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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-30235
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3257395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 Harbor Way
P.O. Box 511
South San Francisco, CA 94083
(Address of principal executive offices, including zip code)
(650) 837-7000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.001 Par Value per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $359,717,031.
As of February 28, 2003, there were 59,649,585 shares of the registrant's common
stock outstanding. As of that date, there were approximately 50,879,244 shares
held by non-affiliates of the registrant, with an approximate aggregate market
value of $293,573,238 based upon the $5.77 closing price of the registrant's
common stock listed on the Nasdaq National Market on February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than April 30, 2003, in connection with the registrant's 2003 Annual Meeting of
Stockholders, are incorporated herein by reference into Part III of this Annual
Report on Form 10-K.
EXELIXIS, INC.
FORM 10-K
INDEX
PART I PAGE
----
Item 1. Business 4
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Consolidated Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Consolidated Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 65
PART III
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 66
Item 13. Certain Relationships and Related Transactions 66
Item 14. Controls and Procedures 66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 66
SIGNATURES 68
CERTIFICATIONS 70
PART I
The following discussion and analysis contains forward-looking statements. These
statements are based on our current expectations, assumptions, estimates and
projections about our business and our industry, and involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied in, or contemplated by, the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan,"
"will," "may," "should," "estimate," "predict," "potential," "continue" or the
negative of such terms or other similar expressions identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors more fully
described under the caption "Risk Factors" as well as those discussed elsewhere
in this document. These and many other factors could affect the future financial
and operating results of Exelixis. Exelixis undertakes no obligation to update
any forward-looking statement to reflect events after the date of this report.
ITEM 1. BUSINESS
Overview
We believe that we are a leader in the discovery and validation of high-quality
novel targets for several major human diseases and a leader in the discovery of
potential new drug therapies, specifically for cancer and other proliferative
diseases. Our primary mission is to develop proprietary human therapeutics by
leveraging our integrated discovery platform to increase the speed, efficiency
and quality of pharmaceutical product discovery and development.
Through our expertise in comparative genomics and model system genetics, we are
able to find new drug targets that we believe would be difficult or impossible
to uncover using other experimental approaches. Our research is designed to
identify novel genes and proteins expressed by those genes that, when changed,
either decrease or increase the activity in a specific disease pathway in a
therapeutically relevant manner. These genes and proteins represent either
potential product targets or drugs that may treat disease or prevent disease
initiation or progression.
Specifically in cancer, the remarkable evolutionary conservation of biochemical
pathways strongly supports the use of simple model systems, such as fruit flies,
nematode worms, zebrafish and mice, to identify key components of critical
cancer pathways that can then be targeted for drug discovery. We expect to
develop new cancer drugs by exploiting the underlying "genetic liabilities" of
tumor cells to provide specificity in targeting these cells for destruction,
while leaving normal cells unharmed. We have discovered and are further
developing a number of small molecule drug targets in addition to monoclonal
antibody drug targets. Molecules directed against these targets may selectively
kill cancer cells while leaving normal cells unharmed, and may provide
alternatives to current cancer therapies.
While our primary focus is on drug discovery and development, we believe that
our proprietary technologies are valuable to other industries whose products can
be enhanced by an understanding of DNA or proteins, including the agrochemical,
agricultural and diagnostic industries. Many of these industries have shorter
product development cycles and lower risk than the pharmaceutical industry,
while at the same time generating significant sales with attractive profit
margins. By partnering with companies in multiple industries, we believe that we
are able to diversify our business risk, while at the same time maximizing our
future revenue stream opportunities.
Clinical Pipeline
In 2002, we made considerable progress in advancing our clinical development
pipeline. We entered into relationships providing for clinical supplies of our
rebeccamycin analogue in anticipation of initiating Company sponsored clinical
studies. In addition, we continued to advance preclinical candidates, including
XL 784, in anticipation of filing our first investigational new drug ("IND")
application for a proprietary compound.
Rebeccamycin Analogue (XL 119). Our most advanced clinical program is the
rebeccamycin analogue, an anticancer compound that we in-licensed from
Bristol-Myers Squibb Company ("Bristol-Myers Squibb" or "BMS") in 2001. The
rebeccamycin analogue has completed Phase I clinical testing. The Phase II
clinical testing program, which is being conducted by the National Cancer
Institute ("NCI"), is well advanced. The compound has been studied in a broad
range of tumors. The safety profile appears manageable and consistent with that
of other cytotoxic agents, and generally includes myelosuppression and
neutropenia. These side effects are largely transient and reversible when
treatment is stopped. To date, the most pronounced antitumor activity was
observed in upper gastrointestinal tumors (most prominently in bile duct
tumors), where several partial responses and instances of prolonged disease
stabilization occurred. Based on these results, we believe that the compound
deserves further development efforts, as there is currently no approved standard
therapy for these rapidly progressing tumors. We anticipate initiating next
development steps, if any, following discussions with the Food and Drug
Administration ("FDA"). The NCI may also expand its Phase II program to include
additional tumor types or combination studies. Drug substance to be used in
Company-sponsored clinical trials has been manufactured in bulk supply by
third-party suppliers. We expect that the available supply of the compound will
be sufficient to support our clinical needs as well as any trials that may be
initiated by the NCI.
XL 784. XL 784 is the first small molecule compound developed from our
proprietary drug discovery platform. The target against which XL 784 is directed
was originally discovered in our anti-angiogenesis research program, although
the actual mechanism by which the compound exerts its anti-tumor effects is
still being explored. We are currently completing regulatory toxicology studies,
and if the safety profile continues to look acceptable, we expect to file an IND
in 2003. Our clinical plans include initiating Phase I first-in-man studies, to
be conducted in healthy volunteers, while we continue to explore the therapeutic
utility of the compound in various animal models of disease, including
cardiovascular disease.
2002 Corporate Collaborations
We have established several commercial collaborations with leading
pharmaceutical and biotechnology companies as well as agriculture companies. In
October 2002, Exelixis and SmithKlineBeecham Corporation ("GlaxoSmithKline" or
"GSK") formed a broad alliance to discover, develop and commercialize novel
therapeutics in the areas of vascular biology, inflammatory disease and cancer.
The alliance combines our powerful gene-to-drug discovery platform and GSK's
strengths in development and commercialization by means of an innovative model
for sharing risks and potential rewards in a research and development
collaboration. Under the terms of the arrangement, we will have responsibility
for the delivery to GSK of small molecule compounds that have met agreed-upon
criteria in early Phase II clinical testing. GSK will have the right to further
develop these compounds and exclusive, worldwide commercialization and
manufacturing rights. We retain co-promotion rights in North America for
molecules selected for development by GSK.
In August 2002, we agreed to a two-year extension of our mechanism of action
("MOA") collaboration with BMS, which was established in 1999. Under this
collaboration, we identify and validate important biological targets directly
affected by selected BMS compounds. This collaboration is in addition to the
broad alliance established with BMS in 2001 focused on cancer target discovery,
which is ongoing.
In December 2002, our joint venture with Bayer CropScience LP ("Bayer
CropScience," formerly, Aventis CropScience USA LP, "Aventis CropScience"),
Agrinomics LLC, established a collaboration with Renessen LLC to enhance seed
oil content in commercially valuable seed oil crops. Renessen is a joint venture
between Monsanto Company and Cargill, Inc. The collaboration combines
Agrinomics' technological leadership in agricultural functional genomics,
high-throughput gene screening and seed trait identification, developed by
Exelixis, with Renessen's global expertise in quality trait crop development and
commercialization, with the goal of accelerating the development of novel
proprietary crops with improved seed composition traits. This collaboration
leverages the unique capabilities of Agrinomics' powerful ACTTAG trait selection
platform to rapidly discover and validate genes that can optimize important seed
traits and potentially increase the commercial value of many of the world's most
significant agricultural crops.
At the beginning of 2002, we established a combinatorial chemistry collaboration
with Merck & Co., Inc. ("Merck") for the joint design and generation of small
molecular compound libraries for high-throughput drug screening. The
collaboration pairs our expertise in combinatorial library design with Merck's
synthetic chemistry expertise with the goal of achieving optimal diversity,
density, novelty and quality in library production. This collaboration is
similar to our other combinatorial chemistry collaborations with Cytokinetics,
Inc., Elan Pharmaceuticals, Inc., Scios Inc. and Schering-Plough Research
Institute, Inc., and provides licensing fees and payments for delivery of
specified numbers of compounds meeting certain quality-assurance criteria.
In addition to our commercial collaborations, we have relationships with other
biotechnology companies, academic institutions and universities that provide us
access to specific technology or intellectual property for the enhancement of
our business. These include collaborations with leading biotechnology product
developers and solutions providers, among them Affymetrix Inc., GeneMachines,
AVI BioPharma, Inc., Silicon Genetics, Galapagos NV, Genomics Collaborative
Inc., Accelrys, Inc., Akceli, Inc., Ardais Corp., Cogen BioCognetics, Inc.,
Impath Predictive Oncology, Inc. and Virtual Arrays, Inc.
In June 2002, we established a collaboration with Merck for the creation of
customized genetically engineered mouse models of disease based on our
proprietary Conditional gene targeting technology. Under the agreement, we will
seek to create a specified number of customized mouse models based on Merck's
genetic specifications. Conditional gene targeting permits highly specific
temporal and spatial control over gene inactivation for the creation of
precisely controlled, information-rich mammalian models of disease.
Following the completion of our acquisition of Genomica Corporation in January
2002, we granted exclusive third- party commercial and development rights to
Genomica's software assets to Visualize, Inc., a provider of sophisticated,
interactive data visualization software serving the financial services industry.
We have a revenue sharing agreement with Visualize, pursuant to which we retain
the right to receive and use the Genomica software as well as any derivative
works created by Visualize for our internal use.
Industry Background
Conventional chemical drug discovery involves a series of steps, many years of
work and substantial resources. Initially, scientists identify potential
molecular targets for therapeutic intervention. These targets must then be
validated, or demonstrated to be able to affect the disease biochemistry. Next,
the validated target is put through a series of assays, or tests, to identify
chemical compounds that would modulate the activity of the target. Once chemical
compounds that modify the activity of the target are identified, they must then
be iteratively optimized through synthetic chemistry processes. After several
iterations, the resulting compounds are tested in animal models of disease, and
selected lead compounds are then considered for preclinical development.
Many of the principal products of the pharmaceutical and biotechnology
industries were developed without knowledge about the underlying genetic and
biochemical causes of disease, or without knowledge of how the drug works in the
body. This limited knowledge about the target or MOA of the product can lead to
somewhat random and/or suboptimal product candidates. Similar issues are
problems for the agrochemical, agricultural and diagnostic industries. As a
result, product development in all of these industries is costly, time
consuming, inefficient and characterized by high failure rates. Many companies
have turned to genomic technologies, primarily for DNA sequence information, to
help address these problems with respect to the selection of molecular or
gene-based targets.
Despite significant investment in genomics and the recent availability of the
human genome sequence, there has not been appreciable improvement in selecting
high quality molecular targets for drug development. Notwithstanding the
tremendous advances in providing genomic data, it is clear that a rational
selection of molecular targets requires more detailed or specific knowledge
about the function of genes and their encoded proteins as well as their
interaction with other components of signaling networks, or biochemical
pathways. Since the complete human sequence and the sequences of other
commercially important genomes are now available, we believe that the
competitive advantage for companies going forward will be the ability to
identify the small number of significant gene targets, within the very large
number of genes, which when modulated will result in a therapeutically and
commercially valuable outcome. By integrating our superior ability to select
biological targets with a state-of-the-art drug discovery platform, we expect
our platform and biological insights to produce novel targets and potentially
innovative products.
Our Strategy
Our business strategy is to leverage our biological expertise and integrated
drug discovery capabilities to improve the speed, efficiency and quality of the
discovery, development and commercialization process for human therapeutics and
other products. Specifically our business strategy includes the following key
elements:
MAINTAIN AND AUGMENT BIOLOGICAL EXPERTISE: Our biological expertise is a key
competitive advantage that we believe applies throughout all aspects of our
collaborative relationships and drug discovery efforts. We seek to continually
enhance our technology platform through building, in-licensing or acquiring
technologies that complement our fundamental knowledge and capabilities as well
as through protecting our proprietary technologies with patents and trade
secrets.
SELECTIVELY DEVELOP THERAPEUTIC PRODUCTS: We have invested and plan to continue
to invest significant funds in discovering and developing proprietary products,
particularly in the area of cancer. We have committed substantial resources to
building a world-class drug discovery effort that is integrated with our unique
understanding of the biological basis of disease, and we expect to generate a
pipeline of compounds to move into clinical trials.
LEVERAGE STRATEGIC COLLABORATIONS: We have established and intend to continue to
pursue commercial relationships and key partnerships with major pharmaceutical,
biotechnology and agrochemical companies based on the strength of our
technologies, biological expertise and drug discovery capabilities. These
collaborations provide us with a substantial committed revenue stream in
addition to opportunities to receive significant future payments, if our
collaborators successfully develop and market products that result from our
collaborative work. In addition, many of our collaborations have been structured
strategically so that we gain access to technology or product opportunities.
Technology access allows us to more rapidly advance our internal programs,
saving both time and money, while at the same time retaining rights to use the
same information or tools in different industries or for different development
opportunities.
ACQUIRE PRODUCTS AND TECHNOLOGIES OPPORTUNISTICALLY: We continually evaluate
opportunities that may provide us with key personnel, intellectual property,
technologies and products that will enhance our development capabilities and
product pipeline. We believe that through the acquisition of strategic products
and technologies we will be able to create additional value in our internal and
collaborative programs. In addition, we believe that many of these strategic
relationships will permit us to obtain co-development, co-promotion or other
rights to products identified or developed in such collaborative relationships
as a result of our efforts.
Integrated Research And Discovery Technologies
We have developed an integrated research and discovery platform that includes
proprietary technologies and know-how. This platform includes model system
genetics and comparative genomics, libraries of modified model organisms,
specialized reagents, assay biology, informatics databases and software, MOA
technology, automated high-throughput screening, a growing compound library in
excess of approximately three million small molecule compounds and extensive
medicinal/combinatorial chemistry capabilities. Using this integrated platform,
we are able to effectively and rapidly identify novel targets and develop
proprietary compounds. We believe that a key competitive advantage is the
breadth of our platform as well as our ability to apply the tools of modern
biology and chemistry to address commercially relevant questions.
Model System Genetics and Comparative Genomics. Model system genetics is
the study of simple biological systems to discover genes, proteins and
biochemical pathways that may be useful in the development of new pharmaceutical
or agricultural products. Our primary model systems are the fruit fly, D.
melanogaster; the nematode worm, C. elegans; the zebrafish, D. rerio, corn smut,
Ustilago maydis; Arabidopsis thaliana; and the micro-tomato, Lycopersicon
esculentum. Empirical evidence has provided us with accurate benchmarks for
applying biological and biochemical discoveries from these model systems to more
developed organisms, such as humans or commercial crops.
Model System Lifecycle Selected Applications
- ----------------------- --------- -----------------------------------------------------------
Drosophila melanogaster 10 days Cancer, angiogenesis, diabetes, inflammation, CNS disorders
- ----------------------- --------- -----------------------------------------------------------
C. elegans 3 days Diabetes, Alzheimer's disease
- ----------------------- --------- -----------------------------------------------------------
D. rerio 90 days Angiogenesis, cancer, inflammation
- ----------------------- --------- -----------------------------------------------------------
Arabidopsis thaliana 10 days Plant traits
- ----------------------- --------- -----------------------------------------------------------
Lycopersicon esculentum 98 days Nutraceuticals
- ----------------------- --------- -----------------------------------------------------------
Ustilago maydis 10 days Plant pathology
- ----------------------- --------- -----------------------------------------------------------
Scientists have used these organisms as research tools for several decades. We
have industrialized the analysis of these model systems by developing a suite of
proprietary tools and reagents that allow us to perform systematic genetic
analyses at a larger scale and with substantially greater speed than otherwise
are currently available. Among other proprietary tools, we have exclusively
licensed the U.S. patent covering P-element, which is a genetic element
essential for performing modern fruit fly genetics.
Comparative genomics is the application of data learned from one biological
system to another system. For example, the use of the angiogenesis pathway data
learned from a zebrafish can be applied to studying human angiogenesis.
Application of comparative genomics relies on the use of our extensive libraries
of model organisms, the proprietary databases of information and informatics
methods generated by our scientists, as well as access to state-of-the-art
technological tools such as RNA interference (RNAi). Each of our model systems
has unique advantages that can be applied in different ways to address
commercially relevant questions in a rapid manner. Our expertise allows us to
use knowledge across species and to select the best model systems for a
particular commercial application.
Proprietary Model Organism Libraries. We have produced and maintain as key
strategic assets populations of well-characterized genetically modified organism
libraries, and the process for their production and use is a core technology. We
have libraries of these organisms that have been modified and catalogued in a
systematic fashion, so that comprehensive pair-wise breeding can allow us to
test the effects of gene alteration or modulation on a specified disease
condition. Through the use of these libraries, we are able to rapidly assess the
effect of increasing or decreasing the output of each gene in the model
organism. The availability of these assets significantly enhances the efficiency
of research directed at drug or agricultural product target identification, as
our model systems permit results to be obtained in a period of weeks or months
from the inception of the research effort. We believe that our ability to
rapidly and selectively move from an alteration in a gene directly to the
identification of validated targets that can reverse or enhance the effects of
that alteration is an extremely powerful, rapid and direct route to new
pharmaceuticals and agricultural products.
High-throughput Screening (HTS) Assays for Target and Lead Discovery. We
also develop proprietary genetic, biochemical and cell-based assays for use in
screening for potential targets, proteins and products. An HTS assay is a test
that may include a biochemical reaction or cell-signaling event that is readily
measured, miniaturizable to a specific format and subject to automation. HTS
assays must meet these criteria in order to address the large numbers of
experimental measurements that we have identified in order to screen our
extensive collection of compounds. We believe that we have also established
world-class expertise in gene cloning, protein expression, scale-up fermentation
and protein purification necessary to meet these needs. Genetic assays are used
to measure the ability of a particular gene or protein to change or regulate the
disease pathway of interest, which leads to the identification of disease
pathway genes as well as those genes that may be product targets. The
development of biochemical assays requires the production of target gene
products (proteins) in sufficient quantity to support hundreds of thousands of
individual measurements. Cell-based assays may also require genetically
engineered cells that over-express the target gene of interest.
Informatics. We have state-of-the-art informatics tools, many of which are
proprietary, and expertise that have been developed as an integral part of our
model systems genetics and comparative genomics capabilities. These tools
include a broad range of applications such as: tracking samples and harvesting
data in the context of high-throughput, automated data collection systems;
creating discovery platforms for storing, managing and querying large data sets;
and analysis, curation and prediction of function relative to compounds and
macromolecules. We believe that these tools are essential to developing our
target and drug discovery pipelines and represent a substantial competitive
advantage. Specific examples include extensive databases and software tools
related to: DNA sequencing and gene discovery; generation of comprehensive
genetic knockout collections; functional identification and classification of
novel protein sequences; and design, characterization and selection of compound
libraries. Our informatics capabilities provide an extensive and readily
accessed informational base for analyzing and comparing data produced using our
core technologies, allowing us to optimize and prioritize among potential
targets and, downstream, drugs directed against those targets.
Sequencing, Proteomics and Transcriptional Profiling. We have built or
in-licensed significant expertise in sequencing, proteomics and transcriptional
profiling. Our sequencing capacity is currently 1.5 million lanes per year,
scalable to ten million lanes in our current facility. We have state-of-the-art
robotics, advanced laboratory information management systems, polymerase chain
reaction, or PCR, mass spectrometry and gene cloning expertise as well as a
significant proteomics effort to complement the existing proficiency in genetic
target discovery. We have brought in several different methods of
transcriptional profiling, both to validate our biological target discovery and
to screen for toxicities.
HTS, Combinatorial and Medicinal Chemistry. Our gene discovery platform
provides novel, biologically validated therapeutic and agricultural targets
without bias towards conventional target classes. Thus, in addition to targets
that are known in the industry to be "druggable," such as protein kinases,
proteases and g-protein coupled receptors, or GPCRs, many other novel classes
are identified in genetic screens that may require specialized assay technology.
We focus on finding diverse drug discovery targets in multiple assay formats. We
have established a high-throughput screening laboratory in which we conducted 22
target screens against millions of compounds in 2002. Through our relationship
with BMS, we have gained access to their proprietary combinatorial hardware and
software systems. We are currently synthesizing hundreds of thousands of
compounds per month. In addition, we have built extensive capabilities into our
high-throughput drug discovery platform, including crystallography, cell
biology, medicinal chemistry, ADME, pharmacokinetics, pharmacodynamics,
pharmacology and chemi-informatics, to potentially identify and develop
innovative drugs.
Extensive Compound Library. We have rapidly assembled a growing collection
of over approximately three million highly diverse, quality controlled,
drug-like, small molecule compounds for lead discovery by high-throughput
screening. Today, these compounds are largely derived from internal
combinatorial synthesis. We believe that we are capable of generating
approximately one million new compounds per year to add to our highly diverse
screening library. In prior years, compounds were identified for acquisition
from external vendors based on structural complexity and diversity, purity and
price. Over one million compounds were originally selected for acquisition using
this analysis. We believe that the continued expansion of our compound library
will increase the frequency and quality of generating highly active lead
compounds.
Clinical Development Capabilities. In 2002, we significantly expanded our
clinical development capabilities, staffing and infrastructure. Our development
group is comprised of experienced professionals with the expertise and
experience to quickly move our development candidate compounds from preclinical
testing to IND status and through "proof of concept" Phase II clinical trials.
The development group possesses critical expertise in the areas of chemistry,
manufacturing and controls ("CMC"), pre-clinical testing, clinical trial design,
management and analysis and regulatory affairs. Therapeutic expertise within the
group includes major disease areas such as allergy-immunology, anti-infectives,
cardiovascular, central nervous system, metabolic diseases and oncology. The
development group has primary responsibility for advancing and managing the
progress of our clinical pipeline, including possibly initiating Phase II trials
for our rebeccamycin analogue as a potential treatment for upper
gastrointestinal tumors, advancing XL 784 into Phase I, first-in-man trials, and
preparing for filing additional INDs, consistent with our corporate goals and
corporate collaboration obligations.
Areas Of Expertise
Human Therapeutics
ANGIOGENESIS AND VASCULAR BIOLOGY. Angiogenesis is the formation of blood
vessels. The ability to block the formation of new blood vessels could be used
to kill cancer cells by depriving them of nutrients. Similarly, anti-angiogenic
agents can be used to treat or prevent diabetic retinopathy, macular
degeneration and psoriasis. Products that promote angiogenesis could be used to
treat coronary heart disease and stroke. We have an active program to study the
zebrafish and Drosophila (fruit fly) model systems in order to identify key
angiogenic and anti-angiogenic gene targets and proteins. Our lead proprietary
compound, XL 784, was discovered in our angiogenesis research program. In 2002,
we entered into a significant small molecule discovery and development
collaboration with GlaxoSmithKline that includes angiogensis, vascular biology,
inflammation and areas of cancer that are not otherwise subject to existing
collaborations.
CANCER. Cancer is a leading cause of death in developed countries. Cancer is
caused by a number of genetic defects in cells resulting in unregulated cell
growth. We have discovered and are further developing a number of small molecule
drug targets, in addition to monoclonal antibody drug targets, that may
selectively kill cancer cells while leaving normal cells unharmed, and may
provide alternatives to current cancer therapies. By exploiting the underlying
"genetic liabilities" of tumor cells, we have identified numerous targets within
specific cell growth and proliferation regulatory pathways and are in the
process of validating these targets in cell-based assays. In 2002, we completed
22 high-throughput screens directed against proprietary cancer targets. We have
established major cancer research collaborations with Bristol-Myers Squibb and
Protein Design Labs ("PDL"). Our lead compound, XL 784, has demonstrated
anti-tumor activity and is advancing toward clinical study. In 2001, through our
cancer collaboration with BMS, we in-licensed an anticancer compound, the
rebeccamycin analogue, that is in Phase II clinical trials in upper
gastrointestinal tumors being conducted by the National Cancer Institute and for
which we expect to possibly initiate Company-sponsored trials.
INFLAMMATION. Our inflammation program focuses on the role of the innate immune
system, especially macrophages, in mediating the inflammatory response.
Misregulation of the innate immune system is of central importance in diseases
of inflammation, such as asthma and arthritis. Drosophila displays a robust
innate immune response, and their macrophages are regulated by the same effector
molecules and pathways that regulate human macrophages. Unlike vertebrates,
however, they lack an adaptive immune system, which allows for more
straightforward analysis of the innate response. Drosophila is therefore useful
for rapidly identifying prospective targets for treating immunological disease.
Novel targets can also be validated in zebrafish, which has all the immune cell
types of mammals, with the advantage of more rapid analysis. We are working in
collaboration with various universities to identify targets that control
inflammation and have identified several targets to date.
METABOLIC DISEASES. Metabolic diseases include such important conditions as
cardiovascular diseases, diabetes and obesity, which represent significant unmet
medical needs. We have an internal program focusing on metabolic diseases as the
result of the conclusion of a three-year sponsored research program with
Pharmacia Corporation (Pharmacia), which formally ended in February 2002 by
mutual consent. The most advanced targets from that program were focused on
optimizing the levels of both cholesterol and fat in the bloodstream, and we
have identified several targets for ourselves that may be useful in developing
products to control Type II diabetes. We have exclusive rights to the research
work done under the program with Pharmacia outside of certain targets that they
have selected under the program, for which we will receive milestone payments
and royalties for further development by Pharmacia.
CENTRAL NERVOUS SYSTEMS (CNS) DISORDERS. CNS disorders include cognitive
disorders such as Parkinson's disease, depression, schizophrenia and Alzheimer's
disease. In our collaboration with Pharmacia, we were applying our genetics
technologies to understand the causes of Alzheimer's disease. As a result of
genetic screens performed to date, Pharmacia selected a number of targets for
which we have received milestone payments and may receive royalties in the
future. In 2002, we published in Developmental Cell a seminal paper concerning
the discovery of two proteins, aph-1 and pen-2, that may play a role in the
production of beta-amyloid, the main constituent of senile plaques associated
with Alzheimer's disease.
MECHANISM OF ACTION PROGRAM. In this program, we identify the MOA for
pharmaceutical compounds that have interesting biological activity but for which
the molecular target is unknown. The targets are identified through the analysis
of model organisms that are either resistant or hypersensitive to the biological
activity produced by the compound. Following identification, the targets are
confirmed using biochemical assays. Targets and other components of the
signaling pathways are then identified as candidates for further compound
development. We have an ongoing MOA collaboration with BMS pursuant to which we
would receive milestone payments and royalties for further development of the
BMS compounds against the targets identified.
Agriculture
FUNGICIDES AND HERBICIDES. We are developing fungal and herbicidal model
systems, which we intend to use to identify targets that will potentially lead
to the development of new, more effective fungicides and herbicides. We have
entered into a MOA agreement with Dow AgroSciences pursuant to which we identify
targets for specific fungicide and herbicide compounds with unknown molecular
targets.
INSECTICIDES AND NEMATICIDES. Currently, there are no products that effectively
and safely control nematodes and their effects on plant crops. In collaboration
with Bayer, we are applying our model systems platform and assay development
capabilities to identify unique targets that may be used to develop new, more
effective, broad-spectrum insecticides as well as nematicides. As a result of
screening targets both from de novo targets as well as from determining the MOA
of an existing compound, we have delivered to Bayer numerous targets and
high-throughput screening assays that may be useful in identifying new
insecticides for which we have received milestone payments. Under our
collaborative arrangement (through our joint venture, Genoptera LLC), Bayer
retains exclusive rights to insecticides and nematicides for crop protection. We
remain free to conduct research in pesticides other than insecticides or
nematicides, as well as in the development of pest-resistant crops.
PLANT TRAIT DISCOVERY. We have developed plant model systems to identify genes
that may be used to develop crops with improved internal and external traits,
including superior yield, improved nutritional profiles and higher oil content.
In collaboration with Bayer CropScience, through an equally-owned subsidiary,
Agrinomics LLC, we are working to research, develop and commercialize novel
genes found through the proprietary ACTTAG gene expression technology in
Arabidopsis thaliana, a plant whose genome has been fully sequenced. ACCTAG gene
expression technology represents a method of identifying genes associated with
gain-of-function and loss-of-function phenotypes. Agrinomics has characterized
and catalogued more than 250,000 lines of Arabidopsis, identifying nearly its
entire genome. The collection of transgenic Arabidopsis, which we believe is one
of the largest gene libraries for this plant in the world, has the potential to
provide extremely important leads for significant improvements in the large
commercial seed, oil, protein and crop protection markets.
Corporate Collaborations
Our strategy is to establish collaborations with major pharmaceutical,
biotechnology and agrochemical companies based on the strength of our
technologies and biological expertise as well as to support additional
development of our proprietary products. Through these collaborations, we obtain
license fees and research funding, together with the opportunity to receive
milestone payments and royalties from research results and subsequent product
development. In addition, many of our collaborations have been structured
strategically to provide us access to technology to advance our internal
programs, saving both time and money, while at the same time retaining rights to
use the same information in different industries. Our collaborations with
leading companies in the agrochemical industries allow us to continue to expand
our internal development capabilities, while providing our partners with novel
targets and assays, and to diversify our revenue stream. For the year ended
December 31, 2002, revenue from two of our collaborators represented
approximately 39% and 25% of total revenue, respectively. For the year ended
December 31, 2001, revenue from three of our collaborators represented
approximately 32%, 31% and 15% of total revenue, respectively. For the year
ended December 31, 2000, revenue from two of our collaborators represented
approximately 53% and 36% of total revenue, respectively.
Bayer Corporation
In December 1999, we established Genoptera LLC, a Delaware limited liability
company, with Bayer Corporation to develop insecticides and nematicides for crop
protection. As part of the formation of this joint venture, Bayer has paid us,
through Genoptera, license fees and research commitment fees of $20.0 million
and has agreed to provide eight years of research funding through 2007 at a
minimum level of $10.0 million per year (for a total of $100.0 million of
committed fees and research support). Bayer owns 60% of Genoptera, and we own
the remaining 40%. We did not make any capital contributions for our ownership
interest and have no obligation to fund future losses. The formation of this
joint venture is an outgrowth of, and replaces, the contractual collaboration
first established with Bayer AG (the corporate parent of Bayer Corporation) in
May 1998. Bayer will pay Genoptera milestones and royalties on products
developed by it resulting from the Genoptera research, and we will pay Genoptera
royalties on certain uses of technology arising from such research.
Either Bayer or Exelixis may terminate the Genoptera research efforts after
2007. In addition, Bayer may terminate the joint venture prior to 2007 or buy
out our interest in the joint venture under specified conditions, including, by
way of example, failure to agree on key strategic issues after a period of
years, the acquisition of Exelixis by another company or the loss of key
personnel that we are unable to replace with individuals acceptable to Bayer.
In July 2002, Bayer completed the acquisition of Aventis S.A., including Aventis
CropScience. We each own 50% of Agrinomics LLC, which was established in July
1999 to enable the funding of a collaboration originally entered into with
Aventis CropScience. Agrinomics focuses on research, development and
commercialization of products in the field of agricultural functional genomics.
Under the terms of the Agrinomics joint venture agreement, Bayer has agreed to
make capital contributions to Agrinomics in cash totaling $20.0 million over a
five-year period. Funding by Bayer for the collaboration is scheduled to expire
in July 2004. We contributed the ACTTAG gene identification and activation
technology, a collection of seeds generated using the ACTTAG gene identification
and activation technology techniques and expertise in molecular and cell biology
to the joint venture. In addition, we perform research work for this
collaboration. Bayer CropScience currently provides high-throughput screening,
robotics, microarray and bioinformatics technologies and support work for the
collaborative research efforts.
Bristol-Myers Squibb
In August 2002, we extended our MOA research collaboration with BMS through
August 2004. The collaboration was initially established in September 1999, and
seeks to leverage our proprietary platform and expertise in comparative genetics
and functional genomics to identify the targets of compounds delivered by
Bristol-Myers Squibb. This information may enable Bristol-Myers Squibb to
enhance the potency, specificity and selectivity of drug candidates and may lead
to the discovery of new generations of compounds with attractive drug
properties. In connection with the collaboration, BMS originally transferred to
us certain combinatorial chemistry hardware and software and paid us a
technology access fee. Under the terms of the extension, BMS will continue to
provide research support payments, as well as pay milestones and royalties based
on achievements in the research and commercialization of products based on BMS
compounds that are the subject of the collaboration.
In July 2001, we entered into a second collaboration with BMS focused on cancer
target identification. The collaboration involves three agreements: (a) a Stock
Purchase Agreement; (b) a Cancer Collaboration Agreement; and (c) a License
Agreement. Under the terms of the collaboration, BMS (i) purchased 600,600
shares of our common stock in a private placement at a purchase price of $33.30
per share, for cash proceeds to us of approximately $20.0 million; (ii) agreed
to pay us a $5.0 million upfront license fee and provide us with $3.0 million
per year in research funding for a minimum of three years; and (iii) granted to
us a worldwide, fully-paid, exclusive license to the rebeccamycin analogue
developed by BMS, which is currently in Phase II clinical studies for cancer and
which we may take into further clinical studies. BMS has exclusive rights to
certain potential small molecule compound drug targets in cancer selected by BMS
during the term of the research collaboration.
Dow Agrosciences
In July 2000, we established a three-year research collaboration with Dow
AgroSciences to identify the MOA of herbicides and fungicides delivered to us by
Dow AgroSciences. We do not know the identity and function of these compounds
prior to their delivery. Under this agreement, we received access to a
collection of proprietary compounds from Dow AgroSciences that may be useful in
our human therapeutic drug discovery programs. We have identified targets to
certain Dow AgroSciences compounds that will be used to develop new classes of
fungicides and herbicides. Dow AgroSciences pays us research funding as well as
milestone payments and royalties based on achievements in the research and
commercialization of these products. Unless otherwise renewed, the collaboration
will expire in July 2003.
Protein Design Labs
In May 2001, we entered into a collaboration with PDL to discover and develop
humanized antibodies for the diagnosis, prevention and treatment of cancer. The
collaboration will utilize our model organism genetics technology for the
identification of new cancer targets and PDL's antibody and clinical development
expertise to create and develop new antibody drug candidates. PDL provided us
with $4.0 million in annual research funding, which will expire as scheduled in
June 2003 and has purchased a $30.0 million convertible note. The five-year note
bears interest at 5.75%, and the interest thereon is payable annually. The note
is convertible into our common stock at a conversion price per share equal to
the lower of (i) $28.175 or (ii) 110% of the Fair Market Value (as defined in
the note) of a share of our common stock at the time of the conversion.
Pharmacia
Our collaboration with Pharmacia was originally established in February 1999 to
identify targets in the fields of Alzheimer's disease, Type II diabetes and
associated complications of metabolic syndrome. We mutually agreed to terminate
further research in February 2002. Under the arrangement, Pharmacia purchased a
$7.5 million equity interest, paid us a license fee of $5.0 million and
milestone payments based on target selection, provided ongoing research support
and has agreed to pay us royalties in the event that products result from the
targets that we identified. Upon termination, we reacquired rights to the
research programs in metabolism and Alzheimer's disease previously licensed
exclusively to Pharmacia. Pharmacia retains rights to certain targets selected
prior to the reacquisition date, subject to the payment of milestones for
certain of those targets selected, and royalties for future development of
products against or using those targets, but Pharmacia has no other obligations
to make payments to us, including approximately $9.0 million in annual funding
that would otherwise be payable for an additional two years if we had not
mutually agreed to terminate the arrangement.
Renessen
In December 2002, Agrinomics established an alliance to enhance seed oil content
in commercially valuable crops with Renessen LLC. Renessen is a joint venture
between Monsanto Company and Cargill, Inc. The collaboration combines
Agrinomics' technological leadership in agricultural functional genomics,
high-throughput gene screening and seed trait identification with Renessen's
global expertise in quality trait crop development and commercialization, with
the goal of accelerating the development of novel proprietary crops with
improved seed composition traits. This collaboration leverages the unique
capabilities of Agrinomics' powerful ACTTAG gene activation and selection
platform to rapidly discover and validate genes that can optimize important seed
traits in order to increase the commercial value of many of the world's most
significant agricultural crops.
SmithKlineBeecham Corporation / GlaxoSmithKline plc
In October 2002, we entered into a broad collaboration with GSK for the
discovery, development and commercialization of novel small molecule
therapeutics in the areas of vascular biology, inflammatory disease and cancer,
to the extent not previously partnered. The collaboration involves three
agreements: (a) a Product Development and Commercialization Agreement; (b) a
Stock Purchase and Stock Issuance Agreement; and (c) a Loan and Security
Agreement. Under the Product Development and Commercialization Agreement, we
will conduct research and development with the objective of delivering to
GlaxoSmithKline a specified number of compounds that have met agreed-upon
criteria through Phase IIa human clinical testing. GSK has an exclusive option
to further develop, manufacture and commercialize each of these compounds on a
worldwide basis, subject to the payment of an option exercise fee as well as
milestone payments and royalties for further development of the compound
selected. We retain co-promotion rights in North America for these compounds.
Depending on the continued successful development of these compounds by GSK up
to and including commercialization and the achievement of certain net sales
levels, we could receive a payment upon option exercise, as well as clinical,
regulatory and commercialization milestone payments, which could collectively
exceed $105.0 million. We would also receive royalty payments on net sales of
the compounds commercialized by GSK, if any, at rates that are dependent upon
the number and timing of compounds delivered to GSK under the alliance.
Under the terms of the Product Development and Commercialization Agreement, GSK
has paid us $30.0 million as an upfront fee and $10.0 million in annual research
funding, and has agreed to pay a minimum of an additional $80.0 million in
research and development funding over the first six years of the collaboration,
subject to GSK's right to terminate the collaboration in the event of a material
breach by us of certain provisions of the agreement, our failure to meet certain
performance requirements after the third year of the collaboration or in the
event of a change of control of Exelixis by a major pharmaceutical company. On
or about the second anniversary of the collaboration, GSK has an option to
expand the collaboration. If this expansion occurs, we would expand our research
efforts to deliver additional compounds to GSK in the same fields. In exchange,
GSK's research payments and the loan facility would increase significantly and
GSK's option exercise fee for these additional compounds would increase
significantly over the originally contemplated levels without the expansion.
Under the terms of the Stock Purchase and Stock Issuance Agreement, GSK
purchased 2,000,000 shares of our common stock in a private placement at a
purchase price of $7.00 per share, for cash proceeds to us of approximately
$14.0 million. Under the agreement, we also have an option to sell, and GSK has
an obligation to purchase, additional shares of our common stock at a specified
time in the future and at a price that is at a premium to the then current
market price of our common stock. Under the Loan and Security Agreement, GSK
provided a loan facility of up to $85.0 million for use in our efforts under the
collaboration, and we borrowed $25.0 million under that agreement in December
2002. All loan amounts bear interest at a rate of 4% per annum and are secured
by the intellectual property, technology and equipment created or utilized
pursuant to the collaboration. Principal and accrued interest become due in
installments, beginning on or about the sixth anniversary of the collaboration,
unless the collaboration is earlier terminated by GSK. Repayment of all or any
of the amounts advanced to us under this agreement may, at our election, be in
the form of our common stock, subject to certain conditions.
Chemistry Collaborations
In 2001 and 2002, we entered into collaboration agreements with each of Elan
Pharmaceuticals, Inc., Scios Inc., Cytokinetics, Inc., Schering-Plough Research
Institute, Inc. and Merck & Co., Inc. to jointly design custom high-throughput
screening compound libraries that we will synthesize and qualify. Each
collaborator has agreed to pay us a per-compound fee for compounds delivered
meeting certain agreed-upon acceptance criteria. Each party also paid an upfront
technology access fee that is creditable towards the future purchase of
compounds. Revenue recognition of upfront fees has been deferred, and revenue
under these collaboration agreements will generally be recorded upon delivery
and acceptance of compounds. Each party retains rights to use the compounds
developed and delivered in its own proprietary drug discovery programs and in
its collaborative efforts with third parties.
Biotech Collaborations
We enjoy collaborations with leading biotechnology product developers and
solutions providers, among them Affymetrix, GeneMachines, AVI BioPharma, Inc.,
Silicon Genetics, Galapagos NV, Genomics Collaborative Inc., Accelrys, Inc.,
Akceli, Inc., Ardais Corp., Cogen BioCognetics, Inc., Impath Predictive
Oncology, Inc. and Virtual Arrays, Inc. These relationships enable us to
continuously update and enhance our technology base at a minimal cost, and at
the same time facilitate our research and development efforts.
Academic and Government Collaborations
In order to enhance our research and technology access, we have established key
relationships with government agencies and major academic centers in the U.S.
and Europe. Our government collaborators include a number of U.S. Department of
Agriculture campuses, and we maintain over ten academic collaborations with
investigators at such institutions as: Children's Hospital, Boston; Institute of
Molecular and Cellular Biology, CNRS, Strasbourg, France; Middle Tennessee
Research Institute; Stanford University; University of British Columbia;
University of California, San Francisco; and University of Georgia. The purpose
of these government and academic collaborations is to continuously improve our
core technology and to facilitate the establishment of new discovery programs.
We will continue to pursue strategic collaborations with government agencies and
academic centers. We will seek to retain significant rights to develop and
market products arising from our strategic alliances. In addition, we will
continue to invest our own funds in certain specific areas and product
opportunities with the aim of maintaining, enhancing and extending our core
technology, as well as increasing our opportunities to generate greater revenue
from such activities.
Acquisitions
We have used acquisitions to strategically position and advance our leadership
as a genomics-based drug discovery company. In May 2001, we acquired Artemis
Pharmaceuticals GmbH, a privately-held genetics and functional genomics company,
in a stock-for-stock transaction valued at approximately $28.2 million. Located
in Koln and Tubingen, Germany, Artemis is focused on the use of vertebrate model
genetic systems such as mice and zebrafish as tools for target identification
and validation.
In December 2001, we acquired Genomica Corporation, a publicly-traded
bioinformatics company, in a stock-for-stock transaction valued at $110.0
million. The transaction was structured as a tender offer for 100% of Genomica's
outstanding common stock and was followed by a merger of Genomica with a
wholly-owned subsidiary of Exelixis. The exchange offer was closed on December
28, 2001, and the subsequent merger completing the transaction occurred on
January 8, 2002. Genomica had cash and investments of approximately $109.6
million, which enhanced our ability to move our drug discovery programs forward.
Competition
We face intense competition in the different market segments we are pursuing.
There are many companies that have or are developing capabilities in the use of
model systems to identify new products. In addition, there are many companies
focused on the development of small molecule pharmaceuticals. Many genomics
companies are expanding their capabilities, using a variety of techniques, to
determine gene function and to develop products based on gene function. Our
potential competitors in the field are many in number and include major
pharmaceutical and agricultural companies, diagnostic companies, specialized
biotechnology companies, genomics companies and academic institutions and
universities.
Many of our potential competitors have significantly more financial, technical
and other resources than we do, which may allow them to have a competitive
advantage. We are aware that companies focused specifically on other model
systems such as mice and yeast have alternative methods for identifying product
targets. In addition, pharmaceutical, biotechnology and genomics companies and
academic institutions are conducting work in this field. In the future, we
expect the field to become more competitive with companies and academic
institutions seeking to develop competing technologies.
Any products that we may develop or discover through application of our
technologies will compete in highly competitive markets. Many of our potential
competitors in these markets have substantially greater financial, technical and
personnel resources than we do, and they may succeed in developing technologies
and products that may render our technologies and products and those of our
collaborators obsolete or noncompetitive. In addition, many of our competitors
have significantly greater experience than we do in their respective fields.
Research and Development Expenses
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs, supplies, licenses and
depreciation of facilities and laboratory equipment. Research and development
expenses were $112.0 million for the year ended December 31, 2002, compared to
$82.7 million for 2001 and $51.7 million for 2000.
Proprietary Rights
We seek patent protection in the United States and international markets for the
plant and animal genes and gene functions, proteins, antibodies, biotherapeutics
and small molecule pharmaceutical and agricultural products that we discover, as
well as genetic methods and technology improvements for discovering such genes,
functions, proteins, antibodies, biotherapeutics and small molecule
pharmaceutical and agricultural products. Our intellectual property strategy is
designed to provide us with freedom to operate and facilitate commercialization
of our current and future products. Our patent portfolio includes a total of 47
issued U.S. patents. Our p-element patent, U.S. patent no. 4,670,388,
exclusively licensed from Carnegie Institution of Washington, has the earliest
patent expiration date, which is June 2, 2004. We are the assignee or exclusive
licensee of four allowed and 209 pending U.S. patent applications and
corresponding international or foreign patent applications related to our
genetic and comparative genomic technologies, gene and protein targets and
specialized screens, and the application of these technologies to diverse
industries including agriculture, pharmaceuticals and diagnostics. One
additional U.S. patent has been issued, one U.S. patent application has been
allowed and 44 U.S. patent applications are pending as part of the Agrinomics
joint venture with Bayer CropScience. An additional 11 U.S. patent applications
are pending as part of the Genoptera joint venture with Bayer.
We also rely in part on trade secret protection of our intellectual property. We
try to protect our trade secrets by entering into confidentiality agreements
with third parties, employees and consultants. Our employees and consultants
also sign agreements requiring that they assign to us their interests in patents
and other intellectual property arising from their work for us. All employees
sign an agreement not to engage in any conflicting employment or activity during
their employment with us and not to disclose or misuse our confidential
information. However, it is possible that these agreements may be breached or
invalidated, and if so, there may not be an adequate corrective remedy
available. Accordingly, we cannot ensure that employees, consultants or third
parties will not breach the confidentiality provisions in our contracts or
infringe or misappropriate our patents, trade secrets and other proprietary
rights, or that measures we are taking to protect our proprietary rights will be
adequate.
In the future, third parties may file claims asserting that our technologies or
products infringe on their intellectual property. We cannot predict whether
third parties will assert such claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our business. If we
are forced to defend ourselves against such claims, whether they are with or
without merit and whether they are resolved in favor of, or against, our
licensors or us, we may face costly litigation and the diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technology or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business or financial condition.
Employees
As of December 31, 2002, we had 550 full-time employees worldwide, 220 of whom
hold Ph.D. and/or M.D. degrees and 476 of whom were engaged in full-time
research and development activities. In 2002, we added several senior executives
to our management team. We plan to expand our preclinical and clinical
development programs, as well as our corporate development programs, and hire
additional staff as corporate collaborations are established and we expand our
internal development efforts to include clinical programs. Our success will
depend upon our ability to attract and retain employees. We face competition in
this regard from other companies in the biotechnology, pharmaceutical and high
technology industries as well as research and academic institutions. None of our
employees are represented by a labor union, and we consider our employee
relations to be good.
Available Information
We were incorporated in Delaware in November 1994 as Exelixis Pharmaceuticals,
Inc., and we changed our name to Exelixis, Inc. in February 2000.
We maintain a site on the world wide web at www.exelixis.com; however,
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information found on our website is not incorporated by reference into this
report. We make available free of charge on or through our website our SEC
filings, including our annual report of Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
In 2003, we plan to adopt a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We intend to post the text
of our code of ethics on our website at www.exelixis.com in connection with
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"Investor" materials. In addition, we intend to promptly disclose (1) the
nature of any amendment to our code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions and (2) the nature of any
waiver, including an implicit waiver, from a provision of our code of ethics
that is granted to one of these specified officers, the name of such person who
is granted the waiver and the date of the waiver on our website in the future.
Risk Factors
EXELIXIS HAS A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES,
AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception, including a net loss
of approximately $86.1 million for the year ended December 31, 2002. As of that
date, we had an accumulated deficit of approximately $287.4 million. We expect
these losses to continue and anticipate negative operating cash flow for the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth, if any, in our license and contract revenues and on the level of
our expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect to spend
significant additional amounts to fund research and development in order to
enhance our core technologies and undertake product development. In 2001, we
acquired a rebeccamycin analogue that is in Phase II clinical development. We
anticipate initiating next development steps, if any, following discussions with
the FDA. Drug substance to be used in Company-sponsored clinical trials has been
manufactured in bulk supply by third-party suppliers. In addition, we are also
preparing to file our first IND for a proprietary compound. As a result, we
expect that our operating expenses will increase significantly in the near term,
and consequently, we will need to generate significant additional revenues to
achieve profitability. Even if we do increase our revenues and achieve
profitability, we may not be able to sustain or increase profitability.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US.
Our future capital requirements will be substantial and will depend on many
factors, including:
- payments received under collaborative agreements;
- the progress and scope of our collaborative and independent research
and development projects;
- our need to expand our product development efforts as well as develop
manufacturing and marketing capabilities to commercialize products;
- the filing, prosecution and enforcement of patent claims; and
- increased costs for clinical activities.
We anticipate that our current cash and cash equivalents, short-term investments
and funding to be received from collaborators will enable us to maintain our
currently planned operations for at least the next two years. Changes to our
current operating plan may require us to consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital when we need it, on favorable terms or at all. If our capital
resources are insufficient to meet future capital requirements, we will have to
raise additional funds. The sale of equity or convertible debt securities in the
future may be dilutive to our stockholders, and debt financing arrangements may
require us to pledge certain assets and enter into covenants that would restrict
our ability to incur further indebtedness. If we are unable to obtain adequate
funds on reasonable terms, we may be required to curtail operations
significantly or to obtain funds by entering into financing, supply or
collaboration agreements on unattractive terms.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH MAY DIVERT RESOURCES AND LIMIT
OUR ABILITY TO SUCCESSFULLY EXPAND OUR OPERATIONS.
We have experienced a period of rapid and substantial growth that has placed,
and our anticipated growth in the future will continue to place, a strain on our
research, administrative and operational infrastructure. As our operations
expand domestically and internationally, we will need to continue to manage
multiple locations and additional relationships with various collaborative
partners, suppliers and other third parties. Our ability to manage our
operations and growth effectively requires us to continue to improve our
operational, financial and management controls, reporting systems and
procedures. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner and
may discover deficiencies in existing systems and controls. In addition,
acquisitions involve the integration of different financial and management
reporting systems. We may not be able to successfully integrate the
administrative and operational infrastructure without significant additional
improvements and investments in management systems and procedures.
WE ARE DEPENDENT ON OUR COLLABORATIONS WITH MAJOR COMPANIES. IF WE ARE UNABLE TO
ACHIEVE MILESTONES, DEVELOP PRODUCTS OR RENEW OR ENTER INTO NEW COLLABORATIONS,
OUR REVENUES MAY DECREASE AND OUR ACTIVITIES MAY FAIL TO LEAD TO COMMERCIALIZED
PRODUCTS.
Substantially all of our revenues to date have been derived from collaborative
research and development agreements. Revenues from research and development
collaborations depend upon continuation of the collaborations, the achievement
of milestones and royalties derived from future products developed from our
research. If we are unable to successfully achieve milestones or our
collaborators fail to develop successful products, we will not earn the revenues
contemplated under such collaborative agreements. In addition, some of our
collaborations are exclusive and preclude us from entering into additional
collaborative arrangements with other parties in the area or field of
exclusivity.
We currently have collaborative research agreements with Bayer, Bristol-Myers
Squibb (two agreements), SmithKlineBeecham, Protein Design Labs, Dow
AgroSciences, Renessen and Bayer CropScience. Our current collaborative
agreement with Bayer is scheduled to expire in 2008, after which it will
automatically be extended for one-year terms unless terminated by either party
upon 12-months written notice. Our agreement permits Bayer to terminate our
collaborative activities prior to 2008 upon the occurrence of specified
conditions, such as the failure to agree on key strategic issues after a period
of years or the acquisition of Exelixis by certain specified third parties. Our
agreement with Bayer is subject to termination at an earlier date if two or more
of our Chief Executive Officer, Chief Scientific Officer, Agricultural
Biotechnology Program Leader and Chief Informatics Officer cease to have a
relationship with us within nine months of each other. Our MOA collaborative
agreement with Bristol-Myers Squibb expires in September 2004. Our cancer
collaborative agreement with Bristol-Myers Squibb expires in July 2004. Our
recent alliance with SmithKlineBeecham is scheduled to expire in October 2008,
but is subject to earlier termination at the discretion of SmithKlineBeecham
starting in 2005 if Exelixis fails to meet certain diligence obligations.
Research funding under our collaborative agreement with Protein Design Labs will
expire in June 2003. Similarly, funding under our arrangement with Dow
AgroSciences is scheduled to expire in July 2003, after which Dow AgroSciences
has the option to renew on an annual basis. Our collaborative research
arrangement with Bayer CropScience is scheduled to expire in September 2004. The
Bayer CropScience arrangement is conducted through a limited liability company,
Agrinomics, which is owned equally by Bayer CropScience and Exelixis. Bayer
CropScience may surrender its interest in Agrinomics and terminate the related
research collaboration prior to the scheduled expiration upon the payment of the
subsequent year's funding commitment. Agrinomics is party to a recent
collaborative agreement with Renessen, which expires in December 2005 but is
subject to earlier termination at the discretion of Renessen prior to October
2003.
If these existing agreements are not renewed or if we are unable to enter into
new collaborative agreements on commercially acceptable terms, our revenues and
product development efforts may be adversely affected. For example, our
agreement with Pharmacia terminated by mutual agreement in February 2002,
eliminated the opportunity for us to earn approximately $9.0 million in research
revenue in each of the next two years. Although we expect to enter into other
collaborations that may offset this loss of revenue, we may not be able to enter
into a new collaborative agreement on similar or superior financial terms than
those under the Pharmacia arrangement, and the timing of new collaborative
agreements may have a significant effect on our ability to continue to
successfully meet our corporate goals and milestones.
CONFLICTS WITH OUR COLLABORATORS COULD JEOPARDIZE THE OUTCOME OF OUR
COLLABORATIVE AGREEMENTS AND OUR ABILITY TO COMMERCIALIZE PRODUCTS.
We are conducting proprietary research programs in specific disease and
agricultural product areas that are not covered by our collaborative agreements.
Our pursuit of opportunities in agricultural and pharmaceutical markets could,
however, result in conflicts with our collaborators in the event that any of our
collaborators take the position that our internal activities overlap with those
areas that are exclusive to our collaborative agreements, and we should be
precluded from such internal activities. Moreover, disagreements with our
collaborators could develop over rights to our intellectual property. In
addition, our collaborative agreements may have provisions that give rise to
disputes regarding the rights and obligations of the parties, including the
rights of collaborators with respect to our internal programs and disease area
research. Any conflict with or among our collaborators could lead to the
termination of our collaborative agreements, delay collaborative activities,
reduce our ability to renew agreements or obtain future collaboration agreements
or result in litigation or arbitration and would negatively impact our
relationship with existing collaborators.
We have limited or no control over the resources that our collaborators may
choose to devote to our joint efforts. Our collaborators may breach or terminate
their agreements with us or fail to perform their obligations thereunder.
Further, our collaborators may elect not to develop products arising out of our
collaborative arrangements or may fail to devote sufficient resources to the
development, manufacture, marketing or sale of such products. Certain of our
collaborators could also become our competitors in the future. If our
collaborators develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain necessary regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of our products,
our product development efforts could be delayed and may fail to lead to
commercialized products.
OUR POTENTIAL THERAPEUTIC PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN
REGULATORY PROCESS THAT MAY NOT RESULT IN THE NECESSARY REGULATORY APPROVALS,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO COMMERCIALIZE PRODUCTS.
The U.S. Food and Drug Administration, or FDA, must approve any drug or biologic
product before it can be marketed in the U.S. Any products resulting from our
research and development efforts must also be approved by the regulatory
agencies of foreign governments before the product can be sold outside of the
U.S. Before a new drug application or biologics license application can be filed
with the FDA, the product candidate must undergo extensive clinical trials,
which can take many years and may require substantial expenditures. The
regulatory process also requires preclinical testing. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. In addition, delays or
rejections may be encountered based upon changes in regulatory policy for
product approval during the period of product development and regulatory agency
review. Completion of clinical trials may take several years or more, but the
length of time generally varies substantially according to the type, complexity,
novelty and intended use of a product candidate. We estimate that typical
clinical trials are completed over the following timelines:
CLINICAL PHASE ESTIMATED COMPLETION PERIOD
-------------- ---------------------------
Phase I 1 Year
Phase II 1-2 Years
Phase III 2-4 Years
However, the duration and the cost of clinical trials may vary significantly
over the life of a project as a result of differences arising during the
clinical trial protocol, including, among others, the following:
- the number of patients that ultimately participate in the trial;
- the duration of patient follow-up that seems appropriate in view of
the results;
- the number of clinical sites included in the trials; and
- the length of time required to enroll suitable patient subjects.
Any clinical trial may fail to produce results satisfactory to the FDA. The FDA
could determine that the design of a clinical trial is inadequate to produce
reliable results. Negative or inconclusive results or adverse medical events
during a clinical trial could cause a clinical trial to be repeated or
development of a product or clinical trial to be terminated. The clinical
development and regulatory approval process is expensive and time consuming. Any
failure to obtain regulatory approval could delay or prevent us from
commercializing products.
Our efforts to date have been primarily limited to identifying targets and
developing small molecule compounds against those targets. Significant research
and development efforts will be necessary before any of our products directed
against such targets can be commercialized. If regulatory approval is granted to
any of our products, the approval may impose limitations on the uses for which a
product may be marketed. Further, even if regulatory approval is obtained, a
marketed product and its manufacturer are subject to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions and sanctions with respect to the product, manufacturer
and relevant manufacturing facility, including withdrawal of the product from
the market.
CLINICAL TESTING OF OUR POTENTIAL PRODUCTS MAY FAIL TO DEMONSTRATE SAFETY AND
EFFICACY, WHICH COULD PREVENT OR SIGNIFICANTLY DELAY REGULATORY APPROVAL.
Clinical trials are inherently risky and may reveal that our potential products
are ineffective or have unacceptable toxicity or other side effects that may
significantly limit the possibility of regulatory approval of the potential
product. The regulatory review and approval process is extensive and uncertain
and typically takes many years to complete. The FDA requires submission of
extensive preclinical, clinical and manufacturing data for each indication for
which approval is sought in order to assess the safety and efficacy of the
potential product. In addition, the results of preliminary studies do not
necessarily predict clinical or commercial success, and larger later-stage
clinical trials may fail to confirm the results observed in the preliminary
studies. With respect to our own proprietary compounds in development, we have
established timelines for manufacturing and clinical development based on
existing knowledge of the compound and industry metrics. We have limited
experience in conducting clinical studies and may not be able to assure that any
specified timelines with respect to the initiation or completion of clinical
studies may be achieved.
In July 2001, we acquired a cancer compound, a rebeccamycin analogue, currently
in Phase II clinical studies. This compound was manufactured by Bristol-Myers
Squibb, and clinical trials to date have been conducted by the National Cancer
Institute, or NCI. We will have to conduct additional clinical testing in order
to meet FDA requirements for regulatory approval. We have no prior experience in
conducting clinical trials, and, in conjunction with the NCI, we expect to
undertake further clinical development of this compound under our own IND in
order to obtain regulatory approval. We may not be able to rapidly or
effectively assume responsibility for further development of this compound. We
do not know whether planned clinical trials will begin on time, will be
completed on schedule, or at all, will be sufficient for registration or will
result in approvable products. Our product development costs will increase if we
have delays in testing or approvals or if we need to perform more or larger
clinical trials than planned. If the delays are significant, our financial
results and the commercial prospects for our products will be harmed, and our
ability to become profitable will be delayed.
WE LACK THE CAPABILITY TO MANUFACTURE COMPOUNDS FOR CLINICAL TRIALS AND WILL
RELY ON THIRD PARTIES TO MANUFACTURE OUR POTENTIAL PRODUCTS, AND WE MAY BE
UNABLE TO OBTAIN REQUIRED MATERIAL IN A TIMELY MANNER OR AT A QUALITY LEVEL
REQUIRED TO RECEIVE REGULATORY APPROVAL.
We currently do not have manufacturing capabilities or experience necessary to
produce materials for clinical trials, including for our Phase II clinical
compound, a rebeccamycin analogue. We intend to rely on collaborators and
third-party contractors to produce materials necessary for preclinical and
clinical testing. We will rely on selected manufacturers to deliver materials on
a timely basis and to comply with applicable regulatory requirements, including
the FDA's current Good Manufacturing Practices, or GMP. These manufacturers may
not be able to produce material on a timely basis or manufacture material at the
quality level or in the quantity required to meet our development timelines and
applicable regulatory requirements. If we are unable to contract for production
of sufficient quantity and quality of materials on acceptable terms, our planned
clinical trials may be delayed. Delays in preclinical or clinical testing could
delay the filing of our INDs and the initiation of clinical trials that we have
currently planned. In addition, our outsourcing efforts with respect to
manufacturing clinical supplies will result in a dependence on our suppliers to
timely manufacture and deliver sufficient quantities of materials produced under
GMP conditions to enable us to conduct planned clinical trials, and if possible
to bring products to market in a timely manner.
WE HAVE NO EXPERIENCE IN DEVELOPING, MANUFACTURING AND MARKETING PRODUCTS AND
MAY BE UNABLE TO COMMERCIALIZE PROPRIETARY PRODUCTS.
Initially, we relied on our collaborators to develop and commercialize products
based on our research and development efforts. We have limited or no experience
in using the targets that we identify to develop our own proprietary products,
or developing small molecule compounds against those targets. Our recent efforts
in applying our drug development capabilities to our proprietary targets in
cancer are subject to significant risk and uncertainty, particularly with
respect to our ability to meet currently estimated timelines and goals for
completing preclinical development efforts and filing an IND for compounds
developed. In order for us to commercialize products, we would need to
significantly enhance our capabilities with respect to product development and
establish manufacturing and marketing capabilities, either directly or through
outsourcing or licensing arrangements. We may not be able to enter into such
outsourcing or licensing agreements on commercially reasonable terms, or at all.
SINCE OUR TECHNOLOGIES HAVE MANY POTENTIAL APPLICATIONS AND WE HAVE LIMITED
RESOURCES, OUR FOCUS ON A PARTICULAR AREA MAY RESULT IN OUR FAILURE TO
CAPITALIZE ON MORE PROFITABLE AREAS.
We have limited financial and managerial resources. This requires us to focus on
product candidates in specific industries and forego opportunities with regard
to other products and industries. For example, depending on our ability to
allocate resources, a decision to concentrate on a particular agricultural
program may mean that we will not have resources available to apply the same
technology to a pharmaceutical project. While our technologies may permit us to
work in both areas, resource commitments may require trade-offs resulting in
delays in the development of certain programs or research areas, which may place
us at a competitive disadvantage. Our decisions impacting resource allocation
may not lead to the development of viable commercial products and may divert
resources from more profitable market opportunities.
OUR COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OUR PRODUCTS AND
TECHNOLOGIES OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by rapid
technological change. In particular, the area of gene research is a rapidly
evolving field. We face, and will continue to face, intense competition from
large biotechnology and pharmaceutical companies, as well as academic research
institutions, clinical reference laboratories and government agencies that are
pursuing research activities similar to ours. Some of our competitors have
entered into collaborations with leading companies within our target markets,
including some of our existing collaborators. Our future success will depend on
our ability to maintain a competitive position with respect to technological
advances.
Any products that are developed through our technologies will compete in highly
competitive markets. Further, our competitors may be more effective at using
their technologies to develop commercial products. Many of the organizations
competing with us have greater capital resources, larger research and
development staffs and facilities, more experience in obtaining regulatory
approvals and more extensive product manufacturing and marketing capabilities.
As a result, our competitors may be able to more easily develop technologies and
products that would render our technologies and products, and those of our
collaborators, obsolete and noncompetitive.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our intellectual property rights from
unauthorized use by third parties only to the extent that our technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the U.S., and many companies have
encountered significant problems in protecting and defending such rights in
foreign jurisdictions. We will continue to apply for patents covering our
technologies and products as and when we deem appropriate. However, these
applications may be challenged or may fail to result in issued patents. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patents. In addition, our patents may be
challenged, invalidated or fail to provide us with any competitive advantages.
We rely on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information and trade secrets, but these measures may not provide adequate
protection. While we seek to protect our proprietary information by entering
into confidentiality agreements with employees, collaborators and consultants,
we cannot assure you that our proprietary information will not be disclosed, or
that we can meaningfully protect our trade secrets. In addition, our competitors
may independently develop substantially equivalent proprietary information or
may otherwise gain access to our trade secrets.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes
and gene fragments, techniques and methodologies relating to model systems and
products and technologies that we have developed or intend to develop. If
patents covering technologies required by our operations are issued to others,
we may have to rely on licenses from third parties, which may not be available
on commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology without
authorization. In addition, third parties may obtain patents that relate to our
technologies and claim that use of such technologies infringes these patents.
Regardless of their merit, such claims could require us to incur substantial
costs, including the diversion of management and technical personnel, in
defending ourselves against any such claims or enforcing our patents. In the
event that a successful claim of infringement is brought against us, we may be
required to pay damages and obtain one or more licenses from third parties. We
may not be able to obtain these licenses at a reasonable cost, or at all.
Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize products.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR OUR ABILITY TO EXPAND OUR OPERATIONS.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives and the continuation of existing collaborations.
In addition, recruiting and retaining qualified scientific and clinical
personnel to perform future research and development work will be critical to
our success. We do not currently have sufficient executive management and
technical personnel to fully execute our business plan. There is currently a
shortage of skilled executives and employees with technical expertise, and this
shortage is likely to continue. As a result, competition for skilled personnel
is intense, and turnover rates are high. Although we believe we will be
successful in attracting and retaining qualified personnel, competition for
experienced scientists from numerous companies and academic and other research
institutions may limit our ability to do so.
Our business operations will require additional expertise in specific industries
and areas applicable to products identified and developed through our
technologies. These activities will require the addition of new personnel,
including management and technical personnel and the development of additional
expertise by existing employees. The inability to attract such personnel or to
develop this expertise could prevent us from expanding our operations in a
timely manner, or at all.
OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND
CHANGE.
We work with scientific and clinical advisors and collaborators at academic and
other institutions that assist us in our research and development efforts. These
scientists and advisors are not our employees and may have other commitments
that would limit their availability to us. Although our advisors and
collaborators generally agree not to do competing work, if a conflict of
interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our advisors and collaborators
sign agreements not to disclose our confidential information, it is possible
that valuable proprietary knowledge may become publicly known through them.
SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED
PRODUCTS, WHICH COULD REDUCE DEMAND FOR OUR PRODUCTS.
Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. For
example, research efforts focusing on plant traits may involve either selective
breeding or modification of existing genes in the plant under study. Public
attitudes may be influenced by claims that genetically engineered products are
unsafe for consumption or pose a danger to the environment. Such claims may
prevent our genetically engineered products from gaining public acceptance. The
commercial success of our future products will depend, in part, on public
acceptance of the use of genetically engineered products, including drugs and
plant and animal products.
The subject of genetically modified organisms has received negative publicity,
which has aroused public debate. For example, certain countries in Europe are
considering regulations that may ban products or require express labeling of
products that contain genetic modifications or are "genetically modified."
Adverse publicity has resulted in greater regulation internationally and trade
restrictions on imports of genetically altered products. If similar action is
taken in the U.S., genetic research and genetically engineered products could be
subject to greater domestic regulation, including stricter labeling
requirements. To date, our business has not been hampered by these activities.
However, such publicity in the future may prevent any products resulting from
our research from gaining market acceptance and reduce demand for our products.
LAWS AND REGULATIONS MAY REDUCE OUR ABILITY TO SELL GENETICALLY ENGINEERED
PRODUCTS THAT WE OR OUR COLLABORATORS DEVELOP IN THE FUTURE.
We or our collaborators may develop genetically engineered agricultural and
animal products. The field-testing, production and marketing of genetically
engineered products are subject to regulation by federal, state, local and
foreign governments. Regulatory agencies administering existing or future
regulations or legislation may prevent us from producing and marketing
genetically engineered products in a timely manner or under technically or
commercially feasible conditions. In addition, regulatory action or private
litigation could result in expenses, delays or other impediments to our product
development programs and the commercialization of products. The FDA has released
a policy statement stating that it will apply the same regulatory standards to
foods developed through genetic engineering as it applies to foods developed
through traditional plant breeding. Genetically engineered food products will be
subject to premarket review, however, if these products raise safety questions
or are deemed to be food additives. Our products may be subject to lengthy FDA
reviews and unfavorable FDA determinations if they raise questions regarding
safety or our products are deemed to be food additives.
The FDA has also announced that it will not require genetically engineered
agricultural products to be labeled as such, provided that these products are as
safe and have the same nutritional characteristics as conventionally developed
products. The FDA may reconsider or change its policies, and local or state
authorities may enact labeling requirements, either of which could have a
material adverse effect on our ability or the ability of our collaborators to
develop and market products resulting from our efforts.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
In addition, our collaborators may use hazardous materials in connection with
our collaborative efforts. To our knowledge, their work is performed in
accordance with applicable biosafety regulations. In the event of a lawsuit or
investigation, however, we could be held responsible for any injury caused to
persons or property by exposure to, or release of, these hazardous materials
used by these parties. Further, we may be required to indemnify our
collaborators against all damages and other liabilities arising out of our
development activities or products produced in connection with these
collaborations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are likely to
fluctuate in the future. A number of factors, many of which we cannot control,
could subject our operating results and stock price to volatility, including:
- recognition of upfront licensing or other fees;
- payments of non-refundable upfront or licensing fees to third parties;
- acceptance of our technologies and platforms;
- the success rate of our discovery efforts leading to milestone
payments and royalties;
- the introduction of new technologies or products by our competitors;
- the timing and willingness of collaborators to commercialize our
products;
- our ability to enter into new collaborative relationships;
- the termination or non-renewal of existing collaborations;
- the timing and amount of expenses incurred for clinical development
and manufacturing of our products;
- the impairment of acquired goodwill and other assets; and
- general and industry-specific economic conditions that may affect our
collaborators' research and development expenditures
A large portion of our expenses, including expenses for facilities, equipment
and personnel, are relatively fixed in the short term. In addition, we expect
operating expenses to increase significantly during the next year. Accordingly,
if our revenues decline or do not grow as anticipated due to the expiration of
existing contracts or our failure to obtain new contracts, our inability to meet
milestones or other factors, we may not be able to correspondingly reduce our
operating expenses. Failure to achieve anticipated levels of revenues could
therefore significantly harm our operating results for a particular fiscal
period.
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. As a result, in some future quarters, our
operating results may not meet the expectations of stock market analysts and
investors, which could result in a decline in the price of our stock.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
We believe the trading price of our common stock will remain highly volatile and
may fluctuate substantially due to factors such as the following:
- the announcement of new products or services by us or our competitors;
- the failure of new products in clinical trials by us or our
competitors;
- quarterly variations in our or our competitors' results of operations;
- failure to achieve operating results projected by securities analysts;
- changes in earnings estimates or recommendations by securities
analysts;
- developments in the biotechnology industry;
- acquisitions of other companies or technologies; and
- general market conditions and other factors, including factors
unrelated to our operating performance or the operating performance of
our competitors.
These factors and fluctuations, as well as general economic, political and
market conditions, may materially adversely affect the market price of our
common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in substantial costs and
divert management's attention and resources, which could have a material and
adverse effect on our business.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS.
We have made, and may in the future make, acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including, but not limited
to:
- difficulties and increased costs in connection with integration of the
personnel, operations, technologies and products of acquired
companies;
- diversion of management's attention from other operational matters;
- the potential loss of key employees of acquired companies;
- the potential loss of key collaborators of the acquired companies;
- lack of synergy, or the inability to realize expected synergies,
resulting from the acquisition; and
- acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of the
acquired company.
Mergers and acquisitions are inherently risky, and the inability to effectively
manage these risks could materially and adversely affect our business, financial
condition and results of operations.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE
SUBSTANTIAL LIABILITIES THAT EXCEED OUR RESOURCES.
We may be held liable if any product our collaborators or we develop causes
injury or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Although we intend to obtain general liability and product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or to otherwise protect ourselves against
potential product liability claims could prevent or inhibit the
commercialization of products developed by our collaborators or us.
OUR HEADQUARTERS FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND
THE OCCURRENCE OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE
DAMAGE TO OUR FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR
CURTAIL OPERATIONS.
Given our headquarters location in South San Francisco, our facilities are
vulnerable to damage from earthquakes. We are also vulnerable worldwide to
damage from other types of disasters, including fire, floods, power loss,
communications failures and similar events. If any disaster were to occur, our
ability to operate our business at our facilities would be seriously, or
potentially completely, impaired. In addition, the unique nature of our research
activities could cause significant delays in our programs and make it difficult
for us to recover from a disaster. The insurance we maintain may not be adequate
to cover our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deemed appropriate. For
example, following an acquisition, a significant number of shares of our common
stock held by new stockholders may become freely tradable. Similarly, shares of
common stock held by existing stockholders prior to our initial public offering
became freely tradable in 2000, subject in some instances to the volume and
other limitations of Rule 144 of the Securities Act. Sales of these shares and
other shares of common stock held by existing stockholders could cause the
market price of our common stock to decline.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND THEIR INTERESTS
COULD CONFLICT WITH THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Due to their combined stock holdings, our officers, directors and principal
stockholders (stockholders holding more than 5% of our common stock) acting
together, may be able to exert significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control of our company, even when a change may
be in the best interests of our stockholders. In addition, the interests of
these stockholders may not always coincide with our interests as a company or
the interests of other stockholders. Accordingly, these stockholders could cause
us to enter into transactions or agreements that you would not approve of.
ITEM 2. PROPERTIES
We currently have commitments to lease an aggregate of 213,967 square feet of
office and laboratory facilities in four buildings in South San Francisco,
California. The first building lease, for 33,000 square feet, expires on July
31, 2005. The second building lease covers three buildings, one for 70,000
square feet, another for 50,000 square feet and the third for 60,967 square
feet. The portion of the lease for the third building is expected to begin in
March 2003. The lease for these three buildings expires in 2017, not including
two five-year options to extend the term prior to expiration. During 2002, we
also subleased two additional facilities totaling 12,000 square feet in South
San Francisco for continued expansion. Leases for these two facilities are set
to expire in 2003.
We lease approximately 17,000 square feet of office and laboratory space in
Portland, Oregon and own a 15-acre farm in Woodburn, Oregon. Greenhouse capacity
at the farm currently totals 50,000 square feet. The lease in Portland expires
on February 28, 2006, and there is an option to renew for an additional five
years.
We lease approximately 2,200 square feet of office and laboratory space in Koln,
Germany and an additional 1,300 square feet of laboratory space in Tubingen,
Germany. These leases expire at dates ranging from March 31, 2004 to October
31, 2007. There is an option to renew all leases for a period ranging from
three to five years.
We lease approximately 41,700 square feet of office and research and development
space in Boulder, Colorado, of which 24,000 is sublet for the remaining term of
the lease. This lease expires in July 2005, and there are two options to renew
for additional five-year terms. We are currently attempting to sublease these
facilities.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Nasdaq National Market under the symbol
"EXEL" since April 11, 2000. The following table sets forth, for the periods
indicated, the high and low bid quotations for our common stock as reported by
the Nasdaq National Market:
Common Stock Price
----------------------
High Low
--------- ---------
Quarter ended December 31, 2002 $9.41 $2.95
Quarter ended September 30, 2002 $7.45 $3.50
Quarter ended June 30, 2002 $13.56 $5.63
Quarter ended March 31, 2002 $16.72 $10.88
Quarter ended December 31, 2001 $17.47 $10.60
Quarter ended September 30, 2001 $19.28 $9.61
Quarter ended June 30, 2001 $19.00 $7.25
Quarter ended March 31, 2001 $16.25 $6.00
On March 5, 2003, the last reported sale price on the Nasdaq National Market for
our common stock was $5.84 per share.
Holders
As of March 5, 2003, there were approximately 1,125 stockholders of record of
Exelixis common stock.
Dividends
Since inception, we have not paid dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business a