Exelixis Inc. (NASDAQ:EXEL)
Q3 2008 Earnings Call
October 27, 2008, 5:00 pm ET
Charles Butler - Head of Investor Relations
George Scangos - Chief Executive Officer
Frank Karbe - Chief Financial Officer
Michael Morrissey - President of R&D
Eric Schmidt - Cowen and Company
Ted Tenthoff - Piper Jaffray
May-Kin Ho - Goldman Sachs
Joel Sendek - Lazard Capital Markets
Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Exelixis Earnings Conference Call. My name is Alexia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. [Operator Instructions].
I would now like to turn the presentation over to your host for today’s call, Mr. Charles Butler. Please proceed, sir.
Charles Butler – Head of Investor Relations
Thank you for everyone joining us on our Q3 2008 earnings call and business update. As usual, joining us for the call today is George, our CEO, and Frank Karbe, our CFO, both will provide a business and financial update. Mike Morrissey, our President of R&D will also be joining us for the Q&A session.
But before I will turn the call over to George, let me just say that we posted the earnings release as well as the slide presentation and the company’s prepared remarks on our website at exelixis.com. And before I get started, I would like to note that during our presentation today, we will be making certain statements that are forward-looking, including without limitation, statements related to our year-end financial guidance, the timing and success of future partner and cost cutting efforts and the execution of our business strategy. These statements are only predictions and are based upon our current assumptions and expectations.
Our actual results and the timing of events could differ materially from those anticipated in such forward-looking statements because of risks and uncertainties discussed in the presentation materials, the comments made during this presentation, and the risk factor sections of our 10-Q for the quarter ended September 26, 2008, and our other reports filed with the Securities & Exchange Commission. We expressly disclaim any duty to make any updates or revisions to any forward-looking statements.
With that, I will turn the call over to George.
George Scangos - Chief Executive Officer
Okay. Thanks Charles and good afternoon to everyone. I think this is, to quote Dickens, the best of time and the worst of time. On the one hand, it is a defining moment for Exelixis with the recent GSK announcement, we now have clarity on the ownership of our pipeline, the pipeline that we have been aggressively building over the last six years and which is now one of the broadest and deepest oncology pipelines in the industry. It’s a major achievement that we have retained almost promising and advanced asset XL184, which is in a pivotal trial with the high likelihood of success. We have also retained rights of several additional compounds in various stages of development that also show promising of clinic especially XL281 and 228. The relative data that we presented at the EORTC meeting last week and the enthusiasm among pharma companies, which soon will become apparent, have tested the quality of these companies.
On the other hand we are operating in an economic environment unlike anything I have seen before. Raising money based on equity is either impossible or unacceptably dilutive. We realize that everyone’s chief concern now is cash. And while it’s true that we have an amazing pipeline and high quality compounds, it’s also true that we don’t have the resources to either financial or human to develop the pipeline. So how we are going to address the issue?
Well, we’re going to do three things. First, we will partner many other compounds to bring in cash and gain expertise to bandwidth, again access to expertise and bandwidth. Second, we will reduce our cost substantially to bring our net cash usage inline with our cash balance and keep this independent of the capital markets for a substantial period. And third, we will focus our internal development on a limited number of compounds. We will provide some more insight into the specifics later in the call and we will layout a detailed plan on R&D Day in December, but first I will turn the call over to Frank Karbe for a discussion of our financials.
Frank Karbe – Chief Financial Officer
Thank you, George. Let me first address what I suspect many of you are worrying about most, our short-term financial position as well as our ability to secure long-term financial stability.
To the first point, we ended the quarter with $285 million in cash and committed funding. 135 million of that is in the form of cash and cash equivalents and 150 million is in the form of the credit facility from Deerfield, which is fully available to us.
To the second point, we are well on our way to bring in cash through new partnerships and substantially reduce our current cost basis. The combination of those two, we expect, will allow us to become essentially independent from the capital markets for financing for an extended period of time.
With that, let me turn to our third quarter financial results. In summary, Q3 results were quite positive, marked the continued significant revenues and the continued impact of our cost savings initiatives implemented earlier this year. As a reminder, we have been putting our financial results on a GAAP basis only, and as usual the complete press release with our results can be accessed through our website at exelixis.com.
Let me begin with revenues. Revenues for Q3 '08 were 29.9 million compared to 26.8 million for the comparable period in '07. The increase from '07 to '08 was primarily due to an acceleration of revenue recognition as a result of the development term of our collaboration with GSK concluding today. This increase was partially offset by the exclusion of revenues as a result of the sale of 80.1% of our pharma subsidiary, Artemis Pharmaceuticals in 2007.
Research and development expenses for Q3 '08 were 65.7 million compared to 58.6 million for the comparable period in '07. The increase from '07 to '08 primarily reflected the increased development expenses associated with the maturation and advancement of our pipeline to Phase III clinical trial startup activities, the initiation of new Phase I and Phase II clinical trials, as well as various non-clinical studies and expanded enrollment in our ongoing clinical trial. Note that the year-over-year increase in R&D expense is slowing down significantly as compared to previous quarters, which is in top due to our ongoing cost containment efforts this year.
General and administrative expenses for Q3 '08 were 8.9 million compared to 10.8 million for the comparable period in '07. The decrease from '07 to '08 was primarily due to the allocation of general corporate costs to research and development, which primarily reflected the growth of the Research and Development function, compared to the G&A function.
Net loss for Q3 '08 was 38.5 million or $0.36 per share compared to 13.7 million or $0.14 per share for the comparable period in '07. The increase in net loss in '08 compared to '07 is primarily due to the sale of our plant trait business in the third quarter of last year for which we recognized an $18.8 million gain in Q3 of '07.
Cash and cash equivalents, short-term and long-term marketable securities, investments held by Symphony Evolution, and restricted cash and investments totaled 135.2 million at September 30, 2008 compared to 299.5 million at December 31, '07. Including our financing facility with Deerfield, cash and committed funding as of the end of the third quarter amounted to $285 million.
Let me elaborate for a moment on the financial implications of the conclusion of our GSK collaboration. With GSK not exercising its right to another compound, there are no further selection milestones. This, however, has no implications to our 2008 outlook and our cash position as the potential selection milestones would have come in form of an offset to the outstanding loan from GSK instead of some cash. The loan from GSK amounts to 85 million, plus accrued interest computed at 4% per annum, totaling approximately $101 million as of the end of the third quarter. This loan matures in three roughly equal tranches over three years beginning one year from now in October 2009. Importantly, the loan can be repaid in cash or in stock at our discretion subject to certain conditions.
Keep in mind that GSK selected XL880 last year and then Exelixis could receive additional milestones of up to $90 million in connection with GSKs successful development XL880. Additional milestones could reduce any outstanding amounts of the loan.
Let me reiterate the impact on our revenue resulting from the expiration of our collaboration with GSK. As you know, we typically recognize revenue over the term of the underlying agreement. To the extent there are any expansion options, we conservatively assume the collaboration would extend to the longest contractual period, which in the case of GSK was October 2010. Because the collaboration now concludes in October ’08, we accelerated revenue recognition for the remaining deferred revenues through October of this year. As a result, our revenues increased by approximately 8.6 million in both the second and the third quarter of this year, and our recognition of deferred revenue i.e. revenue from GSK payments received in the past will be completed at the end of October.
Let me conclude with our financial outlook. We maintain our financial guidance given at the beginning of the year for our full year ’08 revenue, OpEx and year-end cash. Note that our cash guidance of at least 200 million at the end of 2008 excludes the funding that is available to us under the Deerfield facility. In order to meet that guidance, we need to bring in a substantial amount of cash through new business development activity and the achievement of milestones on our existing collaborations.
With that, I will turn the call back to George.
George Scangos – Chief Executive Officer
Okay. Thanks Frank. As I said at the beginning, we have three clear and immediate priorities. First, bring in cash through new partnerships. Second, reduce our cost and our net cash usage. And three, focus our pipeline.
As we have said for a while, this period that we are in right now, post the GSK decision, is one will best be able to address those issues and I think we are in great shape to be able to do so. I want to keep the discussion today focused and to the point so you can appreciate the aggressiveness with which we are tacking other challenges there in front of us. We plan to outline the details of our corporate strategy at R&D Day on December 12 and we will fill in the details there. However, with the current economic and market turmoil I want to take the opportunity today to clearly articulate our short-term goals to address the priorities that I just outlined.
So let’s start with tactics to bring in additional cash through new partnerships. As a result of GSK's decision last week, we now have nine proprietary compounds in clinical development. The five compounds to which we retain rights; 184, 281, 228, 820 and 844, together with the compounds that were already in our proprietary development portfolio, so 019, 147, 765 and 888. I believe that it is one of the most attractive pipelines anywhere and represents truly substantial value. Of course, we know the date of GSK’s decision for a while and we worked hard to hit that date with the running side which we have done. We are in discussions with multiple pharma companies about partnerships for several of the compounds in this pipeline, and our highest priority is to partner those compounds and we believe that the capabilities and bandwidth of the large partner can accelerate development and achieve peak more quickly.
Those compounds include 184, the PI3K inhibitors 147 and 765, the RAF inhibitor 281 and a new HSP 90 inhibitor 888. Especially for XL184, which is almost advanced asset, we are seeking a co-development and commercialization agreement. For the other compounds in the pipelines, we are considering a number of structures including straightforward relationships that include cash, development, regulatory and royalties. Based on the depth and breadth of ongoing discussions on many of the compounds and the waive of interest in XL184 and 281 since GSK's decision last Thursday, we hope to complete one or more of these transactions by year-end and others in early 2009.
The strategy here is really very simple. These compounds may each lead to a significant medical breakthrough and represent potentially large commercial opportunities for multiple tumor types. The data presented last week at the EORTC speak for themselves, and we have taken the compounds as far and as fast as anyone. Further development of these compounds will benefit from the financial muscle, clinical bandwidth and commercial expertise from an established oncology power house. Clearly, we can exploit the early lead that we built with these agents and maximize their value over the long term and of course remember that each partner compound will not only result in cash to upfront milestone payments, but will substantially reduce our clinical costs as well.
I should add that we're also having discussions around 820, 019 and 228 and several of our earlier compounds currently in lead optimization. We are carrying multiple discussions forward in parallel in an effort to achieve the best outcome for the company, balancing the need for near-term cash, reduction of net cash usage, and retention of long-term value for the company. So once we address the cash variable through the partnering, we'll next need to prioritize our internal development efforts. Partnering several of the compounds by itself is a major step in prioritizing our development activities. As the partnerships evolve, we'll make decisions about which compounds to take forward ourselves and of course if the data so indicate which compounds to terminate.
As we said the most attractive compounds to develop ourselves have a low cost, low risk route to the market, usually for a niche indication with the possibility of substantially expanding the market and to major indications. Compounds that could fulfill these criteria are 184, 228 and 019 and we'll provide more color on the proprietary pipeline decisions on R&D Day in December when we have more clarity on which partnerships to pursue and when the data from ASH and 019 and 228 will be available.
And finally of course, we need to substantially reduce our net cash usage. Partnering will bring in cash and allow us to internal our lower costs significantly. In terms of reducing cash requirements, we can see two different ways that this might work. First, a partner may elect to take over the development activities and our costs for such compounds would essentially go to zero. In this case, we would take the appropriate steps to reduce head count so our internal capacity and spend are aligned with smaller number of internal development opportunities.
On the other hand, a potential partner may pay us to continue development activities for compounds with interest and in this case we would expect our costs to be covered in full. Regardless of partnering outcomes, we will reduce our annual cash utilization significantly. In any scenario, it is safe to say that we'll be running mean and lean. At the same time, we'll maintain a significant long-term upside and several partnered compounds that will advance in the hands of pharmas between our oncology capabilities and a smaller number of proprietary compounds. We fully understand the challenges ahead and expect that the current financial crisis will go on for the foreseeable future. We are moving into a mode where we build a strong cash reserve and dramatically cut expenses while not destroying the core foundation of a company that has become a power house in drug discovery, translational medicine and early development. The value of our discovery platform and development portfolio may not be reflected in our current stock price, but we believe that successful execution in the coming months will highlight the intrinsic value that Exelixis brings to investors even in the worst financial crisis in nearly 80 years. It's our goal to provide you with greater clarity and detail on our corporate strategy at our annual R&D Day in December.
And with that, we'll close the call and open it up for questions.
[Operator Instructions]. And your first question comes from the line of Eric Schmidt with Cowen and Company. Please proceed.
Good afternoon. George, I am not sure I got exactly all of the language you used when you discussed decreasing your cost base to a level that sort of – not sure what you said here, roughly equal or sort of equal to net cash intake? What specifically are you guiding toward in terms of the future cash run rate versus the monies you can get from partnerships?
Yeah, I think Eric what by cash or what I am trying to say is we are going to -- we intend to bring in substantial cash through partnering activities and we're in a lot of discussions. We're quite confident that we can sign some attractive partnerships and bring in substantial amounts of cash. We obviously want to be independent of the capital markets for a substantial period of time. So each partnership that we sign does one of two things; either it brings in cash, and it will either off-load cost if a partner decides to take on the development, in which case we will eliminate obviously the external clinical costs and we can reduce headcount to reduce our internal costs. Or the partner can elect to pay us to continue the development in which case actually our costs wouldn't be decreased but our net cash usage or burn sometimes would be decreased. So we have to bring that burn, that cash usage, inline with the cash that we're able to bring in so that we're independent of the capital markets certainly through ‘09 and well grow beyond that period of time. Right now, in any case, let me be clear, regardless of how the partnering sorts out, we will reduce our cost basis from where it has been this year. We have to do that. The cost basis we have isn't sustainable in the current environment.
I think I follow you. All right.
I'm sorry, Eric. There are two components. One is reducing absolute cash use, period. How much we spend. And more importantly than that is reducing the net cash usage to burn.
Okay. So I guess the bottom line is you think that you can maintain roughly the same levels of cash that you have now, be financially independent of the markets, as you say, for the next year or two, based on the partnerships that you're kind of able to envision over that period of time?
That’s the plan.
Okay. And just getting sort of maybe parallel discussion is your decision to keep the discovery platform. Can you talk about how that impacts your cash, whether you're run that discovery platform any differently, whether you'll partner compounds that come out of that platform at an earlier stage or anything of that nature?
Yeah. The discovery platform that we built is as good as any in the industry. It is extremely efficient. We've been turning out, as you know, three to four INDs a year of compounds that have been of quite good quality and have passed due diligence through pharma companies and are moving forward in the clinic and generating good data. We have been able to do that with a relatively small net cash usage because of the partnerships we've been able to sign around the compounds that are preclinical, essentially ready for IND, like for BMS and Genentech, where we were able to get about $40 million per compound at IND. And so based on that and based on current discussions we're having, which give us some I would say optimism that we will be able to keep doing that we would intend to keep the discovery group going. If we fail to sign the new partnerships, if we for some reason can't do that, or the market changes, then we'll have no choice but to reduce the cost, by reducing headcount, but that’s not the first course of action here, and we don't think we'll have to do that in our discovery there.
Thanks a lot.
Your next question comes from the line of Ted Tenthoff with Piper Jaffray. Please proceed.
Great, thanks. Speaking of maybe where you left off with Eric, on the partnering front, have you seen terms change? Have you seen interest levels change? In other term, I always hear turnaround in buyer's market. Is that $40 million preclinical still an appropriate level? And then I have one quick follow-up on some clinical data.
Yeah. I would say, yeah, we've seen a change in the interest. It has gone way up. We have really remarkable interest now from many pharma companies, and we've had huge amount of, let's say, inflow of interest post-announcement of the GSK decision. I think there are a lot of biotech companies trying to partner their compounds. That's true. There are a lot of compounds out there. There aren't so many really good compounds and there are even fewer really good compounds with good clinical data. So for compounds like we have, for 184, for 147, for 761, for 281, and others, we really have good clinical data. The compounds are well tolerated, they're hitting their targets, they're knocking down the pathway, many have clinical efficacy. We have good tolerability. So there aren't a lot of compounds like that. It’s not a buyer's market.
Now, I don't know if you guys have anyone out at ACR, since it is right in your neighborhood, but can you comment on what was seen with the RIGEL compound today and whether there is anything we can read into that from a cardiovascular or safety side into Jack, any cross-over from thick into Jack?
You know, Ted, I really can't comment. We're a little busy around here today. I did notice that their stock tanked today, but I didn't hear the data. I haven’t had a chance to look at it, so I really can't comment on.
Okay, thanks. Good luck with the partnering.
Your next question comes from the line of May-Kin Ho with Goldman Sachs. Please proceed.
Hi George. A couple of questions about the different facilities that you have, for example, Deerfield. Can you discuss any covenants in that agreement, do you have to have a minimum cash requirement and similarly for your GSK agreement?
Yeah, Frank is here and he can comment on that, May-Kin.
Yes May-Kin, we do have certain covenants on both of those facilities, that’s both disclosed in detail in our 10-Q. But let me just summarize them for you. On the Deerfield side, the important I want to note here is that there are no performance requirements with regards to our stock price, which makes this facility different from many other facilities out there. There is, however, a covenant there that requires us to keep at least a minimum cash balance of $75 million. However, we can of course always meet that by simply drawing down on the Deerfield facility before we hit that threshold. With regards to GSK, there are two covenants, one is a minimum working capital covenant, the other one is a cash covenant. The minimum cash covenant here is below the Deerfield covenant, so it is a Deerfield one that we need to be focused on first.
So -- but my understanding, if I read this correctly, once you start drawing on the Deerfield facility, you have to start paying interest on the entire principal. Is that correct?
We have to start paying interest on the principal that was drawn, so as you may…
Just on the drawn.
Drawn facility in $15 million increments and we only pay interest on whatever amount of money we've drawn down.
Okay. And under what circumstances would you be required to accelerate the pay back of any of these?
Well, only in event of default.
Okay. And on the Symphony, at this point it looked like you're not going to pursue the compounds until you find a partner. So what happens to that agreement?
Well, Symphony provided us with $80 million for the development of three compounds; two that are in there now that still have some interest are 784 and 647. And we are working with Symphony to see if we can find partners for those compounds. We have said, I think clearly, that we will not spend our own money to develop those compounds or to reacquire them for Symphony. So in the case where we did not find partnerships, Symphony would own those assets.
But in your partner discussions you involve these compounds as well?
I am sorry.
In your partnership discussions you would also cover these compounds?
We do, yes.
And lastly also cash question, you plan to have about $20 million by the end of the year, so just based on my rough calculation, you probably have to add about $100 million or so between now and the end of the year and. And I guess, potentially there is $20 million milestone from Bristol but then from the new partnerships you would have to have some payments of about $80 million. Is that the right calculation?
I think directionally, May-Kin, you're going in the right direction here. But keep in mind there is several components. You highlighted one with regard to potential milestones that we may still achieve in the later part of the year. Second one I would say is the timing, the extent of our cost cutting efforts that we announced on the call today. And then the third one is the outcome of our business development activities, and it’s where exactly we come out of course is a function of where we come out on all three of those.
Great, thank you very much.
[Operator Instructions]. And your next question comes from the line of Joel Sendek with Lazard Capital Markets. Please proceed.
Hi, thanks. I have two questions. First can you just go over the reason why GSK didn't opt in on an additional compound?
Well, look, GSK gives us a little insight into their thinking, but only a limited amount. So I can speculate a bit, but the bottom line is I really don't know. We've said for a while we weren't sure if they were going to take 184 because it has a similar mechanism of action to 880, which they've already taken. 880 is also a very nice looking compound moving forward by GSK, so I can imagine they wouldn't want to pay twice for a compound that have a similar mechanism. For the other compounds in the pipeline, I think it's from their part partially balancing their own pipeline, balancing their own needs, and I don't know what else, frankly.
Okay. And then just a financial question. Maybe I'm confused a little bit on the timing here. Obviously you know more about the state of your business development deals than we do. But I'm just wondering why you wouldn't be more -- wouldn't cut costs preemptively or more aggressively prior to making any of these partnership deals. And what your definition, you mentioned lean and mean, is that what you are now, or what you will be? Because certainly your R&D expense you don't look too lean and mean on an operational perspective. Can you just give a little more clarity on that, please?
Number one, I hope we know more about our partnering. But look, I think lean and mean means to me not having 10 people isn't necessary leaner than having 100 people is what you get done with those 10 people or 100 people. It’s output per head. So we are having a number of discussions with pharma companies now, some of them have clearly indicated they would prefer that we carry the development of the compounds further, they would cover the costs. So we're not in a position, nor would we would want to eliminate a lot of heads and being unable to carry the development of those compounds further. That makes no sense. And it doesn't matter from terms of cash usage. It actually is preferable for us to do the development and get paid to do it rather than just off-loading it to a pharma company. So we're pretty far along in these discussions. We are going to know within a reasonably short period of time here how these things are sorting out and we'll take the appropriate steps at that time. Now that being said, there are a group of people in a number of positions that can and will be reduced regardless of how the partnering sorts the stuff out because we have to bring our total cost down. That we'll do before we sign the partnership so we'll do some of it right now immediately, and we will have further reductions potentially once the partnerships become clear.
Okay, that helps. Thank you.
And we have no further questions at this time.
Okay. If there are no more questions, let me thank everybody for their attention today and we'll all get back to work. We have plenty to do. Thanks everybody.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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