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: MARCH 31, 2002
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 April 30, 2002, there were 56,929,951 shares of the registrant's common
stock outstanding.
EXELIXIS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 2002 and December 31, 2001 3
Consolidated Condensed Statements of Operations
Three months ended March 31, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 2002 and 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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 5. Other Information - Risk Factors 17
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXELIXIS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2002 2001 (1)
------------ --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 21,444 $ 35,584
Short-term investments 176,638 192,116
Other receivables 3,645 4,026
Other current assets 3,600 2,873
------------ --------------
Total current assets 205,327 234,599
Property and equipment, net 35,979 36,500
Related party receivables 910 937
Goodwill,net 68,334 62,357
Other intangibles, net 5,302 7,126
Other assets 5,080 5,095
------------ --------------
Total assets $ 320,932 $ 346,614
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,244 $ 10,837
Accrued benefits 4,573 5,000
Obligation assumed to exit certain activities of Genomica 1,295 2,919
Accrued merger and acquisition costs 425 2,217
Current portion of capital lease obligations 6,508 5,947
Current portion of notes payable 828 1,200
Deferred revenue 10,073 12,237
------------ --------------
Total current liabilities 30,946 40,357
Capital lease obligations 11,140 11,144
Notes payable 558 652
Convertible promissory note 30,000 30,000
Acquisition liability - 6,871
Other long-term liabilities 236 -
Deferred revenue 18,632 20,370
------------ --------------
Total liabilities 91,512 109,394
------------ --------------
Commitments
Stockholders' equity:
Preferred stock - -
Common stock 58 56
Additional paid-in-capital 454,819 444,229
Notes receivable from stockholders (1,854) (2,205)
Deferred stock compensation, net (3,170) (4,137)
Accumulated other comprehensive income (loss) (788) 501
Accumulated deficit (219,645) (201,224)
------------ --------------
Total stockholders' equity 229,420 237,220
------------ --------------
Total liabilities and stockholders' equity $ 320,932 $ 346,614
============ ==============
<FN>
(1) The consolidated condensed balance sheet at December 31, 2001 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 financial
statements.
EXELIXIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended March 31,
-------------------------------
2002 2001
------------ ------------
(unaudited)
Revenues:
Contract and government grants $ 8,909 $ 6,810
License 2,651 924
------------ ------------
Total revenues 11,560 7,734
------------ ------------
Operating expenses:
Research and development (1) 26,419 16,815
Selling, general and administrative (2) 4,879 4,260
Amortization of goodwill and intangibles 166 1,050
------------ ------------
Total operating expenses 31,464 22,125
------------ ------------
Loss from operations (19,904) (14,391)
Other income (expense):
Interest income 2,121 1,883
Interest expense (704) (223)
Other income (expense), net 66 12
------------ ------------
Total other income (expense) 1,483 1,672
Net loss $ (18,421) $ (12,719)
============ ============
Basic and diluted net loss per share $ (0.33) $ (0.29)
============ ============
Shares used in computing basic and
diluted net loss per share 55,654 44,372
============ ============
<FN>
(1) Includes stock compensation expense of $482 and $1,168 for the three months
ended March 31, 2002 and 2001, respectively.
(2) Includes stock compensation expense of $336 and $708 for the three months
ended March 31, 2002 and 2001, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
EXELIXIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
-----------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(18,421) $(12,719)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,250 1,744
Stock compensation expense 818 1,876
Amortization of goodwill (2001 only) and intangibles 166 1,050
Other 108 -
Changes in assets and liabilities:
Other receivables 257 (132)
Other current assets (758) 79
Related party receivables 25 79
Other assets (200) (726)
Accounts payable and accrued expenses (3,960) 2,982
Obligation assumed to exit certain activities of Genomica (1,651) -
Accrued merger and acquisition costs (2,043) (4,295)
Deferred revenue (3,902) 9,467
----------- -----------
Net cash used in operating activities (26,311) (595)
----------- -----------
Cash flows provided from investing activities:
Purchases of property and equipment (474) (2,936)
Proceeds from maturities of short-term investments 34,558 51,629
Purchases of short-term investments (20,327) (27,215)
----------- -----------
Net cash provided by investing activities 13,757 21,478
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options
and warrants, net of repurchases 64 60
Repayment of notes from stockholders 351 56
Principal payments on capital lease obligations (1,511) (928)
Principal payments on notes payable (525) (395)
----------- -----------
Net cash used in financing activities (1,621) (1,207)
----------- -----------
Effect of foreign exchange rates on cash and cash equivalents 35 -
----------- -----------
Net increase (decrease) in cash and cash equivalents (14,140) 19,676
Cash and cash equivalents, at beginning of period 35,584 19,552
----------- -----------
Cash and cash equivalents, at end of period $ 21,444 $ 39,228
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
EXELIXIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Organization
- ------------
Exelixis, Inc. ("Exelixis" or the "Company") is a biotechnology company whose
primary mission is to develop proprietary human therapeutics by leveraging its
integrated discovery platform to increase the speed, efficiency and quality of
pharmaceutical product discovery and development. The Company uses comparative
genomics and model system genetics to find new drug targets that Exelixis
believes would be difficult or impossible to uncover using other experimental
approaches. The Company's research is designed to identify 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 represent either potential product
targets or drugs that may treat disease or prevent disease initiation or
progression. The Company's most advanced proprietary pharmaceutical program
focuses on drug discovery and development of small molecules in cancer. While
the Company's proprietary programs focus on drug discovery and development,
Exelixis believes that its proprietary technologies are valuable to other
industries whose products can be enhanced by an understanding of DNA or
proteins, including the agrochemical, agricultural and diagnostic industries.
Basis of Presentation
- -----------------------
The accompanying unaudited consolidated condensed 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-month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002, 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, 2001 included in the Company's Annual Report on
Form 10-K.
Net Loss per Share
- ---------------------
Basic and diluted net loss per share are computed by dividing the net loss for
the period by the weighted average number of shares of common stock outstanding
during the period, adjusted for shares that are subject to repurchase. 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
convertible promissory note.
Comprehensive Income (Loss)
- -----------------------------
Comprehensive income (loss) generally represents all changes in stockholder's
equity except those resulting from investments or contributions by stockholders.
Total comprehensive loss amounted to $19.7 million and $12.5 million for the
three-month periods ended March 31, 2002 and 2001, respectively.
Recent Accounting Pronouncements
- ----------------------------------
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
which addresses the financial accounting and reporting standards for goodwill
and other intangible assets subsequent to their acquisition. This accounting
standard requires that goodwill no longer be amortized, and instead, be tested
for impairment on a periodic basis.
In accordance with SFAS 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. In addition, the Company re-characterized
acquired assembled workforce as goodwill because it is no longer defined as an
acquired intangible asset under SFAS No. 141, "Business Combinations".
Accordingly, no acquired workforce amortization was recognized during the
quarter ended March 31, 2002. The provisions of SFAS 142 also require the
completion of a transitional impairment test within six months of adoption, with
any impairments treated as a cumulative effect of change in accounting
principle. During the quarter ended March 31, 2002, the Company completed the
transitional impairment test, which did not result in impairment of recorded
goodwill. The Company will continue to monitor the carrying value of goodwill
through the annual impairment tests. For further discussion, see Note 4,
"Goodwill and Other Acquired Intangibles".
A reconciliation of previously reported net loss and net loss per share to the
amounts adjusted for the exclusion of goodwill and assembled workforce
amortization follows (in thousands, except per share amounts):
Three Months Ended
March 31,
--------------------
2002 2001
--------- ---------
Reported net loss $(18,421) $(12,719)
Add: Goodwill amortization - 886
Assembled workforce amortization - 80
--------- ---------
Adjusted net loss $(18,421) $(11,753)
========= =========
Net loss per share, basic and diluted $ (0.33) $ (0.29)
Add: Goodwill amortization - 0.02
Assembled workforce amortization - 0.00
--------- ---------
Adjusted net loss per share, basic and diluted $ (0.33) $ (0.27)
========= =========
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). The primary objectives of SFAS 144 were
to develop one accounting model based on the framework established in SFAS 121
for long-lived assets to be disposed of by sale, and to address significant
implementation issues. The adoption of SFAS 144 did not have a material impact
on the Company's financial position or results of operations.
Note 2. Genomica Exit Plan
During December 2001, in connection with the acquisition of Genomica Corporation
("Genomica"), Exelixis adopted an exit plan for Genomica to improve the
operating efficiency of the combined company. Under this exit plan, the Company
terminated Genomica's entire workforce and abandoned its leased facilities in
Boulder, Colorado and Sacramento, California. The estimated costs of the exit
plan amounted to $2.9 million and were included as part of the liabilities
assumed in the acquisition.
The activity impacting the exit plan accrual during the three months ended March
31, 2002, including changes in estimates made by management based on available
information, is summarized in the table below (in thousands):
Balance at Change in Balance at
December 31, Cash Reserve March 31,
2001 Payments Estimate 2002
------------ ------------- ------------- ------------
Severance and benefits 1,216 (1,459) 293 50
Lease abandonment 1,703 (192) (266) 1,245
------------ ------------- ------------- ------------
Total exit costs 2,919 (1,651) 27 1,295
============ ============= ============= ============
Note 3. Derivative Financial Instruments
Beginning in 2002, the Company manages exposures to the changes in foreign
currency exchange rates through a program of risk management that includes the
use of derivative financial instruments. The Company utilizes derivative
financial instruments solely to hedge identified exposures and by policy
prohibits the use of derivative instruments for speculative or trading purposes.
The Company's derivative financial instruments are recorded at fair value and
are included in other current assets or other accrued liabilities.
The Company has entered into foreign currency exchange combination option
contracts denominated in European Union euro to minimize the effect of foreign
exchange rate movements on the cash flows related to the Company's payments to
its German subsidiaries for services provided by the subsidiaries. The Company
has designated these derivatives as foreign currency cash flow hedges. The
effective portion of the gain or loss on the derivative instrument is reported
as a separate component of other comprehensive income and reclassified into
earnings in the same period during which the hedged transaction impacts
earnings. The remaining gain or loss on the derivative instrument in excess of
the cumulative change in the present value of the future cash flows of the
hedged item, if any, is recognized in other income or expense in current
earnings in the period of change.
During the three months ended March 31, 2002, the Company recognized no gain or
loss related to the ineffective portion of the hedging instruments. As of March
31, 2002, the Company expects to reclassify $18,000 of net gains on derivative
instruments from accumulated other comprehensive income to earnings over the
next 12 months due to the payment of foreign currency to its German
subsidiaries.
Note 4. Goodwill and Other Acquired Intangibles
Changes in the carrying amount of goodwill for the quarter ended March 31, 2002,
are as follows (in thousands):
Balance as of December 31, 2001 $62,357
Reclassification of intangible asset - assembled workforce 1,658
Exercise of Artemis Call Option 4,042
Other 277
-------
Balance as of March 31, 2002 $68,334
=======
In connection with the Company's May 2001 acquisition of Artemis Pharmaceuticals
GmbH ("Artemis"), Exelixis received a call option from, and issued a put option
to, certain stockholders of Artemis 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 option holders. In January
2002, Exelixis exercised its call option for the purchase of the remaining
329,591 shares. The additional purchase price was recorded as an increase to
goodwill of approximately $4.0 million.
The Company performed an impairment test of goodwill as of January 1, 2002. No
impairment charge was necessary.
The components of the Company's other acquisition-related intangible assets are
as follows (in thousands):
At March 31, 2002
------------------------------------------
Gross
Carrying Accumulated
Amount Amortization Net
------------ -------------- ------------
Developed technology $ 1,640 $ (250) $ 1,390
Patents/core technology 4,269 (357) 3,912
------------ -------------- ------------
Total $ 5,909 $ (607) $ 5,302
============ ============== ============
At December 31, 2001
------------------------------------------
Gross
Carrying Accumulated
Amount Amortization Net
------------ -------------- ------------
Developed technology $ 1,640 $ (156) $ 1,484
Patents/core technology 4,269 (285) 3,984
Assembled workforce 2,270 (612) 1,658
------------ -------------- ------------
Total $ 8,179 $ (1,053) $ 7,126
============ ============== ============
Amortization expense related to the other acquisition related intangible assets
for the first quarter of 2002 was $0.2 million and for the first quarter of 2001
was $0.1 million. The expected future annual amortization expense of the other
acquisition-related intangible assets is as follows (in thousands):
Amortization
Year Ending December 31, Expense
- ------------------------------------ -------------
2002 $ 666
2003 666
2004 633
2005 533
2006 315
Thereafter 2,655
-------------
Total expected future amortization $ 5,468
=============
Note 5. Subsequent Event
In April 2002, Exelixis sold the Genomica software business to Visualize Inc.
("Visualize") for future consideration of up to $2.35 million in license fees
and future royalty payments. Pursuant to the terms of the transaction,
Visualize obtained a license with all rights and obligations to third parties
currently licensing the Genomica software, including the sole right to further
develop and license the software to other third parties. In addition, Visualize
assumed the lease obligation for the Company's abandoned facility in Sacramento,
California. Exelixis retained an internal use license for the software. In the
second quarter of 2002, the Company anticipates recording this transaction as
discontinued operations of the Genomica business. Management is in the process
of evaluating the financial impact of this transaction.
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 2001 audited
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2001. Operating results are not necessarily
indicative of results that may occur in future periods.
The following discussion and analysis contains forward-looking statements.
These statements are based on our current expectations, assumptions, estimates
and projections about our business and our industry, and involve known and
unknown risks, uncertainties and other factors that may cause our or our
industry's results, levels of activity, performance or achievement to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied in or contemplated by the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan,"
"will," "may," "should," "estimate," "predict," "potential," "continue" or the
negative of such terms or other similar expressions, identify forward-looking
statements. Our actual results and the timing of events may differ
significantly from those discussed in the forward-looking statements as a result
of various factors, including but not limited to, those discussed under the
caption "Item 5 - Risk Factors" and those discussed elsewhere in this report and
in our Annual Report on Form 10-K. Exelixis undertakes no obligation to update
any forward-looking statement to reflect events after the date of this report.
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 primary mission is to develop proprietary human therapeutics by
leveraging our integrated discovery platform to increase the speed, efficiency
and quality of pharmaceutical 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 research is designed to
identify 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 represent either
potential product targets or drugs that may treat disease or prevent disease
initiation or progression.
Our most advanced proprietary pharmaceutical program focuses on drug discovery
and development of small molecules in cancer. Specifically, the remarkable
evolutionary conservation of the biochemical pathways strongly supports the use
of simple model systems, such as fruit flies, nematode worms, zebrafish and
mice, to identify key components of critical cancer pathways that can then be
targeted for drug discovery. We expect to develop new cancer drugs by
exploiting the underlying "genetic liabilities" of tumor cells to provide
specificity in targeting these cells for destruction, while leaving normal cells
unharmed. We have discovered and are further developing a number of small
molecule drug targets in addition to monoclonal antibody drug targets.
Molecules directed against these targets may selectively kill cancer cells while
leaving normal cells unharmed, and may provide alternatives to current cancer
therapies.
We believe that our proprietary technologies are also valuable to other
industries whose products can be enhanced by an understanding of DNA or
proteins, including the agrochemical, agricultural and diagnostic industries.
Many of these industries have shorter product development cycles and lower risk
than the pharmaceutical industry, while at the same time generating significant
sales with attractive profit margins. By partnering with companies in multiple
industries, we believe that we are able to diversify our business risk, while at
the same time maximizing our future revenue stream opportunities.
Our strategy is to establish collaborations with major pharmaceutical,
biotechnology and agrochemical companies based on the strength of our
technologies and biological expertise as well as to support additional
development of our proprietary products. Through these collaborations, we
obtain license fees and research funding, together with the opportunity to
receive milestone payments and royalties from research results and subsequent
product development. In addition, many of our collaborations have been
structured strategically to provide us access to technology to advance our
internal programs, saving both time and money, while at the same time retaining
rights to use the same information in different industries. Our collaborations
with leading companies in the agrochemical industries allow us to continue to
expand our internal development capabilities while providing our partners with
novel targets and assays. Since we believe that agrochemical products have
reduced development time and lower risk, we expect to be able to maximize our
potential future revenue stream through partnering in multiple industries. We
have active commercial collaborations with several leading pharmaceutical,
biotechnology and agrochemical companies: Aventis CropScience LLC, Bayer
Corporation, Bristol-Myers Squibb Company (two collaborations), Cytokinetics,
Inc., Dow AgroSciences LLC, Elan Pharmaceuticals, Inc., Merck & Co., Inc.,
Protein Design Labs, Inc., Scios Inc. and Schering-Plough Research Institute,
Inc.
In addition to our commercial collaborations, we have relationships with other
biotechnology companies, academic institutions and universities that provide us
access to specific technology or intellectual property for the enhancement of
our business. These include collaborations with leading biotechnology product
developers and solutions providers, among them Affymetrix Inc., Genemachines,
AVI BioPharma, Inc, Silicon Genetics, Galapagos NV, Genomics Collaborative Inc.
and Accelrys, Inc.
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 development expenses for compounds in pre-clinical and
clinical studies, we expect to incur additional operating losses for the
foreseeable future.
Results of Operations
Revenues
Total revenues were approximately $11.6 million and $7.7 million for the
three-month periods ended March 31, 2002 and 2001, respectively. The increase
in revenues over the 2001 level was primarily driven by revenues from corporate
collaborations established in 2001 with Protein Design Labs and Bristol-Myers
Squibb and compound deliveries under one of our four chemistry collaborations
established in 2001 to jointly design custom high-throughput screening compound
libraries.
Research and Development Expenses
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs, supplies, licenses and
depreciation of facilities and laboratory equipment. Research and development
expenses were $26.4 million and $16.8 million for the three-month periods ended
March 31, 2002 and 2001, respectively. The increase in 2002 over 2001 resulted
primarily from the following costs:
- - Increased Personnel - Staffing costs for the three-month period ended
March 31, 2002 increased by approximately 61% to approximately $10.9
million from the three-month period ended March 31, 2001. The increase was
to support new collaborative arrangements and Exelixis' internal
proprietary research efforts, including increased expenses related to staff
hired with the acquisition of Artemis in May 2001. Salary, bonuses, related
fringe benefits, recruiting and relocation costs are included in personnel
costs. We expect these personnel costs to increase further as we continue
to build our organization.
- - Increased Lab Supplies - As a result of the increase in personnel and the
significant expansion of drug discovery operations, the cost of lab
supplies increased 105% to approximately $5.1 million for the three-month
period ended March 31, 2002 from the period ended March 31, 2001.
- - Increased Licenses and Consulting - To support new collaborative
arrangements, conduct pre-clinical and clinical development, manufacturing
and further development of proprietary programs, license and consulting
expenses increased 81% to approximately $2.0 million for the three-month
period ended March 31, 2002 from the three-month period ended March 31,
2001.
As part of our new collaboration with Bristol-Myers Squibb in July 2001, we
received an exclusive worldwide license to develop and commercialize a selected
analogue of the Bristol-Myers Squibb anticancer compound, DEAE Rebeccamycin.
Phase I trials of the Rebeccamycin analogue have been completed and demonstrated
an acceptable safety profile. In ongoing Phase II trials, being conducted by the
National Cancer Institute, the compound has demonstrated activity against some
tumor types. Planning for additional clinical studies is currently underway and
should be finalized later in 2002. During the period ended March 31, 2002, we
continued to grow our clinical research and development staff. We currently do
not have manufacturing capabilities or experience necessary to produce materials
for clinical trials. We plan to rely on collaborators and third-party
contractors to produce materials for clinical trials. We expect clinical costs
will increase in the future as we enter clinical trials for new product
candidates and additional trials for our Rebeccamycin analogue. We currently do
not have estimates of total costs to reach the market by a particular drug
candidate or in total. 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. In addition, clinical trials of our potential products may fail to
demonstrate safety and efficacy, which could prevent or significantly delay
regulatory approval.
We expect to continue to devote substantial resources to research and
development, and we expect that research and development expenses will continue
to increase in absolute dollar amounts in the future as we continue to advance
drug discovery and development programs, including manufacturing and clinical
development efforts on our maturing pipeline of products.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs to
support our research and development activities, facilities costs and
professional expenses, such as legal fees. General and administrative expenses
were approximately $4.9 million and $4.3 million for the three-month periods
ended March 31, 2002 and 2001, respectively. The increase in 2002 over 2001 of
approximately 14%, was driven primarily by costs associated with personnel and
facilities to support expansion in our research and development operations.
Stock Compensation Expense
Deferred stock compensation for options granted to our employees is the
difference between the fair 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 based
upon estimated fair value, using the Black-Scholes option valuation model. As
of March 31, 2002, we have approximately $3.2 million of remaining deferred
stock compensation related to stock options granted to consultants and
employees. In connection with the grant of stock options to employees and
consultants, we recorded no additional deferred stock compensation during the
three-month period ended March 31, 2002, compared to $0.2 million during the
three-month period ended March 31, 2001. These amounts were recorded as a
component of stockholders' equity and are being amortized as stock compensation
expense over the vesting periods of the options, which is generally four years.
We recognized stock compensation expense of $0.8 million and $1.9 million for
the three-month periods ended March 31, 2002 and 2001, respectively. The
decrease in stock compensation expense in 2002 compared to 2001 primarily
resulted from the accelerated amortization method used for accounting purposes.
During April 2001, we granted approximately 545,000 supplemental stock options
under our 2000 Equity Incentive Plan to certain employees (excluding officers
and directors) who had stock options under the 2000 Equity Incentive Plan with
exercise prices greater than $16.00 per share. 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 suspended 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 period ended March 31,
2002, we recorded a reversal of previously recorded compensation expense
relating to the supplemental options of $246,000 resulting from a decrease in
the market value of our common stock.
Amortization of Goodwill and Intangibles
We implemented Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002.
Accordingly, goodwill and other intangible assets deemed to have indefinite
lives are no longer being amortized but will be subject to annual impairment
tests in accordance with SFAS 142.
Goodwill and intangibles result from our acquisitions of Genomica, Artemis and
Agritope (now renamed Exelixis Plant Sciences). Amortization of intangibles was
$0.2 million for the three-month period ended March 31, 2002, and amortization
of goodwill and intangibles was $1.1 million for the three-month period ended
March 31, 2001. The decrease from 2001 was primarily related to our adoption of
SFAS 142.
Other Income (Expense)
Other income (expense) 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. Total other
income (expense) was income of $1.5 million for the three-month period ended
March 31, 2002, compared to income of $1.7 million for the comparable period in
2001. The decrease year-over-year primarily relates to an increase in interest
expense on capital lease obligations and notes payable, partially offset by
increased interest income as a result of increased cash and investment balances.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through issuances of
capital stock, loans, equipment lease financings and other loan facilities and
payments from collaborators. In addition, during December 2001, we acquired
Genomica, including $109.6 million in cash and investments. As of March 31,
2002, we had approximately $198.1 million in cash, cash equivalents and
short-term investments.
Our operating activities used cash of approximately $26.3 million and $0.6
million for the three-month periods ended March 31, 2002 and 2001, respectively.
For the three-month period ended March 31, 2002, cash used in operating
activities related primarily to funding net operating losses, cash payments
related to our December 2001 acquisition of Genomica and a decrease in deferred
revenue from collaborators, partially offset by non-cash charges related to
depreciation and amortization of deferred stock compensation and other
intangible assets. For the comparable period in 2001, cash used in operating
activities related primarily to funding net operating losses and cash payments
related to our December 2000 acquisition of Agritope, almost completely offset
by an increase in deferred revenues from collaborators and non-cash charges
related to depreciation and amortization of deferred stock compensation,
goodwill and other intangible assets.
Our investing activities provided cash of approximately $13.8 million and $21.5
million for the three-month periods ended March 31, 2002 and 2001, respectively.
The cash provided resulted from the proceeds from maturities of short-term
investments, partially offset by purchases of short-term investments and
property and equipment.
Our financing activities used cash of approximately $1.6 million and $1.2
million for the three-month periods ended March 31, 2002 and 2001, respectively.
The cash used resulted primarily from principal payments on capital lease
obligations and notes payable, partially offset by repayment of notes from
stockholders and proceeds from the exercise of stock options and warrants, net
of repurchases.
We believe that our current cash and cash equivalents, short-term investments
and funding to be received from collaborators, will be sufficient to satisfy our
anticipated cash needs for at least the next two years. Changes in our
operating plan as well as factors described in our "Risk Factors" elsewhere in
this Form 10-Q could require us to consume available resources much sooner than
we expect. It is possible that we will seek additional financing within this
timeframe. We may raise additional funds through public or private financing,
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 that 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 its business and operating results.
Recent Accounting Pronouncements
On January 1, 2002, we adopted SFAS 142, which addresses the financial
accounting and reporting standards for goodwill and other intangible assets
subsequent to their acquisition. This accounting standard requires that goodwill
and other intangible assets deemed to have indefinite lives no longer be
amortized, and instead, be tested for impairment on a periodic basis.
In accordance with SFAS 142, we discontinued the amortization of goodwill
effective January 1, 2002. In addition, we re-characterized acquired assembled
workforce as goodwill because it is no longer defined as an acquired intangible
asset under SFAS No. 141, "Business Combinations". Accordingly, no acquired
workforce amortization was recognized during the quarter ended March 31, 2002.
The provisions of SFAS 142 also require the completion of a transitional
impairment test within six months of adoption, with any impairments treated as a
cumulative effect of change in accounting principle. During the quarter ended
March 31, 2002, we completed the transitional impairment test, which did not
result in impairment of recorded goodwill. We will continue to monitor the
carrying value of goodwill through the annual impairment tests.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002 ("SFAS 144"). SFAS 144 supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). The primary objectives of SFAS 144 were
to develop one accounting model based on the framework established in SFAS 121
for long-lived assets to be disposed of by sale and to address significant
implementation issues. The adoption of SFAS 144 did not have a material impact
on our financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are 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 managers, we maintain risk management
control systems to monitor interest rate risk. The risk management control
systems use analytical techniques, including sensitivity analysis. As of March
31, 2002, there has been no material change in Exelixis' interest rate exposure
from that described in our Annual Report on Form 10-K for the year ended
December 31, 2001.
All highly liquid investments with an original maturity of three months or less
from the date of purchase are considered cash equivalents. Exelixis 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.
We are exposed to foreign currency exchange rate fluctuations related to the
operations of our German subsidiaries. The revenues and expenses of our German
subsidiaries are denominated in Eurodollars. At the end of each reporting
period, the revenues and expenses of these subsidiaries are translated into U.S.
dollars using the average currency rate in effect for the period, and assets and
liabilities are translated into U.S. dollars using the exchange rate in effect
at the end of the period. Fluctuations in exchange rates, therefore, impact our
financial condition and results of operations as reported in U.S. dollars.
In February 2002, we commenced using derivative financial instruments to reduce
our exposure to foreign currency exchange rate movements on our consolidated
operating results. As of March 31, 2002, we had outstanding an aggregate of
$1.9 million (notional amount) of short-term foreign currency option contracts
denominated in European Union euro. The fair value of these contracts at March
31, 2002 was approximately $18,000, which is reflected on the balance sheet as
an asset. Due to the nature of the option contracts' structure, our exposure to
adverse changes in market rates on these instruments is limited to their
carrying value. We cannot give any assurance that our hedging strategies will be
effective or that transaction losses can be minimized or forecasted accurately.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(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, our
net proceeds from the offering were approximately $124.5 million.
From the time of receipt through March 31, 2002, proceeds from the offering have
been used for research and development activities, capital expenditures, working
capital, merger and acquisition expenses and other general corporate purposes.
In the future, we intend to use the remaining net proceeds in a similar manner.
As of March 31, 2002, $44.7 million of the proceeds remained available and were
primarily invested in short-term marketable securities.
Item 5. Other Information - Risk Factors
EXELIXIS HAS 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 $18.4 million for the three months ended March 31, 2002. As of
that date, we had an accumulated deficit of approximately $219.6 million. We
expect these losses to continue and anticipate negative operating 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. During 2001, we
acquired a compound in Phase II clinical development, and we are working with a
third-party vendor to manufacture this compound and preparing for the filing of
an Investigational New Drug Application, or IND. In addition, we are also
preparing to file our first IND for a proprietary compound in 2002. 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 need to expand our 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. 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
domestically and internationally, we expect that we will need to manage multiple
locations 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 collaborative research agreements with Bayer, Bristol-Myers
Squibb (two agreements), Protein Design Labs, Dow AgroSciences and Aventis. 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. Our agreement with Bayer is 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. Our mechanism of
action collaborative agreement with Bristol-Myers Squibb expires in September
2002. Our cancer collaborative agreement with Bristol-Myers Squibb expires in
July 2004. 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. 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 has an agreement to acquire
Aventis, and we have not been advised of the status of the existing Agrinomics
agreement following completion of the acquisition.
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. For example, our
agreement with Pharmacia terminated by mutual agreement in February 2002,
eliminating the opportunity for us to earn approximately $9.0 million in
research revenue in each of the next two years. Although we expect to enter
into other collaborations that may offset this loss of revenue, we may not be
able to enter into a new collaborative agreement on similar or superior
financial terms than those under the Pharmacia arrangement.
CONFLICTS WITH OUR COLLABORATORS COULD JEOPARDIZE THE OUTCOME OF OUR
COLLABORATIVE AGREEMENTS AND OUR ABILITY TO COMMERCIALIZE PRODUCTS.
We are conducting 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 take 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.
Our research and operations thus far have allowed us to identify a number of
product targets for use by our collaborators as well as targets and small
molecule compounds for our own internal development programs. We are not
certain, however, of the commercial value of any of our current or future
targets and molecules, and we may not be successful in expanding the scope of
our research into new fields of pharmaceutical or agricultural research.
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.
Initially, we relied 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,
or developing small molecule compounds against those targets. Our recent
efforts 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 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.
OUR COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OUR PRODUCTS AND
TECHNOLOGIES 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 and clinical
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 and 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 Food and Drug Administration, or 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 and
developing small molecule compounds against those targets. Significant research
and development efforts will be necessary before any of our products directed
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.
CLINICAL TRIALS ON OUR POTENTIAL PRODUCTS MAY FAIL TO DEMONSTRATE SAFETY AND
EFFICACY, WHICH COULD PREVENT OR SIGNIFICANTLY DELAY REGULATORY APPROVAL.
Clinical trials are inherently risky and may reveal that our potential products
are ineffective or have unacceptable toxicity or other side effects that may
significantly limit the possibility of regulatory approval of the potential
product. The regulatory review and approval process is extensive and uncertain
and typically takes many years to complete. The FDA requires submission of
extensive preclinical, clinical and manufacturing data for each indication for
which approval is sought in order to assess the safety and efficacy of the
potential product. In addition, the results of preliminary studies do not
necessarily predict clinical or commercial success, and larger later-stage
clinical trials may fail to confirm the results observed in the preliminary
studies. With respect to our own proprietary compounds in development, we have
established timelines for manufacturing and clinical development based on
existing knowledge of the compound and industry metrics. We have limited
experience in conducting clinical studies and may not be able to assure that any
specified timelines with respect to the initiation or completion of clinical
studies may be achieved.
In July 2001, we acquired a cancer compound, a Rebeccamycin analogue, currently
in Phase II clinical studies. This compound was manufactured by Bristol-Myers
Squibb, and clinical studies to date have been conducted by the National Cancer
Institute, or NCI. We will have to conduct additional studies in order to meet
FDA requirements for regulatory approval. We have no prior experience in
conducting clinical studies, and, in conjunction with the NCI, we expect to
undertake further clinical development of this compound under our own IND in
order to obtain regulatory approval. We may not be able to rapidly or
effectively assume responsibility for further development of this compound or
assure that any specified timelines with respect to the initiation or completion
of clinical studies may be achieved.
WE LACK THE CAPABILITY TO MANUFACTURE COMPOUNDS FOR CLINICAL TRIALS AND WILL
RELY ON THIRD PARTIES TO MANUFACTURE OUR POTENTIAL PRODUCTS, AND WE MAY BE
UNABLE TO OBTAIN REQUIRED MATERIAL IN A TIMELY MANNER OR AT A QUALITY LEVEL
REQUIRED TO RECEIVE REGULATORY APPROVAL.
We currently do not have manufacturing capabilities or experience necessary to
produce materials for clinical trials, including our Phase II clinical compound,
a Rebeccamycin analogue. We intend to rely on collaborators and third-party
contractors to produce materials necessary for preclinical and clinical studies.
We will rely on selected manufacturers to deliver materials on a timely basis
and to comply with applicable regulatory requirements, including the FDA's
current Good Manufacturing Practices, or GMP. These manufacturers may not be
able to produce material on a timely basis or manufacture material at the
quality level or in the quantity required to meet our development timelines and
applicable regulatory requirements. If we are unable to contract for production
of sufficient quantity and quality of materials on acceptable terms, our planned
clinical trials may be delayed. Delays in preclinical or clinical studies could
delay the filing of our INDs and the initiation of clinical trials that we have
currently planned.
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 WE OR OUR COLLABORATORS DEVELOP IN THE FUTURE.
We or our collaborators 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 and 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
used 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 upfront licensing or other fees;
- - payments of non-refundable upfront or 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;
- - the timing and amount of expenses incurred for clinical development and
manufacturing of our products;
- - the impairment of acquired goodwill and other assets; and
- - general and industry-specific economic conditions that may affect our
collaborators' research and development expenditures.
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;
- - the failure of new products in clinical trials 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 HEADQUARTERS 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 headquarters location in South San Francisco, our facilities are
vulnerable to damage from earthquakes. We are also vulnerable worldwide 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. For
example, following an acquisition, a significant number of shares of our common
stock held by new stockholders became freely tradable following the acquisition.
Similarly, shares of common stock held by existing stockholders prior to the
public offering became freely tradable in 2000, 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 THEIR INTERESTS
COULD CONFLICT WITH THE BEST INTERESTS OF OUR OTHER 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 January 11, 2002, Exelixis filed an Item 2 Current Report on Form 8-K
announcing the acquisition of Genomica Corporation.
On March 20, 2002, Exelixis filed an Item 9 Current Report on Form 8-K
pursuant to Regulation FD reporting Exelixis' financial results for the
year ended December 31, 2001.
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: May 13, 2002
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
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3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Specimen Common Stock Certificate (1)
10.32 Sublease, dated March 8, 2002, by and between Tularik, Inc. and
Exelixis, Inc.
- -------------------
(1) 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.