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Exelixis, Inc. (NASDAQ:EXEL)

Q2 2011 Earnings Call

August 4, 2011 5:00 PM ET

Executives

Charles Butler – VP, IR

Mike Morrissey – President and CEO

Frank Karbe – EVP and CFO

Gisela Schwab – EVP and Chief Medical Officer

Analysts

Eric Schmidt – Cowan & Company

Joel Sendek – Lazard Capital Markets

Terence Flynn – Goldman Sachs

Operator

Good day ladies and gentlemen and welcome to the second quarter 2011 Exelixis financial results conference call. My name is Ann and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. If you require assistance at any time during the call please press star followed by zero and an operator will be very happy to assist you. We will be facilitating a question and answer session following the presentation. I would now like to turn the presentation over to Mr. Charles Butler, Vice President of Investor Relations. Please proceed sir.

Charles Butler

Hi. Thanks to everyone for joining us today for the Exelixis second quarter 2011 earnings call. Joining me today from the management team are Mike Morrissey, our President and CEO; Frank Karbe, our CFO; and Gisela Schwab, our CMO, who will together, review our corporate financial and development progress for the quarter ended June 30, 2011. They will also discuss upcoming objectives and provide an update on Cabozantinib our lead clinical development program.

As a reminder, we are reporting our financial result on a GAAP basis only, and as usual, the complete press release with our results can be accessed on our website at exelisix.com.

As a reminder, during the call we will making certain forward-looking statements that are forward-looking including without limitations, statements related to the development in clinical and therapeutic commercial potential of Cabozantinib, Exelixis’ development plan and regulatory strategy for Cabozantinib the timeline for the exam trial, the filing of an NBA and a potential commercial launch in MTC, plans to initiate a Phase 3 pivotal trial and CRPC by year end 2011 and additional Phase 3 pivotal trials in CRPC in 2012, the evaluation of lower doses of Cabozantinib and CRPC, potential partnering opportunities and our updated 2011 financial guidance. These statements are only predictions and are based upon our current assumptions and expectations. Our actual result and timing of events could differ materially from those anticipated in such forward-looking statements because of risk and uncertainties discussed in the slides accompanying this call, the comments made during this call and the risk factor section of our 10-Q for the quarter ended July 1, 2011, and our other reports filed with the Securities and Exchange Commission. We expressly disclaim any duty to make any updates or revisions to any forward-looking statements. And with that, I’ll turn the call over to Mike.

Mike Morrissey

Okay, thank you Charles and thanks to everyone joining us on the call today. The second quarter of 2011 was very productive for Exelixis and we continue to make strong progress on our transformation into a streamlined organization, solely focused on maximizing the clinical and commercial value of Cabozantinib, or Cabo for short. During the quarter, we continued to advance our comprehensive development plan for Cabo and achieved a number of key milestones.

On today’s call, Frank will walk you through our financials and Gisela will provide an update on our Cabo development efforts. I want to focus on a few key themes that we will expand upon throughout the call today.

First, we’re working towards key Cabo milestones in the second half of 2011; the exam trial, our Phase 3 pivotal trial in MTC is tracking towards a readout of top line data around the end of the third quarter. We’re also advancing our comprehensive development plan and regulatory strategy for Cabo and CRPC, including our first pivotal trial that takes advantage of its truly unique clinical profile, targeting three key cell types; tumor cells, osteoblasts and osteoclasts that drive the development and maintenance of metastatic bone lesions.

Second, we are using the CRPC opportunity to explore lower starting doses of Cabo with the aim of maintaining the clinical activity we’ve seen to date with improved palatability. We’ve made some significant progress in this regard over the last few months and Gisela will provide the highlights in her remarks.

Third, we are investigating potential partnering opportunities that would help us maximize the global commercial value of Cabo. We are currently exploring potential regional deals that would grant Asian rights to Cabo to a partner with clinical, regulatory and commercial bandwidth and expertise in this important region.

As mentioned on a call earlier this year, we’re not rushing into a deal just for the sake of doing a deal. It needs to make sense strategically from a near term financial, development and commercial perspective and help us build additional value for the emerging Cabo franchise and potential important indications including CRPC, liver cancer and non-small lung cancer in a region that would be challenging for us to access independently either now or in the midterm.

We’re also engaged in numerous discussions for other early stage non Cabo assets that we hope to conclude in 2011.

Finally, we continued to reduce our expenses and wind down non Cabo collaborations that will help us focus our activities and resources on advancing Cabo as the primary value driver for the organization.

So I’ll come back at the end of the call to make some closing remarks about the second half of 2011. For now, I’ll turn the call over to Frank and Gisela to provide a financial and clinical update. Frank.

Frank Karbe

Thank you Mike. As usual, I will focus my comments on the highlights of our financial performance and refer you to our press release and quarterly SEC filing for additional details.

We finished the quarter with a healthy cash position of over $350 million and year over year, the P&L continues to reflect our transition to the Cabo only company with significant decreases in all of our major expense categories; namely personnel, clinical trials, lab supplies and rent.

Subsequent to the end of the second quarter, we also announced the discontinuation of one of our collaborations with BMS under which Exelixis was still conducting work. This will result in the acceleration of a substantial amount of deferred revenue in the second half of the year, which I’ll explain in more detail in a few moments.

Revenue was down by $15.4 million for the quarter, largely attributable to Exelixis having regained the rights to Cabo as well as the transfer of the clinical work for our PS3K Exelixis 147 and 765 to Santa Fe, which is now essentially completed.

Operating expense decreased by approximately $23 million or 31%, which mainly reflects the significant impact of the large scale restructuring taken last year. Compared to Q2, 2010, there are nearly 200 fewer FT’s. We have significantly lowered our consumption of lab supplies, lowered our clinical trial expenses and substantially reduced our real estate costs largely as a result of successfully subleasing significant portions of our excess lab and office space.

On July 14, we announced the termination of the collaboration agreement with BMS for XL281. XL281 and Cabo were originally part of the same collaboration and with the XL281 termination, this collaboration ends in its entirety resulting in the acceleration of a significant amount of deferred revenue.

Specifically, we expect to recognize revenue of about $110 million in Q3 and about $10 million in Q4 of this year related to the termination of this collaboration.

Let me finally turn briefly to our financial guidance for 2011. We are updating our financial guidance for the full year 2011 by increasing our expected revenues to a range of $220 million to $250 million as a result of the acceleration of deferred revenue mentioned a moment ago.

Our guidance for operating expenses for the full year remains unchanged in the range of $190 million to $220 million and our guidance for yearend cash also remains unchanged at approximately $380 million. As previously stated, our cash guidance assumes a certain amount of cash inflows from expense reimbursement, milestones, stock option exercise activity as well as Cabo and non Cabo related BD activity. A substantial portion of these cash inflows have not yet been realized and therefore are still at risk.

With that, I will turn the call over to Gisela.

Gisela Schwab

Thank you Frank. The Cabo clinical development program continues to make significant progress in multiple areas. Today, I will briefly discuss the status of the Exam trial of Phase 3 in medullary thyroid cancer, or MTC, our efforts in castration resistant prostate cancer or CRPC and additional trial efforts for Cabo.

The Exam trial continues on track and we expect a read out of top line data around the end of the third quarter of this year and plan to present the full data set at a subsequent medical meeting. The plan remains unchanged since the call a few weeks ago and we remain encouraged for a potentially positive outcome.

We are preparing the pre-clinical and CMNC sections for the initiations of a potential rolling NDA filing at the end of 2011 that would be completed with the clinical section in Q1, 2012.

Regarding CRPC, as we said in July, we submitted the 306 protocol to the FDA for its special protocol assessment, or SPA. The 306 trial is the first of three planned pivotal trials in patients with CRPC and it will use a combined end point of bone scan response and resolution of bone pain.

We will describe the trial design in more detail when the SPA process is completed and expect to initiate this trial by year end. Detailed internal planning is underway for the two other pivotal trials in patients with CRPC. The 307 trial will assess Cabo’s ability to extend survival in a well-defined CRPC population that can most benefit from Cabo’s unique clinical profile.

We plan to select the optimal patient population, line of therapy and comparator once we have longer term data from the patients currently on study in the RDT and NRE cohort. We expect to be in a position to finalize key elements of the survival trial and to initiate the trial in 2012.

We also continue to refine our plans for the third projected trial in CRPC. The 308 trial will evaluate the ability of Cabo to prevent the formation of bone metastasis, a setting that represents a large commercial opportunity due to the sizable number of patients and a potential long duration of treatment.

The design of this trial will be informed by regulatory feedback of the supplemental biologics license application or BLA for the (inaudible) based on the 147 study and in the short term, but the upcoming ODEC discussion on end points and trial designs for the prevention of bone metastasis in prostate cancer on September 14, 2011.

As part of our preparation to initiate multiple pivotal trials in prostate cancer beginning later this year with 306, we are also taking into account a detailed evaluation of optimal doses or dosing regimens to serve the earlier lines of therapy in prostate cancer.

Given Cabo’s unique impact on bone scan, we have the ability to quickly generate data with lower doses of Cabo and to assess their differential impact in prostate cancer. To that end, Dr. Mathew Smith, at Massachusetts General Hospital is conducting an investigative sponsor trial to determine the lowest effective starting dose for Cabo in CRPC.

Using bone scan read outs as the primary end point, the trial is designed to evaluate (inaudible) of prostate cancer patients with bone metastasis on bone scan at baseline. The first cohort has been enrolled at 40 milligram per day and based on the observed high rate of bone scan response in this cohort; the study will now involve subjects in the next cohort at a lower 20 milligram per day dose.

In addition to bone scan response, further data will also be collected from this trial including duration of response, the impact on circulating tumor cells, MRI and dexa scans and impact on bone biomarkers. So between the RDT, NRE and the low dose work, we will have a solid data set supporting the design of our planned pivotal trials in CRPC.

The 306 trial, which we plan to start by year end within SPA and the 307 and 308 trials, which we plan to initiate in 2012. Although much of the focus has been on CRPC and MTC, at ASCO, we released data on five tumor types in addition to CRPC; ovarian cancer, melanoma, liver cancer, breast cancer and nonsmoker lung cancer.

Additionally, in a separate study, we have observed encouraging activity in differentiated thyroid cancer and in renal cell cancer. We are planning on presenting these data sets later in the year at medical conferences starting with an oral presentation of the DTC, or differentiated thyroid cancer data at the American Thyroid Association in the fall.

All these data sets warrant further follow up and have generated a high level of interest in the oncology community. We are leveraging this interest to collaborate with leading investigators to plan future investigative sponsored trials that we expect to being in 2011 and 2012.

These trials will generate important data that will allow us to focus our internal resources on the most promising indications in later stage development. We believe that the broad anti-tumor activity observed with Cabo to date could potentially support a broad development plan across multiple different indications that represent a significant commercial opportunity.

With that, I will turn the call over to Mike.

Mike Morrissey

Okay, thanks Gisela. In closing, we expect the company to advance towards several key milestones in the second half of 2011 including the readout of the Exam trial and the potential initiation of the 306 trial in CRPC under an SPA.

We are currently putting together plans to present additional data on lower starting doses of Cabo and CRPC and new updates for non CRPC cohorts of the RDT at medical meetings later this year.

Finally, we’ll hold our annual R&D day in early December where we will outline our plans for 2012. So I’ll leave it there for now and reiterate the team at Exelixis is looking forward to a strong second half of 2011 and an opportunity to provide meaningful benefit to patients and build shareholder value.

So with that, I will turn the call back to the operator and be ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Eric Schmidt with Cowan & Company. Please proceed.

Eric Schmidt – Cowan & Company

Good afternoon. Thanks for taking the question. Gisela, on the Mathew Smith study and a decision to move from 40 milligrams to 20 milligrams, I guess I’m going to ask the obvious question. Is there a specific hurdle in terms of bone scan resolution that had to be achieved to warrant that dose reduction? What is it if so?

Gisela Schwab

So obviously with the nice effect on bone scan that has been described and presented previously, we have a very sensitive read out and so the trial, although I cannot go into great detail, requires a large proportion of patients in a given cohort to have bone scan responses that signal activity and then one would decrease the dose.

So we are at an early stage right now and the bone scan response data in terms of magnitude and number are consistent with what we’ve seen previously in the RDT.

Eric Schmidt – Cowan & Company

Okay. And when will we see data presented from that trial?

Gisela Schwab

We’re hoping to present it or Mathew is planning to present it later this year.

Eric Schmidt – Cowan & Company

At what forum?

Gisela Schwab

Likely at URTC.

Eric Schmidt – Cowan & Company

Okay. And then on the 306 study, I don’t know exactly how many days it’s been since you’ve submitted the DSPA Mike, but is there any update you can provide? Did you receive any response from the FDA? If so, I know you’re going to be leery about getting into details but can you characterize in any way?

Mike Morrissey

Yeah, Eric as we talked about previously, I mean it’s a fair question but we’re going to stick to our plan of non-commenting on that process until we’re all said and done. Again, we don’t want to negotiate that in public with the FDA so we’re going to keep that to ourselves until we have the final protocol lot and the SPA in place.

Eric Schmidt – Cowan & Company

Okay. Thanks.

Operator

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

Joel Sendek – Lazard Capital Markets

Hi. Thanks a lot. Are you interested in knowing once you have the Mathew Smith study, I mean what are you going to do with that? What are the potential outcomes with regard to – I mean are you trying to nail down a dose? Do you want to have dose flexibility? Do you want to rule out the lower dose? Can you just tell us what the likely outcomes will be so that we’ll be able to assess it when we review the data?

Gisela Schwab

Sure. So the desired outcome is to identify the lowest active dose with Cabozantinib in order to introduce a low dose in the early line of therapy in prostate cancer; in particular, in the bone metastasis prevention setting which we anticipate there for the therapy to be extended over many months. So it’s a micronic therapy really, which you want to enter with the low dose.

Joel Sendek – Lazard Capital Markets

Okay. But you don’t – is that required do you think in order to go to earlier lines of therapy? Could you still do it with the dose you have?

Gisela Schwab

I think that would be desirable to go forward with the lower dose because that patient population is clinical asymptomatic.

Joel Sendek – Lazard Capital Markets

Right. Right. Okay. Great. And then just question on timelines. I mean you say obviously you expect to initiate the 306 study by the end of the year. Obviously we want you to have aggressive goals and things like that, but I’m wondering if it might be too aggressive, if obviously you want to do best you can and not rush it. I’m wondering what your thoughts are along those lines. Are you holding yourself to a firm December 31 deadline or are you doing the best you can in order to get it in by then?

Gisela Schwab

Well we’re working towards a timeline. Obviously we will await the FDA feedback and make revisions if necessary to the protocol so we get the regulatory feedback. We also get more information regarding lower dose as well and we will move forward on the basis of solid data. I think the end of year timeline is realistic as it stands right now and so we’re working towards that.

Joel Sendek – Lazard Capital Markets

Okay. That’s all I needed to know. Thanks a lot.

Operator

And our next question comes from the line of Terence Flynn with Goldman Sachs. Please proceed.

Terence Flynn – Goldman Sachs

Hi. Thanks for taking the question. I apologize if this was answered or asked before I jumped on a little bit late, but is there any update on the NRE study for prostate cancer? Just wondering where enrolment stands there and when we might see data out of that study. And then the last part of it is just what type of data would you like to see to kind of form the design of the overall survival trial, the Phase 3. Thanks.

Gisela Schwab

Great question. Thank you. So the NRE study is very actively involving and our numbers change day by day so we don’t really provide accounts of that. The data set I think, once mature, will be presented at an upcoming medical meeting as appropriate.

In terms of what we are looking for, in terms of additional information that will inform the overall survival study, we’re looking obviously to multiple data sources to the NRE as well as the RDT study and we want to see a longer follow up, in particular as it relates to PFS and overall survival in the patient populations that have pre-treated with prior different regimens such as those who are chemotherapy naïve, which is those who have received prior (inaudible) on multiple lines of prior therapy.

Plus, we will see additional information also on biomarkers including circulating tumor cells, which are of interest obviously in this setting, so there are multiple data points that will become available that will help us design the overall survival study.

Also, clearly the issues to address are for the overall survival study, the patient population, the comparator and the line of therapy and in that context, we’re thinking about this in terms of the patient population that might best benefit from Cabozantinib.

Obviously we’ve seen very interesting activity on bone. We’ve seen very interesting activity on pain and when you think back on substance analysis, or retrospective analysis of the text of 327, Phase 3 trial, it is actually interesting to look at the patient population with pain and their outcomes in the overall context.

And there’s a publication that was dealing with this that was published in 2008 that clearly shows the patient with pain at base line do much worse than asymptomatic patients number one, and number two, in treating the patients who actually have a pain response on study do much better than those who do not have a pain response.

And really, the overall survival outcome is markedly different between these two populations of those with pain response versus not and the difference s six months. So those data points all will come together to form the 307 design.

Terence Flynn – Goldman Sachs

Great. And could I just ask two follow ups. So medical meeting is ASCO next year a reasonable expectation in terms of thinking about potential data from NRE study and then with respect to the 327 study that you cited, what percentage of patients had pain at baseline in that study and had the worst outcome?

Gisela Schwab

So in terms of the publication, ASCO next year is a possibility. We haven’t decided that yet. It depends on the status of the data set and if everything comes together on the timeline.

And regarding the number of people with pain at baseline, in this retrospective analysis that I just spoke about, which has been published by Berthold in 2008, 374 of the 815 people tested major pain.

Terence Flynn – Goldman Sachs

Thank you.

Operator

Ladies and gentlemen, with no further questions, this concludes today’s question and answer session. I would now like to turn the call back over to Mr. Mike Morrissey for closing remarks.

Mike Morrissey

Okay. Thanks again for joining us today and we’ll look forward to following up on all these issues in the future. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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