Exelixis Q3 2007 Earnings Call Transcript

Exelixis Inc. (EXEL)

Q3 2007 Earnings Call

November 5, 2007 5:00 pm ET

Executives

Charles Butler - Director of IR

George Scangos - President and CEO

Frank Karbe - EVP and CFO

Mike Morrissey - President of R&D

Analysts

Eric Schmidt - Cowen & Company

William Sargent - Banc of America Securities

Ted Tenthoff - Piper Jaffray

May-Kin Ho - Goldman Sachs

Joel Sendek - Lazard Capital Markets

Han Li - Stanford Group

Karen Buchkovich - JP Morgan

Presentation

Operator

Good day, ladies and gentlemen. Thank you very much for your patience, and welcome to the Third Quarter 2007 Exelixis Earnings Call. My name is Bill, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's conference Mr. Charles Butler, Director of Investor Relations. Please proceed, sir.

Charles Butler

Okay. Thanks as usual to everyone for joining us on our third quarter 2007 earnings call. As usual with me today are George Scangos, President and CEO; Frank Karbe, CFO and Executive Vice President; and Mike Morrissey, our President of R&D.

Before I turn the call over to George, I'd like to note that this afternoon we issued our earnings release for the third quarter and also filed our 10-Q for the quarter with the SEC. We have posted the earnings release and our 10-Q, as well as a slide presentation of the company's, our prepared remark today on our website at exelixis.com.

Please note that during today's call we will be making certain statements that are forward-looking, including without limitation statements relating to our estimated future revenues and expenses; estimated future cash balances and the future development and potential efficacy of our compound. These statements are only predictions and are based upon our current plans, assumptions, belief and expectations, and are subject to risks and uncertainties.

Our actual results and the timing of events could differ materially from those anticipated in such forward-looking statements because of risks discussed in today's earnings release and the slide presentation accompanying this conference call and the comments made during this conference call and in the Risk Factors section of our 10-Q filed today and other reports filed with the SEC. We expressly disclaim any duty, obligation or undertaking to make any updates or revisions to any forward-looking statements.

With that brief intro, I will turn it over to George for some opening remarks.

George Scangos

Okay. Thanks, Charles, and thanks to everybody for joining us this afternoon. We have covered a lot of grounds since our last quarter's call, and I just wanted to take a few minutes to put our 14 clinical development compounds and programs into context with respect to our long-term vision for the pipeline and the company. You know we've been busy in the clinic this quarter, and in fact for the whole year. Our pipeline has advanced significantly and we've gained substantially insight into the potential of many of our compound.

We reported Phase II data for XL647, XL880, and XL784. We reported Phase I data for our second inhibitor of MET XL184, and our two inhibitors of the PI3 kinase pathway, XL765 and XL147, as well as for several other compounds. We generated interesting Phase I data on XL518, our inhibitor of MET; XL019, our JAK2 inhibitor; and XL228, our IGF-1 receptor, ABL and SRC inhibitor.

I want to take a moment to put this data and compounds in prospectus. First 647, which we believe has the potential to be a best-in-class inhibitor of EGFR, HER2 and VEGFR. We believe we have a strong Phase II dataset, a strong preclinical package and a developmental route that we believe will allow us to demonstrate efficacy and gain approval in first and second-line lung cancer. We also plan to study activity of this compound in metastatic breast cancer, glioblastoma and head and neck cancer.

Certainly the current generation of RTK inhibitors, such as Tarceva, are good drugs that provide real benefit to patients. But they are first generation compounds, and we believe there is plenty of room for improvement in terms of both efficacy and tolerability. We believe that 647 has the potential to do both.

647 continues to be tested in additional Phase II trial, the daily dosing cohort and the first-line non-small cell lung cancer trial and trial in patients who responded to and then progressed on another EGFR inhibitor. We anticipate that these trials will find data consistent with those that we have generated to-date and will support moving the compound into pivotal trials in the middle of next year. We believe this compound by itself should make us a very interesting company. However, as you all know, it's only one of our assets.

There are several targets and pathways that are likely to be the focus of the next generation of cancer drug, and we believe we have a leading position in many of those as well. We have two leading inhibitors of MET, XL880 and XL184. MET together with VEGF receptor, which these compounds also inhibit, plays a role in many solid tumor types, including lung, breast and colon cancer. We've demonstrated in vitro speculation of MET and VEGF receptor with our compounds in human and have good times with clinical efficacy. We believe we have a significant lead time, and we're excited about these products.

We recently presented what I believe is the first clinical data on inhibitors of the PI3 kinase pathway. This pathway is one of the most frequently “disregulated” pathways in solid tumors, and there's ample evidence that tumors can escape both chemotherapy and therapy with target agents by activation of this pathway. It's a complex pathway with multiple feedback loops, and we believe we are in a leading position in developing inhibitors that target the pathway at various points.

Our compounds, 765 and 147, have the demonstrated oral availability, good half-life and early signs that the compounds are down-regulating PI3 kinase in vivo. We believe these compounds also are exciting.

Another pathway that is frequently disregulated in human tumors is the MAP kinase pathway, and we have two inhibitors of this pathway moving through Phase I as well. XL518 inhibits MEK and XL281 inhibits RAF. Both of these compounds look good right now, and we are continuing to gather Phase I data. XL518 is partnered with Genentech, and 281 is partnered by GSK collaboration.

The final compound I want to highlight is XL019, which is the one of the most advanced inhibitors of JAK2. This target is a driver of aberrant proliferation of blood cells in many patients with myeloproliferative disorders and may very well have a role in many inflammatory conditions as well. XL019 has generated a very interesting Phase I data set, and we are looking forward to the presentation of the data at ASH in early December.

On the business front, we retain rights for 647. We presented XL880 to GSK early at their request, and we have submitted XL784 to GSK in October. We expect a decision by GSK on XL880 by mid-December and on XL784 by mid-January.

In August, we sold the majority of our plant trait assets to Agrigenetics, a subsidiary of the Dow Chemical Company. And finally, in September, we conducted an equity offering that raised almost $72 million in net proceeds.

So I believe this has been another very productive quarter and year so far.

I will come back for a few closing remarks at the end. But at this point, I will turn the call over to Frank who will review our quarterly financials and provide an update on our yearend guidance. Frank?

Frank Karbe

Thanks, George. The third quarter, as you've just heard from George, has been quite eventful for Exelixis. Apart from a lot of new data on many of our compounds, we announced a number of positive businesses developments, which contributed to substantial cash inflows this quarter.

I'll come back to the key events in a moment and cover their specific financial implications, but let me now first turn to the third quarter financial results in detail.

As a reminder, we are reporting our financial results on a GAAP basis only, and a complete press release with our results can be accessed through our website at exelixis.com.

And we will begin with revenues. Revenues for Q3 were $26.8 million compared to $23.5 million for the comparable period in '06. The increase in revenues from '06 to '07 was primarily due to revenue recognition associated with new collaboration agreements with BMS for various oncology programs and Genentech for the XL518 program.

The increase was partially offset by the completion of revenue recognition related to the collaboration agreement with Daiichi-Sankyo for our MR program and our agreement with Wyeth Pharmaceuticals for the FXR program.

Research and development expenses were $58.6 million compared to $46 million for the comparable period in '06. The increase year-over-year was primarily due to increased development expenses associated with a continued expansion of our clinical trial activity and the advancement of our compounds through preclinical development.

General and administrative expenses for Q3 were $10.8 million compared to $8.8 million for the comparable period in '06. The increase from '06 to '07 was primarily due to increased personnel and stock-based compensation expenses to support our expanding operations.

Net loss for Q3 was $13.7 million or $0.14 per share compared to $25.2 million or $0.30 per share for the comparable period in '06. The decrease in net loss by approximately $11.5 million or 46% from '06 to '07 was primarily due to an $18.8 million gain on the sale of assets recognized in conjunction with the divestiture of the major portion of our plant trait business.

Let me finally turn to cash. Cash and cash equivalents, short-term and long-term marketable securities, investments held by Symphony Evolution, and restricted cash and investments totaled $297.6 million at the end of Q3, compared to $263.2 million at December 31st, '06.

The total cash inflows of over $100 million during the third quarter, seven of which approximately $72 million came from our equity offering, $18 million from the sale of our plant traits assets, and over $12 million from our various R&D collaborations.

Let me now turn to the financial implications of the divestiture of a major portion of our plant trait business to a subsidiary of Dow Chemical, which we announced in early September. This transaction included the sale of tangible and intangible assets as well as a research funding agreement in consideration to Exelixis of up to $60.7 million. We received $18 million upon signing and we will receive another guaranteed payment of $4.5 million on the first anniversary of the deal.

As a result of the sale of assets recognized a net gain of $18.8 million in other incomes on the P&L and $18 million in cash on our balance sheet in our third quarter financial statements. Going forward, under the research funding agreement, we will receive research and development funding of up to $24.7 million to cover our expenses under this agreement and we may receive milestone payments up to $13.5 million.

Future mass down payments, if any, will be reported within other income and R&D funding will be booked as an offset to our R&D expense in each respective periods. We also executed the financing transaction during the third quarter.

On September 10th, we offered 7 million shares at $10.30 per share for total net proceeds of approximately $71.9 million. The transaction was completed at an all in discount of 7.7% to the same day closing price and a 22.6% premium to our last equity offering.

We also announced the 12 months extension of our collaboration with Bristol-Myers Squibb to develop and commercialize novel therapeutics targeted against the Liver X Receptor. The collaboration originally effective in January of '06, for period of two years has been extended at BMS's request through January 12, 2009.

As a result of the extension, we expect to receive additional research funding in the amount of $7.5 million, which will be recognized as revenue over a 12 month period starting January 12, 2008. BMS also has the option to further extend the research collaboration for an additional year.

Let me turn to the GSK collaboration for a moment. As George mentioned, GSK's 90 day review of the XL880 data reports commenced in the September. And we expect a decision from GSK by mid-December. If XL880 is the first compound selected by GSK, we will earn the selection milestone of $35 million. The full amount of the selection milestone would, however, be offset by a milestone payment that GSK advanced to us in 2005. And as a result, there would be no cash impact and no revenue recognition related to the selection milestones.

Going forward, GSK would be responsible for further development of the compound, including potentially seeking FDA approval, marked introduction and sales.

Importantly, Exelixis would have no further expenses associated with this program, but we would be eligible for substantial additional commercialization milestones, double-digit royalties and certain co-promotion rights for North America. If GSK selects the second compound during the development term, the selection milestone would be at least $55 million, which we anticipate it would be applied to the GSK loan.

Let me finally turn to our financial outlook for year end 2007. With respect to financial expectations for the full year '07, we are reducing our revenue guidance to a range of $110 million to $120 million from the range of $120 million to $135 million. The reduction in revenue is due principally to change in timing as it relates to the potential selection milestone from GSK for XL880, which we now forecast for December 2007.

Our operating expense guidance remains unchanged at $260 million to $290 million. And finally, and most importantly, we are increasing our guidance for cash and cash equivalents, short-term and long-term marketable securities, investments held by Symphony Evolution and restricted cash investments, and now expect to end the year with at least $270 million.

And with that, I will turn the call over to Mike.

Mike Morrissey

Thanks, Frank. I'll start where George left off a few minutes ago. The entire Exelixis R&D organization has been extremely focused on advancing key compounds to early clinical phase in the proof-of-concept or POC trials, and finally on to full development.

We are currently working to initiate pivotal trials for several of our compounds in mid 2008. In doing so, we intend to provide the broadest potential benefit to patients as soon as possible and to rapidly build shareholder value. We are focused on execution, pure and simple. We have developed a deep pipeline of compounds that inhibits some of the most important targets and pathways in tumor biology.

We have built an extremely strong drug discovery and development infrastructure, and have complemented our fundamental understanding of tumor biology by utilizing the broad talents of that group. The combined attributes of our R&D organization provide us with a strong platform to build and maintain a leadership position in the key areas of oncology drug development that have the potential to define the tumor paradigms of tomorrow.

During the last several years, we have become leaders in the discovery of both multi-targeted and highly selective kinase inhibitors that modulate key RTKs and their signal transduction pathways, which are commonly activated in many human tumors, and which lead to primary and acquired resistance to both conventional chemotherapeutics and targeted therapies.

Our recent presentations at the 2007 AACR-NCI-EORTC Meeting, which I'll refer to today as simply: “the EORTC Meeting”, held in San Francisco a couple of weeks ago, highlight our success in building and advancing a world-class portfolio of compounds that target key growth factor RTKs, including MET, and signaling pathways, including the PI3 kinase, MAP kinase and JAK/STAT pathways. The 13 posters presented at EORTC covering a range of preclinical Phase I and Phase II clinical data for eight different compounds underscore the depth of our clinical portfolio.

Today, I'll summarize the key results from the meeting for XL880, XL184 and XL647, and I will remind you that all the EORTC posters and a replay of our investor briefing are available for review on our website at www.exelixis.com.

Let's start first with our progress in the area of MET inhibition where we have two compounds with strong clinical data supporting their advancements into full development in future pivotal trials. We believe XL880 is the most advanced inhibitor of MET in clinical trials, and we're leveraging our discovery and clinical experience with XL880 to inhibit additional inhibitors for just XL184, which targets MET, VEGFR2 and RET.

We presented data for both XL880 and XL184 last month at EORTC. I will take a moment now to briefly recap those data.

First, we'll start with key data from the Phase II trial of XL880 in patients with metastatic papillary renal cell carcinoma, or PRC. As of October 10, 2007, a total of 21 patients have been enrolled in this ongoing study. First, of 19 patients with measurable disease evaluable for tumor response assessments, 15 or 79% have had a decrease in tumor size ranging from 4% to 33%, including 1 patient with a partial response as determined by RECIST. At the data cutoff of 21 patients enrolled in this study, 5 had activating MET mutations and 16 had wild type MET.

All 19 evaluable patients, with at least one post-baseline tumor assessment have had stable disease for at least three months. 16 patients are still on study, including 12 patients with stable disease, ranging from 6 months to more than 15 months.

Results of preliminary analysis of plasma biomarkers in tumor samples are consistent with potent inhibition of MET signaling, inhibition of tumor angiogenesis and inhibition of tumor cell proliferation, as well as increased tumor cell death following XL880 administration.

We're very encouraged by the progress of this Phase II study, and I'd to like to take a minute to talk about their relevance of non-progression in PRC. Survival for patients with metastatic PRC is typically about eight to nine months. We believe that the progression-free survival we're seeing, which in many patients is long lasting, is clinically meaningful.

We're very optimistic that XL880 will continue to provide clinical benefit to patients with PRC and will move into a broad Phase II and pivotal trial program in multiple indications; including potentially non-small cell lung cancer, breast cancer and colorectal cancer, once ownership has been established after GSK makes its decision whether to select XL880 for further development and commercialization.

Based on the combined preclinical Phase I and Phase II data set, GSK requested that we expedite their review for their XL880 development decision. A complete data report was submitted to GSK in mid-September, and we expect that GSK will complete its diligence and finalize its decision in mid-December.

As we move ahead with the Phase II trial for XL880, we're also gearing up to initiate a Phase II program for XL184, an inhibitor of MET, VEGFR and RET.

The updated Phase I data for XL184 presented at EORTC continued to be very encouraging. There were 33 patients available for safety, pharmacokinetic and tumor response analysis as of June 22nd, 2007, cutoff. Further, anti-tumor data was also provided for six additional patients after the cutoff.

Of seven patients with medullary thyroid cancer or MTC, three have had partial responses, 2 confirmed and 1 unconfirmed. Six of the seven patients had tumor shrinkage and one had non-measurable disease. All seven patients with MTC experienced a rapid decrease in plasma levels of calcitonin, and six of the seven patients had a decrease in tumor marker, CEA. None of the seven MTC patients had progressed.

In addition, one patient with neuroendocrine tumor had an unconfirmed partial response. In total, 15 patients with various advanced malignancies have had stable disease lasting from 3 months to up to 20 months, including nine patients with stable disease for more than six months.

So in this study of XL184, we observed partial responses in patients with MTC, a tumor type that frequently has overexpression of activated RET and MET. These clinical results in combination with our pharmacodynamic data suggest that the activity of XL184 in the clinic is consistent with our understating of the role of MET and RET in this tumor type.

These results provide strong, biological rationale for advancing XL184 in the Phase II for other tumor types, including non-small cell lung cancer and glioblastoma, which we expect to start by the end of the year.

More importantly, we are currently executing on a plan to demonstrate expedited PRC for XL 184 in MTC in the context of our GSK collaboration in mid-2008, based upon our initial encouraging Phase I results. We also presented an updated data set for XL647 from the first line Phase II non-small cell lung cancer trial.

To-date XL647 has demonstrated clear anti-tumor activity in this population. Out of 34 patients evaluable, 10 patients achieved a partial response, of which eight were confirmed. Of the 10 patients with PRs, six had EGFR activating mutations, few were wild type EGFR and one is still pending. In addition to the 10 partial responses, we also observed 13 patients with stable disease as their best response. So 68% of patients had clinical benefit in this study so far.

Importantly, we are seeing that patients with partial responses and stable disease are staying unsteady for long periods of time ranging up to more than 11 months.

As we said in the past we are continuing to evaluate XL647 in several non-small cell lung cancer trials, both in the first-line studying and in patients who previously progressed after clinical benefit with an EGFR inhibitor. Using both intermittent and daily dosing regimens, and we will determine the optimal doses schedule for future trials.

We're still on track for initiating pivotal trials in mid-year 2008. We also presented data at the EORTC meeting from an ongoing Phase I study of XL647 using daily oral dosing. We have established a maximum tolerated dose of 300 milligrams per day in this study.

The pharmacokinetic exposure obtained over a 28 days cycle with this dosing regimen is approximately twice the exposure observed with the intermittent five and nine schedule used in the first-line Phase II study, while maintaining a similar safety profile.

The observed higher exposure could hold potential for further enhancing the activity of XL647 in the non-small cell lung cancer study. As mentioned previously, XL647 is generally well tolerated in both intermittent and daily dosing regimens. The most frequently reported adverse events assessed as being related to XL647 with diarrhea, rash, fatigue and nausea, all of which were Grade 1 or Grade 2 in severity.

This point is important because investigators continue to report that the EGFR-mediated side-effects observed for XL647, mainly rash and diarrhea are generally milder than what has been previously described for other EGFR inhibitors.

Finally, last Friday, we released data from the Phase II study of XL784 in subjects with albuminuria due to diabetic nephropathy. XL784 is a small molecule inhibitor of ADAM-10 and MMP-2, metalloprotease that may play a role in the pathogenesis of diabetic nephropathy and renal fibrosis. The data was presented during a poster session at the American Society of Nephrology Renal Week 2007 meeting in San Fransisco.

125 subjects were enrolled into this randomized, double-blind, placebo-controlled study. XL784 was dosed at 200 milligrams once daily for 12 weeks and was compared to placebo in subjects with macro-albuminuria who were being treated concurrently with an ACE inhibitor and or an ARB.

The primary endpoint was the reduction from baseline in the urinary albumin to creatinine ratio or ACR at Week 12. After 12 weeks of treatment with XL784 the baseline normalized ACR that is the ratio of end of treatment ACR to baseline ACR in the 784 group was 9.9% lower than that in the placebo group, a difference that was not just a bit significant.

There was a clinically relevant mean ARC reduction from baseline of 23% with the p-value of 0.0027 in subjects randomized to XL784. In an exploratory analysis, subjects were stratified according to dose of ACE inhibitor and/or ARB received as a percentage of the maximum FDA recommended dose.

The benefit of XL784 compared to placebo increased with increasing doses of ACE inhibitor and/or ARB. In the subgroup of subjects treated with maximum recommended doses of ACE inhibitor and/or ARB, the difference between XL784 and placebo was 23% with a p-value of 0.13 for the primary analysis population.

So in summary, the Phase II trial for XL784 did not meet its primary endpoint. Various subgroup analyses suggest that the compound may have a potential to benefit patients with the disease, but proving these hypotheses will require additional cost and time. We submitted the XL784 package to GSK on October 22nd and we'll communicate future plans for 784 once GSK has reached a decision.

So, on wrapping up, let's focus on what's ahead as we bring 2007 to a close and move into 2008. We had the opportunity to introduce three new compounds that recently entered clinical trials at the EORTC meeting. We presented preclinical and clinical data for two first-in-class PI3 kinase inhibitors, XL147 and 765. These two exciting compounds are solely-owned Exelixis assets, and these presentations represent to our knowledge the first clinical updates for selective PI3K inhibitors.

In addition, we also presented the preclinical pharmacology for XL518, a highly potent and selective MEK inhibitor with enhanced in vivo properties that we partnered with Genentech last December. We're advancing these three compounds aggressively in the clinic and we expect to move them into Phase II in 2008.

Over the next two months we'll be providing further updates on our preclinical and clinical pipeline. We have already started planning for our Third Annual R&D Day, which will be held in New York on December 5th where we will review our complete clinical pipeline and discuss many of our new preclinical programs that we expect to be the subject of INDs in 2008.

On December 10th we'll have two oral presentations at the American Society of Hematology Meeting in Atlanta, one for XL019, a potent and selective inhibitor of JAK2, and the second for XL228, which inhibits IGF1R, SRC and ABL. XL019 is an exciting inhibitor of JAK2, an important kinase that appears to drive a variety of myeloproliferative diseases when present in a mutationally activated form.

We have exhaustively optimized XL019 with respect to criteria for chronic dosing in a healthier patient population, and we're starting to see encouraging data from early cohorts in the clinic. We're looking forward to presenting this clinical data from our ongoing Phase I study at ASH, and we are planning a detailed investor update similar to the one we recently had at the EORTC meeting.

So with that, I'll close by saying that we've accomplished a great deal so far this year, and with more to do before yearend as we build momentum from moving into 2008. I'll end here by thanking everyone on the R&D team for their superb talent, focus and commitment, all of which have led to making 2007 an incredibly productive year.

And with that, I will turn the call back George.

George Scangos

Okay. Thanks, Mike. And I will be brief. I just want to make a few remarks, point out that the year is not over yet. We have two months left. We intend to keep the pace up that we've established so far this year. Business development team is busy at work, exploring a number of interesting discussions, some of which will come to fruition later this year or next. And of course, our R&D groups are continuing their aggressive pace, driving our R&D programs forward.

Just to remind everyone, here are the upcoming events. We have our R&D Day on December 5th in New York, presentation of 019 and 228 at ASH on December 10th, a decision by GSK on XL880 by mid December, and a decision on GSK by 784 by mid January.

As we move into '08, we expect to have additional Phase II data from XL647 from the ongoing trials and patients who responded to an EGF inhibitor and then relapsed, and from a daily dosing cohort in the corresponding non-small cell lung cancer trial. We also expect to have additional Phase II data on 880 and to have Phase I data for multiple compounds.

We intend to begin pivotal trials for 647 and 019. And if GSK declines its opt-in on either 880 or 184, we intend to move each of those forward aggressively as well. We are enthusiastic about the two PI3K compounds, which are unpartnered and which will move forward aggressively. We also have several new compounds that will enter clinical development next year, including inhibitors of the hedgehog pathway and Hsp90.

We are rapidly generating data that we believe will increase the value of our pipeline. And as we move forward, we intend to use some of our pipeline assets to generate funds that we can use to move others forward.

We continue to be firing on all cylinders and with each passing quarter and with each additional patient whose tumor response to treatment with one of our drugs, we will become increasingly enthusiastic about our future and increasingly committed to building a company that takes place among the leaders in oncology drugs.

As always, I want to close by thanking all of the Exelixis' employees for their hard work and dedication. And just as it took all 25 of the Red Sox to win the World Series for the second time in four years, our success at Exelixis is the result of and dependent on the contribution of everyone here at Exelixis. So stay tuned.

And I'll stop there and we'll take your questions. Thanks, everyone.

Question-and-Answer Session.

Operator

Thank you very much sir. (Operator Instructions)

Our first question comes from the line of Eric Schmidt with Cowen & Company. Please proceed.

Eric Schmidt - Cowen & Company

Yeah, thanks, Frank, kind of an accounting question on the XL880 milestone. I am not sure I quite understood the guidance, but is there no P&L impact if that milestone is earned or has does that flow through your income statement?

Frank Karbe

Yeah, that's correct. We gave guidance on the milestone we expected to be $35 million, which will be offset by a $36 million advance payment that GSK made to us back in 2005. Thus, the milestone would entirely be offset by the advance payment. So there would be no cash impact and no revenue impact.

Eric Schmidt - Cowen & Company

So you have recognized that $36 million cash payment already through the P&L?

Frank Krabe

That's correct. It was recognized. You may recall the discussion we've had back in 2005 when we actually received the prepayment. It has been recognized ever since.

Eric Schmidt - Cowen & Company

Okay.

Frank Krabe

At the time, we recognized the portion immediately, and the remainder was amortized over the term of the underlying agreement.

Eric Schmidt - Cowen & Company

Okay. And should GSK up into 880, this isn't a financial question, more of a collaborative question. Are there any reach-through rights into XL184 or are there any special opt-ins there or is that a completely separate entity?

George Scangos

XL880 and XL184 are separate entities. And GSK can of course select them both, but they have to use two op-tin decisions to do that.

Eric Schmidt - Cowen & Company

Okay. And George, can you provide us with exact date of the opt-in decision for GSK or are they kind of which is similar to package.

George Scangos

Yeah, it's middle of December. And Eric, I actually don't remember the exact date, but we submitted it in the middle of September. I believe it's December 17th, the cutoff date.

Eric Schmidt - Cowen & Company

Okay. Thanks a lot.

George Scangos

Okay.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of William Sargent of Banc of America Securities. Please proceed.

William Sargent - Banc of America Securities

Hi. Thank you very much. I'm sorry, I was in a meeting, but thanks for taking my question. I was wondering if you could talk a little bit further about next steps with 765 and 147. I think you mentioned Phase II potentially starting 2008, but I was wondering if you could talk a little bit more about where you might be looking as to compounds.

George Scangos

No, we have a very -- again, a very active Phase I trial for each compound looking at that single agents dose escalation to find the tolerability PK, PD and anti-tumor activity. We are planning on initiating combination of Phase I trials with both compounds, with a variety of either targeted therapeutics or chemotherapeutics starting end of this year really 2008.

We would envision initiating Phase II trials for both compounds as single agents sometime approximately in the middle of next year. And then depending upon how the Phase I dose escalation studies go in combination with other agents and then initiating Phase II after that, in terms of, combination with specific tumor type.

So very, I think, deliberate and rational plan around looking at tumor types that have a marked demonstration of having pathway activation either by PI3 kinase mutation or PTEN deletion. And to, again, look for a rapid POC in the context of what we're doing either in Phase I right now, or early Phase II.

William Sargent - Banc of America Securities

Okay. Great. And then, I was wondering also since you've got a number of 647 patients that are at least 11-plus month, I think, on a study, would there be a potential presentation of any progression data or can you disclose whether or not any of these patients have progressed? Or whether PSI might look like?

George Scangos

Well, the last date set we have a couple of weeks ago at URTC, we will probably have another update at ASCO and we are putting together abstracts for that right now. And, you know, we're hoping to have additional data from the daily dosing regimen or ARM as well. So that's our plan for the next data release for 647.

William Sargent - Banc of America Securities

Great. Congratulations on the quarter. Thanks.

George Scangos

Thank you.

Operator

Thank you very much. Ladies and gentlemen, your next question comes from the line of Ted Tenthoff of Piper Jaffray. Please proceed.

Ted Tenthoff - Piper Jaffray

Hi. Thank you very much. Two quick questions, if I may. Firstly, a while back you had given us guidance that if GSK were to select all four milestones the payments would be, I think if I recalled correctly somewhere in the order of $270 million and they were more front-end loaded. So I am trying to understand, sort of, with a $35 million milestone payment how we get to that sum?

And, then, secondly, with the 647 data in hand, can you update us on what you are thinking as with respect to reacquiring the Symphony assets or repurchasing Symphony, considering the interest rate kicks up on a quarterly basis now?

George Scangos

Yeah. Let me take the first question first, which is the milestone payment from GSK, if they should select.

Ted Tenthoff - Piper Jaffray

Thanks, George.

George Scangos

You know, as -- I think we've said all along that the milestone -- there is a lot of moving pieces in terms of the milestones. Right, they generally -- they go down with time and they go up with a number of compounds picked. And they go up if the compounds are part of the Symphony collaboration.

So a year ago, year and a half ago, when we did know there were so many possibilities and so many ranges in the milestones that we tried to give a range. Now, we know, right and the milestone is what it is. The 880 milestone, we know if GSK does select 880, it will come in December. And so, it's the first time we'll actually have clarity on knowing what that milestone would be.

And it's an issue of timing. Remember that if GSK takes the second compound before the end of the collaborative term next October, that milestone will be substantially higher. That will be at least $55 million. And if they were to take a third one, that milestone will be higher still, all right? So there is a range of milestones and it depends on both timing and the number of compounds that they pick.

And now let me answer the second question, which is Symphony, and if I haven't made the first one clear, let me know?

Ted Tenthoff - Piper Jaffray

That was perfect.

George Scangos

Okay. The Symphony issue is we still have about $35 million left in the Symphony path that can be used for the further development of 647. 647 is in two Phase II trials now; one in the first-line non-small cell lung cancer and, of course, the intermittent dosing trial is continuing and the daily dosing cohort in that trial is getting cranked up. We have the second Phase II trial in patients who initially responded to another EGFR inhibitor and then relapsed.

And so, the money in the Symphony path can be used to generate a lot of additional data on 647, so under no immediate obligation to buyback. We, of course, are in discussions with Symphony. We are in discussions with potential other partners about 647. As we speak today, we have a clinical advisory board on XL784 to help us gain further insight into that compound.

So all that is by way of saying there are lot of moving pieces, and we have thought about this a lot obviously. And as we go forward, we'll try and take the best position that we can. That's in the interest of Exelixis.

Ted Tenthoff - Piper Jaffray

Great. Okay.

George Scangos

Let me be clear. We're under no obligation, nor do we intend , to just buy that back right now.

Ted Tenthoff - Piper Jaffray

Great. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of May-Kin Ho, Goldman Sachs. Please proceed.

May-Kin Ho - Goldman Sachs

Hi. I have two questions. The first is really more accounting. Looking at the difference in guidance on the topline, you said that's due to the timing of the milestone from GSK. Can you expand on that because you mentioned that first milestone was a $35 million and the difference in guidance is around $10 million to $15 million?

Frank Karbe

Yes, May-Kin. I can explain that. If the selection would have happened earlier in the year, the milestone would have been higher. If the milestone would have been higher, it would not have been entirely offset by the $36 million prepayment in 2005. And for the difference, we would have been able to recognize revenue. Now that's not the case because the milestone is entirely offset and there is no revenue recognition, and it's that difference.

May-Kin Ho - Goldman Sachs

I see. And for the coming year, looking at all the things that you need to do, I mean basically its really in a sense an exponential growth in terms of the trials that you need to do. So kind of in the worst case if GSK does not opt into these two compounds, do you have to really prioritize your programs?

George Scangos

Yeah, May-Kin. That's a great question of course, and we thought a lot about that as well. And I continue to refuse to believe that it's a problem to have too many interesting compounds, all right? So on the one hand, if GSK, for example, for some reason, doesn't take 880--880 has a wonderful dataset; it's a really good looking compound--I will be very happy to have that compound.

Right now, we know that we can't take multiple compounds. It's a multiple late-stage trial all time opinion. So we don't have their funds to do that. We don't have the bandwidth to do that. So if we are in the fortunate position of having a multiple compounds with data set that merit aggressive development in the later stage trials, then we will take some forward ourselves. We can partner others. There is no shortage of companies, as you know, willing to buy into good, mid-stage clinical asset.

So that's the initiative we don't worry too much about. But yes, the bottomline is we will have to do some prioritization, and we know that we can't everything pulling ourselves.

May-Kin Ho - Goldman Sachs

That's very reasonable. However, some of the programs who had been started, for example 647, some of the later compounds look more interesting than 647?

George Scangos

I hope they do. I mean, 647 looks great. I would always be happy to have compounds that look even better. Let's take a look at 647, because we know it's active in the non-small cell lung cancer population. We know that to date, the EGF-related side effects of 647 have been milder than those that have been reported for other EGFR inhibitors.

And we know that the efficacy we are seeing so far -- we believe that the efficacy we are seeing or could be actually an underestimate, since we now have a dosing schedule that exposes the patients to more than twice as much drug. So we have reason to believe we have a good efficacy in this population and we have the potential to have a better power ability.

Pre-clinically, we have a very good data set for, say, that 647 retains activity against its T790M mutation and about -- and the results were about 50% of the relapses in patients who have responded to Tarceva. So if that's true, that not only provides a potential population, that would allow us to address on the market quickly, but it should translate into more durable responses as well.

So 647 it is what it is. It's a great looking compound. We haven't proven any of those things, but we have good solid basis to suggest that all of those of may be true. And that's all you can expect for a compound at this stage of development. So is it worth putting money and to aggressively develop 647? Absolutely, it is. No question.

We have XL019 coming along. That's in mid-Phase I data that targets JAK2. The target risk for JAK2 as an effective therapy for patients for myeloproliferative disorders is really low as target risk goes. Compound so far looks very good. So we feel enthusiastic about that as well

The clinical development route for 019 is actually relatively straightforward for those patients with myeloproliferative disorders. And remember, myeloproliferative disorders, some of them are kind of chronic diseases, and so a drug has to have different characteristics to really be successful there as for example, a straight out cancer drug addressing the third-line therapy.

And so we have spent a lot of time optimizing 019 to have the characteristics that you would like to see in a drug that's taken chronically. It is very clean. It is very specific. It is half-life suitable for once-a-day treatment. It doesn't look so far like it has any drug-drug interactions or any other liabilities. So we're very optimistic about that drug too, although we have a lot of data yet to gather for it.

The two PI3 cases also look extremely good as far as we are taking them. So I think with the way we're thinking about it now, May-Kin, is that we've got a lot of assets in our pipeline that look really encouraging. As they move forward, we don't expect that all of them will successfully reach the market. That's one of the reasons we have a pipeline as big as we do compound sale.

And so we will make data driven decisions and put the money behind the compounds that we believe have real promised and our strategy remember has always been and we have done this consistently over the past three years, to keep some of the assets ourselves and develop them aggressively and then, to partner others. And partnering, of course, relieves us of the cash burden, it relieves us of the bandwidth burden and it brings in money that we can use to fund the development of those compounds that we keep.

So, I am expecting we'll have a continuing mixture of proprietary and partnered programs.

May-Kin Ho - Goldman Sachs

That's very helpful. Thank you.

Operator

Thank you very much ma'am. (Operator Instructions)

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

Joel Sendek - Lazard Capital Markets

Hi. Thanks a lot. If we could just follow-up a little bit further on the 647 discussion. So you mentioned, first of all, that you might not have more data to present to us until ASCO. But I am wondering if you will have enough data internally as to whether, or be able to define a pivotal plan for the drug or if that will come until middle of the year, middle of next year.

George Scangos

Well, we have data to design a program for pivotal trials. We will have that and we are starting to have that now. We will have discussions with the FDA and other regulatory agencies over the next two, three months.

And so, we will be in a position early next year, say, by the first quarter, sometime in the first quarter of next year, to really start to put some real teeth into this. And then, to be able to start the pivotal trials towards the middle of next year, right? So we are absolutely on that timeline. And I don't see anything right today that's going to keep us from meeting that.

Joel Sendek - Lazard Capital Markets

Okay. So, and secondly, you know, you need to know with regard to the data in order to move that forward.

George Scangos

Yeah. And remember, you know, the trials that we're doing are open label trials. And so we seek data, maybe it's not daily but very often. And then, we'll periodically update everybody at the scientific meeting.

Joel Sendek - Lazard Capital Markets

Okay. Thanks. And then on 880, you mentioned at the EORTC, that some of the stable disease might convert to PR's, what's the timeframe under which that would happen?

George Scangos

I wish I could tell you that, because the patients -- of the 21 patients who have been enrolled in that trial, 16 are still on study. Many of them had their tumors progressively shrinking at different scans. So, our expectation is that many of them will ultimately get to be responsive.

The fact is, right now their tumors are shrinking. Patients are being helped by the drug. Non-progression for those patients is a meaningful clinical benefit since their median survival time, typically has been eight to nine months. So the drug is providing a real benefit to those patients.

And so, yes, I believe that many of those patients will get BPR's. The timing is really difficult to predict, but the real benefit to these patients is that the tumors are -- seem to be -- under control for prolonged periods of time, that the drug does have an impact on those patients. I mean, it's a early Phase II data set, but so far it does seem to be providing real meaningful long-lasting benefit to those patients.

Joel Sendek - Lazard Capital Markets

Okay. Thank you.

Operator

Thank you very much sir. Ladies and gentlemen, you next question comes from the line of Han Li of Stanford Group. Please Proceed.

Han Li - Stanford Group

Yes, just housekeeping items. Frank, can you remind us is there the long-term GSK, a deadline you have to pay off or is there any interest bearing on kind of loan?

Frank Krabe

Yeah, the loan is for $85 million and is fully drawn. We are accruing interest at a rate of 4%, and the total accrued interest at the end of the third quarter stood at $12.7 million. And in terms of repayment of the loan, the loan starts to mature in October 2008, and it will mature in several tranches over several years. And it's repayable in either cash or in stock at our discretion.

Han Li - Stanford Group

Okay. So starting, this is not material you will have to start to pay for the loan.

Frank Krabe

That's correct.

Han Li - Stanford Group

Okay. I'm still a little bit confused regarding the patent, the reason you say you lowered the guidance due to the timing of the potential milestone selection. I thought you just mentioned earlier that the milestone selection is revenue and also cash neutral.

Frank Krabe

I think what we said is that had this selection occurred earlier in the year, the milestone would have been higher and would not have been revenue-neutral. We would have been able to recognize revenue from that larger milestone had it occurred earlier in the year. It didn't. And now it's going to occur in December, and it's $35 million. And so there is no revenue.

Han Li - Stanford Group

So it will happen early in the year, and you will have to pay the GSK loan?

Frank Krabe

None of this is…

George Scangos

If it would have happened earlier in the year, the milestone would have been higher. That's the real point. And it wouldn't have been entirely offset by the $36 million that just came back to us back in 2005.

Han Li - Stanford Group

Got it. Okay. Thank you.

Operator

Thank you very much, sir.(Operator Instructions)

Our next question comes from the line of Karen Buchkovich of JP Morgan. Please proceed.

Karen Buchkovich - JP Morgan

Hello. Could you please recap the highlights of the sale of the plant business, the primary assets that of interest to the buyer the focus of the R&D and the goal which must be met to reach the milestone?

George Scangos

Yeah, I think in terms of exactly the asset that we transferred to Dow, I don't want to go into that just to respect Dow's wishes here to not make all of this public. As you know, we've had a very powerful plant trait discovery engine up in Portland that's generated a lot of interesting insights, and Dow was very interested in our ability to, let's say, manipulate genes and major crops. And that's basically the part of the business that's acquired. We have other aspects of the business out there that they did not and that we believe we can potentially monetize further.

Karen Buchkovich - JP Morgan

And the focus of R&D and the goal for the milestone?

George Scangos

No, we haven't disclosed any of that publicly, and we are just trying to respect the wishes of our partner there.

Karen Buchkovich - JP Morgan

Okay. Thank you.

Operator

Thank you very much, ma'am. And at this time sir, you have no further questions in queue.

George Scangos

Okay. Well, let me just thank everybody for your attention. I know we talked for a bit today. We have a lot of information to let you know. And we thank you all for your attention and we will all get back to work. Thanks.

Operator

Thank you very much sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.

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