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: SEPTEMBER 30, 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)
http://www.exelixis.com/discovery/investors
-------------------------------------------
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 October 31, 2002, there were 57,439,755 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
September 30, 2002 and December 31, 2001 3
Consolidated Condensed Statements of Operations
Three and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURE
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXELIXIS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001 (1)
--------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 29,336 $ 35,584
Short-term investments 124,891 192,116
Other receivables 3,618 4,026
Other current assets 4,295 2,873
--------------- --------------
Total current assets 162,140 234,599
Restricted cash 4,907 -
Property and equipment, net 34,279 36,500
Related party receivables 969 937
Goodwill 67,364 62,357
Other intangibles, net 4,968 7,126
Other assets 4,678 5,095
--------------- --------------
Total assets $ 279,305 $ 346,614
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,390 $ 10,837
Accrued benefits 4,708 5,000
Obligation assumed to exit certain activities of Genomica Corporation 907 2,919
Accrued merger and acquisition costs 60 2,217
Current portion of capital lease obligations 6,756 5,947
Current portion of notes payable and bank obligations 1,722 1,200
Deferred revenue 9,923 12,237
--------------- --------------
Total current liabilities 32,466 40,357
Capital lease obligations 8,020 11,144
Notes payable and bank obligations 3,346 652
Convertible promissory note 30,000 30,000
Acquisition liability - 6,871
Other long-term liabilities 36 -
Deferred revenue 17,285 20,370
--------------- --------------
Total liabilities 91,153 109,394
--------------- --------------
Commitments
Stockholders' equity:
Preferred stock - -
Common stock 58 56
Additional paid-in-capital 456,444 444,229
Notes receivable from stockholders (1,364) (2,205)
Deferred stock compensation, net (1,592) (4,137)
Accumulated other comprehensive income 1,097 501
Accumulated deficit (266,491) (201,224)
--------------- --------------
Total stockholders' equity 188,152 237,220
--------------- --------------
Total liabilities and stockholders' equity $ 279,305 $ 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 condensed financial statements.
EXELIXIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited)
Revenues:
Contract and government grants $ 8,449 $ 9,212 $ 25,268 $ 23,649
License 1,981 2,716 6,601 4,564
----------------- ----------------- ----------------- -----------------
Total revenues 10,430 11,928 31,869 28,213
----------------- ----------------- ----------------- -----------------
Operating expenses:
Research and development (1) 28,845 22,466 84,290 59,836
Selling, general and administrative (2) 4,395 5,361 13,962 14,597
Acquired in-process research and development - - - 6,673
Amortization of goodwill and intangibles 166 1,397 499 3,673
----------------- ----------------- ----------------- -----------------
Total operating expenses 33,406 29,224 98,751 84,779
----------------- ----------------- ----------------- -----------------
Loss from operations (22,976) (17,296) (66,882) (56,566)
Other income (expense):
Interest income and other, net 757 1,617 4,956 5,109
Interest expense (724) (811) (2,090) (1,460)
----------------- ----------------- ----------------- -----------------
Total other income (expense) 33 806 2,866 3,649
----------------- ----------------- ----------------- -----------------
Loss from continuing operations (22,943) (16,490) (64,016) (52,917)
Loss from operations of discontinued segment-
Genomica Corporation (including loss on
sale of $795) - - (1,251) -
----------------- ----------------- ----------------- -----------------
Net loss $ (22,943) $ (16,490) $ (65,267) $ (52,917)
================= ================= ================= =================
Loss per share from continuing operations $ (0.41) $ (0.35) $ (1.14) $ (1.15)
Loss per share from discontinued operations - - (0.02) -
----------------- ----------------- ----------------- -----------------
Net loss per share, basic and diluted $ (0.41) $ (0.35) $ (1.16) $ (1.15)
================= ================= ================= =================
Shares used in computing basic and
diluted loss per share amounts 56,483 47,750 56,096 45,848
================= ================= ================= =================
<FN>
(1) Includes stock compensation expense of $364 and $1,136 in the quarters ended September 30, 2002 and 2001, respectively,
and includes stock compensation expense of $1,349 and $3,936 in the nine-month periods ended September 30, 2002 and 2001,
respectively.
(2) Includes stock compensation expense of $305 and $551 in the quarters ended September 30, 2002 and 2001, respectively,
and includes stock compensation expense of $957 and $1,921 in the nine-month periods ended September 30, 2002 and 2001,
respectively.
The accompanying notes are an integral part of these consolidated condensed financial statements.
EXELIXIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------------- ---------------
Cash flows from operating activities:
Net loss $ (65,267) $ (52,917)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 795 -
Depreciation and amortization 10,176 7,135
Stock compensation expense 2,306 5,857
Amortization of goodwill and other intangibles 499 3,673
Acquired in-process research and development - 6,673
Changes in assets and liabilities:
Other receivables 302 (234)
Other current assets (1,240) (717)
Related party receivables (32) (474)
Other assets (278) (2,731)
Accounts payable and accrued expenses (3,030) 4,038
Obligation assumed to exit certain activities of Genomica Corporation (2,069) -
Accrued merger and acquisition costs (1,810) (4,056)
Deferred revenue (5,399) 20,441
-------------- --------------
Net cash used in operating activities (65,047) (13,312)
-------------- --------------
Cash flows provided from investing activities:
Purchases of property and equipment (4,560) (8,326)
Change in restricted cash (4,907) -
Cash acquired in acquisition - 3,463
Proceeds from maturities of short-term investments 137,171 115,779
Purchases of short-term investments (69,843) (111,562)
-------------- --------------
Net cash provided by (used in) investing activities 57,861 (646)
-------------- --------------
Cash flows from financing activities:
Proceeds from exercise of stock options
and warrants, net of repurchases 68 384
Proceeds from issuance of common stock - 10,000
Proceeds from convertible note - 30,000
Proceeds from employee stock purchase plan 1,423 1,198
Repayment of notes from stockholders 840 181
Principal payments on capital lease obligations (4,773) (3,162)
Proceeds from bank obligations 4,441 -
Principal payments on notes payable (1,259) (1,429)
-------------- --------------
Net cash provided by financing activities 740 37,172
-------------- --------------
Effect of foreign exchange rates on cash and cash equivalents 198 47
-------------- --------------
Net increase (decrease) in cash and cash equivalents (6,248) 23,261
Cash and cash equivalents, at beginning of period 35,584 19,552
-------------- --------------
Cash and cash equivalents, at end of period $ 29,336 $ 42,813
============== ==============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial statements.
EXELIXIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 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 nine-month periods ended September 30, 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
because their effect is antidilutive. Potential common stock consists of shares
of common stock subject to repurchase, incremental common shares issuable upon
the exercise of stock options and warrants and common shares issuable upon
conversion of the convertible promissory note.
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 goodwill or acquired workforce amortization was recognized
during the nine-month period ended September 30, 2002. The provisions of SFAS
142 also require the completion of a transitional impairment test within nine
months of adoption, with any impairment treated as a cumulative effect of change
in accounting principle. During the first quarter of 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 annual impairment tests. For further discussion, see Note 5, "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 September 30,
-----------------------------------
2002 2001
---------------- -----------------
Reported net loss $ (22,943) $ (16,490)
Add: Goodwill amortization - 1,075
Assembled workforce amortization - 189
---------------- -----------------
Adjusted net loss $ (22,943) $ (15,226)
================ =================
Net loss per share, basic and diluted $ (0.41) $ (0.35)
Add: Goodwill amortization - 0.03
Assembled workforce amortization - -
---------------- -----------------
Adjusted net loss per share, basic and diluted $ (0.41) $ (0.32)
================ =================
Nine Months Ended September 30,
-----------------------------------
2002 2001
---------------- -----------------
Reported net loss $ (65,267) $ (52,917)
Add: Goodwill amortization - 2,955
Assembled workforce amortization - 403
---------------- -----------------
Adjusted net loss $ (65,267) $ (49,559)
================ =================
Net loss per share, basic and diluted $ (1.16) $ (1.15)
Add: Goodwill amortization - 0.06
Assembled workforce amortization - 0.01
---------------- -----------------
Adjusted net loss per share, basic and diluted $ (1.16) $ (1.08)
================ =================
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.
In June 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"),
which addresses accounting for restructuring, discontinued operations, plant
closing, or other exit or disposal activity. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002, although earlier adoption is permitted. The Company
expects to adopt SFAS 146 in the fourth quarter of 2002. The adoption is not
expected to have a significant impact on the financial position or results of
operations of the Company.
NOTE 2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on available-for-sale securities, unrealized gains
and losses on cash flow hedges and cumulative translation adjustments.
Comprehensive income (loss) for the three- and nine-month periods ended
September 30, 2002 and 2001, are as follows (in thousands):
Three Months Ended September 30,
-----------------------------------
2002 2001
---------------- -----------------
Net loss $ (22,943) $ (16,490)
Increase (decrease) in unrealized gains on
available-for-sale securities 1,288 430
Increase (decrease) in unrealized gains on
cash flow hedges (125) -
Increase (decrease) in cumulative translation adjustment (80) 105
---------------- -----------------
Comprehensive loss $ (21,860) $ (15,955)
================ =================
Nine Months Ended September 30,
-----------------------------------
2002 2001
---------------- -----------------
Net loss $ (65,267) $ (52,917)
Increase (decrease) in unrealized gains on
available-for-sale securities 102 685
Increase (decrease) in unrealized gains on
cash flow hedges 109 -
Increase (decrease) in cumulative translation adjustment 385 (81)
---------------- -----------------
Comprehensive loss $ (64,671) $ (52,313)
================ =================
The components of accumulated other comprehensive income (loss) are as follows
(in thousands):
September 30, December 31,
2002 2001
-------------- --------------
Unrealized gains on available-for-sale securities $ 703 $ 601
Unrealized gains on cash flow hedges 109 -
Cumulative translation adjustment 285 (100)
-------------- --------------
Accumulated other comprehensive income $ 1,097 $ 501
============== ==============
NOTE 3. GENOMICA CORPORATION
In December 2001, in connection with the acquisition of Genomica Corporation
("Genomica"), Exelixis adopted an exit plan for Genomica. 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.
As of September 30, 2002, the remaining actions to be taken under the exit plan
consisted primarily of residual payments related to the lease obligation for the
facility in Boulder, Colorado, which are expected to continue until the
termination of the lease in 2005, unless the facility is subleased earlier.
The activity impacting the exit plan accrual during the nine months ended
September 30, 2002, including changes in estimates made by management based on
available information, is summarized in the table below (in thousands):
Balance at Change in Assumed Balance at
December 31, Cash Reserve by September 30,
2001 Payments Estimate Visualize 2002
------------- -------------- -------------- -------------- --------------
Severance and benefits $ 1,216 $ (1,493) $ 277 $ - $ -
Lease abandonment 1,703 (576) (44) (176) 907
------------- -------------- -------------- -------------- --------------
Total exit costs $ 2,919 $ (2,069) $ 233 $ (176) $ 907
============= ============== ============== ============== ==============
In April 2002, Exelixis transferred the Genomica software business to Visualize,
Inc. ("Visualize") for future consideration of up to $2.4 million in license
fees and 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. Royalties that Exelixis receives,
if any, will be recorded in the period they are earned as a gain from
discontinued operations. In addition, Visualize assumed the lease obligation
for the Company's abandoned facility in Sacramento, California. Exelixis
retains an internal use license for the software. As a result of this
transaction, the Company reported the operating results of Genomica and the
estimated loss on the sale of Genomica as discontinued operations. For the
period beginning January 1, 2002 to its disposal in April 2002, Genomica's
operating results consisted of revenues of approximately $58,000 and an
operating loss of approximately $456,000. The loss on the sale of Genomica
includes the write-off of goodwill of approximately $971,000, partially offset
by the reversal of Genomica's lease obligation for the Sacramento facility
assumed by Visualize of approximately $176,000.
NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS
The Company manages exposures to the changes in foreign currency exchange rates
for its foreign operations through a program of risk management adopted in 2002,
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 accrued expenses.
The Company enters into foreign currency exchange combination option contracts
denominated in European Union Euro ("Euro") to minimize the effect of foreign
exchange rate movements on the cash flows related to the Company's payments to
one of its German subsidiaries for services provided by the subsidiary. 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 each reporting period.
During the three- and nine-month periods ended September 30, 2002, the Company
did not recognize any gain or loss related to the ineffective portion of the
hedging instruments and reclassified a gain of $112,000 from other comprehensive
income into earnings under the caption, "Research and development expense." As
of September 30, 2002, the Company expects to reclassify $109,000 of net gains
on derivative instruments from accumulated other comprehensive income to
earnings over the next 12 months as a result of the payment of foreign currency
to its German subsidiaries.
NOTE 5. GOODWILL AND OTHER ACQUIRED INTANGIBLES
Changes in the carrying amount of goodwill for the nine months ended September
30, 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
Write-off of goodwill (Note 3) (971)
Other 278
--------
Balance as of September 30, 2002 $67,364
========
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 460,000
shares of Exelixis common stock in exchange for the remaining 22% of the
outstanding capital stock of Artemis held by the option holders. In December
2001, Exelixis exercised its call option for the purchase of 131,674 shares. In
January 2002, Exelixis exercised its call option for the purchase of the
remaining 329,591 shares. The additional purchase price for the exercise in
2002 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 and
concluded no impairment charge was required.
The Company has adopted an annual goodwill impairment test date as of the
beginning of the fourth quarter. Following this approach, the Company will
monitor asset-carrying values as of September 30, 2002, assess if there is a
potential impairment and complete the measurement of impairment, if required.
Subsequent to September 30, 2002, the Company's common stock has traded at a
price that represents a market capitalization that is less than its book value.
Should this condition persist for a significant portion of the fourth quarter of
2002, or should the extent of the reduction in the market capitalization become
significant, this condition may signify a potential impairment of the Company's
goodwill. The Company will perform the impairment measurement procedures under
SFAS No. 142 if it determines that a potential impairment of goodwill exists,
which may result in a fourth quarter charge for the impairment of goodwill. As
of September 30, 2002, the carrying value of the Company's goodwill was
approximately $67.4 million.
The components of the Company's other acquisition-related intangible assets are
as follows (in thousands):
At September 30, 2002
---------------------------------------------------------
Gross Carrying Accumulated
Amount Amortization Net
---------------------- ---------------- ---------------
Developed technology $ 1,640 $ (442) $ 1,198
Patents/core technology 4,269 (499) 3,770
---------------------- ---------------- ---------------
Total $ 5,909 $ (941) $ 4,968
====================== ================ ===============
At December 31, 2002
---------------------------------------------------------
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 three- and nine-month periods ended September 30, 2002 was $166,000 and
$499,000, respectively, compared to $133,000 and $315,000 for the three- and
nine-month periods ended September 30, 2001, respectively. 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 ($166 remaining subsequent to September 30, 2002) $ 665
2003 666
2004 633
2005 533
2006 315
Thereafter 2,655
-------------
Total expected future amortization $ 5,467
=============
NOTE 6. COMMITMENTS
In May 2002, the Company entered into a loan and security agreement with a bank
for an equipment line of credit of up to $16.0 million with a drawdown period of
one year. Each draw on the line of credit has a payment term of 48 months and
bears interest at the bank's published prime rate (4.75% at September 30, 2002).
At September 30, 2002, approximately $4.2 million was outstanding under the line
of credit and $11.8 million remained available on the line of credit. Pursuant
to the terms of the line of credit, the Company is required to maintain a first
priority security interest in the form of a deposit or securities account at the
bank equal to 110% of the outstanding obligation under the line of credit. This
collateral account is managed in accordance with the Company's investment policy
and is restricted as to withdrawal. As of September 30, 2002, the collateral
account had a cash balance of approximately $4.9 million and the Company
recorded this amount in the balance sheet as restricted cash.
NOTE 7. SUBSEQUENT EVENTS
Collaboration Agreement
- ------------------------
In October 2002, Exelixis and SmithKline Beecham Corporation ("GSK") established
an alliance to discover and develop novel therapeutics in the areas of vascular
biology, inflammatory disease and oncology. The alliance involved three
agreements: (a) a Product Development and Commercialization Agreement; (b) a
Stock Purchase and Stock Issuance Agreement; and (c) a Loan and Security
Agreement. Under the terms of the alliance, GSK has agreed to pay the Company
an upfront payment of $30.0 million and a minimum of $90.0 million in
development funding over the initial six years of the alliance. Exelixis issued
two million shares of its common stock to GSK for cash proceeds of $7.00 per
share, which represented a premium of approximately 100% to the stock price on
the effective date of the agreements. The upfront fee and the premium portion
of the equity purchase will be deferred and recognized as revenue at a rate of
approximately $4.7 million per year. Exelixis has the option to issue GSK
additional shares in the future. Exelixis is also expected to receive clinical
and developmental payments based on the number and timing of compounds reaching
specified milestones. Based on the continued successful development of these
compounds, these payments could range from $220 million to $350 million, through
the compounds' commercialization. In addition, GSK will make available a loan
facility to Exelixis of up to $85 million. Exelixis is expected to also receive
sales-based milestone payments and royalties on product sales, if any.
Two years from the start of the alliance, GSK and Exelixis may elect to expand
the collaboration, and under this option, Exelixis' milestone payments could
double, and the development funding and the loan facility would also be
significantly expanded.
Restructuring Plan
- -------------------
In November 2002, the Company implemented a restructuring plan. This
restructuring plan is designed to facilitate the Company's evolution into a
fully integrated drug discovery company by reallocating resources to permit
greater focus on building the Company's expanding portfolio of development
programs. The restructuring will also enable the Company to add, as needed,
appropriate resources to support its new, as well as existing, pharmaceutical
and agricultural corporate collaborations.
The restructuring plan resulted in an immediate reduction in force of
approximately 8% of the Company's North American operations. Accordingly, the
Company anticipates recording a restructuring charge during the fourth quarter
of 2002, which is currently estimated to be less than $1.0 million, comprised
primarily of involuntary termination benefits.
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 Other Information - Risk Factors" and those discussed elsewhere
in this report, in our other SEC filings 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 or supplements 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 (now Bayer
CropScience LLC), Bayer Corporation, Bristol-Myers Squibb Company (two
collaborations), Cytokinetics, Inc., Dow AgroSciences LLC, Elan Pharmaceuticals,
Inc., SmithKline Beecham Corporation, Merck & Co., Inc. (two collaborations),
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.
RECENT DEVELOPMENTS
COLLABORATION AGREEMENT
In October 2002, we established an alliance with SmithKline Beecham ("GSK") to
discover and develop novel therapeutics in the areas of vascular biology,
inflammatory disease and oncology. The alliance involved three agreements: (a)
a Product Development and Commercialization Agreement; (b) a Stock Purchase and
Stock Issuance Agreement; and (c) a Loan and Security Agreement. Under the
terms of the alliance, GSK has agreed to pay us an upfront payment of $30.0
million and a minimum of $90.0 million in development funding over the initial
six years of the alliance. We issued two million shares of our common stock to
GSK for cash proceeds of $7.00 per share, which represented a premium of
approximately 100% to our stock price on the effective date of the agreements.
The upfront fee and the premium portion of the equity purchase will be deferred
and recognized as revenue at a rate of approximately $4.7 million per year. We
have the option to issue GSK additional shares in the future. We also expect to
receive clinical and developmental payments based on the number and timing of
compounds reaching specified milestones. Based on the continued successful
development of these compounds, these payments could range from $220 million to
$350 million, through the compounds' commercialization. In addition, GSK will
make available a loan facility to us of up to $85 million. We also expect to
receive sales-based milestone payments and royalties on product sales, if any.
Two years from the start of the alliance, GSK and Exelixis may elect to expand
the collaboration, and under this option, our milestone payments could double,
and the development funding and the loan facility would also be significantly
expanded.
RESTRUCTURING PLAN
In November 2002, we implemented a restructuring plan. This restructuring plan
is designed to facilitate our evolution into a fully-integrated drug discovery
company by reallocating resources to permit greater focus on building our
expanding portfolio of development programs. The restructuring will also enable
us to add, as needed, appropriate resources to support our new, as well as
existing, pharmaceutical and agricultural corporate collaborations.
The restructuring plan resulted in an immediate reduction in force of
approximately 8% of our North American operations. Accordingly, we anticipate
recording a restructuring charge during the fourth quarter of 2002, which is
currently estimated to be less than $1.0 million, consisting primarily of
involuntary termination benefits.
ARTEMIS
We have undertaken a strategic initiative with respect to our Artemis
Pharmaceuticals GmbH subsidiary in Cologne, Germany. We intend to split off the
entity, including all personnel, and create a separate independent company.
This activity is expected to occur in early 2003.
RESULTS OF OPERATIONS
REVENUES
Total revenues were approximately $10.4 million and $31.9 million for the three-
and nine-month periods ended September 30, 2002, respectively, compared to $11.9
million and $28.2 million, respectively, for the comparable periods in 2001.
The decrease in revenues for the quarter from the 2001 levels was driven
primarily by the reduction of revenue from Pharmacia due to the February 2002
conclusion of our collaboration, partially offset by revenue from compound
deliveries under three of our chemistry collaborations established with Elan
Pharmaceuticals, Scios and Schering-Plough Research Corporation to jointly
design custom high-throughput screening compound libraries. The increase in
revenues over the 2001 levels for the nine months ended September 30, 2002 was
driven primarily by new corporate collaborations established in 2001 with
Protein Design Labs and Bristol-Myers Squibb and compound deliveries under these
chemistry collaborations, partially offset by the reduction of revenue from
Pharmacia due to the February 2002 conclusion of our collaboration.
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 approximately $28.8 million and $84.3 million for the three- and
nine-month periods ended September 30, 2002, respectively, compared to $22.5
million and $59.8 million, respectively, for the comparable periods in 2001.
The increase in 2002 over 2001 resulted primarily from the following costs:
- - Increased Personnel - Staffing costs increased 18% to $10.2 million and 38%
to $32.1 million for the three- and nine-month periods ended September 30,
2002, respectively. The increase was to support new collaborative
arrangements and Exelixis' internal proprietary research efforts. 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, our
compound collaborations and the significant expansion of drug discovery
operations, lab supplies expense increased 21% to $5.4 million and 55% to
$16.9 million for the three- and nine-month periods ended September 30,
2002, respectively.
- - Increased Licenses and Consulting - In order to support new collaborative
arrangements, conduct pre-clinical and clinical development, engage in
contract manufacturing and enable further development of proprietary
programs, license and consulting expenses increased 233% to $4.4 million
and 151% to $9.1 million for the three- and nine-month periods ended
September 30, 2002, respectively.
As part of our collaboration with Bristol-Myers Squibb in July 2001, we received
an exclusive worldwide license to develop and commercialize a Bristol-Myers
Squibb anticancer compound, a novel analogue of rebeccamycin. Phase I trials of
the rebeccamycin analogue have been completed and demonstrated an acceptable
safety profile. The Phase II trials of our rebeccamycin analogue sponsored by
the National Cancer Institute ("NCI") are proceeding. Exelixis is working with
the NCI and investigators to collect and audit the results of the ongoing Phase
II program with the goal of initiating the next phase of development under our
control. Manufacturing of additional clinical supplies of the compound is in
progress. We also continued to make progress toward filing our first
proprietary compound investigational new drug ("IND") application for XL 784,
anticipated for early 2003. We currently do not have the manufacturing
capabilities or experience necessary to produce materials for clinical trials.
With respect to the rebeccamycin analogue and our own proprietary compounds, we
are currently relying 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 proprietary 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 $4.4 million and $14.0 million for the three- and nine-month
periods ended September 30, 2002, respectively, compared to $5.4 million and
$14.6 million, respectively, for the comparable periods in 2001. The
year-over-year decrease in expense for the three months ended September 30, 2002
primarily resulted from decreased stock compensation expense, legal and
accounting expenses, recruiting charges and other corporate services expense.
The year-over-year decrease in expense for the nine-months ended September 30,
2002 resulted from decreased stock compensation expense, partially offset by an
increase in 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 September 30, 2002, we had approximately $1.6 million of remaining deferred
stock compensation related to stock options granted to consultants and
employees. Deferred stock compensation is recorded as a component of
stockholders' equity and is being amortized as stock compensation expense over
the vesting periods of the options, which is generally four years. We recognized
stock compensation expense of $0.7 million and $2.3 million for the three- and
nine-month periods ended September 30, 2002, respectively, compared to $1.7
million and $5.9 million, respectively, for the comparable periods in 2001. 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 the
Financial Accounting Standards Board ("FASB") Interpretation Number 44,
"Accounting for Certain Transactions Involving Stock Compensation," and resulted
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 three- and nine-month periods ended September 30, 2002, we recorded a
reversal of previously recorded compensation expense relating to the
supplemental options of zero and $242,000, respectively, 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
$166,000 and $499,000 for the three- and nine-month periods ended September 30,
2002, respectively, compared to amortization of goodwill and intangibles of $1.4
million and $3.7 million, respectively, for the comparable periods in 2001. The
decrease from 2001 was primarily related to our adoption of SFAS 142.
Under our accounting policy, we have adopted an annual goodwill impairment test
date as of the beginning of our fourth quarter. Following this approach, we
will use our asset-carrying values as of September 30, 2002, assess if there is
a potential impairment and complete the measurement of impairment, if required.
Subsequent to September 30, 2002, our common stock has traded at a price that
represents a market capitalization that is less than our book value. Should
this condition persist for a significant portion of the fourth quarter of 2002,
or should the extent of the reduction in the market capitalization become
significant, this condition may signify a potential impairment of our goodwill.
If we determine that a potential impairment of our goodwill exists, we will
perform the impairment measurement procedures under SFAS No. 142, which may
result in a fourth quarter charge for the impairment of goodwill. As of
September 30, 2002, the carrying value of our goodwill was approximately $67.4
million.
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of interest income earned on cash,
cash equivalents and short-term investments, offset by interest expense incurred
on notes payable, bank obligations and capital lease obligations. Total other
income (expense) was income of $33,000 and $2.9 million for the three- and
nine-month periods ended September 30, 2002, respectively, compared to income of
$806,000 and $3.6 million, respectively, for the comparable periods in 2001.
DISCONTINUED OPERATIONS
In April 2002, Exelixis transferred the Genomica software business to Visualize,
Inc. ("Visualize") for future consideration of up to $2.4 million in license
fees and 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. Royalties that Exelixis receives,
if any, will be recorded in the period they are earned as a gain in discontinued
operations. In addition, Visualize assumed the lease obligation for Genomica's
abandoned facility in Sacramento, California. Exelixis retained an internal use
license for the software. As a result of this transaction, we reported the
operating results of Genomica and the estimated loss on the sale of Genomica as
discontinued operations. For the period beginning January 1, 2002 and ending
with the discontinuation of operations in April 2002, Genomica's operating
results consisted of revenues of approximately $58,000 and an operating loss of
approximately $456,000. The loss on the sale of Genomica includes the write-off
of goodwill of approximately $971,000, partially offset by the reversal of
Genomica's lease obligation for the Sacramento facility assumed by Visualize of
approximately $176,000.
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 September 30,
2002, we had approximately $159.1 million in cash, restricted cash, cash
equivalents and short-term investments.
Our operating activities used cash of approximately $65.0 million and $13.3
million for the nine-month periods ended September 30, 2002 and 2001,
respectively. For the nine-month period ended September 30, 2002, cash used in
operating activities related primarily to funding net operating losses, cash
payments related to our December 2001 acquisition of Genomica, a decrease in
accounts payable and accrued expenses 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, partially offset by an increase in
deferred revenues from collaborators and non-cash charges related to
depreciation, acquired in-process research and development and amortization of
deferred stock compensation, goodwill and other intangible assets.
Our investing activities provided cash of approximately $57.9 million for the
nine-month period ended September 30, 2002 and used cash of $0.6 million for the
nine-month period ended September 30, 2001. The cash provided in 2002 resulted
from proceeds from maturities of short-term investments, partially offset by an
increase in restricted cash and purchases of short-term investments and property
and equipment. For the comparable period in 2001, cash used resulted from the
purchases of short-term investments and property and equipment, almost
completely offset by the proceeds from maturities of short-term investments and
cash acquired in acquisitions.
Our financing activities provided cash of approximately $0.7 million and $37.2
million for the nine-month periods ended September 30, 2002 and 2001,
respectively. For the nine-month period ended September 30, 2002, cash provided
from financing activities related primarily to proceeds from our employee stock
purchase plan, repayment of notes from stockholders and proceeds from bank
obligations, almost completely offset by principal payments on notes payable and
capital lease obligations. For the comparable period in 2001, cash provided
from financing activities related primarily to proceeds from a convertible note,
proceeds from the issuance of stock to Bristol-Myers Squibb and proceeds from
our employee stock purchase plan, partially offset by principal payments on
notes payable and capital lease obligations.
We believe that our current cash and cash equivalents, short-term investments
and funding to be received from collaborators, including funding to be received
from our collaboration with GSK that was entered into during the fourth quarter
of 2002, 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 financings 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 our
business and operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS 146), which addresses accounting for
restructuring, discontinued operations, plant closing or other exit or disposal
activity. SFAS 146 requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. We expect to
adopt SFAS 146 in the fourth quarter of 2002. The adoption is not expected to
have a significant impact on our financial position or results of operations.
DISCLOSURES ON STOCK OPTION PLANS
OPTION PROGRAM DESCRIPTION
Our stock option program is a broad-based, long-term retention program that is
intended to attract and retain talented employees and align stockholder and
employee interests. We consider our option program critical to our operation
and productivity; essentially all of our employees participate. Of the options
we granted in 2001, 75% went to employees other than the five most highly
compensated executive officers. Options are currently granted under two stock
option plans: one under which options to purchase shares of our stock are
granted to non-employee directors and one under which options to purchase shares
of our stock may be granted to all employees. Option vesting periods are
generally four years.
The Exelixis board of directors or a designated committee of the board of
directors is responsible for the administration of our employee stock option
plans and determines the term, exercise price and vesting terms of each option.
Incentive stock options may be granted at an exercise price per share at least
equal to the estimated fair value per underlying common share on the date of
grant (not less than 110% of the estimated fair value in the case of holders of
more than 10% of Exelixis' voting stock). Options granted under the plans are
exercisable when granted and generally expire ten years from the date of grant
(five years for incentive stock options granted to holders of more than 10% of
Exelixis' voting stock).
DISTRIBUTION AND DILUTIVE EFFECT OF OPTIONS
Employee and Executive Option Grants
As of September 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended Year ended
September 30, December 31,
2002 2001 2000
------------------ ------------- -------------
Net grants during the period as a % of outstanding shares 4.0% 5.1 % 10.1%
Grants to listed officers* during the period as % of total options granted - % 25.2% 13.8%
Grants to listed officers* during the period as % of outstanding shares - % 1.4% 1.5%
Cumulative options held by listed officers as % of total options outstanding 17. 2% 22.5% 17.2%
<FN>
* Exelixis' chief executive officer and the four other most highly compensated executive officers for the most recently
completed fiscal year are referred to as the "listed officers."
During the nine months ended September 30, 2002, we granted our employees
options to purchase approximately 2.3 million shares of our common stock, which
was net of 432,507 shares related to forfeited options. The net options granted
after forfeitures represented 4.0% of our total outstanding shares of common
stock, which was approximately 56.2 million as of the beginning of 2002.
During the nine months ended September 30, 2002, no options were granted to the
five most highly compensated executive officers. Options granted to the five
most highly compensated executive officers as a percentage of total options
granted to all employees varies from year to year. The increase in the
percentage of grants to listed officers as a percentage of total options granted
increased in 2001 as compared to 2000. The increase primarily related to a
larger number of grants to other employees in 2000. We typically grant options
to all newly hired employees, and in 2000, there was significant hiring activity
associated with the build-out of our research infrastructure and drug discovery
operations.
GENERAL OPTION INFORMATION
Summary of Option Activity
As of September 30, 2002
- ------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
---------- ------------------
Options outstanding at December 31, 2000 4,492,835 $ 17.70
Granted 3,160,628 14.47
Exercised (204,125) 2.75
Cancelled (270,902) 19.92
----------
Options outstanding at December 31, 2001 7,178,436 16.63
Granted 2,723,113 12.87
Exercised (110,164) 0.85
Cancelled (432,507) 18.77
----------
Options outstanding at September 30, 2002 9,358,878 15.63
==========
In-the-Money and Out-of-the Money Option Information
As of September 30, 2002
- ----------------------------------------------------------------------------------
Outstanding and Exercisable
---------------------------
Wtd. Avg
Exercise
At September 30, 2002 Shares Price
- ----------------------------------------------------- ----------- ------------
In-the-Money 565,677 $ 1.25
Out-of-the-Money (1) 8,793,201 $ 16.56
-----------
Total Options Outstanding 9,358,878 $ 15.63
===========
<FN>
(1) Out-of-the-money options are those options with an exercise price
above the closing price of $4.95 at September 30, 2002
EXECUTIVE OPTIONS
During the nine months ended September 30, 2002, no options have been granted to
the executive officers listed below. The following table shows the option
exercises and remaining option holdings of the listed executive officers.
Amounts shown under the column, "Value of Unexercised In-the-Money Options at
September 30, 2002" are based on the September 30, 2002 closing price of $4.95
per share, without taking into account any taxes that may be payable in
connection with the transaction, multiplied by the number of shares underlying
the option, less the exercise price payable for these shares.
Option Exercises and Remaining Holdings of Listed Executive Officers
Year-to-Date September 30, 2002
- --------------------------------------------------------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Values of Unexercised In-
Acquired on Value Options at the-Money Options at
Name Exercise Realized (1) September 30, 2002 (2) September 30, 2002 (2)
- ------------------------------- ----------- ------------- ---------------------- --------------------------
George A. Scangos, Ph.D. 862,500 $ 679,999 600,000 $ -
Geoffrey Duyk, M.D., Ph.D. 375,000 240,000 618,750 790,312
Lloyd M. Kunimoto 262,500 240,000 150,000 -
Michael M. Morrissey, Ph.D. 82,500 - 70,000 -
Gregory D. Plowman, M.D., Ph.D. - - 175,000 -
<FN>
- -------------------------------
(1) Based on the fair market value of the common stock on the date of exercise.
(2) All options are exercisable upon grant, but underlying shares are subject to a right of repurchase by
Exelixis until vested.
EQUITY COMPENSATION PLAN INFORMATION
(1) (2) (3)
Number of securities Weighted-Avg Number of securities remaining
to be issued upon exercise price available for future issuance
exercise of outstanding of outstanding under equity compensation
options, warrants options, warrants plans (excluding securities
and rights and rights reflected in column (1))
------------------------ ------------------- -------------------------------
Plan Category
Equity compensation plans
approved by shareholders 9,358,878 $ 15.63 2,995,177
Equity compensation plans
not approved by shareholders - - -
------------------------ ------------------- -------------------------------
Total 9,358,878 $ 15.63 2,995,177
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
September 30, 2002, a hypothetical 1% adverse move in interest rates along the
entire interest rate yield curve would cause an approximately $1.0 million
decline in the fair value of our financial instruments.
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 Euro. 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 September 30, 2002, we had outstanding an aggregate of
$3.5 million (notional amount) of short-term foreign currency option contracts
denominated in Euro. The fair value of these contracts at September 30, 2002
was approximately $109,000, 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.
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have concluded that
Exelixis' disclosure controls and procedures (as defined in Securities Exchange
Act of 1934, as amended ("Exchange Act"), Rule 13a-14(c)) are sufficiently
effective to ensure that the information required to be disclosed by the company
in the reports it files under the Exchange Act is gathered, analyzed and
disclosed with adequate timeliness, accuracy and completeness, based on an
evaluation of such controls and procedures conducted within 90 days prior to the
date hereof.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above, nor were there any significant deficiencies or
material weaknesses in Exelixis' internal controls. Accordingly, no corrective
actions were required or undertaken.
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 September 30, 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 September 30, 2002, $900,000 of the proceeds remained
available and was primarily invested in short-term marketable securities.
ITEM 5. OTHER INFORMATION
APPROVAL OF NON-AUDIT SERVICES
The following non-audit services have been approved by the Audit Committee of
our Board of Directors to be performed by Ernst & Young LLP, our external
auditor. Non-audit services are defined as services other than those provided in
connection with an audit or a review of the financial statements of the company.
The Audit Committee has approved engagements of Ernst & Young for the following
non-audit services: (1) tax consulting services; (2) accounting consulting
services and (3) review of registration statements.
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 $65.3 million for the nine months ended September 30, 2002. As
of that date, we had an accumulated deficit of approximately $266.5 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. 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), SmithKline Beecham, Protein Design Labs, Dow
AgroSciences and Bayer CropSciences (formerly Aventis CropSciences). 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 nine months of each other. Our mechanism of
action collaborative agreement with Bristol-Myers Squibb expires in September
2004. 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 September 2004. The Bayer CropSciences arrangement is conducted
through a limited liability company, Agrinomics, which is owned equally by Bayer
CropSciences and Exelixis. Bayer CropSciences 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. Our recent alliance with SmithKline Beecham is scheduled to expire
in October 2008, but is subject to earlier termination at the discretion of
SmithKline Beecham starting in 2005 if Exelixis fails to meet certain diligence
obligations.
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, and the timing of
new collaborative agreements may have a significant effect on our ability to
continue to successfully meet our corporate goals and milestones.
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. Similarly, shares of
common stock held by existing stockholders prior to our initial 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 October 28, 2002, the Company filed an Item 5 Current Report on
Form 8-K announcing the signing of an alliance agreement with
SmithKline Beecham Corporation.
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: November 7, 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)
CERTIFICATION
I, George A. Scangos, Ph.D., Chief Executive Officer of Exelixis, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Exelixis, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002
----------------------------------
/s/ George A. Scangos
- -----------------------------------------
George A. Scangos
President and Chief Executive Officer
CERTIFICATION
I, Glen Y. Sato, Chief Financial Officer of Exelixis, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exelixis, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002
------------------------------------
/s/ Glen Y. Sato
- -------------------------------------------
Glen Y. Sato
Chief Financial Officer, Vice President
of Legal Affairs and Secretary
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -------------------------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Specimen Common Stock Certificate (1)
10.36* Product Development and Commercialization Agreement, dated as of
October 28, 2002, by and between SmithKline Beecham Corporation and
Exelixis, Inc.
10.37* Stock Purchase and Stock Issuance Agreement, dated as of October 28,
2002, by and between SmithKline Beecham Corporation and Exelixis, Inc.
10.38* Loan and Security Agreement, dated as of October 28, 2002, by and
between SmithKline Beecham Corporation and Exelixis, Inc.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (2)
- ----------------
(1) Filed with Exelixis, Inc. 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.
(2) This certification accompanies this Quarterly Report on Form 10-Q and shall
not be deemed "filed" by Exelixis, Inc. for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
* Confidential treatment requested for certain portions of this exhibit.