Exelixis Inc (EXEL) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you, very much, for your patience and welcome to the third quarter 2007 Exelixis earnings conference call. My name is Bill and I will be your conference coordinator for today.

At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the call over to our host for today's conference, Mr. Charles Butler, Director of Investor Relations. Please proceed, sir.

Thanks as usual to everyone for joining us on our third quarter 2007 earnings call. As usual with me today are George Scangos, President and CEO, Frank Karbe, CFO and Executive Vice President, and Mike Morrissey, our President of R&D.

Before I turn the call to George, I'd like to note that this afternoon we issued our earnings release for the third quarter and also filed our 10-Q for the quarter with the SEC. We have posted the earnings release and our 10-Q as well as a slide presentation of the Company's prepared remarks today on our Web site at exelixis.com.

Please note that during today's call, we will be making certain statements that are forward-looking including without limitation statements relating to our estimated future revenues and expenses, estimated future cash balances, and the future development and potential efficacy of our compounds. These statements are only predictions and are based upon our current plans, assumptions, beliefs and expectations and are subject to risk and uncertainties.

Our actual results and the timing of events could differ materially from those anticipated in such forward-looking statements because of risks discussed in today's earnings release and the slide presentation accompanying this conference call, in the comments made during this conference call, and in the risk factor section of our 10-Q filed today, and other reports filed with the SEC. We expressly disclaim any duty, obligation or undertaking to make any update to revisions to any forward-looking statements.

With that brief intro, I will turn it over to George for some opening remarks.

Thanks, Charles, and thanks to everybody for joining us this afternoon.

We've covered a lot of ground since our last quarter's call and I just want to take a few minutes to put our 14 clinical development compounds and programs into context with respect to our long-term vision for the pipeline and the Company.

We've been busy in the clinic this quarter and, in fact, for the whole year. The pipeline has advanced significantly and we've gained substantial insight into the potential of many of our compounds.

We reported Phase II data for XL647, XL880 and XL784. We reported Phase I data for our second inhibitor of MET, XL184, and our two inhibitors of the PI3 kinase pathway XL765 and XL147, as well as for several other compounds. We generated interesting Phase 1 data on XL518, our inhibitor of MEK, XL019 our JAK2 inhibitor and XL228 our IGF1 receptor ABL and SRC inhibitor

So I want to take a moment to put these data and compounds in perspective. First 647, which we believe has the potential to be a best-in-class inhibitor of EGFR, HER2 and VEGFR .

We believe we have a strong Phase II data set, a strong preclinical package and a developmental route that we believe will allow us to demonstrate efficacy and gain approval in third and second line lung cancer. We also plan to study activity of this compound in metastatic breast cancer, glioblastoma and head and neck cancer.

Certainly, the current generation of RTK inhibitors, such as Tarceva, are good drugs that provide real benefit to patients, but they're first generation compounds and we believe there's plenty of room for improvement in terms of both efficacy and tolerability and we believe that 647 has the potential to do both. 647 continues to be tested in additional Phase II trials.

The daily dosing cohort in the first line non-small cell lung cancer trial and the trial in patients who responded to and then progressed on another EGFR inhibitor. We anticipate that these trials will provide data consistent with those that we've generated to date and will support moving the compound into pivotal trials in the middle of next year.

We believe this compound by itself should make us a very interesting company, however, as you all know, it's only one of our assets. There are several targets and pathways that are likely to be the focus of the next generation of cancer drugs and we believe we have a leading position in many of those as well.

We have two leading inhibitors of MET, XL880, and XL184. MET, together with VEGFR receptor which these compounds also inhibit, plays a role in many solid tumor types including lung, breast and colon cancer. We've demonstrated in vivo [adjulation] of MET and VEGFR receptor with our compounds in humans and have good signs of clinical efficacy. We believe we have a significant lead-time and we're excited about these programs.

We recently presented what I believe is the first clinical data on inhibitors of the PI3 kinase pathway. This pathway is one of the most frequently disregulated pathways in solid tumors and there's ample evidence that tumors can escape both chemotherapy and therapy with target agents by activation of this pathway. It's a complex pathway with multiple feedback loops and we believe we're in a leading position in developing inhibitors that target the pathway at various points.

Our compounds 765 and 147 have demonstrated oral availability, good half-life and early signs that the compounds [now] regulating PI3 kinase in vivo. We believe these compounds also are exciting.

Another pathway that's frequently disregulated in human tumors is the MAP kinase pathway and we have two inhibitors of this pathway moving through Phase I as well. XL518 inhibits MEK and XL281 inhibits RAS. Both of these compounds look good right now and we're continuing to gather Phase 1 data. XL518 is partnered with Genentech and 281 is part of our GSK collaboration.

The final compound I want to highlight is XL019, which is one of the most advanced inhibitors of JAK2. This target is a driver of abhorrent proliferation of blood cells in many patients with myeloproliferative disorders and may very well have a role in many inflammatory conditions as well. XL019 has generated a very interesting Phase I data set and we're looking forward to the presentation of the data at ASH in early December.

On the business front, we retain rights to 647. We presented XL880 to GSK early at their request and we submitted XL784 to GSK in October. We expect a decision by GSK on XL880 by mid-December and on XL784 in January.

In August, we sold a majority of our plant trade assets to Agrigenetics, a subsidiary of the Dow Chemical Company, and finally, in September we conducted an equity offering that raised almost $72 million in net proceeds. So I believe this has been another very productive quarter and year so far.

I'll come back for a few closing remarks at the end. But at this point, I'll turn the call over to Frank who will review our quarterly financials and provide an update on our year-end

Thanks, George.

The third quarter, as you just heard from George, has been quite eventual for Exelixis. Apart from many new data on many of our compounds we announced a number of positive business developments which contributed to substantial cash inflows this quarter.

I will come back to the key events in a moment and cover their specific financial implications, but let me now first turn to the third quarter financial results in detail. As a reminder, we are reporting our financial results on a GAAP basis only and a complete press release with our results can be accessed through our Web site at exelixis.com.

And we'll begin with revenues. Revenues for Q3 were $26.8 million compared to $23.5 million for the comparable period in '06. The increase in revenues from '06 to '07 was primarily due to revenue recognition associated with new collaboration agreements with BMS, for their oncology programs, and Genentech for the XL518 program.

The increase was partially offset by the completion of revenue recognition related to the collaboration agreement with Daiichi Sankyo for our MR program, and our agreement with Wyeth Pharmaceuticals for the FXR program.

Research and development expenses were $58.6 million compared to $46 million for the comparable period in '06. The increase year-over-year was primarily due to increased development expenses associated with the continued expansion of our clinical trial activity, and the advancement of our compounds through preclinical development.

General and administrative expenses for Q3 were $10.8 million compared to $8.8 million for the comparable period in '06. The increase from '06 to '07 was primarily due to increased personnel and stock-based compensation expenses to support our expanding operations.

Net loss for Q3 was $13.7 million, or $0.14 per share compared to $25.2 million, or $0.30 per share for the comparable period in '06. The decrease in net loss by approximately $11.5 million, or 46% from '06 to '07, was primarily due to an $18.8 million gain on the sale of assets recognized in conjunction with the divestiture of the major portion of our plant trait business.

Let me finally turn to cash. Cash and cash equivalents, short-term and long-term marketable securities, investments held by Symphony Evolution, restricted cash and investments totaled $297.6 million at the end of Q3 down to $263.2 million at December 31 '06. The total cash inflows of over $100 million during the third quarter, ['07] of which approximately $72 million came from our equity offering, $18 million from the sale of our plant traits assets and over $12 million from our various R&D collaborations.

Let me now turn to the financial implications of the divestiture of a major portion of our plant traits business to a subsidiary of Dow Chemical which we announced in early September.

This transaction included the sale of tangible and intangible assets as well as the research funding agreement with total consideration to Exelixis of up to $60.7 million. We have received $18 million upon signing, and we will receive another guaranteed payment of $4.5 million on the first anniversary of the deal.

As a result of the sale of assets, we recognized a net gain of $18.8 million in other income on the P&L, and $18 million in cash on our balance sheet and our third quarter financial statement. Going forward, under the research funding agreement, we will receive research and development funding of up to $24.7 million to cover our expenses under this agreement and we may receive milestone payments up to $13.5 million.

Future milestone payments, if any, will be reported within other income and R&D funding will be booked as an offset to our R&D expense in each respective period.

We also executed the financing transaction during the third quarter. On September 10th, we offered 7 million shares at $10.30 per share for total net proceeds of approximately $71.9 million. The transaction was completed at an all-in discount of 7.7% to the same day closing price, and a 22.6% premium to our last equity offering.

We also announced a 12-month extension of our collaboration with Bristol-Myers Squibb to develop and commercialize [other] therapeutics targeted against the Liver X receptor. The collaboration originally effective for January of '06 for a period of two years has been extended at BMS' request through January 12, 2009.

As a result of the extension, we expect to receive additional research funding in the amount of $7.5 million which will be recognized as revenue over a 12-month period starting January 12, 2008. BMS also has the option to further extend the research collaboration for an additional year.

Let me turn to the GSK collaboration for a moment. As George mentioned, GSK's 90-day review of the XL880 data report commenced in mid-September and we expect a decision from GSK by mid-December. If XL880 is the first compound selected by GSK, we will earn a selection milestone of $35 million.

The full amount of this selection milestone would, however, be offset by a milestone payment that GSK advanced to us in 2005 and as a result, there would be no cash impact and no revenue recognition related to this selection milestone. Going forward, GSK would be responsible for further development of the compound, including potentially seeking FDA approval, market introduction, and sales.

Importantly, Exelixis would have no further expenses associated with this program, but we would be eligible for substantial additional commercialization milestones, double-digit royalties, and certain co-promotion rights for North America. If GSK selects a second compound during the development term the selection milestone will be at least $55 million, which we anticipate would be applied to the GSK loan.

Let me finally turn to our financial outlook for year-end 2007. With respect to financial expectations for the full-year '07, we are reducing our revenue guidance to a range of 110 to $120 million from a range of 120 to $135 million. The reduction in revenue is due principally to a change in timing as it relates to the potential selection milestone from GSK for XL880, which we now forecast for December 2007.

Our operating expense guidance remains unchanged at 260 to $290 million. And finally and most importantly, we're increasing our guidance for cash and cash equivalents, short-term and long-term marketable securities, investments held by Symphony of [illution] and restricted cash and investments and now expect to end the year with at least $270 million.

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

Thanks, Frank.

I'll start where George left off a few minutes ago. The entire Exelixis R&D organization has been extremely focused on advancing key compounds to early clinical studies into proof of concept, or POC trials, and finally, on to full development.

We are currently working to initiate pivotal trials for several of our compounds in mid 2008. In doing so, we intend to provide the broadest potential benefit to patients as soon as possible, and to rapidly build shareholder value.

We are focused on execution, pure and simple. We have developed a deep pipeline of compounds that inhibit some of the most important targets and pathways in tumor biology.

We have built an extremely strong drug discovery and development infrastructure and have complemented our fundamental understanding of tumor biology by utilizing the broad talents of that group. The combined attributes of our R&D organization provide us with a strong platform to build and maintain a leadership position in the key areas of oncology drug development that have the potential to define the treatment paradigms of tomorrow.

During the last several years, we have become leaders in the discovery of both multi-targeted and highly selective kinase inhibitors that modulate key RTKs and their signal transduction pathways which are commonly activated in many human tumors and which lead to primary and acquired resistance to both conventional chemotherapeutics and targeted therapies.

Our recent presentations at the 2007AACR-NCI-EORTC meeting, which I'll refer to today as simply the EORTC meeting held in San Francisco a couple of weeks ago, highlight our success in building and advancing a world class portfolio of compounds that target key growth factor RTKs, including MET, and signaling pathways including the PI3 kinase, MAP kinase and JAK stat pathways. The 13 posters presented at EORTC covering a range of preclinical, Phase I, and Phase II clinical data for eight different compounds, underscored the depth of our clinical portfolio.

Today, I'll summarize the key results from the meeting for XL880, XL184 and XL647, and I'll remind you that all the EORTC posters and a replay of our investor briefing are available for review on our Web site at www.exelixis.com. Let's start first with our progress in the area of MET inhibition where we have two compounds with strong clinical data supporting their advancement into full development and future pivotal trials.

We believe XL880 is the most advanced inhibitor of MET in clinical trials and we're leveraging our discovery and clinical experience with XL880 to innovate additional inhibitors such as XL184, which targets MET, VEGFR2 and RET. We presented data for both XL880 and XL184 last month at the EORTC. I'll take a moment now to briefly recap those data.

First, let's start with key data from the Phase II trial of XL880 in patients with metastatic capillary renal cell carcinoma, or PRC. As of October 10, 2007, a total of 21 patients have been enrolled in this ongoing study. First of 19 patients with miserable disease, evaluable for tumor response assessment, 15, or 79%, have had a decrease in tumor size ranging from 4 to 33% including one patient with a partial response as determined by resist.

At the data cut-off of 21 patients enrolled in this study, five had activating MET mutations and 16 had wild-type MET. All 19 evaluable patients with at least one post baseline tumor assessment have had stable disease for at least three months. 16 patients are still on study, including 12 patients with stable disease, ranging from six months to more than 15 months.

Results are preliminary analysis of plasma biomarkers and tumor samples are consistent with potent inhibition of MET signaling, inhibition of tumor angiogenesis and inhibition of tumor cell proliferation, as well as increased tumor cell death following XL880 administration. We are very encouraged by the progress of this Phase II study and I'd like to take a minute to talk about the relevance of nonprogression in PRC.

Survival for patients with metastatic PRC is typically about eight to nine months. We believe that the progression of free survival we're seeing, which in many patients is long-lasting, is clinically meaningful.

We are very optimistic that XL880 will continue to provide clinical benefit to patients with PRC and will move into a broad Phase II and pivotal trial program in multiple indications, including potentially non-small cell lung cancer, breast cancer and colorectal cancer, once ownership has been established after GSK makes its decision whether to select XL880 for further development and commercialization.

Based on the combined preclinical Phase I and Phase II data set, GSK requested that we expedite their review for their XL880 development decision. A complete data report was submitted to GSK in mid-September and we expect that GSK will complete its diligence and finalize its decision in mid-December.

As we move ahead with the Phase II trial for XL880 we're also gearing up to initiate a Phase II program for XL184, an inhibitor of MET, VEGFR2 and RET. The updated Phase 1 data for XL184 presented at EORTC continue to be very encouraging.

There were 33 patients available for safety, pharmacokinetic, and tumor response analysis as of the June 22, 2007 cutoff. Further, any tumor data was also provided for six additional patients after the cutoff.

Of seven patients with medullary thyroid cancer, or MTC, three have had partial responses, two confirmed, and one unconfirmed. Six of the seven patients had tumor shrinkage and one had nonmeasurable disease.

All seven patients with MTC experienced a rapid decrease in plasma levels of calcintonin and six of the seven patients had a decrease in the tumor marker CEA. None of the seven MTC patients had progressed. In addition, one patient with neural endocrine tumor had an unconfirmed partial response.

In total, 15 patients with various advanced malignancies have had stable disease lasting from three months up to 20 months, including nine patients with stable disease for more than six months. So in this study of XL184 we observed partial responses in patients with MTC, a tumor type that frequently has overexpression of activated RET and MET.

These clinical results in combination with our pharmacodynamic data suggests that the activity of XL184 in the clinic is consistent with our understanding of the role of MET and RET in this tumor type. These results provide strong biological rationale for advancing XL184 into Phase II for other tumor types including non-small cell lung cancer and glioblastoma which we expect to start by the end of the year.

More importantly, we are currently executing on a plan to demonstrate expedited POC for XL184 in MTC in the context of our GSK collaboration in mid 2008 based upon our initial encouraging Phase I results.

We also presented an updated data set for XL647 from the first line Phase II non-small cell lung cancer trial. To date, XL647 has demonstrated clear anti-tumor activity in this population. Out of 34 patients evaluable, 10 patients achieved a partial response of which eight were confirmed. Of the 10 patients with PR's six had EGFR activating mutations, a few were wild-type EGFR and one is still pending.

In addition to the 10 partial responses we also observed 13 patients with stable disease as their best response. So 68% of patients had clinical benefit in this study so far. Importantly, we are seeing that patients with partial responses and stable disease are staying on study for prolonged periods of time ranging up to more than 11 months.

As we said in the past, we are continuing to evaluate XL647 in several non-small cell lung cancer trials, both in the first line setting and in patients who previously progressed after clinical benefit with an EGFR inhibitor. We are using both intermittent and daily dosing regimens and we will determine the optimal dosing schedule for future trials. We're still on track for initiating pivotal trials in mid-year 2008.

We also presented data at the EORTC meeting from an ongoing Phase I study of XL647 using daily oral dosing. We have established a maximum tolerated dose of 300-milligrams per day in this study.

The pharmacokinetic exposure obtained over a 28-day cycle with this dosing regimen is approximately twice the exposure observed with the intermittent five and nine schedule used in the first line Phase II study, while maintaining a similar safety profile. The observed higher exposure could hold potential for further enhancing the activity of XL647 in the non-small cell lung cancer setting.

As mentioned previously, XL647 is generally well tolerated in both the intermittent and daily dosing regimens. The most frequently reported adverse events assessed is being related to XL647 were diarrhea, rash, fatigue and nausea, all of which were grade one or grade two in severity.

This point is important because investigators continue to report that the EGFR mediated side effects observed for XL647, namely rash and diarrhea, are generally milder than what has been previously described for other EGFR inhibitors.

Finally, last Friday we released data from the Phase II study of XL784 in subjects with albumin nuria due to diabetic nephropathy. XL784 is a small molecule inhibitor of ADAM-10 and MMP-2 metalloproteases that may play a role in the pathogenesis of diabetic nephropathy and renal fibrosis. The data was presented during a poster session at the American Society of Nephrology Renal Week 2007 meeting in San Francisco.

125 subjects were enrolled into this randomized double blind placebo-controlled study. XL784 was dosed at 200 milligrams once daily for 12 weeks and was compared to placebo in subjects with macro albumin nuria who are being treated concurrently with an ACE inhibitor and/or and ARB.

The primary end point was the reduction from baseline in the urinary albumin to creatinine ratio, or ACR, at week 12. After 12 weeks of treatment with XL784, the baseline normalized ACR, that is the ratio of end of treatment ACR to baseline ACR, in the 784 group was 9.9% lower than that in the placebo group, a difference that was not statistically significant. There was a clinically relevant mean ACR reduction from baseline of 23% with a P value of 0.0027 in subjects randomized to XL784.

In an exploratory analysis, subjects were stratified according to dose of ACE inhibitor and/or ARB received as a percentage of the maximum [FDA] recommended dose. The benefit of XL784 compared to placebo increased with increasing doses of ACE inhibitor and/or ARB.

In the subgroup of subjects treated with maximum recommended doses of ACE inhibitor and/or ARB, the difference between XL784 and placebo was 23% with a P value of 0.13 for the primary analysis population.

So in summary, the Phase II trial for XL784 did not meet its primary end point. Various subgroup analyses suggests that the compound may have the potential to benefit patients with the disease but proving these hypotheses will require additional cost and time.

We submitted the XL784 package to GSK on October 22nd and will communicate future plans for 784 once GSK has reached a decision.

So in wrapping up, let's focus on what's ahead as we bring 2007 to a close and move into 2008. We had the opportunity to introduce three new compounds that recently entered clinical trials at the EORTC meeting. We presented preclinical and clinical data for two first-in-class PI3K kinase inhibitors, XL147 and 765.

These two exciting compounds are solely owned Exelixis assets and these presentations represent, to our knowledge, the first clinical updates for selective PI3K inhibitors. In addition, we also presented the preclinical pharmacology for XL518, a highly potent and selective MEK inhibitor with enhanced in vivo properties that we partnered with Genentech last December. We're advancing these three compounds aggressively in the clinic and we expect to move them into Phase II in 2008.

Over the next two months we'll be providing further updates on our preclinical and clinical pipeline. We've already started planning for our third annual R&D day which will be held in New York on December 5th where we will review our complete clinical pipeline and review many of our new preclinical programs that we expect to be the subject of INDs in 2008.

On December 10th we'll have two oral presentations at the American Society of Hematology meeting in Atlanta, one for XL019, a potent and selective inhibitor of JAK2, and a second for XL228 which inhibits IGF1R, SRC and ABL. XL019 is an exciting inhibitor of JAK2, an important kinase that appears to drive a variety of myeloproliferative diseases when present in its mutationally activated form.

We have exhaustively optimized XL019 with respect to criteria for chronic dosing in a healthier patient population and we're starting to see encouraging data from early cohorts in the clinic. We're looking forward to presenting this clinical data from our ongoing Phase I study at ASH and we are planning a detailed investor update similar to the one we recently had at the EORTC meeting.

So with that, I'll close by saying that we've accomplished a great deal so far this year and with more to do before year-end as we build momentum for moving into 2008. I'll end here by thanking everyone on the R&D team for their superb talent, focus and commitment all of which have led to making 2007 an incredibly productive year.

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

Okay. Thanks, Mike, and I'll be brief. I just want to make a few remarks.

Point out that the year's not over yet, we have two months left. We intend to keep the pace up that we've established so far this year. The business development team is busy at work exploring a number of interesting discussions, some of which could come to fruition later this year or next and, of course, our R&D groups are continuing their aggressive pace driving our R&D programs forward.

Just to remind everyone, here are the upcoming events. We have our R&D day on December 5th in New York. The presentation of 019 and 228 at ASH on December 10th. A decision by GSK on XL880 by mid-December, and a decision on GSK by 784 by mid-January.

As we move into '08, we expect to have additional Phase II data from XL647, from the ongoing trials in patients who responded to an EGF inhibitor and then relapsed and from a daily dosing cohort in the first line non-small cell lung cancer trial. We also expect to have additional Phase II data on 880, and to have Phase I data from multiple compounds.

We intend to begin pivotal trials for 647 and 019 and if GSK declines its option on either 880 or 184 we intend to move each of those forward aggressively as well. We're enthusiastic about the two PI3K compounds which are unpartnered and which we'll move forward aggressively.

We also have several new compounds set to enter clinical development next year including inhibitors of the Hedgehog pathway and HSP90. We're rapidly generating data that we believe will increase the value of our pipeline and as we move forward, we intend to use some of our pipeline assets to generate funds that we can use to move others forward.

We continue here to be firing on all cylinders and with each passing quarter and with each additional patient whose tumor response to treatment with one of our drugs, we become increasingly enthusiastic about our future and increasingly committed to building a company that takes place among the leaders in oncology drugs.

As always, I want to close by thanking all of the Exelixis employees for their hard work and dedication. And just as it took all 25 of the Red Sox to win the World Series for the second time in four years, our success at Exelixis is the result of and dependent on the contributions of everyone here at Exelixis. So stay tuned.

And I'll stop there and we'll take your questions. Thanks, everyone.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Eric Schmidt of Cowen and Company. Please proceed.

Yes, thanks.

Frank, kind of an accounting question on the XL808 milestone if GSK does opt in. I'm not sure I quite understood the guidance but is there no P&L impact if that milestone is earned or how's that flow through your income statement?

That's correct. We gave guidance on the milestone, we expect it to be $35 million which will be offset by a $36 million advanced payment that GSK made to us back in 2005. The milestone would entirely be offset by the advanced payment so there would be no cash impact and no revenue impact.

So you recognized that $36 million cash payment already through the P&L?

That's correct. It was recognized, you may recall the discussion we had back in 2005, when we actually received the pre-payment. It has been recognized ever since. We at the time recognized the portion immediately and the remainder was amortized over the term of the underlying agreement.

And should GSK opt into 880, this isn't a financial question, more of a collaborative question, are there any reach to rights in XL184? Do they have any special opt-ins there or is that a completely and separate entity?

XL880 and 184 are separate entities and GSK can, of course, select them both. But they have to use two opt-in decisions to do that.

Okay.

And George, can you provide us with the exact date of the opt-in decision for GSK or the time at which you submitted the package?

Yes, it's the middle of December. And actually, Eric, I actually don't remember the exact date but we submitted it in the middle of September. I believe it's December 17th is the cutoff date.

Okay. Thanks a lot.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of William Sargent of Banc of America Securities. Please proceed.

Hi, thank you very much. Sorry I'm in a heavy meeting flow area but thanks for taking my question.

I was wondering if you could talk a little bit further about next steps with 765 and 147. I think you mentioned Phase II potentially starting in 2008 but I was wondering if you could talk a little bit more about where you might be looking for those two compounds?

We have a very, again, a very active Phase I trial for each compound looking at single agents, dose escalation, to find the tolerability PKPD and any tumor activity. We're planning on initiating combination Phase 1trials with both compounds with a variety of either targeted therapeutics or chemotherapeutics starting end of this year, early 2008.

We would envision initiating Phase II trials for both compounds as single agents sometime approximately in the middle of next year. And then depending upon how the Phase 1 dose escalation studies go in combination with other agents, and then initiating Phase IIs after that in terms of combination with specific tumor types.

So very, I think, deliberate and rational plan around looking at tumor types that have a marked demonstration of having pathway activation either by PI3K kinase mutation or P10 deletion and, again, look for a rapid POC in the context of what we're doing either in Phase I right now or early Phase II.

Okay. Great.

And then I was wondering, also, since you've got a number of 647 patients that are at least 11-plus months, I think, on the study, would there be a potential presentation of any progression data or can you disclose whether or not any of these patients have progressed or what a PSI might look like?

Well, the last data set we had was a couple of weeks ago at EORTC. We expect to have another update at ASCO and we're putting together abstracts for that right now. And we're hoping to have additional data from the daily dosing regimen, or ARM, as well. So that's our plan for the next data release for 647.

Great. Congratulations on the quarter. Thanks.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ted Tenthoff of Piper Jaffray. Please proceed.

Thank you very much. Two quick questions if I may.

Firstly, a while back you had given us guidance that if GSK were to select all four milestones, the payments would be, I think if I recall correctly, somewhere on the order of $270 million, and they were more front-end loaded. So I'm trying to understand sort of with the $35 million milestone payment how we get to that sum.

And then secondly, with the 647 data in hand, can you update us on what you're thinking as with respect to reacquiring the Symphony assets or repurchasing Symphony, considering the interest rate kicks up on a quarterly basis now?

Yes, let me take the first question first which is the milestone payment from GSK if they should select. As I think we've said all along, there's a lot of moving pieces in terms of the milestones. They go down with time and they go up with the number of compounds picked and they go up if the compounds are part of the Symphony collaboration.

So you know, a year ago, a year and a half ago when we didn't know, there were so many possibilities and so many ranges in the milestones, that we tried to give a range. Now we know, right, and the milestone is what it is. The 880 milestone we know if GSK does select 880 will come in December and so the first time, it's the first time we actually have clarity on knowing what that milestone would be and it's an issue of timing.

Remember that if GSK takes a second compound before the end of the collaborative term next October, that milestone will be substantially higher. That will be at least $55 million. And if they were to take a third one, that milestone will be higher still. So there's a range of milestones and it depends on both timing and the number of compounds that they pick.

So and now let me answer the second question which is Symphony. And if I haven't made the first one clear, let me know.

That's okay.

The Symphony issue is, we still have about $35 million left in the Symphony pot. That can be used for the further development of 647. 647 is in two Phase II trials now, one in the non-small cell, first line non-small cell lung cancer and, of course, the intermittent dosing trial is continuing, and the daily dosing cohort in that trial is getting cranked up.

We have the second Phase II trial in patients with non-small, I'm sorry, patients who initially responded to another EGFR inhibitor and then relapsed. And so the money in the Symphony pot can be used to generate a lot of additional data on 647. So we're under no immediate obligation to buy it back.

We, of course, are in discussions with Symphony. We are in discussions with potential other partners about 647. We are, as we speak today, we have a clinical advisory board on XL784 to help us gain further insight into that compound.

So all that is by way of saying there are a lot of moving pieces. And we have thought about this a lot, obviously. And as we go forward, we'll try and make the best decision that we can that's in the interest of Exelixis.

Great.

And kind of we're under no obligation or do we intend to just buy that back right now.

Great. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of May-Kin Ho, Goldman Sachs. Please proceed.

Hi. I have two questions.

The first is really more accounting. Looking at the difference in guidance on the top line, you said that's due to the timing of the milestone from GSK. Can you expand on that because you mentioned the first milestone was the $35 million and the difference in guidance is around 10 to $15 million?

Yes, May-Kin, I can explain that. If the selection would have happened earlier in the year, the milestone would have been higher. If the milestone would have been higher, it would not have been entirely offset by the $36 million prepayment in 2005 and for the difference we would have been able to recognize revenue.

Now, that's not the case, because the milestone is entirely offset and there's no revenue recognition and it's that difference.

I see. And for the coming year, looking at all the things that you need to do, I mean, basically is really in a sense an exponential growth in terms of the trials that you need to do, so kind of in the worst case, if GSK does not opt into these two compounds, do you have to reprioritize your program?

Yes, May-Kin, that is a great question, of course, and we thought a lot about that as well, and I continue to refuse to believe that it's a problem to have too many interesting compounds. So on the one hand, if GSK, for example, for some reason doesn't take 880, 880 has a wonderful data set, it's a really good-looking compound, I'll be very happy to have that compound.

Now we know that we can't take multiple compounds into multiple late stage trials all simultaneously. We don't have the funds to do that. We don't have the bandwidth to do that. So if we're in the fortunate position of having multiple compounds with data sets that merit aggressive development into later stage trials, then we'll take some forward ourselves.

We can partner others. There's no shortage of companies, as you know, willing to buy into good mid stage clinical assets. So that's an issue that we don't worry too much about. But yes, the bottom line is we'll have to do some prioritization and we know that we can't take everything forward ourselves.

That's very reasonable. However, some of the programs that have been started, for example, 647, could some of the later compounds look more interesting than 647?

I hope they do. 647 looks great. I would always be happy to have compounds that look even better.

What we know is 647, and let's take a look at 647 because it's, you know, we know it's active in the non-small cell lung cancer population. We know that to date, the EGF-related side effects of 647 have been milder than those that have been reported for other EGFR inhibitors.

So we, and we know that the efficacy we're seeing so far, or we believe that the efficacy we're seeing so far, could be actually an underestimate since we now have a dosing schedule that exposes the patients to a little more than twice as much drug. So we have reason to believe we have good efficacy in this population and we have the potential to have better tolerability.

Preclinically, we have a very good data set to say that 647 retains activity against the T790M mutation that about, and the results were about 50% of the relapses of patients who have responded to Tarceva. So if that's true, that not only provides a potential population that would only allow us to address, get on the market quickly, but it should translate to more durable responses as well.

So 647, it is what it is. It's a great looking compound. We haven't proven any of those things but we have a good solid basis to suggest that all of those may be true and that's all you can expect for a compound at this stage of the development.

So is it worth putting money into aggressively develop 647? Absolutely it is. No question.

We have XL019 coming along. That's in mid Phase I data that targets JAK2. The target risk for JAK2 as an effective therapy for patients of myeloproliferative disorders is really low, as target risk goes.

Compounds so far looks very good. So we're being enthusiastic about that as well. The clinical development route for 019 is actually relatively straightforward for those patients with myeloproliferative disorders.

And remember myeloproliferative disorders, or some of are them, are kind of chronic diseases and so a drug has to have different characteristics to be really successful there as, for example, a straight-out cancer drug addressing the third line, some kind of third line therapy. And so we spent a lot of time optimizing 019 to have the characteristics that you would like to see in a drug that's taken chronically.

It's a very clean, it is very specific, it is half-life, you know, suitable for once a day treatment, it doesn't look so far like it has any drug-drug interactions or any other liabilities, so we're very optimistic about that drug, too, although we have a lot of data yet to get, of course. The two PI3Ks also look really good as far as we've taken them.

So I think the way we're thinking about now, May-Kin, is that we've got a lot of assets in our pipeline that look really encouraging. As they move forward, we don't expect that all of them will successfully reach the market. That's one of the reasons we have a pipeline as big as we do, compounds fail. And so we will make data-driven decisions and put the money behind the compounds that we believe have real promise.

And our strategy, remember, has always been, and we've done this consistently over the past few years, to keep some of the assets ourselves, develop them aggressively and then to partner others, and partnering, of course, relieves us of the cash burden, it relieves us of the bandwidth burden and it brings in money that we can use to fund the development of those compounds that we keep. So I'm expecting we'll have a continuing mixture of proprietary and partnered programs.

That's very helpful. Thank you.

Thank you very much, ma'am. (OPERATOR INSTRUCTIONS) And our next question comes from the line of Joel Sendek of Lazard Capital Markets. Please proceed.

Thanks a lot.

If we could just follow-up a little further on the 647 discussion. So you mentioned, first of all, that you might not have more data to present to us until ASCO but I'm wondering if you will have enough data internally as to whether, or be able to define a pivotal plan for the drug, or if that won't come until the middle of the year, middle of next year?

Well, we have data to design a program for pivotal trials. We will have that, and we are starting to that have now. We will have discussions with the FDA and other regulatory agencies over the next two, three months.

And so we will be in a position early next year, say, by the first quarter, sometime in the first quarter of next year, to really start to put some real teeth into this and then to be able to start the pivotal trials towards the middle of next year. So we are absolutely on that time line and I don't see anything right today that's going to keep us from meeting that.

Okay. So effectively, you know what you need to know with regard to the data in order to move that forward.

Yes, and remember, the trials that we're doing are open label trials, and so we seek data, maybe it's not daily very often, and then we, you know, we'll periodically update everybody at the scientific meeting.

Okay. Thanks.

And then on 880, you mentioned at the EORTC that some of the stable disease might convert to PRs. What's the time frame over which that would happen?

Oh, boy, I wish I could tell that you because, you know, look, the patients, of the 21 patients who have been enrolled in that trial, 16 are still on the study. Many of them have their tumors progressively shrinking at different scans. So our expectation is that many of them will ultimately get to be responsive.

You know, the fact is right now, the tumors are shrinking, patients are being helped by the drug, nonprogression for those patients is a meaningful clinical benefit because since their median survival time typically has been eight to nine months. So the drug is providing a real benefit to those patients. And so, yes, I believe that many of those patients will get the BPR.

The timing is really difficult to predict. But the real benefit to these patients is that the tumors seem to be under control for prolonged periods of time, that the drug does have an impact on those patients, and does, I mean, you know, it's early Phase II data set, but so far, it does seem to be providing real, meaningful long-lasting benefit to those patients.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Han Li of Stanford Group. Please proceed.

Yes, just a housekeeping items. Frank, can you remind us, is there a, the loan from GSK, is there a deadline now you have to pay off, or is there any interest bearing on the loan?

The loan is for $85 million and it's fully drawn. We're accruing interest at a rate of 4% and the total accrued interest at the end of the third quarter stood at $12.7 million.

And in terms of repayment of the loan, the loan starts to mature in October 2008 and it will mature with several tranches over several years and it's repayable in either cash or in stock at our discretion.

So starting this time next year you'll have to start to pay for the loan?

That's correct.

I'm still a little bit confused regarding the reason you say you lowered the guidance is due to the timing of the potential milestone selection. I thought you just mentioned earlier that the milestone selection is revenue and also cash neutral.

I think what we said is that had the selection occurred earlier in the year, the milestone would have been higher and would not have been revenue neutral. We would've been able to recognize revenue from that larger milestone had it occurred earlier in the year. It didn't. Now it's going to occur in December and it's $35 million and so there is no revenue recognition.

So if it happened earlier in the year, you don't have to pay the GSK loan?

None of this is --

If it would have happened early in the year, the milestone would have been higher.

That's the real point.

And it wouldn't have been entirely offset by the $36 million that GSK advanced to us back in 2005.

Got it. Okay. Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Your next question comes from the line of Karen Buchkovich of JPMorgan. Please proceed.

Hello.

Could you briefly recap the highlights of the sale of the plant business, the primary assets that were of interest to the buyer, the focus of the R&D and the goals which must be met to reach the milestone?

I think in terms of exactly the asset that we transferred to Dow, I don't want to go into that just to respect Dow's wishes here to not make all of this public. But, you know, we have a, as you know, we've had a very powerful plant trait discovery engine up in Portland that's generated a lot of interesting insights.

And (inaudible) was very interested in our ability to, let's say, manipulate genes in major crops, and that's basically the part of the business that they acquired. We have other aspects of the business up there that they did not, and that we believe we can potentially monetize further.

And the focus of the R&D and the goal for the milestone?

We haven't disclosed any of that publicly, and we're just trying to respect the wishes of our partner there.

Okay. Thank you.

Thank you very much, ma'am. At this time, sir, have you no further questions in queue.

Okay. Well, look, let me just thank everybody for your attention. I know we talked for a bit today. We have a lot of information to let you know. And we thank you all for your attention. And we'll all get back to work. Thanks.

Thank you very much, sir. Thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.