SEC Filings

10-Q
EXELIXIS, INC. filed this Form 10-Q on 11/03/2016
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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: 000-30235
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)
Delaware
04-3257395
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
210 East Grand Ave.
South San Francisco, CA 94080
(650) 837-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 26, 2016, there were 286,455,917 shares of the registrant’s common stock outstanding.



EXELIXIS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXELIXIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30,
2016
 
December 31, 2015*
 
(unaudited)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
111,219

 
$
141,634

Short-term investments
208,462

 
25,426

Trade and other receivables
91,207

 
5,183

Inventory
3,292


2,616

Prepaid expenses and other current assets
7,148

 
3,806

Total current assets
421,328

 
178,665

Long-term investments
55,817

 
83,600

Long-term restricted cash and investments
4,150

 
2,650

Property and equipment, net
1,737

 
1,434

Goodwill
63,684

 
63,684

Other long-term assets
1,774

 
2,309

Total assets
$
548,490

 
$
332,342

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,965

 
$
6,401

Accrued collaboration liability
18,710

 
10,938

Accrued compensation and benefits
15,986

 
3,629

Accrued clinical trial liabilities
14,887

 
18,071

Current portion of convertible notes
29,365

 

Current portion of term loan payable
80,000

 

Current portion of deferred revenue
18,939

 

Other accrued liabilities
19,791

 
13,212

Total current liabilities
201,643

 
52,251

Long-term portion of convertible notes
81,493


337,937

Long-term portion of term loan payable


80,000

Long-term portion of deferred revenue
232,573

 

Other long-term liabilities
759

 
2,960

Total liabilities
516,468

 
473,148

Commitments

 

Stockholders’ equity (deficit):
 
 
 
Preferred stock

 

Common stock, $0.001 par value; 400,000,000 shares authorized; issued and outstanding:
286,123,166 and 227,960,943 shares at September 30, 2016 and December 31, 2015,
respectively
286

 
228

Additional paid-in capital
2,050,086

 
1,772,123

Accumulated other comprehensive loss
(80
)
 
(232
)
Accumulated deficit
(2,018,270
)
 
(1,912,925
)
Total stockholders’ equity (deficit)
32,022

 
(140,806
)
Total liabilities and stockholders’ equity (deficit)
$
548,490

 
$
332,342

*
The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements as of that date.
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Net product revenues
$
42,742

 
$
6,854

 
$
83,459

 
$
24,234

Royalty, license and contract revenues
19,452

 
3,000

 
30,414

 
3,000

Total revenues
62,194

 
9,854

 
113,873

 
27,234

Operating expenses:
 
 
 
 
 
 
 
Cost of goods sold
2,455

 
1,420

 
4,700

 
2,872

Research and development
20,256

 
26,091

 
72,166

 
72,879

Selling, general and administrative
32,463

 
17,842

 
103,143

 
40,162

Restructuring (recovery) charge
(244
)
 
282

 
871

 
1,142

Total operating expenses
54,930

 
45,635

 
180,880

 
117,055

Income (loss) from operations
7,264

 
(35,781
)
 
(67,007
)
 
(89,821
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest income and other, net
3,059

 
276

 
4,010

 
146

Interest expense
(7,834
)
 
(10,037
)
 
(28,575
)
 
(30,501
)
Loss on extinguishment of debt
(13,773
)
 

 
(13,773
)
 

Total other income (expense), net
(18,548
)
 
(9,761
)
 
(38,338
)
 
(30,355
)
Net loss
$
(11,284
)
 
$
(45,542
)
 
$
(105,345
)
 
$
(120,176
)
Net loss per share, basic and diluted
$
(0.04
)
 
$
(0.21
)
 
$
(0.44
)
 
$
(0.59
)
Shares used in computing basic and diluted net loss per share
256,319

 
217,587

 
238,024

 
203,153

The accompanying notes are an integral part of these condensed consolidated financial statements.


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(11,284
)
 
$
(45,542
)
 
$
(105,345
)
 
$
(120,176
)
Other comprehensive income (loss) (1)
(209
)
 
133

 
152

 
80

Comprehensive loss
$
(11,493
)
 
$
(45,409
)
 
$
(105,193
)
 
$
(120,096
)
____________________
(1)
Other comprehensive income (loss) consisted solely of unrealized gains or losses, net on available for sale securities arising during the periods presented. There were no reclassification adjustments to net loss resulting from realized gains or losses on the sale of securities and there was no income tax expense related to other comprehensive income during those periods.
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(105,345
)
 
$
(120,176
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
754

 
1,063

Stock-based compensation expense
18,346

 
15,420

Accretion of debt discount and debt issuance costs
8,295

 
14,274

Accrual of interest paid in kind
5,939

 
1,890

Gain on sale of equity investment
(2,494
)
 
(95
)
Loss on extinguishment of debt
13,773

 

Change in the fair value of warrants

 
549

Other
(1,381
)
 
1,338

Changes in assets and liabilities:
 
 
 
Trade and other receivables
(85,923
)
 
1,034

Inventory
(676
)
 
259

Prepaid expenses and other current assets
(3,342
)
 
(1,940
)
Other long term assets
535

 
1,832

Accounts payable, accrued compensation and benefits, and other accrued liabilities
18,816

 
(14,293
)
Accrued collaboration liability
7,772

 
8,400

Clinical trial liabilities
(3,184
)
 
(11,757
)
Deferred revenue
251,512

 
(2,583
)
Other long-term liabilities
(815
)
 
(1,367
)
Net cash provided by (used in) operating activities
122,582

 
(106,152
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(1,116
)
 
(114
)
Proceeds from sale of property and equipment
92

 
1,300

Proceeds from sale of equity investments
2,494

 
95

Proceeds from maturities of restricted cash and investments
2,650

 
16,754

Purchase of restricted cash and investments
(4,150
)
 
(2,616
)
Proceeds from sale of investments
2,266

 

Proceeds from maturities of investments
100,635

 
130,341

Purchases of investments
(258,509
)
 
(119,692
)
Net cash (used in) provided by investing activities
(155,638
)
 
26,068

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net

 
145,651

Proceeds from exercise of stock options
9,296

 
3,787

Proceeds from employee stock purchase plan
479

 
274

Principal payments on debt

 
(4,381
)
Payments on conversion of convertible notes
(7,134
)
 

Net cash provided by financing activities
2,641

 
145,331

Net (decrease) increase in cash and cash equivalents
(30,415
)
 
65,247

Cash and cash equivalents at beginning of period
141,634

 
80,395

Cash and cash equivalents at end of period
$
111,219

 
$
145,642

Supplemental cash flow disclosure - non-cash financing activity:
 
 
 
Issuance of common stock in settlement of convertible notes
$
285,308

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


EXELIXIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Exelixis, Inc. (“Exelixis,” “we,” “our” or “us”) is a biopharmaceutical company committed to the discovery, development and commercialization of new medicines that will improve care and outcomes for people with cancer. Since its founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the commercial marketplace. This portfolio includes two products derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, and VEGF receptors. They are CABOMETYX™ tablets for the treatment of advanced kidney cancer and COMETRIQ® capsules for the treatment of certain forms of thyroid cancer, each approved both in the United States and European Union. The third product is COTELLIC®, a product derived from cobimetinib, a selective inhibitor of MEK, marketed under a collaboration with Roche and Genentech (a member of the Roche Group) that has been approved in combination with ZELBORAF® (vemurafenib) to treat advanced melanoma in several major territories, including the United States and European Union.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the U.S. dollar. All intercompany balances and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included.
We adopted a 52- or 53-week fiscal year that generally ends on the Friday closest to December 31st. Fiscal year 2016 will end on December 30, 2016, and fiscal year 2015, ended on January 1, 2016. For convenience, references in this report as of and for the fiscal periods ended September 30, 2016, and October 2, 2015, and as of and for the fiscal years ended December 30, 2016 and January 1, 2016, are indicated as being as of and for the periods ended September 30, 2016, September 30, 2015, and the years ended December 31, 2016, and December 31, 2015, respectively.
Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or for any future period. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the SEC on February 29, 2016.
Correction of an Immaterial Error
During the third quarter of 2016, we identified errors in the Consolidated Balance Sheets and Consolidated Statements of Operations, Comprehensive Loss and Cash Flows for 2015, 2014, 2013, and 2012, and in the unaudited interim Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations, Comprehensive Loss and Cash Flows for all prior interim fiscal periods from September 30, 2012 through June 30, 2016. Specifically, in 2012 we incorrectly calculated 1) the allocation between Additional paid-in capital and Convertible notes of the $287.5 million aggregate principal amount from our 4.25% Convertible Subordinated Notes due 2019 (“2019 Notes”); and 2) the amortization of the debt discount associated with the 2019 Notes during 2012 and all subsequent periods.
Having evaluated the materiality of these errors from a quantitative and qualitative perspective, management has concluded that although the accumulation of these errors was significant to the three and nine months ended September 30, 2016, the correction of these errors would not be material to any individual prior period, and did not have an effect on the trend of financial results, taking into account the requirements of the SEC Staff Accounting Bulletin No. 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. Because management has concluded that these errors are not material, we will correct

6


them prospectively when the consolidated balance sheets, statements of operations, comprehensive loss and cash flows for such periods are included in future filings.
Following are the amounts (in thousands, except per share amounts) that should have been reported for the affected line items of the statements of operations, statements of comprehensive loss and statements of cash flows:
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2015
 
Year ended December 31,
 
 
 
2015
 
2014
 
2013
 
2012
Statements of Operations:
Interest expense, overstated by $2,022, $5,920, $7,993, $7,245, $6,568, $2,310 for the three and nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
$
(10,037
)
 
$
(30,501
)
 
$
(40,680
)
 
$
(41,362
)
 
$
(38,779
)
 
$
(24,778
)
Total other income (expense), net, overstated by $2,022, $5,920, $7,993, $7,245, $6,568, $2,310 for the three and nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
$
(9,761
)
 
$
(30,355
)
 
$
(40,268
)
 
$
(37,021
)
 
$
(37,556
)
 
$
(22,792
)
Net loss, overstated by $2,022, $5,920, $7,993, $7,245, $6,568, $2,310 for the three and nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
$
(45,542
)
 
$
(120,176
)
 
$
(161,744
)
 
$
(261,297
)
 
$
(238,192
)
 
$
(145,335
)
Net loss per share, basic and diluted, overstated by $0.01, $0.03, $0.04, $0.04, $0.04, $0.01 for the three and nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
$
(0.21
)
 
$
(0.59
)
 
$
(0.77
)
 
$
(1.34
)
 
$
(1.29
)
 
$
(0.91
)
Statements of Comprehensive Loss:
Comprehensive loss, overstated by $2,022, $5,920, $7,993, $7,245, $6,568, $2,310 for the three and nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
$
(45,409
)
 
$
(120,096
)
 
$
(161,855
)
 
$
(261,564
)
 
$
(237,954
)
 
$
(145,289
)
Statements of Cash Flows(1):
Net loss, overstated by $5,920, $7,993, $7,245, $6,568, $2,310 for the nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
Not reported
 
$
(120,176
)
 
$
(161,744
)
 
$
(261,297
)
 
$
(238,192
)
 
$
(145,335
)
Accretion of debt discount and debt issuance costs, overstated by $5,920, $7,993, $7,245, $6,568, $2,310 for the nine months ended September 30, 2015 and the years ended December 31, 2015, 2014, 2013 and 2012, respectively
Not reported
 
$
14,274

 
$
17,041

 
$
22,289

 
$
19,722

 
$
12,442

(1)
The error did not impact our net cash provided by or used in operating activities, financing activities or investing activities for any of the periods presented.


7


Following are the amounts (in thousands) that should have been reported for the affected line items of the balance sheets and statements of stockholders’ (deficit) equity:
 
December 31,
 
2015
 
2014
 
2013
 
2012
Balance Sheets:
Long-term portion of convertible notes, understated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively
$
337,937

 
$
223,629

 
$
301,550

 
$
291,828

Liabilities, understated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively
$
473,148

 
$
482,592

 
$
483,452

 
$
476,015

Additional paid-in capital, overstated by $60,618 as of all dates presented
$
1,772,123

 
$
1,591,782

 
$
1,504,052

 
$
1,489,727

Accumulated deficit, overstated by $24,116, $16,124, $8,879, $2,310 as of December 31, 2015, 2014, 2013 and 2012, respectively
$
(1,912,925
)
 
$
(1,751,180
)
 
$
(1,489,883
)
 
$
(1,251,692
)
Stockholders’ (deficit) equity, misstated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively
$
(140,806
)
 
$
(159,323
)
 
$
14,499

 
$
238,127

Statements of Stockholders’ (Deficit) Equity:
Net loss, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively
$
(161,744
)
 
$
(261,297
)
 
$
(238,192
)
 
$
(145,335
)
Additional paid-in capital, overstated by $60,618 as of all dates presented
$
1,772,123

 
$
1,591,782

 
$
1,504,052

 
$
1,489,727

Accumulated deficit, overstated by $24,116, $16,124, $8,879, $2,310 as of December 31, 2015, 2014, 2013 and 2012, respectively
$
(1,912,925
)
 
$
(1,751,180
)
 
$
(1,489,883
)
 
$
(1,251,692
)
Stockholders’ (deficit) equity, misstated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively
$
(140,806
)
 
$
(159,323
)
 
$
14,499

 
$
238,127

These errors did not affect any other caption or total in our unaudited condensed or annual consolidated financial statements.
Segment Information
We operate as a single reportable segment.
Use of Estimates
The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the United States that requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, including for deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances) and the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations, recoverability of inventory, certain accrued liabilities including clinical trial and collaboration liability accruals, the valuation of the debt and equity components of our convertible debt and share-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Limited Sources of Revenues and the Need to Raise Additional Capital
We have incurred net losses since inception through September 30, 2016, with the exception of the 2011 fiscal year. For the nine months ended September 30, 2016, we incurred a net loss of $105.3 million and as of September 30, 2016, we had an accumulated deficit of $2.0 billion. These losses have had an adverse effect on our stockholders’ equity and working

8


capital. Because of the numerous risks and uncertainties associated with developing drugs, we are unable to predict the extent of any future losses or when we will become profitable. Excluding fiscal 2011, our research and development expenditures and selling, general and administrative expenses have exceeded our revenues for each fiscal year, and we expect to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we are evaluating the expansion of our pipeline through drug discovery and corporate development activities. As a result, we expect to continue to incur substantial operating expenses and, consequently, we will need to generate significant additional revenues to achieve future profitability.
Other than sales of CABOMETYX and COMETRIQ, which have totaled $157.7 million in net product revenues since the first commercial launch in January 2013, we have derived substantially all of our revenues since inception from collaborative research and development agreements, which depend on royalties, license fees, the achievement of milestones, and research funding we earn from any products developed from the collaborative research.
The amount of our net losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the United States; achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ under our collaboration with Ipsen Pharma SAS (“Ipsen”); our share of the net profits and losses for the commercialization of COTELLIC in the U.S. under our collaboration with Genentech (a member of the Roche group); the amount of royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and, the level of our expenses, including commercialization activities for cabozantinib and any pipeline expansion efforts.
As of September 30, 2016, we had $379.6 million in cash and investments, which included $293.8 million available for operations, $81.6 million of compensating balance investments that we are required to maintain on deposit with Silicon Valley Bank, and $4.2 million of long-term restricted investments. We anticipate that our current cash and cash equivalents, and short-term investments available for operations, and product revenues, will enable us to maintain our operations for a period of at least 12 months following the filing date of this report. Our capital requirements will depend on many factors, and we may need to use available capital resources and raise additional capital significantly earlier than we currently anticipate.
Revenue Recognition
We recognize revenue from product sales and from license fees, milestones, contingent payments and royalties earned on research, collaboration and license arrangements.
See “Note 1 - Organization and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a description of our revenue recognition policies for product sales discounts and allowances, license and contract revenues under our collaboration agreement with Genentech and our Patient Assistance Program.
Net Product Revenues
We recognize revenue when it is both realized or realizable and earned, meaning persuasive evidence of an arrangement exists, delivery has occurred, title has transferred, the price is fixed or determinable, there are no remaining customer acceptance requirements, and collectability of the resulting receivable is reasonably assured. For product sales in the United States, this generally occurs upon delivery of the product to a specialty pharmacy or distributor. For product sales to our distribution partner, Swedish Orphan Biovitrum (“Sobi”), this generally occurs when Sobi has accepted the product. For product sales to our collaboration partner Ipsen, this generally occurs upon delivery.
In the United States, we sell our products, CABOMETYX and COMETRIQ, to specialty pharmacies and distributors that benefit from customer incentives and have a right of return under certain circumstances. Prior to 2015, COMETRIQ had limited sales history and we could not reliably estimate expected future returns, discounts and rebates of the product at the time the product was sold to a single specialty pharmacy, therefore we recognized revenue when the specialty pharmacy provided the product to a patient based on the fulfillment of a prescription. This is frequently referred to as the “sell-through” revenue recognition model. In January 2015, we established that we had sufficient historical experience and data to reasonably estimate expected future returns of COMETRIQ and the discounts and rebates due to payors at the time of shipment to the specialty pharmacy. Accordingly, beginning in January 2015 we began to recognize revenue upon delivery to the specialty pharmacy. This approach is frequently referred to as the “sell-in” revenue recognition model. In connection with the change in the timing of recognition of U.S. COMETRIQ sales, we recorded a one-time adjustment to recognize revenue that had previously been deferred under the “sell-through” revenue recognition model, resulting in the additional recognition of gross product revenues of $2.6 million for the nine months ended September 30, 2015; there were no such additional amounts recorded during the comparable period in 2016.

9


In determining discounts and allowances for the initial launch and sale of CABOMETYX, in addition to using payer data received from the specialty pharmacies and distributors that sell CABOMETYX and historical data for COMETRIQ, we also utilized claims data from third party sources for competitor products for the treatment of advanced renal cell carcinoma (“RCC”). Based in part on the availability of this third party data, we made the determination that we had sufficient experience and data to reasonably estimate expected future returns and the discounts and allowances due to payers at the time of shipment to the specialty pharmacy or distributor, and therefore record revenue for the product using the “sell-in” revenue recognition model. Net product revenues during the nine months ended September 30, 2016 were impacted by the build of channel inventory related to the initial launch period for CABOMETYX.
We also utilize the “sell-in” revenue recognition model for product sales to Sobi for all periods presented. Once Sobi has accepted the product, the product is generally no longer subject to return; therefore, we record revenue at the time Sobi has accepted the product. As described further in “Note 2 - Research and Collaboration Agreements”, under the terms of our collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib, we provided Sobi with a notice of termination of our commercialization agreement for COMETRIQ which will become effective November 1, 2016. We expect to repurchase the remaining product on hand from Sobi following the termination. As of September 30, 2016, we recorded allowances for expected future returns totaling $0.4 million; there were no such allowances recorded as of December 31, 2015 or September 30, 2015.
For product sales to Ipsen, which began during the three months ended September 30, 2016, we utilize the “sell-in” revenue recognition model. Once title has transferred to Ipsen, the product is generally no longer subject to return; therefore, we record revenue at the time product is delivered.
Royalty, License and Contract Revenues
We enter into corporate collaboration and license agreements under which we may obtain upfront license fees, research funding, and contingent, milestone and royalty payments. These arrangements have multiple elements and our deliverables may include intellectual property rights, distribution rights, delivery of manufactured product, and participation on joint steering, commercial and development committees. In order to account for these arrangements, we identify the deliverables and evaluate whether the delivered elements have value to our collaboration partner on a stand-alone basis and represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver future goods or services, a right or license to use an asset, or another performance obligation. If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting. For a combined unit of accounting, non-refundable upfront fees are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period of continued involvement. Amounts received in advance of performance are recorded as deferred revenue. Upfront fees are classified as license revenues in our consolidated statements of operations.
We consider sales-based contingent payments to be royalty revenue which is generally recognized at the date the contingency is achieved. Royalties are recorded based on sales amounts reported to us for the preceding quarter.
For certain contingent payments under collaboration and license arrangements, we recognize revenue using the milestone method. Under the milestone method a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event: (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is: (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

10


Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) No. 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”). ASU 2014-09 will replace most existing revenue recognition guidance when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued an update to defer the effective date of this update by one year. ASU 2014-09, as amended, becomes effective for us in the first quarter of fiscal year 2018, but allows us to adopt the standard one year earlier if we so choose. We currently plan to adopt this accounting standard in the first quarter of fiscal year 2018. We have not yet selected a transition method and are evaluating the effect that ASU 2014-09 will have on our Consolidated Financial Statements and related disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 was effective for all interim and annual reporting periods beginning after December 15, 2015 and therefore we adopted ASU 2015-05 in the three months ended March 31, 2016 on a prospective basis. The adoption of ASU 2015-05 did not have a material impact on our Condensed Consolidated Statements of Operations during the period of adoption and is not expected to have a material effect on our Consolidated Financial Statements in future periods.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU No. 2015-11”). ASU No. 2015-11 requires inventory measurement at the lower of cost and net realizable value. ASU No. 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted by all entities as of the beginning of an interim or annual reporting period. We are in the process of assessing the impact, if any, of ASU No. 2015-11 on our condensed consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”). ASU 2016-09 is aimed at the simplification of several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for all interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material impact on our Consolidated Financial Statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing and contingent consideration payments made after a business combination. We do not expect the adoption of ASU 2016-15 to have a material impact on our Consolidated Statements of Cash Flows.
NOTE 2: RESEARCH AND COLLABORATION AGREEMENTS
Ipsen Collaboration
On February 29, 2016, we entered into a collaboration and license agreement (the “Agreement”) with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the Agreement, Ipsen will have exclusive commercialization rights for current and potential future cabozantinib indications outside of the United States, Canada and Japan. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications.
In consideration for the exclusive license and other rights contained in the Agreement, Ipsen paid us an upfront nonrefundable payment of $200.0 million in March 2016. As a result of the approval of cabozantinib by the European Medicines Agency (“EMA”) in second-line RCC in September 2016, we achieved a $60.0 million milestone which we expect to receive in November 2016. We will be eligible to receive additional development and regulatory milestones, totaling up to $240.0 million, including milestone payments of $10.0 million and $40.0 million upon the filing and the approval of cabozantinib in second-line hepatocellular carcinoma, and additional milestones for other future indications. We will also be eligible to receive two $10.0 million milestone payments upon the launch of the product in the first two of the following countries: Germany, France, Italy, Spain and the United Kingdom. The Agreement also provides that we will be eligible to receive contingent payments of up to $525.0 million associated with the achievement of specified levels of Ipsen sales to end

11


users. We will also receive royalties on net sales of cabozantinib outside of the United States, Canada and Japan. We will receive a 2% royalty on the initial $50.0 million of net sales, and a 12% royalty on the next $100.0 million of net sales. After the initial $150.0 million of sales, we will receive a tiered royalty of 22% to 26% on annual net sales; these tiers will reset each calendar year. We are primarily responsible for funding cabozantinib related development costs for existing trials; global development costs for potential future trials will be shared between the parties, with Ipsen to reimburse us for 35% of such costs. Pursuant to the terms of the Agreement, we will remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the Agreement. As part of the Agreement, we entered into a supply agreement which provides that through the end of the second quarter of 2018, we will supply finished, labeled product to Ipsen for distribution in the territories outside of the United States, Canada and Japan. From the end of the second quarter of 2018 forward, we will continue to manufacture CABOMETYX tablets, while Ipsen will be responsible for packaging and labeling the product in territories where it has been approved outside of the United States, Canada and Japan, as applicable.
The Agreement contains multiple elements, and the deliverables under the Agreement consist of intellectual property licenses, delivery of products and/or materials containing cabozantinib to Ipsen for all development and commercial activities, research and development services, and participation on the joint steering and development committees (as defined in the Agreement) with Ipsen. These deliverables are non-contingent in nature. The Company determined that these deliverables do not have stand-alone value, because each one of them has value only if the Company meets its obligation to provide Ipsen with cabozantinib, which the Company deems to be the predominant deliverable under the Agreement. The Company also determined that the level of effort required of the Company to meet its obligations under the Agreement is not expected to vary significantly over the life of the Agreement. Accordingly, the Company combined these deliverables into a single unit of accounting and allocated the entire arrangement consideration to that combined unit of accounting. As a result, the upfront payment of $200.0 million, received in the first quarter of 2016 is being recognized ratably over the effective term of the Agreement, which continues through early 2030, the current estimated patent expiration of cabozantinib in the European Union. At the time we entered into the agreement, we also determined that the $60.0 million milestone we achieved upon the approval of cabozantinib by the EMA in second-line RCC was not substantive due to the relatively low degree of uncertainty and relatively low amount of effort required on our part to achieve the milestone as of the date of the Agreement; the $60.0 million was deferred as of the date of the EMA’s approval of cabozantinib in second-line RCC in September 2016, which we expect to receive in November 2016, and is being recognized ratably over the remaining term of the Agreement. We determined that the remaining development and regulatory milestones are substantive and will be recognized as revenue in the periods in which they are achieved. We consider the contingent payments due to us upon the achievement of specified sales volumes to be similar to royalty payments. Subsequent to February 29, 2016, we transferred the intellectual property rights to Ipsen, and participated in s regulatory filing activities and planning for the production, delivery and distribution of manufactured product. As a result of these activities, we began to recognize of the upfront payment under the Agreement. During the three and nine months ended September 30, 2016, we have recognized $3.8 million and $8.6 million, respectively, in license revenue under the Agreement. As of September 30, 2016, short-term and long-term deferred revenue relating to the Agreement was $18.9 million and $232.6 million, respectively.
In connection with the establishment of the Agreement with Ipsen, we provided Sobi with a notice of termination of our distribution and commercialization agreement for COMETRIQ. Effective November 1, 2016, Ipsen will become responsible for the distribution and commercialization of COMETRIQ for the approved medullary thyroid cancer indication in territories previously supported by Sobi. Pursuant to our commercialization agreement with Sobi we are required to pay a termination fee. As of September 30, 2016, we had a $2.7 million accrual for the estimated termination fee to be paid to Sobi and the related expense, which was recorded during the three months ended March 31, 2016, is included in Selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016. Additionally, pursuant to our commercialization agreement with Sobi, we expect to repurchase unsold product from Sobi and have recorded a returns allowance of $0.4 million as of September 30, 2016, the related charge for which is included as a reduction to Net product revenues in the accompanying Condensed Consolidated Statements of Operations.
Genentech Collaboration
In December 2006, we out-licensed the development and commercialization of cobimetinib to Genentech (a member of the Roche group) pursuant to a worldwide collaboration agreement. We discovered cobimetinib internally and advanced the compound to investigational new drug (“IND”) status.
Genentech paid upfront and milestone payments of $25.0 million in December 2006 and $15.0 million in January 2007 upon signing of the collaboration agreement and with the submission of the IND application for cobimetinib. Under the terms of the agreement, we were responsible for developing cobimetinib through the determination of the maximum-tolerated dose in a phase 1 clinical trial, and Genentech had the option to co-develop cobimetinib, which Genentech could exercise after receipt of certain phase 1 data from us. In March 2008, Genentech exercised its option to co-develop cobimetinib. In March

12


2009, we granted to Genentech an exclusive worldwide revenue-bearing license to cobimetinib, at which point Genentech became responsible for completing the phase 1 clinical trial and subsequent clinical development.
The U.S. Food and Drug Administration (“FDA”) approved cobimetinib in the United States under the brand name COTELLIC on November 10, 2015. It is indicated in combination with vemurafenib as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. COTELLIC in combination with vemurafenib has also been approved in multiple other territories including the European Union and Canada.
Under the terms of our collaboration agreement with Genentech for cobimetinib, we are entitled to a share of U.S. profits and losses in connection with the commercialization of cobimetinib. The profit and loss share has multiple tiers: we are entitled to 50% of profits and losses from the first $200.0 million of U.S. actual sales, decreasing to 30% of profits and losses from U.S. actual sales in excess of $400.0 million. We are entitled to low double-digit royalties on ex-U.S. net sales. In November 2013, we exercised an option under the collaboration agreement to co-promote in the United States. Following the approval of COTELLIC in the United States in November 2015, we began fielding 25% of the sales force promoting COTELLIC in combination with vemurafenib as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma.
We recorded net losses of $2.9 million and $14.8 million under the collaboration agreement during the three and nine months ended September 30, 2016, respectively, as compared to $4.3 million and $11.8 million for the comparable periods in 2015; those costs are included in Selling, general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations. A majority of the liability for those costs which consists of commercialization expenses that Genentech has allocated to the collaboration, but are in dispute, is identified as Accrued collaboration liability on the accompanying Condensed Consolidated Balance Sheets. On June 3, 2016, we filed a Demand for Arbitration before JAMS in San Francisco, California asserting claims against Genentech related to its clinical development, pricing and commercialization of COTELLIC, and cost and revenue allocations in connection with COTELLIC’s commercialization in the United States.
Our arbitration demand asserts that Genentech has breached the parties’ contract for, amongst other breaches, failing to meet its diligence and good faith obligations. The demand seeks various forms of declaratory, monetary, and equitable relief, including without limitation that the cost and revenue allocations for COTELLIC be shared equitably consistent with the collaboration agreement’s terms, along with attorneys’ fees and costs of the arbitration. Genentech has asserted a counterclaim for breach of contract, which seeks monetary damages and interest related to the cost allocations under the collaboration agreement.
We also recognized license revenues of $0.7 million and $1.8 million for royalties on ex-U.S. net sales of COTELLIC during the three and nine months ended September 30, 2016, respectively, based on sales amounts reported by Genentech for the preceding quarter. We recognized no such royalties during the comparable periods in 2015.
Other Collaborations
During the three and nine months ended September 30, 2016, we recognized $15.0 million in contract revenues from a milestone payment earned from Daiichi Sankyo related to its worldwide license of our compounds that modulate mineralocorticoid receptor (“MR”), including CS-3150 (an isomer of XL550). During the nine months ended September 30, 2016 and the three and nine months ended September 30, 2015, we recognized $5.0 million, $3.0 million and $3.0 million, respectively, in contract revenues from milestone payments earned from Merck related to its worldwide license of our phosphoinositide-3 kinase-delta program.
See “Note 2 - Research and Collaboration Agreements” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a description of our existing collaboration agreements.
NOTE 3: RESTRUCTURINGS
Between March 2010 and May 2013, we implemented five restructurings (which we refer to collectively as the “2010 Restructurings”) to manage costs and as a consequence of our decision in 2010 to focus our proprietary resources and development efforts on the development and commercialization of cabozantinib. In September 2014, as a consequence of the failure of COMET-1, one of our two phase 3 pivotal trials of cabozantinib in metastatic castration-resistant prostate cancer, we initiated a restructuring (which we refer to as the “2014 Restructuring”) to enable us to focus our financial resources on the phase 3 pivotal trials of cabozantinib in advanced RCC and advanced hepatocellular carcinoma. See “Note 3 - Restructurings” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for additional information about the restructurings.
For the nine months ended September 30, 2016 and 2015, we recorded a restructuring charge of $0.9 million and $1.1 million, respectively, for the restructurings. Both periods included the effect of the passage of time on our discounted cash flow computations (“accretion expense”) for the exit, in prior periods, of certain of our South San Francisco buildings. During the nine months ended September 30, 2016, the restructuring charge included $0.8 million in charges related to a tenant’s default on an existing sublease which was partially offset by a $0.1 million recovery related to a new sublease executed in July 2016. The restructuring charge for the nine months ended September 30, 2015 included $1.5 million in additional charges due to the

13


partial termination of one of our building leases and additional facility-related charges related to the decommissioning and exit of certain buildings which was partially offset by $0.9 million in recoveries recorded in connection with the sale of excess equipment and other assets.
The total outstanding restructuring liability is included in the current and long-term portion of restructuring on the accompanying Condensed Consolidated Balance Sheets. The changes of these liabilities during the nine months ended September 30, 2016, which related primarily to facilities, are summarized in the following table (in thousands):
 
2010 Restructurings
 
2014 Restructuring
 
Total
Restructuring liability as of December 31, 2015
$
4,087

 
$
503

 
$
4,590

Restructuring charge
862

 
9

 
871

Proceeds from sale of assets

 
34

 
34

Cash payments, net
(3,774
)
 
(437
)
 
(4,211
)
Other items
975

 
(34
)
 
941

Restructuring liability as of September 30, 2016
$
2,150

 
$
75

 
$
2,225

We expect to pay accrued facility charges of $2.2 million, net of cash received from our subtenants, through the end of the lease terms of the buildings, all of which end in May 2017. We expect to incur additional restructuring charges of approximately $0.1 million relating to the effect of accretion expense through to the end of the lease terms of the buildings.
NOTE 4: CASH AND INVESTMENTS
All of our cash equivalents and investments are classified as available-for-sale. The following tables summarize cash and cash equivalents, investments, and restricted cash and investments by balance sheet line item as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
111,219

 
$

 
$

 
$
111,219

Short-term investments
208,412

 
70

 
(20
)
 
208,462

Long-term investments
55,840

 
28

 
(51
)
 
55,817

Long-term restricted cash and investments
4,150

 

 

 
4,150

Total cash and investments
$
379,621

 
$
98

 
$
(71
)
 
$
379,648

 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
141,634

 
$

 
$

 
$
141,634

Short-term investments
25,484

 
5

 
(63
)
 
25,426

Long-term investments
83,665

 
2

 
(67
)
 
83,600

Long-term restricted cash and investments
2,650

 

 

 
2,650

Total cash and investments
$
253,433

 
$
7

 
$
(130
)
 
$
253,310

Under our loan and security agreement with Silicon Valley Bank, we are required to maintain compensating balances on deposit in one or more investment accounts with Silicon Valley Bank or one of its affiliates. The total collateral balances were $81.6 million as of both September 30, 2016 and December 31, 2015 and are reflected in our Condensed Consolidated Balance Sheets in short-term investments as of September 30, 2016 and long-term investments as of December 31, 2015; the change in classification from long-term to short-term was the result of a corresponding change in the classification for our term loan payable to Silicon Valley Bank which matures in May 2017. See “Note 7 - Debt” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, for more information regarding the collateral balance requirements under our Silicon Valley Bank loan and security agreement.

14


The following tables summarize our cash equivalents and investments by security type as of September 30, 2016 and December 31, 2015. The amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):
 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Money market funds
$
47,148

 
$

 
$

 
$
47,148

Commercial paper
133,309

 

 

 
133,309

Corporate bonds
124,346

 
44

 
(67
)
 
124,323

U.S. Treasury and government sponsored enterprises
61,228

 
54

 
(4
)
 
61,278

Total investments
$
366,031

 
$
98

 
$
(71
)
 
$
366,058

 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Money market funds
$
72,000

 
$

 
$

 
$
72,000

Commercial paper
78,155

 

 

 
78,155

Corporate bonds
72,205

 
4

 
(118
)
 
72,091

U.S. Treasury and government sponsored enterprises
28,434

 
1

 
(12
)
 
28,423

Marketable equity security
16

 
2

 

 
18

Total investments
$
250,810

 
$
7

 
$
(130
)
 
$
250,687

All of our investments are subject to a quarterly impairment review. During the nine months ended September 30, 2016 and 2015, we did not record any other-than-temporary impairment charges on our available-for-sale securities. As of September 30, 2016, there were 37 investments in an unrealized loss position with gross unrealized losses of $71,000 and an aggregate fair value of $67.3 million. The investments in an unrealized loss position comprise corporate and government sponsored enterprise bonds. The unrealized losses were not attributed to credit risk, but rather associated with the changes in interest rates. Based on the scheduled maturities of our investments, we concluded that the unrealized losses in our investment securities are not other-than-temporary, as it is more likely than not that we will hold these investments for a period of time sufficient for a recovery of our cost basis.
The following table summarizes the fair value of securities classified as available-for-sale by contractual maturity as of September 30, 2016 (in thousands): 
 
Mature within One Year
 
After One Year through Two Years
 
Fair Value
Money market funds
$
47,148

 
$

 
$
47,148

Commercial paper
133,309

 

 
133,309

Corporate bonds
74,661

 
49,662

 
124,323

U.S. Treasury and government sponsored enterprises
55,123

 
6,155

 
61,278

Total investments
$
310,241

 
$
55,817

 
$
366,058

Cash is excluded from the table above.

15


NOTE 5. INVENTORY
Inventory consists of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Raw materials
$
890

 
$
1,037

Work in process
2,540

 
2,251

Finished goods
582

 
583

Total
4,012

 
3,871

Less: non-current portion included in Other assets
(720
)
 
(1,255
)
Inventory
$
3,292

 
$
2,616

We generally relieve inventory on a first-expiry, first-out basis. A portion of the manufacturing costs for inventory was incurred prior to regulatory approval of CABOMETYX and COMETRIQ and, therefore, were expensed as research and development costs when those costs were incurred, rather than capitalized as inventory. Write-downs related to excess and expiring inventory are charged to cost of goods sold. Such write-downs were $0.4 million for both the three and nine months ended September 30, 2016 as compared to $1.1 million and $0.9 million for the comparable periods in 2015. The non-current portion of inventory recorded as other assets consists of raw materials and a portion of the active pharmaceutical ingredient which is included in work in process.
NOTE 6. DEBT
The amortized carrying amount of our debt consists of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Convertible Senior Subordinated Notes due 2019 (“2019 Notes”)
$
1,865

 
$
235,210

Secured Convertible Notes due 2018 (“Deerfield Notes”)
108,993

 
102,727

Term loan payable
80,000

 
80,000

Total debt
190,858

 
417,937

Less: current portion
(109,365
)
 

Long-term debt
$
81,493

 
$
417,937

Prior period balances in this Note reflect revisions due to a correction of an immaterial error with regards to the 2019 Notes. The immaterial error resulted in an overstatement of the discount on the 2019 Notes and therefore understated the amortized carrying amount of the 2019 Notes and overstated the related interest expense. See “Note 1 - Organization and Summary of Significant Accounting Policies - Correction of an Immaterial Error” for additional information on the correction of the immaterial error.
See “Note 7 - Debt” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, for additional information on the terms of our debt, including a description of the conversion features of the 2019 Notes and the Deerfield Notes.
2019 Notes
In August 2012, we issued and sold $287.5 million aggregate principal amount of the 2019 Notes, for net proceeds of $277.7 million, all of which remained outstanding at December 31, 2015. The 2019 Notes bear interest at a rate of 4.25% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. On August 9, 2016 and August 19, 2016 we entered into separate, privately negotiated exchange agreements with certain holders of the 2019 Notes. Under the terms of the exchange agreements, the holders agreed to convert an aggregate principal amount of $239.4 million of 2019 Notes held by them in exchange for an aggregate of 45,064,456 shares of the Company’s common stock. In addition, the holders received inducements of $6.0 million which included an aggregate cash payment of $2.4 million and the forgiveness of the repayment of interest payments of $3.6 million. Further, under the terms of the indenture for the 2019 Notes, upon conversion the holders that entered into exchange agreements on August 9, 2016 were required to repay $3.6 million in interest payments that the holders of record on August 1, 2016 received on or about August 15, 2016. Under the terms of the exchange agreements, we forgave the repayment of such interest. We have included those interest payments as financing activities in our Condensed Consolidated Statement of Cash Flows. Inducements are included in the loss on extinguishment of debt.

16


Following the completion of the exchange transactions, on August 24, 2016, we provided public notice of the redemption of $48.1 million of the 2019 Notes, representing all remaining notes outstanding. Following a required redemption period, which ended on November 2, 2016, holders of the 2019 Notes had the option to convert their notes into shares of our common stock, plus cash in lieu of any fractional share, at a conversion rate of 188.2353 shares of common stock per $1,000 principal amount of the remaining 2019 Notes at any time before close of business on October 31, 2016. Subsequent to the announcement of the redemption of all remaining 2019 Notes outstanding, on various dates in August and September of 2016, $45.9 million of additional aggregate principal amount of 2019 Notes were converted by the holders into an aggregate of 8,640,455 shares of the Company’s common stock.
The combined issuance of 53,704,911 shares of the Company’s common stock pursuant to the conversions resulted in an increase to common stock and additional paid-in capital of $589.2 million. We recognized an additional loss on extinguishment of debt of $7.3 million, representing the difference between the total settlement consideration transferred to the holders that was attributed to the liability component of the 2019 Notes, based on the fair value of that component at the time of conversion, and the net carrying value of the liability. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a $340.5 million reduction of additional paid-in capital. Transaction costs incurred with third parties related to the settlement of the 2019 Notes were allocated between the liability and equity components and resulted in an additional $0.5 million of loss on extinguishment of debt and a $0.7 million reduction of additional paid-in capital.
As of September 30, 2016, $2.2 million aggregate principal amount the 2019 Notes remained outstanding. Unless converted earlier, those notes will be redeemed on November 2, 2016 in cash for 100% of the principal amount thereof, plus accrued and unpaid interest.
The following is a summary of the liability component of the 2019 Notes (in thousands):
 
September 30,
2016
 
December 31,
2015
Net carrying amount of the liability component
$
1,865

 
$
235,210

Unamortized discount of the liability component
327

 
52,290

Face amount of the 2019 Notes
$
2,192

 
$
287,500

The following is a summary of the interest expense for the 2019 Notes (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stated coupon interest
$
1,683

 
$
3,054

 
$
7,793

 
$
9,164

Amortization of debt discount and debt issuance costs
1,763

 
2,929

 
7,968

 
8,585

Total interest expense
$
3,446


$
5,983


$
15,761

 
$
17,749

The balance of unamortized fees and costs was $26,000 and $4.2 million as of September 30, 2016 and December 31, 2015, respectively, which is recorded as a reduction of the carrying amount of the 2019 Notes on the accompanying Condensed Consolidated Balance Sheets.
Deerfield Notes
As of September 30, 2016 and December 31, 2015, the outstanding principal balance on the Deerfield Notes was $109.8 million and $103.8 million, respectively, which, subject to certain limitations, is payable in cash or in stock at our discretion. Beginning on July 2, 2015, the outstanding principal amount of the Deerfield Notes bears interest at the rate of 7.5% per annum to be paid in cash, quarterly in arrears, and 7.5% per annum to be paid in kind, quarterly in arrears, for a total interest rate of 15% per annum. Through July 1, 2015, the outstanding principal amount of the Deerfield Notes bore interest in the annual amount of $6.0 million, payable quarterly in arrears.

17


The following is a summary of the interest expense for the Deerfield Notes (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stated coupon interest paid in cash
$
2,031

 
$
1,891

 
$
5,939

 
$
4,866

Amortization of debt discount, debt issuance costs and accrual of interest paid in kind
2,152

 
1,959

 
6,266

 
7,279

Total interest expense
$
4,183

 
$
3,850

 
$
12,205

 
$
12,145

The balance of unamortized fees and costs was $0.5 million and $0.7 million as of September 30, 2016 and December 31, 2015, respectively, which is recorded as a reduction of the carrying amount of the Deerfield Notes on the accompanying Condensed Consolidated Balance Sheets. Effective March 4, 2015, upon notification of our election to extend the maturity date to July 1, 2018, we began to amortize the remaining unamortized discount, fees and costs through July 1, 2018 using the effective interest method and an effective interest rate of 15.3%.
We were required to make an additional mandatory prepayment on the Deerfield Notes in January 2015 and 2016 equal to 15% of certain revenues from collaborative arrangements, which we refer to as Development/Commercialization Revenue, received during the prior fiscal year, subject to a maximum prepayment amount of $27.5 million. We made no such mandatory prepayments due to the fact that we received no such revenues during the fiscal year ended December 31, 2014 and Deerfield elected not to receive the mandatory prepayment in January 2016 related to development/commercialization revenue received during the year ended December 31, 2015. As a result of the extension of the maturity date of the Deerfield Notes to July 1, 2018, our obligation to make annual mandatory prepayments equal to 15% of Development/Commercialization Revenue received by us during the prior fiscal year will continue to apply in January 2017 and January 2018. However, we will only be obligated to make any such annual mandatory prepayment if the note holders provide notice to us of their election to receive the prepayment. Pursuant to this requirement, we may be required make a mandatory prepayment of $27.5 million in January 2017 as a result of the upfront payment of $200.0 million upfront nonrefundable payment received in March 2016 in consideration for the exclusive license and other rights contained in the collaboration and license agreement with Ipsen and the $5.0 million milestone payment from Merck we received in the first quarter of 2016 related to its worldwide license of our phosphoinositide-3 kinase-delta program. That portion of the Deerfield Notes is included in current liabilities. The definition of “Development/Commercialization Revenue” expressly excludes any sale or distribution of drug or pharmaceutical products in the ordinary course of our business, and any proceeds from any Intellectual Property Sale, but would include our share of the net profits from the commercialization of cobimetinib in the U.S. and the receipt of royalties from cobimetinib sales outside the U.S., if any.
NOTE 7. FAIR VALUE MEASUREMENTS
Financial Assets Measured on a Recurring Basis
The following table sets forth the fair value of our financial assets that were measured and recorded on a recurring basis as of September 30, 2016 and December 31, 2015. We did not have any Level 3 investments as of September 30, 2016 or December 31, 2015. The amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):
 
September 30, 2016
 
Level 1
 
Level 2
 
Total
Money market funds
$
47,148

 
$

 
$
47,148

Commercial paper

 
133,309

 
133,309

Corporate bonds

 
124,323

 
124,323

U.S. Treasury and government sponsored enterprises

 
61,278

 
61,278

Total financial assets
$
47,148

 
$
318,910

 
$
366,058



18


 
December 31, 2015
 
Level 1
 
Level 2
 
Total
Money market funds
$
72,000

 
$

 
$
72,000

Commercial paper

 
78,155

 
78,155

Corporate bonds

 
72,091

 
72,091

U.S. Treasury and government sponsored enterprises

 
28,423

 
28,423

Marketable equity securities
18

 

 
18

Total financial assets
$
72,018

 
$
178,669

 
$
250,687

The estimated fair value of our financial instruments that are carried at amortized cost is as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
2019 Notes
$
1,865

 
$
5,277

 
$
235,210

 
$
336,260

Deerfield Notes
$
108,993

 
$
110,806

 
$
102,727

 
$
101,096

Term loan payable
$
80,000

 
$
79,828

 
$
80,000

 
$
79,815

The carrying amounts of cash, trade and other receivables, accounts payable, accrued clinical trial liabilities, accrued compensation and benefits, accrued collaboration liability, and other accrued liabilities approximate their fair values and are excluded from the tables above.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
When available, we value investments based on quoted prices for those financial instruments, which is a Level 1 input. Our remaining investments are valued using third-party pricing sources, which use observable market prices, interest rates and yield curves observable at commonly quoted intervals of similar assets as observable inputs for pricing, which is a Level 2 input.
On August 24, 2016, we announced the redemption of $48.1 million of the 2019 Notes, representing all remaining 2019 Notes outstanding. As of September 30, 2016, the 2019 Notes were convertible into shares of our common stock, plus cash in lieu of any fractional share, at a conversion rate of 188.2353 shares of common stock per $1,000 principal amount of the 2019 Notes at any time before close of business on October 31, 2016. Following our issuance of the notice of redemption of the 2019 Notes, the third-party pricing source we historically used to value the 2019 Notes was no longer available. Based on the terms of the redemption and the related conversion feature, we estimated that the value of the shares issuable pursuant to a conversion by the holder approximates the fair value of the 2019 Notes, which represents a Level 3 input.
We estimate the fair value of our other debt instruments, where possible, using the net present value of the payments. For the term loan, we use an interest rate that is consistent with money-market rates that would have been earned on our non-interest-bearing compensating balances as our discount rate, which is a Level 2 input. For the Deerfield Notes, we used a discount rate of 15%, which we estimate as our current borrowing rate for similar debt as of September 30, 2016, which is a Level 3 input.

Financial Assets, Liabilities and Equity Measured on a Nonrecurring Basis
In connection with the conversions for our 2019 Note during the three months ended September 30, 2016, we were required to determine the fair value of the settlement consideration received by the holders and the fair value of the liability component of the 2019 Notes, as of the various settlement dates of the conversions. The following methods and assumptions were used to estimate the fair value of those financial instruments:
The settlement consideration comprises, in part, shares of our Common Stock. The fair value of our Common Stock was determined based on the closing market price of our Common Stock on the various settlement dates of the conversions, which are level 1 inputs;
The carrying value of the remaining settlement consideration, which includes cash and the forgiveness of the repayment of certain prior interest payments, approximates fair value;
We estimated the fair value of the liability component of the 2019 Notes using the net present value of estimated future cash flows through maturity. We used a discount rate of 9.50%, which we estimate as our current borrowing rate for straight debt as of September 30, 2016, which is a Level 3 input.
NOTE 8. STOCK-BASED COMPENSATION
We recorded and allocated employee stock-based compensation expense for our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”) as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Research and development expense
$
1,165

 
$
6,676

 
$
7,894

 
$
8,049

Selling, general and administrative expense
2,438

 
5,350

 
10,452

 
7,371

Total employee stock-based compensation expense
$
3,603

 
$
12,026

 
$
18,346

 
$
15,420

We use the Black-Scholes Merton option pricing model to value our stock options. The weighted average grant-date fair value of our stock options and ESPP purchases was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stock options
$
8.59

 
$
3.92

 
$
4.31

 
$
2.51

ESPP
$
1.51

 
$
1.26

 
$
1.65

 
$
0.97

The fair value of employee stock option awards and ESPP purchases was estimated using the following assumptions:
 
Stock Options
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Risk-free interest rate
1.07
%
 
1.18
%
 
1.09
%
 
1.20
%
Dividend yield
%
 
%
 
%
 
%
Volatility
76
%
 
88
%
 
76
%
 
93
%
Expected life
4.5 years

 
4.6 years

 
4.4 years

 
4.5 years

 
Employee Stock Purchase Plan
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Risk-free interest rate
0.37
%
 
0.06
%
 
0.39
%
 
0.09
%
Dividend yield
%
 
%
 
%
 
%
Volatility
63
%
 
107
%
 
66
%
 
101
%
Expected life
6 months

 
6 months

 
6 months

 
6 months

The expected life computation is based on historical exercise patterns and post-vesting termination behavior. We considered implied volatility as well as our historical volatility in developing our estimate of expected volatility.
A summary of all stock option activity for the nine months ended September 30, 2016 is presented below (dollars in thousands, except per share amounts):
 
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining Contractual
Term
 
Aggregate
Intrinsic
Value
Options outstanding at December 31, 2015
27,425,854

 
$
4.22

 
 
 
 
Granted
3,771,250

 
$
7.35

 
 
 
 
Exercised
(3,360,248
)
 
$
2.81

 
 
 
 
Forfeited
(307,601
)
 
$
4.67

 
 
 
 
Expired
(80,516
)
 
$
10.49

 
 
 
 
Options outstanding at September 30, 2016
27,448,739

 
$
4.80

 
4.58 years
 
$
221,332

Exercisable at September 30, 2016
20,042,258

 
$
4.19

 
4.02 years
 
$
172,458

As of September 30, 2016, a total of 574,885 shares were available for grant under our stock option plans.

19


As of September 30, 2016, we had $22.9 million of unrecognized compensation expense related to employee stock options that is expected to be recognized over a weighted-average period of 3.01 years.
On March 7, 2016, as a result of the FDA acceptance of our New Drug Application “NDA” submission and on April 28, 2016, as a result of the FDA’s approval of our NDA submission, the Compensation Committee of the Board of Directors of Exelixis convened to determine we had met certain performance objectives related to performance-based stock options granted to employees in 2014 and 2015. As a result of these determinations, 5,870,303 performance-based stock options vested during the nine months ended September 30, 2016 and we recorded an additional $4.1 million in stock-based compensation expense during the period related to those options. During 2015, we recorded $3.3 million in employee stock-based compensation expense related to those options.
A summary of all restricted stock unit (“RSU”) activity for the nine months ended September 30, 2016 is presented below (dollars in thousands, except per share amounts):
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Awards outstanding at December 31, 2015
1,002,188

 
$
5.16

 
 
 
 
Awarded
3,038,386

 
$
7.38

 
 
 
 
Vested and released
(1,390,654
)
 
$
5.55

 
 
 
 
Forfeited
(30,309
)
 
$
4.77

 
 
 
 
Awards outstanding at September 30, 2016
2,619,611

 
$
8.21

 
1.97 years
 
$
33,505

As of September 30, 2016, we had $13.9 million of unrecognized compensation expense related to employee RSUs that is expected to be recognized over a weighted-average period of 3.30 years.
During the nine months ended September 30, 2016, we made a bonus payment to our employees in the form of 1,072,833 shares of fully-vested restricted stock units which had a grant date fair value of $4.5 million.
NOTE 9. NET LOSS PER SHARE
The following table sets forth a reconciliation of basic and diluted net loss per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net loss
$
(11,284
)
 
$
(45,542
)
 
$
(105,345
)
 
$
(120,176
)
Denominator:
 
 
 
 
 
 
 
Shares used in computing basic and diluted net loss per share
256,319

 
217,587

 
238,024

 
203,153

Net loss per share, basic and diluted
$
(0.04
)
 
$
(0.21
)
 
$
(0.44
)
 
$
(0.59
)
The following table sets forth potentially dilutive shares of common stock that are not included in the computation of diluted net loss per share because to do so would be anti-dilutive (in thousands): 
 
September 30
 
2016
 
2015
Convertible Senior Subordinated Notes due 2019
413

 
54,118

Secured Convertible Notes due 2018
33,890

 
33,890

Outstanding stock options, unvested RSUs and ESPP contributions
30,474

 
31,331

Warrants
1,000

 
1,000

Total potentially dilutive shares
65,777

 
120,339

The warrants are participating securities and the warrant holders do not have a contractual obligation to share in our losses.

20


NOTE 10. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit risk are primarily trade and other receivables and investments. Investments consist of money market funds, taxable commercial paper, corporate bonds with high credit quality, U.S. Treasury and government sponsored enterprises, and municipal bonds. All investments are maintained with financial institutions that management believes are creditworthy.
Trade and other receivables are unsecured and are concentrated in the pharmaceutical and biotechnology industries. Accordingly, we may be exposed to credit risk generally associated with pharmaceutical and biotechnology companies. We have incurred no bad debt expense since inception. As of September 30, 2016, 38%, 17%, 12% and 10% of our trade receivables are with Diplomat Specialty Pharmacy, Caremark L.L.C., Accredo Health, Incorporated and affiliates of McKesson Corporation, respectively. All of these customers pay promptly. As of September 30, 2016, we had also had other receivables for milestone payments totaling $60.0 million due from Ipsen and $15.0 million due from Daiichi Sankyo. We received the full amount due from Daiichi Sankyo subsequent to September 30, 2016 and expect to receive the payment from Ipsen in mid-November 2016 in accordance with the terms of our collaboration and license agreement with Ipsen.
All of our long-lived assets are located in the United States.
We have operations primarily in the United States, while some of our collaboration partners have headquarters outside of the United States and some of our clinical trials for cabozantinib are also conducted outside of the United States. The following table shows the percentage of revenues earned in the United States and Europe:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Percentage of revenues earned in the United States
98
%
 
96
%
 
98
%
 
90
%
Percentage of revenues earned in Europe
2
%
 
4
%
 
2
%
 
10
%
The following table sets forth the percentage of revenues recognized by customer that represent 10% or more of total revenues:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Product sales:
 
 
 
 
 
 
 
Diplomat Specialty Pharmacy
31
%
 
66
%
 
41
%
 
79
%
Sobi
2
%
 
4
%
 
2
%
 
10
%
Collaboration agreements:
 
 
 
 
 
 
 
Merck
%
 
30
%
 
4
%
 
11
%
Daiichi Sankyo
24
%
 
%
 
13
%
 
%

21


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements. These statements are based on Exelixis, Inc.’s (“Exelixis,” “we,” “our” or “us”) 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 “expect,” “potential,” “will,” “goal,” “would,” “intend,” “continues,” “objective,” “anticipate,” “may be,” “initiate,” “believe,” “could,” “plan,” “trend,” or the negative of such terms or other similar expressions identify forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in Part II, Item 1A of this Form 10-Q, as well as those discussed elsewhere in this report.
This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission, or SEC, on February 29, 2016. Operating results are not necessarily indicative of results that may occur in future periods. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
Overview
Exelixis, Inc. is a biopharmaceutical company committed to the discovery, development and commercialization of new medicines that will improve care and outcomes for people with cancer. Since its founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the commercial marketplace. This portfolio includes two products derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, and VEGF receptors. They are CABOMETYX™ tablets for the treatment of advanced kidney cancer and COMETRIQ® capsules for the treatment of certain forms of thyroid cancer, each approved both in the United States and the European Union. The third product is COTELLIC®, a product derived from cobimetinib, a selective inhibitor of MEK, marketed under a collaboration with Roche and Genentech (a member of the Roche Group) that has been approved in combination with ZELBORAF® (vemurafenib) to treat advanced melanoma in several major territories, including the United States and European Union.
The approval of CABOMETYX by the United States Food and Drug Administration, or FDA, as a treatment for patients with advanced renal cell carcinoma, or RCC, who have received prior anti-angiogenic therapy was a significant milestone for us because of the substantial commercial opportunity that the advanced RCC market represents in the United States. From a financial perspective, the early strength of the launch has made the realization of our goal to drive the business to become cash flow positive is increasingly achievable, while operationally, cabozantinib’s significant commercial potential has enabled us to attract top talent and build commercial and medical affairs organizations of considerable size and strength. Having fully integrated these functions within our corporate structure, we are better equipped to support the growth of cabozantinib. Our commercial team markets the availability of CABOMETYX consistent with its FDA-approved labeling and maximizes accessibility for the patient populations for which it is indicated for treatment. Separately, our medical affairs organization engages and collaborates with clinicians and medical institutions towards a complete understanding of how cabozantinib may best be deployed in the fight against cancer. Looking to the future, the growth of our product revenue stream, as well as anticipated partnership royalty and contract revenue, and vigilant expense management, has provided us with the opportunity to begin to evaluate the expansion of our pipeline through reinvestment in drug discovery, in-licensing opportunities, and other corporate development activities.
The approval of CABOMETYX was based on results of our phase 3 pivotal trial METEOR (Metastatic RCC Phase 3 Study Evaluating Cabozantinib vs. Everolimus), which met its primary endpoint of improving progression-free survival, or PFS. The median PFS was 7.4 months for the cabozantinib arm versus 3.8 months for the everolimus arm, and the hazard ratio [HR] was 0.58 (95% confidence interval [CI] 0.45-0.74, p<0.0001), corresponding to a 42% reduction in the rate of disease progression or death for cabozantinib compared to everolimus. CABOMETYX also significantly improved the objective response rate, or ORR, and demonstrated a statistically significant and clinically meaningful increase in overall survival, or OS. Compared with everolimus, CABOMETYX was associated with a 34% reduction in the rate of death and median OS was 21.4 months for patients receiving CABOMETYX versus 16.5 months for those receiving everolimus (HR=0.66, 95% CI 0.53-0.83, P=0.0003). CABOMETYX, which was granted Fast Track and Breakthrough Therapy designations by the FDA, is the first therapy to demonstrate in a phase 3 trial for patients with advanced RCC, robust and clinically meaningful improvements in all three key efficacy parameters - OS, PFS and ORR. A review of adverse events, or AEs, demonstrated that the frequency of AEs of any grade regardless of causality was approximately balanced between study arms, and the rate of treatment discontinuation due to adverse events was 10% for each of the cabozantinib and everolimus arms.
On February 29, 2016, we entered into a collaboration and license agreement with Ipsen Pharma SAS, or Ipsen, focused on the further development of cabozantinib and the exclusive commercialization of current and potential future cabozantinib indications outside of the United States, Canada and Japan, if and when additional regulatory approvals are secured in those territories. A key reason we chose Ipsen as a partner was because Ipsen is established and engaged in the global distribution of oncology medicines. With the European Commission’s, or EC, approval of CABOMETYX tablets for the treatment of adult patients with advanced RCC following prior vascular endothelial growth factor (VEGF)-targeted therapy on September 9, 2016, we and our partner Ipsen are poised to capitalize on the sizable European commercial opportunity. At the same time, we are engaged in an effort to determine the most effective means to obtain cabozantinib’s approval and launch in Japan and Canada, either by partnering in those territories or potentially launching the product ourselves.
Beyond the FDA-approved indications of cabozantinib for second-line RCC and progressive, metastatic medullary thyroid carcinoma, or MTC, we are engaged in a broad development program composed of over 45 ongoing or planned clinical trials in additional tumor types, many of which are conducted through our Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute’s Cancer Therapy Evaluation Program, or NCI-CTEP, or our investigator sponsored trial program. The most notable studies at this time are our company-sponsored phase 3 trial of cabozantinib in advanced hepatocellular carcinoma, or HCC, called CELESTIAL (Cabozantinib Phase 3 Controlled Study In Hepatocellular Carcinoma) and CABOSUN, a randomized phase 2 trial comparing cabozantinib to sunitinib in the first-line treatment of intermediate- or poor-risk RCC patients. In September 2016, following the first planned interim analysis for CELESTIAL, the trial’s Independent Data Monitoring Committee, or IDMC, determined that the study should continue without modifications per the study protocol. We anticipate top-line results from CELESTIAL in 2017. The CABOSUN trial is being conducted by The Alliance for Clinical Trials in Oncology, or The Alliance, through our CRADA with NCI-CTEP. In May 2016, The Alliance informed us that CABOSUN met its primary endpoint demonstrating a statistically significant and clinically meaningful improvement of PFS compared with sunitinib. Based on these results, we plan to submit a Supplemental New Drug Application, or sNDA, for cabozantinib as a treatment for first-line advanced RCC. Additionally, results from a phase 1b trial of cabozantinib plus nivolumab alone, or in combination with ipilimumab, in patients with genitourinary tumors being conducted under our collaboration with NCI-CTEP, continue to support further investigation of cabozantinib in combination with immunotherapies to treat genitourinary and other tumors.
In addition to these advances connected with cabozantinib, significant progress continues to be made with respect to the clinical development, regulatory status and commercial potential of certain other partnered compounds. In the aggregate, these partnered compounds could be of significant value to us if their development programs progress successfully. For example, cobimetinib, a compound we out-licensed in 2006 to Genentech, was approved by the FDA on November 10, 2015, under the brand name COTELLIC, in combination with vemurafenib as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. It was launched in the United States soon thereafter and in the United States we contribute 25% of the sales force to the commercialization effort. COTELLIC in combination with vemurafenib has also been approved and launched by Genentech in multiple other territories, including the European Union, Canada, Australia and Brazil. Cobimetinib is also being evaluated in a broad development program comprising a Phase 3 trial of cobimetinib in combination with atezolizumab in patients with colorectal carcinoma, as well as several earlier stage clinical trials investigating cobimetinib in combination with a variety of agents in multiple tumor types. Owing to disagreements over clinical development, pricing and commercialization of COTELLIC, and cost and revenue allocations arising from COTELLIC’s commercialization in the United States, on June 3, 2016, we filed a demand for arbitration against Genentech, and shortly thereafter, Genentech filed a counterclaim against us. For additional information on our arbitration with Genentech please see, “- Part II - Other Information - Legal Proceedings.”
Collaborations
We have established collaborations with Ipsen for cabozantinib, Genentech (a member of the Roche group) for cobimetinib, and other collaborations with leading pharmaceutical companies including Bristol-Myers Squibb Company, or Bristol-Myers Squibb, Sanofi, Merck (known as MSD outside of the United States and Canada), and Daiichi Sankyo Company Limited, or Daiichi Sankyo, for compounds and programs in our portfolio. Excluding our collaboration agreement with Ipsen for cabozantinib and our co-promotion agreement with Genentech, we have fully out-licensed compounds or programs to a partner for further development and commercialization under these collaborations and have no further development cost obligations under our collaborations. Under each of our collaborations, we are entitled to receive milestones and royalties or, in the case of cobimetinib, a share of profits (or losses) from commercialization.
Cabozantinib Collaboration
On February 29, 2016, we entered into a collaboration and license agreement, or the Agreement, with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the Agreement, Ipsen will have exclusive commercialization rights for current and potential future cabozantinib indications outside of the United States, Canada and

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Japan. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications.
In consideration for the exclusive license and other rights contained in the Agreement, Ipsen paid us an upfront nonrefundable payment of $200.0 million in March 2016. As a result of the approval of cabozantinib by the European Medicines Agency, or EMA, in second-line RCC in September 2016, we achieved a $60.0 million milestone which we expect to receive in November 2016. We are also eligible to receive additional development and regulatory milestones, totaling up to $240.0 million, including, milestone payments of $10.0 million and $40.0 million upon the filing and the approval of cabozantinib in second-line HCC with the EMA, and additional milestones for other future indications. We will also be eligible to receive two $10.0 million milestone payments upon the launch of the product in the first two of the following countries: Germany, France, Italy, Spain and the United Kingdom. The Agreement also provides that we will be eligible to receive contingent payments of up to $525.0 million associated with the achievement of specified levels of Ipsen sales to end users. We will also receive royalties on net sales of cabozantinib outside of the United States, Canada and Japan. We will receive a 2% royalty on the initial $50.0 million of net sales, and a 12% royalty on the next $100.0 million of net sales. After the initial $150.0 million of sales, we will receive a tiered royalty of 22% to 26% on annual net sales; these tiers will reset each calendar year. We are primarily responsible for funding cabozantinib related development costs for existing trials; global development costs for potential future trials will be shared between the parties, with Ipsen to reimburse us for 35% of such costs. Pursuant to the terms of the Agreement, we will remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the Agreement. As part of the Agreement, we entered into a supply agreement which provides that through the end of the second quarter of 2018, we will supply finished, labeled product to Ipsen for distribution in the territories outside of the United States, Canada and Japan. From the end of the second quarter of 2018 forward, we will continue to manufacture CABOMETYX tablets, while Ipsen will be responsible for packaging and labeling the product in territories where it has been approved outside of the United States, Canada and Japan, as applicable.
Cobimetinib Collaboration
Cobimetinib in combination with vemurafenib has been approved in multiple territories, including the United States, European Union and Canada as a treatment for patients with advanced melanoma harboring a BRAF V600E or V600K mutation, and is marketed as COTELLIC. Results from coBRIM, the phase 3 pivotal trial conducted by Genentech evaluating cobimetinib in combination with vemurafenib in previously untreated patients with unresectable locally advanced or metastatic melanoma harboring a BRAF V600E or V600K mutation served as the basis for such regulatory approvals.
In addition to the coBRIM trial, additional clinical trials are ongoing studying the combination of cobimetinib with a variety of agents in multiple tumor types. These include:
COTEZO, a phase 3 pivotal trial evaluating the combination of cobimetinib and atezolizumab, an anti-PD-L1 antibody, or atezolizumab alone versus regorafenib, in unresectable locally advanced or metastatic colorectal cancer, or CRC. COTEZO is expected to enroll 360 patients who have received at least two prior chemotherapies in the metastatic disease setting, and the primary endpoint of the trial is OS. The decision to start COTEZO was informed by results from the ongoing phase 1b trial of the combination in advanced solid tumors;
The combination of cobimetinib and vemuarfenib in additional melanoma patient populations and settings;
A phase 2 trial of cobimetinib in combination with paclitaxel in triple negative breast cancer;
Phase 1 studies of cobimetinib in combination with atezolizumab in melanoma and non-small cell lung cancer, or NSCLC, in combination with vemurafenib and atezolizumab in melanoma, and in combination with venetoclax in relapsed or refractory acute myeloid leukemia; and
A phase 1b study evaluating the safety, tolerability and pharmacokinetics of cobimetinib in combination with atezolizumab and bevacizumab in patients with metastatic colorectal cancer.
On the basis of encouraging anti-tumor activity and acceptable tolerability observed in the phase 1b trial combining cobimetinib, atezolizumab and vemurafenib in patients with previously untreated BRAF V600 mutation-positive advanced melanoma, a phase 3 pivotal trial, Trilogy is planned by Roche, details of which have been posted to www.ClinicalTrials.gov.
A complete listing of all ongoing trials can be found at www.ClinicalTrials.gov.
Under the terms of our collaboration agreement with Genentech for cobimetinib, we are entitled to a share of U.S. profits and losses received in connection with commercialization of cobimetinib. The profit share has multiple tiers: we are entitled to 50% of profits and losses from the first $200.0 million of U.S. actual sales, decreasing to 30% of profits and losses

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from U.S. actual sales in excess of $400.0 million. We are entitled to low double-digit royalties on ex-U.S. net sales. In November 2013, we exercised an option under the collaboration agreement to co-promote in the United States. Following the approval of COTELLIC in the United States in November 2015, we began fielding 25% of the sales force promoting COTELLIC in combination with vemurafenib as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma.
We believe that cobimetinib has the potential to provide us with an additional meaningful source of revenue. Our objective, therefore, is and has been to work with Genentech on the execution of the U.S. COTELLIC commercial plan in order to maximize the product’s revenue potential. However, to date, we believe Genentech’s pricing of and cost and revenue allocations for COTELLIC, as determined exclusively by Genentech, have been contrary to the applicable terms of the collaboration agreement. We raised this concern with Genentech, along with other material concerns regarding Genentech’s performance under the collaboration agreement, but were unable to come to resolution on any of these issues. Accordingly, on June 3, 2016, following a 30 day dispute resolution period, we filed a demand for arbitration asserting claims against Genentech related to its clinical development, pricing and commercialization of COTELLIC, and cost and revenue allocations in connection with COTELLIC’s commercialization in the United States, and shortly thereafter, Genentech filed a counterclaim against us.
Other Collaborations
With respect to our partnered compounds, other than cabozantinib and cobimetinib, we are eligible to receive potential contingent payments totaling approximately $3.1 billion in the aggregate on a non-risk adjusted basis, of which 8% are related to clinical development milestones, 38% are related to regulatory milestones and 54% are related to commercial milestones, all to be achieved by the various licensees, which may not be paid, if at all, until certain conditions are met.
Business Highlights for the Three Months Ended September 30, 2016 and Recent Events
Data Presented at the 2016 European Society of for Medical Oncology (ESMO) Congress
In October 2016, clinical data from cabozantinib and cobimetinib was the subject of 15 separate data presentations at the 2016 ESMO Congress, including a Presidential Symposium session covering data from CABOSUN, a randomized phase 2 trial comparing cabozantinib to sunitinib in the first-line treatment of intermediate- or poor-risk RCC patients being conducted by The Alliance through our CRADA with NCI-CTEP. CABOSUN met its primary endpoint demonstrating a statistically significant and clinically meaningful improvement of PFS compared with sunitinib. Based on these results, we plan to submit an sNDA for cabozantinib as a treatment for first-line advanced RCC. Additionally, data from a phase 1 trial of cabozantinib in combination with nivolumab in patients with previously treated genitourinary tumors and preliminary results from a phase 1b clinical trial evaluating the safety and clinical activity of the triple combination of cobimetinib, vemurafenib, and atezolizumab in patients with previously untreated BRAF V600 mutation-positive advanced melanoma were also presented in poster discussion presentations.
Initiation of Phase 3 Clinical Development for CS-3150 by Daiichi Sankyo
On September 26, 2016, we announced that our collaboration partner, Daiichi Sankyo, had initiated a phase 3 pivotal trial to evaluate CS-3150, an oral, non-steroidal, selective mineralocorticoid receptor antagonist, as a treatment for essential hypertension in Japanese patients. As a result of Daiichi Sankyo enrolling the first patient in the phase 3 pivotal trial, we became eligible for a $15.0 million milestone payment, which we received in October 2016.
Election of Julie Anne Smith to the Board of Directors
On September 22, 2016, accomplished biopharmaceutical executive Julie Anne Smith was elected to our Board of Directors. Ms. Smith has nearly two decades of operational leadership experience in high growth public, private, startup, and established biopharmaceutical businesses. She served as president and chief executive officer of Raptor Pharmaceuticals, a commercial-stage, global innovator in the development and commercialization of orphan disease therapies, from January 2015 through the company’s acquisition by Horizon Pharma plc, or Horizon. Ms. Smith is continuing to provide transition services to Horizon through December 31, 2016. Ms. Smith previously held key commercial and strategic leadership positions at companies including Enobia Pharma, Jazz Pharmaceuticals, and Genzyme.
EC Approval of CABOMETYX for the Treatment of Advanced RCC Following VEGF-Targeted Therapy
On September 9, 2016, the EC approved CABOMETYX tablets for the treatment of advanced RCC in adults following prior VEGF targeted therapy. This approval allows for the marketing of CABOMETYX in all 28 member states of the European Union, Norway and Iceland.


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Outcome of First Planned Interim Analysis of CELESTIAL
On September 6, 2016, we announced the outcome from the first planned interim analysis of CELESTIAL, a randomized global phase 3 trial of cabozantinib compared with placebo in patients with advanced HCC who have been previously treated with sorafenib. Following this interim analysis, which was scheduled to take place when 50% of the events for the primary endpoint of OS had occurred, the trial’s IDMC determined that the study should continue without modifications per the study protocol. The trial protocol calls for a second interim analysis to take place once 75% of events have been observed.

Conversion and Redemption of 4.25% Convertible Senior Subordinated Notes

On August 9, 2016 and August 19, 2016, respectively, we entered into separate, privately negotiated exchange transactions with certain holders of the 4.25% Convertible Senior Subordinated Notes due 2019, or the 2019 Notes. Under the terms of the associated exchange agreements, the holders agreed to convert an aggregate principal amount of $239.4 million of 2019 Notes held by them in exchange for an aggregate of 45,064,456 shares of our common stock and an aggregate cash payment of approximately $2.4 million. Following completion of the exchange transactions, on August 24, 2016, we provided public notice of the redemption of the final $48.1 million of the 2019 Notes, representing all remaining notes outstanding. Following a required redemption period, holders of the remaining 2019 Notes had the option to convert their notes into shares of our common stock, plus cash in lieu of any fractional share, at a conversion rate of 188.2353 shares of common stock per $1,000 principal amount of their notes at any time before close of business on October 31, 2016. During the required redemption period, $47.5 million of the 2019 Notes were converted into shares of our common stock and the remaining $0.6 million of the 2019 Notes outstanding on November 2, 2016 were redeemed in cash for 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding such date.
Certain Factors Important to Understanding Our Financial Condition and Results of Operations
Successful development and commercialization of drugs is inherently difficult and uncertain. Products often fail during the research and development process and, if and when they are approved by regulatory authorities, they must then compete in highly competitive therapeutic areas, such as cancer treatment. Our financial performance is driven by many factors, including those described below, and is subject to the risks set forth in “Item 1A - Risk Factors” below.
Limited Sources of Revenues and the Need to Raise Additional Capital
We have incurred net losses since inception through September 30, 2016, with the exception of the 2011 fiscal year. For the nine months ended September 30, 2016, we incurred a net loss of $105.3 million and as of September 30, 2016, we had an accumulated deficit of $2.0 billion. These losses have had an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with developing drugs, we are unable to predict the extent of any future losses or when we will become profitable. Excluding fiscal 2011, our research and development expenditures and selling, general and administrative expenses have exceeded our revenues for each fiscal year, and we expect to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we are evaluating the expansion of our pipeline through drug discovery and corporate development activities. As a result, we expect to continue to incur substantial operating expenses and, consequently, we will need to generate significant additional revenues to achieve future profitability.
Since the launch of our first commercial product in January 2013, through September 30, 2016, we have generated an aggregate of $157.7 million in net product revenues. Other than sales of CABOMETYX and COMETRIQ, we have derived substantially all of our revenues since inception from collaborative research and development agreements, which depend on royalties, license fees, the achievement of milestones, and research funding we earn from any products developed from the collaborative research.
The amount of our net losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the United States; achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ under our collaboration with Ipsen; our share of the net profits and losses for the commercialization of COTELLIC in the U.S. under our collaboration with Genentech (a member of the Roche group); the amount of royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and, the level of our expenses, including commercialization activities for cabozantinib and any pipeline expansion efforts.
As of September 30, 2016, we had $379.6 million in cash and investments, which included $293.8 million available for operations, $81.6 million of compensating balance investments that we are required to maintain on deposit with Silicon Valley Bank, and $4.2 million of long-term restricted investments. We anticipate that our current cash and cash equivalents, and

25


short-term investments available for operations, and product revenues, will enable us to maintain our operations for a period of at least 12 months following the filing date of this report. Our capital requirements will depend on many factors, and we may need to use available capital resources and raise additional capital significantly earlier than we currently anticipate. For a description of the factors upon which our capital requirements depend, please see “– Liquidity and Capital Resources – Capital Requirements.”
Clinical Development and Commercialization of Cabozantinib
Our primary development and commercialization program is focused on cabozantinib, currently approved under the brand name CABOMETYX for the treatment of advanced RCC and COMETRIQ for the treatment of MTC, in the United States and the European Union. The future development path of cabozantinib beyond advanced RCC and MTC will depend upon the results of each stage of clinical development. We have and expect to continue to incur significant expenses for the development of cabozantinib as it advances in clinical development.
The commercial success of cabozantinib depends upon the degree of market acceptance of both CABOMETYX and COMETRIQ among physicians, patients, health care payers such as Medicare and Medicaid, and the medical community. It also depends upon how cabozantinib fares in competition with other products. In connection with the FDA’s approval of cabozantinib for the treatment of patients with advanced RCC who have received prior anti-angiogenic therapy, we increased our sales, marketing and distribution capabilities. Establishing and maintaining sales, marketing and distribution capabilities are expensive and time-consuming and may be disproportional compared to the revenues we may be able to generate.
Convertible Senior Subordinated Notes
In August 2012, we issued and sold $287.5 million aggregate principal amount of the 2019 Notes, for net proceeds of $277.7 million, all of which remained outstanding at December 31, 2015. On August 9, 2016 and August 19, 2016, respectively, we entered into separate, privately negotiated exchange transactions with certain holders of the 2019 Notes. Under the terms of the associated exchange agreements, the holders agreed to convert an aggregate principal amount of $239.4 million of 2019 Notes held by them in exchange for an aggregate of 45,064,456 shares of our common stock. In addition, the holders received inducements of $6.0 million, including an aggregate cash payment of approximately $2.4 million, which is included in the loss on extinguishment of debt. Following the completion of the exchange transactions, on August 24, 2016, we provided public notice of the redemption of the final $48.1 million of the 2019 Notes, representing all remaining notes outstanding. Following a required redemption period, holders of the remaining 2019 Notes had the option to convert their notes into shares of our common stock, plus cash in lieu of any fractional share, at a conversion rate of 188.2353 shares of common stock per $1,000 principal amount of the 2019 Notes at any time before close of business on October 31, 2016. During the required redemption period, $47.5 million of the 2019 Notes were converted into shares of our common stock and the remaining $0.6 million of the 2019 Notes outstanding on November 2, 2016 were redeemed in cash for 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding such date.
Deerfield Notes
In June 2010, we entered into a note purchase agreement with Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P., or the Original Deerfield Purchasers, pursuant to which, on July 1, 2010, we sold to the Original Deerfield Purchasers an aggregate of $124.0 million principal amount of our Secured Convertible Notes due July 1, 2015, which we refer to as the Original Deerfield Notes, for an aggregate purchase price of $80.0 million, less closing fees and expenses of approximately $2.0 million. On January 22, 2014, the note purchase agreement was amended to provide us with an option to extend the maturity date of our indebtedness under the note purchase agreement to July 1, 2018. On July 1, 2015, we made a $4.0 million principal payment and then extended the maturity date of the Original Deerfield Notes from July 1, 2015 to July 1, 2018. In connection with the extension, affiliates of the Original Deerfield Purchasers, which we refer to as the New Deerfield Purchasers, acquired the $100.0 million principal amount of the Original Deerfield Notes and we issued restated notes, which we refer to as the Restated Deerfield Notes with each of the New Deerfield Purchasers, representing the $100.0 million principal amount. We refer to the Original Deerfield Purchasers and the New Deerfield Purchasers collectively as Deerfield, and to the Original Deerfield Notes and Restated Deerfield Notes, collectively as the Deerfield Notes.
As of September 30, 2016 and December 31, 2015, the outstanding principal balance on the Deerfield Notes was $109.8 million and $103.8 million, respectively, which, subject to certain limitations, is payable in cash or in stock at our discretion. Beginning on July 2, 2015, the outstanding principal amount of the Deerfield Notes bears interest at the rate of 7.5% per annum to be paid in cash, quarterly in arrears, and 7.5% per annum to be paid in kind, quarterly in arrears, for a total interest rate of 15% per annum. Through July 1, 2015, the outstanding principal amount of the Deerfield Notes bore interest in the annual amount of $6.0 million, payable quarterly in arrears.

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On August 6, 2012, the parties amended the note purchase agreement to permit the issuance of the 2019 Notes and modify certain optional prepayment rights. The amendment became effective upon the issuance of the 2019 Notes and the payment to the Original Deerfield Purchasers of a $1.5 million consent fee. On August 1, 2013, the parties further amended the note purchase agreement to clarify certain of our other rights under the note purchase agreement. On January 22, 2014, the note purchase agreement was amended to provide us with an option to extend the maturity date of our indebtedness under the note purchase agreement to July 1, 2018, which extension was completed on July 1, 2015. On July 10, 2014, the parties further amended the note purchase agreement to clarify certain provisions of the note purchase agreement.
The following is a summary of the interest expense for the Deerfield Notes (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stated coupon interest
$
2,031

 
$
1,891

 
$
5,939

 
$
4,866

Amortization of debt discount, debt issuance costs and accrual of interest paid in kind
2,152

 
1,959

 
6,266

 
7,279

Total interest expense
$
4,183

 
$
3,850

 
$
12,205

 
$
12,145

The balance of unamortized fees and costs was $0.5 million and $0.7 million as of September 30, 2016 and December 31, 2015, respectively, which is recorded as a reduction of the carrying amount of the 2019 Notes on the accompanying Condensed Consolidated Balance Sheets. Effective March 4, 2015, upon notification of our election to require the New Deerfield Purchasers to acquire the Deerfield Notes and extend the maturity date to July 1, 2018, we began to amortize the remaining unamortized discount, fees and costs through July 1, 2018 using the effective interest method and an effective interest rate of 15.3%.
In each of January 2014 and 2013, we made mandatory prepayments of $10.0 million on the Deerfield Notes. We were required to make an additional mandatory prepayment on the Deerfield Notes in January 2015 and 2016 equal to 15% of certain revenues from collaborative arrangements, which we refer to as Development/Commercialization Revenue, received during the prior fiscal year, subject to a maximum prepayment amount of $27.5 million. We made no such mandatory prepayments due to the fact that we received no such revenues during the fiscal year ended December 31, 2014 and Deerfield’s election not to receive the mandatory prepayment in January 2016 related to development/commercialization revenue received during the year ended December 31, 2015. As a result of the extension of the maturity date of the Deerfield Notes to July 1, 2018, our obligation to make annual mandatory prepayments equal to 15% of Development/Commercialization Revenue received by us during the prior fiscal year will continue to apply in January 2017 and January 2018. However, we will only be obligated to make any such annual mandatory prepayment if the note holders provide notice to us of their election to receive the prepayment. Pursuant to this requirement, we may be required make a mandatory prepayment of $27.5 million in January 2017 as a result of the $200.0 million upfront nonrefundable payment received in March 2016 in consideration for the exclusive license and other rights contained in the collaboration and license agreement with Ipsen and the $5.0 million milestone payment from Merck we received in the first quarter of 2016 related to its worldwide license of our phosphoinositide-3 kinase-delta program. That portion of the Deerfield Notes is included in current liabilities. The definition of “Development/Commercialization Revenue” expressly excludes any sale or distribution of drug or pharmaceutical products in the ordinary course of our business, and any proceeds from any Intellectual Property Sale, but would include our share of the net profits from the commercialization of cobimetinib in the U.S. and the receipt of royalties from cobimetinib sales outside the U.S., if any.
Under the note purchase agreement, we may at our sole discretion prepay all of the principal amount of the Deerfield Notes at a prepayment price equal to 105% of the outstanding principal amount of the Deerfield Notes, plus all accrued and unpaid interest through the date of such prepayment, plus, if prior to July 1, 2017, all interest that would have accrued on the principal amount of the Deerfield Notes between the date of such prepayment and July 1, 2017, if the outstanding principal amount of the Deerfield Notes as of such prepayment date had remained outstanding through July 1, 2017, plus all other accrued and unpaid obligations, collectively referred to as the Prepayment Price.
In lieu of making any portion of the Prepayment Price or mandatory prepayment in cash, subject to certain limitations (including a cap on the number of shares issuable under the note purchase agreement), we have the right to convert all or a portion of the principal amount of the Deerfield Notes into, or satisfy all or any portion of the Prepayment Price amounts or mandatory prepayment amounts with shares of our common stock. Additionally, in lieu of making any payment of accrued and unpaid interest in respect of the Deerfield Notes in cash, subject to certain limitations, we may elect to satisfy any such payment with shares of our common stock. The number of shares of our common stock issuable upon conversion or in settlement of principal and interest obligations will be based upon the discounted trading price of our common stock over a specified trading period. Upon certain changes of control of Exelixis, a sale or transfer of assets in one transaction or a series of

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related transactions for a purchase price of more than (i) $400 million or (ii) 50% of our market capitalization, Deerfield may require us to prepay the Deerfield Notes at the Prepayment Price. Upon an event of default, as defined in the Deerfield Notes, Deerfield may declare all or a portion of the Prepayment Price to be immediately due and payable.
We are required to notify the applicable Deerfield entities of certain sales, assignments, grants of exclusive licenses or other transfers of our intellectual property pursuant to which we transfer all or substantially all of our legal or economic interests, defined as an Intellectual Property Sale, and the Deerfield entities may elect to require us to prepay the principal amount of the Deerfield Notes in an amount equal to (i) 100% of the cash proceeds of any Intellectual Property Sale relating to cabozantinib and (ii) 50% of the cash proceeds of any other Intellectual Property Sale.
In connection with the January 2014 amendment to the note purchase agreement, on January 22, 2014, we issued to the New Deerfield Purchasers two-year warrants, which we refer to as the 2014 Warrants, to purchase an aggregate of 1,000,000 shares of our common stock at an exercise price of $9.70 per share. Subsequent to our election to extend the maturity date of the Deerfield Notes, the exercise price of the 2014 Warrants was reset to $3.445 per share and the term was extended by two years to January 22, 2018. In August 2015 the New Deerfield Purchasers assigned the 2014 Warrants to OTA LLC. The 2014 Warrants contain certain limitations that prevent the holder from acquiring shares upon exercise that would result in the number of shares beneficially owned by the holder to exceed 9.98% of the total number of shares of our common stock then issued and outstanding. In addition, upon certain changes in control of Exelixis, to the extent the 2014 Warrants are not assumed by the acquiring entity, or upon certain defaults under the 2014 Warrants, the holder has the right to net exercise the 2014 Warrants for shares of common stock, or be paid an amount in cash in certain circumstances where the current holders of our common stock would also receive cash, equal to the Black-Scholes Merton value of the 2014 Warrants.
In connection with the issuance of the 2014 Warrants, we entered into a registration rights agreement with Deerfield, pursuant to which we filed a registration statement with the SEC covering the resale of the shares of common stock issuable upon exercise of the 2014 Warrants.
In connection with the note purchase agreement, we also entered into a security agreement in favor of Deerfield which provides that our obligations under the Deerfield Notes will be secured by substantially all of our assets except intellectual property. On August 1, 2013, the security agreement was amended to limit the extent to which voting equity interests in any of our foreign subsidiaries shall be secured assets.
The note purchase agreement as amended and the security agreement include customary representations and warranties and covenants made by us, including restrictions on the incurrence of additional indebtedness.
Loan Agreement with Silicon Valley Bank
On May 22, 2002, we entered into a loan and security agreement with Silicon Valley Bank for an equipment line of credit. On June 2, 2010, we amended the loan and security agreement to provide for a new seven-year term loan in the amount of $80.0 million. As of both September 30, 2016 and December 31, 2015, the outstanding principal balance due under the term loan was $80.0 million. All other amounts due under the agreement were repaid prior to December 31, 2015. The principal amount outstanding under the term loan accrues interest at 1.0% per annum, which interest is due and payable monthly. We are required to repay the term loan in one balloon principal payment, representing 100% of the principal balance and accrued and unpaid interest, on May 31, 2017, and therefore have classified the term loan as a current liability as of September 30, 2016. We have the option to prepay all, but not less than all, of the amounts advanced under the term loan, provided that we pay all unpaid accrued interest thereon that is due through the date of such prepayment and the interest on the entire principal balance of the term loan that would otherwise have been paid after such prepayment date until the maturity date of the term loan. In accordance with the terms of the loan and security agreement, we are required to maintain an amount equal to at least 100%, but not to exceed 107%, of the outstanding principal balance of the term loan and all equipment lines of credit under the loan and security agreement, if any, on deposit in one or more investment accounts with Silicon Valley Bank or one of its affiliates as support for our obligations under the loan and security agreement (although we are entitled to retain income earned or the amounts maintained in such accounts). Any amounts outstanding under the term loan during the continuance of an event of default under the loan and security agreement will, at the election of Silicon Valley Bank, bear interest at a per annum rate equal to 6.0%. If one or more events of default under the loan and security agreement occurs and continues beyond any applicable cure period, Silicon Valley Bank may declare all or part of the obligations under the loan and security agreement to be immediately due and payable and stop advancing money or extending credit to us under the loan and security agreement.
Critical Accounting Estimates
The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the United States that requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, management evaluates its

28


estimates including, but not limited to, those related to revenue recognition, including for deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances) and the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations, recoverability of inventory, certain accrued liabilities including clinical trial and collaboration liability accruals, the valuation of the debt and equity components of our convertible debt and share-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. We believe our critical accounting policies relating to inventory, revenue recognition, clinical trial accruals, restructuring liability, share based compensation and warrant valuation reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
Net Product Revenues including Discounts and Allowances
In the United States, we sell our products, CABOMETYX and COMETRIQ, to specialty pharmacies and distributors that benefit from customer incentives and have a right of return under certain circumstance. Historically we have relied on payer data received from the specialty pharmacy that sells COMETRIQ in the United States and historical utilization rates in determining our discounts and allowances. In determining discounts and allowances for the sale of CABOMETYX, in addition to using payer data received from the specialty pharmacies and distributors that sell CABOMETYX and historical data for COMETRIQ, we also utilized claims data from third party sources for competitor products for the treatment of advanced RCC. Based in part on the availability of this third party data, we made the determination that we had sufficient experience and data to reasonably estimate expected future returns and the discounts and allowances due to payers at the time of shipment to the specialty pharmacy or distributor, and therefore record revenue for the product using the “sell-in” revenue recognition model.
Royalty, License and Contract Revenues
We enter into corporate collaboration and license agreements under which we may obtain upfront license fees, research funding, and contingent, milestone and royalty payments. Our deliverables under these arrangements may include intellectual property rights, distribution rights, delivery of manufactured product, and participation on joint steering committees and/or research and development services. In order to account for the multiple-element arrangements, we identify the deliverables included within the arrangement and evaluate whether the delivered elements under these arrangements have value to our collaboration partner on a stand-alone basis and represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver future goods or services, a right or license to use an asset, or another performance obligation. If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting. For a combined unit of accounting, non-refundable upfront fees are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period of continued involvement. Amounts received in advance of performance are recorded as deferred revenue. Upfront fees are classified as license revenues in our consolidated statements of operations.
We consider sales-based contingent payments to be royalty revenue which is generally recognized at the date the contingency is achieved. Royalties are recorded based on sales amounts reported to us for the preceding quarter.
For certain contingent payments under collaboration and license arrangements, we recognize revenue using the milestone method. Under the milestone method a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event: (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the

29


consideration earned from the achievement of the milestone is: (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
Valuation of Debt and Equity Instruments issued in Connection with August 2012 Offering
The 2019 Notes are accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options. Under ASC Subtopic 470-20, issuers of certain convertible debt instruments that have a net settlement feature and may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of any outstanding debt instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument at issuance and the total settlement consideration transferred to the holders upon conversion. The effective interest rate used in determining the original component of the 2019 Notes was 10.09% when issued in August 2012 and 9.50% during the three months ended September 30, 2016. See “Note 6 - Debt” of the Note to Consolidated Financial Statements for further information regarding the 2019 Notes.
There have been no other significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2016, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Updates, or ASU, No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09 will replace most existing revenue recognition guidance when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued an update to defer the effective date of this update by one year. ASU 2014-09, as amended, becomes effective for us in the first quarter of fiscal year 2018, but allows us to adopt the standard one year earlier if we so choose. We currently plan to adopt this accounting standard in the first quarter of fiscal year 2018. We have not yet selected a transition method and are evaluating the effect that ASU 2014-09 will have on our Consolidated Financial Statements and related disclosures.
In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, or ASU 2015-05. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 was effective for all interim and annual reporting periods beginning after December 15, 2015 and therefore we adopted ASU 2015-05 in the three months ended March 31, 2016 on a prospective basis. The adoption of ASU 2015-05 did not have a material impact on our Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and is not expected to have a material effect on our Consolidated Financial Statements in future periods.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory, or ASU No. 2015-11”). ASU No. 2015-11 requires inventory measurement at the lower of cost and net realizable value. ASU No. 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted by all entities as of the beginning of an interim or annual reporting period. We are in the process of assessing the impact, if any, of ASU No. 2015-11 on our condensed consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. ASU 2016-09 is aimed at the simplification of several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for all interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-09 will have on our consolidated financial statements and related disclosures.

30


In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. ASU 2016-15 addresses eight specific cash flow issues including, debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing and contingent consideration payments made after a business combination. We do not expect the adoption of ASU 2016-15 to have a material impact on our Consolidated Statements of Cash Flows.

Fiscal Year Convention
We adopted a 52- or 53-week fiscal year that generally ends on the Friday closest to December 31st. Fiscal year 2016 will end on December 30, 2016, and fiscal year 2015, ended on January 1, 2016. For convenience, references in this report as of and for the fiscal periods ended September 30, 2016, and October 2, 2015, and as of and for the fiscal years ended December 30, 2016 and January 1, 2016, are indicated as being as of and for the periods ended September 30, 2016, September 30, 2015, and the years ended December 31, 2016, and December 31, 2015, respectively.
Results of Operations
Revenues
Revenues by category were as follows (dollars in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Gross product revenues
$
46,720

 
$
7,230

 
$
92,383

 
$
25,794

Discounts and allowances
(3,978
)
 
(376
)
 
(8,924
)
 
(1,560
)
Net product revenues
42,742

 
6,854

 
83,459

 
24,234

Royalty and license revenues (1)
4,452

 

 
10,414

 

Contract revenues (2)
15,000

 
3,000

 
20,000

 
3,000

Total revenues
$
62,194

 
$
9,854

 
$
113,873

 
$
27,234

Dollar change
$
52,340

 
 
 
$
86,639

 


Percentage change
531
%
 
 
 
318
%
 


____________________
(1)
Includes royalties and amortization of upfront payments.
(2)
Includes contingent and milestone payments.
Net product revenues by product were as follows (dollars in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
CABOMETYX
$
31,238

 
$

 
$
48,812

 
$

COMETRIQ
11,504

 
6,854

 
34,647

 
24,234

Net product revenues
$
42,742

 
$
6,854

 
$
83,459


$
24,234

Dollar change
$
35,888

 
 
 
$
59,225

 
 
Percentage change
524
%
 
 
 
244
%
 
 
The increase in net product revenues for the three and nine months ended September 30, 2016, as compared to the comparable periods in 2015, reflects the impact of the commercial launch of CABOMETYX in late April 2016. CABOMETYX was approved by the FDA on April 25, 2016 as a treatment for patients with advanced RCC who have received prior anti-angiogenic therapy. Net product revenues during the nine months ended September 30, 2016 were impacted by the build of channel inventory related to the initial launch period for CABOMETYX. Net product revenues for both CABOMETYX and COMETRIQ are recorded using the “sell-in” method of revenue recognition.
Royalty and license revenues for the three and nine months ended September 30, 2016 included recognition of $3.8 million and $8.6 million, respectively, of the $200.0 million upfront nonrefundable payment received in March 2016 in consideration for the exclusive license and other rights contained in the collaboration and license agreement with Ipsen and the $60.0 million milestone we achieved upon the approval of cabozantinib by the EMA in second-line RCC in September 2016. During the three and nine months ended September 30, 2016, we also recognized $0.7 million and $1.8 million, respectively, of

31


royalties on ex-U.S. net sales of COTELLIC. There were no such royalty and license revenue during the comparable periods in 2015.
Contract revenues for the three and nine months ended September 30, 2016 reflect recognition of $15.0 million from a milestone payment earned from Daiichi Sankyo related to its worldwide license of our compounds that modulate mineralocorticoid receptor (“MR”), including CS-3150 (an isomer of XL550) in September 2016 and $5.0 million from a milestone payment earned from Merck related to its worldwide license of our phosphoinositide-3 kinase-delta program in July 2016. Contract revenues for the three and nine months ended September 30, 2015 reflect an additional $3.0 million contingent payment earned in March 2016 from Merck related to that same license.
Total revenues by significant customer were as follows (dollars in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Diplomat Specialty Pharmacy
$
19,392

 
$
6,457

 
$
46,770

 
$
21,567

Daiichi Sankyo
15,000

 

 
15,000

 

Merck

 
3,000

 
5,000

 
3,000

Swedish Orphan Biovitrum
1,350

 
397

 
2,453

 
2,667

Others, individually less than 10% of total revenues for all periods presented
26,452

 

 
44,650

 

Total revenues
$
62,194

 
$
9,854

 
$
113,873

 
$
27,234

Dollar change
$
52,340

 


 
$
86,639

 
 
Percentage change
531
%
 
 
 
318
%
 
 
Cost of Goods Sold
Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty on net sales of any product incorporating cabozantinib payable to GlaxoSmithKline, indirect labor costs, the cost of manufacturing, write-downs related to expiring and excess inventory, and other third party logistics costs of our product. A portion of the manufacturing costs for inventory was incurred prior to regulatory approval of CABOMETYX and COMETRIQ and, therefore, were expensed as research and development costs when those costs were incurred, rather than capitalized as inventory.
The cost of goods sold and our gross margins were as follows (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Cost of goods sold
$
2,455

 
$
1,420

 
$
4,700

 
$
2,872

Gross margin
94
%
 
79
%
 
94
%
 
88
%
The increase in gross margins for the three and nine months ended September 30, 2016 as compared to the comparable period in 2015, was primarily related to the launch of CABOMETYX which has lower manufacturing costs than COMETRIQ. Cost of goods sold also include write-downs related to excess and expiring inventory. Such write-downs were $0.4 million for both the three and nine months ended September 30, 2016 as compared to $1.1 million and $0.9 million for the comparable periods in 2015. The cost of goods sold and gross margin we have experienced in this early stage of the CABOMETYX product launch may not be representative of what we may experience going forward.
Research and Development Expenses
Total research and development expenses were as follows (dollars in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Research and development expenses
$
20,256

 
$
26,091

 
$
72,166

 
$
72,879

Dollar change
$
(5,835
)
 
 
 
$
(713
)
 
 
Percentage change
(22
)%
 
 
 
(1
)%
 
 
Research and development expenses consist primarily of clinical trial expenses, personnel expenses, stock-based compensation, consulting and outside services, the allocation of general corporate costs, and temporary personnel expenses.

32


The decrease in research and development expenses for the three months ended September 30, 2016 as compared to the comparable period in 2015, was primarily related to decreases in stock-based compensation, clinical trial costs, which includes services performed by third-party contract research organizations and other vendors who support our clinical trials , which was partially offset by increases in personnel expenses. The decrease in stock-based compensation of $5.5 million for the three months ended September 30, 2016 as compared to the comparable period in 2015 was primarily related to the vesting of performance-based stock options tied to top-line METEOR data received in July 2015 and was expensed during the three months ended months ended September 30, 2015. The decrease in clinical trial costs of $2.9 million for the three months ended September 30, 2016 as compared to the comparable period in 2015 was predominantly due to decreases in costs related to METEOR and was partially offset by increases in costs related to CELESTIAL. Personnel expenses increased by $2.6 million for the three months ended September 30, 2016 as compared to the comparable period in 2015 primarily due to the hiring of medical science liaisons as a result of the launch of CABOMETYX and an increase in the accrual for corporate bonuses.
The decrease in research and development expenses for the nine months ended September 30, 2016 as compared to the comparable period in 2015, was primarily related to clinical trial costs, which includes services performed by third-party contract research organizations and other vendors who support our clinical trials, and a decrease in the allocation of general corporate costs; those decreases were partially offset by increases in personnel expenses and consulting and outside services. The decrease in clinical trial costs was $9.2 million for the nine months ended September 30, 2016 as compared to the comparable period in 2015. The decrease in clinical trial costs was predominantly due to decreases in costs related to METEOR, our phase 3 pivotal trial in advanced RCC and was partially offset by increases in costs related to CELESTIAL, our phase 3 pivotal trial in advanced HCC. The allocation of general corporate costs decreased by $3.7 million for the nine months ended September 30, 2016 as compared to the comparable period in 2015, primarily due to headcount growth in the selling, general and administrative functions. Personnel expenses increased by $7.6 million for the nine months ended September 30, 2016 as compared to the comparable period in 2015 primarily due to the hiring of medical science liaisons as a result of the launch of CABOMETYX and an increase in the accrual for corporate bonuses. Consulting and outside services increased by $2.3 million for the nine months ended September 30, 2016 as compared to the comparable period in 2015 primarily due to increases in activities related to medical affairs and drug safety.
We are focusing our development and commercialization efforts primarily on cabozantinib to maximize the therapeutic and commercial potential of this compound, and as a result, we expect our near-term research and development expenses to relate to the clinical development of cabozantinib. We expect to continue to incur significant development costs for cabozantinib in future periods as we evaluate its potential in a broad development program comprising over 45 ongoing or planned clinical trials across multiple indications. The most notable study of this program is our company-sponsored phase 3 trial of cabozantinib in advanced HCC called CELESTIAL. In addition, postmarketing commitments in connection with the approval of COMETRIQ in progressive, metastatic MTC dictate that we conduct an additional study in that indication.
We do not have reliable estimates regarding the timing of our clinical trials. We estimate that typical phase 1 clinical trials last approximately one year, phase 2 clinical trials last approximately one to two years and phase 3 clinical trials last approximately two to four years. However, the length of time may vary substantially according to factors relating to the particular clinical trial, such as the type and intended use of the drug candidate, the clinical trial design and the ability to enroll suitable patients.
We do not have reliable estimates of total costs for a particular drug candidate, or for cabozantinib for a particular indication, to reach the market. Our potential therapeutic products are subject to a lengthy and uncertain regulatory process that may involve unanticipated additional clinical trials and may not result in receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses were as follows (dollars in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Selling, general and administrative expenses
$
32,463

 
$
17,842

 
$
103,143

 
$
40,162

Dollar change
$
14,621