Exelixis Inc Q4 2008 Earnings Call Transcript

| About: Exelixis, Inc. (EXEL)

Exelixis, Inc. (NASDAQ:EXEL)

Q4 2008 Earnings Call

March 4, 2009 5:00 pm ET


Charles Butler – Head of Investor Relations

Dr. George A. Scangos - Chief Executive Officer and President

Frank L. Karbe – Chief Financial Officer

Michael Morrissey – President of Research and Development


Eric Schmidt – Cowen and Company

Joel Sendek – Lazard Capital Markets

Jessica Lee – Goldman Sachs

Cory Kasimov – J.P. Morgan


Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Exelixis Earnings Conference Call. 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, Head of Investor Relations.

Charles Butler

Thank you everyone for joining us on our 2008 fourth quarter and year end earnings call. As usual, joining me today are George, Frank, and Mike who will talk through the company’s outlook, review of our 2008 financials, as well as an R&D update.

Before we go onto that, let me just briefly read our forward-looking statement. I would like to note that during our presentation today, we will be making certain statements that are forward looking, including without limitations statements related to our financial objectives, our 2009 year-end financial guidance and expectations regarding our 2010 cash balance, our expectations regarding future partnering and business development activities and goals, our development plans and goals for compounds in the pipeline, the potential efficacy of our compounds, and the execution of our business strategies. 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 section 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.

Dr. George A. Scangos

Thanks everyone for joining us today on our year end call. The year 2008 was a busy and productive year for Exelixis and typically I would devote a fair amount of time to reviewing our numerous clinical, business, and corporate development achievements over the past year. I think our industry is facing a rather challenging time right now, and as proud as I am of our accomplishments over the past year, I know that what matters most today is where we’re going, how we intend to rise to the challenges ahead of us, and how are we going to continue to make progress towards our goal of brining innovative therapies to the market in the face of a challenging economic climate.

In our last quarterly call in October, we outlined a plan that we believe would enable us to operate free of the equity markets for the next few years. Our newest collaboration with BMS which we signed in December enabled us to end 2008 with $284 million and is an excellent first step to achieving that goal. One of the things we would like to accomplish on this call is to explain the plan that will enable us to operate the company through 2011. Our plan is based on careful management of our expenses, increase in support from our current collaborators, and a reasonable set of business development assumptions based on ongoing discussions and current assets.

As you know, our goal was to end 2008 with more than $200 million in cash. In fact, we ended with $284 million. In 2009, we are again projecting that we will end the year with more than $200 million in cash, and that includes making the $35 million cash loan repayment to GSK. We have been able to a large extent to offset our expenses through income based on the valuable set of compounds that we continue to generate. So our strategy of doing R&D at scale with critical mass so that we can generate multiple high-quality assets with significant therapeutic and commercial potential has been working. One part of that strategy involves establishing partnership around some of the compounds to bring in cash, offload expense, and gain access to increasing bandwidth. Clearly, we have done that. We anticipate additional partnerships for this year.

The second related part of this strategy is to move the compounds rapidly into late stage clinical development. We have accomplished that goal with XL184 and will continue to work to bring additional quality compounds to late stage development. Looking at our pipeline today, some of which we’re advancing ourselves and some of which is being advanced by partners, it is clear that this has been an effective strategy for the company.

The question before us now is in the current environment, can we continue to generate the cash inflows that have largely offset our expenses over the past few years, and a thoughtful analysis indicates that we can for at least the next 3 years. We are certainly aware of the current economic situation, and I don’t want anyone to get the impression that we are operating with rose-colored glasses. We know this is not business as usual. However, not only do we expect to end 2009 with greater than $200 million, we expect to end 2010 with a healthy cash balance as well that will carry us well into the future.

How are we going to achieve these goals? First, we have taken several steps to reduce our expense base even while the cost for the development of XL184 continues to rise. In 2009 versus 2008, our operating costs, exclusive of 184, have been reduced meaningfully. As you remember, we instituted 10% headcount reduction last November. Additionally, we have gone through every line in our budget and taken out substantial costs. This year, we won’t award any merit salary increases. We have reduced bonus payments. We have made limited promotion awards among a number of other steps.

Second, as Frank will outline in more detail, an increase in share of our expenses is being reimbursed by partners. The largest increase in our budget is 184 and the cash received from BMS will cover a substantial portion of that spent. Third, there are some business development assumptions built into our financial plans. Currently, we are in advanced discussions on several collaborations that we expect will bring in substantial cash this year. Importantly, we expect to conclude some of these transactions in the first half of the year. We have several ongoing discussions. We have substantial insight into what the collaborations will look like, and we are confident in meeting our 2009 business development goals.

We have additional business development goals for 2010 and beyond. We believe that the assumptions for those future transactions are reasonable, and we have attributed a conservative value to the transaction based on the state of assets that we are likely to have. Given the confidence in this year’s activities and the conservative assumptions for the future, we are confident that we can achieve that 2009 year end cash guidance, and expect to have a strong cash balance at the end of 2010 as well.

Ironically, Exelixis finds itself in the best financial shape it has ever been, and the reason we are in good shape is that we generated many high-quality assets over the years, and we have consistently been able to partner them on their attractive terms. Certainly, some of our compounds have not achieved their goals and have been terminated. That is the business. The important factor to remember is that we have several mid to late stage clinical compounds that continue to generate excitement and that are moving towards the markets. These compounds include XL184, XL880, XL281, XL518, XL147, and XL765. Additionally, there are earlier-stage compounds such as XL228, XL888, and XL019 that we are rapidly driving towards go or no-go decisions.

For a company with so many opportunities, we actually have a pretty short to-do list which is basically to continue what we have done over the past few months; that is thoughtfully partner programs to generate near-term cash while retaining substantial long-term value, continue to manage our costs, and maintain a pragmatic but productive balance between operational costs and financial resources, and focus our clinical developments, especially on XL184, and until partnered on our two PI3K compounds 147 and 765. In addition, we are making strategic investments in a limited number of other compounds to assess their clinical and commercial potential. We laid out this plan a few months ago, and we have already made significant progress in executing it.

Moving forward, we are focused on continuing to align our operational costs with our available financial resources and balancing our spending with significant gains substantially made by investing wisely in programs with truly compelling therapeutic and commercial prospects. We are continuing to explore additional partnering opportunities around our clinical PI3K compounds, 147 and 765, in discovery stage metabolism, oncology, and inflammation assets, and we are confident that at least some of these deals will be successfully completed within the next few months and will generate substantial near-term cash and a long-term value.

We believe by assuring our financial stability over the near term, we will be able to substantially advance our lead asset, XL184, and our other compounds in ways that substantially increase shareholder value, so our to-do list may be short, but we are going to be very busy in the coming months.

With that, I will turn the call over to Frank who will review our year end 2008 financials and our financial outlook for 2009.

Frank L. Karbe

Before I get into the financials in depth, I would like to emphasize that we are in a strong financial position and that our financial outlook is solid. We finished 2008 with $284 million in cash which far exceeded our cash guidance for the year. With close to $500 million in cash and committed funding, expect to generate significant new cash inflows from business development activities this year, and we expect to finish 2009 and 2010 with a healthy cash balance. So in short, our financing strategy is serving us very well in the current tough economic environment.

The year 2008 was a very successful year for us. We met our financial guidance for the year for revenue and operating expense and substantially exceeded our guidance for year end cash with substantial liquidity available to us, and we expect significant additional cash inflows from ongoing business development discussions as well as our already existing collaborations. Through our new partnership with BMS, we offloaded a substantial amount of future development expenses, and we reduced our operating expense base and substantially cut back on capital expenditure. All in all, we are confident about our objective of having the ability to operate financially independent from the capital markets for an extended period of time and just as important to be adequately resourced to aggressively advance our most promising clinical programs.

I would like to briefly review some of our 2008 financial accomplishments before I turn to the Q4 and year end results in detail. Some of these reflect measures initiated early in 2008 in anticipation of a difficult economic environment. We secured $150 million financing facility with Deerfield that served as a safety net and put us in a strong financial position during our negotiations with potential new partners. We forged a new collaboration with BMS which enables us to share costs on XL184 and entirely offload costs for the development of XL281.

We prioritized our development pipeline by deciding to discontinue XL647, XL844, and XL820, thereby eliminating a significant portion of future expenses, and we focused our development plans for XL019, XL228, as well as XL888 with a goal to get to a clear no-go decision later this year. Finally, we reduced headcount which will contribute about $10 million in savings in 2009, lower general operating expenses, and substantially cut back on our capital expenditures. As a result, we met or exceeded our financial guidance for 2008.

Furthermore, our collaboration with GSK ended as scheduled in October last year. We significantly simplified our story and freed up several clinical assets, some of which became the subject of our new partnership with BMS resulting in upfront and other near-term payments of $240 million as well as significant future R&D funding. Other business development discussions are still ongoing, and assuming we are successful in those discussions, we expect to offload a substantial amount of additional future development costs as well as generate a significant amount of near-term cash.

The bottomline here is that we are confident we can meet our business development target presented at our R&D date in December. In summary, while more work in ahead of us, we are well positioned to see our way through the current economic environment.

Let me now turn to our fourth quarter and year end 2008 financial results in detail, and as a reminder, we are reporting 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.

Revenues for the fourth quarter 2008 were $29.6 million compared to $29.3 million for the comparable period in 2007. Additional milestone revenue associated with the selection of XL413 under our 2007 collaboration agreement with BMS largely offset a decrease in revenue associated with our LXR program which is also partnered with BMS as a completion of revenue recognition associated with the collaboration agreements with Wyeth for our FXR Program and Genentech for our Notch Program. In addition, our 2008 financial results excluded revenue associated with our former subsidiary, Artemis, as a result of the sale of 80.1% of our ownership to Taconic in 2007.

Revenues for the full year 2008 amounted to $117.9 million, compared to $113.5 million in 2007. Increases in revenue primarily due to milestone revenue associated with the selection of XL139 and XL413 under our 2007 collaboration agreement with BMS as well as the acceleration of revenue recognition as a result of the conclusion of the development term under our collaboration with GSK more than compensated for decreases in revenue due to the completion of revenue recognition associated with the collaboration agreement with Daiichi Sankyo for our MR Receptor Program and with Wyeth for our FXR Program. Again, note that 2008 revenue excluded revenue from Artemis as a result of a divestiture in 2007.

Research and development expenses for the fourth quarter 2008 were $56.9 million compared to $60.2 million for the comparable period in 2007. Research and development expenses for the year amounted to $257.4 million compared to $225.4 million for 2007. The decrease in expenses in the quarter is primarily due to the transfer of the clinical trial costs associated with XL880 to GSK, lower manufacturing activity on our compounds, and various cost-saving measures implemented during the year. The increases in expenses for the full year reflect the increased costs associated with the maturation and advancements of our pipeline into phase III clinical trials as well as the initiation of various preclinical studies in phase I and phase II clinical trials.

General and administrative expenses for the fourth quarter were $9.1 million compared to $11.8 million for the comparable period in 2007. General and administrative expenses for the year amounted to $36.9 million compared to $44.9 million for 2007. The decrease for both the quarter and full year primarily reflected the stronger growth of the research and development function compared to the general and administrative function and was mainly due to the allocation of general corporate costs to research and development.

Net loss for the fourth quarter 2008 was $38 million or $0.36 per share, compared to $19.9 million or $0.19 per share for the comparable period in 2007. For the full year 2008, net loss was $162.9 million or $1.54 per share compared to $86.4 million or $0.87 per share in 2007. The increase in net loss for the quarter as well as the full year was primarily due to the divestiture of non-core businesses in 2007. Q4 2007 included a gain of $18.1 million associated with the sale of 80.1% of Artemis and the full year 2007 included gains of $36.9 million associated with the divestiture of Artemis as well as our plant trait business.

Cash and cash equivalents, short term and long term marketable securities, investments held by Symphony Evolution, and restricted cash and investments totaled $284.2 million at the end of 2008, compared to $299.5 million at the end of 2007.

Let me turn to our financial outlook. For the full year 2009, we expect revenues in the range of $140 to $170 million and operating expenses in the range of $290 to $320 million, including stock-based compensation expense of approximately $23 million. The revenue guidance represents an increase over 2008 actual revenues of approximately 19% to 44% while operating expenses year over year are expected to remain flat. Expected increase in revenue is primarily due to the revenue recognition in connection with our new collaboration with BMS as well as from other anticipated business development activities. These increases more than offset a reduction in revenue as a result of the end of our GSK collaboration in October 2008.

Cash, cash equivalents, short-term and long-term marketable securities, and restricted cash balance at the end of 2009 is expected to exceed $200 million which would imply a net decrease in our cash balance for 2009 of less than $85 million which includes $35 million cash repayment of the first tranche of the GSK loan. The 2009 year-end cash guidance does not include any funds from the Deerfield facility.

Let me also elaborate on our operating expenses. While our operating expenses in 2009 are expected to be about the same as in 2008, the portion of our operating expenses that is paid for by partners is expected to increase significantly, mainly driven by changes in the cost-sharing dynamics for our development expenses. Development accounts for approximately 50% of our total operating expenses projected for 2009. In 2008, only 11% of our expenses were funded, and we expect the funded portion to increase to approximately 38% in 2009 and to over 50% in 2010. Funded portions may in each case potentially increase even further depending on the outcome of our anticipated business development activities.

As it relates to discovery, discovery accounts for approximately 30% of our total operating expenses projected for 2009. As in the past, we believe that the output from our discovery operations will allow us to cover most of the expenses of this group.

Let me finally cover the impact of our new collaboration with BMS on our financial statements in a little more detail. The upfront payment of $195 million and the fully committed payments of $45 million that we will receive in the first half of 2009 will be amortized over 5 years and recorded as license revenue from the effective date of the agreement in December 2008. Any milestone payments that we may receive under this agreement would be amortized of the same 5-year period but recorded as contract revenue.

As it relates to operating expenses, the basic principle is simple, though the underlying accounting is a little more complex. Both companies will perform work on both programs, and our operating expense will reflect 100% of the cost incurred for work performed by Exelixis on the two programs. As a general principle, Exelixis is responsible for only 35% of the aggregate development costs incurred on XL184, while BMS is responsible for the remaining 65%. As a contractual matter, Exelixis is responsible for funding the first $100 million in development costs for XL184. However, from an economic perspective, we have used $65 million of that amount to be funded by BMS through the $45 million license fee we will receive in 2009 and $20 million of the upfront payment that we received in December 2008.

As it relates to XL 281, BMS is responsible for 100% of the costs associated with this program. As a result of this cost sharing for XL184 and XL 281, we expect the unfunded portion of our development expenses or the portion that Exelixis has to cover itself to be far lower in 2009 and beyond than it was in 2008. On an annual basis, to the extent net R&D funding payments are received from BMS, Exelixis will record the net cash inflow as revenue. In any of the periods where the net R&D funding payments result in a payable to BMS, these amounts will be presented as collaboration cost sharing expense.

I will close by saying that we’re confident that we can achieve our objective of being independent from the capital markets for an extended period of time. We’ve diligently executed on all elements of our strategy which puts us in a strong financial position. We started 2009 with cash and committed funding of close to $500 million, and over the next two years, we expect substantial additional cash inflows from committed R&D funding, milestones, and upfront payments from new business development activities.

With that, I’ll turn the call over to Mike.

Michael Morrissey

Before we go into more detail about the activities within R&D, I’ll start by saying first we’ve matured a set of first in class and/or best in class compounds that will either be the subject of new collaborations or that will develop independently. We believe that our small molecule franchise in oncology is one of the best in the business. Second, we currently have 12 compounds in development ranging from Phase I to Phase III, either being developed internally or by partners. Each of these compounds has an attractive clinical profile with meaningful commercial potential. This is a point we’ve been building towards for several years. Finally, XL184 is our key priority, and ongoing Phase III trial in MTC, Phase II in glioblastoma or GBM, and a planned expansion which could lead to a Phase III trial in GBM later this year or early 2010.

So we ended 2008 with a bolus of momentum, by first retaining XL184 and 281 from our GSK collaboration in October and then partnering these compounds with BMS in December, after a great deal of interest from the pharma community. Our primary objective for XL R&D moving forward in 2009 is to advance XL184 towards NDA filings as quickly and as broadly as possible and our collaboration with BMS. In the simplest terms, the XL184 development program is our highest priority and has top billing in all aspect of resource allocation and staff deployment. Collaboration with BMS, we have completed our initial planning phase of the full development program for XL184 in a variety of oncology indications, including potential pivotal trials that we expect to initiate in late 2009 or early 2010 as well as a broad Phase II trial that we plan to initiate this year to identify other potential indications.

We have staffed the XL184 development program in a fashion that is competitive with other clinically active agents at this stage of development, and together with BMS has critical mass and expertise in clinical, regulatory, manufacturing, and commercial to extend the sizeable lead we have with XL 184 as the most advanced MET inhibitor in clinical testing.

We have a developed a consolidated XL184 regulatory strategy that provides several shots at NDA filings depending of course on the data that are generated from current and future trials. For competitive reasons, we’ll continue to speak about these plan at a high level and hope to be more transparent as data from ongoing trials are published and provide a backdrop for more granularity.

Our XL184 GBM program is advancing rapidly and represents an opportunity to potentially accelerate time lines from a regulatory perspective. Enrolment was completed very quickly in our initial second line Phase II GBM trial where 40 of 46 patients were enrolled in less than three months after the first six patients had passed a protocol mandated safety review. We believe this reflects both a substantial unmet medical need in this indication and the enthusiasm for potential of XL184 in the neuro-oncology community.

While highly selective VEGF derived therapies such as bevacizumab and cediranib are clinically active in GBM, emerging data suggest that dual MET VEGFR2 inhibition by XL184 can have substantial activity in this tumor by a number of mechanisms. In addition, MET also appears to promote the growth and stabilization of the tumor (inaudible), and preclinical data demonstrates that MET and HGF cooperate with VEGF and VEGFR2 to drive tumor angiogenesis. Our collaborator, Dr. Donald McDonald at UCSF has generated compelling preclinical data indicating that simultaneous inhibition of both MET and VEGFR2 with XL184 results in more tumor vascular destruction than agents that collectively inhibit VEGF. Therefore, the target inhibition profile of XL184, namely extremely potent and long lasting MET and VEGFR2 inhibition provides a potential novel and improved treatment modality for GBM.

Although it’s still early, the clinical data we’ve seen thus far in GBM is consistent with this hypothesis and continues to look encouraging. The full data set on the first 46 patients should be ready for ASCO, and we estimated three abstracts for XL184 in GBM. Based on the strength of the available data, we recently submitted an amendment to the current second line GBM protocol that would allow us to add an additional 100 patients to this study to provide further insight into the clinical activity and safety of XL184 in this GBM setting. While I won’t dive into the details of this amendment now, it’s safe to say that we expect to enroll additional patients very quickly based on our previous experience with the first 46 patients and the overwhelmingly positive feedback from our investigators. We are targeting ASCO 2010 to be able to present these consolidated findings.

Assuming these data hold up, it would provide a compelling rationale for evaluating XL184 in late-stage paralysis for GBM. If the results of the phase II trials show evidence of clear clinical and commercial potential, we together with BMS plan to move quickly to initiate a phase III clinical trial in this indication potentially in late 2009 or early 2010.

The phase III trial in MTC is on track and enrolment is in line with our expectations. While we don’t comment on accruals in ongoing studies, I will remind you that this is an international trial targeting approximately 80 sites and is currently open in both the US and Europe. Based on the experience from the Vandetinib MTC trial, that completed enrolment in 2008, we expect that European states will contribute the majority of patients to this study, and we are focused on initiating these sites with the highest priority. We continue to be impressed by the clinical activity we’ve seen in the MTC patients in our phase I study and are excited to be working with top investigators in both North America and Europe to advance to this phase III program. While MTC is not a large commercial opportunity, it does provide important regulatory flexibility and depth that may play a central role in meeting our overall regulatory goals over the next several years.

While we plan to expedite those trials for XL184 on that final path to registration, our plans also include a broad assessment of XL184 activity in phase II trials in multiple solid tumors. Potential for XL184 to extend beyond MTC and GBM is very strong, as phase I data set revealed that multiple tumor types appeared to respond with either tumor shrinkage or prolong stable disease in heavily pre-treated patients. Phase II plan includes the ongoing Phase I B2 trial in non-small cell lung cancer that will study XL184 alone and in combination with erlotinib. We’ll also use a phase II signal searching approach that we expect to initiate this year to identify other potential indications.

Broad Phase II clinical programs can potentially lead to various randomized trials in multiple tumor types with either single agents or in combination with other compounds and is the fastest way to identify additional indications that can help expand the market for XL184. With this comprehensive clinical development program in place, we could be in a position to file an initial NDA for XL184 in the next few years. As you know, the development agreement with BMS also covers XL281, a highly potent selective inhibitor of both wild type and mutationally activated RAP kinase. XL281 is the leading selective RAP inhibitor in clinical development. Both RAS and RAP play key roles in cancer related signaling. Clinical data showed that patients with ARAS or PRAP mutations cannot benefit from EGFR inhibitors, and we believe that XL281 has the potential to provide benefit in these patients by acting downstream with EGFR.

BMS has exclusive rights to XL281 and is responsible for all costs of this program going forward. We expect to continue a number of these clinical trials over the next two years. Our initial focus is to enroll additional patients for the tumors likely to have RAS-RAP pathway alterations such as colorectal cancer, non-small cell lung cancer, melanoma, and papillary thyroid cancer. As part of these studies, we will continue to document clinical pathogen inhibition with pharmacodynamic evaluation.

Beyond 184 and 281, we have a variety of other first in class and/or best in class compounds that inhibit key pathways which play important roles in tumor growth, proliferation, and survival. It’s part of our general strategy to identify potent and selective inhibitors of key signaling pathways, so 147 and XL765 are today two of the most advanced PI3K inhibitors in clinical development. The early clinical data has generated a significant level of interest from potential pharma partners, clinical investigators, and the oncology community as a whole. This interest is largely due to the impressive level of clinical target and pathway inhibition observed in a range of tumors and surrogate tissues of patients treated with these compounds at well tolerated doses.

We are on track to complete the phase I single agent studies and the Phase I B2 trials for each compound in 2009 and have several Phase II studies planned for initiation once a partnership for these compounds is finalized. Ongoing Phase I B2 studies for 147 include combinations with erlotinib in non-small cell lung cancer and carboplatin and paclitaxel in advanced solid tumors. Our XL765 is under investigation in combination again with erlotinib in non-small cell lung cancer and temozolomide in glioblastoma.

As we stated publicly, our strategy is to partner these PI3K assets in a manner that provides significant near-term cash and long term value. We are in advanced discussions for partnership that could include Exilixis’ participation in additional PI3K pathway discovery programs and/or continued involvement in the development of XL147 and 765. The interest in these programs nearly rivals what we saw at the end of 2008 with our other advanced clinical assets. We believe this high value of our early clinical evaluation process and the broach integration of our translational medicine strategies allows for the potential derisking of first in class agents like XL147 and 765 with unprecedented speed and depth.

We have other compounds in early stage clinical development including XL228, XL888, and XL019 will complete studies that will lead to go or no-go decisions in 2009. In addition, we recently reached the MTD with XL518, highly potent selective MEK inhibitor which triggered the transfer of the compound to Genentech under our existing collaboration. We expect to complete the IMD transfer over the next several weeks and after that point will not carry out any additional work nor incur any additional expense going forward.

So in closing, we’re extremely focused with clear priorities on our near-term value drivers. XL184 is at the top of our list, and we also continue to advance other programs in the context of looking for compounds and indications with compelling commercial value and also short development timelines and attractive partnering possibilities. We are looking forward to ASCO in late May, and we expect to hear back shortly on which of the 10 abstracts we submitted in January will be accepted for presentation.

With that I’ll turn the call back to George.

George A. Scangos

I’ll be brief here in my summary. I hope you can see from all of that that we’re in a strong and stable financial position. We’ve brought in a lot of cash at the end of 2008, and we expect to bring in substantially more cash this year, both from existing partners and from new partnerships. We’ve reduced our expenses. As it has in the past, our discovery group is expected to cover the majority of this cost through the compounds we generate, and an increasing fraction of our development costs are being borne by partners. The result is that we’re well on our way to fulfilling our goal of financial independence for a substantial period of time. At the same time, we have moved key assets in our pipeline forward, and they’ve generated encouraging data. Together with BMS, we’re mounting an aggressive late stage development program for 184. This compound has utility well beyond MTC, and we hope to get first glimpse of that when our abstracts are accepted at ASCO, and 184 has several opportunities to gain regulatory approval in the next few years.

Although we’ve talked a lot about 184 since it’s our most advanced compound, I don’t want anyone to get the impression that we’re a one trick pony. Many of the other compounds that we have continue to generate encouraging data as well, so that our maturity pipeline of oncology compounds is taking shape and I think emerging as one of the most promising in the industry. In the coming months, we expect to have news on both the medical and business fronts. We’ve submitted 10 abstracts to ASCO, and we should hear about their acceptance within the next few weeks. We look forward to presenting data on some of our mid and late stage compounds at that meeting, and we’ll of course have more data later in the year at EORTC and ASH. We expect to initiate further pivotal trials for XL184 as well as start a number of Phase II trials for the compound.

On our financial and business development side, we’re in discussions around potential new collaborations for our PI3 kinase programs. We’re having multiple discussions concerning those compounds. We’re confident of signing an attractive partnership within the next few months. Additionally, we’re having discussions around several program that are preclinical including compounds for oncology, metabolic disease and inflammation. We believe that the combination of our compounds advancing and generating encouraging data, financial stability, and the additional partnering revenue this year could substantially increase shareholder value over the coming months and years.

I’ll stop there, and now we’ll be happy to open up the call for questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Eric Schmidt with Cowen and Company.

Eric Schmidt – Cowen and Company

I think it was actually Frank who mentioned that you re-triggered some of the phase I studies on 228, 888, and 019 to get to sooner or clearer no-go decision. I’m just kind of curious as to what’s potentially changed in some of the protocols as to how you are now designing those studies?

Michael Morrissey

It revolves around for all those compounds having minimal data sets either in the dose escalation phase or an expansion cohorts that will allow us to show very clear on target activity at the MTD and then some level of clinical activity in specific tumor types, and those are all different for individual compounds obviously, but it’s a very focused approach that gets us to a very crisp go or no-go based upon clinical data this year.

Eric Schmidt – Cowen and Company

Then on the PI3 kinase partnership, how important is it that you get some signs of clinical activity out of those compounds and not just target modulation? How does that work with the terms that you are interested in getting? Can you get to where you want to be without clear clinical response for example?

Michael Morrissey

Well, I guess I would caution you that the last data set that we published was last October at EORTC, so that’s another four months since then. I think we are very well along in terms of those discussions, and I think the totality of the data with both compounds looks very encouraging right now.

Eric Schmidt – Cowen and Company

On the $35 million payment to GSK, I guess a question for Frank, have you made the decision to pay that initial repayment to GSK in cash or didn’t you have the option?

Frank Karbe

Eric, we have not made a decision, but we have been conservative in our financial projections, and we have assumed that we would repay it in cash. What we eventually end up doing will depend on a variety of factors once we get closer to the actual payment date, but again in our financial projection we try to be as conservative as possible.

Eric Schmidt – Cowen and Company

Do you have a stock price at which you would be potentially more interested in paying it in cash?

Frank Karbe

We will have to evaluate a variety of factors at the time when the payment comes due and stock price is one of them, and we will see where we come out at that point in time.


Your first question comes from the lines of Cory Kasimov with J.P. Morgan.

Cory Kasimov – J.P. Morgan

I have a couple of questions first here Frank relating to the ’09 financials. On the spending related to XL184, when do you expect to get through that initial $100 million before switching over to this 65:35 deal with Bristol?

Frank Karbe

We’re not really disclosing that. It depends obviously on the progress that we’re making under the program. We have agreed on the budgets with BMS, but we’re not exactly disclosing how we exactly we’re going to go into that money.

Cory Kasimov – J.P. Morgan

Maybe I can ask you this another way. Can you tell us roughly what percent of your ’09 R&D budgeted spend is dedicated to 184?

Frank Karbe

Not exactly. We’re also not disclosing that. As you know in the past, we have never disclosed spend on a program by program basis. What we can say is that for 2009 roughly 50% of our total operating expense is development related, and a substantial portion of that is related to XL184. As you know, a big portion of that will be covered by BMS. I hope you understand there is of course some sensitivity here in what we can and cannot say about both the development plans as well as the actual budgets because we have to coordinate here with BMS.

Cory Kasimov – J.P. Morgan

Your topline guidance for ’09, can you comment on what that may look like if we were not to assume any new deals this year?

Frank Karbe

The revenue guidance, I presume?

Cory Kasimov – J.P. Morgan


Frank Karbe

What I can say is that our revenue guidance for the year is based on very conservative assumptions about revenue being booked from new business development activities as well as from revenue that we expect to come in on our existing collaborations. What exactly the mix is there, we’ve not disclosed this in the past, we are not disclosing now, but again we are very confident with where we stand in our business development discussions, and that’s really a reflection of the quality and the number of assets that we have available for partnering and secondly the quality of the discussions that we are having and the level of interest that we’re seeing from potential partners.

Cory Kasimov – J.P. Morgan

One clinical question for Mike relating to 184 for GBM. With this 100 patient amendment to the phase 2 study, if the data were compelling enough and given the imminent medical need that GBM represents, could this potentially become a pivotal phase II or is it clearly going to phase III before you even think about approval?

Michael Morrissey

That’s a scenario that is possible based on upon how the data comes out, so we are certainly opening up the door to be able to move in that direction which is actually based upon how that data actually plays out.

Cory Kasimov – J.P. Morgan

Is that one of the reasons behind putting the additional patients in there to see if additional dosing works and things like that?

Michael Morrissey

That’s one of the reasons.


Your next question comes from the line of Joel Sendek with Lazard Capital Markets. Please proceed.

Joel Sendek – Lazard Capital Markets

So when you say you are in advanced discussions with regard to the partnering for the PI3 kinase and that the interest rivals that you saw in late ’08, should we interpret that to mean that you could get deal terms that are in the same ballpark as the Bristol deal, and are you going to partner those drugs separately or together?

George Scangos

When we say that the interest rivals what we saw with 184, I think one of the reasons we are able to get attractive terms for 184 is not only the quality of the data set we have, and remember you have only seen part of the data; we have lot more data, but also the fact that there are multiple parties interested in each of the 184 compounds. We are actively pursuing a number of those discussions, some of them are very late stage, and I don’t want to really speculate at this time as to what the exact terms will be, but we are expecting to get very attractive very terms as we have in the past.

Joel Sendek – Lazard Capital Markets

So potentially you could partner off 147 to one partner and 765 to another?

George Scangos

In theory, yes. We would prefer not to do that, I think. On the other hand, that’s certainly a possibility.

Joel Sendek – Lazard Capital Markets

Just to be clear, there are multiple parties so you have competitive bidding going on with regard to that right now?

George Scangos

There are multiple parties to whom we are talking, yes.

Joel Sendek – Lazard Capital Markets

Just to follow up on 184 amendment, I’m kind of confused. Should we view this as an acceleration or a delay? I don’t know how to characterize it.

Michael Morrissey

I would look at it as a way to get more data quickly in the second line population as the primary driver for the amendment and then to frame that relative to the data set we will talk about hopefully at ASCO in June and how that then might play out relative to the initiation of a pivotal trial in the second line setting either later this year or early next year, being obviously big on purpose to respect certainly our BMS relationship at all so because the data is still in progress, right? I think we are lining things up to be able to maximize success here, and we have to now do the experiment and see how it all plays out.

Joel Sendek – Lazard Capital Markets

Are you more or less excited on that program now versus three months ago or two months ago?

Michael Morrissey

I would say we are extremely excited about the program, about the potential in GBM based on our view of published data obviously, the feedback we are getting from our investigators and consultants and experts, and we are very excited about where this could go.


(Operator Instructions). Your next question comes from the line of Jessica Lee with Goldman Sachs.

Jessica Lee – Goldman Sachs

When I look at your ’09 guidance for revenues, expenses, as well as year-end cash, I did a quick calculation, it seems that you are assuming there would be about $100 million cash infusion potentially from business development. Is that a correct calculation?

Frank L. Karbe

I don’t really want to comment on that. I really have to leave it up to you how you run your model. As you know, we don’t provide real guidance on burn, but I did say that the net change and cash balance obviously implied in our guidance is less than $85 million and that includes a $35 million dollar cash repayment of the first tranche of the GSK loan.

Jessica Lee – Goldman Sachs

Just on your topline or revenue guidance, if you do include any revenue related to the future deals, will that be amortization of the cash that you receive?

Frank L. Karbe

It’s actually both, and I think it’s important to know that a substantial portion of the revenue that we are guiding to for 2009 is already secure because it relates to the revenue amortization based on the BMS deal that we signed in December. On top of that, as we said, we are due to receive $45 million from BMS in the first half of 2009, which is also fully committed and not at risk, and which will also call some part into our revenue recognition in 2009. On top of that, we’ve also assumed a certain portion of our revenue to come from new business development-related activities, and as I said before, the assumptions we’ve made here are very conservative, and we’re very comfortable that we’ll be able to meet our BD objectives, and again it’s a reflection of the quality and the number of assets that we have available and the quality of discussions we are having at the moment and the level of interest that we are seeing.


We have no further questions at this time. I’ll now turn the call over to Mr. George Scangos for closing remarks.

George Scangos

Let me thank everybody once again for your attention and your interest. We’ll get back to work and make sure we achieve all these goals we just laid out, and before we sign off, let me just again thank all of our employees who worked very hard last year to accomplish everything we have and who are continuing to work incredibly hard so we can meet this year’s goals as well, so thanks to all of them, many of whom I know are listening right now, and thanks to all of you once again.

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