Exelixis Inc (EXEL) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and full-year 2006 financial results conference call.

My name is Eric, and I will be your coordinator for for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn our presentation over to our host, Mr. Charles Butler, please proceed, sir.

Thank you all, for joining us for our 2006 Q4 and full year financial results and business update call.

On today's call, in addition to myself, are George Scangos President and CEO, Frank Karbe, CFO, and Mike Morrissey, President-R&D. Before we go into the call, let me first make a small forward-looking statement.

As usual, we will be making forward-looking statements. Please carefully review the forward-looking statements slide at the beginning of the web cast presentation for the risk associated with these forward-looking statements.

And with that, I will turn the call over to George.

Okay, thanks, Charles, and thanks to all of you who are listening into the call today.

As Charles indicated, I'll begin by reviewing our accomplishments for 2006, of which there were many. After that, Frank will go through the numbers, and then we'll get to what I know is of keen interest to many of you, which is our goals and milestones upcoming for 2007.

But let's first take a look back over the year of 2006 and first look at clinical development, which as you know is a key priority for us. So in '06 we initiated Phase II clinical development programs for three compounds XL784, 647 and 880. For 784, we're conducting a single Phase II trial which is a randomized placebo controlled study in patients with type II diabetes and moderate levels of proneuria. We expect to complete enrollment mid-year and have data available from that trial in the second half of '07.

We initiated a Phase II trial for 647 in previously untreated patients with metastatic non-small cell lung cancer and expect to make data available from this program around mid-year. For XL880 we begin Phase II trials in patients with papillary renal cell carcinoma and in patients advanced gastric cancer. We expect data from the papillary renal cell trial also will be available in the middle of the year.

We also enrolled many patients in the XL999 Phase II clinical trials program and as you know we encountered some cardiovascular adverse events and as you will hear we now believe that we've worked through all those issues and have a good way to move this compound forward as well. We achieved our goal of filing 3 INDs, one for XL228 which inhibits the IGF1rescepter, one for XL281 which is a wrath inhibitor, and one for XL518, an inhibitor of MEK.

During 2006, we also reported clinical data from multiple Phase I trials. Phase I data for 647, 880, 999, 820, and 184 were reported at ASCO and at EORTC. The data from these studies were promising and provide a compelling rationale for the Phase II programs that we've already initiated as well as for those that we expect to initiate later on this year.

On the business development front, 2006 was another productive year for Exelixis. Early in the year we signed a collaboration, with Sankhya and that was to develop cardiovascular therapies targeted against the [mineral corticoid] receptor. We received the $20 million up front payment, research funding, and we have the potential to receive substantial development, regulatory, and commercialization milestone payments as well as double digit royalties on the sale of any products that are commercialized under the collaboration.

In December, we signed a collaboration with Bristol Myers Squibb to discover novel oncology compounds. We received $60 million upfront and will receive $20 million in milestone payments for each of 3 IND ready compounds that BMS selects to develop. Exelixis and BMS will share clinical development costs in a ratio of 65% for BMS and 35% for Exelixis, and we'll share profits in the U.S. 50/50 while Exelixis will receive milestones and royalties for sales in the rest of the world.

This type of deal structure isn't the one off. Just before the holidays, we signed a promising collaboration Genentech covering our MEK inhibitor, XL518. MEK is a very interesting cancer target and 518 has a great preclinical data package. We're excited about this program and believe that Genentech is a great partner for it.

As part of the collaboration, we received $40 million in upfront and milestone payments. Exelixis will conduct a Phase I program for 518, at the end of which, Genentech will have an option to further develop the compound. If Genentech exercises the option, they'll conduct and finance all subsequent clinical activities, and then Exelixis and Genentech will share commercialization costs and profits.

Profit share will initially be 50/50, but as annual sales exceed certain thresholds, Genentech's share of the profits will increase to compensate them for the cost and risk of clinical development. This is, I think, an interesting and innovative structure that achieves the goals of both companies and most importantly is structured in a way that can speed the development of this very interesting compound.

But to make a couple points about these collaborations. First, neither of them is the first collaboration we've signed with a partner. Signing multiple collaborations with the same partners, I think as a reflection or of our ability to function as a good partner and to execute on our programs.

I think secondly, both of these collaborations accomplish goals we set out for ourselves in 2006 to bring in near term cash through partnering at the same time that we retain substantial up side in our compounds. Both of these profit sharing agreements accomplish those goals in a way consistent with the needs of our partners.

In '06, we also completed a public equity offering that brought in net proceeds of $90.5 million. As Frank Karbe will detail in a few minutes, we finished 2006 with over $260 million in cash, our highest year-end cash balance ever and that doesn't include $75 million we received in early January from BMS and Genentech. So we made substantial progress during 2006, and we look forward to a great 2007.

At this point, I'll turn the call over to Frank who will go through the numbers and then to Mike Morrissey who will run through our goals for 2007. Frank?

Thank you, George.

Our success on the business side is reflected in our strong fourth quarter and full year 2006 financial results. Our revenue for both Q4 and for full year '06 increased significantly due to our business development activities in late 2005 and early '06. As a result, our non-GAAP net loss decreased substantially for Q4 '06 versus Q4 '05 and non-GAAP net loss remained flat for the full year '06 versus full year '05, despite the increase in our operating expense, which as you would expect was primarily driven by the expansion in our clinical trial activity throughout last year.

Looking out to '07, we project that net loss will again remain flat. This would in fact be the third year in a row that our non-GAAP net loss remains flat despite a very significant expansion in our operating activities commensurate with the maturation of our pipeline. For a company that rapidly broadens and matures its pipeline, but does not yet have any revenue from product sales, that is a remarkable achievement.

We also recorded substantial cash inflows during 2006, resulting in a very healthy year-end cash balance of over $260 million, and that is excluding $75 million, which we received in January under our new collaborations with Genentech and BMS. As George pointed out, '06 was a very successful year for Exelixis, and our financial results reflect that. While some of the revenue that we had budgeted for 2006 slipped into 2007 due to the timing of the effective dates for some of our new deals, we have, in fact exceeded our goals on the business development side which is reflected in our cash balance and which will positively impact our revenues in 2007 and beyond.

Let me now turn to our financial results in detail, and as usual, we are reporting results both on a GAAP and non-GAAP basis and a reconciliation of GAAP to non-GAAP results is contained in our fourth quarter and full year press release, which is posted on our website at Exelixis.com. Let me begin with the revenues. Revenues for the fourth quarter '06 were $29.8 million, up 107%compared to $14.4 million for the comparable period in '05.

Revenues for the year were $98.7 million, up 30% compared to $76 million in '05. The net increase in revenues for the quarter and year was primarily due to the revenue recognition associated with our metabolism collaborations which we signed in late '05 and early '06 with Bristol Meyer Squibb, Wyatt, and Sankhyo. These increases were partially offset by the conclusion of our collaborations with [inaudible-heavy accent] in '05 and [inaudible-heavy accent] in early '06.

Research and development expenses for the fourth quarter '06 were $52.1 million compared to $36 million for the comparable period in 2005. Research and development expenses for the full year '06 were $185.5 million compared to $141.1 million in '05. Increase in expenses for both the quarter and the full year reflect on one hand the increased development expenses associated with the expansion of our clinical trial activity and the advance of our compounds through preclinical developments, and on the other hand, the inclusion of employee stock-based compensation expense of $2.7 million for the quarter and $11.2 million for the year for the adoption of FAS 123R in January '06.

General and administrative expenses for Q4 '06 were $11.3 million, compared to $7.6 million for the comparable period in '05. General and administrative expense for the year were $39.1 million, compared to $27.7 million in '05. The increase for both the quarter and year was primarily due to employee stock-based compensation expense of $1.8 million for the quarter and $6.3 million for the year as well as higher personnel related expenses to support our expanding operation.

Let me turn to net loss. Net loss on the GAAP for the fourth quarter '06 was $25.2 million or $0.27 per share compared to $25.5 million or $0.29 per share for the comparable period in '05. Non-GAAP net loss for the fourth quarter was $20.6 million or $0.22 per share compared to $24.2 million or $0.29 per share for the comparable period in '05.

For the full-year 2006, net loss on GAAP was $101.5 million or $1.17 per share compared to $84.4 million or $1.07 per share in '05. Non-GAAP net loss for '06 was $83.1 million or $0.96 per share compared to $83.2 million or $1.06 per share in 2005. I'd like to point out that GAAP net loss for the fourth quarter and full-year '06 includes stock-based compensation expense and amortization of intangibles of $4.6 million and $18.4 million respectively.

Finally, cash and cash equivalence, short-term and long-term marketable securities investments [inaudible-heavy accent] and restricted cash and investments totalled $263.2 million at the end of '06 compared to $210.5 million at the end of '05. As you know, we recently announced two significant new collaborations with Genentech and BMS and I'd like to spend a moment covering the impact of these important new alliances to our financial statement.

First our collaboration with BMS. Focussed on the discovery, development, and commercialization of novel targeted therapies for the treatment of cancer and under which BMS has the right to select up to 3 IND candidates became effective on January 11, 2007. We have received an upfront fee of $60 million in January '07, which we expect to recognize as revenue over four years starting at the effective date. The collaboration with Genentech focussed on the development and commercialization of our MEK program XL518, became effective on December 22nd, '06.

Under this agreement we have received upfront and milestone payment totaling $40 million of which $25 million were received in December and $15 million in January '07. We expect to recognize these payments as revenue over a three year period, again starting at the effective date.

Finally, I would like to comment on our financial outlook for 2007, and in particular, highlight an important change in the provision of our financial results going forward. Starting in '07, we will no longer provide non-GAAP financial. Accordingly, our financial guidance for the year will only reflect GAAP numbers. Our GAAP operating expense guidance will therefore include stock-based compensation expense and other non-cash charges, which we will, however, identify and quantify separately to the extent [inaudible-heavy accent].

For the full-year '07, we expect revenues in the range of $120 to $135 million. This revenue forecast represents an increase over the '06 actual revenue in the range of 22% to 37%, and it's driven primarily by our new collaborations with Genentech and BMS.

We expect operating expenses in the range of $260 to $290 million, including stock-based compensation and other non-cash charges of approximately $20 million. These numbers represent an increase of 15% to 29% over the '06 actual operating expenses and are primarily related to the ongoing advancement and expansion of our development activities and corresponding increases in our general and administrative infrastructure.

The Company's cash, cash equivalents, short-term and long-term marketable securities, investments held by Symphony of [Illusion] and restricted cash balance at the end of '07 is expected to exceed $200 million. So we're entering '07 in a strong financial condition which provides us the financial ability to aggressively advance through our compound--through clinical development. And as you will hear from Mike in a moment, this is one of our key focuses this year.

But first, let me turn the call back to George.

Okay, thanks, Frank.

Earlier this month, Mike Morrissey was promoted from Executive Vice President of Discovery to President of Research and Development. Mike has been with Exelixis for almost 7 years and in that time has built the world class discovery group that I believe truly is one of the best in the industry. Mike now has responsibility for an integrated R&D organization that has been realigned to maximize efficiency and data flow from the labs to the clinic and back again.

So I'll turn the call over to Mike who will go through our 2007 goals and mock-ups. Mike?

Thanks, George.

Thank all of you on the call today, appreciate that Exelixis has an uncommonly deep, diverse, and robust development pipeline. We built this promising pipeline by combining our insights into tumor biology with strong drug discovery and early development capabilities. The key challenge moving forward is focussed entirely on rapidly advancing these agents through clinical proof of concept and into pivotal trials required for registration.

Our current R&D organization is now realigned into a single, seamless and flexible process so that our earliest discovery data helps direct our clinical development activities. Our integrated discovery and development strategy is based on three key components. The best people, the most enabling technologies and a sense of urgency and focus that drives us to convert insights into action.

In terms of our 2007 objectives, we have very clear priorities. Our most important goals for the year are to advance XL880, XL647, and XL784 through Phase II proof of concept trials. Pending discussions with the FDA, we're optimistic about restarting enrollment for a number of the Phase II trials for XL999 in the second quarter and obtaining Phase II proof of concept data by year end.

We have exhaustedly reviewed the data from the initial 999 trials and we believe that the frequency and severity of the cardiovascular adverse events observed with this compound are correlated with dose and infusion rate. Based on this data, we have identified a way to move forward with 999, initially in non-small cell lung cancer and AML indications that we believe will retain the ability to achieve drug exposure at which any tumor activity has been seen while reducing both the frequency and the severity of the cardiovascular adverse events.

We have submitted amended protocol to the FDA and we will work with the agency to restart the trials as soon as possible. I want to reiterate that our Phase II objectives are the number one priority for the R&D organization in 2007. We have been and will continue to reallocate significant resources to ensure that we achieve these key objectives as soon as possible.

Nothing is more important to us than advancing these four compounds if supported by the Phase II data into pivotal registration trials either by ourselves, with GSK, or with other potential partners. In addition to the four compounds currently in Phase II, we expect to advance XL820 and XL184 into Phase II clinical development in 2007. In addition, we also expect to advance the Phase I trials for XL844, XL228, XL281, and XL518.

In addition, we've already filed one IND this year for XL418, a potent inhibitor of AKT and S6K, two key targets in the [inaudible] pathway. In addition, we anticipate filing three new INDs this year, one for XL147, a potent and selective inhibitor of PI-3 kinase, one for XL765, a potent dual inhibitor of PI-3 kinase and mTOR, and finally one for XL019 a potent and selective inhibitor of JAK2. We expect to file these INDs during the first half of '07 and to initiate Phase I trials shortly thereafter.

I'd like to point out that these three letter compounds are all wholly owned by Exelixis. Finally we expect to advance three new development candidates this year, a number of which may be part of our new BMS oncology discovery alliance. These are substantial tasks and I believe that we have the team, the strategy, and the sense of urgency to make it all happen.

And with that, I'll turn the call back to George.

Thanks, Mike.

I'll just be brief and close on a few key points. Today, Exelixis has a deep and broad pipeline that includes 17 compounds, 7 of which are part of partnerships and 10 of which are owned by Exelixis. We have substantial cash to keep our pipeline moving forward, we expect GSK to make multiple compound selection decisions in 2007 and through our productive R&D group, we've demonstrated the ability to renew and expand our pipeline and we expect to continue to do so.

And that strategy of discovering and developing multiple compounds of continuously renewing and expanding the pipeline, we believe reduces the risk around the failure of any one compound while it preserves the upside potential that can result from compound success. So we believe we really have created somewhat of a new paradigm for building a successful, sustainable, and ultimately profitable company.

Let me just close again by--once again by thanking all of the Exelixis employees who worked tirelessly in 2006 to meet all our goals across the Company and for the commitment to continue to grow the Company in 2007. So with that, we'll close and be happy to open up the call for questions at this time.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Karen with JPMorgan. Please proceed.

Yes, hello. Did you say you expect the Phase II results from XL999 by the end of the year?

We, do, Karen, but of course you have to realize that we haven't yet reached an agreement with the FDA for how to proceed. We are optimistic that the amended protocol that we've submitted is a reasonable one and that we will reach agreement with them in a reasonable time frame and move that compound forward, and if that happens, yes we would expect to have those goals. But keep in mind the caveat that we haven't done that yet.

Okay. Sure. Can you estimate the development class for Symphony compounds for the coming year?

We do know what the budgets are for the development of these compounds. As you know, Karen, historically not provided guidance on the individual development budgets for each of our programs. But you can see from our financial statements that we have about $55 million in cash left on our balance sheet to fund the programs going forward, and you can expect that a substantial portion of that will be used in 2007 as the three Symphony compounds advance through Phase II.

Okay. Thank you.

Next question comes from the line of David Witzke with Banc of America Securities. Please proceed.

Good afternoon. I guess for Frank, can you remind us the factors that go into calculating how the value of the GSK milestone payments are calculated should they select a compound at proof of concept?

That's actually a very good question, I'm glad you ask it. There are three factors that determine the size of the GSK selection milestones. One the timing, when GSK makes its development election, secondly the number of compounds they pick, meaning the size of the milestone is higher for the second pick than it is for the first and so forth.

And thirdly, whether or not they pick a compound that is funded through Symphony or not. Remember, if it is a Symphony funded compound, the selection milestone gets increased by 25%. So taking all of these three factors into account, the individual milestones could be anywhere between $55 and approximately $120 million.

And keep in mind that the first selection milestone will be reduced by about $36 million, which is to account for the milestone advance that we got in early '05 as part of the amendment.

Thanks, and the timing of when you would need to repurchase the compound from Symphony for the hand-off and how the mechanics work on that, and are you confident the milestone payments will be sufficient to cover that payment?

Well, we would only have to repurchase the compounds from Symphony if GSK elects one of the Symphony funded compounds, and what the cash implications would be to us really depends on the size of the milestones that we receive, which again will be dependent on the three factors that are outlined.

Okay. But does it look at this point--if things move on track that the payment would be sufficient to cover the Symphony repurchase?

We said in the past that the milestone will cover all or a portion of the buy back price. And if you take the range into account that I've just mentioned from $55 to approximately $120, obviously the low end of the range it only covers a portion of the buy back price. If we're on the high end of the range, it covers substantially all of it. So it really depends on which compound they select and what the timing would be.

Great. That's helpful. Quickly, Mike, on 019 given the Pfizer rheumatoid arthritis data on their JAK23 compound, will you pursue RA with this compound or focus mainly on [myloprolific] diseases?

We're focusing on the latter, initially. The Pfizer data has not escaped our attention and there's plans in progress to profile 019 and related analogs in those kinds of models, preclinically to CFA selective JAK2 inhibitor has reasonable efficacy in that potential indication.

And is 019 orally available?

It is, yes.

Okay. Thank you.

Your next question comes from the line of Eric Schmidt with Cowen and Company. Please proceed.

Yes, congratulations on a terrific 2006. Question for Michael. Is it too early to know what exactly might be presented at ASCO, I guess maybe by the mid- 2007 designation for Phase II data on 647 and 880, you're thinking ASCo at least?

We've submitted a number of abstracts for ASCO, we haven't heard back on what's been accepted yet. So I think it's a little bit premature to really give you guidance on that as we get that feedback, we'll be making that known so you can plan on that information.

Okay. Frank, could you just update us on how much cash you have yet to receive that's committed sort of an aggregate from your partners? Historically you've given out those data.

Yes, total cash and committed funding as of the end of the year was a little north of $400 million.

That included the 75 you've received since?

Correct. That's total cash and committed funding.

That does, however, exclude any type of milestone payments that we might get.

Right.

That's really funding that's contractually committed to us.

So as of today we're closer to 325?

In terms of cash?

Yes, and committed funding. Because you got another 75.

As of today we're still taking cash and committed funding. We're close to $400 million. Because remember we finished the year with $263 million in cash, plus $75 million --

I'm sorry, I got you now, okay.

Plus we have further committed funding through our various collaboration agreements.

I'm with you. It hasn't changed. Okay.

And George, maybe to play devil's advocate, I could ask a question about 999 and why you didn't kill this compound, you have an embarrassment of riches and potential things to be spending on, why try and thread the needle with a drug that obviously has some issues associated with it?

Yes, well, you're not the first one to ask that question, Eric. And obviously we've thought about this a lot, and we do have a lot of compounds, and we are not looking for excuses to keep compounds going, actually. We did have a lot of internal discussions, and really we try and be a data-driven organization, and after reviewing all of the data, there is a dose range and a rate of administration range, below which we have not seen any cardiovascular adverse events at all. I mean, the patient numbers aren't huge there, but we haven't seen any events.

And we have seen a lot of biological activity in terms of responses in that same data in that same dose range, and when we theoretically calculate the level, the dose that we need to get to reach a plasma level of the drug that should provide good inhibition of the targets based on what we know about the IC50s against the various targets, we are way above that. So if you are--I guess all of the data would point to trying to get the right dose is not threading the eye of a needle, but that we have a very large opening to drive through.

And that--and it's based on that that we think we can find a good dose that will retain efficacy and substantially reduce both the severity and frequency of the cardiovascular events. We have the cash from Symphony to develop the vehicle now, so it's not really our own money. So there seems to be very little down side to taking it forward, and the other half of the equation is that the efficacy we saw in AML and in the non-small cell lung cancer trials was really quite striking.

And so we do believe that compound has the potential to really provide substantial benefit to those patient populations. And we'd be ashamed to just let it drop and not test that further.

Great. Appreciate the recap.

Your next question comes from the line of May-Kin Ho with Goldman Sachs. Please proceed.

Hi. Just wanted to ask you with the announcement of the [Nexcorp] data on primary liver cancer, does it change how you view your trials going forward and your approach in designing studies?

It changes [inaudible--no, I don't think so. I haven't seen any data, May-Kin on that study.

All I've heard is that they looked at the data, they stopped the study early because of efficacy because they had a--must have a significant impact on survival, at least that's what you would interpret. So that's great, and it's great for patients, great for [inaudible], great for the whole field here.

But we have not I think adjusted anything we're doing as a result of that yet. Maybe when we see the details of the trial we'd learn something, until then.

Your next question comes from the line of Brian Lian with CIBC World Markets. Please proceed.

Hi, thank you. Just a follow-up on 999. Mike, you said you're going forward in non-small cell lung cancer first, and will you then wait and see if you have any cardiac signals before you look at AML and multiple myeloma?

I think the plan right now is to proceed in both AML and non-small cell lung initially. If the experience there is good, then the kind of current thoughts is that we can then move into both medullary thyroid cancer, which is driven by activating mutation in RET, which we hit very, very hard with 999 as well as the myeloma indication, so it's to get initial experience both from a safety window--a safety signal as well as maybe from a dynamics with AML and then if everything goes well, then to move in a broader sense into the other indications.

Okay. Great. And then with 820 and 184, have you identified tumor types to look at for Phase II?

We're--I think we're fairly close with 820, and maybe a step behind that with 184, but I think the plan again is to initiate those Phase II trials in the second half of the year.

Okay. Thanks a lot.

Yes.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of David Garrett with Fortis. Please proceed.

Hi, and thanks. Could you guys provide us some detail on how you plan to update the street with regards to time lines on the GSK deal and what I'm really getting at is will you tell us when data's been submitted to GSK or will we just get a press release that they've selected a compound or not and then a second question, could you discuss your initial thinking on what a Phase III for 647 in front line lung cancer might look like? Thanks.

The--look, let me answer the first part of that question. We will certainly make an announcement when GSK has made any decisions on the compound. I don't actually--don't know we haven't thought about whether we'd make an announcement when we submitted compound to them.

The important event of course is when they make their decision. So that we'll certainly announce, and actually, I think it's premature to discuss the design of a Phase III trial for 647.

Again, we'll look at the data that come out of the Phase II trial that we're doing now on the subsequent Phase II trials that we'll initiate for 647 soon. And I think based on those data that we'll be able to make an intelligent statement about what a pivotal trial would look like.

[OPERATOR INSTRUCTIONS]

It appears we have no more questions at this time.

Okay. Well, then, if there are no more questions, let me thank, really thank you all, for your attention, your support, and we look forward to another great year in 2007. Thanks.

Thank you for your participation in today's conference. This concludes our presentation, you may now disconnect. Have a good day.