UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-30235
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3257395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 Harbor Way
P.O. Box 511
South San Francisco, CA 94083
(Address of principal executive offices, including zip code)
(650) 837-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
As of July 31, 2001, there were 49,161,649 shares of the registrant's common
stock outstanding.
EXELIXIS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets
June 30, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Operations
Three and Six Months ended June 30, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows
Six Months ended June 30, 2001 and 2000 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information - Risk Factors 19
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EXELIXIS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000 (1)
---------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 46,063 $ 19,552
Short-term investments 76,990 93,000
Other receivables 2,689 1,493
Inventories - 3,612
Other current assets 2,791 1,987
---------- --------------
Total current assets 128,533 119,644
Property and equipment, net 35,639 23,480
Related party receivables 993 494
Goodwill and other intangibles, net 68,851 58,674
Other assets 4,503 2,622
---------- --------------
Total assets $ 238,519 $ 204,914
========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 11,304 $ 10,050
Line of credit - 1,484
Current portion of capital lease obligations 5,750 3,826
Current portion of notes payable 3,539 1,664
Advances from minority shareholders - 868
Deferred revenue 6,463 6,233
---------- --------------
Total current liabilities 27,056 24,125
Capital lease obligations 8,778 6,341
Notes payable 1,128 1,635
Convertible promissory note 30,000 -
Minority interest in consolidated subsidiary - 1,044
Other long-term liabilities 200 -
Deferred revenue 17,831 9,036
---------- --------------
Total liabilities 84,993 42,180
---------- --------------
Stockholders' equity:
Common stock 50 47
Additional paid-in-capital 328,008 304,339
Notes receivable from stockholders (1,701) (1,805)
Deferred stock compensation, net (6,800) (10,174)
Accumulated other comprehensive income 434 365
Accumulated deficit (166,465) (130,038)
---------- --------------
Total stockholders' equity 153,526 162,734
---------- --------------
Total liabilities and stockholders' equity $ 238,519 $ 204,914
========== ==============
<FN>
(1) The consolidated condensed balance sheet at December 31, 2000 has been
derived from the audited financial statement at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
EXELIXIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
License $ 924 $ 932 $ 1,848 $ 1,864
Contract and government grants 7,627 4,684 14,437 9,703
--------- --------- --------- ---------
Total revenues 8,551 5,616 16,285 11,567
--------- --------- --------- ---------
Operating expenses:
Research and development (1) 20,555 13,365 37,370 22,299
General and administrative (2) 4,976 4,921 9,236 9,216
Amortization of goodwill and intangibles 1,226 - 2,276 -
Acquired in-process research and development 6,673 - 6,673 -
--------- --------- --------- ---------
Total operating expenses 33,430 18,286 55,555 31,515
--------- --------- --------- ---------
Loss from operations (24,879) (12,670) (39,270) (19,948)
Other income (expense):
Interest and other income 1,597 1,866 3,492 2,014
Interest expense (426) (168) (649) (326)
--------- --------- --------- ---------
Total other income 1,171 1,698 2,843 1,688
Net loss $(23,708) $(10,972) $(36,427) $(18,260)
========= ========= ========= =========
Net loss per share, basic and diluted $ (0.52) $ (0.32) $ (0.81) $ (0.90)
========= ========= ========= =========
Shares used in computing net loss per share,
basic and diluted 45,724 34,622 45,048 20,263
========= ========= ========= =========
<FN>
(1) Includes stock compensation expense of $1,633 and $3,998 in the quarters
ended June 30, 2001 and 2000, respectively, and includes stock compensation
expense of $2,800 and $6,002 in the six month periods ended June 30, 2001 and
2000, respectively.
(2) Includes stock compensation expense of $661 and $1,297 in the quarters ended
June 30, 2001 and 2000, respectively, and includes stock compensation expense of
$1,370 and $2,556 in the six month periods ended June 30, 2001 and 2000,
respectively.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
EXELIXIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss $(36,427) $(18,260)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 4,401 1,749
Amortization of deferred stock compensation 4,170 8,558
Amortization of goodwill and other intangibles 2,276 -
Acquired in-process research and development 6,673 -
Changes in assets and liabilities:
Other receivables (587) (751)
Other current assets (962) (973)
Related party receivables (399) 160
Other assets (2,203) (20)
Accounts payable and accrued expenses (2,070) 2,800
Deferred revenue 9,747 10,163
--------- ---------
Net cash provided by (used in) operating activities (15,381) 3,426
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (10,403) (8,498)
Proceeds from sale-leaseback of equipment 4,008 -
Cash acquired in acquisition 3,463 -
Proceeds from maturity of short-term investments 90,469 -
Purchases of short-term investments (74,203) (73,045)
--------- ---------
Net cash provided by (used in) investing activities 13,334 (81,543)
--------- ---------
Cash flows from financing activities:
Proceeds from initial public offering, net - 124,709
Proceeds from convertible note 30,000 -
Proceeds from exercise of stock options and warrants 309 545
Proceeds from employee stock purchase plan 1,198 -
Repayments of notes from stockholders 105 -
Principal payments on capital lease obligations (1,922) (386)
Principal payments on notes payable (1,025) (733)
--------- ---------
Net cash provided by financing activities 28,665 124,135
--------- ---------
Effect of foreign exchange rate changes on cash (107) -
Net increase in cash and cash equivalents 26,511 46,018
Cash and cash equivalents, at beginning of period 19,552 5,400
--------- ---------
Cash and cash equivalents, at end of period $ 46,063 $ 51,418
========= =========
The accompanying notes are in integral part of these consolidated condensed
financial statements.
EXELIXIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Exelixis, Inc. ("Exelixis" or the "Company") is a genomics-based biotechnology
company focused on product development through its expertise in comparative
genomics and model system genetics. An outstanding team of Company scientists
has developed multiple fungal, nematode, insect, plant and vertebrate genetic
systems. Exelixis' proprietary model systems and comparative genomics
technologies address gene function by using biologically relevant functional
genomics information very early on in the process to rapidly, efficiently and
cost-effectively translate sequence data to knowledge about the function of
genes and the proteins that they encode. The Company also has a significant
internal cancer discovery and drug development program. Exelixis believes that
its technology is broadly applicable to all life science industries including
pharmaceutical, diagnostic, agricultural biotechnology and animal health. The
Company has active partnerships with Aventis, Bayer, Bristol-Myers Squibb,
Pharmacia, Protein Design Labs and Dow AgroSciences.
Basis of Presentation
- -----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of
the Securities and Exchange Commission ("SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001, or for any future period. These financial statements and
notes should be read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 2000 included in the Company's
Annual Report on Form 10-K.
Net Loss per Share
- ---------------------
Basic and diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common stock if their effect is antidilutive. Potential common stock
consists of common stock subject to repurchase, incremental common shares
issuable upon the exercise of stock options and warrants and shares issuable
upon conversion of the preferred stock and a convertible promissory note.
Comprehensive Income
- ---------------------
There are two components of other comprehensive income: unrealized gains on
available-for-sale securities and foreign currency translation adjustments. For
the three and six month periods ended June 30, 2001, total comprehensive loss
amounted to approximately $23.7 and $36.5 million, respectively. For the three
and six month periods ended June 30, 2000, total comprehensive loss amounted to
$10.9 million and $18.2 million, respectively.
Foreign Currency Translation
- ------------------------------
The Company's German subsidiary, Artemis Pharmaceuticals GmbH ("Artemis"), uses
its local currency as its functional currency. Assets and liabilities are
translated at exchange rates in effect at the balance sheet date and income and
expense amounts at the average exchange rates during the period. Resulting
translation adjustments are recorded directly to a separate component of
stockholders' equity.
Reclassification
- ----------------
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Recent Accounting Pronouncements
- ----------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" ("SFAS No. 141"), which establishes financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires
that all business combinations be accounted for using one method, the purchase
method. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 is expected to have
no material impact on financial reporting and related disclosures of the
Company.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition, and after they have been initially recognized in the
financial statements. The provisions of SFAS No. 142 are effective for fiscal
years beginning after December 15, 2001. The Company will adopt SFAS No. 142
during the first quarter of fiscal 2002, and is in the process of evaluating the
impact of implementation on the financial position of the Company.
NOTE 2. SALE OF VINIFERA OWNERSHIP INTEREST
On March 31, 2001, the Company reduced its ownership interest in Vinifera, Inc.
("Vinifera") to 19% by selling 3.0 million shares of Vinifera common stock back
to Vinifera in consideration for $2.1 million in interest bearing promissory
notes. The promissory notes bear interest rates of prime plus 1% and are
payable in two installments of $400,000, due no later than September 30, 2001
and February 28, 2002, respectively, and one installment of $1.3 million, due on
February 28, 2006. Due to risks associated with Vinifera's operating results,
the Company has reserved for $1.7 million of these promissory notes.
As a result of this transaction, the Company recorded the following amounts as
an adjustment to goodwill recorded in connection with the acquisition of
Agritope, Inc. (parent company of Vinifera), based on the operating results of
Vinifera through March 31, 2001: a write down of the value of acquired developed
technology attributable to Vinifera, a gain on sale of Vinifera shares, and the
promissory note reserve. The net adjustment was an increase to goodwill in the
amount of $675,000. Beginning April 1, 2001, the Company accounts for its
remaining investment in Vinifera using the cost method.
NOTE 3. ACQUISITION OF ARTEMIS
In May 2001, Exelixis acquired a majority of the outstanding capital stock of
Artemis, a privately held genetics and functional genomics company organized
under the laws of Germany. The transaction, which was accounted for under the
purchase method of accounting, was effected through the exchange of shares of
Exelixis common stock for DEM 1.00 of nominal value of Artemis capital stock,
using an exchange ratio of 4.064 to one. Approximately 1.6 million shares of
Exelixis common stock were issued in exchange for 78% of the outstanding capital
stock of Artemis held by the Artemis stockholders. In addition, Exelixis
received a call option (the "Call Option") from, and issued a put option (the
"Put Option") to, certain stockholders of Artemis (the "Option Holders") for the
issuance of approximately 480,000 shares of Exelixis common stock in exchange
for the remaining 22% of the outstanding capital stock of Artemis held by the
Artemis stockholders. Exelixis may exercise the Call Option at any time from
May 14, 2001 through January 31, 2002, and the Option Holders may exercise their
rights under the Put Option at any time from April 1, 2002 through May 15, 2002.
The value of any shares issued pursuant to exercising the Call Option or Put
Option will be added to goodwill. In connection with the acquisition, Exelixis
also issued fully vested options representing the right to purchase
approximately 187,000 additional shares of Exelixis common stock to Artemis
employees in exchange for such employees' vested options formerly representing
the right to purchase shares of Artemis capital stock pursuant to an Employee
Phantom Stock Option Program.
The total consideration for the acquisition was approximately $22.3 million,
which consisted of Exelixis common stock and options valued at $21.4 million and
estimated Exelixis transaction costs of $900,000. Exelixis' transaction costs
include financial advisory, legal, accounting and other fees.
Based upon an independent valuation of the tangible and intangible assets
acquired, Exelixis management has completed a preliminary allocation of the
total cost of the acquisition to the assets acquired and liabilities assumed as
follows (in thousands):
Tangible assets acquired $6,848
In-process research and development 6,673
Developed technology 1,240
Assembled workforce 1,332
Goodwill 9,655
Patents/core technology 571
Liabilities assumed (4,016)
-------
$22,303
=======
The Company will amortize the acquired intangible assets using the following
estimated useful lives:
Developed technology 5 years
Patents/core technology 15 years
Assembled workforce 3 years
Goodwill 15 years
The valuation of the purchased in-process research and development of $6.7
million was based upon the results of an independent valuation using the income
approach for each of the three significant in-process projects. The in-process
projects relate primarily to the development of technologies that use vertebrate
genetic model organisms, zebrafish and mice, to identify and functionally
validate novel genes in vivo. These genes can be used as novel screening
targets or as the basis for secreted proteins in clinically and commercially
relevant diseases. The in-process projects are expected to be completed over
the next 18 months. The income approach estimates the value of each acquired
project in-process based on its expected future cash flows. The valuation
analysis considered the contribution of the core technology as well as the
percent complete of each in-process research and development project. The
expected present value of the cash flows associated with the in-process research
and development projects was computed using a risk adjusted rate of return of
30%, which is considered commensurate with the overall risk and percent complete
of the in-process projects. The purchased in-process research and development
was not considered to have reached technological feasibility, and it has no
alternative future use, accordingly, it has been recorded as a component of
operating expense.
The revenues, expenses, cash flows and other assumptions underlying the
estimated fair value of the acquired in-process research and development involve
significant risks and uncertainties. The risks and uncertainties associated with
completing the acquired in-process projects include the ability to reach future
research milestones since the technologies being developed are unproven, the
ability to retain key personal, the ability to obtain licenses to key
technology, and the ability to avoid infringing on patents and propriety rights
of third parties.
PRO FORMA RESULTS
The Company's historical statements of operations include the results of Artemis
and Agritope, Inc. (now Exelixis Plant Sciences, Inc.) subsequent to the
acquisition dates of May 14, 2001 and December 8, 2000, respectively. The
following unaudited pro forma financial information presents the consolidated
results of the Company as if the acquisitions of Artemis and Agritope had
occurred at the beginning of each period presented. Nonrecurring charges, such
as acquired in-process research and development, are not reflected in the
following pro forma financial information. This unaudited pro forma information
is not intended to be indicative of future operating results (in thousands,
except per share data).
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
--------- ---------
Total revenues $ 16,359 $ 16,541
Net loss $(25,754) $(33,357)
Net loss per share, basic and diluted $ (1.09) $ (0.72)
NOTE 4. SUPPLEMENTAL STOCK OPTION PLAN
During April 2001, the Company granted approximately 545,000 supplemental stock
options ("Supplemental Options") under the 2000 Equity Incentive Plan to
employees (excluding officers and directors) who had stock options with exercise
prices greater than $16.00 per share under the 2000 Equity Incentive Plan. The
number of Supplemental Options granted were equal to 50% of the corresponding
original grant held by each employee, have an exercise price of $16.00, vest
monthly over a two year period beginning April 1, 2001, and have a 27 month
term. The vesting on the corresponding original grants was halted and will
resume in April 2003 following the completion of vesting of the Supplemental
Options. This new grant constitutes a synthetic repricing as defined in FASB
Interpretation Number 44 "Accounting for Certain Transactions Involving Stock
Compensation" and will result in certain options being reported using the
variable plan method of accounting for stock compensation expense until they are
exercised, forfeited or expire. For the quarter ended June 30, 2001, the
compensation expense recorded for these supplemental options is approximately
$0.3 million.
NOTE 5. COMMITMENTS
During April 2001, the Company entered into a master lease agreement with a
third party lessor for an equipment lease line of credit of up to $12.0 million,
which expires on December 31, 2001. The master lease agreement provides for a
periodic delivery structure. Each delivery has a payment term of 36 or 48 months
depending on the type of the equipment purchased under the lease. At June 30,
2001, $7.9 million was outstanding under the equipment lease line of credit.
Under the master lease agreement, the Company is subject to certain financial
covenants. As of June 30, 2001, the Company was in compliance with all such
covenants.
NOTE 6. COLLABORATION AGREEMENTS
On May 22, 2001, the Company and Protein Design Labs, Inc. ("PDL") entered into
a collaboration to discover and develop humanized antibodies for the diagnosis,
prevention and treatment of cancer. The collaboration will utilize Exelixis'
model organism genetics technology for the identification of new cancer drug
targets, and PDL's antibody and clinical development expertise to create and
develop new antibody drug candidates. PDL will provide Exelixis with $4.0
million in annual research funding for two or more years and has purchased a
$30.0 million convertible note. The note bears interest at 5.75% and the
interest thereon is payable annually. The note is convertible into Exelixis
common stock at a conversion price per share equal to the lower of (i) $28.175
and (ii) 110% of the Fair Market Value (as defined in the note) of a share of
Exelixis common stock at the time of conversion.
On July 17, 2001, the Company and Bristol-Myers Squibb Company ("BMS") entered
into a collaboration. The collaboration involved three agreements: (a) a Stock
Purchase Agreement; (b) a Cancer Collaboration Agreement; and (c) a License
Agreement. Under the terms of the collaboration, BMS (i) purchased 600,600
shares of Exelixis Common Stock in a private placement at a purchase price of
$33.30 per share, for proceeds to Exelixis of approximately $20.0 million; (ii)
agreed to pay Exelixis a $5.0 million upfront license fee and provide Exelixis
with $3.0 million per year in research funding for a minimum of three years; and
(iii) granted to Exelixis a worldwide, fully-paid, exclusive license to an
analogue to Rebeccamycin developed by BMS, which is currently in Phase I and
Phase II clinical studies for cancer. Due to risk and uncertainties with
Rebeccamycin, this was given no value in the collaboration agreement. Exelixis
has agreed to provide BMS with exclusive rights to certain potential small
molecule compound drug targets in cancer identified during the term of the
research collaboration. The premium of $10.0 million on the stock purchase by
BMS is being accounted for similar to an upfront license fee. Therefore,
revenue is being recognized ratably over the life of the contract.
On July 26, 2001, the Company announced the reacquisition, effective February
2002, of future rights to research programs in metabolism and alzheimer's
disease previously licensed exclusively to Pharmacia Corporation ("Pharmacia").
Pharmacia will retain rights to targets under the existing agreement selected
prior to the reacquisition date, subject to the payment of milestones for
certain of those targets selected and royalties for future development of
products against or using those targets but will have no other obligations to
make payments to the Company, including approximately $9.0 million in annual
funding that would otherwise be payable for an additional two years if the
Company had not elected to reacquire rights to the research at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with our financial
statements and accompanying notes included in this report and the 2000 audited
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2000. Operating results are
not necessarily indicative of results that may occur in future periods.
The following discussion and analysis contains forward-looking statements that
are based upon current expectations. Forward-looking statements involve risks
and uncertainties. Our actual results and the timing of events may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" as well as those discussed elsewhere in this
document and those discussed in our Annual Report on Form 10-K.
OVERVIEW
We believe that we are a leader in the discovery and validation of high-quality
novel targets for several major human diseases, and a leader in the discovery of
potential new drug therapies, specifically for cancer and other proliferative
diseases. Our mission is to develop proprietary cancer products by leveraging
our integrated discovery platform to increase the speed, efficiency and quality
of pharmaceutical and agricultural product discovery and development.
Through our expertise in comparative genomics and model system genetics, we are
able to find new drug targets that we believe would be difficult or impossible
to uncover using other experimental approaches. Our pharmaceutical research
identifies novel genes and proteins expressed by those genes that, when changed,
either decrease or increase the activity in a specific disease pathway in a
therapeutically relevant manner. These genes and proteins then represent either
potential product targets or drugs that may treat disease, or prevent disease
initiation or progression.
We have established commercial collaborations with Aventis CropScience, Bayer,
Bristol-Myers Squibb, Dow AgroSciences, Pharmacia and Protein Design Labs, which
provide us with substantial funding, including licensing fees, research funding,
milestone payments when specific objectives are met and royalties, if our
partners successfully develop and commercialize products. In addition, many of
these collaborations provide us with access to strategic technologies and
product development opportunities. Revenues from these collaborations were $16.3
million for the six months ended June 30, 2001, $24.8 million in 2000, $10.5
million for the same period in 1999 and $2.3 million for the same period in
1998. Our sources of potential revenue for the next several years are likely to
include upfront license and other fees, funded research payments under existing
and possible future collaborative arrangements and milestone payments and
royalties from our collaborators based on revenues received from any products
commercialized under those agreements.
We have a history of operating losses resulting principally from costs
associated with research and development activities, investment in core
technologies and general and administrative functions. As a result of planned
expenditures for future research and development activities, including
manufacturing and clinical development expenses for a compound in Phase II
clinical studies, Exelixis expects to incur additional operating losses for the
foreseeable future.
License, research commitment and other non-refundable payments received in
connection with research collaboration agreements are deferred and recognized on
a straight-line basis over the relevant periods specified in the agreements,
generally the research term. Exelixis recognizes contract research revenues as
services are performed in accordance with the terms of the agreements. Any
amounts received in advance of performance are recorded as deferred revenue.
ACQUISITION OF ARTEMIS PHARMACEUTICALS
In May 2001, we acquired a majority of the outstanding capital stock of Artemis
Pharmaceuticals GmbH, a privately held genetics and functional genomics company
organized under the laws of Germany ("Artemis"). The transaction, which was
accounted for under the purchase method of accounting, was effected through the
exchange of shares of our common stock for DEM 1.00 of nominal value of Artemis
capital stock, using an exchange ratio of 4.064 to one. Approximately 1.6
million shares of our common stock was issued in exchange for 78% of the
outstanding capital stock of Artemis held by the Artemis stockholders. In
addition, we received a call option (the "Call Option") from, and issued a put
option (the "Put Option") to, certain stockholders of Artemis (the "Option
Holders") for the issuance of approximately 480,000 shares of our common stock
in exchange for the remaining 22% of the outstanding capital stock of Artemis
held by the Option Holders. We may exercise the Call Option at any time from
May 14, 2001 through January 31, 2002, and the Option Holders may exercise their
rights under the Put Option at any time from April 1, 2002 through May 15, 2002.
The value of any shares issued pursuant to exercising the Call Option or Put
Option will be added to goodwill. In connection with the acquisition, we also
issued fully vested options representing the right to purchase approximately
187,000 additional shares of our common stock to Artemis employees in exchange
for such employees' vested options formerly representing the right to purchase
shares of Artemis capital stock pursuant to an Employee Phantom Stock Option
Program.
The purchase price, which for financial accounting purposes was valued at $22.3
million, was allocated to the assets acquired and the liabilities assumed based
on their estimated fair values at the date of acquisition, as determined by
management based upon an independent valuation. As a result of this
transaction, we recorded expense associated with the purchase of in-process
research and development of $6.7 million, net tangible assets of $2.8 million,
and intangible assets (including goodwill) of $12.8 million, the majority of
which will be amortized over 15 years.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $8.6 million and $16.3 million for the three- and six-month
periods ended June 30, 2001, respectively, compared to $5.6 million and $11.6
million, respectively, for the comparable periods in 2000. The increase in
revenues over the 2000 levels was primarily due to additional license and
contract revenues earned from existing collaborations with Bayer, Bristol-Myers
Squibb, Pharmacia, and Dow AgroSciences, revenues earned under the collaboration
with Aventis Crop Sciences resulting from our acquisition of Agritope, Inc., now
renamed Exelixis Plant Sciences, Inc., and revenues earned under our new
collaboration with PDL entered into in May 2001. Our acquisition of Artemis in
May 2001 also resulted in approximately $0.3 million in additional revenue. We
expect revenues to continue to increase during the remainder of 2001 with the
signing of our new collaboration agreement with Bristol-Myers Squibb in July
2001.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs, supplies and depreciation of
facilities and laboratory equipment. Research and development expenses were
$20.6 million and $37.4 million for the three- and six-month periods ended June
30, 2001, respectively, compared to $13.4 million and $22.3 million,
respectively, for the comparable periods in 2000. The increase was due
primarily to increased staffing and other personnel-related costs. These
expenses were incurred to support new collaborative arrangements, our internal
self-funded research efforts, including the significant build-out of our drug
discovery organization and increased expenses related to the ongoing research
and development activities at Agritope and Artemis. This was partially offset by
a decrease in non-cash stock compensation expense (as described below). We
expect to continue to devote substantial resources to research and development.
In addition, we expect that research and development expenses will continue to
increase in absolute dollar amounts in the future as we assume the
responsibility for manufacturing and clinical development of a Phase I/II cancer
compound and as we continue to expand our proprietary drug development efforts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel costs to
support our worldwide activities, facilities costs and professional expenses,
such as legal fees. General and administrative expenses were $5.0 million and
$9.2 million for the three- and six-month periods ended June 30, 2001,
respectively, compared to $4.9 million and $9.2 million, respectively, for the
comparable periods in 2000. General and administrative expenses remained flat
year-over-year due primarily to a decrease in non-cash stock compensation
expense (as described below) which offset our increased staffing and other
personnel related costs and rent for facilities and expenses associated with
expanding our corporate headquarters. We expect that our general and
administrative expenses will increase in absolute dollar amounts in the future
as we support a larger, worldwide organization through expanding our
administrative staff and adding infrastructure to support our growing research
and development efforts.
STOCK COMPENSATION EXPENSE
Deferred stock compensation for options granted to our employees is the
difference between the deemed value for financial reporting purposes of our
common stock on the date such options were granted and their exercise price.
Deferred stock compensation for options granted to consultants has been
determined in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and is periodically remeasured as the underlying
options vest in accordance with Emerging Issues Task Force ("EITF") No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with, Selling Goods or Services."
As of June 30, 2001, the Company has recorded $6.8 million of deferred stock
compensation, net of amortization, related to stock options granted to
consultants and employees. Stock compensation expense is being recognized in
accordance with FASB Interpretation No. 28 "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" ("FIN 28") over the
vesting periods of the related options, generally four years. During April 2001,
the Company granted approximately 545,000 supplemental stock options
("Supplemental Options") under the 2000 Equity Incentive Plan to certain
employees (excluding officers and directors) who had stock options with exercise
prices greater than $16.00 per share under the 2000 Equity Incentive Plan. The
number of Supplemental Options granted was equal to 50% of the corresponding
original grant held by each employee. The Supplemental Options have an exercise
price of $16.00, vest monthly over a two year period beginning April 1, 2001,
and have a 27 month term. The vesting on the corresponding original stock
options was halted and will resume in April 2003 following the completion of
vesting of the Supplemental Options. This new grant constitutes a synthetic
repricing as defined in FASB Interpretation Number 44, "Accounting for Certain
Transactions Involving Stock Compensation" and will result in certain options
being reported using the variable plan method of accounting for stock
compensation expense until they are exercised, forfeited or expire. For the
quarter ended June 30, 2001, the compensation expense recorded for these
supplemental options was approximately $0.3 million. The Company recognized
stock compensation expense of $2.3 million and $4.2 million for the three- and
six-month periods ended June 30, 2001, respectively, compared to $5.3 million
and $8.6 million, respectively, for the comparable periods in 2000. The decrease
in stock compensation expense year-over-year primarily results from the
accelerated amortization method proscribed by FIN 28 partially offset by the
expense resulting from the synthetic repricing effect of the supplemental
options.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The valuation of the purchased in-process research and development related to
the acquisition Artemis of $6.7 million was determined by management based upon
the results of an independent valuation using the income approach for each of
the three significant in-process projects. The in-process projects relate
primarily to the development of technologies that use vertebrate genetic model
organisms, zebrafish and mice, to identify and functionally validate novel genes
in vivo. These genes can be used as novel screening targets or as the basis for
secreted proteins in clinically and commercially relevant diseases. The
in-process projects are expected to be completed over the next 18 months. The
income approach estimates the value of each acquired project in-process based on
its expected future cash flows. The valuation analysis considered the
contribution of the core technology as well as the percent complete of each
in-process research and development project. The expected present value of the
cash flows associated with the in-process research and development projects was
computed using a risk adjusted rate of return of 30%, which is considered
commensurate with the overall risk and percent complete of the in-process
projects. The purchased in-process technology was not considered to have reached
technological feasibility, and it has no alternative future use, accordingly, it
has been recorded as a component operating expense.
AMORTIZATION OF GOODWILL AND INTANGIBLES
Amortization of goodwill and intangibles results from our acquisitions of
Artemis and Agritope, now renamed Exelixis Plant Sciences, Inc. Amortization of
goodwill and intangibles was $1.2 million and $2.3 million for the three and six
month periods ended June 30, 2001, respectively, compared to none for the
comparable periods in 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net primarily consists of interest income earned on
cash, cash equivalents and short-term investments, partially offset by interest
expense incurred on notes payable and capital lease obligations. Net interest
income was $1.2 million and $2.8 million for the three- and six-month periods
ended June 30, 2001, respectively, compared to $1.7 million for the comparable
periods in 2000. The increase year-over-year primarily relates to having earned
interest on higher levels of cash, cash equivalents and short-term investments
for a full six months during 2001, as compared to 2000 when we closed our
initial public offering in April. The decrease for the current quarter compared
to last year primarily relates to lower interest income due to declining cash
balances and an increase in interest expense for additional capital leases.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of preferred stock, loans, convertible debt, equipment lease
financing and other loan facilities and payments from collaborators. In
addition, during the second quarter of 2000, we completed our initial public
offering raising $124.5 million in net cash proceeds. We intend to continue to
use the proceeds for research and development activities, capital expenditures,
working capital and other general corporate purposes. As of June 30, 2001, we
had approximately $123.1 million in cash, cash equivalents and short-term
investments.
Our operating activities used cash of $15.4 million for the six months ended
June 30, 2001, compared to cash provided of $3.4 million for the six months
ended June 30, 2000. Cash used in operating activities related primarily to
funding net operating losses, partially offset by an increase in non-cash
charges related to depreciation and amortization of deferred stock compensation,
goodwill and other intangible assets.
Our investing activities provided cash of $13.3 million for the six months ended
June 30, 2001, compared to cash used of $81.5 million for the corresponding
period in 2000. Investing activities consist primarily of maturities of
short-term investments, partially offset by purchases of short-term investments
and property and equipment for the six months ended June 30, 2001. We expect to
continue to make significant investments in research and development and our
administrative infrastructure, including the purchase of property and equipment
to support our expanding operations.
Our financing activities provided cash of $28.7 million and $124.1 million for
the six months ended June 30, 2001, and 2000, respectively. These amounts
consisted primarily of proceeds from a $30.0 million convertible note entered
into as part of our collaboration agreement with Protein Design Labs in May 2001
and proceeds from our initial public offering in April 2000.
We believe that our current cash and cash equivalents, short-term investments
and committed funding to be received from collaborators, will be sufficient to
satisfy our anticipated cash needs for at least the next two years. However, it
is possible that we will seek additional financing within this timeframe. We may
raise additional funds through public or private financings, collaborative
relationships or other arrangements. In July 2001, we filed a registration
statement on Form S-3 to offer and sell up to $150.0 million of common stock.
We have no current commitments to offer or sell securities with respect to
shares that may be offered or sold pursuant to this filing. We cannot assure
you that additional funding, if sought, will be available or, even if available,
will be available on terms favorable to us. Further, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. Our failure to raise capital when needed may harm
our business and operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" ("SFAS No. 141"), which establishes financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires
that all business combinations be accounted for using one method, the purchase
method. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 is expected to have
no material impact on financial reporting and related disclosures of the
Company.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition, and after they have been initially recognized in the
financial statements. The provisions of SFAS No. 142 are effective for fiscal
years beginning after December 15, 2001. The Company will adopt SFAS No. 142
during the first quarter of fiscal 2002, and is in the process of evaluating the
impact of implementation on the financial position of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments are only subject to interest rate risk and our interest income
may fluctuate due to changes in U.S. interest rates. By policy, we limit our
investments to money market instruments, debt securities of U.S. government
agencies and debt obligations of U.S. corporations. We manage market risk by our
diversification requirements, which limit the amount of our portfolio that can
be invested in a single issuer. We manage credit risk by limiting our purchases
to high quality issuers. Through our money manager, we maintain risk management
control systems to monitor interest rate risk. The risk management control
systems use analytical techniques, including sensitivity analysis. A
hypothetical 1% adverse move in interest rates along the entire interest rate
yield curve would cause an approximately $0.5 million decline in the value of
our financial instruments at June 30, 2001.
All highly liquid investments with an original maturity of three months or less
from the date of purchase are considered cash equivalents. The Company views its
available-for-sale portfolio as available for use in current operations.
Accordingly, we have classified all investments with an original maturity date
greater than three months as short-term, even though the stated maturity date
may be one year or more beyond the current balance sheet date.
Due to our German operations, we have market risk exposure to adverse changes in
foreign currency exchange rates. The revenues and expenses of our subsidiary
Artemis Pharmaceuticals, GmbH are denominated in Deutche Marks. At the end of
each quarter, the revenues and expenses of this subsidiary are translated into
U.S. dollars using the average currency rate in effect for the quarter and
assets and liabilities are translated into U.S. dollars using the exchange rate
in effect at the end of the quarter. Fluctuations in exchange rates therefore
impact our financial condition and results of operations, as reported in U.S.
dollars. To date we have not experienced any significant negative impact as a
result of fluctuations in foreign currency markets. As a policy, we do not
engage in speculative or leveraged transactions, nor do we hold financial
instruments for trading purposes. We will periodically analyze our exposure to
foreign currency fluctuations and may adjust our policies to allow for financial
hedging techniques to minimize exchange rate risk.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On May 22, 2001, we issued a convertible promissory note for the aggregate
principal amount of $30.0 million (the "Note") to Protein Design Labs, Inc.
("PDL") in connection with the execution of a collaboration agreement. The
Note, which bears interest at a rate of 5.75% annually, is convertible into
shares of Exelixis common stock, par value $0.001 per share (the "Exelixis
Common Stock"), after the first anniversary of the Note's date of issuance. The
Note is convertible into Exelixis Common Stock at a conversion price per share
equal to the lower of (i) $28.175 and (ii) 110% of the Fair Market Value (as
defined in the Note) of a share of Exelixis Common Stock at the time of
conversion. We issued the Note in reliance upon an exemption from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof and Regulation D promulgated thereunder.
On May 14, 2001, we acquired all, or rights to acquire all, of the outstanding
capital stock of Artemis Pharmaceuticals GmbH, a privately held genetics and
functional genomics company organized under the laws of Germany ("Artemis"). The
acquisition of Artemis (the "Acquisition") was effected pursuant to a Share
Exchange and Assignment Agreement among Exelixis and the stockholders of Artemis
(not including Exelixis, the "Artemis Stockholders"), dated as of April 23, 2001
(the "Exchange Agreement"), providing for the exchange of 4.064 shares of
Exelixis Common Stock for each DEM 1.00 of nominal value of Artemis capital
stock. Pursuant to the Exchange Agreement, Exelixis issued approximately 1.6
million shares of its common stock, in exchange for 78% of the outstanding
capital stock of Artemis held by the Artemis Stockholders. In addition, we
received a call option (the "Call Option") from, and issued a put option (the
"Put Option") to, certain stockholders of Artemis (the "Option Holders") for the
issuance of approximately 480,000 shares of Exelixis Common Stock in exchange
for the remaining 22% of the outstanding capital stock of Artemis held by the
Artemis Stockholders. We may exercise the Call Option at any time from May 14,
2001 through January 31, 2002, and the Option Holders may exercise their rights
under the Put Option at any time from April 1, 2002 through May 15, 2002.
Further, in connection with the Acquisition, we issued fully vested options
representing the right to purchase approximately 187,000 additional shares of
Exelixis Common Stock to Artemis employees in exchange for such employees'
vested options formerly representing the right to purchase shares of Artemis
capital stock pursuant to an Employee Phantom Stock Option Plan. We issued the
restricted shares of Exelixis Common Stock in reliance upon an exemption from
the registration requirements of the Securities Act by virtue of Section 4(2)
thereof and Regulation D promulgated thereunder.
(d) In May 2000, we completed our initial public offering for aggregate proceeds
of approximately $136.0 million. In connection with the offering, We paid a
total of approximately $9.5 million in underwriting discounts and commissions
and $2.0 million in other offering costs and expenses. After deducting the
underwriting discounts and commissions and the offering costs and expenses, the
net proceeds from the offering were approximately $124.5 million.
From the time of receipt through June 30, 2001, the proceeds from the offering
were used for research and development activities, capital expenditures, working
capital and other general corporate purposes. In the future, Exelixis intends
to use the net proceeds in a similar manner. As of June 30, 2001, approximately
$93.1 million of the proceeds remained available and were primarily invested in
short-term marketable securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2001 Annual Meeting of Stockholders held on May 22, 2001, the
stockholders were asked to vote on two items as follows:
1. To elect two Class II directors, Jason Fisherman, M.D. and
Jean-Francois Formela, M.D., to hold office until the 2004 Annual
Meeting of Stockholders; and
2. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Company for its fiscal year ended December 31,
2001.
The results of the matters presented at the annual meeting, based on 46,797,585
shares of record entitled to vote, were as follows:
1. Drs. Fisherman and Formela were approved as directors of the Company
until the 2004 Annual Meeting of Stockholders as follows:
For Withheld
---------- --------
Jason Fisherman 33,564,553 276,908
Jean-Francois Formela 33,563,612 277,849
2. The ratification of PricewaterhouseCoopers LLP as independent
accountants of the Company for its fiscal year ended December 31, 2001
was approved as follows:
For Against Abstain Broker Non-Vote
---------- ------- ------- ---------------
33,715,423 120,139 5,899 0
ITEM 5. OTHER INFORMATION - RISK FACTORS
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception, including a net loss
of approximately $36.4 million for the six months ended June 30, 2001. As of
that date, we had an accumulated deficit of approximately $166.5 million. We
expect these losses to continue and anticipate negative cash flow for the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth, if any, in our license and contract revenues and on the level of
our expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect to spend
significant additional amounts to fund research and development in order to
enhance our core technologies and undertake product development. As a result, we
expect that our operating expenses will increase significantly in the near term
and, consequently, we will need to generate significant additional revenues to
achieve profitability. Even if we do increase our revenues and achieve
profitability, we may not be able to sustain or increase profitability.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US.
Our future capital requirements will be substantial, and will depend on many
factors including:
- payments received under collaborative agreements;
- the progress and scope of our collaborative and independent research and
development projects;
- our ability to successfully continue development of a recently acquired
cancer compound;
- our need to expand our other proprietary product development efforts as
well as develop manufacturing and marketing capabilities to
commercialize products; and
- the filing, prosecution and enforcement of patent claims.
We anticipate that our current cash and cash equivalents, short-term investments
and funding to be received from collaborators will enable us to maintain our
currently planned operations for at least the next two years. Changes to our
current operating plan may require us to consume available capital resources
significantly sooner than we expect. For example, our newly acquired cancer
product from our recent relationship with Bristol-Myers Squibb will require
significant resources for development that were not in our operational plans
prior to acquiring the cancer product. We may be unable to raise sufficient
additional capital when we need it, on favorable terms, or at all. If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds. The sale of equity or convertible debt
securities in the future may be dilutive to our stockholders, and debt financing
arrangements may require us to pledge certain assets and enter into covenants
that would restrict our ability to incur further indebtedness. If we are unable
to obtain adequate funds on reasonable terms, we may be required to curtail
operations significantly or to obtain funds by entering into financing, supply
or collaboration agreements on unattractive terms.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH MAY DIVERT RESOURCES AND LIMIT
OUR ABILITY TO SUCCESSFULLY EXPAND OUR OPERATIONS.
We have experienced a period of rapid and substantial growth that has placed,
and our anticipated growth in the future will continue to place a strain on our
administrative and operational infrastructure. As our operations expand, we
expect that we will need to manage multiple locations, including additional
locations outside of the United States, and additional relationships with
various collaborative partners, suppliers and other third parties. Our ability
to manage our operations and growth effectively requires us to continue to
improve our operational, financial and management controls, reporting systems
and procedures. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner and
may discover deficiencies in existing systems and controls. In addition,
acquisitions involve the integration of different financial and management
reporting systems. We may not be able to successfully integrate the
administrative and operational infrastructure without significant additional
improvements and investments in management systems and procedures.
WE ARE DEPENDENT ON OUR COLLABORATIONS WITH MAJOR COMPANIES. IF WE ARE UNABLE TO
ACHIEVE MILESTONES, DEVELOP PRODUCTS OR RENEW OR ENTER INTO NEW COLLABORATIONS,
OUR REVENUES MAY DECREASE AND OUR ACTIVITIES MAY FAIL TO LEAD TO COMMERCIALIZED
PRODUCTS.
Substantially all of our revenues to date have been derived from collaborative
research and development agreements. Revenues from research and development
collaborations depend upon continuation of the collaborations, the achievement
of milestones and royalties derived from future products developed from our
research. If we are unable to successfully achieve milestones or our
collaborators fail to develop successful products, we will not earn the revenues
contemplated under such collaborative agreements. In addition, some of our
collaborations are exclusive and preclude us from entering into additional
collaborative arrangements with other parties in the area or field of
exclusivity.
We currently have continuing collaborative research agreements with Bayer,
Bristol-Myers Squibb (two agreements), Dow AgroSciences, Aventis and Protein
Design Labs. Our current collaborative agreement with Bayer is scheduled to
expire in 2008, after which it will automatically be extended for one-year terms
unless terminated by either party upon 12-month written notice. Our agreement
permits Bayer to terminate our collaborative activities prior to 2008 upon the
occurrence of specified conditions, such as the failure to agree on key
strategic issues after a period of years or the acquisition of Exelixis by
certain specified third parties. In addition, our agreements with Bayer are
subject to termination at an earlier date if two or more of our Chief Executive
Officer, Chief Scientific Officer, Agricultural Biotechnology Program Leader and
Chief Informatics Officer cease to have a relationship with us within six months
of each other and we are unable to find replacements acceptable to Bayer. The
first of our collaborative agreement with Bristol-Myers Squibb expires in
September 2002. The funded research term of second arrangement, entered into in
July 2002, expires in July 2005. Our collaborative agreement with Dow
AgroSciences is scheduled to expire in July 2003, after which Dow AgroSciences
has the option to renew on an annual basis. Our collaborative research
arrangement with Aventis is scheduled to expire in June 2004. Aventis has the
right to terminate the research arrangement prior to the expiration date,
provided that it pays the annual research funding amount due for the year
following termination. Thereafter, the arrangement renews annually unless
Aventis terminates automatic renewal prior to the scheduled date of renewal. The
Aventis arrangement is conducted through a limited liability company,
Agrinomics, which is owned equally by Aventis and Exelixis. Aventis may
surrender its interest in Agrinomics and terminate the related research
collaboration prior to the scheduled expiration upon the payment of the
subsequent year's funding commitment. Bayer and Aventis recently announced an
exclusive negotiation period for the purchase of Aventis by Bayer. We have not
been advised of the status of those discussions nor are we able to predict the
impact of such an acquisition of Aventis, if the acquisition were to occur. Our
agreement with Protein Design Labs is scheduled to expire in May 2003. Protein
Design Labs has a unilateral right to renew for additional 12 and six month
periods thereafter. The five-year term of the convertible promissory note
entered into as part of this arrangement is unaffected by whether or not Protein
Design Labs renews. If these existing agreements are not renewed or if we are
unable to enter into new collaborative agreements on commercially acceptable
terms, our revenues and product development efforts may be adversely affected.
We recently announced the reacquisition, effective February 2002, of future
rights to research programs in metabolism and alzheimer's disease previously
licensed exclusively to Pharmacia Corporation. The existing agreement with
Pharmacia will terminate as of that date. Pharmacia will retain rights to
targets under the existing agreement selected prior to the reacquisition date,
subject to the payment of milestones for certain of those targets selected and
royalties for future development of products against or using those targets but
will have no other obligations to make payments to the Company, including
approximately $9.0 million in annual funding that would otherwise be payable for
two years if the Company had not elected to reacquire rights to the research at
this time. Although we anticipate entering into future collaborations involving
either or both of these programs, there can be no assurance that we will be able
to enter into new collaborative agreements or that such collaborations will
provide revenues equal to or exceeding those otherwise obtainable under the
Pharmacia collaboration.
CONFLICTS WITH OUR COLLABORATORS COULD JEOPARDIZE THE OUTCOME OF OUR
COLLABORATIVE AGREEMENTS AND OUR ABILITY TO COMMERCIALIZE PRODUCTS.
We intend to conduct proprietary research programs in specific disease and
agricultural product areas that are not covered by our collaborative agreements.
Our pursuit of opportunities in agricultural and pharmaceutical markets could,
however, result in conflicts with our collaborators in the event that any of our
collaborators takes the position that our internal activities overlap with those
areas that are exclusive to our collaborative agreements, and we should be
precluded from such internal activities. Moreover, disagreements with our
collaborators could develop over rights to our intellectual property. In
addition, our collaborative agreements may have provisions that give rise to
disputes regarding the rights and obligations of the parties. Any conflict with
our collaborators could lead to the termination of our collaborative agreements,
delay collaborative activities, reduce our ability to renew agreements or obtain
future collaboration agreements or result in litigation or arbitration and would
negatively impact our relationship with existing collaborators.
We have limited or no control over the resources that our collaborators may
choose to devote to our joint efforts. Our collaborators may breach or terminate
their agreements with us or fail to perform their obligations thereunder.
Further, our collaborators may elect not to develop products arising out of our
collaborative arrangements or may fail to devote sufficient resources to the
development, manufacture, market or sale of such products. Certain of our
collaborators could also become our competitors in the future. If our
collaborators develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain necessary regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of our products,
our product development efforts could be delayed and may fail to lead to
commercialized products.
WE ARE DEPLOYING UNPROVEN TECHNOLOGIES, AND WE MAY NOT BE ABLE TO DEVELOP
COMMERCIALLY SUCCESSFUL PRODUCTS.
You must evaluate us in light of the uncertainties and complexities affecting a
biotechnology company. Our technologies are still in the early stages of
development. Our research and operations thus far have allowed us to identify a
number of product targets for use by our collaborators and our own internal
development programs. We are not certain, however, of the commercial value of
any of our current or future targets, and we may not be successful in expanding
the scope of our research into new fields of pharmaceutical or pesticide
research, or other agricultural applications such as enhancing plant traits to
produce superior crop yields, disease resistance or increased nutritional
content. Significant research and development, financial resources and personnel
will be required to capitalize on our technology, develop commercially viable
products and obtain regulatory approval for such products.
WE HAVE NO EXPERIENCE IN DEVELOPING, MANUFACTURING AND MARKETING PRODUCTS AND
MAY BE UNABLE TO COMMERCIALIZE PROPRIETARY PRODUCTS.
We recently acquired a development compound, an analog to rebeccamycin
("Rebeccamycin"), directed against cancer under our recent collaborative
arrangement with Bristol-Myers Squibb. Clinical development of Rebeccamycin to
date has been conducted by the National Cancer Institute (the "NCI"), and
manufacturing of this product has been the responsibility of Bristol-Myers
Squibb. Rebeccamycin has recently completed Phase I clinical studies and is in
Phase I and early Phase II clinical trials being conducted by the NCI. We are
currently in negotiations with the NCI to use the results of the clinical
studies they have conducted and are conducting in order to determine what
additional studies, if any, will be conducted by the NCI or us. There can be no
assurance that we will successfully agree upon further development plans, the
respective rights and obligations of the parties to conduct additional clinical
studies or the timing of such studies. In addition, there can be no assurance
that the clinical studies conducted to date will support further clinical
development or be accepted by the Food and Drug Administration or FDA, in
conjunction with any application for product approval submitted to the FDA for
Rebeccamycin. Moreover, although Bristol-Myers Squibb has provided the NCI with
sufficient quantities of Rebeccamycin to complete the existing Phase I and II
clinical studies, development necessary for further clinical studies and product
approval will require us to either develop internal manufacturing capabilities
or retain a third party to manufacture the product. In addition, we have
recently hired a new Senior Vice President responsible for clinical development
of this product, as well as any new potential products that we may develop. As
a result, we have limited experience in clinical development and no experience
in manufacturing potential drug products. Accordingly, the development of
Rebeccamycin is subject to significant risk and uncertainty, particularly with
respect to our ability to successfully develop, manufacture and market
Rebeccamycin as a product.
With respect to products developed against our proprietary drug targets, we will
rely on our collaborators to develop and commercialize products based on our
research and development efforts. We have limited or no experience in using the
targets that we identify to develop our own proprietary products. Our recent
success in applying our drug development capabilities to our proprietary targets
in cancer are subject to significant risk and uncertainty, particularly with
respect to our ability to meet currently estimated timelines and goals for
completing preclinical development efforts and filing an Investigational New
Drug Application ("IND") for compounds developed. In order for us to
commercialize products, we would need to significantly enhance our capabilities
with respect to product development, and establish manufacturing and marketing
capabilities, either directly or through outsourcing or licensing arrangements.
We may not be able to enter into such outsourcing or licensing agreements on
commercially reasonable terms, or at all.
SINCE OUR TECHNOLOGIES HAVE MANY POTENTIAL APPLICATIONS AND WE HAVE LIMITED
RESOURCES, OUR FOCUS ON A PARTICULAR AREA MAY RESULT IN OUR FAILURE TO
CAPITALIZE ON MORE PROFITABLE AREAS.
We have limited financial and managerial resources. This requires us to focus on
product candidates in specific industries and forego opportunities with regard
to other products and industries. For example, depending on our ability to
allocate resources, a decision to concentrate on a particular agricultural
program may mean that we will not have resources available to apply the same
technology to a pharmaceutical project. While our technologies may permit us to
work in both areas, resource commitments may require trade-offs resulting in
delays in the development of certain programs or research areas, which may place
us at a competitive disadvantage. Our decisions impacting resource allocation
may not lead to the development of viable commercial products and may divert
resources from more profitable market opportunities. Moreover, our recent
acquisition of Rebeccamycin will require that resources and management time be
directed to clinical development and manufacturing of this potential product.
There can be no assurance that allocating resources and time to these efforts
will allow us to remain competitive in existing programs and potential areas of
future research. The resources dedicated to the development of Rebeccamycin may
limit or hinder our ability to meet currently estimated timelines and goals for
completing preclinical development efforts and filing an IND for our proprietary
compounds.
OUR COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by rapid
technological change. In particular, the area of gene research is a rapidly
evolving field. We face, and will continue to face, intense competition from
large biotechnology and pharmaceutical companies, as well as academic research
institutions, clinical reference laboratories and government agencies that are
pursuing research activities similar to ours. Some of our competitors have
entered into collaborations with leading companies within our target markets,
including some of our existing collaborators. Our future success will depend on
our ability to maintain a competitive position with respect to technological
advances.
Any products that are developed through our technologies will compete in highly
competitive markets. Further, our competitors may be more effective at using
their technologies to develop commercial products. Many of the organizations
competing with us have greater capital resources, larger research and
development staffs and facilities, more experience in obtaining regulatory
approvals and more extensive product manufacturing and marketing capabilities.
As a result, our competitors may be able to more easily develop technologies and
products that would render our technologies and products, and those of our
collaborators, obsolete and noncompetitive.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our intellectual property rights from
unauthorized use by third parties only to the extent that our technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the U.S., and many companies have
encountered significant problems in protecting and defending such rights in
foreign jurisdictions. We will continue to apply for patents covering our
technologies and products as and when we deem appropriate. However, these
applications may be challenged or may fail to result in issued patents. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patents. In addition, our patents may be
challenged, invalidated or fail to provide us with any competitive advantages.
We rely on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information and trade secrets, but these measures may not provide adequate
protection. While we seek to protect our proprietary information by entering
into confidentiality agreements with employees, collaborators and consultants,
we cannot assure you that our proprietary information will not be disclosed, or
that we can meaningfully protect our trade secrets. In addition, our competitors
may independently develop substantially equivalent proprietary information or
may otherwise gain access to our trade secrets.
LITIGATION OR THIRD PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties, and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes
and gene fragments, techniques and methodologies relating to model systems, and
products and technologies that we have developed or intend to develop. If
patents covering technologies required by our operations are issued to others,
we may have to rely on licenses from third parties, which may not be available
on commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology without
authorization. In addition, third parties may obtain patents that relate to our
technologies and claim that use of such technologies infringes these patents.
Regardless of their merit, such claims could require us to incur substantial
costs, including the diversion of management and technical personnel, in
defending ourselves against any such claims or enforcing our patents. In the
event that a successful claim of infringement is brought against us, we may be
required to pay damages and obtain one or more licenses from third parties. We
may not be able to obtain these licenses at a reasonable cost, or at all.
Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize products.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR OUR ABILITY TO EXPAND OUR OPERATIONS.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives and the continuation of existing collaborations.
In addition, recruiting and retaining qualified scientific personnel to perform
future research and development work will be critical to our success. We do not
currently have sufficient executive management and technical personnel to fully
execute our business plan. There is currently a shortage of skilled executives
and employees with technical expertise, and this shortage is likely to continue.
As a result, competition for skilled personnel is intense and turnover rates are
high. Although we believe we will be successful in attracting and retaining
qualified personnel, competition for experienced scientists from numerous
companies, academic and other research institutions may limit our ability to do
so.
Our business operations will require additional expertise in specific industries
and areas applicable to products identified and developed through our
technologies. These activities will require the addition of new personnel,
including management and technical personnel and the development of additional
expertise by existing employees. The inability to attract such personnel or to
develop this expertise could prevent us from expanding our operations in a
timely manner, or at all.
OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND
CHANGE.
We work with scientific advisors and collaborators at academic and other
institutions that assist us in our research and development efforts. These
scientists are not our employees and may have other commitments that would limit
their availability to us. Although our scientific advisors and collaborators
generally agree not to do competing work, if a conflict of interest between
their work for us and their work for another entity arises, we may lose their
services. In addition, although our scientific advisors and collaborators sign
agreements not to disclose our confidential information, it is possible that
valuable proprietary knowledge may become publicly known through them.
OUR POTENTIAL THERAPEUTIC PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN
REGULATORY PROCESS THAT MAY NOT RESULT IN THE NECESSARY REGULATORY APPROVALS,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO COMMERCIALIZE PRODUCTS.
The FDA must approve any drug or biologic product before it can be marketed in
the U.S. Any products resulting from our research and development efforts must
also be approved by the regulatory agencies of foreign governments before the
product can be sold outside the U.S. Before a new drug application or biologics
license application can be filed with the FDA, the product candidate must
undergo extensive clinical trials, which can take many years and may require
substantial expenditures. The regulatory process also requires preclinical
testing. Data obtained from preclinical and clinical activities are susceptible
to varying interpretations, which could delay, limit or prevent regulatory
approval. In addition, delays or rejections may be encountered based upon
changes in regulatory policy for product approval during the period of product
development and regulatory agency review. The clinical development and
regulatory approval process is expensive and time consuming. Any failure to
obtain regulatory approval could delay or prevent us from commercializing
products.
Our efforts to date have been primarily limited to identifying targets.
Significant research and development efforts will be necessary before any
products resulting from such targets can be commercialized. If regulatory
approval is granted to any of our products, this approval may impose limitations
on the uses for which a product may be marketed. Further, once regulatory
approval is obtained, a marketed product and its manufacturer are subject to
continual review, and discovery of previously unknown problems with a product or
manufacturer may result in restrictions and sanctions with respect to the
product, manufacturer and relevant manufacturing facility, including withdrawal
of the product from the market.
SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED
PRODUCTS, WHICH COULD REDUCE DEMAND FOR OUR PRODUCTS.
Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. For
example, research efforts focusing on plant traits may involve either selective
breeding or modification of existing genes in the plant under study. Public
attitudes may be influenced by claims that genetically engineered products are
unsafe for consumption or pose a danger to the environment. Such claims may
prevent our genetically engineered products from gaining public acceptance. The
commercial success of our future products will depend, in part, on public
acceptance of the use of genetically engineered products including drugs and
plant and animal products.
The subject of genetically modified organisms has received negative publicity,
which has aroused public debate. For example, certain countries in Europe are
considering regulations that may ban products or require express labeling of
products that contain genetic modifications or are "genetically modified."
Adverse publicity has resulted in greater regulation internationally and trade
restrictions on imports of genetically altered products. If similar action is
taken in the U.S., genetic research and genetically engineered products could be
subject to greater domestic regulation, including stricter labeling
requirements. To date, our business has not been hampered by these activities.
However, such publicity in the future may prevent any products resulting from
our research from gaining market acceptance and reduce demand for our products.
LAWS AND REGULATIONS MAY REDUCE OUR ABILITY TO SELL GENETICALLY ENGINEERED
PRODUCTS THAT OUR COLLABORATORS OR WE DEVELOP IN THE FUTURE.
Our collaborators or we may develop genetically engineered agricultural and
animal products. The field-testing, production and marketing of genetically
engineered products are subject to regulation by federal, state, local and
foreign governments. Regulatory agencies administering existing or future
regulations or legislation may prevent us from producing and marketing
genetically engineered products in a timely manner or under technically or
commercially feasible conditions. In addition, regulatory action or private
litigation could result in expenses, delays or other impediments to our product
development programs and the commercialization of products.
The FDA has released a policy statement stating that it will apply the same
regulatory standards to foods developed through genetic engineering as it
applies to foods developed through traditional plant breeding. Genetically
engineered food products will be subject to premarket review, however, if these
products raise safety questions or are deemed to be food additives. Our products
may be subject to lengthy FDA reviews and unfavorable FDA determinations if they
raise questions regarding safety or our products are deemed to be food
additives.
The FDA has also announced that it will not require genetically engineered
agricultural products to be labeled as such, provided that these products are as
safe and have the same nutritional characteristics as conventionally developed
products. The FDA may reconsider or change its policies, and local or state
authorities may enact labeling requirements, either of which could have a
material adverse effect on our ability or the ability of our collaborators to
develop and market products resulting from our efforts.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of hazardous
materials, including chemicals, radioactive and biological materials. Our
operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
In addition, our collaborators may use hazardous materials in connection with
our collaborative efforts. To our knowledge, their work is performed in
accordance with applicable biosafety regulations. In the event of a lawsuit or
investigation, however, we could be held responsible for any injury caused to
persons or property by exposure to, or release of, these hazardous materials use
by these parties. Further, we may be required to indemnify our collaborators
against all damages and other liabilities arising out of our development
activities or products produced in connection with these collaborations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are likely to
fluctuate in the future. A number of factors, many of which we cannot control,
could subject our operating results and stock price to volatility, including:
- recognition of license, milestone or other fees;
- payments of licensing fees to third parties;
- acceptance of our technologies and platforms;
- the success rate of our discovery efforts leading to milestones and
royalties;
- the introduction of new technologies or products by our competitors;
- the timing and willingness of collaborators to commercialize our
products;
- our ability to enter into new collaborative relationships;
- the termination or non-renewal of existing collaborations;
- general and industry-specific economic conditions that may affect our
collaborators' research and development expenditures; and
- exposure to fluctuations in foreign currency
A large portion of our expenses, including expenses for facilities, equipment
and personnel, are relatively fixed in the short term. In addition, we expect
operating expenses to increase significantly during the next year. Accordingly,
if our revenues decline or do not grow as anticipated due to the expiration of
existing contracts or our failure to obtain new contracts, our inability to meet
milestones or other factors, we may not be able to correspondingly reduce our
operating expenses. Failure to achieve anticipated levels of revenues could
therefore significantly harm our operating results for a particular fiscal
period.
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. As a result, in some future quarters, our
operating results may not meet the expectations of stock market analysts and
investors, which could result in a decline in the price of our stock.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
We believe the trading price of our common stock will remain highly volatile and
may fluctuate substantially due to factors such as the following:
- the announcement of new products or services by us or our competitors;
- quarterly variations in our or our competitors' results of operations;
- failure to achieve operating results projected by securities analysts;
- changes in earnings estimates or recommendations by securities analysts;
- developments in the biotechnology industry;
- acquisitions of other companies or technologies; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
These factors and fluctuations, as well as general economic, political and
market conditions, may materially adversely affect the market price of our
common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in substantial costs and
divert management's attention and resources, which could have a material and
adverse effect on our business.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS.
We have made, and may in the future make, acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including, but not limited
to:
- difficulties and increased costs in connection with integration of the
personnel, operations, technologies and products of acquired
companies;
- diversion of management's attention from other operational matters;
- the potential loss of key employees of acquired companies;
- the potential loss of key collaborators of the acquired companies;
- lack of synergy, or the inability to realize expected synergies,
resulting from the acquisition; and
- acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of the
acquired company.
Mergers and acquisitions, are inherently risky, and the inability to effectively
manage these risks could materially and adversely affect our business, financial
condition and results of operations.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE
SUBSTANTIAL LIABILITIES THAT EXCEED OUR RESOURCES.
We may be held liable if any product our collaborators or we develop causes
injury or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Although we intend to obtain general liability and product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or to otherwise protect ourselves against
potential product liability claims could prevent or inhibit the
commercialization of products developed by our collaborators or us.
OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
Given our location, our facilities are vulnerable to damage from earthquakes. We
are also vulnerable to damage from other types of disasters, including fire,
floods, power loss, communications failures and similar events. If any disaster
were to occur, our ability to operate our business at our facilities would be
seriously, or potentially completely, impaired. In addition, the unique nature
of our research activities could cause significant delays in our programs and
make it difficult for us to recover from a disaster. The insurance we maintain
may not be adequate to cover our losses resulting from disasters or other
business interruptions. Accordingly, an earthquake or other disaster could
materially and adversely harm our ability to conduct business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deemed appropriate. In
October 2000, a significant number of shares of our common stock held by
existing stockholders became freely tradable, subject in some instances to the
volume and other limitations of Rule 144. Sales of these shares and other
shares of common stock held by existing stockholders could cause the market
price of our common stock to decline.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS.
Due to their combined stock holdings, our officers, directors and principal
stockholders (stockholders holding more than 5% of our common stock) acting
together, may be able to exert significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control of our company, even when a change may
be in the best interests of our stockholders. In addition, the interests of
these stockholders may not always coincide with our interests as a company or
the interests of other stockholders. Accordingly, these stockholders could cause
us to enter into transactions or agreements that you would not approve.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are filed or
incorporated by reference (as stated therein) as part of this Quarterly
Report on Form 10-Q.
(b) Reports on Form 8-K
On May 15, 2001, the Company filed a Reg FD, Item 9 Current Report on
Form 8-K, in connection with the announcement of the Company's first
quarter financial results.
On May 15, 2001, the Company filed an Item 2 Current Report on Form 8-K
in connection with the Company's acquisition of Artemis.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 2001
EXELIXIS, INC.
/s/ Glen Y. Sato
-------------------
Glen Y. Sato
Chief Financial Officer, Vice President of
Legal Affairs and Secretary
(Principal Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -------------------------
2.1 Share Exchange and Assignment Agreement, dated April 23, 2001, by and
among Exelixis, Inc. and the Artemis stockholders named therein. (1)
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amended and Restated Bylaws (2)
4.1 Specimen Common Stock Certificate (2)
4.2 Form of Convertible Promissory Note, dated May 22, by and between
Exelixis,Inc. and Protein Design Labs, Inc.
4.3 Form of Note Purchase Agreement, dated May 22, by and between
Exelixis, Inc.and Protein Design Labs, Inc.
10.28* Collaboration Agreement, dated May 22, 2001, by and between Exelixis,
Inc. and Protein Design Labs, Inc.
- -------------------------------
(1) Filed with Exelixis' Item 2 Current Report on Form 8-K filed on May
15, 2001 and incorporated herein by reference.
(2) Filed with Exelixis' Registration Statement on Form S-1, as amended
(No. 333-96335), declared effective by the Securities and Exchange
Commission on April 10, 2000, and incorporated herein by reference.
* Confidential treatment requested for certain portions of this exhibit.