squibb Company, or Bristol-Myers Squibb, Sanofi, Genentech, GlaxoSmithKline, Merck (known as MSD outside of the United States and Canada) and Daiichi Sankyo Company Limited, or 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, cobimetinib (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 $2.8 billion in the aggregate on a non-risk adjusted basis, of which 10% are related to clinical development milestones, 43% are related to regulatory milestones and 47% are related to commercial milestones.
Business Highlights for the Three Months Ended March 31, 2013 and Recent Developments

Commercial Availability of COMETRIQ
COMETRIQ became commercially available in the United States in late January 2013 for the treatment of patients with progressive, metastatic MTC. The recommended dose of COMETRIQ in progressive, metastatic MTC is 140 mg orally, once daily (one 80 mg capsule and three 20 mg capsules) administered without food, and this dose may be reduced stepwise to 100 or 60 mg once daily to appropriately manage each individual patient's tolerability. We are marketing COMETRIQ principally through a small commercial team with relevant expertise in the marketing, sales, distribution and reimbursement of oncology drugs. We have also fielded a small, outsourced specialty sales force whose responsibility is to promote COMETRIQ for its approved indication to customers. The wholesale acquisition cost of COMETRIQ has been set at $9,900 for a 28-day supply. COMETRIQ has been flat priced, meaning each dosage strength is priced the same. 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. During the three months ended March 31, 2013, we recorded net product revenues of $1.9 million from the commercial sale of COMETRIQ.

Plan to Distribute COMETRIQ for Named Patient Use Program in Europe and Potentially Other Countries
In November 2012, the European Medicines Agency, or EMA, accepted for review our Marketing Authorization Application for COMETRIQ for the proposed indication of treatment of progressive, unresectable, locally advanced MTC, or metastatic MTC. In February 2013, we entered into an agreement with Swedish Orphan Biovitrum, or Sobi, for the distribution and commercialization of COMETRIQ for the treatment of metastatic MTC in the European Union and potentially other countries. No other indication is covered by the agreement, and Exelixis maintains full commercial rights for COMETRIQ in MTC outside the covered territory and for all other indications on a global basis. Sobi will serve as the exclusive distributor of COMETRIQ in the covered territory where applicable for requests under a Named Patient Use, or NPU, program, and will, if approved by the EMA, promote, market, and sell COMETRIQ for MTC in the covered territory. An NPU program provides access to unapproved drugs for a single patient or group of patients in a particular country. Products offered through NPU programs can be investigational (e.g. still in clinical studies) or approved in one country but not yet approved in the patient's home country. Regulations governing NPU programs vary by country but companies offering products through NPU can sometimes charge for the product being administered.

Notice of First Patient Dosed in Phase 3 Pivotal Trial of Cobimetinib
(GDC-0973/XL518)
On January 14, 2013, we received notice from Genentech that the first patient was dosed in a phase 3 pivotal trial evaluating the BRAF inhibitor Zelboraf® (vemurafenib) alone and in combination with cobimetinib (GDC-0973/XL518) in previously untreated patients with malignant melanoma and the BRAF V600 mutation. Our receipt of this notice triggers the beginning of the 12 month period in which we can exercise our option to co-promote cobimetinib (GDC-0973/XL518) in the United States under the terms of our agreement with Genentech.

Preclinical Data Presented at the American Association for Cancer Research 2013 Annual Meeting
Data from a preclinical study not funded by Exelixis assessing the mechanism(s) of action underlying the impact of cabozantinib in an animal model on prostate cancer bone metastases were presented at the American Association for Cancer


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Research, or AACR, 2013 Annual Meeting. The data in this animal model demonstrated rapid and substantial inhibition of tumor growth evident by both bioluminescent and magnetic resonance imaging, or MRI, techniques, and tumor cell death. The preclinical data also demonstrated that treatment with cabozantinib resulted in a rapid and sustained reduction of 99Tc-methylene diphosphonate, or 99Tc-MDP, uptake at the site of bone metastasis and a normalization of bone architecture, with a significant reduction in sclerotic bone growth and increased trabecular bone growth. We believe these data suggest that cabozantinib's effect on tumors metastatic to the bone consists of multiple mechanisms of action. In addition, we believe these preclinical data provide support for the use of 99Tc-MDP bone scan and diffusion weighted MRI as methods for monitoring treatment response to cabozantinib in the clinic. Data from a preclinical study and an IST clinical trial assessing the combination of cabozantinib and abiraterone in CRPC, both funded by Exelixis, were presented at the AACR 2013 Annual Meeting. The preclinical data demonstrated that cabozantinib enhances the efficacy of abiraterone in a CRPC xenograft model in mice. Interim data from the phase 1 IST indicated that no dose limiting toxicities were observed when cabozantinib at 20 mg, 40 mg, or 60 mg daily was combined with full dose abiraterone (1000 mg daily) in patients with CRPC. However, 2 of 3 patients in the 60 mg cohort experienced adverse events and were dose-reduced to 40 mg. The investigators are planning to expand the 20 mg and 40 mg cohorts to further evaluate the safety of the combination. Data from a preclinical study not funded by Exelixis assessing the activity of cabozantinib in human colorectal cancer, or CRC, xenograft models were presented at the AACR 2013 Annual Meeting. The preclinical data demonstrated that treatment with cabozantinib resulted in a significant decrease in tumor growth in 12 out of 12 CRC patient-derived explants, with 2 of the explants exhibiting tumor regression. The explants used in this study contain molecular alterations commonly found in CRC, including mutations in KRAS, PIK3CA, NRAS, and BRAF. The researchers who performed the study are planning additional explant testing in order to identify predictive biomarkers of sensitivity or resistance to cabozantinib, and believe the work may lead to a phase 2 biomarker-driven clinical trial of cabozantinib in patients with metastatic CRC.
Data from a preclinical study not funded by Exelixis assessing the activity of cabozantinib in human pediatric cancer xenograft models were presented at the AACR 2013 Annual Meeting. The preclinical data demonstrated that treatment with cabozantinib resulted in tumor regression in 2 of the brain tumor xenograft models, and significantly inhibited tumor growth in 91% of the other tumor models tested. The researchers who performed the study concluded that the activity observed with cabozantinib in their models is consistent with its known anti-angiogenic activity.
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, and products often 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 late 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 March 31, 2013, we have not generated meaningful revenues from the sale of COMETRIQ. We have derived substantially all of our revenues to date from collaborative research and development agreements. Revenues from research and development collaborations depend upon continuation of the collaborations, research funding, the achievement of milestones and royalties we earn from any future products developed from the collaborative research. We anticipate only limited revenues from our collaborative research and development agreements in 2013.
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.


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Liquidity
As of March 31, 2013, we had $566.8 million in cash and investments, which included short- and long-term restricted cash and investments of $12.2 million and $21.9 million, respectively, and short- and long-term unrestricted investments of $185.3 million and $176.1 million, respectively. We are required to maintain on deposit with Silicon Valley Bank or one of its affiliates short- and long-term unrestricted investments of $2.9 million and $83.2 million, respectively, pursuant to covenants in our loan and security agreement with Silicon Valley Bank. We anticipate that our current cash and cash equivalents, short- and long-term investments and product revenues will enable us to maintain our operations for a period of at least 12 months following the end of the first quarter of 2013. 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. Convertible Senior Subordinated Notes
On August 14, 2012, we issued and sold $287.5 million aggregate principal amount of the 4.25% convertible senior subordinated notes due 2019, or 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. $6.1 million in short-term restricted cash and investments held in the escrow account matured in February 2013 and we used the proceeds to pay the first scheduled semi-annual interest payment due at that time. The short- and long-term amounts held in the escrow account as of March 31, 2013 are $12.2 million and $18.2 million, and included in Short-term restricted cash and investments and Restricted cash and investments, respectively. 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 entities affiliated with Deerfield Management Company, L.P., or 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, or the Deerfield Notes, 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


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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. As of March 31, 2013, the combined outstanding principal balance due under the lines of credit and term loan was $84.5 million, compared to $85.3 million as of December 31, 2012. 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.


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Restructurings
We implemented restructurings in March 2010, December 2010, March 2011 and May . . .

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