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EXEL > SEC Filings for EXEL > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for EXELIXIS, INC.

Form 10-Q for EXELIXIS, INC.


1-May-2014

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," "planned," "focus," "objective," "will," "may," "could," "would," "estimate," "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 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, 2013, filed with the Securities and Exchange Commission, or SEC, on February 20, 2014. 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 biopharmaceutical company committed to developing small molecule therapies for the treatment of cancer. Our two most advanced assets, COMETRIQ® (cabozantinib), our wholly-owned inhibitor of multiple receptor tyrosine kinases, and cobimetinib (GDC-0973/XL518), a potent, highly selective inhibitor of MEK, which we out-licensed to Genentech, Inc. (a member of the Roche Group), or Genentech, are currently the subject of six ongoing phase 3 pivotal trials. Top-line results from four of these pivotal trials are expected in 2014. We are focusing our development and commercialization efforts primarily on COMETRIQ (cabozantinib), which was approved by the U.S. Food and Drug Administration, or FDA, on November 29, 2012, for the treatment of progressive, metastatic medullary thyroid cancer, or MTC, in the United States, where it became commercially available in late January 2013. In March 2014, the European Commission approved COMETRIQ for the treatment of adult patients with progressive, unresectable locally advanced or metastatic MTC. The European Commission granted conditional marketing authorization following a positive opinion from the European Committee for Medicinal Products for Human Use, or CHMP, issued in December 2013.
Cabozantinib is being evaluated in a broad development program, comprising over fifty clinical trials, including two ongoing phase 3 pivotal trials in metastatic castration-resistant prostate cancer, or CRPC, an ongoing phase 3 pivotal trial in metastatic renal cell cancer, or RCC, and an ongoing phase 3 pivotal trial in advanced hepatocellular cancer, or HCC. We believe cabozantinib has the potential to be a broadly-active and differentiated anti-cancer agent that can make a meaningful difference in the lives of patients. Our objective is to develop cabozantinib into a major oncology franchise, and we believe that the initial regulatory approvals of COMETRIQ (cabozantinib) for the approved MTC indications provide us with the opportunity to establish a commercial presence to further this objective. We currently expect top-line results from our two phase 3 pivotal trials of cabozantinib in CRPC, and from the overall survival analysis of our phase 3 pivotal trial of cabozantinib in progressive, metastatic MTC, in 2014.
Cobimetinib is also being evaluated in a broad development program, including a phase 3 clinical trial evaluating the combination of cobimetinib with vemurafenib versus vemurafenib alone in previously untreated BRAFV600 mutation positive patients with unresectable locally advanced or metastatic melanoma, which was initiated on November 1, 2012. Roche and Genentech have announced that they expect top-line results from this trial in 2014 and if the data are positive, to file a new drug application, or NDA, with the FDA in 2014. We believe we are in a unique position as an independent biopharmaceutical company with a wholly-owned drug that has been approved in its first indication in both the United States and the European Union and has the potential to be a broadly active anti-cancer agent, and with a total of six ongoing phase 3 pivotal trials of two of our lead drug candidates. If the outcome from one or more of these pivotal clinical development programs is positive and subsequently leads to regulatory filings seeking marketing approval, our business could be positively impacted and create value for our stockholders. We therefore believe 2014 will be a critically important year for the company. Our Strategy
We believe that the available clinical data demonstrate that cabozantinib has the potential to be a broadly active anti-cancer agent, and our objective is to build cabozantinib into a major oncology franchise. The initial regulatory approvals of COMETRIQ (cabozantinib) for the approved MTC indications in the United States and European Union provide a niche market opportunity that allows us to gain commercialization experience while providing a solid foundation for potential expansion into larger cancer indications.
We are focusing 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 resources.
Beyond our efforts regarding cabozantinib, under the terms of our various collaboration agreements, we are working with our corporate partners to realize the potential value of the compounds and programs we have out-licensed to them. Most notable of these is cobimetinib, which is being evaluated by Roche and Genentech in a broad development program, including a phase 3 pivotal trial. In the aggregate, these partnered compounds could potentially be of significant value to us if their development progresses successfully. Collaborations

We have established a collaboration with Genentech for cobimetinib and other collaborations with leading pharmaceutical companies, including Bristol-Myers Squibb Company, or Bristol-Myers Squibb, Sanofi, Merck (known as MSD outside of the United States and Canada) and Daiichi Sankyo Company Limited, or Daiichi Sankyo, for 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, have no further development cost obligations related to such compounds or programs and may be entitled to receive milestones and royalties or a share of profits from commercialization. With respect to our partnered compounds, we are eligible to receive potential contingent payments under our collaborations totaling approximately $2.3 billion in the aggregate on a non-risk adjusted basis, of which 10% are related to clinical development milestones, 42% are related to regulatory milestones and 48% are related to commercial milestones, all to be achieved by the various licensees.
Our collaboration with Genentech for cobimetinib continues to be of increasing importance to us in 2014 since cobimetinib is our most advanced partnered compound in development and has the greatest near-term potential for commercialization. As noted above, a multicenter, randomized, double-blind, placebo-controlled phase 3 clinical trial evaluating the combination of cobimetinib with vemurafenib versus vemurafenib alone in previously untreated BRAFV600 mutation positive patients with unresectable locally advanced or metastatic melanoma, known as coBRIM, was initiated on November 1, 2012. Roche and Genentech have announced that they expect top-line results from this trial and if the data are positive, to file a NDA with the FDA in 2014. Preliminary results from BRIM7, an ongoing phase 1b dose escalation study conducted by Roche and Genentech of the BRAF inhibitor vemurafenib in combination with cobimetinib in patients with locally advanced/unresectable or metastatic melanoma carrying a BRAFV600 mutation were presented at the 2012 European Society for Medical Oncology Annual Meeting. Updated data from BRIM7 reported at the European Cancer Congress 2013 suggest that the preliminary safety profile and activity of the investigational combination of cobimetinib and vemurafenib are encouraging in BRAF inhibitor-naïve patients. Although the phase 1b dose escalation study was designed to evaluate the safety and tolerability of cobimetinib in combination with vemurafenib, objective responses (comprising complete or partial responses) were observed in 85% of the patients who had not been previously treated with a BRAF inhibitor. Roche and Genentech have announced that additional data from BRIM7 will be presented at the 10th European Association of Dermato-Oncology Congress (May 7-10, 2014) and at the 2014 American Society of Clinical Oncology Annual Meeting (May 30-June 3, 2014). In addition, on the basis of strong scientific rationale and encouraging preclinical data, Genentech has initiated the following clinical trials of cobimetinib in combination with other agents:

•            A Phase 1b, Open-Label, Dose-Escalation Study of the Safety,
             Tolerability, and Pharmacokinetics of MEHD7945A and Cobimetinib in
             Patients with Locally Advanced or Metastatic Solid Tumors with
             Mutant KRAS (NCT01986166);


•            A Phase 1b, Open-Label Study Evaluating the Safety, Tolerability,
             and Pharmacokinetics of Onartuzumab in Combination with Vemurafenib
             and/or Cobimetinib in Patients with Advanced Solid Malignancies
             (NCT01974258); and


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•            A Phase 1b Study of the Safety and Pharmacology of MPDL3280A
             Administered with Cobimetinib in Patients with Locally Advanced or
             Metastatic Solid Tumors (NCT01988896).

Under the terms of our co-development agreement with Genentech for cobimetinib, we are entitled to an initial equal share of U.S. profits and losses for cobimetinib, which will decrease as sales increase, and will share equally in the U.S. marketing and commercialization costs. The profit share has multiple tiers: we are entitled to 50% of profits from the first $200 million of U.S. actual sales, decreasing to 30% of profits from U.S. actual sales in excess of $400 million. We are entitled to low double-digit royalties on ex-U.S. net sales. In November 2013, we exercised an option under the co-development agreement to co-promote in the United States. Under the co-promote agreement, we are allowed to provide up to 25% of the total sales force for cobimetinib in the United States if commercialized, and will call on customers and otherwise engage in promotional activities using that sales force, consistent with the terms of the co-development agreement and a co-promotion agreement to be entered into by the parties.
A development involving our collaboration with GlaxoSmithKline for foretinib
(XL880) occurred subsequent to the end of the period covered by this report. In April 2014, we received a notice from GlaxoSmithKline of its intent to terminate the development of foretinib and to return it to us pursuant to the terms and conditions of the product development and commercialization agreement between the parties. We continue to work with GlaxoSmithKline on the transition of the program, which we expect will be completed in the third quarter of 2014. It is contemplated that in connection with the return of foretinib, the product development and commercialization agreement will terminate, although GlaxoSmithKline will continue to be entitled to a 3% royalty on net sales of any product incorporating cabozantinib, including COMETRIQ, and a 4% royalty on net sales of any product incorporating foretinib.
Business Highlights for the Three Months Ended March 31, 2014 and Recent Developments
Approval of COMETRIQ(R) (cabozantinib) by the European Commission In March 2014, the European Commission approved COMETRIQ for the treatment of adult patients with progressive, unresectable locally advanced or metastatic MTC. The European Commission granted conditional marketing authorization following a positive opinion from CHMP, issued in December 2013. Similar to another drug approved in this setting, the approved indication for the European Union states that for patients in whom RET mutation status is not known or is negative, a possible lower benefit should be taken into account before individual treatment decisions.
Additionally, the Committee for Orphan Medicinal Products (COMP) during its January 2014 meeting reviewed the designation for COMETRIQ (cabozantinib) as an orphan medicinal product for the treatment of MTC and recommended maintenance of orphan drug designation at the time of marketing authorization.
Pursuant to the terms of a commercialization and distribution agreement between Exelixis and Swedish Orphan Biovitrum, or Sobi, signed in February 2013, Sobi will support the commercialization of COMETRIQ in the European Union for the approved MTC indication through the end of 2015. Interim Analysis of COMET-1
In March 2014, we were notified by the Independent Data Monitoring Committee, or IDMC, that a planned interim analysis of our COMET-1 phase 3 pivotal trial had been completed, and that the IDMC recommended the trial proceed to its final analysis, which we expect to read out in 2014.
Appointment of New Executive Vice President and General Counsel In February 2014, we appointed Jeffrey J. Hessekiel, J.D., a veteran legal professional with more than a decade of corporate and commercial experience specific to the biopharmaceutical industry, as Executive Vice President and General Counsel.
Amendment of Deerfield Facility
In January 2014, we entered into an amendment to our financing arrangement with Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P. to provide us with an option to extend to July 1, 2018 from July 1, 2015 the maturity date of the indebtedness incurred by us under the financing arrangement. See "Certain Factors Important to Understanding Our Financial Condition and Results of Operations - Deerfield Facility" below for additional information on this financing arrangement.


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Completion of Underwritten Public Offering In January 2014, we completed an underwritten public offering of 10.0 million shares of common stock, raising net proceeds of $75.6 million after deducting the underwriting discount and related offering expenses.
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, 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 on November 29, 2012. We commercially launched COMETRIQ in the United States in late January 2013. We currently estimate that there are between 500 and 700 first- and second-line progressive, metastatic MTC patients diagnosed each year in the United States who will be eligible for COMETRIQ, and as a result we only expect to generate limited revenues from U.S. sales of COMETRIQ in MTC. Effective October 29, 2013, the wholesale acquisition price for COMETRIQ is $10,395 for a 28-day supply of all dosage strengths. Prior to the approval of COMETRIQ, we had no pharmaceutical product that had received marketing approval, and from the commercial launch through March 31, 2014, we generated $19.9 million in net revenues from the sale of COMETRIQ. On March 25, 2014, the European Commission approved COMETRIQ for the treatment of adult patients with progressive, unresectable locally advanced or metastatic MTC. We currently believe that the patient population for the approved MTC indication in the European Union who will be eligible for COMETRIQ is similar to that in the United States, and as a result, we only expect to generate limited revenues from European Union sales of COMETRIQ in MTC. Timelines for securing reimbursement in the individual EU countries can vary considerably, with some countries taking twelve to eighteen months to approve products for reimbursement. We are working with Sobi, our distribution partner, on activities in preparation for the commercial launch of COMETRIQ in the approved MTC indication in the European Union. These activities include preparing submissions for securing reimbursement in individual countries of the European Union, undertaking promotional activities to raise awareness of COMETRIQ as a treatment for the approved MTC indication, and preparing the supply chain for distribution of COMETRIQ in the European Union.
We have derived substantially all of our revenues since inception from collaborative research and development agreements. Revenues from research and development collaborations depend on research funding, the achievement of milestones and royalties we earn from any future products developed from the collaborative research. During 2013, we completed the recognition of deferred revenue derived from research funding under our existing collaborative research and development agreements. Any future revenue derived from our existing collaborative research and development agreements will depend on the achievement of milestones and royalties we earn from any future products developed from the collaborations. We do not expect any significant contingent or milestone payments in 2014.
Our collaborative research and development agreements may be terminated or allowed to expire. In April 2014, we received a notice from GlaxoSmithKline of its intent to terminate the development of foretinib and return the compound to us pursuant to the terms and conditions of the product development and commercialization agreement between the parties. Once foretinib is returned to us, we will no longer be eligible to receive milestones or royalties from our collaborative arrangement with GlaxoSmithKline.

Clinical Development and Commercialization of COMETRIQ (cabozantinib)

We have focused our development and commercialization efforts primarily on COMETRIQ (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.

The commercial success of COMETRIQ will depend upon the degree of market acceptance of COMETRIQ among physicians, patients, health care payors, and the medical community. Establishing and maintaining sales, marketing, and distribution capabilities are expensive and time-consuming. Such expenses may be disproportional compared to the revenues we may be able to generate on sales of COMETRIQ and have an adverse impact on our results of operations. We expect to


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incur increased expenses for the commercialization of COMETRIQ in connection with the approved MTC indications and any future indications for which COMETRIQ may be approved.
Liquidity
As of March 31, 2014, we had $407.7 million in cash and investments, which included short- and long-term restricted cash and investments of $12.2 million and $10.8 million, respectively, and short- and long-term unrestricted investments of $116.0 million and $111.2 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 $1.4 million and $81.8 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 2014. 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
In August 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 offering of the 2019 Notes, $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. As of March 31, 2014, we have used $18.4 million of the amounts held in the escrow account to pay the required semi-annual interest payments. The short- and long-term amounts held in the escrow account as of March 31, 2014 were $12.2 million and $6.1 million, respectively, and are included in short- and long-term restricted cash and investments. We have pledged our interest in the escrow account to the Trustee as security for our obligations under the 2019 Notes. Deerfield Facility
In June 2010, we entered into a note purchase agreement with Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P., or the Original Deerfield Purchasers, pursuant to which, on July 1, 2010, we sold to the Original Deerfield Purchasers an aggregate of $124.0 million initial principal amount our Secured Convertible Notes due July 1, 2015, which we refer as the Deerfield Notes, for an aggregate purchase price of $80.0 million, less closing fees and expenses of approximately $2.0 million. As of March 31, 2014 and December 31, 2013, the remaining outstanding principal balance on the Deerfield Notes was $104.0 million and $114.0 million, respectively, which, subject to certain restrictions, is payable in


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cash or in stock at our discretion. We refer to the Original Deerfield Purchasers and the New Deerfield Purchasers (identified below) collectively as Deerfield.
The outstanding principal amount of the Deerfield Notes bears interest in the annual amount of $6.0 million, payable quarterly in arrears. During the three months ended March 31, 2014 and 2013, total interest expense for the Deerfield Notes was $4.2 million and $3.9 million, respectively, including the stated coupon rate and the amortization of the debt discount and debt issuance costs. The non-cash expense relating to the amortization of the debt discount and debt issuance costs was $2.7 million and $2.4 million, respectively, during those periods. The balance of unamortized fees and costs was $3.6 million and $1.4 million as of March 31, 2014 and December 31, 2013, respectively, which is included in Other assets on the accompanying Consolidated Balance Sheets. 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 the Original Deerfield Purchasers of a $1.5 million consent fee. On August 1, 2013, the parties further amended the note purchase agreement to clarify certain of our other rights under the note purchase agreement.
On January 22, 2014, the note purchase agreement was further amended to provide us with an option to extend the maturity date of our indebtedness under the note purchase agreement to July 1, 2018. Under the terms of the extension option, which expires on March 31, 2015, we have the right to require Deerfield Partners, L.P. and Deerfield International Master Fund, L.P., or the New . . .

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