Exelixis Inc (EXEL) 2001 Q4 法說會逐字稿

Good afternoon. My name is and I will be your conference facilitator today. At this time I would like to welcome everyone to the Exelixis fourth quarter and year-end 2001 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. If you would like to ask a question during that time, simply press star and then the number one on your telephone keypad, and questions will be taken in the order that they are received.

If you would like to withdraw your question, press the pound key. Thank you. I will now turn the conference over to Ms. . Please begin ma'am.

Good afternoon and thank you for joining the Exelixis management team on our fourth quarter and year-end 2001 financial results conference call. Participating in this call are George Scangos, President and Chief Executive Officer and Glen Sato, Chief Financial Officer and Vice President of Legal Affairs. Glen will review the company's financial performance for the quarter and for the year and provide guidance for 2002. George will discuss the company's progress during the year and our goals for 2002.

We'll then open the call for questions. Please be advised that the following discussion contain certain statements are forward-looking including without limitation answers to questions at the end of the formal remarks. These statements are only prediction and based upon our current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including our ability to enter into new collaborations, continue existing collaborations and receive milestones and loyalties derived from future products developed from our research efforts under collaborative agreements. The rate of growth, if any, in license and contract revenues, the timing and level of expenses associated with the growth of proprietary programs, the ability successfully to identify, and develop compounds against proprietary cancer targets, the amounts and timing of investments, the manufacturing in clinical development of currently enfaced to clinical studies that was acquired in July 2001, and the timing of the filing for an investment in our initial proprietary small molecule .

These and other risk factors are discussed under risk factors and elsewhere in Exelixis' annual report on Form 10-K for the year ended December 31, 2001 and other SEC reports. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard there to or any change in events, conditions, or circumstances on which any such statements are based.

Now Glen Sato will discuss the company's financial performance.

Thank you and thanks to the participants for joining us today. We had a very good year in 2001. I'm very pleased to report that we delivered a strong financial performance, which met our expectations for the year. In particular we took advantage of a significant opportunity to strengthen our financial position through the acquisition of at the end of the year.

This allows us to enhance our ability to make strategic investments designed to advance our clinical candidates, accelerate our evolution to a product-focus company. We will continue to invest wisely and prudently in moving our products into the clinic with a focus on those areas of the company that will produce the most value for our stockholders. As you may -- as you may have noticed in our press release, we are reporting results including and excluding financial charges. We believe that this is consistent with recent pronouncements by the SEC regarding financial results in press release.

Our presentation will overview the fourth quarter and year-end results followed by a more detailed discussion of the revenue and expenses behind those figures reported. I'll then finish with the financial outlook for 2002. Throughout my discussion, references to non-cash charges will include expenses related to stock compensation, impairment of goodwill, acquired and processed research and development, and amortization of goodwill and intangibles.

For the fourth quarter we reported a pro forma net loss of approximately $12.7 million or 26 cents per share excluding non-cash charges. This compared to the fourth quarter of 2000 pro forma net loss of approximately 7.7 million shares -- $7 million or 18 cents per share excluding non-cash charges. Including non-cash charges our net loss was $18.3 million or 38 cents per share for the fourth quarter compared to a net loss of 48 million or $1.13 per share in the fourth quarter of 2000.

For the year ended December 31, 2001 our pro forma net loss was approximately 49.4 million or $1.06 per share excluding non-cash charges. This compared to 2000, in which our annual pro forma net loss was 22.9 million or 61 cents per share excluding non-cash charges. Including non-cash charges, we reported a net loss of 71.2 million or $1.53 per share for the year ended December 31compared to a net loss of 75.3 million or $2.43 per share in 2000.

We're particularly pleased to report that at December 31, 2001 our cash and investments totaled approximately 227.7 million compared to 112.6 million at December 31, 2000, and our cash for the year was approximately 41.5 million, and we're very pleased to report our ability to manage at the cash of the company. Let me now discuss the revenues and expenses.

For the quarter ended December 31, 2001 total revenues were approximately 12.8 million compared to 7.1 million for the same period of 2000. Total revenues for the year ended December 31, 2001 were approximately 41 million compared to 24.8 million for 2000. The increase in revenues was driven primarily by new corporate collaborations established in 2001 with PDL, Protein Design Labs and Bristol-Myers Squibb, additional revenue under the pharmacia arrangement that reached completion in February 2002, as we previously announced in the summer, and increase research funding under existing corporate collaboration. In addition, 2001 included a of revenues from Agronomics resulting from the December 2000 acquisition of .

With respect to expenses, research and development expenses for the fourth quarter of 2001 were 21.8 million excluding stock compensation expense of 1.1 million. This compared to a 13.3-million excluding stock compensation expense of 1.1 million for equivalent period in 2000. R&D expenses for 2001 were 77 million -- 77.7 million excluding a stock compensation expense of five million compared to 42.3 million excluding stock compensation expense of 9.4 million for 2000.

The increase in both periods was driven primarily by expansion of our drug discovery operations including increased staffing and expansion of facilities to expand core research programs and to support new collaborative arrangements as well as the ongoing expenses associated with additional R&D efforts from our acquisitions. G&A, general administrative expenses for the fourth quarter of 2001 total approximately 4.1 million excluding stock compensation expense of 400,000. This compared to 3.3 million excluding stock compensation expense of 900,000 for the fourth quarter of 2000. General administrative expenses for 2001 total approximately 16.8 million excluding stock compensation expense of 2.4 million compared to 11.1 million excluding stock compensation expense of 4.6 million for 2000.

The increase in both periods was driven primarily by cost associated with , facility expansion, and growth in our research and development operations, as well as ongoing expenses for operations associated with acquisitions. With respect to guidance for the full year of 2002, we anticipate that we will experience an increase in projected cash in 2002 consistent with our evolution as a drug discovery company, and our progress towards bringing compounds into clinical development.

Specifically, our expenses will principally be driven by significant investment and scaling up clinical development programs including manufacturing for , advancing our own proprietary candidate through enabling studies, as well as advancing our other development pipeline programs. We will also continue to build out of our drug discovery capability and the year will also include additional expenses associated with a full year of costs from our German operations that we acquired in May of 2001.

Assuming the closing of three new collaborations, and that's not including the collaborations that we announced in January of this past year, we anticipate that revenues will increase in the range of 20 to 25 percent from 2001 level, and our operating expenses excluding non-cash charges will increase in the range of 40 to 50 percent from 2001 levels. For 2002, our anticipated cash is expected to be in the range of 68 to $73 million including approximately 18 to $20 million in capital expenditures worldwide.

Accordingly, expect to end the year 2002 with cash balances in excess of $154 million. competition expense for the year is anticipated total approximately $6.2 million. With respect to guidance for the first quarter, our financial expectations are such that we expect revenues to decline slightly from the Q4 2001 levels to principally to the February 2002 completion of the pharmacia arrangement, as we've previously discussed, and our operating expenses excluding non-cash charges will increase by 15 to 20 percent from the fourth quarter 2001 levels.

Again, we're very pleased with our 2001 financial performance and are well positioned for 2002. Let me now turn the presentation over to George to discuss our 2001 achievements and our 2002 goals.

OK, thanks Glen. 2001, I think, was a great year for Exelixis. We had a very strong year of growth maturation and execution, and we made a lot of progress in building our business, establishing corporate partnerships, adding breadth and depth to the organization in key operational areas. We strengthened our capabilities as a drug discovery company and we made significant progress in advancing our products towards and through the clinic. And simply we're a much more advanced, capable company than we were a year ago.

I think every year in the life of a company like Exelixis is critical and defines level of success in how far you can raise the bar for subsequent years, and for Exelixis 2001 was the year we hit full stride in our transition from a platform company to a product-focus drug discovery and development company. Our accomplishments for the year, I think, put us on a trajectory of really building and sustaining a robust clinical development program and of moving our number of compounds towards the clinic and through the clinic.

In short order, we've created an integrated drug discovery capability that's generated a pipeline for proprietary cancer compounds that we're advancing towards the clinic with a phase two cancer compound that continues to demonstrate therapeutic potential and that provides a strategic driver for establishing our clinical development infrastructure. And we have a broad base of corporate partnerships that generates significant revenue. They enhance the value of our assets, diversify our product development opportunities.

And I think we did a good job integrating our acquisitions, and we delivered a very good overall financial performance, as you heard from Glen including ending the year with more than double the cash reserves with which we began the year. So I think we had a great year, in which we delivered on our promises and set the stage for continued achievement and we're optimistic here as we go forward.

In terms of specifics, let me start by discussing the corporate partnering. In the beginning of 2001, our stated goal was to establish three strategic collaborations. We thought two of them would be with pharmaceutical companies and one with an agriculture company. In fact, at the end of the year we'd established six new partnerships including two pharmaceutical alliances, one with Protein Design Labs and the other with Bristol-Myers Squibb, and four combinatorial chemistry collaborations, both PDL and BMS alliances, focus on new ways to discover cancer drugs, and they've had a markedly beneficial impact on the company financially and both provide multiple opportunities for us to advance our own pipeline and participate in the commercial value of any drugs that may emerge from the collaboration.

The alliance with PDL is in the area of antibody-base cancer targets, and this was a strategic expansion of our drug discovery programs since, as you know, our in-house focus is predominantly on small molecule drugs. We've been looking for ways to monetize our assets that have value for non-small molecule products and our collaboration with PDL is one way to do that. It really enables us to leverage our target discovery and validation assets not only for our own use, but also for the partners and provides us commercial participation in potentially important antibody drugs.

The alliance with BMS was an especially important one for us and essentially transformed us overnight into a drug development company through the in-licensing of a promising phase two cancer compound that continues to be of significant interest. Collaboration jump-started our clinical development activities enabling us to build infrastructure and attract experienced development professionals. Also allowed us to establish our identity and expand relationships in the cancer treatment community and build relationships with the appropriate regulatory agencies.

Now is the appropriate time for us to be doing this, since our goal is to bring a number of compounds into the clinic now as we go forward. 2001, we established four combinatorial chemistry collaborations with Scios Scios Kinetics and Schering-Plough. These were designed to generate small molecule compound libraries for high throughput screening. There are several notable aspects, I think, to these partnerships.

First, they nicely augment our revenue. The collaborations are all structured similarly. They provide us with up-front payments, as well as payment for compounds. Second, they enable us to expand our own libraries while deferring the cost of doing so. Third and perhaps most importantly, in a very short period of time we are not able -- not only able to build and operationalize a state of the art combinatorial chemistry and high through-put screening program, but we're able to establish partnerships and generate revenue based on that program, and I think having established these partnerships goes a long way towards validating the quality of the programs that we've built.

Today we have a compound library of over two million compounds, and we're generating new compounds at a rate of about 40,000 per week. Last year we did over 20 high throughput screens all focused on cancer, and that's a number that is comparable to or more than a large pharmaceutical company does in a given therapeutic area. So not only have we established and maintained a very high level of productivity, we've been able to move quickly to exploit it commercially, and we intend to do more of these chemistry deals in 2002.

In terms of our drug discovery, during the year we built out substantial capability in medicinal chemistry, structural biology, and pharmacology in order to take the output of high through-put screening facility and rapidly move those compounds towards the clinic, and I'll talk a little more about that in a few minutes. As you know, we have an agriculture business that enables us to diversify our revenue, fuel our pharmaceutical efforts, manage our risks. The relationships were extremely productive in 2001 and contributed substantially to our revenue base.

The industry underwent a significant change last year, as you know, by competition, consolidation, some controversy. We'd hope to finalize an additional agricultural deal in 2001. We anticipate a more favorable and receptive climate for deal making in 2002 as the industry recovers from its wave of consolidation. In 2001 we consistently delivered on the milestones and all of our collaborations. We deliver high-quality validated and assets to our agricultural buyer, identified key plant trade teams for events as crop science and in pharmaceuticals we delivered a number of very promising targets to pharmacia, PDL, and to BMS. This commitment to execute on our promises is important to us, and I really believe that the ability to execute on our existing partnerships facilitates our ability to sign additional partnerships as we go forward.

Now let's take a look at our pipeline and development strategies, and we'll start with DEAE Rebeccamycin, which is our phase two cancer compound, and then we'll talk about the rest of the pipeline. As you know, as part of our collaboration with BMS, we received a fully paid-up royalty free license to DEAE Rebeccamycin, which is currently in phase two trials being conducted by the National Cancer Institute. DEAE Rebeccamycin is a very interesting cancer compound with significant strategic importance for Exelixis. Everything we're learning about Rebeccamycin as the phase two trials continue encourages us to believe that the compound has significant therapeutic potential that could bring important benefits to patients, and that it could be commercially important for us.

Compound has -- excuse me -- has demonstrated an acceptable safety and tolerability profile and potential in treating a variety of tumors including upper GI tumors such as stomach and hepatic biliary tumors for which there is no approved therapy today. Strategically the compound provides us with the opportunity to build staff, mobilize our clinical development and regulatory capabilities, to establish relationships with clinicians and leaders in the cancer treatment community.

We made a lot of progress on this front in the last year, starting with appointing Jeff Latts as Chief Medical Officer in July and just recently adding additional key personnel to our development organization. is continuing to conduct phase two trials in a broad range of tumors with Rebeccamycin. As you know, clinical trial sites affiliated with operate independently. Over the past several months, Jeff Latts has visited many of these sites and continues to gather information about the trials that's encouraging. It'll be important to determining future development plans.

Currently there are multiple ongoing trials in various tumor types and about 300 patients now have been exposed to the drug. Because the entire supply of drug has been committed to for the current trials, we found a commercial manufacturer and anticipate having additional drug supply later this year to support ongoing development. As the current trials progress and a more complete profile of the drug is beginning to emerge, we'll determine the next development steps.

We're excited about this program and based on the data we've seen, we feel even more positive about the drug's potential today than we did when we first licensed it from BMS. So while Rebeccamycin provides a cornerstone for our clinical development program, we also made significant progress in 2001 in generating our own proprietary cancer pipeline. Today we have multiple compounds that work through a diversity of mechanisms that are in various stages of research and preclinical development.

These include an identified lead compound and several backups that are currently undergoing enabling studies including scale up, regulatory toxicology, pharmaco dynamic and pharmaco kinetic studies. We anticipate these studies will continue throughout the courser of the year.

In 2001, we said that our goal is to file our first from our own discovery program late in 2002 and starting in 2003 to file two per year. We continue to believe that these goals are reasonable given the robustness in productivity of our discovery activities. If our lead compound continues to be viable in preclinical studies, we'll aggressively work to file an this year. You have to remember, though, that the reason we're doing those studies is because we don't know the answer yet. So if that lead compound does not continue to generate acceptable data, and we decide not to move forward with it, we have to go back to one of our backups and the timeline for our first may need to be extended into early 2003.

So realistically we have work to do on that. We're on track to file by the end of the year if the lead compound continues to generate acceptable data, and we just don't have the data yet. So we've said very little about the nature of the targets on which those lead compounds are based, and that's mainly for competitive reasons. I can tell you that the lead compound is directed toward a novel cell surface enzyme that's involved in a pathway that regulates angiogenesis. This pathway is independent of the pathway, and we have reason to believe that this pathway and these compounds could work synergistically with . In some cases, it might treat indications that are not treated by .

We'll get more data on that as we move -- we move forward. The target is of significant interest, not only in cancer, but potentially in other indications as well. We've applied for patent production for the target and for the compounds and for all aspects of the program. Until we're further along in development, though, we think it's prudent to say very little more specific about the target or the nature of the target.

So I'd like to spend a minute discussing some of the key strategic initiatives that we completed in 2001, and that we believe significantly strengthen the company. First with the acquisition of the remaining interest of and second the acquisition of . The acquisition of was kind of a natural follow on to the increasingly close relationships between the two companies. In '98, Exelixis cofounded with the goal of gaining access to model genetic systems such as and that would complement Exelixis of any existing expertise in systems.

Over the years we established what we believe is the leading position now in genetics. Our close collaboration with enabled us to broaden, to diversify our biological understanding, strengthen our research capabilities, accelerate our drug discovery capabilities so that in 2001 it made strategic sense for us to consolidate those assets. We did so and the collaboration between the science at Exelixis and are going, I have to say extraordinarily well. And that's not always easy to do given nine time zones of separation.

In late 2001, as Glen previously noted, we acquired , which is a publicly traded company in a stock for stock transaction for which we issued about 6.9 million shares of Exelixis stock at a price of 15.89 per share. Transaction added about 110 million to our balance sheet effectively enabling us to finance the company at the then current Exelixis share price and without transaction fees. We intend to use software selectively and to identify a commercial software company to assume the third party businesses and those activities are well under way.

So let's take a look at 2002 goals. In the next 12 months we intend to maintain the momentum we established in 2001. We'll continue to develop Rebeccamycin and most likely finalize development plans in the second half of this year. We'll continue to perform our enabling studies on our proprietary lead compounds and related programs with the goal of filing our first as soon as possible, hopefully this year and filing a number of on a continual basis. Our goal of two a year beginning 2003 is quite realistic.

We intend to continue the stock rate development pipeline so that we can have an ongoing program of bringing compounds into the clinic. We'll deliver on the milestones we've promised our pharmaceutical on agricultural partners, and we intend to establish new collaborations that can further expand and diversify the product opportunities for us, continue to look for strategic opportunities to leverage our assets and strengthen our product development capabilities. And we intend to achieve the financial goals that Glen outlined earlier.

So in conclusion, I think 2001 was a year in which we really hit our stride. We continued to build the company's infrastructure, at the same time executing on our goals, and managing our expenses. We attracted experienced seasoned professionals who bring depth and expertise to the organization in key operational areas, and we represent our commitment to building a strong focused and sustainable business. I think at Exelixis we're quite realistic. We know what it takes to do high-quality work, and we know what it takes to deliver on our promises. We know that making drugs is high-risk undertaking.

We're under no illusions that we'll be successful in everything we undertake. And our strategies to build a broad base company with the , business , resources, management experience to sustain itself through the challenging times and emerge successful and strong. For us it's about shots on goal, generating multiple options while not losing focus. So, we're trying to maximize every opportunity to be successful, rationalize our activities when necessary, manage the risks inherent in what we do.

We know that these days it's difficult for investors to navigate biotechnology landscape and decide what products and what companies look most promising. I think for our part, we'll continue to make every effort to communicate appropriately with investors, to be as candid and accessible as we can. So on behalf of the employees, management, and Board of Exelixis, I'd like to express our appreciation for the confidence and support that all of you have shown for our company. And with that, we'll end the prepared comments and turn the meeting over for questions.

Ladies and gentlemen, at this time I would like to remind everyone in order to ask a question, simply press star and then the number one on your telephone keypad. Your first question comes from Charles Duncan of Dresdner Klein.

Yes, good afternoon folks and congratulations on a -- on a notable year. A couple of questions -- with regard to the that you spoke of, not only in this year, but in the following year, in '03, it would suggest that because you're pretty confident that you're going to be able to file at least one, possibly two 0 next year, that you've identified, if not lead compounds, certainly lead targets that you're working on. Could you provide us some additional color on the kind of targets that you're working on that could emerge in not only this year, but the following year?

Sure. Charles, as you know, we made some effort to diversify our target base on different mechanisms and different ways of controlling cancer. So our lead compounds, as I said, are focused on angiogenesis. The next most advanced series of compounds, there are -- and there are a number of them now. There is one series that's based on inducing in cancer cells. There's another series, which blocks the cell cycle of cancer cells, and then there's another series of compounds, I think, that are the next most advanced compounds moving forward. There are a number of other targets behind those -- we've done 20 screens.

So we have a number of compounds against a variety of targets, and our philosophy really has been to do enough screens so that the -- there's a surplus of screens, and we're not limited. Our screening, we're limited by medicinal chemistry and the reason for that is we can do a lot of screens very rapidly because we've been very rapid adopters of new technology. And as anybody who's done this for a while can attest, some of the screens for reasons you don't understand just generate better lead compounds than others.

And so by having screens in excess, it allows us in some sense a continual supply of low-hanging fruit, which save substantial time in medicinal chemistry. So it's on those compounds that are moving forward, and they are anti angiogenic. They are and they control the cell cycle. I think those are the three main mechanisms that were the most advanced compounds.

OK, and then with regard to some of the activity that you had talked about being able to do, would you be willing to give us some insight as to whether or not you had planned to monetize the metabolic diseases programs again that were in part the subject of the pharmacia ...

Yes.

Collaboration or would it be in angiogenesis?

Oh I think the Spanish pharmacia, we're in the final stages now of finalizing who owns what. You know they'll have rights to a certain number of targets. Everything on top of that we'll have rights too, and once that's finalized, which will be soon now, then we'll know exactly what we have in terms of assets, and we can begin discussions with potential other partners.

And so we would expect to do that. Our angiogenesis program is very ripe, and it's been, as you know, we've been working on it for a while. We have a number of very interesting targets in hand. We actually have interesting compounds in hand. So -- and so that's also a good area for us to partner. If we were to partner there, we would want the relationship that had some of the characteristics of the BMS and the PDL relationships to allow us to develop our own compounds there, leave us substantial rights.

So, you know, we can't comment very specifically on partnerships, of course. But I think both of those areas represent opportunities for us.

And then a final question, and I promise George or Glen, could you remind me again how you define committed capital because we've been going through looking at your committed capital, which seems to be by my definition greater than that of many mind share competitors. But I just want to get this straight.

Yeah, that's a very good question, Charles, because everybody defines it differently. We've been trying -- we've deliberately been very conservative, so when we say committed capital, we mean only truly committed capital -- what we've received in up-front payments and committed research funding.

So it's absolutely the minimum money that we can receive. It does not include milestones. It does not included any imputed royalties. It does not include the value, any imputed value of our partner's contribution to our work. It's just cash that we're contractually obligated to receive. So it's the most conservative way to report that number.

OK. Thanks for .

OK.

Your next question comes from Meirav Chovav of Credit Suisse First Boston.

Hi, it's Meirav and . We were wondering if you can give us a more detailed update in terms of the target that you're working on, for instance, with , and how that partnership is going.

Well, sure, I can -- I can comment on some of that. I think in terms of the targets, which we've delivered to and we've delivered a number of them now. I'm certainly not in a position to disclose those targets. If PDL feels comfortable disclosing those targets, then they can do that. But, you won't -- you won't hear their identify from me. I can tell you that they are proprietary, that they are self-surface molecules, that we have good biological data to say that an antibody against those targets will result in not just the targeting of the antibody to the tumor, but will actually result in the death of the cells that have the target on the surface.

And we know that many human tumors have these targets on their surface. It's interesting in that -- and through the way we've done our work, we've been able to identify a lot of molecules on the cell surface that have apparently escaped the searches that other people have done using algorithms designed to pick out proteins that are on the cell surface or secreted based on some common structural mortise that those proteins often have. And as time goes on, it's clear that there are many targets on the cell surface that lack those structural domains so that they've escaped to some of the other approaches to finding them.

In terms of how the collaboration is going, it's going really well. We've delivered a number of targets to them. They've made antibodies against some of those targets, and we are aggressively moving those -- moving those forward. So I think PDL actually has been a very good partner, and the, you know, they're close to Exelixis. So it certainly facilitates the collaboration. It's easy to run back and forth and have lots of contact. So we're very pleased with that -- with that collaboration, and I'm confident we'll get additional out of that collaboration on top of the ones that we expect to file with our small molecule program.

One note of curiosity...

Yeah.

When you talk about the fact that people have not identified those cell surface marker previously...

Yeah.

when you look, for instance, at the human genome database, the one the government put out...

.

Is it there?

Well, some of them are. Some of them aren't. And there are -- if you look at the algorithms, there are two different kinds of algorithms -- right? There are algorithms that people have used to predict genes just based on the general where do genes lie? And that turns out to be fairly hard, and some of those predictions are right and some of them aren't. So, you can -- and there are all kinds of permutations. Sometimes the gene is there. Sometimes it's not there. Sometimes part of it is there. Some of the axons will be there, sometimes not. So, there -- you can find examples of all of those things.

And the other kinds of algorithms are those that are designed to look for immunoglobulin like domains or other kinds of domains that are commonly associated with self-surface molecules. And those are actually pretty good, and so they -- I think most of the molecules that have those kinds of domains have been picked out. But there are a lot of self-surface molecules that don't have those domains, and so don't get picked up by those algorithms.

So do you think that those self-surface markers might be very unique and specific to or that they're part of broader family?

Well they are -- you're asking good questions. I'm trying to give you as much as information as I can. But, the -- they -- come of them certainly are restricted to cell type. There are, for example, examples now that we've turned up and are starting to see now in the literature where receptors that were thought to be single-chain receptors turned out to be multi-chain receptors. The knows one chain, but people don't know the other chains. So that the structure of receptor and other types of cell surface entities, which previously -- which in many cases were thought to be rather simple, I think will turn out not to be so simple. So we have a lot of those kinds of molecules.

to my mind very simplicity, the more typical the structure, the more you need to structure its potential. It could be a better target.

I agree with that. I agree with that. So, I mean the ultimate target is something that's expressed only on the tumor but and so the more restricted the target is, if it's on your target tissue, the better off you are, and that's one of the criteria we use to determine whether or not the targets are interesting. And we do a proprietary screen. We do a screen for expression, how widely the targets are expressed. We obviously do the functional work to understand what happens if we successfully that particular molecule. So, all those things go into making a decision about the target.

OK.

And I'm not trying to be cute about evading what the targets are. I do think that having these targets is a substantial competitive advantage for us and so we're torn between, you know, letting you know what they are, which could, you know, obviously will make you more interested and keeping them as a proprietary advantage and so far we've chosen to do that.

No, that's fine. We just wanted to get a little bit more color.

OK.

Thanks.

OK.

Your next question comes from of CIBC World Markets.

Hello. Can you hear me?

Yes.

Hi there, congratulations on this quarter. I have two questions. The first is have you scheduled the next set of -- the next installment of targets that you plan to give to Protein Design Labs?

We have regularly scheduled meetings with Protein Design Labs and with BMS at which we present an update on the targets, and at which they have the opportunity to select additional targets. And those are scheduled according to the contract, in terms of the number of times per year they meet and I think the meetings for the rest of the year are already scheduled.

So, in that case, yes. I can't tell you off the top of my head exactly when those meetings are. I'd have to look on the calendar.

OK. The next question I have is are you going to be presenting, or do you know if there'll be a presentation of data related to Rebeccamycin this year in a formal scientific meeting or through a peer review journal?

Well as best as we can determine, there will not be a presentation this year at .

OK.

And as you know, the investigators carrying out the trials are independent, and so we don't have control over when and where they publish the data. But based on our conversations with those investigators, I don't believe there'll be anything at and there may -- there may very well be presentations later on in the year, but I can't tell you that for sure yet.

And without identifying more about your own proprietary pipeline, when do you think you will be able to disclose more about your lead candidates ...

Oh...

Yeah I think when we -- when we file the , then we can say a little bit more about the target and how it works and why we're -- why we're so excited about it actually.

OK? I mean I could tell you a little bit now. The target works by a -- an angiogenic pathway that's induced in response to inflammatory processes. OK, and that's involved in certain tumor cell types and obviously in certain inflammatory indications. So, it's a novel target, novel pathway -- we've not only identified this particular target, but a number of other targets in the same pathway. We have one or two of those others also in screening because we can never predict our where the best place to intervene in a particular pathway is. So, it's a -- it's a novel pathway. We feel we have unique insight there, and some good around it, and very compelling biological data. So ...

Well, thank you very much.

OK.

Your next question comes from May-Kin Ho of Goldman Sachs.

Hi George.

Hi May-Kin.

I have several questions. The first is that you mentioned that you feel more comfortable now with Rebeccamycin ...

Yes.

Better when you signed the deal. Can you expand on it a little bit more? I mean ...

Sure.

Should we know more about the , the mechanism, or what are you seeing that made you feel more comfortable?

Well yeah, we're seeing more patient data. So we -- you know, it's been in about 300 patients now. So, that's a substantial number of patients. And when we've seen it, you know, in the first license BMS the number of patients for which we had data was under 200. And about half of them were involved in the phase one dose escalating studies. So there were probably less than 100 patients who'd seen therapeutic levels of the drug.

So now we have well over 200 patients who have seen therapeutic levels of the drug. And so you have much more confidence about its safety and tolerability because there have not been any unacceptable side effects. And we continue to see a pattern of responses in the same tumor types that we saw them in -- we saw the data -- ones that were in the data at the time we had license in the compound for BMS. But at that time obviously the number of patients was low, and the number of responses were low. Now the patients are higher and we continue to see responses. So we have more confidence because the numbers are bigger, and the data become more believable.

Do you think the manufacturing is going to ?

I think it's one -- yeah, it's one of the here. It's a -- as you know, it's a semi synthetic compound. It has to be fermented, and then there's one chemical modification. The chemical modification stuff is trivial. The fermentation is not. You know, rocket science, but it needs to be done right, and so we have, what we feel is a very high quality contract manufacturer and they're working on it. So, I think it'll take them some months to make it frankly, which is certainly one of the limiting steps here.

But, you know, I -- look, I have to say I've seen lots of manufacturing issues. I don't think this is going to be a nightmare of a manufacturing problem. It's just we're starting from scratch and it takes a while.

And in terms of side effects, what have you seen so far?

Well, the dose limiting toxicity is myelosuppression. And that's very common for and it's . It's reversible, and it's manageable. So, oncologists are not concerned with myelosuppression. The other toxicity, I guess, was phlebitis at the site of injection, and so, there are -- there are ways around that by the root of administration, which also aren't substantial liabilities. So those are the two main liabilities of the compounds. Those are very not worrisome liabilities.

And then on the development of proprietary compounds...

Yeah.

Are there other disease areas that you can use these compounds for besides oncology?

Yes. Well, yes is too glib an answer, but let's say there is good data to suggest that the compounds may have some efficacy in certain inflammatory diseases, rheumatoid arthritis and certain ocular disease like macular degeneration. So it's actually a very large indication. And we're testing the compounds in those pharmacological models now. And so when we get data that we are comfortable with, then we'll know better. All we have right now is very preliminary kind of data.

What do you think is the biggest risk is in terms of reaching your goal of getting the this year?

. I mean...

I assume you have backups and other things.

Yeah, we have backups and we have series of compounds. We have several different series moving forward, so but you know when you do this kinds of studies and you go into the regulatory and you have to do different species and you know some of them have to be large animal species, which we haven't done yet, and we have pretty good data in small animals. It's -- you can't always predict how those are going to come out. So I just try to be realistic about it. We don't know anything bad about it. So I'm not trying to prepare people or anything we're very, very kind of optimistic about it, but we just don't have all the data and so you never know.

Yeah. Yeah, that's true, and that's why you've got to do it.

That's exactly right.

That sounds great.

Thanks.

Your next question comes from Jeff Zekauskas of J.P. Morgan.

Hi, good afternoon.

Hi Jeff.

Just sort of a few questions, in the press release it says that you remain confident about filing two in '03. But I don't think it says that you're confident about filing one this year. Is that intentional or not intentional?

Well, I think the situation is just as we described, that our lead compound is on track, on a -- on a track where we can file an on it this year assuming all the data are clean. If the data are OK, if the other data we get between now and then are OK, we can file this year. And the reason, you know, we're being a little -- we're trying to be a little careful is because we don't have those data yet. And that's the whole reason you have to go do it, because you don't -- you don't know the answer yet. So, if, you know, on December 1st we get data that says this compound can't be advanced towards the clinic because the toxology aren't acceptable, then we won't move it forward.

We have backup compounds, so the program isn't dead, and those are -- those are moving forward also in parallel. So you know I think the issue, Jeff, is that we're talking about small numbers. We have a number of things moving forward. The lead one is on track to be filed this year. I can't point to any one of them and say with absolute, you know, absolute sureness that this one is going to make it all the way through. You can point to the collection of them and say since we have this number at this stage and we know at the industry attrition rates, we're very confident about it meeting this number per year. So the problem when you start that process and you're at the beginning of the process, and everybody's looking at the first one, is that then, you know, you can't point to that one and say with 100 percent certainty that it's going to make it. And that's the reason for being a little cautious, and that's the reason also for being optimistic about having multiple per year because we have a number of things moving forward.

I guess back to Rebeccamycin ...

Yeah.

Is it showing any promising activity against tumors other than upper GI tumors?

It -- yes, we have some data to suggest that it may work in some other tumor types and we -- these are not our data yet, and they're not confirmed yet, so that's why we haven't really said anything about them yet.

And so that's why it's a little bit more promising than you thought?

Well, that's one reason. The other is it's been in a lot of -- lot more patients who have the upper GI tumors, and we've seen additional responses there. So this is not -- you know, these responses are now not one offs or two offs with patients, but there are enough numbers now to give you more confidence in it. So, it's both.

And I guess lastly, I think just on the Ag side, I think is planning to sell its household insecticide business. Does that make any difference for ?

No, it does not. The biggest potential for the compounds that are coming out of are in agriculture applications and in animal health. So tick and flea control, and the biggest margin part of that business is tick and flea control. The household pesticides are not a big margin part of that business or a big part of the business.

OK. Thank you very much.

Your next question comes from Real Leclerc of UBS Warburg.

Good evening. Can you hear me?

Yes.

OK, great. Can you provide an update on how the programs are progressing and if any functionally validated targets been identified yet? I know the big focus has been on the oncology side, and if there's some history with metabolic diseases, how are the other programs progressing?

Well, you know we have the program. We had an Alzheimer's program with pharmacia -- where we worked on with pharmacia for those years. There were a number of targets that came out of that compound. It was focused on Alzheimer's disease, and those are now at pharmacia. So yes, there have been a number of targets identified. And that's a -- as you know, that's been a very difficult area to find with targets for Alzheimer's disease.

Right.

And there are -- there are some good targets, but a very limited number of them. And we are able to work in those pathways -- in the pathways and identify some novel points of intervention, so that we consider it to be a very successful program. We've also had a program on Parkinson's disease, and we've been working on that at -- I would say the honest answer is at a low level because our own internal efforts are really focused on cancer, angiogenesis, some programs on inflammation and metabolism and has been a smaller area.

Is there enough critical mass there where we could see a potential collaboration, you know, in the near future, or is it still, you know, in the earlier stages but being built up?

Well, our goal is not to just go get collaborations...

That's right.

...on random therapeutic areas, right?

I understand.

Our goal is to go get collaborations that will enhance our strategic objectives. So that's why we have the partnerships we do in cancer. That's why we think and is a good area for collaborations. If our compounds truly have utility in inflammatory indications, and we have a number of targets that might have utility in inflammatory indications, as well as in cancer, then that would be a logical area for us to move into. Metabolic area, we have a nice program. That would be a nice area for us to move into.

We simply can't do everything, right? We'd get too unfocused. So, we're trying, in terms of building out new therapeutic areas, new opportunities for partnering, to get the most bang for the buck -- to build on the things that we're doing now, expand those, like cancer and inflammation, which -- we can open up a new therapeutic area without having to invest in 50 new biologists, you know, doing experiments for two years to generate some data. So that seems like a much more attractive way for us to go forward and continue to generate partnerships and starting on a whole new area.

OK. And then just a quick financial question. What is the EPS range you're going to guide to for '02?

Well, I'll turn that one over to .

To ?

We'll guide on EPS ranges .

OK.

So...

We're just trying to get some -- if there's some clarity that you can provide. Or is it for us to do the math?

I'd like for you guys to do a little bit of math for yourself. I just provide you all the data points, but I've seen enough models. I'd like you guys to do some of the math yourself.

Yeah, it's a problem. And is there any residual costs within that's expected to disappear over '02?

No, we've taken a pretty conservative look at , and that's why we have the impairment line this year -- or in 2001 -- because we wanted to be pretty conservative in writing down the that were there. So, I think we feel pretty comfortable that there will not be any negative surprises coming out of that.

OK. And then the last quick question is: On the first quarter guidance on the operating costs -- a 15 to 20 percent increase. Is that over Q4 or over Q1?

That's correct.

Over Q4. Ok. Thank you very much.

Thanks.

Hello?

Your next question comes from of .

Good evening. Congratulations, also, on a great year. In your press release, and on the call, you mentioned that you were looking to sign three partnerships during 2002. I was wondering if you could give us guidance on what the nature of those partnerships would be? Would they be , or chemistry?

Yes. Look, I think we -- I mean, the situation with partnerships is always a little hard to talk about one, 'cause we just can't give very many specifics, as you know. Also, what we've learned over the years is that any partnership can fall apart until the day it's signed.

And so in order to say that we're going to have three, we obviously have to have a number of discussions going on. And they're, frankly, in all of those areas. Some are in , some are in , some are in chemistry. So we just -- it's very difficult to say what combination of them are actually going to come to fruition by the end of the year. But we have, certainly, a potential to do additional deals in all of those areas.

OK. And you touched on this a little bit in the last question, but your requirements for a partnership have obviously changed as your business has grown.

Right.

nadeau. Can you tell us what your priorities are now -- what you really look for in a partnership first -- with respect to cash versus therapeutic area versus, maybe, some other skill?

Sure. Well, cash is good. That's for sure. But we -- look we -- the future of , and I think the success of depends on getting products into the clinic, getting products onto the market and participating in a substantial way in the revenues from those products. And so, we're looking at deals as one way to help us achieve that objective.

So, that means we're not interested, necessarily, in a deal that gives away our rights in a therapeutic area. And that doesn't provide us -- provides us only with the cash to cover the work that we do. That is not a particularly attractive kind of partnership. An attractive kind of partnership is like we have with or , where it's in an area where we also have substantial interest in working, so that we're not diverted; that brings us substantial cash, that leaves us rights in that area, so that we can develop our own compounds and participate in a significant way in the compounds that are developed by our partner.

And that's why is such a nice area for a partnership; because we have the kind of data there we think can justify those kinds of partnerships. And we're working there anyway. And the same with, probably, inflammatory diseases. You can make the same case there. -- we still have all of the rights to all of our programs. We have some potentially interesting molecules.

We're looking for ways to monetize some of those assets as we go forward. And we need a combination of cash, obviously, to help us keep our burn rate in a reasonable range. And there are substantial non-cash assets that we've gotten in our other partnerships, like with , that we would also be very interested in getting. And, but, importantly, we need to make sure we retain the rights in the important areas for Exelixis.

OK. And one final question. As you look at your business, what area is it you priority to grow organically over 2002?

Oh, that's clear. It's all has to do with the -- we need -- we'll have some more medicinal chemists, so that we can aggressively move our compounds forward. And we need to build out our clinical infrastructure.

Great. Thank you.

OK.

your next question comes from of Bank of America.

Sorry, it's actually Jim Redding. Thanks. Most of my questions have been answered. One last question is: Of the two drugs that you expect to put in the clinic in '03, are both of those 100 percent owned compounds? Or could one of those be a -shared or shared with another company?

Oh, no. Those two are based on 100 percent-owned compounds that come out of our own small molecule program that are not beholden to a partner. And anything we get from or a partner will be on top of that.

redding. OK. Any guidance on when the first antibody could go in the clinic?

Well, obviously, that's also an issue for . I think it's not unreasonable to think about 2003 as a date for that, but, you know, that's a milestone that takes both companies, so I'm a little shy about predicting that, 'cause I'm committing to some things, and, so, they have to -- they have to do that for themselves.

Great. And, lastly, another target question: Would you consider your target types precedented targets? Do they fall in a class? Or ...

Oh, yes. Absolutely. We've -- we are trying to our make our life easy whenever we can. So, since we seem to have a number of targets that fall into classes. So, there are enzymes that are -- you know how to inhibit, and we're -- there's been an experience base on making inhibitors, and we focus really on those, because why make your life harder than you need it to be?

Right. And, actually, since that was a quick answer, one last one. And that is, will your collaborations -- I thought it was your intention to take products -- if the product is the source of the collaboration -- to take those into the clinic before partnering those. Has that changed, or ...

No, that has not changed. We have our -- that's why we are intent on filing . I think as we move forward -- it's interesting, your question, because it -- I think reflects on the changing philosophy of the industry. I think the industry is less enthusiastic about early-stage target deals than they used to be. I don't think we'll see so many of those. They're very interested in compounds. And even relatively early clinical compounds. So I think there'll be substantial partnering opportunities for those companies that demonstrate an ability to move compounds near the clinic or into the clinic. And I think that's how we're looking at things as we go forward, or one of the ways we're looking at things as we go forward. And, frankly, I think there aren't that many companies that can credibly execute on that.

OK. Who would expect your product-based collaborations to be after the product has gone into the clinic?

Yeah. I think we are exploring a number of collaborations. We could have additional collaborations like we have with or , where we do deliver targets. We're also exploring collaborations where our deliverable would be compounds.

OK.

But I don't -- I don't want the deliverable to be our compounds that we've taken into the clinic. I want -- I would like to have a collaboration that gave us the resources to develop additional compounds, for example. But we'll see. We're talking about all these things, and we'll see how they sort out.

OK. Thanks.

Your next question comes from of .

Hi and congratulations on a successful year. I would like to switch gears a little bit and ask you a little bit about your plans for . Specifically, you mentioned that you're potentially looking -- in the press release specifically -- into undertaking third party software business. Can you elaborate on that, on, sort of, the short, near-term, and what financial implications that might have?

Sure. You want to answer that, ?

Yeah. I think we view the software business with respect to third parties as upside. Obviously, you know, we want to fulfill our commitments to existing customers, and we've focused on making sure that they're comfortable with our acquisition of the software and that we have the resources available for them to provide the minimal support that's obligated going forward from there.

We also think they have a nice customer base and a nice opportunity for someone who wants to be in the space and support that as a business. So we view that as complete upside, because, I think, you know, we're seeing about $110 million in cash out of the transaction. Whatever we do with respect to the software, as long as it's not diversionary for us, becomes complete upside from the transaction.

OK. Are you looking to -- what I'm reading here -- you're not necessarily looking on building on that.

No.

That's correct. It will be a third party who will take it with the -- with the capabilities and interest in building the infrastructure and support for a third party software business.

OK. I've got -- probably you will get some sort of benefit from that collaborative agreement.

Yes, that would be correct. It'd be a royalty structure or some kind of milestone payment structure in which we'd be able to share on the upside there that they would be able to generate.

OK. Thank you very much.

Your next question comes from of the Foundation.

Good evening. I'd like to ask you a little bit about your programs. We sent . I believe you have 10 programs in development, and I was hoping you could give us some more color on those and what shareholders can reasonably expect from those projects. And then I'd like to follow up on the comment you just made about big being more interested now in compounds rather than targets. Is this because they're drowning in targets, and they don't need any new ones? Thank you.

OK. Was the first part of your compound -- I'm sorry -- the first part of your question about ...

Yes.

projects? OK -- just wanted to make sure I heard that correctly.

The -- well, we have a number of projects moving forward, both with and and with . We have those three partners in the agriculture area, and with we focused on insecticides.

We delivered to a number of high screening assays. Our deliverable to goes beyond targets into high screening assays that are formatted to run in their high screening facility. And there's a specified number of those assays that we are required to deliver every year.

And that number feels is proprietary, so I can't tell you exactly that number. But I can tell you that there have been a number of those that have been through screening, and there are compounds identified, and those projects are moving forward.

With , it's a relationship focused on plant traits, and we have had, I think, some extraordinary success in identifying genes which have potential utility to confer interesting traits on plants and in which there is substantial commercial interest. And -- but I want to emphasize their potential utility, because until we are able to demonstrate that the traits of these genes confer those desirable traits, not only in the relevant species, but in the commercially important sub-strain of that species, then we can't be confident of that. So, we're in the -- we don't have all the data yet, but those projects are moving forward.

And then with , our relationship is in fungicides. And there again, we've delivered to a number of very interesting fungicide targets. And that's been an extraordinary, productive relationship. It's not one of our bigger relationships, but they've gotten a lot of interesting targets out of it, and they're moving forward as well. So, I don't know if that answers your question or not, but that's -- I can't reveal the nature of those targets or the compounds or the genes.

OK. Let me just rephrase the question differently. What would be the likelihood, in your view, that your first product revenues would be from the side rather than from the drug side?

Well, I mean there's -- what I like about is that the development times are shorter than in , and the risk is smaller than in . And that's one of the reasons we entered into that business. I think if moves forward and goes successfully through clinical trials, it probably is our shortest route to product revenue.

What I like -- but, you know, there's an "if" attached all of these, so what we like is multiple shots and multiple opportunities. And I think what does is provide us an opportunity to see product revenue in a timeframe that is shorter than one can typically see it in the industry.

So -- now on the side, I think the changes in the industry are . This is just speculation on my part and based on some discussions with the companies, but, you know, they did -- companies did a lot of deals to get targets. And they have, as you suggest, more targets than they know what to do with. They don't have enough high quality targets. You know, more targets than you know what to do with isn't a good thing, because it means you really can't prioritize them and take the truly high quality targets into screening and moving forward.

So I think -- but the main reason, I think, is they're under some financial pressure, and they're looking to establish relationships that will contribute to their bottom line, nearer-term than a relationship will if it's only focused on targets that will generate profits a decade from now. They're looking for something that will contribute sooner than that.

Ok. Thank you. I have a few quick ones for . Regarding the asset impairment, my understanding of the deal was that you basically paid out as much as you got in cash, so I'm confused about why you would have an asset impairment there.

Right. You know, until the -- until the actual closing of the transaction, we measure it as the stock price went up -- from the time of the announcement of the transaction. So, that's an accounting, you know, that's sort of a function of the accounting and the fact that we're measuring at two different points.

OK. You have share guidance for year-end 2000 -- of actual shares outstanding? And also, do you use any, or are you planning to use any synthetic leases?

We don't use any synthetic leases, and we don't have plans to use special purpose entities or other entities like that that wouldn't be consolidated as part of our financial reporting. Where there's shares outstanding -- are you talking about EPS purposes or are you talking about actual share count ...

I'm talking about actual share count for the end of the year, if you can give that.

Well, the share count at the end of December is 56.1 million shares -- as of '01. Now, that's not going to necessarily be consistent with what we would use for weighted average shares outstanding for EPS, but I'm glad to go ahead and provide those numbers if people would like that as well.

You basically would start in the first quarter at 55.5 million shares and go up about 400,000 per quarter, assuming no other changes or other transactions. So that's a little bit of help for and the other folks out there who are going to calculate EPS.

Yes, I appreciate that. And can you tell us the number of employees currently, and how many are professionals?

The numbers at December 31 -- hold on for one second, please. Sorry, give me a moment while we go ahead and specifically get the number...

Sure.

...for professionals. Do you have other questions that I can deal with in the interim?

I think you've dealt with them all. Thank you.

OK. Perhaps we could go to the next question, if you don't mind, and we'll go ahead and announce the number of employees and professionals after the next set of questions, if that works for you.

Sir, your final question comes from of JP Morgan.

Just a quick question for . Is the burn rate for 2003 likely to be larger than the burn rate for 2002? And what was the old burn rate for '02?

The burn rate for 2002 that we had projected originally, acquisition ...

Yes.

... was 42 to 47 million -- I'm sorry -- for '01 rather. Sorry. With respect to '02, this is the first time we've given guidance with respect to the burn rate for '02.

OK. And '03 -- does it go up or down or stay the same?

It's going to be a function of our ability to succeed in the clinic, . I would like to say it would go up simply, because that would mean that we would be advancing our clinical candidates pretty aggressively.

Uh huh.

It also depends on our ability to generate additional revenues, and it's a little early to do that for '03.

Right. And , I was going to say -- you know, that's a functional question based on resources, so, obviously, we're going to be judicious about how rapidly we can advance things moving forward.

OK. Well, we wish you luck on generating the revenues.

Thank you.

If I could answer the last question with respect to the number of employees at December 31 -- there were 548 total employees, of which approximately 300 were professionals.

At this time, there are no further questions. Do you have any closing remarks?

Well, let me just thank everybody for their attention and for their support of the company. And we're going to be doing our best to meet all our milestones this year, so thanks again.

Thank you for participating in today's Exelixis fourth quarter and year-end 2001 financial release. This call will be available for replay beginning at 8 p.m. Eastern time today through 11:59 p.m. Eastern time on March the 27th, 2002. The conference ID number for the replay is three, five, four, one, one, seven, three. Again, the conference ID number for the replay is three, five, four, one, one, seven, three. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

This concludes today's conference. You may now disconnect.

, are you still on the line, please?

Yes ma'am.

And , are you still on the line? OK. I was going to ask you whether we could go into a private room, but that's OK. We'll disconnect.

All right, ma'am.

Thank you very much.

You're welcome.