Exelixis, Inc.
Q2 2008 Earnings Call Transcript

Published: 6 Aug 2008

[Operator:]

Good day, ladies and gentleman, and welcome to the Q2 2008 financial results business update conference call. (Operator Instructions). I will now like to turn the call over to Mr. Charles Butler, Head of Investor Relations. Please proceed sir.

[Charles Butler:]

Thank you. Thank you for everyone joining us on our Q2 2008 financial results conference call. Joining me today are George, Frank, and Mike, our CEO and CFO and President of R&D respectively. George will give some highlights of the quarter and then Frank will walk through the financials and Mike will provide an R&D update. But before I turn the call over to George, just like to say that we posted our earnings press release, as well as the slide presentation that accompanies our prepared remarks on our website, and lastly, before I turn the call over, let me just read our forward-looking statements. I would like to note that during our presentation today, we will be making certain statements that are forward-looking, including without limitation, statements related to the timing and impact of potential compound selections of our GFK, the timing and success of business development activities, our year end financial guidance, the future development and potential efficacy of our compounds and the timing of initiation of clinical trials. These statements are only predictions and are based upon our current assumption and expectations and are subject to risks and uncertainties. Our actual results and timing of events could differ materially from those anticipated in such forward-looking statements because of risks discussed in, our presentation materials, the comments made during this presentation and the risk factor sections of our 10-Q for the quarter ended June 27 2008, and our other reports filed with the Securities & Exchange Commission. We expressly disclaim any duty, obligation or undertaking to make any updates, revisions to any forward-looking statements. And with that, I will turn the call over to George.

[George Scangos:]

Okay. Thanks, Charles, and thanks to all of you for tuning in today. I think we had an very active quarter with significant data presented on five of our key compounds at ASCO and at the European Hematology Association Meeting signing of a $150 million finance facility to improve our financial position, and the announcement that our successful six year collaboration with GFK, will conclude in October. Also, we recently announced the beginning of a Phase III pivotal trial for XL184 and the submission of the proof-of-concept package for XL184 to GSK. Finally, after the quarter, we announced that we had hired Frances Heller, our formerly Head of Strategic Alliances for the Novartis Institute for Biomedical Research, as our Head of Business Development. So before turning the call over to Frank and Mike, who will provide financial and R&D updates, I want to take a few minutes to discuss these important events and also to provide a snapshot of important upcoming events for the rest of 2008. But first at ASCO, we had seven presentations which is the largest presence at ASCO in the company's history. And our clinical investigators reported substantial new data on four of our lead compounds, that's XL184, 765, 647 and 880. The highlights included the following. There was clear anti-tumor activity for XL184 in patients with medullary thyroid cancer, with a 100% disease control rate, hard to get better than that and a 53% response rate. The data supported initiation of the Phase III trial of XL184 in medullary thyroid cancer patients and that trial started in July. We have proof of mechanism data for the PI3 kinase pathway inhibition by XL765, in both tumor and surrogate tissues from patients or data presented showing an impressive 96% disease control rate for XL880, inpapillary renal cell carcinoma and that compound is now of course in the hands of GSK and is now known as GSK089. And there was a strong evidence of supporting the further study of 647 in non-small cell lung cancer patients, clinically selected for the presence of activating EGF receptor mutations. On our ASCO Investor briefing, we also described advances on two of our other compounds, XL147 our other PI3 kinase pathway inhibitor, for which we've also shown good pathway inhibition in a Phase I trial, and XL281, our RAF inhibitor which has shown, both good target and pathway inhibition in tumors after oral dosing in cancer patients. In late June, we announced that Exelixis and GlaxoSmithKline have agreed to conclude our successful six-year discovery in development collaboration on October 27, 2008 as scheduled. Under the terms of the collaboration, GSK previously selected XL880 for further development and, will be able to choose one additional compound from among XL184, 281, 228, 820 and 844. Exelixis will have a right to develop compounds not selected by GSK either alone or in collaboration with others. We submitted a proof-of-concept package on 184 to GSK on July 25th and GSK has 90 days from that date or until October 22nd to decide whether or not to select XL184. If GSK decides not to select 184, they will then have 30 days from the date on which we submit data packages on the other compounds, to make a single selection from the remaining compounds. We expect to submit those packages in the fall. The collaboration has been beneficial for us and I believe for GSK, as well. To-date, we have received approximately $235 million from GSK in upfront, milestone, R&D support payments, and a loan facility. In return, GSK has acquired rights to 880 and has the right to select a second high-quality compound to strengthen their own pipeline. While our collaboration has been a success, ending it at this time will actually be a very good thing for Exelixis because it will define the ownership of the compounds in the collaboration. The GSK collaboration was particularly complicated because of the number of compounds involved and the number of different permutations and possible scenarios depending on which and how many compounds GSK selected. With the end of the collaboration, our story and our pipeline will be considerably simplified. Well now which compounds GSK selected and those to which we have retained rights. I believe that this clarity will be attractive to both investors and to potential pharmaceutical partners, and it certainly will allow us to set clear priorities as we allocate resources for the development of our compounds. We recently announced $150 million funding arrangement with Deerfield Management that significantly increases our financial strength, as we continue to engage in multiple business development discussions. Although, we are not required to draw down on these funds, they provide us with significant financial security and flexibility in this turbulent economic period. Importantly, the arrangement provides us the flexibility to see our way through a number of important business and pipeline milestones in the second half of the year. Frank will discuss our deal with Deerfield in a little further in a moment. Now, we have received the lot of questions on our plans to take the company forward. Fundamental facet of our corporate strategy is to achieve the appropriate balance between partnerships which are financially attractive in the short and mid-term, and retention of our pipeline of wholly-owned compounds to maximize long-term value. Partnering a compound not only offloads the majority of the clinical development expenses, but brings in up-front and milestone payments that can be used to fund the development of proprietary compounds. As we sit here today, I would note that we have a total of six compounds being developed by partners. We have retained significant equity in the partnered compounds and they offer substantial value for Exelixis with little or no near-term expense. So with the clarity that will be achieved through the end of the GSK collaboration, we will be able to make clear decisions about which compounds to retain, which compounds to partner. Importantly, we can modulate the balance between proprietary and partnered compounds as our financial situation dictates. Certainly, the wealth of positive data we recently presented in seminar reports at ASCO puts us in a position of strength with regard to partnering possibilities and opportunities to move compounds into later stage trial. We are currently involved in multiple partnering discussions and are optimistic that we will be able to successfully conclude at least one of those discussions this year. Importantly, the arrangement with Deerfield will permit us to be judicious in making partnering decisions, despite the pressures of the currently difficult financial environment. Now the program for 647 is of course, part of the overall strategy. 647 clearly has demonstrated activity as a first line agents in non-small cell lung cancer patients with an activating mutation, and are planning for a trial comparing 647 to double the chemotherapy and that population has proceeded. However, we have to consider this compound and trial in the context of our entire pipeline. Later this year, we will have as our proprietary pipeline, XL765, 147, 019, 888 and four to five compounds in the GSK collaboration which include 184, 281, 228, 844 and 820. Clearly, we will have more compounds than we can develop alone. Some of the compounds which addressed focus markets and have short low risk development path are attractive for us to take forward on our own. Others like XL647 which have substantial potential for more complicated development paths are more suitable for development in conjunction with partners. We have been engaged in a number of partnership discussions which if successfully concluded. We will provide the funds necessary to purchase the collaboration from Symphony and further and then develop the compound. However, at this point in the absence of a partner, we do not intend to pursue further development of XL647 or to repurchase the compound. As we move into the second half of the year, in addition to discussions on new partnerships we'll have a decision by GSK on which of the remaining compounds they wish to select, will clarify the potential of 019 in myelofibrosis, we will have data in 019 in polycythemia vera. We will aggressively pursue enrollment of our clinical programs and we look forward to substantial additional data at the URTC meeting, where we had 15 abstracts accepted and at ASH. These data presentations will include 184, 228, 019, 765, 147, 281 and 647 among others. Their immediate future promises to be highly productive and meaningful for Exelixis. So we believe there are real opportunities to increase shareholder value this year through presenting data on key compounds and initiating additional later stage clinical trials and entering into new partnerships focused on specific compounds or on larger strategic relationships. We're working on all of these fronts and hope to have positive news to report later this year. Now, I will turn the call over to Frank, for the details of our financials, and then Mike will provide an R&D update. Frank?

[Frank Karbe:]

Thanks, George. We have made significant progress in advancing our business and the Q2 financial results reflect this progress, and we are in-line with our expectations. As George mentioned, we are currently engaged in multiple business development discussions that has the potential to bring new cash into the company and offload future development expenses. While the exact timing of these deals is difficult to predict, we are confident that we will bring some of our discussions to a successful close. The Deerfield facility, even without drawing on it, puts us in a stronger position and gives us the flexibility to see our way through those discussions. It also buys us time to see some important business and pipeline milestones fall into place, such as GSK's decision on XL184 for example and then determine the proper path forward for us. So in all, we are excited about the level of clarity, we will be able to provide later this year, as it relates to our strategy going forward. We are confident that we can substantially strengthen the financial position of the company through new business development activities. Now let me turn to the second quarter financial results in detail, and as a reminder, we are reporting our financial results on a GAAP basis only. And as usual, the complete press release with our results can be accessed through our website at Exelixis.com. I will start with revenues. Revenues for the second quarter '08 were $30.4 million compared to $29.3 million for the comparable year in '07. The increase from '07 to '08 was primarily due to the conclusion of our collaboration with GSK on October 27th 2008, which shortens the term over which we had historically recognized revenue and therefore it results in an accelerated recognition of revenue until October of this year. This increase was partially offset by the completion of revenue recognition associated with our collaboration with Daiichi Sankyo for our Mineralocorticoid Receptor program and the exclusion of revenue as a result of the sale of 80.1% of our former subsidiary Artemis Pharmaceuticals at the end of 2007. Research and development expenses for the second quarter '08 were $68.9 million, compared to $56.3 million for the comparable period in '07. The increase from '07 to '08 was in-line with our expectations and primarily reflects the increased development expenses associated with the continued maturation of our pipeline and expansion of our clinical trial activity. The majority of the expense increase year-over-year is driven by external trial related expenses, a portion of which we would expect to offload in the future, as we put in place new partnerships. Keep in mind, that as our pipeline matures, and compounds advance through Phase I and Phase II and now also into Phase III, we naturally see an increase in side initiations, patient enrollment, manufacturing and other trial-related expenses. The increase in expenses, in fact directly reflects the significant progress that we have made in advancing our pipeline, as evidenced by the substantial body of new clinical data presented at ASCO this year. General and administrative expenses for the second quarter '08 were 10.2 million, compared to 11.2 million for the comparable period in '07. The decrease from '07 to '08 was primarily due to the allocation of a greater portion of general corporate costs through research and development, which again mainly reflects the relatively higher growth of the R&D function, compared to the general and administrative parts of the organization. Net loss for Q2 '08 was 45.1 million or $0.43 per share, compared to 28.6 million or $0.29 per share for the comparable period in '07. The increase in net loss from '07 to '08 which is again in-line with our expectations, was primarily due to the significant progress in our research and development activity, as I just discussed. Cash and cash equivalents, short-term and long-term marketable securities, investments held by Symphony Evolution, and restricted cash and investments, totaled $189.8 million at the end of Q2 '08. Including the funding facility with Deerfield, cash and committed funding at the end of Q2, therefore amounted to approximately $340 million. Let me elaborate for a moment, on the financial implications of the decision by GSK to not extend our collaboration. As George pointed out, the collaboration has been a success for both companies, and ending it now, on its originally scheduled term is unquestionably the positive outcome for us. It provides certainty as to the ownership of a substantial portion of our pipeline, and it simplifies our story. Of the five compounds still encompassed by the collaboration, four will end up as Exelixis proprietary compounds later this year, which we are free to develop in anyway we wish, and this of course, opens up significant new partnering opportunities, which could result in substantial new funding for Exelixis. We submitted the proof-of-concept package on XL184 to GSK on July 25th. If GSK selects XL184 for further development, we will be entitled to receive a milestone of $55 million. If GSK selects any of the earlier stage compounds under the collaboration, we would be entitled to a milestone of $27.5 million, which would however, not be payable, until such compound has achieved proof-of-concept. These milestones would be recognized as revenue in their entirety upon achievement. However, neither of these milestones would have any cash impact to us, as they would go (inaudible) paying down the loan facility that GSK extended to us. The loan from GSK amounts to 85 million, plus accrued interest computed at 4% per annum totaling approximately $100 million as of June 2008. The loan is due in three annual installments, starting in October 2009. The repayment made at our election, to be in the form of cash or common stock at fair market value subject to certain conditions. Keep in mind that the amount owed to GSK, may be reduced by a milestone payment associated with GSK selecting its second compound for further development. Let me finally touch again upon the impact to our revenue, resulting from GSK's decision to not extend the collaboration. As you know, we typically recognized revenue over the term of the underlying agreement. To the extent that any extension options, we conservatively assume the collaboration would extend to the longest contractual period, which in the case of GSK was October 2010. Because the collaboration is now concluding on October 2008, we will accelerate revenue recognition for the remaining deferred revenues through October of this year. As a result, our revenues increased by $8.6 million in the second quarter and we expect the same level of revenue increased under our GSK collaboration for the third quarter of this year. Let me also expand on the Deerfield facility for a moment. In early June, we signed an agreement for $150 million fully committed funding facility with Deerfield. We previously discussed this transaction in detail on a separate call and I will therefore not reiterate the specific terms today., but I do want to make a few key points about the deal. The Deerfield facility uniquely addresses the challenges faced by pre-commercial biotech companies in a difficult capital markets environment. It provides unusual flexibility and how the funds can be drawn and repaid which allows us to better manage our cost of capital and dilution. We are under no obligation to draw on this facility, but, yet have this facility fully committed to us, providing access to capital independent of the capital market's environment. It provides if you will another tool in our financing toolbox at a moderate upfront cost, and importantly without limiting other financing alternatives. Moreover, even without accessing this facility, just having it in place, strengthens our financial position as we see our way through a number of important pipeline and business milestone, including the emergence of significant new clinical data and potential new partnerships over the next few months. Whether or not we draw on the Deerfield facility will obviously depend on our financing needs during the 18-months draw period, as well as, on how the cost of accessing this facility compares to alternative sources of funding. In summary, things are progressing very well at Exelixis. We have several important events upcoming over the next few months which will allow us to clearly define our way forward. We are confident that we will be able to sign new partnerships which have the potential to provide a significant infusion of cash and which we expect to enable us to meet our year end financial guidance, particularly as it relates to our projected yearend cash balance. With that, I will turn the call over to Mike for the R&D update.

[Mike Morrissey:]

Thank you, Frank. As George noted, we have recently initiated our Phase III trial of XL184, in medullary thyroid cancer or MTC. XL184 is a small molecule tyrosine kinase inhibitor targeting MET, RET and VEGFR2. We reached agreement with the FDA on this Phase III registrational trial, via the special protocol assessment process, and have also discussed the trial design with European regulatory agencies. The study is now open. The initiation of this trial was based on encouraging data that were presented at this year's ASCO meeting. Safety and clinical activity data were presented from an ongoing Phase I 1 trial of XL184 in 69 patients with various solid tumors including patients with metastatic MTC. These data showed a disease control rate of 100% in the valuable MTC patients, meaning that all these patients had partial responses or prolonged stable disease for more than three months. In addition of the 17 MTC patients with measurable disease, nine of them or at 53% experienced partial responses. Most of the MTC patients in the trial had previously failed other treatments including TKIs with anti-RET activity such as vandetanib, sorafenib or motesanib. The Phase III trial was designed in collaboration with internationally renowned experts in the field of thyroid cancer that's a randomized placebo control double-blind study of XL184 as a single agent in 315 patients with unresectable locally advanced or metastatic MTC. Patients are randomized in a 2

[Operator:]

(Operator Instructions). Your first question comes from the line of Joel Sendek. Please proceed.

[Joel Sendek:]

Hi, thanks. I have two questions. Can you just go over what the plan is for XL647? Did you say you are going to wait to get a partner until you move it because I guess the previous plan was to move that into front line lung cancer? Then I have a question on 184 after that.

[George Scangos:]

Yes, I think for 647, we have been in a number of partnership discussions. As we look at our pipeline now, and let's say the return of compounds or lets say freeing up of the compounds in the GSK collaboration becomes imminent, so that we are looking down the road a few months from now, in couple of months from now of having eight or nine compounds in our proprietary pipeline, it is very clear we can't develop all of them on our own. And we've begun a prioritization process of these compounds, so that we can be focused and allocate our resources toward those compounds that will provide us the biggest return in a reasonable period of time. So compounds that address, or let's say whose clinical development path is low risk, short time, relatively low cost to get to the market are attractive ones for us to take forward on our own. Other compounds, certainly not only XL647 but including XL647 have substantial potential but have much more complicated clinical development paths, and we think those are best suited for development in collaboration with a partner. So, as we look at XL647, certainly the compound has activity in non-small cell lung cancer. I think it can take its place as a compound that treats lung cancer. I do not think given where we are today, and given the compounds in our pipeline it makes, that XL647 reaches or let's say meet those criteria development paths little more complicated. Accordingly, we don't want to begin a development project where we don't want to complete it unless we have a partner. So, in the absence of a partner, we do not intend to further develop XL647. We are still having partnership discussions. We think the compound does have merit. So if we get a partner, we will take that compound forward.

[Joel Sendek:]

Okay, I understand. And just quickly on 184, can you give us some feeling for how long enrollment will take for Phase III?

[George Scangos:]

We are projecting right now between 14 to 18 months.

[Joel Sendek:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of John Sonnier. Please proceed.

[John Sonnier -:]

Thanks a lot, it is John Sonnier, William Blair, I appreciate the update, just another question on 647, I think the original partnering strategy was to try to hang on to US rights, if possible. I am just wondering if you are now asking a third-party to take on a greater proportion of the development burden, are you more flexible with that thinking? And I guess parallel to that, I believe it's also a Symphony compounds., if you can help us think about what happens if it's partnered and what happens if it's not with that relationship? Thanks.

[George Scangos:]

Yes, I think implicit in saying that and in the absence of a partner we do not intend to further develop the compound is in the absence of a partner we will not repurchase the compounds from Symphony. We are partnership discussions; our goal is to establish a partnership in which the upfront milestone payments from the partner can cover the repurchase cost from Symphony, and the majority of the clinical development expenses. So, if we're successful, we will go down that road, if we are not, then we don't intend to take that compound further.

[John Sonnier:]

Thank you.

[Operator:]

(Operator Instructions) Your next question comes from the line of Cory Kasimov. Please proceed.

[Mona Ashiya:]

Hi, this is Mona Ashiya for Cory, actually. Just a question on 184, so, you know RET, obviously plays a key role in MTC, but as far as other settings such as lung cancer and GBM, I wondered if you could speak a bit more about the rationale? And moving into these settings, is it largely the inhibition of VEGF that's driving the decision to go there? And also related to that, is there anything that you've seen in your pharmacodynamic results with 184 that's shaping your expectations in these other settings?

[George Scangos:]

I think in both non-small cell lung cancer, GBM and really a wide variety of histologies. I think the target profile of XL184 which focuses on both VEGFR2 and MET, really addresses the genetics of those different histologies in a very powerful way. So again, due to the MET-inhibition and the potent VEGFR2-inhibition, we see a very strong potential for the compound in a wide range of histologies. We had a lot of pharmacodynamic data at the ASCO meeting and I think that obviously from my point of view helped us really set the stage for how that compound is behaving in the clinical study.

[Mona Ashiya:]

And that's very helpful. And then, just another question actually on the PI3 kinase program. So you have represented some very interesting and exciting data at ASCO. I was just wondering if from a strategic standpoint, what you are seeing in terms of the enthusiasm from potential partners, and at what stage would you consider partnering these programs?

[George Scangos:]

Yes, I think your statement that we presented exciting data at ASCO was shared by a number of pharmaceutical companies as we have had a number of inbound calls subsequent to ASCO. We are having discussions with a number of companies around those PI3 compounds. Those are compounds where again, the development path is complicated, its market potential is huge. The number of trials we would like to do simultaneously is very large in order to maximize the market potential for those compounds. So we think those compounds also are very good ones to develop in collaboration with a partner and we are having those discussions.

[Mona Ashiya:]

Thanks very much.

[Operator:]

(Operator Instructions). At this time, I would like to turn the call back over to George Scangos.

[George Scangos:]

Okay. Thanks. I guess when we talk for half hour, we wear everybody out. So let me thank everybody for your attention today. I would like to reiterate Mike's comments about thanking all of our employees, for their individual and collective work. Thank you for your interest. With that, we'll sign off.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.