Exelixis, Inc.
Q3 2007 Earnings Call Transcript

Published: 6 Nov 2007

[Operator:]

Good day, ladies and gentlemen. Thank you very much for yourpatience, and welcome to the Third Quarter 2007 Exelixis Earnings Call. My nameis Bill, and I will be your conference coordinator for today. At this time, allparticipants are in a listen-only mode. We will be conducting a question-and-answersession towards the end of today's conference. (Operator Instructions). As areminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host fortoday's conference Mr. Charles Butler, Director of Investor Relations. Pleaseproceed, sir.

[Charles Butler:]

Okay. Thanks as usual to everyone for joining us on ourthird quarter 2007 earnings call. As usual with me today are George Scangos, Presidentand CEO; Frank Karbe, CFO and Executive Vice President; and Mike Morrissey, ourPresident of R&D. Before I turn the call over to George, I'd like to note thatthis afternoon we issued our earnings release for the third quarter and alsofiled our 10-Q for the quarter with the SEC. We have posted the earningsrelease and our 10-Q, as well as a slide presentation of the company's, our preparedremark today on our website at exelixis.com. Please note that during today's call we will be makingcertain statements that are forward-looking, including without limitationstatements relating to our estimated future revenues and expenses; estimatedfuture cash balances and the future development and potential efficacy of ourcompound. These statements are only predictions and are based upon our currentplans, assumptions, belief and expectations, and are subject to risks anduncertainties. Our actual results and the timing of events could differmaterially from those anticipated in such forward-looking statements because ofrisks discussed in today's earnings release and the slide presentation accompanyingthis conference call and the comments made during this conference call and in theRisk Factors section of our 10-Q filed today and other reports filed with theSEC. We expressly disclaim any duty, obligation or undertaking to make anyupdates or revisions to any forward-looking statements. With that brief intro, I will turn it over to George for someopening remarks.

[George Scangos:]

Okay. Thanks, Charles, and thanks to everybody for joiningus this afternoon. We have covered a lot of grounds since our last quarter'scall, and I just wanted to take a few minutes to put our 14 clinicaldevelopment compounds and programs into context with respect to our long-term visionfor 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'vegained substantially insight into the potential of many of our compound. We reported Phase II data for XL647, XL880, and XL784. We reportedPhase I data for our second inhibitor of MET XL184, and our two inhibitors of thePI3 kinase pathway, XL765 and XL147, as well as for several other compounds. Wegenerated interesting Phase I data on XL518, our inhibitor of MET; XL019, our JAK2inhibitor; and XL228, our IGF-1 receptor, ABL and SRC inhibitor. I want to take a moment to put this data and compounds inprospectus. First 647, which we believe has the potential to be a best-in-classinhibitor 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 willallow us to demonstrate efficacy and gain approval in first and second-linelung cancer. We also plan to study activity of this compound in metastaticbreast 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 firstgeneration compounds, and we believe there is plenty of room for improvement interms of both efficacy and tolerability. We believe that 647 has the potentialto do both. 647 continues to be tested in additional Phase II trial, thedaily dosing cohort and the first-line non-small cell lung cancer trial and trialin patients who responded to and then progressed on another EGFR inhibitor. Weanticipate that these trials will find data consistent with those that we havegenerated to-date and will support moving the compound into pivotal trials inthe middle of next year. We believe this compound by itself should make us avery interesting company. However, as you all know, it's only one of ourassets. There are several targets and pathways that are likely to bethe focus of the next generation of cancer drug, and we believe we have aleading 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 alsoinhibit, plays a role in many solid tumor types, including lung, breast and coloncancer. We've demonstrated in vitro speculation of MET and VEGF receptor withour compounds in human and have good times with clinical efficacy. We believewe have a significant lead time, and we're excited about these products. We recently presented what I believe is the first clinicaldata on inhibitors of the PI3 kinase pathway. This pathway is one of the mostfrequently “disregulated” pathways in solid tumors, and there's ample evidencethat tumors can escape both chemotherapy and therapy with target agents byactivation of this pathway. It's a complex pathway with multiple feedbackloops, and we believe we are in a leading position in developing inhibitorsthat target the pathway at various points. Our compounds, 765 and 147, have the demonstrated oralavailability, good half-life and early signs that the compounds aredown-regulating PI3 kinase in vivo. We believe these compounds also areexciting. Another pathway that is frequently disregulated in humantumors is the MAP kinase pathway, and we have two inhibitors of this pathwaymoving through Phase I as well. XL518 inhibits MEK and XL281 inhibits RAF. Bothof these compounds look good right now, and we are continuing to gather Phase Idata. XL518 is partnered with Genentech, and 281 is partnered by GSKcollaboration. The final compound I want to highlight is XL019, which isthe one of the most advanced inhibitors of JAK2. This target is a driver ofaberrant proliferation of blood cells in many patients with myeloproliferativedisorders and may very well have a role in many inflammatory conditions aswell. XL019 has generated a very interesting Phase I data set, and we arelooking forward to the presentation of the data at ASH in early December. On the business front, we retain rights for 647. Wepresented XL880 to GSK early at their request, and we have submitted XL784 toGSK in October. We expect a decision by GSK on XL880 by mid-December and onXL784 by mid-January. In August, we sold the majority of our plant trait assets toAgrigenetics, a subsidiary of the Dow Chemical Company. And finally, inSeptember, we conducted an equity offering that raised almost $72 million innet proceeds. So I believe this has been another very productive quarterand year so far. I will come back for a few closing remarks at the end. Butat this point, I will turn the call over to Frank who will review our quarterlyfinancials and provide an update on our yearend guidance. Frank?

[Frank Karbe:]

Thanks, George. The third quarter, as you've just heard fromGeorge, has been quite eventful for Exelixis. Apart from a lot of new data onmany of our compounds, we announced a number of positive businessesdevelopments, which contributed to substantial cash inflows this quarter. I'll come back to the key events in a moment and cover theirspecific financial implications, but let me now first turn to the third quarterfinancial results in detail. As a reminder, we are reporting our financial results on aGAAP basis only, and a complete press release with our results can be accessedthrough our website at exelixis.com. And we will begin with revenues. Revenues for Q3 were $26.8million compared to $23.5 million for the comparable period in '06. Theincrease in revenues from '06 to '07 was primarily due to revenue recognitionassociated with new collaboration agreements with BMS for various oncologyprograms and Genentech for the XL518 program. The increase was partially offset by the completion ofrevenue recognition related to the collaboration agreement with Daiichi-Sankyofor our MR program and our agreement with Wyeth Pharmaceuticals for the FXRprogram. Research and development expenses were $58.6 millioncompared to $46 million for the comparable period in '06. The increaseyear-over-year was primarily due to increased development expenses associatedwith a continued expansion of our clinical trial activity and the advancementof our compounds through preclinical development. General and administrative expenses for Q3 were $10.8million compared to $8.8 million for the comparable period in '06. The increasefrom '06 to '07 was primarily due to increased personnel and stock-basedcompensation expenses to support our expanding operations. Net loss for Q3 was $13.7 million or $0.14 per sharecompared 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 '07was primarily due to an $18.8 million gain on the sale of assets recognized inconjunction with the divestiture of the major portion of our plant traitbusiness. Let me finally turn to cash. Cash and cash equivalents,short-term and long-term marketable securities, investments held by SymphonyEvolution, and restricted cash and investments totaled $297.6 million at theend of Q3, compared to $263.2 million at December 31st, '06. The total cash inflows of over $100 million during the thirdquarter, seven of which approximately $72 million came from our equityoffering, $18 million from the sale of our plant traits assets, and over $12million from our various R&D collaborations. Let me now turn to the financial implications of thedivestiture of a major portion of our plant trait business to a subsidiary ofDow Chemical, which we announced in early September. This transaction includedthe sale of tangible and intangible assets as well as a research fundingagreement in consideration to Exelixis of up to $60.7 million. We received $18million upon signing and we will receive another guaranteed payment of $4.5million 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 ourbalance sheet in our third quarter financial statements. Going forward, underthe research funding agreement, we will receive research and developmentfunding of up to $24.7 million to cover our expenses under this agreement andwe may receive milestone payments up to $13.5 million. Future mass down payments, if any, will be reported withinother income and R&D funding will be booked as an offset to our R&Dexpense in each respective periods. We also executed the financing transactionduring the third quarter. On September 10th, we offered 7 million shares at $10.30 pershare for total net proceeds of approximately $71.9 million. The transactionwas completed at an all in discount of 7.7% to the same day closing price and a22.6% premium to our last equity offering. We also announced the 12 months extension of ourcollaboration with Bristol-Myers Squibb to develop and commercialize noveltherapeutics targeted against the Liver X Receptor. The collaborationoriginally effective in January of '06, for period of two years has beenextended at BMS's request through January 12, 2009. As a result of the extension, we expect to receiveadditional research funding in the amount of $7.5 million, which will be recognizedas revenue over a 12 month period starting January 12, 2008. BMS also has the option tofurther extend the research collaboration for an additional year. Let me turn to the GSK collaboration for a moment. As Georgementioned, GSK's 90 day review of the XL880 data reports commenced in theSeptember. And we expect a decision from GSK by mid-December. If XL880 is thefirst compound selected by GSK, we will earn the selection milestone of $35million. The full amount of the selection milestone would, however, be offsetby a milestone payment that GSK advanced to us in 2005. And as a result, therewould be no cash impact and no revenue recognition related to the selectionmilestones. Going forward, GSK would be responsible for furtherdevelopment of the compound, including potentially seeking FDA approval, markedintroduction and sales. Importantly, Exelixis would have no further expensesassociated with this program, but we would be eligible for substantialadditional commercialization milestones, double-digit royalties and certainco-promotion rights for North America. If GSKselects the second compound during the development term, the selection milestonewould be at least $55 million, which we anticipate it would be applied to theGSK loan. Let me finally turn to our financial outlook for year end2007. With respect to financial expectations for the full year '07, we arereducing our revenue guidance to a range of $110 million to $120 million fromthe range of $120 million to $135 million. The reduction in revenue is dueprincipally to change in timing as it relates to the potential selection milestonefrom GSK for XL880, which we now forecast for December 2007. Our operating expense guidance remains unchanged at $260million to $290 million. And finally, and most importantly, we are increasingour guidance for cash and cash equivalents, short-term and long-term marketablesecurities, 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 fewminutes ago. The entire Exelixis R&D organization has been extremelyfocused on advancing key compounds to early clinical phase in theproof-of-concept or POC trials, and finally on to full development. We are currently working to initiate pivotal trials forseveral of our compounds in mid 2008. In doing so, we intend to provide thebroadest potential benefit to patients as soon as possible and to rapidly buildshareholder value. We are focused on execution, pure and simple. We havedeveloped a deep pipeline of compounds that inhibits some of the most importanttargets and pathways in tumor biology. We have built an extremely strong drug discovery anddevelopment infrastructure, and have complemented our fundamental understandingof tumor biology by utilizing the broad talents of that group. The combinedattributes of our R&D organization provide us with a strong platform tobuild and maintain a leadership position in the key areas of oncology drugdevelopment that have the potential to define the tumor paradigms of tomorrow. During the last several years, we have become leaders in thediscovery of both multi-targeted and highly selective kinase inhibitors thatmodulate key RTKs and their signal transduction pathways, which are commonlyactivated in many human tumors, and which lead to primary and acquiredresistance 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

[George Scangos:]

Okay. Thanks, Mike. And I will be brief. I just want to makea few remarks, point out that the year is not over yet. We have two monthsleft. 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 interestingdiscussions, some of which will come to fruition later this year or next. Andof course, our R&D groups are continuing their aggressive pace, driving ourR&D programs forward. Just to remind everyone, here are the upcoming events. Wehave 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 midJanuary. As we move into '08, we expect to have additional Phase IIdata from XL647 from the ongoing trials and patients who responded to an EGFinhibitor and then relapsed, and from a daily dosing cohort in thecorresponding non-small cell lung cancer trial. We also expect to haveadditional Phase II data on 880 and to have Phase I data for multiplecompounds. We intend to begin pivotal trials for 647 and 019. And ifGSK declines its opt-in on either 880 or 184, we intend to move each of thoseforward aggressively as well. We are enthusiastic about the two PI3K compounds,which are unpartnered and which will move forward aggressively. We also haveseveral new compounds that will enter clinical development next year, includinginhibitors of the hedgehog pathway and Hsp90. We are rapidly generating data that we believe will increasethe value of our pipeline. And as we move forward, we intend to use some of ourpipeline assets to generate funds that we can use to move others forward. We continue to be firing on all cylinders and with eachpassing quarter and with each additional patient whose tumor response totreatment with one of our drugs, we will become increasingly enthusiastic aboutour future and increasingly committed to building a company that takes placeamong 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 theRed Sox to win the World Series for the second time in four years, our successat Exelixis is the result of and dependent on the contribution of everyone hereat Exelixis. So stay tuned. And I'll stop there and we'll take your questions. Thanks,everyone.

[Operator:]

Thank you very much sir. (Operator Instructions) Our first question comes from the line of Eric Schmidt withCowen & Company. Please proceed.

[Eric Schmidt:]

Yeah, thanks, Frank, kind of an accounting question on theXL880 milestone. I am not sure I quite understood the guidance, but is there noP&L impact if that milestone is earned or has does that flow through yourincome statement?

[Frank Karbe:]

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

[Eric Schmidt:]

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

[Frank Krabe:]

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

[Eric Schmidt:]

Okay.

[Frank Krabe:]

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

[Eric Schmidt:]

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

[George Scangos:]

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

[Eric Schmidt:]

Okay. And George, can you provide us with exact date of the opt-indecision 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'tremember the exact date, but we submitted it in the middle of September. Ibelieve it's December 17th, the cutoff date.

[Eric Schmidt:]

Okay. Thanks a lot.

[George Scangos:]

Okay.

[Operator:]

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

[William Sargent -Banc of AmericaSecurities:]

Hi. Thank you very much. I'm sorry, I was in a meeting, but thanksfor 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 wonderingif you could talk a little bit more about where you might be looking as tocompounds.

[George Scangos:]

No, we have a very -- again, a very active Phase I trial foreach compound looking at that single agents dose escalation to find thetolerability PK, PD and anti-tumor activity. We are planning on initiatingcombination of Phase I trials with both compounds, with a variety of eithertargeted therapeutics or chemotherapeutics starting end of this year really2008. We would envision initiating Phase II trials for bothcompounds as single agents sometime approximately in the middle of next year.And then depending upon how the Phase I dose escalation studies go incombination with other agents and then initiating Phase II after that, in termsof, combination with specific tumor type. So very, I think, deliberate and rational plan aroundlooking at tumor types that have a marked demonstration of having pathwayactivation either by PI3 kinase mutation or PTEN deletion. And to, again, lookfor 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 AmericaSecurities:]

Okay. Great. And then, I was wondering also since you've gota 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 youdisclose whether or not any of these patients have progressed? Or whether PSImight look like?

[George Scangos:]

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

[William Sargent -Banc of AmericaSecurities:]

Great. Congratulations on the quarter. Thanks.

[George Scangos:]

Thank you.

[Operator:]

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

[Ted Tenthoff:]

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 allfour milestones the payments would be, I think if I recalled correctlysomewhere in the order of $270 million and they were more front-end loaded. SoI am trying to understand, sort of, with a $35 million milestone payment how weget to that sum? And, then, secondly, with the 647 data in hand, can youupdate us on what you are thinking as with respect to reacquiring the Symphonyassets or repurchasing Symphony, considering the interest rate kicks up on aquarterly basis now?

[George Scangos:]

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

[Ted Tenthoff:]

Thanks, George.

[George Scangos:]

You know, as -- I think we've said all along that themilestone -- 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 ofcompounds picked. And they go up if the compounds are part of the Symphonycollaboration. So a year ago, year and a half ago, when we did know therewere so many possibilities and so many ranges in the milestones that we triedto give a range. Now, we know, right and the milestone is what it is. The 880milestone, 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 milestonewould be. And it's an issue of timing. Remember that if GSK takes thesecond compound before the end of the collaborative term next October, thatmilestone will be substantially higher. That will be at least $55 million. Andif they were to take a third one, that milestone will be higher still, allright? So there is a range of milestones and it depends on both timing and thenumber of compounds that they pick. And now let me answer the second question, which isSymphony, and if I haven't made the first one clear, let me know?

[Ted Tenthoff:]

That was perfect.

[George Scangos:]

Okay. The Symphony issue is we still have about $35 millionleft 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 lungcancer and, of course, the intermittent dosing trial is continuing and thedaily dosing cohort in that trial is getting cranked up. We have the secondPhase II trial in patients who initially responded to another EGFR inhibitorand then relapsed. And so, the money in the Symphony path can be used togenerate a lot of additional data on 647, so under no immediate obligation tobuyback. We, of course, are in discussions with Symphony. We are in discussionswith potential other partners about 647. As we speak today, we have a clinicaladvisory board on XL784 to help us gain further insight into that compound. So all that is by way of saying there are lot of movingpieces, and we have thought about this a lot obviously. And as we go forward, we'lltry and take the best position that we can. That's in the interest of Exelixis.

[Ted Tenthoff:]

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:]

Great. Thank you.

[Operator:]

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

[May-Kin Ho:]

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

[Frank Karbe:]

Yes, May-Kin. I can explain that. If the selection wouldhave happened earlier in the year, the milestone would have been higher. If themilestone 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 ableto recognize revenue. Now that's not the case because the milestone is entirelyoffset and there is no revenue recognition, and it's that difference.

[May-Kin Ho:]

I see. And for the coming year, looking at all the thingsthat you need to do, I mean basically its really in a sense an exponentialgrowth in terms of the trials that you need to do. So kind of in the worst caseif GSK does not opt into these two compounds, do you have to really prioritizeyour programs?

[George Scangos:]

Yeah, May-Kin. That's a great question of course, and wethought a lot about that as well. And I continue to refuse to believe that it'sa 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 wonderfuldataset; it's a really good looking compound--I will be very happy to have thatcompound. 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 fundsto do that. We don't have the bandwidth to do that. So if we are in thefortunate position of having a multiple compounds with data set that meritaggressive development in the later stage trials, then we will take some forwardourselves. We can partner others. There is no shortage of companies, as youknow, willing to buy into good, mid-stage clinical asset. So that's the initiative we don't worry too much about. Butyes, the bottomline is we will have to do some prioritization, and we know thatwe can't everything pulling ourselves.

[May-Kin Ho:]

That's very reasonable. However, some of the programs whohad been started, for example 647, some of the later compounds look moreinteresting than 647?

[George Scangos:]

I hope they do. I mean, 647 looks great. I would always behappy 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. Weknow that to date, the EGF-related side effects of 647 have been milder thanthose that have been reported for other EGFR inhibitors. And we know that the efficacy we are seeing so far -- webelieve 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 thantwice as much drug. So we have reason to believe we have a good efficacy inthis population and we have the potential to have a better power ability. Pre-clinically, we have a very good data set for, say, that647 retains activity against its T790M mutation and about -- and the resultswere about 50% of the relapses in patients who have responded to Tarceva. So ifthat's true, that not only provides a potential population, that would allow usto address on the market quickly, but it should translate into more durableresponses as well. So 647 it is what it is. It's a great looking compound. Wehaven't proven any of those things, but we have good solid basis to suggestthat all of those of may be true. And that's all you can expect for a compoundat this stage of development. So is it worth putting money and to aggressivelydevelop 647? Absolutely, it is. No question. We have XL019 coming along. That's in mid-Phase I data thattargets JAK2. The target risk for JAK2 as an effective therapy for patients formyeloproliferative disorders is really low as target risk goes. Compound so farlooks very good. So we feel enthusiastic about that as well The clinical development route for 019 is actuallyrelatively straightforward for those patients with myeloproliferativedisorders. And remember, myeloproliferative disorders, some of them are kind ofchronic diseases, and so a drug has to have different characteristics to reallybe successful there as for example, a straight out cancer drug addressing thethird-line therapy. And so we have spent a lot of time optimizing 019 to havethe characteristics that you would like to see in a drug that's takenchronically. It is very clean. It is very specific. It is half-life suitablefor once-a-day treatment. It doesn't look so far like it has any drug-druginteractions or any other liabilities. So we're very optimistic about that drugtoo, although we have a lot of data yet to gather for it. The two PI3 cases also look extremely good as far as we aretaking them. So I think with the way we're thinking about it now, May-Kin, isthat we've got a lot of assets in our pipeline that look really encouraging. Asthey move forward, we don't expect that all of them will successfully reach themarket. That's one of the reasons we have a pipeline as big as we do compoundsale. And so we will make data driven decisions and put the moneybehind the compounds that we believe have real promised and our strategy remember has always been and we havedone this consistently over the past three years, to keep some of the assetsourselves and develop them aggressively and then, to partner others. Andpartnering, of course, relieves us of the cash burden, it relieves us of thebandwidth burden and it brings in money that we can use to fund the developmentof those compounds that we keep. So, I am expecting we'll have a continuing mixture ofproprietary and partnered programs.

[May-Kin Ho:]

That's very helpful. Thank you.

[Operator:]

Thank you very much ma'am. (Operator Instructions) And our next question comes from Joel Sendek of LazardCapital Markets. Please proceed.

[Joel Sendek:]

Hi. Thanks a lot. If we could just follow-up a little bitfurther on the 647 discussion. So you mentioned, first of all, that you mightnot have more data to present to us until ASCO. But I am wondering if you willhave enough data internally as to whether, or be able to define a pivotal plan for the drug or if that will come untilmiddle 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 havediscussions with the FDA and other regulatory agencies over the next two, threemonths. And so, we will be in a position early next year, say, bythe first quarter, sometime in the first quarter of next year, to really startto put some real teeth into this. And then, to be able to start the pivotaltrials towards the middle of next year, right? So we are absolutely on thattimeline. And I don't see anything right today that's going to keep us frommeeting that.

[Joel Sendek:]

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

[George Scangos:]

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

[Joel Sendek:]

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 timeframeunder which that would happen?

[George Scangos:]

I wish I could tell you that, because the patients -- of the21 patients who have been enrolled in that trial, 16 are still on study. Manyof them had their tumors progressively shrinking at different scans. So, ourexpectation is that many of them will ultimately get to be responsive. The fact is, right now their tumors are shrinking. Patientsare being helped by the drug. Non-progression for those patients is ameaningful clinical benefit since their median survival time, typically hasbeen eight to nine months. So the drug is providing a real benefit to thosepatients. 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 thesepatients is that the tumors are -- seem to be -- under control for prolongedperiods 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 realmeaningful long-lasting benefit to those patients.

[Joel Sendek:]

Okay. Thank you.

[Operator:]

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

[Han Li:]

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

[Frank Krabe:]

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

[Han Li:]

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

[Frank Krabe:]

That's correct.

[Han Li:]

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 potentialmilestone selection. I thought you just mentioned earlier that the milestoneselection is revenue and also cash neutral.

[Frank Krabe:]

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

[Han Li:]

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

[Frank Krabe:]

None of this is…

[George Scangos:]

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

[Han Li:]

Got it. Okay. Thank you.

[Operator:]

Thank you very much, sir.(Operator Instructions) Our next question comes from the line of Karen Buchkovich ofJP Morgan. Please proceed.

[Karen Buchkovich:]

Hello. Could you please recap the highlights of the sale ofthe plant business, the primary assets that of interest to the buyer the focusof 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 wetransferred to Dow, I don't want to go into that just to respect Dow's wisheshere to not make all of this public. As you know, we've had a very powerfulplant trait discovery engine up in Portlandthat's generated a lot of interesting insights, and Dow was very interested inour ability to, let's say, manipulate genes and major crops. And that's basicallythe part of the business that's acquired. We have other aspects of the businessout there that they did not and that we believe we can potentially monetizefurther.

[Karen Buchkovich:]

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 arejust trying to respect the wishes of our partner there.

[Karen Buchkovich:]

Okay. Thank you.

[Operator:]

Thank you very much, ma'am. And at this time sir, you haveno 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 andgentlemen, for your participation in today's conference call. This concludesyour presentation for today. You may now disconnect. Have a good day.