Exelixis Inc (EXEL) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Exelixis second quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Charles Butler, Director of Investor Relations. Thank you, Mr. Butler, you may begin.

Thanks, everyone, for joining us on our quarterly call. Joining me today is George Scangos , CEO, and Frank Karbe, CFO. George will provide a business overview, while Frank will give us some more details on the financials for the quarter. As usual, we will be making forward-looking statements, and I just direct your attention to the slide that describes a lot of forward-looking statements that we'll be making.

At this point, I will turn the call over to George to give his outlook on the business.

Okay, thanks, Charles. Well, I'm pleased to say Exelixis once again had another really strong quarter, both financially and in terms of advancing our compounds. Frank will obviously provide the details on our financial performance in a couple of minutes. The take-home message is that we continued in a very strong financial quarter. Our net loss was down from the first quarter. Our revenue increased. We ended the quarter with over 190 million in cash, even while we reduced our debt by 30 million by paying off a note we had with [PDL.] And all of this while we continued to advance our compounds through the clinic.

So clinical development is and of course will continue to be a critical area of focus for us, I think, and in the second quarter we did reach a number of important clinical objectives, and I'll just go through them quickly now. And as we indicated on the last call, we now have four compounds in phase II clinical trials, and let me just give you a brief summary of each of those, 999, phase II trials for 999, which you may remember, inhibits VEGF receptor, PDGF receptor and the FGF receptor are ongoing. We initiated six trials for this compound and they are progressing well and we expect to have a substantial amount of phase II data for 999 by the end of the year.

Excuse me. The phase II trial for 784 in patients with diabetic nephropathy is enrolling well. It's basically on track with our projected enrollment rate and it's on schedule to have data in the first half of 2007. We initiated a phase II trial for XL880 in the second quarter in patients with papillary renal cell carcinoma.

The data from a phase I trial of 880 were presented at ASCO in June. And you may remember that at ASCO the investigators presented data in which there were 19 patients evaluable for efficacy. And of those 19, there were two patients with partial responses, three patients with MRs, and four patients with stable disease. And it was a very high rate of potential clinical benefit in this population and both we and the investigators are very enthusiastic about the compound.

I think, importantly, there were two patients in the trial with papillary renal cell carcinoma. Both achieved partial responses and both responses are continuing. The phase II trial for patients with papillary renal cell carcinoma began in the second quarter, in phase II trials for gastric cancer, for head and neck tumors will begin in the near future.

[Met] our primary targets of 880 plays an important role in those three tumor types and it is likely to have an important role and other major tumor types as well, for example, lung and colon. Although not strictly a Q2 event, a phase II trial for 647 was initiated last week in patients with non-small cell lung cancer. Again, the phase I data for 647 were presented at ASCO and there were 40 available patients. In that trial, there was one PR and 12 cases of stable disease. I think importantly in that trial there were 12 patients with non-small cell lung cancers.

Among those 12, there was one PR and three cases of prolonged stable disease. So we believe that 647 is a promising compound that has real potential advantages. First, I think it's really a balanced inhibitor of EGF receptor, HER2 and VEGF, making it a true multi-targeted inhibitor.

And I think this factor accounts at least in part for its remarkable potency in preclinical studies. Second, 647 retains activity against the gatekeeper mutations that arise in EGF receptors and other kinases after prolonged treatment and which confer resistance to the first generation of inhibitors, including Tarceva and Iressa. Additional phase II trials for 647 in patients who responded to Tarceva and then progressed, and then in patients with metastatic breast cancer, we'll begin within the next few moths.

The phase I trials for XL820, 184 and 844 continued. We anticipate having data from the trials, at least the first two of those compounds, by the end of the year. Preclinical development of our compounds 228, which targets Abl and Src, 418, which hits Akt and S6K and 281, which inhibits [inaudible], and we anticipate filing INDs for each of these compounds by the end of the year.

And then we continued to advance the preclinical development of additional developments including 147, which inhibits PI3 kinase, 518, which inhibits MEK and 765, which is a dual inhibitor, actually, of PI3 kinase and mTOR, and we expect that all three compounds will be the subject of IND filings in the first half of '07.

Each of these compounds was designed to specifically inhibit T downstream molecules that are points of convergence in critical signaling pathways. Those pathways include the Ras pathway, the PI3 kinase P10 pathway and [Jacspat], and those pathways also are often mutationally activated in a variety of tumors. And I think these kinase targets in these pathways may provide really superior efficacy, safety, tolerability and hopefully will enable new approaches to cancer therapy.

So, in the second quarter, we also advanced another compound. This one is 019 - to development candidate status. 019 targets Jak-2, which is a key component of downstream signaling cascades associated with a variety of growth factors. Activation of Jak-2 is associated with a number of myeloid and lymphoid malignancies, and more than 50% of patients with myelo-proliferative disorders have activating mutations in Jak-2.

So, in summary, we have seven compounds in clinical development, four of which are in phase II, three of which are in phase I. We have an additional seven compounds in preclinical development, for which we will file three INDs by the end of this year and anticipate an additional four INDs next year.

These numbers do not include 119, which is the phase III compound which we outlicensed to Helsinn, and to which we have the right to reacquire North American rights, and two additional preclinical molecules being developed by our partners Wyeth and BMS. Probably will see a lot, and it doesn't matter if we have great drugs if we don't have the capability of moving them forward aggressively. So as we build out our portfolio of clinical programs, we're also building out the infrastructure that we need to design and execute the clinical development program.

So in the quarter we were very pleased to announce the appointment of Dr. Gisela Schwab as Chief Medical Officer. Dr. Schwab is an experienced oncologist with more than 13 years of industry experience, and she'll direct our global clinical development programs.

Most recently, Dr. Schwab was FCP and Chief Medical Officer at Abgenix, where she led worldwide product development activities, including preclinical development, pharmacokinetics and tox, regulatory affairs, clinical development in diverse therapeutic areas, including hematology and oncology.

Prior to joining Abgenix, she had various roles of increasing responsibility at Amgen, and most recently as therapeutic area leader for the clinical development of Amgen's hematology and oncology pipeline.

Dr. Schwab is a great addition to our team and we're very excited to have her on board. She reports to Dr. Jeff Latts, who in his capacity is our Executive Vice President of Development will continue to oversee all development functions, including preclinical development, clinical development, process development, CMC manufacturings, regulatory affairs.

So, as you may recall, our business development group was busy at the end of 2005 and in early 2006, executing deals with BMS, Wyeth, [inaudible] around our preclinical metabolic disease programs. They certainly are keeping very busy now, managing several ongoing discussions around our exciting preclinical oncology program. In these discussions, we're looking for high-value collaborations that provide us with the opportunity to codevelop and copromote these exciting compounds and also gain access to later-stage development and commercialization resources while we keep a big piece of the downstream value.

So all of this activity certainly keeps our finance group busy as well, so now I'll turn the call over to Frank who will review our financial performance for the quarter.

Thank you, George. Overall, the second quarter was again a strong quarter from a financial perspective. As compared to Q1 of this year, we significantly increased our revenue and reduced our net loss, while further expanding our clinical development activities.

However, compared to Q2 last year, our revenue is down and net loss is up, but only because Q2 2005 included about $21 million of one-off revenue bookings primarily associated with the termination of our Genoptera collaboration during Q2 last year. In addition, Q2 '06 includes $4.4 million of stock-based compensation expense following the adoption of FAS-123R in January of this year.

Finally, also from a cash perspective, Q2 '06 was a very strong quarter, with cash inflows of almost $650 million from our various partnerships, which allowed us to pay off a $30 million convertible note to PDL that matured in May and still end the quarter with over $190 million in cash. Let me now turn to our financial results in detail.

As usual, we are reporting results both on a GAAP and non-GAAP basis. A reconciliation of GAAP results to non-GAAP results is contained in our second quarter press release, which as always is posted on our website at www.exelixis.com.

Let me begin with net loss. Net loss on a GAAP for Q2 was $24 million, up $0.29 per share, compared to $9.7 million, or $0.13 per share, for the comparable period in '05. Non-GAAP net loss for the second quarter was 19.3 million, or $0.23 per share, compared to 9.4 million, or $0.12 per share, for the comparable period in '05.

Non-GAAP net loss for Q2 '06 excludes stock-based compensation expense of 4.4 million and amortization of intangibles of 0.2 million.

Let's turn to revenues. Revenues from Q2 '06 were $27.2 million, compared to 34.3 million for the comparable period in '05. The decrease in revenues from '05 to '06 was primarily due to about 21 million in revenue recognition associated with the conclusion of our Genoptera collaboration in 2005, which included a one-time termination fee and acceleration of related deferred revenue. This decrease was partially offset by a $4 million milestone from Helsinn related to the delivery of drug substance to support the ongoing phase III clinical development of XL119. And revenues from our new collaboration agreements with Sankyo, Bristol Myers Squibb, Wyeth and Genentech.

Research and development expenses for the second quarter '06 were 47.4 million, compared to 36.6 million for the comparable period in '05. The increase from '05 to '06 was primarily due to increased development expenses associated with the expansion of our clinical trial activity, which now encompasses eight compounds in clinical development.

Further increases in R&D expenses resulted from the advancement of compounds through preclinical development and employee stock-based compensation of 2.9 million following the adoption of FAS-123R at the beginning of the year. General and administrative expenses for Q2 '06 were 10 million, compared to $7.1 million for the comparable period in '05.

The increase from '05 to '06 was primarily due to employee stock-based compensation expense of 1.5 million related to the adoption of FAS-123R, as well as higher consulting and personnel-related expenses. As I pointed out on the last call, we have increased our G&A headcount, most notably in HR, finance, operations and strategic marketing to support our significantly expanded clinical operations.

Cash, cash equivalents, marketable securities, investments held [inaudible] and restricted cash and investments totaled 192.2 million at June 30th, 2006, compared to 210.5 million at the beginning of the year.

Now, at the last earnings call, I gave a brief outlook on a few Q3 events. You will find that we have done exactly what we said we would do. We have paid back the 30 million convertible note with PDL after thoroughly exploring several alternatives how to deal with this instrument and concluding that paying off the note at its maturity date in May was the best option. Our remaining debt now consists primarily of the 85 million loan facility under our GSK collaboration, which matures in several tranches starting in late 2008, and for which we accrue but currently don't pay any interest.

Under our financing arrangement with Symphony Evolution, we were entitled to draw down an additional 20 to 40 million by June 9th, which marked the first anniversary of the deal. As anticipated, we drew $40 million to fund the further clinical development of XL999, XL784 and XL647, all of which are now in phase II.

I would like to point out that during the first six months of this year, we had cash inflows of over $100 million, which I think again demonstrates how our financing strategy is playing out. All of these inflows were exclusively the result of our various business development activities earlier this year and throughout last year.

So as you can see, we continue to manage our finances and maintain a healthy cash balance that allows us to aggressively move compounds into and through the clinic. We'll continue to execute on our financial strategy to ensure that we are well funded to facilitate the maturation of our pipeline, and we reconfirm our year-end guidance for revenue, operating expense and cash.

With that, I will turn the call back over to George.

Thanks, Frank. So we're really pleased, I think, to have completed another successful quarter and we're certainly focusing now on the opportunities that are ahead of us. Over the remainder of 2006, we're really focused on advancing all of our programs. We have four programs in phase II, 999, 647, 880 and 784. We are expecting data from those trials starting about the end of the year, and going into the first half of next year, we should have phase II data from all of those programs.

We will expect data from our phase I programs, 820, 184 and we will present data on some of those compounds at the EORTC meeting in Prague in November. We will also provide updates on those programs at our annual R&D day, which will be held in New York on December 4th. Also by the end of the year, we expect to file INDs for XL228, XL418 and XL281 and we are making - intend to make significant progress on moving the earlier compounds forward in preparation for an additional set of INDs to be filed in the first half of next year. So we have a lot on our plate. So far, it's all going forward and we expect it to continue to do so.

So as I also mentioned, we are exploring a number of potential collaboration opportunities. It's obviously difficult to predict how or if these discussions will conclude, but we may have more to report n that front later on in the year.

And, finally, I really want to thank all of the Exelixis employees for all of their contributions. All this progress doesn't come about by magic. It comes from the hard work of the people here at Exelixis. And as we've morphed from a biology-based company to a really integrated drug discovery company how, the company has grown a lot but we haven't lost the basic spark, the basic work ethic, the basic dedication of the employees, and I really want to publicly recognize all of them.

So, with that, we'll end the call and open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Mr. Jeffrey Zekauskas with JPMorgan. Please proceed with your questions.

Hi, this is Karen Buchkovich sitting in for Jeff. I have a couple questions on the clinical programs. How is continuous dosing regimens of 647 and 880, how are they looking? Do you have results?

They're ongoing. I think it's too early to make any comments about that. We'll update people on those at an investigator-sponsored meeting. But we are doing both of those programs.

And can you say anything about 184, is it approaching a dose-limiting toxicity?

Well, hard to know that you're approaching dose-limiting toxicity until you hit dose-limiting toxicity. Not yet. Not yet.

I think it's been a little over year since you started the Genentech collaboration. Can you update us on that, how it's going?

Sure. We are collaborating with Genentech around a project focused on the [Notch] pathway. It's a very interesting developmental pathway, certainly cells use Notch pathway, certainly involved in decisions that cells make about whether to proliferate or differentiate aberrations in the Notch pathway, certainly are involved in certain types of cancer and may very well have a role in certain degenerative diseases, as well. So we have a collaboration with Genentech in which we are making antibodies against the various members of the Notch pathway and we're testing the utility of those antibodies in a variety of indications, both cancer and outside of cancer.

I can tell you, the collaboration is going very well. As you can imagine, Genentech is a very good partner, is very aggressive, in a good sense, and certainly their expertise in making antibodies is unparalleled, I think. So, anyway, collaboration is going well.

We had goals for the first year of the collaboration and basically achieved all those goals. We have a number of antibody reagents. We're testing the utility and hopefully will take some of those forward.

Okay, thanks for the update. Did Frank mention the increase in headcount in the second quarter, or was that before the second quarter?

Well, I don't remember what Frank actually said, but we certainly are adding heads. And we are adding heads to our clinical and regulatory groups and a minor number of heads in support functions to support them. But that's the area of growth for the company.

Can you give us an idea how many new employees?

We can tell you what the headcount is as of the end of July. It was 615.

Okay.

And as George pointed out, we had some increase over Q2, primarily in clinical development.

Okay, all right. Thank you.

Thank you. Our next question comes from the line of Mr. David Witzke with Banc of America. Please proceed with your question.

Hi, this is John Watkins in for Dave, but I was wondering if it's possible to get a little more granularity on the revenues this quarter. They were a little bit higher than we expected.

Sure, I think the one thing that you may not have factored into your forecast is a $4 million from Helsinn which we achieved and fully booked as revenue in the second quarter. I think that accounts for the biggest difference. The remainder of the increase comes from the collaboration with Sankyo, BMS and Wyeth, primarily. It's about $4.6 million from Sankyo, 4 million from BMS and 2.5 million from Wyeth, and that accounts for the majority of the increase year over year.

And would you say this is a good rate to think about going forward, what you had in 2Q?

Well, I think I would...

Minus the Helsinn, I guess.

Certainly minus the Helsinn. I would refer you back to the disclosures on the last earnings call where we spoke in greater detail how we recognize revenue under all three of those new collaborations, because keep in mind, we recognized revenue over slightly different timeframes. And so I would say go back to that slide on the last earnings call and you will find all the details there.

Okay, thanks, Frank.

Thank you. Our next question comes from Mr. George Farmer of Wachovia Securities. Please proceed with your question.

Hi, thanks for taking my question. George, could you talk a little bit more about the trial design for 647, the phase II that you just initiated, non-small cell lung. I understand this is a front-line trial in patients from selected demographics that have previously shown to be highly responsive to EGFR inhibitor therapy and furthermore will be in the absence of chemotherapy. Can you talk a little bit more about the rationale for designing the study this way?

Sure. That's kind of a window of opportunity trial, so we're taking newly diagnosed non-small cell lung cancer patients, previously untreated, and the rationale is that if we select the population that is enriched for patients who are likely to respond to EGF inhibition that we can get a reasonably high response rate and therefore provide a benefit to a substantial number of those patients. So the inclusion criteria, there are four inclusion criteria, which are female, Asian, non-smoker and patients with adenocarcinoma. And in order to be enrolled I the trial, a patient has to have any two of those characteristics.

And so in consultation with our clinical advisory board, we think that will enrich and we'll have 20 or 30% of the patients with EGFR receptor activating mutations. And the rationale is we can provide a substantial benefit to those patients without exposing them to all the obvious side effects of chemotherapy.

Do you have data showing that 647 does have preferential cell-killing activity in cells that express the mutant form of the receptor that are found in these demographics.

We know that cells that have those activating forms of the receptors are especially sensitive to EGF inhibition, whether it's through 647 or any other compound. They're just very sensitive to EGF inhibition.

And how do you think you can compete for patients who I would expect these particular patients to be candidates for a Tarceva, say, in the front line, who may not be candidates for chemotherapy. How do you convince patients to go onto a 647 trial when they may be equally responsive to a Tarceva or even an Iressa?

Yes, they may be, and your question is a good one, but it's not specific to this trial in these patients. I think the general question is how do you compete for oncology patients in general these days within any indication like - big indication like non-small cell lung cancer, there are a lot of trials going on, and so there is competition. So you have to gauge the extent of kind of investigator excitement about the protocol and about the compound. And as we've discussed this protocol with our own advisory board and with investigators around the country, there are a substantial number of investigators who are very enthusiastic about both 647 and this trial design. And so right now we feel pretty confident about the enrollment that we'll get.

Now, having said that, the trial is just starting, so we'll see what the enrollment really looks like, but from all the indications we're expecting a reasonable enrollment rate.

And what's your target enrollment for this?

You mean number of patients?

Yes.

It's about 40.

Great, thanks very much.

Thank you. Our next question comes from the line of Mr. Eric Schmidt with Cowen & Company. Please proceed with your questions.

Good afternoon. George, I just wasn't sure exactly what we should we be expecting at EORTC. Are you promising data on 820 and 184? Maybe you can just clarify if we're definitely going to see data on those two and if maybe we'll see something on 999 at that time as well.

Eric, I've been doing this long enough not to promise anything. But, look, we are the - let me tell you, on 820 and 184 we're kind of in what we think are the mid to late stages of the phase I program. So we are expecting that by the EORTC meeting in November, we will have - we already have substantial numbers of patients treated and we'll certainly have more treated and analyzed by that time. And of course the investigators are enthusiastic about submitting abstracts, so we're expecting that to go. But, remember, these are investigator-submitted presentations, not Exelixis-submitted presentations.

But we will have substantial data at that time and we understand everybody's - let's say the desirability of showing everybody those data. So we will do our best to get them out at the EORTC meeting. We also have our own annual R&D day in November, I mean, in December - December 4th, so we can make those data available at that venue as well.

And with 999, the trials are going. We certainly will have substantial numbers of patients enrolled and analyzed by the time of the EORTC meeting, and again, I am optimistic that we'll have some of those data for a presentation there.

Okay, staying on a theme of milestones that you don't want to promise. In terms of the collaborative opportunities, I think you caveated appropriately that collaborations are hard to predict if and when. I assume they're even harder to predict, given the GSK opt-in rights. So maybe you could just talk a little bit about when we might be expecting some sort of news on the GSK front and how you're thinking about these collaborations.

That's a good question, Eric. The collaborations we're talking about are for compounds that are not part of our GSK collaboration, so actually they're not impacted at all by GSK. But they're impacted by the rates of discussion and, frankly, we are - we think we have a very valuable set of assets. We have very interesting compounds. We are not desperate for cash or for partnering, and so we are moving them forward aggressively ourselves. We have too many things there for us to develop on our own. We just don't have even the bandwidth to do that, let alone the finances. So we know that we'll need to partner some of those, but we can partner them under very favorable conditions.

So we're having a number of discussions, and when one of those moves along in a way that we feel is good, we'll move forward with it. So that's why I want to be a little circumspect on the timing. It's not that we can't go ahead and sign one reasonably soon, we could. We are in a position where there are certain aspects to these deals that we feel are important for us, and we want to make sure we get good deals.

Okay, thanks for the clarification.

GSK, is that the second part of your question?

Yes, that's right.

I wish I could tell you. I mean, if I knew what GSK was going to do and what they were going to pick, it would make our internal planning certainly a lot easier. They of course aren't obligated to make any decision at all until we have a POC data package for them, so we're really focused on getting those data packages as quickly as we can, and that's dependent on getting these clinical programs, or some of these clinical programs, done as quickly as we can, so that's really our focus. And then the - as soon as we get the data packages together, we'll of course put them together and present them to GSK. GSK then will make a decision, so when there's just a lot of variability in both when they're ready, not when they make a decision, but which ones they'll take and which ones they won't.

So we've tried not to - because of all of those factors, it's a little hard to predict.

Okay, thanks.

Thank you. Our next question comes from the line of Mr. Brian Lian, CIBC World Markets. Please proceed with your question.

Hi, thanks. I just have a question on XL184. How do you see the development path differing between 184 and 880? Do you see a similar set of tumors for 184, or is it too early to say?

Well, they're different compounds and they have different target spectra and they have different binding affinities. They have different half lives. So they're pretty different, actually, so yes, we would see developing them along different paths, and 880 is going forward as we described. 184 is still in the mid stage of phase I, so it's a little early to speculate on what its development path will be. But based on what we know about those compounds, we are expecting that they will be different in terms of their efficacy.

And then just very quickly on XL999, I believe at ASCO there were 11 evaluable patients from the weekly dosing schedule. Is that phase I portion completely wrapped up then with weekly dosing and can you say how many patients received the weekly dose?

Oh, I don't know off the top of my head how many patients in the end got the weekly dosing, certainly more. But I don't actually know the number. And now the phase II trial is of course proceeding with the weekly dosing, and there are a lot of patients that have been enrolled in that phase II program so far. So there have been some number of tens of patients all in all enrolled in the weekly dosing regimen.

Okay, thanks.

Thank you. [OPERATOR INSTRUCTIONS]. We do have a follow-up question from Mr. George Farmer of Wachovia Securities. Please proceed with your question.

Hi, thanks. Frank, just one quick question regarding stock option expensing. Have you guided what that number will be at year end?

Yes, we have guided on our last earnings call, we've said we'll be between 15 and $20 million, and you'll see we are pretty much tracking to that. It was 4.4 million this quarter, a similar number in Q1, so we're on track here.

Okay, thanks.

Thank you. [OPERATOR INSTRUCTIONS].

So while we're waiting to see if there are any more questions, let me just follow up a bit on Eric's question about data presentation at the EORTC meeting, because I don't want to be too cute about this. I mean, we are planning to have data presented on multiple of our compounds. We certainly are expecting 999 data there. We would like to have data on 184, 820 there. We may actually have data on additional compounds as well. So we do expect a substantial flurry of data at year end, some of which will be at EORTC, and some of which will be at our annual R&D day.

Gentlemen, there are no further questions at this time.

Okay, if there are no further questions then thank everybody for your interest and we can all get back to work. Thanks a lot.

Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time.