Exelixis Inc (EXEL) 2004 Q2 法說會逐字稿

Good afternoon. My name is Alene, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Exelixis quarter 2 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. I will now to call over to Ms. Jane Green.

Good afternoon, and thanks for joining the Exelixis management team on our second quarter 2004 financial results conference call. Present during this call are George Scangos, President and Chief Executive Officer; Frank Karbe, Senior Vice President and Chief Financial Officer; and Christine Wallbeck (ph), President of Finance.

Following this introduction, George will provide perspective on the quarter and the year. Frank will review the Company's financial performance for the quarter, and provide guidance for the third quarter 2004 and update guidance for the full year of 2004. George will then provide additional commentary, then we will open the call for questions.

Please note 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 (indiscernible) expectation.

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 these risks and uncertainties, which include, without limitation -- risks related to our ability to enter into new collaborations, continue existing collaborations, and receive milestones and royalties derived from future products; develop research efforts under collaborative agreements; the rate of growth, if any, in license and contract revenue; the timing and level of expenses associated with the growth of proprietary programs in the GSK collaboration; the rate of growth, if any, in license and contract revenues; our estimated future balance of cash, cash equivalent, short-term investments, and restricted cash; potential failure of Exelixis product candidates to demonstrate safety and efficacy in clinical testing; the ability of Exelixis to file IND applications and initiate clinical trials at the referenced time; the ability of Exelixis to conduct a Phase II clinical trial of XL119, sufficient to achieve FDA approval; the ability of Exelixis to successfully advance and develop additional compounds, including XL784, XL647, XL999, XL880, XL820, XL844, XL184 and others.

These and other risk factors are discussed under the (technical difficulty) annual report on Form 10-K for the year ended December 31, 2003, and our quarterly report for the quarter ended June 30, 2004 and other as 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 our expectations with regard thereto; or any change in event, conditions, or circumstances on which any such statements are made.

Now, I will turn the call over to George Scangos.

Thank you, Jane. Let me welcome everybody to the call. We are happy to be here today. I want to make a few brief comments, and I will turn it over to Frank Karbe, who will go through the financial results. And then I will come back at the end and talk in more detail about our programs.

I think the short news is, we had a really good second quarter and a really good first half of the year. I think we delivered a very strong performance. The development pipeline is growing quickly with what we believe are promising, high-quality, highly potent compounds.

We initiated a multinational Phase III trial for 119 in patients with bile duct tumors, which would be the largest clinical trial undertaken in the syndication. We started the Phase I trial for XL647 in cancer patients. We filed an IND application for XL999. That IND is now active, and we anticipate starting the Phase I trial in the fall.

We are continuing to explore the potential of XL784 in renal disease, with the goal of pursuing that indication in the clinic in early 2005. And we made good progress along those lines.

XL820, XL844, and XL880 are all in advancing toward IND applications in the first half of 2005. And behind that promising lineup, our multiple additional programs that are moving along to continuing toward IND applications in later 2005 and 2006, including XL184, which is a very interesting compound, that has just moved into the development pipeline as a potential IND candidate in the second half of 2005.

So taken together, a pipeline represents a remarkable achievement in terms of quality of effort, productivity, value creation. We are executing aggressively on our goal of generating a large and diverse portfolio of high quality anti-cancer compounds with substantial therapeutic and commercial potential.

We are proud of our accomplishments. And we believe we have set the stage for creating long-term value for our shareholders and for patients who we hope will benefit from our efforts.

Today, our organization really is structured for success. Our financial condition is sound. Our workforce is committed and motivated. And I believe that, as a Company, we have never been stronger, and that 2004 is going to be and important year in the evolution of the Company.

So I will come back to these points and talk about them in more detail at the end of the call. But now, I would like to turn it over to Frank and ask him to review the quarter's financial results.

Thanks, George. I will start with an overview of our financial performance for the second quarter, and then discuss guidance for the fourth quarter and the full year 2004.

Exelixis financial performance in the second quarter was right on target. We delivered results that were consistent with our guidance for the quarter, both in terms of revenue and expenses. Revenue increased 6 percent in line with our anticipation at the end of the first quarter, that revenue would increase in the second quarter by 5 to 10 percent.

Expenses decreased by 2 percent -- again, in line with our anticipation that operating expenses, excluding non-cash and restructuring charges, would be relatively flat. As most of you know, we implemented a restructuring at the end of the quarter that we expect will strengthen the Company's ability to generate and advance multiple compounds into and through the clinic.

We believe that the company is in fundamentally sound financial condition. And with that, I will now provide more detail on our quarterly results.

As in the past, we are reporting results both on a GAAP and non-GAAP basis. As reminder, non-GAAP results exclude restructuring expense, in process research and development, and non-cash charges relating to stock compensation expense and amortization of intangibles.

Let's begin with net loss. For the quarter ended June 30, 2004, we reported a GAAP net loss a $29.3 million, or 41 cents per share, compared to a GAAP net loss of 23.4 million, or 39 cents per share, for the quarter ended June 30, 2003.

On a non-GAAP basis, we reported a net loss of 27 million, or 37 cents per share, for the second quarter '04. And the comparable non-GAAP net loss for the second quarter '03 was 23.9 million, or 40 cents per share.

Let us take a look cash. At June 30, 2004, cash, cash equivalents, short-term investments, and restricted cash totaled 170.3 million compared to 241.9 million at the end of 2003.

Revenue -- for the quarter ended June 30, 2004, total revenues were 12.6 million compared to 13 million for the same period of '03. The decrease from '03 to '04 was primarily a result of the successful conclusion of our collaboration with Protein Design Labs in May 2003.

This, however, was partially offset by milestone revenue earned on our Bristol-Myers Squibb collaboration. During the second quarter of 2004, BMS and we completed on a another draft pick of model cancer targets, resulting in a milestone payment to Exelixis.

Let us look at R&D costs. Research and development expenses for the quarter ended June 30, 2004 were 34.4 million, compared to 32.5 million for the equivalent period of 2003. The increase in '04 from the '03 level was driven primarily by increased expenses associated with advancing the Company's clinical and pre-clinical development programs.

Next, let's take a look at G&A costs. It is a fairly simple story. General and administrative expenses for the quarter were 4.7 million, unchanged from the level for the comparable period in '03.

Finally, I would like to elaborate a little bit on the restructuring. At the end of the second quarter, Exelixis implemented a restructuring and consolidation of its research and discovery organizations, designed to optimize the ability to generate multiple new high-quality investigation of new drug applications per year, and rapidly advance these new drug candidates through clinical development.

We anticipate realizing significant cost savings and efficiencies through the restructuring that will enhance the quality and growth of our maturing franchise of proprietary anti-cancer compounds, while the same time ensure our ability to fulfill obligations to corporate partners.

Most of the headcount reductions took place in the Company's research organization, and resulted in a reduction in force of 62 positions, or approximately 11 percent of the Company's personnel. The restructuring is expected to result in cost savings of at least 5 million in 2004, and that is excluding the restructuring charge, an annual cost savings of at least $10 million in '05 and beyond. As a result of the restructuring, the Company recorded a restructuring charge of 1.74 million during the second quarter of '04, attributable to involuntary termination benefits.

Let's finally turn our outlook. First, with respect to financial expectations for the third quarter of 2004, as compared to the second quarter, we anticipate that revenues will decrease in the range of 4 to 9 percent, and that operating expenses, excluding restructuring charges acquired in process research and development and non-cash charges, will increase in the range of 4 to 9 percent.

As result of our restructuring in the second quarter, we are revising our 2004 year-end financial guidance for both operating expenses and cash investment balance.

For the year ending December 31, '04 as compared to 2003, we anticipate that operating expenses, excluding restructuring charges acquired in process research and development and non-cash charges, will increase in the range of 10 to 15 percent. The Company's cash, cash equivalents, short-term investments, and restricted cash balance of the end of 2004 is expected to exceed $180 million, including estimated proceeds of 30 million in '04 from our loan facility with GlaxoSmithKline.

Let me point out that the above guidance does not reflect the potential impact of any product in-licensing, equity offering, or business combination that may be closed or entered into after June 30, 2004.

And with that, I would like to turn the call back over to George.

Thanks, Frank. I would like to take a few minutes and just talk about how we see our business taking shape and evolving, given the rapid maturation that we have experienced over the past couple of years, and in light of our goal to continue our progress at an aggressive pace.

I think first on perspective -- I think we have made remarkable progress in the last couple of years. If you look at where we are today compared to where we were at the beginning of 2002, the contrast is, I think, quite dramatic.

At that time, XL119 was still in the hands of the National Cancer Institute. And we were just beginning pre-clinical studies for our first proprietary compound. Last year at this time, we were just beginning to plan the Phase III trial for 119, and XL784 was in the early stages of Phase I. Today, we have 4 clinical programs under way, including global Phase III trial.

By this time next year, we could have 7 or 8 clinical programs running simultaneously. We have revved up our discovery engines such that we are generating a steady supply of IND-worthy compounds for the foreseeable future.

This is a remarkable track record of progress, productivity, and success. And as you know, we are not prone to hyperbole. But I do believe that this record of achievement is unequaled by any other biotech Company.

We have become the product-focused Company that we intended to be. In our early days, target identification and validation were the Company's core activities. Today, the activities that are essential to our progress as a Company are entirely focused on filling and advancing our clinical pipeline.

Going forward, the Company will be defined by the quantity, quality, and diversity of our compounds; the speed with which we can move them through the clinic and onto the market; and our ability to optimize their therapeutic and commercial potential.

We have also been innovators in the area of strategic corporate partnering. We (technical difficulty) alliances to build and advance our business, to bring in assets, and to accelerate our growth, to leverage and monetize our assets opportunistically.

We have established partnerships that have helped to seed our pipeline, and that are structured to enable us to retain substantial rights to our own inventions. We intend to continue this strategy.

And as you know, about 2 years ago, we established the landmark discovery and development alliance with GSK. That was hailed at the time as an innovative experiment in pharma biotech relations. For us, and we believe for GSK, it was the right deal at the right time with the right partner. Today, we are extremely pleased with this collaboration. And I believe that statement also applies to GSK.

In the last 2 years, we have exceeded the partnership's goals in terms of productivity and quality, and our pipeline today is stocked with promising anti-cancer compounds. Some of these compounds have the potential to be selected for development by GSK at the end of Phase IIa, triggering substantial milestones, royalties, and co-promotion rights.

Because we have generated more compound opportunities than GSK can contractually select, we also expect to end up owning some of these compounds. At the same time, in the last year, we have begun the critically important process of balancing our investment in partnered and proprietary programs, plus laying the groundwork for bringing greater diversity to our pipeline in terms of target classes, therapeutic areas of focus, and asset ownership.

Key components of this balancing strategy include both generating compounds against targets we have identified and validated in our oncology collaboration with BMS, as well as generating compounds active against targets emerging from our internal discovery efforts.

As you know, later on this year begins a time period in which GSK has the option to, as we call it, "supersize" the relationship. I have to say that at this time, we don't know what option GSK will take. But whether the agreement goes forward in its current form or is enlarged, both options are attractive to us. GSK has been a very good and cooperative partner. And we are very confident that the relationship will go forward in a way that is positive and beneficial for both companies.

So not only have we made extraordinary progress over the last 2 years in transforming the Company and becoming a product-focused business, but we have also transformed our organization. And I think today, we are structured for success.

We have created a new organizational structure in research and discovery that is streamlined and fully integrated. The group is being led by Michael Morrissey (ph). Jeff Latts' group in development has been extraordinarily productive, and will continue to expand and support are growing clinical pipeline.

We believe that within this new, integrated structure, we can continue to increase our productivity and efficiency. We have focused our resources on those areas that are essential to meet the strategic goals and to maintain the steady state of generating at least 2 high-quality INDs per year.

We have also ensured that we can dedicate the right level of resources for current and future clinical programs, and support our transition into the commercial organization.

So, having said all that, our strength (indiscernible) biology is more than ever a core asset, while our needs for target identification and validation are decreased. Since we have a set of assets that can keep us going for the next few years, our goal is to marry biology more closely to the clinic.

In this age of targeted therapies, or what people hope will be targeted therapies, we intend to find new ways to acquire fundamental understanding, gleaned from model system genetics, and functional genomics, to better identify the activated and mutated forms of our targets in disease states and to develop patient stratification and selection criteria for clinical trial.

The industry as a whole is struggling to make sense of how to apply biology to clinical development, and we intend to be innovators in this field, as well.

It is the right application of our assets at this time, and Greg Tommin (ph), who is our new Chief Science Officer, is going to spearhead this effort within Exelixis, as well as to spearhead the efforts to identify exciting new areas of biology in which to generate new drugs.

So in the past couple of years, we have succeeded in executing on our goals. Our pipeline is expanding, the balance sheet is down, partnerships are productive, and our partners are happy. Our strategies appear to be working, and our people are focused and motivated. So we think our future is very bright. We are optimistic about the Company.

We are, however, also realists. We know that despite our track record of achievements, we still face significant business challenges. A full and a rich pipeline, one could argue, is the only sensible strategy to pursue. And of course, we do argue that in light of the inherent risks in drug development.

We all know that not all of our programs, nor all of anybody's programs, will succeed in the way we want them to. And we will, at some point, have to make some choices about what programs to advance or not.

It is much easier to make those kinds of decisions in the presence of a rich and growing pipeline. If a company has only 1 or 2 products -- or projects in clinical development, certainly, the motivation is to try and keep those going.

If a company, like us, has multiple compounds going through clinical development, the motivation really is to focus in on those high-quality compounds that a generating good data and are worthy of putting a lot of resources behind.

Going forward, we may decide that it is strategically valuable for us to venture beyond cancer into other therapeutic areas. For example, we have assets in therapeutic areas outside cancer, and outside the world of small molecules that we want to exploit. But we cannot afford to invest heavily in those areas completely on our own. So we are exploring ways to leverage or partner these assets that would enable us to advance them, but also to retain significant rights.

We want to explore new target classes beyond kinases. We are expanding our drug discovery efforts into therapeutically interesting and commercially valuable target classes, including nuclear hormone receptors -- NGPCRs (ph). We have already generated some interesting inhibitors -- again, some of these targets from our high throughput screening programs that we are aggressively moving forward.

This initiative should significantly expand our ability to generate valuable development compounds that could apply to therapeutic areas outside of cancer, such as metabolic diseases or cardiovascular disease, thus significantly expanding the commercial potential of our clinical pipeline.

We have to continue, obviously, to fund our expanding operations. We have to be creative and conservative at the same time. This is hardly a challenge that is unique to Exelixis, or new to Exelixis. We are confident that we will find appropriate solutions.

So these are some of the key long-term strategic issues that we're dealing with now. In the meantime, in the short-term, we know exactly what our goals are. XL119 -- we intend to continue aggressive efforts to recruit investigators in the U.S. and Europe, recruit patients, and carry out a high-quality Phase III program.

The two-arm, single-blind trial is designed to enroll up to 600 patients in a one-to-one randomization. The primary end point of the trial is survival. And we hope to be able to show a 2-month benefit in the XL119 treated group compared to the control group. We will conduct 2 event-driven interim analyses. We anticipate that the full trial could take about 3 years to complete.

We are also continuing to have discussions with potential partners for the European and Asian markets. Interestingly, at this year's ASCO meeting, one of the NCI investigators involved in the original Phase II programs presented data from a study in refractory breast cancer that showed encouraging results. So there is additional data from the Phase II trials indicating that XL119 is an active molecule.

Take a look at XL784 -- we intend to complete the pre-clinical activities designed to explore the potential of XL784 in renal disease. We're doing additional toxicology and pharmacology studies, including studies in a diabetic graph model (ph). Confirmatory studies have shown that XL784 is active, and a key (indiscernible) model of hypertensive renal disease.

We passed a major technical hurdle relative to reformulating the compound into a convenient oral dosing form and we are confident that we will be able to achieve an appropriate formulation. We anticipate that all this work should be completed around year-end or early 2005, at which time we will determine next development steps, which could potentially include initiation of the Phase I/II clinical trial in patients with renal disease.

XL647 -- we intend to conduct a high-quality Phase I trial for 647. A Phase I program was initiated in the second quarter, and is designed as an open label, single and repeat dose escalation study, and will be conducted in patients with solid tumors for whom there is no alternative therapy. We anticipate that this trial should take about a year to complete. But obviously, the timing is dependent on the dosing.

XL999 -- an IND is now active as of last Friday. And we intend to initiate the Phase I trial in the fall. We'll provide more detail on the Phase I trial design when we initiate that program.

We intend to file more INDs. XL880, 820, and 844 are all slated for filings in the first half of 2005. And an IND for XL184 is anticipated in the second half of 2005. We also have a broad portfolio of compounds in lead discovery and optimization that could form the basis of potential IND applications later in 2005 and beyond.

As always, we continued intend to continue to meet our partners' expectations and establish additional partnerships. As I noted, we could expand our efforts into therapeutic areas outside of cancer. We are also looking at options to in-license as well as out-license.

We are actively engaged in several different conversations with a number of companies. And we are carefully weighing our options. Our goal is to establish the right combination of alliances that will help us to achieve the right balance in terms of partners and proprietary programs.

We are interested in pursuing additional partnerships if they can help us to advance the business, generate substantial cash, and are structured thus that we retain significant rights to our pipeline.

Integral to our consideration of new alliances is the set of implications relative to whether GSK will increase the size of the alliance with them. Frankly, that option may put us in a very interesting and potentially advantageous position from which to think about appropriate new deal structures. So while there is a lot of active interest in our Company right now, we are evaluating the best course of action for us to take.

So in conclusion, we intend to do a lot this year. We have already accomplished a lot in the first half of this year. Our goal was to file 2 IND's this year; we have already done that. We are primed to accomplish even more goals.

I expect that the productivity of the next two years will resemble the productivity of the past two. And that puts the Company at a very exciting time with a very exciting future (technical difficulty). So let me thank you all for your attention, and we will now open up the call for questions.

(OPERATOR INSTRUCTIONS) David Witzke, SunTrust.

First question, George -- can you give us more detail on the timing of your joint decision with GSK on whether or not to supersize the collaboration, and really how you think through the pros and cons of this -- and whether giving GSK more options to your leading programs is in your best interest, and how you balance that?

Sure, David. There is a 6-month window during which GSK can elect to increase the size of the collaboration. That begins at the second anniversary of the collaboration, which is the end of October. So there is a 6-month window that starts at the end of this October, in which they can make that decision. It is their choice to make the decision.

We think about it actually in a couple of ways. The basic (indiscernible), if you want, is that they pay a lot more money, and they get to pick more compounds. And they get expanded rights.

So since we do have other options -- we have other companies with whom we are in discussion who are potentially interested in collaborations with Exelixis, we are -- Exelixis actually would be fine with the expanded option or without the expanded option.

GSK has been a very good partner. And so our goal in the collaboration, as in all our partnerships, has been to perform well, to make sure the partner is happy, and that they are getting what they paid for and even more. And we intend to continue to do that.

Similarly, GSK has been very aware of the issues around a small biotech Company like ours, and has expressed and has shown a willingness to work with us in a very cooperative way. So we are happy with them as a partner. I believe they are happy with us as a partner.

That doesn't necessarily mean that the relationship will be expanded. So we just don't know. And I guess the bottom line is, we are preparing for the Company for either way. There really aren't any -- I do not want a sound Pollyanna-ish here, but there aren't any negatives. They expand, that's great; we will get more money, we will deliver more to them. If they don't expand, we will have more rights, and we can either take them for ourselves or we will find other partners.

And can you give us some indication on how many options GSK currently has under the structure and whether that would double on supersizing, or just a feel for how that would increase?

Yes -- we have not given out that information, nor am I comfortable doing it unless we discuss it with GSK first. I think that is only fair to them. And we haven't discussed with them whether or not we should make these numbers public. I will do that, and if they are amenable, we will be happy to make those numbers public. But I do not want to do that right now.

Understood. And just a final, if I may, on the cash guidance of 180 million -- I show about 170 million now. If my math is right, about a 35 million quarterly run rate. So about 100 by year-end, plus the 30 million loan from GSK, and I get 130, which is, I believe, a 50 million gap from guidance. Can you walk through that (multiple speakers)

Well, yes -- I mean, in the general logic is right, although I wouldn't confirm all those numbers that you went through. But as you can sort out, we are coming on some additional revenues coming in before the year in terms of -- Frank?

Yes. Well, as you know, we don't formally give any guidance on our cash burn. (indiscernible) But our year-end cash guidance assumes ongoing revenue from established corporate partnerships, as well as some additional cash from new initiatives. And we are currently carefully evaluating a number of alternates. And we will see where we come out on those. One important point, I think that you have mentioned yourself already, and that is the drawdown under the GSK loan facility.

And just a feel for whether (technical difficulty) more funding would come from the collaborative side versus from corporate finance side?

Yes, also, David, what you should know is GSK pays us annually for the R&D payments. And that payment comes in the fourth quarter. So even without loan facility new agreements, the cash balance will be higher than you would have expected it to be, based on your calculations.

Edward Tenthoff, Piper Jaffray.

Two quick questions -- one follow-up from David. Actually, I guess both of them are a bit follow-up, relating to GSK. Firstly, you mentioned other corporate discussions -- does the current GSK alliance limit or even sort of push out those discussions? And then secondly, how much have you taken down to date from that GSK credit line? And then, lastly, could you repeat the IND filing goals for 2005?

So that is three questions in one. (laughter) On the -- I forgot the first one now -- (multiple speakers)

Are we limited --?

Oh, are we limited in our partnering discussions. Well, sure. Every time you sign an agreement, whether it's with GSK or anybody else, it has a field in which you are collaborating. So we have a field of cooperation with GSK, just like we have a field of cooperation with BMS. And that limits our ability to sign additional collaborations within those fields.

It doesn't limit the ability; it means we can't sign additional collaborations within those fields. However, those fields are -- there still are plenty of therapeutic areas outside of those fields where we have complete freedom to sign additional partnerships.

And so, we are, and we have assets in some of those fields -- metabolic diseases, cardiovascular diseases -- so we are -- there's plenty of assets here and plenty of programs that can form the basis for additional partnerships.

Moving back to your financial question, we thus far drawn down 55 million under the GSK loan facility. And we anticipate to draw down another 30 million in the second half of the year.

And then the '05 IND goals, we have a number of compounds -- 880, 820, and 844. All of those are on track for IND filing in the first half of the year.

And then we have one more that we have identified, which is 184, and there may be others, as well, which could reach IND status in the second half of 2005 (technical difficulty). So there are at least 4 compounds now, potentially another 1 or 2, that could be on track for IND filings in 2005.

That doesn't mean that they will all make it. That there will -- there may be some attrition there (technical difficulty). We don't -- as from all the data we have, those compounds look great. There is nothing that we have in hand now that would give us any doubt that those compounds will make it.

On the other hand, if we had all of the data in hand, (indiscernible) we would file them now. So there is a set of data we have yet to get. But there are at least 4, and potentially more, compounds that are on track for IND filing in 2005.

Great, that is what I thought I heard you say. And that is really impressive productivity. So good luck on that.

Eric Schmidt, SG Cowen.

Good afternoon. George, I was wondering if you would just tell us about what your plans are to update the Street, if any, on the enrollment in the Rebeccamycin study?

Yes, that is a good question, Eric. You know, we don't want to get into ongoing discussions about where the enrollment is and the -- reporting monthly or quarterly on the enrollment rates. As you know, they vary a lot from time to time. And so I think our goal is just to keep going. And we will give periodic updates as to where we are. But not on a regular, routine quarterly basis.

Okay. And it would seem to me, with a lot of the buzz going on in the oncology space, about mutation analysis of responders versus non-responders -- targeted kinase therapies, that you guys would be pretty well situated to take advantage of this emerging field. Could you talk about what you're doing there? And I guess one of the maybe -- needs on your part would be more access to tissue samples, things like that?

Great question. Routinely, when we have kinase inhibitors, screen them not only against the wild-type form of the kinase, but against the forms of the kinase that are known to occur frequently in tumors. So they are if they are mutationally activated or somehow change, we also screen against those as well.

647, which as you know, targets the EGF receptor, we are actually in the process of screening that, I guess, (technical difficulty) unknown mutation and the EGF receptor. We don't have the data yet. For some of the other compounds against, for example, flip (ph), flip 3 and a few of the other kinases -- we have data. They all indicate that the compounds are equally as inhibitory to the activated forms of the kinase as to the wild-type forms of the kinases.

But you're right -- that is a key issue, I think, for all kinase inhibitors as we go forward. They have to be able to inhibit the mutation reactivated and other forms of the kinases, as well as the wild-types.

And just a housekeeping question -- is there going to the -- are there going to be any more restructuring charges in Q3 related to the recent changes?

No, there will not be.

Jeff Zekauskas, JP Morgan.

Just a few short questions. George, you spoke of the collaboration with GSK as generally going well. Your belief is that GSK thinks that it's going well. What do you think the criteria are that GSK is using to measure whether the collaboration is going well?

Yes, I think three things -- number of compounds that we have generated at various stages -- DC, development candidate or later; the quality of those compounds -- quality measured objectively, not by us just looking at these and thinking they are good, but by a really objective set of criteria against which we measure all of our compounds as well as their compounds and everybody else's compound; and the rate at which we've generated those. So there is number, quality, and speed. So probably no different from how anybody else evaluates them. So I can tell you we are ahead of schedule in our deliverables. The quality of these compounds is good. And there are a lot of them. So I believe they are quite pleased with what they are getting from us.

Second question is can you just remind me when Genoptera collaboration ends, and whether the revenues from Genoptera are sort of level going forward, or whether they change?

Yes, they are level -- and it ends in 2008.

To 2008 --

Correct.

Third question is -- with the restructuring savings, why does it step up to 10 million in '06 from '05?

Oh, because we see the savings for half a year this year -- no, it doesn't step up from '06 to '05; it steps up in '05 from '04.

Yes, we said it's 5 million for the remainder of this year, and then 10 million for '05 and beyond. So it's simply the scale up for the entire year versus the half a year for 2004.

Okay, so the average cost per employee is 160,000 -- something like that? Is a that the way to think about it to get to the 10 million number?

Well, no, because you know, you talk about -- if you talk about take fully burdened (ph) cost of an employee here or at any other company and you allocate their share of the building and lights and utilities, it is much more than that. But, of course, if you lay somebody off, you still have the lights and utilities and buildings. So what you save is the variable cost, not the fully burdened cost. So it depends on how you think about the cost of an employee.

I guess what I meant to say is that the cash savings from the 62 people leaving will then be 10 million, pretax?

That is correct.

Charles Duncan, JMP Securities.

Congrats on another good quarter of extraordinary productivity. Quick question on 119 -- you mentioned some interim analysis. Can you help us understand what -- you said those were event-driven. Could you help us understand a little bit more about the events? It might be fairly obvious, but also, about -- maybe based on historical event rates in that population, when you would expect the interim analysis to be done?

(technical difficulty) Charles, are you there?

Yes.

Sorry -- we had some airplane rumbling by here; we put ourselves on mute there for a second.

Okay, it is an event-driven interim analysis. So the first interim analysis will be done a third of the way through the trial; the second interim analysis would be done halfway through the trial -- third and half being divined (ph) by events. And so what we are looking for is a two-month increase in survival, and the whole trial, with the 600 patients, is 90-percent powered to show a two-month increase.

As you may remember, the data from the Phase II trial suggests a much bigger increase in survival than that. And because the median survival in the Phase II trial was about nine months in the treated patients, the historical controls are about five months. So if we see in the Phase III a magnitude of difference similar to what we saw in the Phase II, we ought to pick it up at one of those interim analyses, and be able to stop the trial early and go forward.

On the other hand, you know that in the Phase III trial, you often don't replicate those data that you saw in the Phase II trial like that. And so, we've designed the whole trial to be able to detect the smaller increase in survival. And that smaller increase, that two months, isn't something we made up; that was a series of discussions with both our clinical advisory board and with the FDA to determine what would be a medically meaningful benefit for those patients.

So we tried to take into consideration the possible outcomes that there could be. We could (ph) replicate the Phase II data, in which case we will see it in one of the interim analyses and not have to complete the whole 600-patient trial. If there is a decrease in the survival in the control trial, then we still have a trial that is big enough -- powered enough to prove that the drug has that benefit.

And George, specifically, at a third of the way through the trial, those events would be signs of progression, or death --?

Death.

Is it possible that you could file, if you saw a pretty interesting result at that point, for an approval?

It is possible. I mean, that is the reason for doing them. In order to do those interim analyses without taking a big statistical penalty at the end of the trial, the company doesn't actually see the data. There is an independent third party who looks at the data.

The company will get one of 3 pieces of information -- either keep the trial going on track; stop the trial, because based on the data so far, you have no hope of showing any statistical difference -- and that's very unlikely at the first analysis, just because the data would have to be really extraordinary; or you could get feedback saying stop the trial now, you already have statistically significant differences in survival between the control and the treated group. And that just depends on the magnitude of the effect. And so if you got that third answer, you stop the trial on the spot (ph).

Okay, and then, a follow-up to a previous question -- I want to talk to you a little bit about the perspective milestone payments that you could realize over the course of the next 18 months, because frankly, with your current cash position, I'm a little bit concerned -- unless you hit this interim analysis and it is very positive and the market reacts to it -- that you will have sufficient cash or have the ability to raise cash in the near-term at a decent valuation. So beyond being able to raise cash, are there milestone payments, or payments to GSK that can significantly bolster your balance sheet?

Yes, there are. I mean, we have the potential for substantial milestone payments from GSK. We have the potential for substantial payments from new collaborators. And we have the potential for substantial cash coming in from other kinds of relationships related to the clinical development of our compound. So I think there are a lot of opportunities for us.

And obviously, this is something we think about a lot. We finished the year with 180 million. We are not about to run out of money, but that is not an infinite supply, either. And so we are very actively involved in planning for how to finance our company going forward. It is an interesting problem to have. We have a kind of unique strategy. There haven't been other biotech companies that have generated this kind of a pipeline in this period of time -- or maybe ever.

So our problem is a high-quality problem -- how to fund this plethora of interesting, high-quality compounds moving through the clinic. So it's a high-quality problem, but it is a problem. We do have to pay for it. And there are several options, Charles. And I think you'll see over the coming months how we intend to do that. (multiple speakers) We have been relatively conservative about running the company, but, I think, creative about how to finance it. And I don't see any reason why that is going to change anytime soon.

I agree with that. If you were to license from a pretty extensive list of current product opportunities, would you seek to retain commercial rights -- at least the ability to buy in later on? And then secondarily, do you intend to in the near-term start to establish a commercial infrastructure with which to sell, say, 119 if it gets to the market in the near-term?

Well, the second part first -- yes. We are, right now, in the process of bringing in our first marketing people, which in the first case, are strategic marketing, because we need strategic marketing input -- certainly for 119, but also for our other clinical compounds. And so we are as we speak in the process of bringing in the first part of the commercial infrastructure.

We have looked at a number of potential partners for 119, for example. We do intend to keep North American rights to those compounds. Realistically, we could benefit from help in the Asian market and could probably benefit from help in Europe, as well. And so we are in those discussions. But yes, we intend to commercialize our own compounds -- or some of our own compounds.

Brett Holly, CIBC World Markets.

I just had a follow-up to the earlier question about the mutational activation being associated with response to the receptor tyrosine kinase inhibitors. And I was wondering -- is there evidence for multiple receptors being mutated in different forms of cancer that you know of? And if activating mutations in single receptors -- say, EGFR -- are primarily -- you know, not solely, but primarily associate with the response, does that suggest that inhibiting multiple kinases has less value than targeting more specifically on one?

Well, let's take a step back from that, because there are multiple ways by which kinases can drive the proliferations of tumor or average cell types (ph) -- only one of them is by being mutationally activated. So there are many examples where there are kinases that are overexpressed in tumors. There are examples where kinases are neither mutated nor overexpressed, but which, nevertheless, seem to be primary drivers of tumors.

So it is so complicated right now to understand for any given tumor type what combination of kinases or pathways is driving the proliferation of that tumor, and it probably isn't even correct to say that tumor, because there is heterogeneity within the different cells of the tumor.

So I think it is way too simple (ph) (technical difficulty) you know, small-cell lung cancer is driven by EGF, or a fraction of it is driven by mutated -- activated EGF -- that EGF is a driver of that tumor type. There certainly are other kinases that are also involved in that tumor type.

So I think it is going to be increasingly important to be able to inhibit multiple key kinases because of the heterogeneity in tumors and because even of the heterogeneity within tumors, and because there are lots of cases now where the proliferation of tumors seems to be driven by more than one kinase.

So I think the strategy of inhibiting multiple kinases at once is more valid than ever. And I think you see that now, because more and more companies are making noise about this kind of approach.

(OPERATOR INSTRUCTIONS) At this time, gentlemen, there are no further questions.

Okay. There are no more questions -- again, thanks, everybody, for your attention, for your questions. And we will all get back to work and hopefully generate some more value, and we will talk to you next quarter. Thanks.

Thank you.

Ladies and gentlemen, this does conclude today's quarter two 2004 earnings conference call. You may now disconnect.