Exelixis Inc (EXEL) 2002 Q1 法說會逐字稿

Good afternoon. My name is Mitch, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Exelixis first quarter 2002 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 1 on your telephone keypad, and you will be placed into a queue until the question-and-answer session of the program. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Miss Jane Green, vice president of corporate communications. Ms. Green, may begin your conference.

Good afternoon and thank you for joining Exelixis' management team on our first quarter 2002 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, Legal Affairs. Glen will review the company's financial performance for the quarter, and [inaudible] for the second quarter of 2002. George will discuss the company's progress through the quarter and provide some commentary on our outlook for 2002. We'll then open the call for questions. Please be advised that the following discussion contains certain statements that are forward- looking, including, without limitation, answers to questions at the end of the formal remarks. These statements are only predictions and are based upon our current expectations.

Forward-looking statements involve risks or 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 royalties derived from future products developed from its research efforts under collaborative agreements, the rate of growth, if any, in licensing 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 time and amounts of investments in manufacturing and clinical development, the DEAE Rebeccamycin currently in phase II clinical studies, and the timing of the filings for and investment in our initial proprietary small molecule IND. These and other risk factors are discussed under "risk factors" in our quarterly report on form 10-Q filed today and elsewhere in Exelixis' annual report on form 10-K for the year ended December 31, 2001, and other SEC reports. We expressly exclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any statements are based.

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

Thanks, Jane. As indicated I'm going to begin with an overview of our financial results for the quarter, proceed to more specifics on our performance, and offer second quarter financial guidance. In first quarter 2002 our financial performance remained on track and was consistent with the guidance we provided in our year-end conference call. Our revenue grew substantially compared for the first quarter of 2001 but fell somewhat from the levels of the first quarter of 2001 as we had indicated. This was due principally to previously announced termination of our Pharmacia relationship in February of 2002. As we continue to invest in our development programs our expenses grew in the anticipated range, and/or being driven by investment in advancing our clinical development programs to meet our planned near-term goals, specifically preparation for our first IND filing this year and two INDs per year beginning in 2003. These investments to meet our goals include IND-enabling studies for our proprietary small molecule IND candidate as well as advancing our other development and pipeline programs and manufacturing for DEAE Rebeccamycin.

Let me now review the specifics our quarterly

performance. As in the past, we are reporting results including and excluding noncash charges. References to noncash charges include charges for stock compensation expense and amortization of good will and intangibles. For the first quarter of 2002, we reported a pro forma net loss of approximately $17.4 million, or 31 cents per share excluding noncash charges. This compared to a pro forma net loss of approximately $9.8 million or 22% per share in the first quarter of 2001. Again, excluding noncash charges. Including noncash charges, we reported a net loss of approximately $18.4 million, or 33 cents per chair for the first quarter of 2002. This compared to a net loss of approximately 12.7 [inaudible] 29 cents per share in the first quarter of 2001. At March 31, our cash and investments totaled approximately $198.1 million compared to 227.7 million at December 31. The reduction in cash and investment balances included 4.5 million [inaudible] related to our acquisition of Genomica Corporation. With respect to more detail on our first quarter, total revenues were approximately $11.6 million compared to 7 point [inaudible] for the same period of 2001. This increase in revenues was primarily driven by corporate collaborations established in 2001, with protein design labs and Bristol-Myers-Squibb, and some compound deliveries under one of our four chemistry collaborations established in 2001. Research and development expenses for the first quarter of 2002 were approximately $25.9 million excluding a stock compensation expense of approximately $480,000 compared to approximately $15.6 million and [excluding] stock compensation expenses of approximately $1.2 million for the corresponding period of 2001.

This increase was driven primarily by expansion of our drug discovery and development operations as I indicated a moment ago including increased mapping and expansion of facilities to expand core program, support of new collaborative agreements, expansion of our drug discovery authorizations, and expenses for preclinical and clinical development related to DEAE Rebeccamycin and our other proprietary [inaudible]. General and administrative expenses for the first quarter of 2002 total approximately $4.5 million, including stock compensation expense of approximately $340,000. This compared to approximately $3.6 million, excluding stock compensation expense of approximately 700,000 for the first quarter of 2001. This increase was driven primarily by costs associated with personnel and facilities to support expansion in our research and development operations. With respect to guidance for the second quarter of 2002 and thereafter, the timing of new deals will have a substantial impact on our quarterly performance. Inaudible] in the absence of a new deal, we anticipate the first full quarter reflecting discontinuation of the Pharmacia collaboration funding will result in a decrease in revenue. Conservatively, we are anticipating that the impact of new deals will most likely be felt in the second half of the year, and that this will result in uneven growth in revenues. As George will discuss in a moment, we remain confident about the company's prospects in this area in any event. In the second quarter we anticipate that our revenues will decline in the range of 15 to 20%, and our operating expenses will likely increase by 10 to 15%. As I stated previously, our investments are focused on those areas of the company from which we will derive the most value and that will enable us to advance our product pipeline, file our INDs, and fulfill or corporate partnering obligations that are directly tied to our revenue expectations. We fully intend to continue to carefully review our operating expenses with the intention of managing our spending line [inaudible] financial goals for the year, with a particular focus on our cash burns. We remain confident that our cash burn for the year should be in the range of 68 to $73 million, and that we will end the year with tax [inaudible] $174 million.

Let me now turn the call over to George.

Thanks, Glen. If we think back for a while, I think 2001 was a year where Exelixis just gained a lot of momentum and programs really got rolling, and I think that momentum continued through the first quarter and certainly expected it to continue throughout the rest of the year. I'd

like to really focus my remarks on -- on the accomplishments during it is first quarter, and really try and put them into some context. I think the main priorities for us for the first quarter and certainly for the whole year are to advance our preclinical and clinical problems, fulfill our obligations to our current partners, and actively cultivate new partnerships. We made a lot of progress on each of those, and I'll talk about that in a minute. I'd just like to take perhaps a step back and say that the -- you know, the approach that Exelixis has taken, which is a bet that we all made and I think the bet that many of our investors made our biology platform coupled with other drug development capabilities is paying off. I think the high throughput in systematic biology with the biological insights certainly is generating a large number of very attractive targets. I think the chemistry capabilities we've had I think demonstrated by the most recent relationship we signed with Merck are really first-rate, and have allowed us to really take some of those targets and generate some compounds that are quite interesting compounds now.

I think what we're doing is leverageable, as I'll talk about in a minute, as most of you know, we've been focusing our activities on cancer angiogenesis. As a result of some of the work that we've done and some of the work that was published this past quarter in the Nature paper that we have and the [veg F] paper and the paper on [inaudible] immunity. Two papers published in Nature and Cell. I think we've been able to gain insight into the role that some of the [paths] we have been looking at will have on other diseases, which I think will allow us to explore additional therapeutic opportunities as we go forward.

And finally, I'll talk about this more in a minute, all these capabilities [inaudible] I think are really making us an attractive partner for a pharmaceutical company, they're looking for different things these days than what they were for a couple of years ago and I think that really plays to our strengths.

So, let's talk about our pipeline and what it looks like. Our lead compounds that we are moving forward are directed towards a target that is

involved in inflammatory angiogenesis. There's a pathway in angiogenesis that is distinct from [veg F]. We know how the target works. It's an enzyme that's required for activation of other molecules that are both pro-angiogenic and pro-inflammatory. We know about it's expression level, and very high levels in a variety of human tumors. We also know that there are certain inflammatory indications where angiogenesis may play a key role in things like rheumatoid arthritis, macular degeneration, where we are certainly going to move our compounds forward.

So compounds are working distinctly from [veg F], certainly we'll move them forward, and they have potential in both cancer and inflammatory indications, and I think that's a sign of the breadth our biology.

The two compounds that we're moving forward are against that one target, are different from each other in that one is subcue and the other is oral. We also have structurally unrelated backups so if for any reason one of those fails we have other compounds that can step in and move forward quickly. We are concluding the pharmacology studies now and preparing the [GOP] tox in preparation for IND filing. So as we said before, these compounds are still on track to be the subject of IND filing at the end of the year. However, we just don't have all the data yet, and -- to be honest and realistic about these, that they could have bad data and we should result in going to one of the backup compounds or our next compound for our first IND. I'm not trying to prepare anything, we're not trying to prepare anybody. We don't know anything negative about these, everything we have to date looks good, we just don't have all of the data yet.

Coming behind those, very quickly, we have a well- stocked pipeline of preclinical compounds that interfere with angiogenesis through other mechanisms. We have compounds that [inaudible] cell cycle of cancer cells, DNA replication, compounds [inaudible] [poptic] in cancer cells, they're all in medicinal chemistry and we anticipate identify development compounds during the course of this year so that we'll have compounds moving forward for IND filings next year.

In addition to those, we have a number of antibody partners, antibody targets. As you know, we have a partnership with PDL. That partnership is going very well. We've delivered a number of targets to PDL in making antibodies. Some of those antibodies are now in testing. So together with PDL, we'll be moving those antibodies forward. Rebeccamycin continues to look good. We continue to see responses in patients that are exposed to the drug, which suggests that the drug is active and will have some therapeutic benefit. The most consistent pattern of responses continues to be in patients with upper GI tumors, and as we said before, we will be in a position to provide everybody with more information on the progress of Rebeccamycin later in the year. We have found a third-party manufacturer for the drug, which -- who is currently manufacturing it for us, and we're also taking steps to see if Rebeccamycin can be manufactured completely synthetically. As you know, it's a semi-synthetic product. Rebeccamycin itself is a fermentation progress, [unintelligible] one chemical step to tack on the DEAE [moravie] onto Rebeccamycin. It can be synthesized completely in the laboratory at small scale and we're working with a number of contractors now to see if we can develop a process that will allow large-scale synthesis of Rebeccamysis -- Rebeccamycin.

Our relationships with BMS and PDL are going well. The collaboration with BMS [inaudible] very productive, valuable for us, and we know that the collaboration is very high priority with the oncology group BMS and they're devoting a significant level of internal resources to the collaboration. We continue to joy a very productive exchange of data and reagents and to share in the targets, as you all know, the small monthly cure targets we find are shared. And we work together with BMS on sometimes quite innovative, I think, validation strategies for some of the targets that we find.

Similarly, relationship with PDL remains very strong. You all know there have been some management changes at PDL. I can tell you that we have a very good relationship with Doug Eversol in the management of PDL. We expect them to continue

aggressively with the targets that we've delivered to them, and we have talked to them exclusively about that and they've assured us that our collaboration has a very high priority and they intend to be extremely aggressive moving these targets forward. So I think that relationship is actually in very good shape.

Our agriculture progress target -- excuse me -- agriculture collaborations are progressing extremely well. As you know, we have a relationship with Bayer, which has a joint venture called Genoptera. This joint venture completed the sequence of the genome of the [Heliothis] moth which is an economically important pest, and also a very good model for moth species. We've delivered a number of [Heliothis] based targets and assays for Bayer, but because they're really based on the pest itself, could potentially lead to more rapid discovery of novel potent and potentially more specific insecticides. And I can tell you both Bayer and Exelixis are very pleased with this collaboration. We've identified over 250 potential target genes in the process of validating [inaudible], and in agriculture that's a substantial achievement. And to date we've delivered more than 50 validated targets to Bayer. Some of these targets belong to well-known insecticides classes. Some are completely novel. Bayer is actively screening these targets and has identified a number of hits and leads that they are aggressively moving forward.

We are very optimistic about our ongoing partnership discussions, are actively engaged in multiple partnering conversations these days, and I think they -- the direction of these really plays to our strength. The pharma industry or what we are hearing from the pharma industry these days is that they are not so interested in early-stage research deals, they're not so interested in collaborations that will deliver to them targets. They are interested in compounds. And they are interested either in compounds that are ready to go into the clinic, IND-ready compounds, or in some cases compounds that are actually in the clinic, and we believe that's really one of our strengths and that we are one of a strong number of biotech companies that can credibly deliver a pipeline of compounds at that stage, so here optimistic about

these partnerships as we go forward.

So, I think we're very confident about meeting our goals for 2002. We think we've created some real value and certainly distinguished ourselves from in other companies in our sector.

At the same time, we're certainly mindful of the challenges that are ahead of us. We've set ambitious goals for the year, both in terms of milestones that we want to achieve, moving the company forward. We are aware of the fact that we -- we have a burn rate to manage and we have to be responsible about that. And at this point we are confident that we will manage our financial performance consistent with the goals we set and continue to meet the milestones that we've talked about publicly. So we've had, I think, a very good first quarter and we're quite optimistic about the rest of the year.

So I think, with that, we'll open it up for questions.

Thank you. Ladies and gentlemen, at this time I would like to remind everyone, in order to ask a question, please press star and then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Charles Duncan of Dresdner Kleinwort.

Good afternoon, folks. Congratulations on a good quarter of progress. It seems like we're just talking a couple weeks ago about last quarter. But a couple of quick questions. First is, you've referred to some of the work that you're doing with PDL as rigorous, and what I would like to know really, George, or whoever wants to take a stab at this is how would you define rug Russ, and can you give us some insights as to that work and why you think it's going to be better than some of the work that's been done in the past.

Yeah, I didn't write the word rigorous but I can tell you what's meant by that. I think what we mean by that is that the extent or work we put in of validating the target, that, as you know, there are many collaborations between genomics companies and antibody companies, and the

number of targets that have been delivered from genomics companies to antibody companies is actually quite staggering, and in my view, anyway, it's virtually impossible to make antibodies against all of those targets and test what the antibodies do. So, in order to maximize the chances that an antibody will have a therapeutic effect, you need to know that blocking the activity of the target actually will have an impact on the tumor so that the antibody binding on a tumor cell, for example, will have a functional consequence itself and minimize the need to hook on some radio label or something that would affect the tumor killing. So we've put a lot of work validating the targets and making sure that the targets that we deliver and against which the antibodies develop will have a functional consequence, if the antibodies find their target and block the activity.

So you're talking about maybe agonistic antibodies?

No, antagonistic antibodies. It's a much easier goal, of course, than agonistic antibodies. But if he can inhibit a target with an antibody, self-surface molecules say that's a signal transduction molecule involving in some cell surface process, and you can inhibit its function, and that can have an impact [inaudible] on the tumor cell, then that's a much higher quality target than something that just passively allows the antibody to bind but not have a functional consequence. And in that case it still might be an interesting target, but you have to link something onto the antibody that will then lead to the death of those cells.

George, do you expect to be able to announce either out of that collaboration or out of your internal efforts new -- and would you announce new development compounds by the end of the year?

Well, under the PDL relationship I think we'd let PDL speak to that. They are the party that is charged with bringing the antibodies forward and filing the IND. So I think that for the timing of that you should talk to PDL. I -- I don't think this will be the end of this year, frankly, but I would get that first from them. Or

I guess you got it first from me, but I would confirm it with them. And we didn't really expect that to happen. From our own -- as we said, we have compounds that are on track that would be ready to be filed, have INDs filed on them by the end of this year.

Having said that, you know, the reason we're not filing today is because we don't have all the data, and, you know, it could be that they will regenerate between now and then won't justify going forward. So all I can tell you today is that everything we have today looks good, and we have -- we don't have any red flags, we don't see anything badly about these, the timing -- I mean we're not behind schedule, we're on schedule, so we are feeling pretty good about where we are, but I -- you know, just -- I think we need to be realistic these days, because I don't want to make promises and then, you know, not keep them. So we're on track. If we get bad tox data or something like that we won't file on those compounds and we'll file on the next compound, but right now things look good.

George, I appreciate your clarity on that. I'm sorry, I wasn't clear in my question.

Yeah.

are there -- would you be as forthcoming and say, you know, by year end that we've identified two other mechanisms that we hope to exploit four IND candidates in '03?

Yes, I think we can say that today. We have several, serge more than two. We have several compounds now based on targets that are distinct from the target from the lead compounds that are in medicinal chemistry and lead optimization phase on which we anticipate identifying formal development candidates during the rest of the course of this year. And those will be the subject of INDs in 2003.

Now, we know that, you know, statistically speaking not all of those will make it to IND filing. If

you just look back at the industry averages. We have enough those projects going forward now, so with industry known attrition rates we're confident we'll make our two-IND candidate -- or two-IND target in 2003. But there -- and they're all mechanistically distinct from our lead compounds. There is one target in there that is a [pro-peptotic] target, seems to induce apoptosis in people through [inaudible] cells, there's another target that is an inhibitor of an enzyme involving DNA replication. There is that I cell -- or two cell cycle inhibitors all of which are being optimized now that could be the subject of INDs next year. They won't all make it. But some of them will.

And then last quick question, let's accept that the nuclear winter in terms of cash raising activity for biotech continues, do you think that you're adequately -- you have enough cash equivalents to take care of, say, two, three IND candidates as well as Rebeccamycin so for the next 18 months?

Yes, we have enough cash for the next 18 months. So if that's the length of the nuclear winter we're in fine shape. You know, we are mindful, certainly, Charles of the burn. And I think next year as we move Rebeccamycin forward and we have our own INDs filed and are moving our own compounds through the clinic, certainly there will be additional expenses. I think we have -- I'll say at this point I am feeling pretty good about our ability to be able to bring in additional revenue through additional partnerships. If that does not turn out to be the case, then we certainly have, you know, contingency plans so this we can achieve all of our strategicals and certainly survive a nuclear winter.

Okay, thank you.

Hi, George, how are you?

I'm fine.

Good. Could you talk a little bit about

your angiogenesis compounds differ, could you expand on that a little bit in terms of what you've seen, in terms of [inaudible] clinicals, et cetera, what advantages the approach you're taking might have over other compounds that are currently in the clinic.

Yeah, sure. You know, the compounds that are currently in the clinic are largely [veg F] in type. And I can tell you [veg F] is certainly -- or [veg F] [inaudible] is certainly a very potent way to inhibit angiogenesis, and some of our models, if you inhibit [veg F], for example, you wipe out all vasculature. With the particular target that is the subject of our most advanced compounds, if that's inhibited in the models, it does not wipe out all the vasculature. It has a more specific kind of effect, and the large vessels are largely left impact; newly forming vessels are altered and impaired. So it has a -- a different mechanismal action and a different effect on angiogenesis than [veg F]. So I think [veg F] -- or let's say anti- angiogenesis is going to turn out to be not any different from controlling hypertension, for -- or other therapeutic approaches where there are several drug classes that target different targets, different pathways that have sometimes synergistic effects; sometimes one pathway will work better for some patient than another. And I fully expect that that's the way this will work. Each target will have its unique spectrum of efficacy and side effects. So it's -- we can tell -- we have looked at a large number of tumors, human tumors directly for expression of our targets, some types of breast cancer, for example, some other types of tumors, have very high levels of expression of this particular target. So we are getting a pretty good idea of where we want -- we want to develop it first. And if we look at, as I said before, some noncancer indications, things like rheumatoid arthritis, macular degeneration, which are obviously very large markets where [veg F] may not work, which have an inflammatory component, so a target like ours which is involved in inflammatory angiogenesis is likely to be involved, or may very well be involved. Those are places where we'd like to move our compounds forward, and so I'm sure we will have a different spectrum of action from the [veg F] antagonists.

Great. Thanks a lot.

Once again, ladies and gentlemen, I would like to remind everyone, in order to ask a question please press star and then the number 1 on your telephone key bad. Your next question comes from Diane Zekauskas from JP Morgan.

Jeff Zekauskas, actually. A couple of questions. George, do you have enough Rebeccamycin to complete your ongoing trials or your to engage in future trials? Is the quantity of Rebeccamycin rate [inaudible] in step?

Well, "yes" and "no." We have enough Rebeccamycin to complete all of the phase II trials that are ongoing through the NCI. There's an adequate supply to take those trials through, and there is not enough Rebeccamycin existing for us to do our own regulatory trials designed to gain approval of Rebeccamycin, so we're going to have to manufacture more for those trials. And that's ongoing.

Okay. Can you just discuss possible time lines with Rebeccamycin.

Yeah, I think what we've -- what we've said, and this means our expectation, that [inaudible] year we will have a lot more data from the ongoing phase II trials, so we will be in a position to design, say, an intelligent phase III or phase II bead designed to gain approval for the drug, and we also expect to have adequate drug [sustenance] around that same time.

Is it clear what kinds of liver cancers are -- is it clear which liver cancers Rebeccamycin [inaudible] or is that not clear yet?

Well, this -- some of the data we're continuing to gather because the -- the -- the inclusion criteria for some of the trials that are going on right now I'll say not as precise as we would want in a trial designed to gain regulatory approval. And so part of the reason I mean we're gathering more data is to identify exactly that question so we can be very precise about, among other things, the inclusion criteria,

the types of tumors that we want to test a compound in, in further trials. So we'll have a better answer to that as we go on.

I guess that the price of all kinds -- or the prices of all kinds of biotech assets have really moved down sharply over the past few months.

Right.

Does that mean that I mean if you had to size up Exelixis right now and say you know, are you mostly looking inward or mostly looking outward, sort of how would you put it, that is, has the decrease in prices of so many assets made you think that you really need to step up your thinking about, you know, various things that you might do with other biotech companies?

Yeah, look, I think some things don't change regardless of where the stock market is. One is we have to move our programs forward, we have to execute. And so our focus is on execution. You know, we've -- we've got our compounds moving forward, we have Rebeccamycin moving forward, not only our most advanced compounds but the others moving behind it and we've got to get those moving forward, we have to have a clinical pipeline. The clinical pipeline should be one that's full of interesting compounds. And that's our goal, and that's our goal, you know, whether our stock price is 100 or five. And so that thing doesn't change.

As the values of companies have come down, certainly there are lots of very nervous management teams as I go around the industry and go to people and talk to other companies, and all kinds of companies are much less confident than they were, you know, a year or two ago. And I think what -- what the current financing market has done is really make companies take a hard look at themselves and ask the question, do they have what it takes to really make it. And I think for some companies -- not Exelixis, make that clear -- but for some companies the answer is maybe we don't. And for Exelixis the answer is "Yeah, we do, and let's go," and I think, as you suggested, there could be interesting opportunities that arise as a result of the kind of market that we're in. And

we're looking at those, and we've been, you know, in discussions, but, frankly, you know, we want to be very selective, because I think we're on a very good track as we go right now alone. So number one is, you know, don't screw it up, and number two is can we enhance our goals, can we get there faster by some strategic moves. And I don't know the answer to that question yet, but we're -- we're constantly looking at that. So that's -- there's more of it to look at these days.

Okay, thank you very much.

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

I think we've adequately covered all the topics, and since there aren't any more questions, we'll call it a day.

Thank you for attending today's Exelixis first quarter 2002 financial results conference call. You may now disconnect.