Exelixis Inc (EXEL) 2005 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Exelixis second quarter 2005 earnings conference call. At this time, all participants are in a listen-only mode to prevent background noise. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone key pad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Charles Butler. Thank you, sir. You may begin.

Thanks. Good afternoon. Thank you for joining the Exelixis management team on our second quarter 2005 financial results and business update conference call. Participating in today's call are George Scangos, President and CEO, and Frank Karbe, Senior Vice President and CFO. Following this introduction George will give a brief recap of the quarter and some perspective on 2005. Frank will review the Company's financial performance for the second quarter and following the financials, George will provide additional comments and an outlook for the year ahead, after which we will open the call for questions.

But, first, let me allow me to make our disclosure statement regarding forward-looking statements in today's call. 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 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 these risk factors and uncertainties which include: our ability to enter into new collaborations, continue existing collaborations, and receive milestones and royalties derived from future products developed from research efforts under collaborative agreement, our estimated future license and contract revenues, as well as expenses, our estimated future balances of cash, cash equivalents, short-term investments, and investments held by Symphony Evolution restricted cash, the potential failure of our product candidates to demonstrate safety and efficacy in clinical testing, our ability to file IND applications, and initiate clinical trials at the referenced time, the ability of Helsinn for the Phase III clinical trials for XL 199 sufficient to meet FDA approval, plans to initiate and conduct additional studies for Exel 784 in 2005, our ability to conduct Phase I clinical trials for XL 647, 999, 80, and 820, sufficient to achieve positive completion. Our ability to successfully advance and develop additional compounds including XL 844, and 184, and our ability to develop drug candidates and/or INDs as part of the metabolism program.

These and other risk factors are discussed under Risk Factors in our quarterly report for the three months ended June 30, 2005 and other SEC reports. We expressly disclaim any obligation or undertaking to release publicly any update or revisions to any forward-looking statements contained herein. Now, I will turn the call over to George.

Okay. Thanks, Charles. We just completed what I think is the most productive quarter in Exelixis's history and I am very pleased to have the opportunity to review these accomplishments with you. I will save some of my comments until Frank goes through our financial results but I do want to give you some context in which to consider how we continue to generate and advance promising compounds, how we strengthen our financial position, and how we grew our business opportunities.

In the second quarter, we achieved a number of key objectives on the technical and scientific front. We kept all of our clinical programs on track. The XL 119 trial is in progressing well and enrollment is in line with our expectations. The 647 and 999 trials progressed well. We're well into those trials and we're confident that those programs both will advance into Phase II trials. We completed the formulation, toxicology, and pharmacology for XL 784 so that it can re-enter clinical development for diabetic neuropathy within the next month or two. We continue to advance XL 880 through its Phase I clinical development. We expanded our pipeline of product opportunities by filing three new INDs, the Phase I trial filed for one of those, XL 820, has already begun, and the other two will begin soon. We advanced three additional cancer compounds to drug candidate status, those we see serving as a basis for INDs next year.

Taken together, they are a remarkable achievement for a company of our size and I think for a company of any size, for that matter. As we speak, we have five compounds in clinical testing with another three to begin clinical trials within the next month or two. I think this unprecedented product activity is being maintained by bringing even more compounds into pre-clinical development in preparation for IND filings next year. The compounds are all of high quality. It unlikely that all of them will be successful but with a pipeline of that magnitude and quality, we feel very confident in the future of the Company and in our ability to bring in important new therapies to patients.

On the business front, we were equally productive, and innovative. We executed several strategic transactions during the quarter, all of which are designed to further enhance our productivity, create new product and revenue opportunities, and reduce the risk of product failure while retaining the opportunity to participate in the long-term value of our product success. What we've accomplished I think in the second quarter was quite remarkable. We established a collaboration with Genentech to develop antibodies targeting the Noch pathway, which is one of the key signalling pathways that plays an important role in cancer, inflammation, tissue growth and repair. The importance of Noch in degenerative diseases has become clear over the past year or two and our collaboration with Genentech, certainly a leader in antibody-based therapies has given us entirely new product opportunities beyond those offered by our proprietary small molecule pipeline.

We entered in an agreement with Helsinn for the further development and commercialization of XL 119. As you know, under the terms of the agreement, Helsinn has paid Exelixis close to $4 million up front and will pay up to 21 million in additional milestone payments. And in addition, they assume the cost and the management of the ongoing Phase III trial. This agreement creates substantial financial and man power resources that we can now devote to our other clinical programs. Importantly, we retain rights to reacquire the marketing rights for XL 119 in North America. We're pleased to be working with Helsinn, an excellent partner, and we believe that this transaction represents a win for both companies.

And finally, we secured up to $80 million to fund the Phase II development of XL 647, 999, and 784 through the establishment of Symphony Evolution. This is a terrific transaction for us and allows us to access the capital we need to conduct regular and broad Phase II trials for 647, 999, and 784, at very attractive terms. This transaction is an excellent one for several reasons.

First, it provides the necessary potential resources to conduct thorough, thoughtful, Phase II programs for each of the compounds which maximizes our chances of success. Second, the translation eliminates financial risk of product failure for Exelixis since we have no obligation if the compounds failure. Third, it preserves our right to the compounds in case of success. And fourth, all of this will minimize dilution for us and our investors.

Also, I don't want anyone to forget during the quarter we received 35 million in milestones from GSK. Our focus is not just on signing new collaborations but on making sure that we execute under our existing ones. Those milestones reflect the continued progress that Exelixis is making under this collaboration, as well as the confidence that GSK continues to show in Exelixis and its compounds.

All in all, this was a remarkable quarter on both technical and business financial fronts and the accomplishments we made this quarter, I think, reflect the aggressive attitudes and commitment to excellence and the commitment to execution that has been the hallmark of Exelixis since its inception. We're energized by what we accomplished. We're excited about the prospects for the compounds in our company, and we're committed to moving forward as aggressively as we can to build Exelixis into a truly great company. I will come back to make a few closing remarks, but at this point I will turn the call over to Frank who will review our financial results for the quarter. Frank?

Thanks, George. We truly had a spectacular quarter marked by the completion of several transactions which have given tangible evidence of how we turn our financing strategy into reality. In aggregate, we had cash inflows of almost $100 million in the second quarter of '05, enabling us to continue our aggressive development of our clinical and pre-clinical programs. As we stated in the past, our strategy to finance the Company rests upon four pillars.

First, executing on our existing partnership which could result in very significant milestone payments to us. Second, seeking new partnerships for some of our unpartnered efforts. Third, exploring the suitability of financing vehicles, and fourth, opportunistically accessing the capital markets.

We announced the achievement of $35 million in milestones from GSK at the day of our last earnings call, and I said that we were working hard in putting other pieces of our financing strategy in place. Well, during the second quarter we've executed several elements of this strategy and announced three important transactions. Including the GSK milestones, these transactions have a combined financial impact of about $180 million, some of which we benefit from in 2005, and the remainder in 2006 and beyond.

I think we have demonstrated in the first half of the year the viability of our financing strategy, and I'm confident that the continued execution of this strategy, will enable us to aggressively advance our development.

Let me now turn to the financial results for the second quarter 2005. As usual, we are reporting results both on a GAAP and non-GAAP basis. Non-GAAP results exclude restructuring expense, loss from discontinued operations, and noncash charges, with documentation in Exelixis R&D, as well as amortization of intangibles. A reconciliation of GAAP results to non-GAAP results is in our second quarter press release, which is posted on our Web site at www.Exelixis .com. Our net loss under GAAP was 97 million, or $0.15 per share compared to 29.3 million or $0.41 per share for the second quarter of '04. Non-GAAP net loss was 9.4 million or $0.12 per share compared to 27 million or $0.37 per share for the fourth quarter of '04.

Cash, cash equivalents, short-term investments, investments held by Symphony Evolution and restricted cash, totaled 202.3 million at June 30, 2005, as compared to 139.1 million at March 31, 2005, and 172 million at December 31, '04. The increase in cash for the second quarter was primarily driven by the 40 million capital draw of our financing arrangement with Symphony, the 35 million milestone received from GSK, a 10.9 million termination fee from Biocorp Sciences in connection with the termination of Argenta [ph] collaboration, and the up front payment associated with the Genentech and Helsinn transaction.

Revenues were approximately 34.3 million, compared to 12.6 million for the same period in '04. The increase from '04 to '05 was primarily the result of the recognition of approximately $21 million in revenue related to the termination of our Genoffa [ph] collaboration and to the increase in research and development funding under our GSK collaboration since October, 2004. This increase was partially offset by the expiration of one our Bristol-Myers Squibb collaborations in July of '04.

Research and development expenses were approximately 36.6 million, compared to 34.4 million for the comparable period in '04. The increase from '04 to '05 was primarily due to license fee payable to a third party licensor in connection with our Genentech collaboration and increased development expenses resulting from the further expansion of our development activities. The increase was partially offset by an decrease in lab supplies.

General administrative expenses were approximately 7.1 million compared to 4.7 million for the comparable period in 2004. The increase from '04 to '05 is a result of leg legal expenses associated with our business development activities in the second quarter of '05, as well as increased facility expenses. Given the tremendous amount of deal activity in the second quarter of this year, I would like to briefly review our outlook for year-end 2005 financials. I would also like to review some important accounting details for the transactions we announced and the milestones we received in the second quarter. Because I believe there may be some confusion how this impacted our financial statements. Most importantly, these clarifications have no impact on our cash flow but they do relate to revenue and expense recognition.

As I mentioned on the last two earnings calls, our year-end guidance provided at the beginning of the year already excluded those business development activities and milestones that we felt reasonably certain we would be able to achieve during the course of the year. I also mentioned in the past that the accounting treatment for some of these transactions was still under review. We've exceeded our expectations with regards to our business development activities, and we've completed our review how to account for these transactions. As a result, we need to revise our guidance for year-end 2005. As compared to the original guidance provided in February '05, we are lowering our revenue guidance by approximately 6% to a range of 75 million to 80 million.

This revision is primarily due to a change in the anticipated timing of revenue recognition for the 30 million milestone received from the second quarter '05 under our amended GSK collaboration. While the total amount of revenue recognition will eventually be the same, we recognize as a result of this change, less revenue in 2005 than initially anticipated but we will recognize more revenue in future periods. This change has no impact to our cash flow.

As discussed in the past, we amortize milestone payments over the term of the underlying agreement. Once a milestone is achieved we recognize immediately that portion of the milestone as revenue that relates to the period of the underlying term that has already elect [ph], and we amortize the remaining amount of the milestone over the remaining term of the agreement. We initially expected to recognize the 30 million GSK milestone starting in October 2000 two, the original signing date of the agreement, but we now concluded that we should recognize the milestone as of January '05, the date of the amendment to our collaboration with GSK.

We now turn to operating expenses. As compared to the original guidance, we expect operating expenses, excluding restructuring, and in process research and development, noncash charges and amortization of intangibles, to increase by approximately 10% to a range of 185 million to 195 million. The increase in our operating expense guidance is exclusively driven by our plans for broader Phase II programs than initially included in our forecast for XL648, 999, and 784. These three compounds fall under our arrangement with Symphony and the associated expenses will be fully reimbursed by Symphony Evolution and therefore will not affect our net loss nor our cash flow.

Because we fully consolidated Symphony Evolution in our financial statements, we showed the development expenses associated with the three compounds as part of our R&D expense. But a new line item in our P&L called noncontrolling interest, shows the reimbursements for these expenses. The cash drawn on Symphony appears in the current assets on our balance sheet, also on a new line item called Investments held by Symphony Evolution.

Let me finally turn to cash. We are raising our guidance for the Company's cash, cash equivalents, short-term investment, investments held for Symphony Evolution, and restricted cash balance at the end of '05 by 40% and expect to end the year with a a balance of at least 140 million. This increase is primarily driven by our business development activities in the first half of the year being more successful than originally anticipated. As in the past, this forecast includes some funds from new deals that we feel reasonably confident to achieve by year end. Our revised guidance, however, does not include the second capital draw of up to $40 million from Symphony Evolution because we do not anticipate drawing these funds until 2006. If you were to include these funds, which we can draw at any point before June, 2006, our year-end cash would be at the 180 million, versus 171 million, at the beginning of 2005. With that, I will turn the call back to George for some perspective on the second half of the year.

Okay. Thanks, Frank. I would like to take just a few minutes to discuss how the accomplishments of the second quarter move us closer to our ultimate goal of commercializing innovative therapies for cancer patients. We believe that one of our key differentiating factors is our high productivity rate, and discovering and optimizing new compounds, and our ability to move rapidly from discovery to clinical development. Our achievements in the second quarter are a further example of our ability too continue to execute and move our business forward.

In the second quarter, we filed INDs for XL 820, 844, and 184, all of which were generated by our internal cancer discovery and development program. We have now advanced seven compounds from our internal discovery efforts into clinical development in just two years. Our oncology program is focused on the development of compounds that are optimized to specifically target unique combinations of kinases implicated in tumor, cell proliferation, and angiogenesis. We believe that these spectrum selective kinase inhibitors have significant potential to create innovative therapies that are more potent and efficacious and have better tolerability profiles compared with existing cancer therapies.

The most recent INDs we filed reinforce the potential of our discovery platform and development pipeline. XL 820 inhibited the VEGF receptor, KIT and. the PDGF receptor, which are clinically validated targets implicated in a variety of human cancers. In pre-clinical studies 820 exhibited growth inhibition in models of breast carcinoma, glyoma, and leukemia, and has induced significant tumor regression. And 820 had good oral viability and sustained inhibition of the targets in vivo following a single oral dose. The Phase I trial for 820 has recently begun.

XL 844 is a potent, selective inhibitor of Chk1 & 2, protein kinases that induce cell cycle arrest in response to a variety of DNA damaging agents In pre-clinical studies 844 increases the efficacy of an array of chemotherapeutic agents in cellular and tumor models without an associated increase in systemic toxicity. If these results are replicated in the clinic, 844 could be a widely used therapeutic that could improve therapy for large numbers of cancer patients. XL 184 is a potent inhibitor of CMET and VFGR receptor, kinase that we believe play synergistic roles in tumor growth and angiogenesis in a variety of tumor types. In pre-clinical studies 184 reduced regression large tumors in a variety of human tumor models, including breast cancer, lung cancer and glyoma. All of these compounds have the potential to become important in therapies and we will move them through clinical development as rapidly as possible.

We also completed in this quarter the pharmacology, toxicology, and formulation for XL 784. Just to remind you 784 is a potent inhibitor of ADAM-10 to the cell circuits found in metalloprotease. Pre-clinical toxicology in a single-dose Phase I study, we found no evidence of the joint toxicity that limited the development of earlier generations. MMP inhibitor 784 has shown very good efficacy in pre-clinical models of renal failure and it will re-enter clinical studies for diabetic nephropathy this fall.

Importantly, our ongoing clinical trials for 647, 999, 880, and 119 all remain on track. We expect to share data from the 647 and 119 Phase I trials, in the second half of the year and we're confident that these two compounds will move into Phase II trials as well. We also advanced three additional pre-clinical compounds: 281, which targets RAF kinase. 228, which targets the IGF1 receptor, and 418 which targets AKT and S6K, maintaining a steady stream of compounds that will support INDs next year.

The compounds in pre-clinical and clinical development are very high quality and in pre-clinical studies meet the standard of being potentially first in class or best in class compounds as compared to those already in the market or in development for our competitors. The transactions with Genentech, Helsinn and Symphony which were all executed in the second quarter are examples of our direct strategy for financing our aggressive plans.

Together, these transactions brought substantial money into the Company and allowed us to also the cost of our foremost advanced clinical programs while maintaining rights to market the compounds if they succeed. The Symphony transaction is conceptually simple although I know it is quite complicated and caused some confusion from an accounting point of view. I hope that Frank -- and I think that Frank was able to clarify some of the accounting issues. For me the deal was simple. We brought in resources that allow us to conduct the aggressive broad Phase II programs that our compounds deserve thus maximizing their chances of success. We offloaded the financial risk of product failure. We've minimized dilution to ourselves and our shareholders, and we have retained rights to the compounds if they succeed; an excellent transaction with a high-quality, sophisticated, partner, and unequivocally good for Exelixis, and I believe for Symphony as well.

The transaction with Helsinn served a similar purpose although it is structured differently. Straightforward and doesn't require a lot of explanation. In addition to bringing in cash, the transaction relieved Exelixis of the cost and management of the Phase III trial allowing us to devote resources to other compounds in our expanding pipeline. As we discussed previously, we retained rights to acquire the marketing rights for 119 in North America.

The transaction with Genentech is also straightforward, provides us with cash and an excellent partner to test the ability of antibodies against various members of the NOCH pathway and a variety of cancer and other diseases. An exciting collaboration with an excellent partner that provides Exelixis with exciting new product opportunities.

So I will finish where I started. This was a truly remarkable quarter, during which Exelixis executed on all fronts. We've made substantial progress advancing our pipeline and our business. We have a remarkable pipeline of compounds and a realistic strategy for moving them forward. I know that going forward, the key issues for Exelixis will be the success of its clinical program. We will report the data from the Phase I trials for 647 and 999 later this year, and we will begin the Phase II programs for both of them. The XL 808 phase one trial will finish later year, or early next. The 820 trial is up and running. The Phase I/II program for 784 will begin this fall as well as Phase I trials for 18 and 844. So, for the next several months we will have clinical news from several of our programs.

Although at this point we can't comment on any nonpublic data on our program, I can point out that those who have seen the proprietary clinical and pre-clinical data, i.e., GSK and Symphony, were positive enough to lay out substantial sums of money. At Exelixis we are trying to accomplish something that is extraordinarily difficult, to move from a platform genomics company into a fully-integrated, product-focused, profitable company. We have made remarkable progress and I think we're justifiably proud of our accomplishments. At the same time, we're aware of and energized by the challenges that lie ahead of us. We will continue to execute, demand excellence of ourselves, and to move forward aggressively. We're confident of our ultimate success and we know that every day matters. We are excited about the prospects for our compounds in our Company and we thank you you all for your support and we're looking forward to soon being able to discuss our programs in more detail. So thanks for your time and at this point we will open up the call to Q-and-A.

Thank you, sir. Ladies and gentlemen, at this time we will be conducting the question-and-answer session. If you would like to ask a question, please press star one on your telephone key pad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it will be necessary to pick up your handset before you press the star key. Our first question comes from Han Lee with SunTrust.

Yes, thank you for taking my questions. First question is regarding your two leading anti-angiogenesis and cancer compound, the 647 and 999, you can tell us what the tumor types have you seen -- the tumor activity seen, where we will see the Phase I data and in what kind of format?

Each of those compounds demonstrated very potent pre-clinical -- or very potent activity in a variety of pre-clinical models and we presented those models in human tumors growing in mice, including lung, breast, colon, glyoma, and in the case of 999, leukemia as well. So, very broad range of activity in pre-clinical models. They both are very far along in Phase I trials. And we anticipate that the data will be available and public later on this year. And we know that both the investigators on both of those studies are planning to submit abstracts for the EORTC meeting in Philadelphia in November.

Oh, for both compounds?

For both compounds, yes.

Okay. The second question -- this is more of a general question regarding angiogenesis small molecule clot [ph] development. Recently we see that Novartis PTK787 failed to show a survival benefit in colorectal cancer and the other antiangiogenesis molecules like Onyx [ph] and Thoracanid [ph] also didn't show composite activity in colorectal cancers. I would be interested in hearing your view on product development, different kind of tumor, and the specificity.

Yeah, look, I think it is always dangerous to general . If you remember back a couple of years ago, before Avastin had demonstrated really compelling data, people were asking questions as to whether anti-angiogenesis therapy was effective at all and that's because some of the early trials seemed to suggest a limited effect. Now that there is more data on Avastin and it is clear it does provide a good effect, that's accepted.

So just because one or two small molecules have failed to show in early clinical trials a significant impact on colon cancer, does not mean that small molecule approaches to angiogenesis are unlikely to work. It means that those compounds in those trials have the data that they had.

I'm not saying they're not working, because Avastin is working in renal cell carcinoma.

I know that. I know the compound and I know that 06, it works in renal cell. So what we have done is with 999 and with all of our compounds, in pre-clinical models, we made sure that those molecules that we're advancing are -- show superior efficacy to other compounds that we can get our hands on and test. So, as far as we can tell, these are extraordinarily potent, efficacious, compounds. And I think part of the reason small molecules cannot work, is if you don't get adequate coverage, if their half life is too small and not pharmaco dynamic effects and they don't have the target long enough, so there are gaps in the dosing when the target might have activity. So we can tell that you the compounds have extraordinarily good PK, that is also true in humans, and very good pharmaco dynamic activity, long-lasting in position of the target after a single dose.

So we believe the compounds have a good chance of success, but the data are the data and we're -- pre-clinically they work and they should work from what we know bio chemically.

Regarding the number of patients in the Phase II study, is it very typical -- I'm sorry, Phase I study, is that typical of the numbers for that type of study?

You know the Phase I studies are dose escalating studies which are designed primarily to assess the safety and tolerability of the compound. And so, as such you start with a low dose and treat with a small number of patients, typically three, with that dose, and if that dose is tolerated you then go up to the next dose. So, the number of patients is partially dependent on how many doses escalations you can do before you run into dose limiting tox. And once you run into dose limiting tox, you simply back down a little bit and then treat a number of other patients and then of course you can expand on those cohorts a bit, if you want. So you know, it is in the number of some tens of patients but it can vary a lot.

Dos that mean you already have an indication for the phase one study?

Well, there is no indication for Phase I study. It is a safety study. So, we take -- as do almost everybody, all comers and for most diseases, as you know you do the Phase I in healthy volunteers and in cancer you do it in patients with advanced cancer for whom there are no alternative therapies.

Got it. Okay. My last question is for Frank. This is regarding the minority interest, interest payment. How do we -- can you give us some guidance on how to model it. Like the balance sheet, and the income statement?

Yes, as I said, we fully consolidate Symphony Evolution in our financial statements. That means that we will show the R&D expenses associated with the three compounds that are funded through Symphony that is 784, 647 and 999. We will show those related expenses as part of our R&D expenses in our P&L, but there will be an offsetting line item. There is the new line item in our P&L which is called non controlling interest, and that will show the reimbursements coming through from Symphony, and that will essentially fully reimburse us for those expenses, and the impact on the bottom line is neutral. And on the balance sheet, we show that cash that we have drawn under Symphony as part of our current assets.

Got it. Thank you.

Our next question comes from Jeff Zekauskas with J.P. Morgan.

Hi, this is [inaudible] for Jeff. How are you?

Fine, thanks.

So, a couple of questions. The first one is, has GSK started to evaluate any of the three compounds, 647 999, or 784, yet? And have they begun looking at them given that they will probably be starting Phase II trials the end of this year?

Well, they've been looking at them since day one, of course. We meet with GSK quarterly. So they have them running updates on the data from each of those programs. But if your question is have they indicated whether or not they're likely to select any of those compound, the answer is certainly not. They're not obligated to do so until Phase II A. So ...

And so Phase II A is -- do you expect Phase II A to begin in the next 10 months, 12 months, or 18 months?

Yes.

In terms of reimbursement you expect from Symphony, your operating expense, I guess, your guidance operating expense increased by 10% versus the previous guidance, or roughly 15 million, but then also I think you were saving an estimated 25 million from outsource and development for rebeccamycin so is the cost tied to these three compounds, you know, 50 million or is it 40 million?

Okay, I don't think you can -- I think you're confusing a couple of different issues there. The Phase II trials for 647, 999, and 784, are broader than we had envisioned originally envisioned and we will do more trials for those which is why the expense guidance is increased. And we're doing more for those compounds because we're excited about those compounds and we want to make sure that the -- we give them their just due. They're very interesting compounds.

In order to be able to afford that we have the collaboration with Symphony. And we wouldn't be able to afford such broad programs if we didn't have the collaboration with Symphony. So our expense guidance has gone up but it has no impact on our cash flow because it is reimbursed through our collaboration with Symphony.

Right. I understand that, but if you're -- so what is your -- what I'm trying to figure out is what is the real increase in the expected amount for the development, and I'm not complaining about it, I'm just trying to understand what the amount really is because if you're -- when you talk about the amount of money that you raised recently you kind of include savings related to, you know, not spending money for the development of rebeccamycin, and I think the amount that you pointed us to was 25 million you know, in addition you are raising your operating expense by 15 million. So --

To interrupt you, don't forget our original guidance already included some of the business development activity that -- that we felt -- at the beginning of the year we felt comfortable we would achieve during the course of the year. So keep that in mind. And then the new number is in fact ,the number that we've guided to, and that is driven by the costs associated with the three Symphony compounds.

And the $25 million savings is not this year. That is over the life of the trial.

Okay. That's helpful. Lastly, should we see your interest expense go up as the expense for the costs of the warrant issue to Symphony? And if yes, by how much?

No, you will not see those costs go up.

Thanks very much.

Our next question comes from Edward Tentoff with Piper Jaffray.

Great. Thank you very much. I'm not sure if some of those questions were actually asked in those last two question, but a little bit more on Symphony and the Phase II program, not to beat a dead horse here, but can you give us an idea of how long that 40 million will last? Also, are you prepared to give us any idea of the design of the upcoming Phase IIs? And then lastly, just broadly speaking, what kind of hurdles will be required for you to actually repurchase those drugs?

Okay. That was several questions. Look, the 40 million that we've drawn from Symphony is the first trounce [ph] of money. We will draw an additional trounce of money somewhere between 20 -- an additional $20 million and an additional $40 million. So we have up to $80 million.

The reason that it is sized that way is because we believe that that $80 million is sufficient to conduct the Phase II programs for each of those three programs. So the Symphony transaction should cover the cost of getting those programs through at least Phase II A and some potentially more. The time line, you know, that the Symphony transaction is up to a four-year transaction. We don't anticipate that those [inaudible] programs will last anywhere near that long.

Now, I forgot the other parts of your question. I'm sorry. Oh, what are the hurdles to provide a compound -- there are no hurdles. We have to pay the investors a 25% IRR on the money, so we -- you know, if we pony up the money, we get the compounds back, and of course we would do that once we see the data. And so if the data is good, our data are good, then we would of course we would buy them back. And remember these three compounds are all part of the GSK payment, And GSK does have an option to select these.

If they, do they pay us a selection milestone and remember, they have agreed to increase the size of the selection milestone for those compounds that we financed through Symphony. So, if GSK picks one of these, we will have all or most of the money we need to pay and get them back. We're not prepared at this point to comment on the Phase II trial design. It certainly will be different for 647 and 999. And I think once we get a little further near the Fall, we will be more prepared to talk about that.

Fair enough. I look forward to hearing more.

Did I get all your questions then?

Our next question comes from Eric Schmidt with SG Cowen.

Good afternoon. Frank, I just want to make sure, looking at your income statement correctly, with the increased operating expenses with about 10% over prior guidance, a little over 15 million, I guess, that means that we will see 15 million in loss attributable to the noncontrolling interest flow through the income statement this year as well?

That's correct.

So that seems like a fair bit of expenses given you're going -- only could be entering into the Phase II programs around year end. Can maybe George just talk about what the money is being spent on ahead of patient recruitment?

Well, I think I can address that, Eric. The Symphony arrangement is such that Symphony reimburses us as of the date of signing for any expenses related to those trials so in fact they're already paying for the Phase I ongoing at the moment.

Okay. I didn't realize that. That thanks. And another housekeeping issue, just remind us of the pre-clinical candidates in development so I guess this is now 281, 418, and 228, which if any programs GSK has rights to?

All of them. Well, they -- let's say GSK has -- our collaboration with GSK encompasses 12 programs. So what we have here in our -- and I don't know if these numbers, they get kind of confusing after a while, but there are 10 named programs now, included in those 12. And then there are two earlier-stage programs. Of those, they get to pick two or three.

Right.

So -- but included in them are 281, 418 and 228. The three new development candidates are all part of the GSK collaboration.

Okay. Just didn't know whether those were part of the 12 or not.

Yes, they are.

And last question, the $30 million milestone payment, can you disclose over what period of time going forward that will be amortized over?

Yes. And I think we have disclosed this also in the past how we've dealt with the up front payments and how we tend to deal with other future milestones. They are amortized over a period starting either from the original signing date, which is October 2002, until October 2010, or in the case of the $30 million milestone payment, we start amortizing as of the signing date of the amendment, January '05 until October 2010. And keep in mind this is really an exclusive treatment only for this $30 million milestone. Everything else will be unchanged.

Thanks for the update.

Our next question comes from George Farmer with Wachovia.

Hi, thanks for taking my question. So Frank, just on the same thing, with the GSK milestone. We will assume you will probably be booking about 6 million based on that this year.

I can't comment on what you should put into your models but if you take the guidance in the past and the methodology that I've outlined earlier, a few minutes ago, I think you will be okay.

Okay. And I guess again, maybe I'm still a little bit confused on how you tend to book the Symphony Evolution reimbursement. You have this as a line -- as a loss attributable to the noncontrolling interest. Can we assume that that will be a credit going forward then if you're going to be booking it as an expense in the R&D?

Yes, it is in fact a credit. As you look at the P&L, which is included in our press release, you can see an amount of 429,000 as a credit.

Okay.

It is a very small amount at this point because it only covers the stop period from signing until the end of the quarter which is really only a few days.

Okay. Great. And George, you know, a lot of us are waiting for Exelixis, despite the breadth of all of your compounds in development, to be a real Phase II company. And I think a lot of us have been taking away that you will be in fact going into Phase II this year. I'm hearing kind of a variation on that language in your introductory comments. Do you think we will see one of these compounds going into Phase II development before the end of '05?

Oh, absolutely. If I gave you any other impression, it certainly wasn't intentional.

Okay, and again, we can't get any color as to which tumor indication you may be going forward with?

No, but I think if you take the compound like 999, which is, you know, a VGF -- PGVFG inhibitor anti-angiogenetic compound, you can probably make pretty good guesses.

What about combination studies? Do you plan on moving forward with additional Phase I trials? Evaluate these things in combination? Or were you -- or I would assume these next phases would be single agent studies?

Yes, some would be single agent and we do have some combination trials lined up as well and as you know, when you star the combination trials, you got to back down on the dose a bit and do the combined cost and make sure you're okay. So that shouldn't take very long. We would expect it would be up into Phase II trials for the combination studies as well.

Okay. Thank you.

Our next question comes from Bret Holley with CIBC World Markets. Sir, your line is live. Our next question comes from Brian Neem [ph] with Fortis Bank.

Hi, thank you. Just sort of a follow-up on George's question. With any potential combination agents that you might want to look at, are you ready to tell us what agents seem to look promising in pre-clinical studies and what you might see first in the combo trial?

No, I -- the reason --

I was close. [laughter]

No, look. I'm torn. Obviously, we know you guys really would like to know the data and if I were in your shoes, I would want to know it, too. And we true to be as open as we can here, but I think at this point, until we get the plans a little more finalized and we make sure we have all the centers lined up, I would rather be a little bit more certain before answering that question for a while. I do want to emphasize, because I don't want there to be any confusion about this, that we expect 647 and 999 to enter Phase II trials by the end of the year. There's no change in our expectation there.

784 will go back into the clinic for a Phase I/II study in diabetic nephropathy very soon now. That involves a short Phase I portion. As you know, we did the initial Phase I studies with the liquid formulation. We now have capsules. We have the capsule, they are bio equivalent and the animal models we to make sure they're bio equivalent in humans and then we will rapidly turn that over into a Phase II study as well.

Okay. And then with 880, has the go/no go decision been made yet to bring that into Phase I?.

No, not yet.

Okay. All right.Thanks very much.

Our next question comes from Bret Holley.

Hi, you can hear me now?

Yes.

Great. Sorry about the technical difficulties. My question has to do with, you know, angiogenesis inhibitors,in general, and I think some cancers we have seen some pretty revolutionary data for Avastin, and for the small molecules it particularly those that target VEGF and it seems like four or five of the compounds you're dealing with do. Does this make -- you know, what are the plans going forward in terms of later clinical development should you, you know, run into Avastin in a Phase III trial? Do you think that is a paradigm in later-stage trials, at least in the larger cancer test trials?

Yes. That's a real good question and the honest answer is we're still sorting through that. There are some data that seem to suggest there could be a benefit on top of Avastin, could be an alternative to Avastin but certainly Avastin is rapidly becoming the standard of care. So we will do some studies. I think in combination. An then we will -- you know, basically we are waiting to see some of the data we get and the Phase II data before we decide on how to go forward into pivotal registration trials.

So you would actually do combinations with Avastin with one of your small molecules even though --

You could think about doing that, yes.

And do you think that would be regulatory pharmaco going forward?

I don't know. Look the challenge is-- and what you're really asking is a broader question, is that Avastin is on the market, there are other kinase inhibitors that are ahead off our clinical development and the field will get crowd and we will have to differentiate our compounds as will anybody else who is developing cancer compounds. And it so you know all I can tell you is that in the end, you need good data. And it is largely data driven. If, as we hope, our compounds prove to be efficacious, and prove to really provide us a substantial benefit to patient, there will be a place for them in the marketplace. And we are going through now, and if the process that we are actively engaged in to assess exactly how to position them, and exactly what kinds of trials we should do, and frankly those kinds of decisions are also data driven and we will refine those as we go forward and we get more data from the clinical trials.

Thank you.

If there are any further questions or comments please press star one now. Gentlemen, we have no further questions at this time.

Okay. Look, no more questions, then let me just thank everybody for your attention and your interest. We are cranking ahead here full speed. We have no changes in our timeline. If anything, we're being aggressive and trying to move things forward. And we are generating lots of patient data as we speak. And I think very soon we will be in a position to make some of it public and have more substantive discussions about the compound. So thanks, everybody. And we will get back to work.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.