UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-30235
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3257395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 Harbor Way
P.O. Box 511
South San Francisco, CA 94083
(Address of principal executive offices, including zip code)
(650) 837-7000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.001 Par Value per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $359,717,031.
As of February 28, 2003, there were 59,649,585 shares of the registrant's common
stock outstanding. As of that date, there were approximately 50,879,244 shares
held by non-affiliates of the registrant, with an approximate aggregate market
value of $293,573,238 based upon the $5.77 closing price of the registrant's
common stock listed on the Nasdaq National Market on February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than April 30, 2003, in connection with the registrant's 2003 Annual Meeting of
Stockholders, are incorporated herein by reference into Part III of this Annual
Report on Form 10-K.
EXELIXIS, INC.
FORM 10-K
INDEX
PART I PAGE
----
Item 1. Business 4
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Consolidated Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Consolidated Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 65
PART III
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 66
Item 13. Certain Relationships and Related Transactions 66
Item 14. Controls and Procedures 66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 66
SIGNATURES 68
CERTIFICATIONS 70
PART I
The following discussion and analysis contains forward-looking statements. These
statements are based on our current expectations, assumptions, estimates and
projections about our business and our industry, and involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied in, or contemplated by, the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan,"
"will," "may," "should," "estimate," "predict," "potential," "continue" or the
negative of such terms or other similar expressions identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors more fully
described under the caption "Risk Factors" as well as those discussed elsewhere
in this document. These and many other factors could affect the future financial
and operating results of Exelixis. Exelixis undertakes no obligation to update
any forward-looking statement to reflect events after the date of this report.
ITEM 1. BUSINESS
Overview
We believe that we are a leader in the discovery and validation of high-quality
novel targets for several major human diseases and a leader in the discovery of
potential new drug therapies, specifically for cancer and other proliferative
diseases. Our primary mission is to develop proprietary human therapeutics by
leveraging our integrated discovery platform to increase the speed, efficiency
and quality of pharmaceutical product discovery and development.
Through our expertise in comparative genomics and model system genetics, we are
able to find new drug targets that we believe would be difficult or impossible
to uncover using other experimental approaches. Our research is designed to
identify novel genes and proteins expressed by those genes that, when changed,
either decrease or increase the activity in a specific disease pathway in a
therapeutically relevant manner. These genes and proteins represent either
potential product targets or drugs that may treat disease or prevent disease
initiation or progression.
Specifically in cancer, the remarkable evolutionary conservation of biochemical
pathways strongly supports the use of simple model systems, such as fruit flies,
nematode worms, zebrafish and mice, to identify key components of critical
cancer pathways that can then be targeted for drug discovery. We expect to
develop new cancer drugs by exploiting the underlying "genetic liabilities" of
tumor cells to provide specificity in targeting these cells for destruction,
while leaving normal cells unharmed. We have discovered and are further
developing a number of small molecule drug targets in addition to monoclonal
antibody drug targets. Molecules directed against these targets may selectively
kill cancer cells while leaving normal cells unharmed, and may provide
alternatives to current cancer therapies.
While our primary focus is on drug discovery and development, we believe that
our proprietary technologies are valuable to other industries whose products can
be enhanced by an understanding of DNA or proteins, including the agrochemical,
agricultural and diagnostic industries. Many of these industries have shorter
product development cycles and lower risk than the pharmaceutical industry,
while at the same time generating significant sales with attractive profit
margins. By partnering with companies in multiple industries, we believe that we
are able to diversify our business risk, while at the same time maximizing our
future revenue stream opportunities.
Clinical Pipeline
In 2002, we made considerable progress in advancing our clinical development
pipeline. We entered into relationships providing for clinical supplies of our
rebeccamycin analogue in anticipation of initiating Company sponsored clinical
studies. In addition, we continued to advance preclinical candidates, including
XL 784, in anticipation of filing our first investigational new drug ("IND")
application for a proprietary compound.
Rebeccamycin Analogue (XL 119). Our most advanced clinical program is the
rebeccamycin analogue, an anticancer compound that we in-licensed from
Bristol-Myers Squibb Company ("Bristol-Myers Squibb" or "BMS") in 2001. The
rebeccamycin analogue has completed Phase I clinical testing. The Phase II
clinical testing program, which is being conducted by the National Cancer
Institute ("NCI"), is well advanced. The compound has been studied in a broad
range of tumors. The safety profile appears manageable and consistent with that
of other cytotoxic agents, and generally includes myelosuppression and
neutropenia. These side effects are largely transient and reversible when
treatment is stopped. To date, the most pronounced antitumor activity was
observed in upper gastrointestinal tumors (most prominently in bile duct
tumors), where several partial responses and instances of prolonged disease
stabilization occurred. Based on these results, we believe that the compound
deserves further development efforts, as there is currently no approved standard
therapy for these rapidly progressing tumors. We anticipate initiating next
development steps, if any, following discussions with the Food and Drug
Administration ("FDA"). The NCI may also expand its Phase II program to include
additional tumor types or combination studies. Drug substance to be used in
Company-sponsored clinical trials has been manufactured in bulk supply by
third-party suppliers. We expect that the available supply of the compound will
be sufficient to support our clinical needs as well as any trials that may be
initiated by the NCI.
XL 784. XL 784 is the first small molecule compound developed from our
proprietary drug discovery platform. The target against which XL 784 is directed
was originally discovered in our anti-angiogenesis research program, although
the actual mechanism by which the compound exerts its anti-tumor effects is
still being explored. We are currently completing regulatory toxicology studies,
and if the safety profile continues to look acceptable, we expect to file an IND
in 2003. Our clinical plans include initiating Phase I first-in-man studies, to
be conducted in healthy volunteers, while we continue to explore the therapeutic
utility of the compound in various animal models of disease, including
cardiovascular disease.
2002 Corporate Collaborations
We have established several commercial collaborations with leading
pharmaceutical and biotechnology companies as well as agriculture companies. In
October 2002, Exelixis and SmithKlineBeecham Corporation ("GlaxoSmithKline" or
"GSK") formed a broad alliance to discover, develop and commercialize novel
therapeutics in the areas of vascular biology, inflammatory disease and cancer.
The alliance combines our powerful gene-to-drug discovery platform and GSK's
strengths in development and commercialization by means of an innovative model
for sharing risks and potential rewards in a research and development
collaboration. Under the terms of the arrangement, we will have responsibility
for the delivery to GSK of small molecule compounds that have met agreed-upon
criteria in early Phase II clinical testing. GSK will have the right to further
develop these compounds and exclusive, worldwide commercialization and
manufacturing rights. We retain co-promotion rights in North America for
molecules selected for development by GSK.
In August 2002, we agreed to a two-year extension of our mechanism of action
("MOA") collaboration with BMS, which was established in 1999. Under this
collaboration, we identify and validate important biological targets directly
affected by selected BMS compounds. This collaboration is in addition to the
broad alliance established with BMS in 2001 focused on cancer target discovery,
which is ongoing.
In December 2002, our joint venture with Bayer CropScience LP ("Bayer
CropScience," formerly, Aventis CropScience USA LP, "Aventis CropScience"),
Agrinomics LLC, established a collaboration with Renessen LLC to enhance seed
oil content in commercially valuable seed oil crops. Renessen is a joint venture
between Monsanto Company and Cargill, Inc. The collaboration combines
Agrinomics' technological leadership in agricultural functional genomics,
high-throughput gene screening and seed trait identification, developed by
Exelixis, with Renessen's global expertise in quality trait crop development and
commercialization, with the goal of accelerating the development of novel
proprietary crops with improved seed composition traits. This collaboration
leverages the unique capabilities of Agrinomics' powerful ACTTAG trait selection
platform to rapidly discover and validate genes that can optimize important seed
traits and potentially increase the commercial value of many of the world's most
significant agricultural crops.
At the beginning of 2002, we established a combinatorial chemistry collaboration
with Merck & Co., Inc. ("Merck") for the joint design and generation of small
molecular compound libraries for high-throughput drug screening. The
collaboration pairs our expertise in combinatorial library design with Merck's
synthetic chemistry expertise with the goal of achieving optimal diversity,
density, novelty and quality in library production. This collaboration is
similar to our other combinatorial chemistry collaborations with Cytokinetics,
Inc., Elan Pharmaceuticals, Inc., Scios Inc. and Schering-Plough Research
Institute, Inc., and provides licensing fees and payments for delivery of
specified numbers of compounds meeting certain quality-assurance criteria.
In addition to our commercial collaborations, we have relationships with other
biotechnology companies, academic institutions and universities that provide us
access to specific technology or intellectual property for the enhancement of
our business. These include collaborations with leading biotechnology product
developers and solutions providers, among them Affymetrix Inc., GeneMachines,
AVI BioPharma, Inc., Silicon Genetics, Galapagos NV, Genomics Collaborative
Inc., Accelrys, Inc., Akceli, Inc., Ardais Corp., Cogen BioCognetics, Inc.,
Impath Predictive Oncology, Inc. and Virtual Arrays, Inc.
In June 2002, we established a collaboration with Merck for the creation of
customized genetically engineered mouse models of disease based on our
proprietary Conditional gene targeting technology. Under the agreement, we will
seek to create a specified number of customized mouse models based on Merck's
genetic specifications. Conditional gene targeting permits highly specific
temporal and spatial control over gene inactivation for the creation of
precisely controlled, information-rich mammalian models of disease.
Following the completion of our acquisition of Genomica Corporation in January
2002, we granted exclusive third- party commercial and development rights to
Genomica's software assets to Visualize, Inc., a provider of sophisticated,
interactive data visualization software serving the financial services industry.
We have a revenue sharing agreement with Visualize, pursuant to which we retain
the right to receive and use the Genomica software as well as any derivative
works created by Visualize for our internal use.
Industry Background
Conventional chemical drug discovery involves a series of steps, many years of
work and substantial resources. Initially, scientists identify potential
molecular targets for therapeutic intervention. These targets must then be
validated, or demonstrated to be able to affect the disease biochemistry. Next,
the validated target is put through a series of assays, or tests, to identify
chemical compounds that would modulate the activity of the target. Once chemical
compounds that modify the activity of the target are identified, they must then
be iteratively optimized through synthetic chemistry processes. After several
iterations, the resulting compounds are tested in animal models of disease, and
selected lead compounds are then considered for preclinical development.
Many of the principal products of the pharmaceutical and biotechnology
industries were developed without knowledge about the underlying genetic and
biochemical causes of disease, or without knowledge of how the drug works in the
body. This limited knowledge about the target or MOA of the product can lead to
somewhat random and/or suboptimal product candidates. Similar issues are
problems for the agrochemical, agricultural and diagnostic industries. As a
result, product development in all of these industries is costly, time
consuming, inefficient and characterized by high failure rates. Many companies
have turned to genomic technologies, primarily for DNA sequence information, to
help address these problems with respect to the selection of molecular or
gene-based targets.
Despite significant investment in genomics and the recent availability of the
human genome sequence, there has not been appreciable improvement in selecting
high quality molecular targets for drug development. Notwithstanding the
tremendous advances in providing genomic data, it is clear that a rational
selection of molecular targets requires more detailed or specific knowledge
about the function of genes and their encoded proteins as well as their
interaction with other components of signaling networks, or biochemical
pathways. Since the complete human sequence and the sequences of other
commercially important genomes are now available, we believe that the
competitive advantage for companies going forward will be the ability to
identify the small number of significant gene targets, within the very large
number of genes, which when modulated will result in a therapeutically and
commercially valuable outcome. By integrating our superior ability to select
biological targets with a state-of-the-art drug discovery platform, we expect
our platform and biological insights to produce novel targets and potentially
innovative products.
Our Strategy
Our business strategy is to leverage our biological expertise and integrated
drug discovery capabilities to improve the speed, efficiency and quality of the
discovery, development and commercialization process for human therapeutics and
other products. Specifically our business strategy includes the following key
elements:
MAINTAIN AND AUGMENT BIOLOGICAL EXPERTISE: Our biological expertise is a key
competitive advantage that we believe applies throughout all aspects of our
collaborative relationships and drug discovery efforts. We seek to continually
enhance our technology platform through building, in-licensing or acquiring
technologies that complement our fundamental knowledge and capabilities as well
as through protecting our proprietary technologies with patents and trade
secrets.
SELECTIVELY DEVELOP THERAPEUTIC PRODUCTS: We have invested and plan to continue
to invest significant funds in discovering and developing proprietary products,
particularly in the area of cancer. We have committed substantial resources to
building a world-class drug discovery effort that is integrated with our unique
understanding of the biological basis of disease, and we expect to generate a
pipeline of compounds to move into clinical trials.
LEVERAGE STRATEGIC COLLABORATIONS: We have established and intend to continue to
pursue commercial relationships and key partnerships with major pharmaceutical,
biotechnology and agrochemical companies based on the strength of our
technologies, biological expertise and drug discovery capabilities. These
collaborations provide us with a substantial committed revenue stream in
addition to opportunities to receive significant future payments, if our
collaborators successfully develop and market products that result from our
collaborative work. In addition, many of our collaborations have been structured
strategically so that we gain access to technology or product opportunities.
Technology access allows us to more rapidly advance our internal programs,
saving both time and money, while at the same time retaining rights to use the
same information or tools in different industries or for different development
opportunities.
ACQUIRE PRODUCTS AND TECHNOLOGIES OPPORTUNISTICALLY: We continually evaluate
opportunities that may provide us with key personnel, intellectual property,
technologies and products that will enhance our development capabilities and
product pipeline. We believe that through the acquisition of strategic products
and technologies we will be able to create additional value in our internal and
collaborative programs. In addition, we believe that many of these strategic
relationships will permit us to obtain co-development, co-promotion or other
rights to products identified or developed in such collaborative relationships
as a result of our efforts.
Integrated Research And Discovery Technologies
We have developed an integrated research and discovery platform that includes
proprietary technologies and know-how. This platform includes model system
genetics and comparative genomics, libraries of modified model organisms,
specialized reagents, assay biology, informatics databases and software, MOA
technology, automated high-throughput screening, a growing compound library in
excess of approximately three million small molecule compounds and extensive
medicinal/combinatorial chemistry capabilities. Using this integrated platform,
we are able to effectively and rapidly identify novel targets and develop
proprietary compounds. We believe that a key competitive advantage is the
breadth of our platform as well as our ability to apply the tools of modern
biology and chemistry to address commercially relevant questions.
Model System Genetics and Comparative Genomics. Model system genetics is
the study of simple biological systems to discover genes, proteins and
biochemical pathways that may be useful in the development of new pharmaceutical
or agricultural products. Our primary model systems are the fruit fly, D.
melanogaster; the nematode worm, C. elegans; the zebrafish, D. rerio, corn smut,
Ustilago maydis; Arabidopsis thaliana; and the micro-tomato, Lycopersicon
esculentum. Empirical evidence has provided us with accurate benchmarks for
applying biological and biochemical discoveries from these model systems to more
developed organisms, such as humans or commercial crops.
Model System Lifecycle Selected Applications
- ----------------------- --------- -----------------------------------------------------------
Drosophila melanogaster 10 days Cancer, angiogenesis, diabetes, inflammation, CNS disorders
- ----------------------- --------- -----------------------------------------------------------
C. elegans 3 days Diabetes, Alzheimer's disease
- ----------------------- --------- -----------------------------------------------------------
D. rerio 90 days Angiogenesis, cancer, inflammation
- ----------------------- --------- -----------------------------------------------------------
Arabidopsis thaliana 10 days Plant traits
- ----------------------- --------- -----------------------------------------------------------
Lycopersicon esculentum 98 days Nutraceuticals
- ----------------------- --------- -----------------------------------------------------------
Ustilago maydis 10 days Plant pathology
- ----------------------- --------- -----------------------------------------------------------
Scientists have used these organisms as research tools for several decades. We
have industrialized the analysis of these model systems by developing a suite of
proprietary tools and reagents that allow us to perform systematic genetic
analyses at a larger scale and with substantially greater speed than otherwise
are currently available. Among other proprietary tools, we have exclusively
licensed the U.S. patent covering P-element, which is a genetic element
essential for performing modern fruit fly genetics.
Comparative genomics is the application of data learned from one biological
system to another system. For example, the use of the angiogenesis pathway data
learned from a zebrafish can be applied to studying human angiogenesis.
Application of comparative genomics relies on the use of our extensive libraries
of model organisms, the proprietary databases of information and informatics
methods generated by our scientists, as well as access to state-of-the-art
technological tools such as RNA interference (RNAi). Each of our model systems
has unique advantages that can be applied in different ways to address
commercially relevant questions in a rapid manner. Our expertise allows us to
use knowledge across species and to select the best model systems for a
particular commercial application.
Proprietary Model Organism Libraries. We have produced and maintain as key
strategic assets populations of well-characterized genetically modified organism
libraries, and the process for their production and use is a core technology. We
have libraries of these organisms that have been modified and catalogued in a
systematic fashion, so that comprehensive pair-wise breeding can allow us to
test the effects of gene alteration or modulation on a specified disease
condition. Through the use of these libraries, we are able to rapidly assess the
effect of increasing or decreasing the output of each gene in the model
organism. The availability of these assets significantly enhances the efficiency
of research directed at drug or agricultural product target identification, as
our model systems permit results to be obtained in a period of weeks or months
from the inception of the research effort. We believe that our ability to
rapidly and selectively move from an alteration in a gene directly to the
identification of validated targets that can reverse or enhance the effects of
that alteration is an extremely powerful, rapid and direct route to new
pharmaceuticals and agricultural products.
High-throughput Screening (HTS) Assays for Target and Lead Discovery. We
also develop proprietary genetic, biochemical and cell-based assays for use in
screening for potential targets, proteins and products. An HTS assay is a test
that may include a biochemical reaction or cell-signaling event that is readily
measured, miniaturizable to a specific format and subject to automation. HTS
assays must meet these criteria in order to address the large numbers of
experimental measurements that we have identified in order to screen our
extensive collection of compounds. We believe that we have also established
world-class expertise in gene cloning, protein expression, scale-up fermentation
and protein purification necessary to meet these needs. Genetic assays are used
to measure the ability of a particular gene or protein to change or regulate the
disease pathway of interest, which leads to the identification of disease
pathway genes as well as those genes that may be product targets. The
development of biochemical assays requires the production of target gene
products (proteins) in sufficient quantity to support hundreds of thousands of
individual measurements. Cell-based assays may also require genetically
engineered cells that over-express the target gene of interest.
Informatics. We have state-of-the-art informatics tools, many of which are
proprietary, and expertise that have been developed as an integral part of our
model systems genetics and comparative genomics capabilities. These tools
include a broad range of applications such as: tracking samples and harvesting
data in the context of high-throughput, automated data collection systems;
creating discovery platforms for storing, managing and querying large data sets;
and analysis, curation and prediction of function relative to compounds and
macromolecules. We believe that these tools are essential to developing our
target and drug discovery pipelines and represent a substantial competitive
advantage. Specific examples include extensive databases and software tools
related to: DNA sequencing and gene discovery; generation of comprehensive
genetic knockout collections; functional identification and classification of
novel protein sequences; and design, characterization and selection of compound
libraries. Our informatics capabilities provide an extensive and readily
accessed informational base for analyzing and comparing data produced using our
core technologies, allowing us to optimize and prioritize among potential
targets and, downstream, drugs directed against those targets.
Sequencing, Proteomics and Transcriptional Profiling. We have built or
in-licensed significant expertise in sequencing, proteomics and transcriptional
profiling. Our sequencing capacity is currently 1.5 million lanes per year,
scalable to ten million lanes in our current facility. We have state-of-the-art
robotics, advanced laboratory information management systems, polymerase chain
reaction, or PCR, mass spectrometry and gene cloning expertise as well as a
significant proteomics effort to complement the existing proficiency in genetic
target discovery. We have brought in several different methods of
transcriptional profiling, both to validate our biological target discovery and
to screen for toxicities.
HTS, Combinatorial and Medicinal Chemistry. Our gene discovery platform
provides novel, biologically validated therapeutic and agricultural targets
without bias towards conventional target classes. Thus, in addition to targets
that are known in the industry to be "druggable," such as protein kinases,
proteases and g-protein coupled receptors, or GPCRs, many other novel classes
are identified in genetic screens that may require specialized assay technology.
We focus on finding diverse drug discovery targets in multiple assay formats. We
have established a high-throughput screening laboratory in which we conducted 22
target screens against millions of compounds in 2002. Through our relationship
with BMS, we have gained access to their proprietary combinatorial hardware and
software systems. We are currently synthesizing hundreds of thousands of
compounds per month. In addition, we have built extensive capabilities into our
high-throughput drug discovery platform, including crystallography, cell
biology, medicinal chemistry, ADME, pharmacokinetics, pharmacodynamics,
pharmacology and chemi-informatics, to potentially identify and develop
innovative drugs.
Extensive Compound Library. We have rapidly assembled a growing collection
of over approximately three million highly diverse, quality controlled,
drug-like, small molecule compounds for lead discovery by high-throughput
screening. Today, these compounds are largely derived from internal
combinatorial synthesis. We believe that we are capable of generating
approximately one million new compounds per year to add to our highly diverse
screening library. In prior years, compounds were identified for acquisition
from external vendors based on structural complexity and diversity, purity and
price. Over one million compounds were originally selected for acquisition using
this analysis. We believe that the continued expansion of our compound library
will increase the frequency and quality of generating highly active lead
compounds.
Clinical Development Capabilities. In 2002, we significantly expanded our
clinical development capabilities, staffing and infrastructure. Our development
group is comprised of experienced professionals with the expertise and
experience to quickly move our development candidate compounds from preclinical
testing to IND status and through "proof of concept" Phase II clinical trials.
The development group possesses critical expertise in the areas of chemistry,
manufacturing and controls ("CMC"), pre-clinical testing, clinical trial design,
management and analysis and regulatory affairs. Therapeutic expertise within the
group includes major disease areas such as allergy-immunology, anti-infectives,
cardiovascular, central nervous system, metabolic diseases and oncology. The
development group has primary responsibility for advancing and managing the
progress of our clinical pipeline, including possibly initiating Phase II trials
for our rebeccamycin analogue as a potential treatment for upper
gastrointestinal tumors, advancing XL 784 into Phase I, first-in-man trials, and
preparing for filing additional INDs, consistent with our corporate goals and
corporate collaboration obligations.
Areas Of Expertise
Human Therapeutics
ANGIOGENESIS AND VASCULAR BIOLOGY. Angiogenesis is the formation of blood
vessels. The ability to block the formation of new blood vessels could be used
to kill cancer cells by depriving them of nutrients. Similarly, anti-angiogenic
agents can be used to treat or prevent diabetic retinopathy, macular
degeneration and psoriasis. Products that promote angiogenesis could be used to
treat coronary heart disease and stroke. We have an active program to study the
zebrafish and Drosophila (fruit fly) model systems in order to identify key
angiogenic and anti-angiogenic gene targets and proteins. Our lead proprietary
compound, XL 784, was discovered in our angiogenesis research program. In 2002,
we entered into a significant small molecule discovery and development
collaboration with GlaxoSmithKline that includes angiogensis, vascular biology,
inflammation and areas of cancer that are not otherwise subject to existing
collaborations.
CANCER. Cancer is a leading cause of death in developed countries. Cancer is
caused by a number of genetic defects in cells resulting in unregulated cell
growth. We have discovered and are further developing a number of small molecule
drug targets, in addition to monoclonal antibody drug targets, that may
selectively kill cancer cells while leaving normal cells unharmed, and may
provide alternatives to current cancer therapies. By exploiting the underlying
"genetic liabilities" of tumor cells, we have identified numerous targets within
specific cell growth and proliferation regulatory pathways and are in the
process of validating these targets in cell-based assays. In 2002, we completed
22 high-throughput screens directed against proprietary cancer targets. We have
established major cancer research collaborations with Bristol-Myers Squibb and
Protein Design Labs ("PDL"). Our lead compound, XL 784, has demonstrated
anti-tumor activity and is advancing toward clinical study. In 2001, through our
cancer collaboration with BMS, we in-licensed an anticancer compound, the
rebeccamycin analogue, that is in Phase II clinical trials in upper
gastrointestinal tumors being conducted by the National Cancer Institute and for
which we expect to possibly initiate Company-sponsored trials.
INFLAMMATION. Our inflammation program focuses on the role of the innate immune
system, especially macrophages, in mediating the inflammatory response.
Misregulation of the innate immune system is of central importance in diseases
of inflammation, such as asthma and arthritis. Drosophila displays a robust
innate immune response, and their macrophages are regulated by the same effector
molecules and pathways that regulate human macrophages. Unlike vertebrates,
however, they lack an adaptive immune system, which allows for more
straightforward analysis of the innate response. Drosophila is therefore useful
for rapidly identifying prospective targets for treating immunological disease.
Novel targets can also be validated in zebrafish, which has all the immune cell
types of mammals, with the advantage of more rapid analysis. We are working in
collaboration with various universities to identify targets that control
inflammation and have identified several targets to date.
METABOLIC DISEASES. Metabolic diseases include such important conditions as
cardiovascular diseases, diabetes and obesity, which represent significant unmet
medical needs. We have an internal program focusing on metabolic diseases as the
result of the conclusion of a three-year sponsored research program with
Pharmacia Corporation (Pharmacia), which formally ended in February 2002 by
mutual consent. The most advanced targets from that program were focused on
optimizing the levels of both cholesterol and fat in the bloodstream, and we
have identified several targets for ourselves that may be useful in developing
products to control Type II diabetes. We have exclusive rights to the research
work done under the program with Pharmacia outside of certain targets that they
have selected under the program, for which we will receive milestone payments
and royalties for further development by Pharmacia.
CENTRAL NERVOUS SYSTEMS (CNS) DISORDERS. CNS disorders include cognitive
disorders such as Parkinson's disease, depression, schizophrenia and Alzheimer's
disease. In our collaboration with Pharmacia, we were applying our genetics
technologies to understand the causes of Alzheimer's disease. As a result of
genetic screens performed to date, Pharmacia selected a number of targets for
which we have received milestone payments and may receive royalties in the
future. In 2002, we published in Developmental Cell a seminal paper concerning
the discovery of two proteins, aph-1 and pen-2, that may play a role in the
production of beta-amyloid, the main constituent of senile plaques associated
with Alzheimer's disease.
MECHANISM OF ACTION PROGRAM. In this program, we identify the MOA for
pharmaceutical compounds that have interesting biological activity but for which
the molecular target is unknown. The targets are identified through the analysis
of model organisms that are either resistant or hypersensitive to the biological
activity produced by the compound. Following identification, the targets are
confirmed using biochemical assays. Targets and other components of the
signaling pathways are then identified as candidates for further compound
development. We have an ongoing MOA collaboration with BMS pursuant to which we
would receive milestone payments and royalties for further development of the
BMS compounds against the targets identified.
Agriculture
FUNGICIDES AND HERBICIDES. We are developing fungal and herbicidal model
systems, which we intend to use to identify targets that will potentially lead
to the development of new, more effective fungicides and herbicides. We have
entered into a MOA agreement with Dow AgroSciences pursuant to which we identify
targets for specific fungicide and herbicide compounds with unknown molecular
targets.
INSECTICIDES AND NEMATICIDES. Currently, there are no products that effectively
and safely control nematodes and their effects on plant crops. In collaboration
with Bayer, we are applying our model systems platform and assay development
capabilities to identify unique targets that may be used to develop new, more
effective, broad-spectrum insecticides as well as nematicides. As a result of
screening targets both from de novo targets as well as from determining the MOA
of an existing compound, we have delivered to Bayer numerous targets and
high-throughput screening assays that may be useful in identifying new
insecticides for which we have received milestone payments. Under our
collaborative arrangement (through our joint venture, Genoptera LLC), Bayer
retains exclusive rights to insecticides and nematicides for crop protection. We
remain free to conduct research in pesticides other than insecticides or
nematicides, as well as in the development of pest-resistant crops.
PLANT TRAIT DISCOVERY. We have developed plant model systems to identify genes
that may be used to develop crops with improved internal and external traits,
including superior yield, improved nutritional profiles and higher oil content.
In collaboration with Bayer CropScience, through an equally-owned subsidiary,
Agrinomics LLC, we are working to research, develop and commercialize novel
genes found through the proprietary ACTTAG gene expression technology in
Arabidopsis thaliana, a plant whose genome has been fully sequenced. ACCTAG gene
expression technology represents a method of identifying genes associated with
gain-of-function and loss-of-function phenotypes. Agrinomics has characterized
and catalogued more than 250,000 lines of Arabidopsis, identifying nearly its
entire genome. The collection of transgenic Arabidopsis, which we believe is one
of the largest gene libraries for this plant in the world, has the potential to
provide extremely important leads for significant improvements in the large
commercial seed, oil, protein and crop protection markets.
Corporate Collaborations
Our strategy is to establish collaborations with major pharmaceutical,
biotechnology and agrochemical companies based on the strength of our
technologies and biological expertise as well as to support additional
development of our proprietary products. Through these collaborations, we obtain
license fees and research funding, together with the opportunity to receive
milestone payments and royalties from research results and subsequent product
development. In addition, many of our collaborations have been structured
strategically to provide us access to technology to advance our internal
programs, saving both time and money, while at the same time retaining rights to
use the same information in different industries. Our collaborations with
leading companies in the agrochemical industries allow us to continue to expand
our internal development capabilities, while providing our partners with novel
targets and assays, and to diversify our revenue stream. For the year ended
December 31, 2002, revenue from two of our collaborators represented
approximately 39% and 25% of total revenue, respectively. For the year ended
December 31, 2001, revenue from three of our collaborators represented
approximately 32%, 31% and 15% of total revenue, respectively. For the year
ended December 31, 2000, revenue from two of our collaborators represented
approximately 53% and 36% of total revenue, respectively.
Bayer Corporation
In December 1999, we established Genoptera LLC, a Delaware limited liability
company, with Bayer Corporation to develop insecticides and nematicides for crop
protection. As part of the formation of this joint venture, Bayer has paid us,
through Genoptera, license fees and research commitment fees of $20.0 million
and has agreed to provide eight years of research funding through 2007 at a
minimum level of $10.0 million per year (for a total of $100.0 million of
committed fees and research support). Bayer owns 60% of Genoptera, and we own
the remaining 40%. We did not make any capital contributions for our ownership
interest and have no obligation to fund future losses. The formation of this
joint venture is an outgrowth of, and replaces, the contractual collaboration
first established with Bayer AG (the corporate parent of Bayer Corporation) in
May 1998. Bayer will pay Genoptera milestones and royalties on products
developed by it resulting from the Genoptera research, and we will pay Genoptera
royalties on certain uses of technology arising from such research.
Either Bayer or Exelixis may terminate the Genoptera research efforts after
2007. In addition, Bayer may terminate the joint venture prior to 2007 or buy
out our interest in the joint venture under specified conditions, including, by
way of example, failure to agree on key strategic issues after a period of
years, the acquisition of Exelixis by another company or the loss of key
personnel that we are unable to replace with individuals acceptable to Bayer.
In July 2002, Bayer completed the acquisition of Aventis S.A., including Aventis
CropScience. We each own 50% of Agrinomics LLC, which was established in July
1999 to enable the funding of a collaboration originally entered into with
Aventis CropScience. Agrinomics focuses on research, development and
commercialization of products in the field of agricultural functional genomics.
Under the terms of the Agrinomics joint venture agreement, Bayer has agreed to
make capital contributions to Agrinomics in cash totaling $20.0 million over a
five-year period. Funding by Bayer for the collaboration is scheduled to expire
in July 2004. We contributed the ACTTAG gene identification and activation
technology, a collection of seeds generated using the ACTTAG gene identification
and activation technology techniques and expertise in molecular and cell biology
to the joint venture. In addition, we perform research work for this
collaboration. Bayer CropScience currently provides high-throughput screening,
robotics, microarray and bioinformatics technologies and support work for the
collaborative research efforts.
Bristol-Myers Squibb
In August 2002, we extended our MOA research collaboration with BMS through
August 2004. The collaboration was initially established in September 1999, and
seeks to leverage our proprietary platform and expertise in comparative genetics
and functional genomics to identify the targets of compounds delivered by
Bristol-Myers Squibb. This information may enable Bristol-Myers Squibb to
enhance the potency, specificity and selectivity of drug candidates and may lead
to the discovery of new generations of compounds with attractive drug
properties. In connection with the collaboration, BMS originally transferred to
us certain combinatorial chemistry hardware and software and paid us a
technology access fee. Under the terms of the extension, BMS will continue to
provide research support payments, as well as pay milestones and royalties based
on achievements in the research and commercialization of products based on BMS
compounds that are the subject of the collaboration.
In July 2001, we entered into a second collaboration with BMS focused on cancer
target identification. The collaboration involves three agreements: (a) a Stock
Purchase Agreement; (b) a Cancer Collaboration Agreement; and (c) a License
Agreement. Under the terms of the collaboration, BMS (i) purchased 600,600
shares of our common stock in a private placement at a purchase price of $33.30
per share, for cash proceeds to us of approximately $20.0 million; (ii) agreed
to pay us a $5.0 million upfront license fee and provide us with $3.0 million
per year in research funding for a minimum of three years; and (iii) granted to
us a worldwide, fully-paid, exclusive license to the rebeccamycin analogue
developed by BMS, which is currently in Phase II clinical studies for cancer and
which we may take into further clinical studies. BMS has exclusive rights to
certain potential small molecule compound drug targets in cancer selected by BMS
during the term of the research collaboration.
Dow Agrosciences
In July 2000, we established a three-year research collaboration with Dow
AgroSciences to identify the MOA of herbicides and fungicides delivered to us by
Dow AgroSciences. We do not know the identity and function of these compounds
prior to their delivery. Under this agreement, we received access to a
collection of proprietary compounds from Dow AgroSciences that may be useful in
our human therapeutic drug discovery programs. We have identified targets to
certain Dow AgroSciences compounds that will be used to develop new classes of
fungicides and herbicides. Dow AgroSciences pays us research funding as well as
milestone payments and royalties based on achievements in the research and
commercialization of these products. Unless otherwise renewed, the collaboration
will expire in July 2003.
Protein Design Labs
In May 2001, we entered into a collaboration with PDL to discover and develop
humanized antibodies for the diagnosis, prevention and treatment of cancer. The
collaboration will utilize our model organism genetics technology for the
identification of new cancer targets and PDL's antibody and clinical development
expertise to create and develop new antibody drug candidates. PDL provided us
with $4.0 million in annual research funding, which will expire as scheduled in
June 2003 and has purchased a $30.0 million convertible note. The five-year note
bears interest at 5.75%, and the interest thereon is payable annually. The note
is convertible into our common stock at a conversion price per share equal to
the lower of (i) $28.175 or (ii) 110% of the Fair Market Value (as defined in
the note) of a share of our common stock at the time of the conversion.
Pharmacia
Our collaboration with Pharmacia was originally established in February 1999 to
identify targets in the fields of Alzheimer's disease, Type II diabetes and
associated complications of metabolic syndrome. We mutually agreed to terminate
further research in February 2002. Under the arrangement, Pharmacia purchased a
$7.5 million equity interest, paid us a license fee of $5.0 million and
milestone payments based on target selection, provided ongoing research support
and has agreed to pay us royalties in the event that products result from the
targets that we identified. Upon termination, we reacquired rights to the
research programs in metabolism and Alzheimer's disease previously licensed
exclusively to Pharmacia. Pharmacia retains rights to certain targets selected
prior to the reacquisition date, subject to the payment of milestones for
certain of those targets selected, and royalties for future development of
products against or using those targets, but Pharmacia has no other obligations
to make payments to us, including approximately $9.0 million in annual funding
that would otherwise be payable for an additional two years if we had not
mutually agreed to terminate the arrangement.
Renessen
In December 2002, Agrinomics established an alliance to enhance seed oil content
in commercially valuable crops with Renessen LLC. Renessen is a joint venture
between Monsanto Company and Cargill, Inc. The collaboration combines
Agrinomics' technological leadership in agricultural functional genomics,
high-throughput gene screening and seed trait identification with Renessen's
global expertise in quality trait crop development and commercialization, with
the goal of accelerating the development of novel proprietary crops with
improved seed composition traits. This collaboration leverages the unique
capabilities of Agrinomics' powerful ACTTAG gene activation and selection
platform to rapidly discover and validate genes that can optimize important seed
traits in order to increase the commercial value of many of the world's most
significant agricultural crops.
SmithKlineBeecham Corporation / GlaxoSmithKline plc
In October 2002, we entered into a broad collaboration with GSK for the
discovery, development and commercialization of novel small molecule
therapeutics in the areas of vascular biology, inflammatory disease and cancer,
to the extent not previously partnered. The collaboration involves three
agreements: (a) a Product Development and Commercialization Agreement; (b) a
Stock Purchase and Stock Issuance Agreement; and (c) a Loan and Security
Agreement. Under the Product Development and Commercialization Agreement, we
will conduct research and development with the objective of delivering to
GlaxoSmithKline a specified number of compounds that have met agreed-upon
criteria through Phase IIa human clinical testing. GSK has an exclusive option
to further develop, manufacture and commercialize each of these compounds on a
worldwide basis, subject to the payment of an option exercise fee as well as
milestone payments and royalties for further development of the compound
selected. We retain co-promotion rights in North America for these compounds.
Depending on the continued successful development of these compounds by GSK up
to and including commercialization and the achievement of certain net sales
levels, we could receive a payment upon option exercise, as well as clinical,
regulatory and commercialization milestone payments, which could collectively
exceed $105.0 million. We would also receive royalty payments on net sales of
the compounds commercialized by GSK, if any, at rates that are dependent upon
the number and timing of compounds delivered to GSK under the alliance.
Under the terms of the Product Development and Commercialization Agreement, GSK
has paid us $30.0 million as an upfront fee and $10.0 million in annual research
funding, and has agreed to pay a minimum of an additional $80.0 million in
research and development funding over the first six years of the collaboration,
subject to GSK's right to terminate the collaboration in the event of a material
breach by us of certain provisions of the agreement, our failure to meet certain
performance requirements after the third year of the collaboration or in the
event of a change of control of Exelixis by a major pharmaceutical company. On
or about the second anniversary of the collaboration, GSK has an option to
expand the collaboration. If this expansion occurs, we would expand our research
efforts to deliver additional compounds to GSK in the same fields. In exchange,
GSK's research payments and the loan facility would increase significantly and
GSK's option exercise fee for these additional compounds would increase
significantly over the originally contemplated levels without the expansion.
Under the terms of the Stock Purchase and Stock Issuance Agreement, GSK
purchased 2,000,000 shares of our common stock in a private placement at a
purchase price of $7.00 per share, for cash proceeds to us of approximately
$14.0 million. Under the agreement, we also have an option to sell, and GSK has
an obligation to purchase, additional shares of our common stock at a specified
time in the future and at a price that is at a premium to the then current
market price of our common stock. Under the Loan and Security Agreement, GSK
provided a loan facility of up to $85.0 million for use in our efforts under the
collaboration, and we borrowed $25.0 million under that agreement in December
2002. All loan amounts bear interest at a rate of 4% per annum and are secured
by the intellectual property, technology and equipment created or utilized
pursuant to the collaboration. Principal and accrued interest become due in
installments, beginning on or about the sixth anniversary of the collaboration,
unless the collaboration is earlier terminated by GSK. Repayment of all or any
of the amounts advanced to us under this agreement may, at our election, be in
the form of our common stock, subject to certain conditions.
Chemistry Collaborations
In 2001 and 2002, we entered into collaboration agreements with each of Elan
Pharmaceuticals, Inc., Scios Inc., Cytokinetics, Inc., Schering-Plough Research
Institute, Inc. and Merck & Co., Inc. to jointly design custom high-throughput
screening compound libraries that we will synthesize and qualify. Each
collaborator has agreed to pay us a per-compound fee for compounds delivered
meeting certain agreed-upon acceptance criteria. Each party also paid an upfront
technology access fee that is creditable towards the future purchase of
compounds. Revenue recognition of upfront fees has been deferred, and revenue
under these collaboration agreements will generally be recorded upon delivery
and acceptance of compounds. Each party retains rights to use the compounds
developed and delivered in its own proprietary drug discovery programs and in
its collaborative efforts with third parties.
Biotech Collaborations
We enjoy collaborations with leading biotechnology product developers and
solutions providers, among them Affymetrix, GeneMachines, AVI BioPharma, Inc.,
Silicon Genetics, Galapagos NV, Genomics Collaborative Inc., Accelrys, Inc.,
Akceli, Inc., Ardais Corp., Cogen BioCognetics, Inc., Impath Predictive
Oncology, Inc. and Virtual Arrays, Inc. These relationships enable us to
continuously update and enhance our technology base at a minimal cost, and at
the same time facilitate our research and development efforts.
Academic and Government Collaborations
In order to enhance our research and technology access, we have established key
relationships with government agencies and major academic centers in the U.S.
and Europe. Our government collaborators include a number of U.S. Department of
Agriculture campuses, and we maintain over ten academic collaborations with
investigators at such institutions as: Children's Hospital, Boston; Institute of
Molecular and Cellular Biology, CNRS, Strasbourg, France; Middle Tennessee
Research Institute; Stanford University; University of British Columbia;
University of California, San Francisco; and University of Georgia. The purpose
of these government and academic collaborations is to continuously improve our
core technology and to facilitate the establishment of new discovery programs.
We will continue to pursue strategic collaborations with government agencies and
academic centers. We will seek to retain significant rights to develop and
market products arising from our strategic alliances. In addition, we will
continue to invest our own funds in certain specific areas and product
opportunities with the aim of maintaining, enhancing and extending our core
technology, as well as increasing our opportunities to generate greater revenue
from such activities.
Acquisitions
We have used acquisitions to strategically position and advance our leadership
as a genomics-based drug discovery company. In May 2001, we acquired Artemis
Pharmaceuticals GmbH, a privately-held genetics and functional genomics company,
in a stock-for-stock transaction valued at approximately $28.2 million. Located
in Koln and Tubingen, Germany, Artemis is focused on the use of vertebrate model
genetic systems such as mice and zebrafish as tools for target identification
and validation.
In December 2001, we acquired Genomica Corporation, a publicly-traded
bioinformatics company, in a stock-for-stock transaction valued at $110.0
million. The transaction was structured as a tender offer for 100% of Genomica's
outstanding common stock and was followed by a merger of Genomica with a
wholly-owned subsidiary of Exelixis. The exchange offer was closed on December
28, 2001, and the subsequent merger completing the transaction occurred on
January 8, 2002. Genomica had cash and investments of approximately $109.6
million, which enhanced our ability to move our drug discovery programs forward.
Competition
We face intense competition in the different market segments we are pursuing.
There are many companies that have or are developing capabilities in the use of
model systems to identify new products. In addition, there are many companies
focused on the development of small molecule pharmaceuticals. Many genomics
companies are expanding their capabilities, using a variety of techniques, to
determine gene function and to develop products based on gene function. Our
potential competitors in the field are many in number and include major
pharmaceutical and agricultural companies, diagnostic companies, specialized
biotechnology companies, genomics companies and academic institutions and
universities.
Many of our potential competitors have significantly more financial, technical
and other resources than we do, which may allow them to have a competitive
advantage. We are aware that companies focused specifically on other model
systems such as mice and yeast have alternative methods for identifying product
targets. In addition, pharmaceutical, biotechnology and genomics companies and
academic institutions are conducting work in this field. In the future, we
expect the field to become more competitive with companies and academic
institutions seeking to develop competing technologies.
Any products that we may develop or discover through application of our
technologies will compete in highly competitive markets. Many of our potential
competitors in these markets have substantially greater financial, technical and
personnel resources than we do, and they may succeed in developing technologies
and products that may render our technologies and products and those of our
collaborators obsolete or noncompetitive. In addition, many of our competitors
have significantly greater experience than we do in their respective fields.
Research and Development Expenses
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs, supplies, licenses and
depreciation of facilities and laboratory equipment. Research and development
expenses were $112.0 million for the year ended December 31, 2002, compared to
$82.7 million for 2001 and $51.7 million for 2000.
Proprietary Rights
We seek patent protection in the United States and international markets for the
plant and animal genes and gene functions, proteins, antibodies, biotherapeutics
and small molecule pharmaceutical and agricultural products that we discover, as
well as genetic methods and technology improvements for discovering such genes,
functions, proteins, antibodies, biotherapeutics and small molecule
pharmaceutical and agricultural products. Our intellectual property strategy is
designed to provide us with freedom to operate and facilitate commercialization
of our current and future products. Our patent portfolio includes a total of 47
issued U.S. patents. Our p-element patent, U.S. patent no. 4,670,388,
exclusively licensed from Carnegie Institution of Washington, has the earliest
patent expiration date, which is June 2, 2004. We are the assignee or exclusive
licensee of four allowed and 209 pending U.S. patent applications and
corresponding international or foreign patent applications related to our
genetic and comparative genomic technologies, gene and protein targets and
specialized screens, and the application of these technologies to diverse
industries including agriculture, pharmaceuticals and diagnostics. One
additional U.S. patent has been issued, one U.S. patent application has been
allowed and 44 U.S. patent applications are pending as part of the Agrinomics
joint venture with Bayer CropScience. An additional 11 U.S. patent applications
are pending as part of the Genoptera joint venture with Bayer.
We also rely in part on trade secret protection of our intellectual property. We
try to protect our trade secrets by entering into confidentiality agreements
with third parties, employees and consultants. Our employees and consultants
also sign agreements requiring that they assign to us their interests in patents
and other intellectual property arising from their work for us. All employees
sign an agreement not to engage in any conflicting employment or activity during
their employment with us and not to disclose or misuse our confidential
information. However, it is possible that these agreements may be breached or
invalidated, and if so, there may not be an adequate corrective remedy
available. Accordingly, we cannot ensure that employees, consultants or third
parties will not breach the confidentiality provisions in our contracts or
infringe or misappropriate our patents, trade secrets and other proprietary
rights, or that measures we are taking to protect our proprietary rights will be
adequate.
In the future, third parties may file claims asserting that our technologies or
products infringe on their intellectual property. We cannot predict whether
third parties will assert such claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our business. If we
are forced to defend ourselves against such claims, whether they are with or
without merit and whether they are resolved in favor of, or against, our
licensors or us, we may face costly litigation and the diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technology or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business or financial condition.
Employees
As of December 31, 2002, we had 550 full-time employees worldwide, 220 of whom
hold Ph.D. and/or M.D. degrees and 476 of whom were engaged in full-time
research and development activities. In 2002, we added several senior executives
to our management team. We plan to expand our preclinical and clinical
development programs, as well as our corporate development programs, and hire
additional staff as corporate collaborations are established and we expand our
internal development efforts to include clinical programs. Our success will
depend upon our ability to attract and retain employees. We face competition in
this regard from other companies in the biotechnology, pharmaceutical and high
technology industries as well as research and academic institutions. None of our
employees are represented by a labor union, and we consider our employee
relations to be good.
Available Information
We were incorporated in Delaware in November 1994 as Exelixis Pharmaceuticals,
Inc., and we changed our name to Exelixis, Inc. in February 2000.
We maintain a site on the world wide web at www.exelixis.com; however,
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information found on our website is not incorporated by reference into this
report. We make available free of charge on or through our website our SEC
filings, including our annual report of Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
In 2003, we plan to adopt a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We intend to post the text
of our code of ethics on our website at www.exelixis.com in connection with
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"Investor" materials. In addition, we intend to promptly disclose (1) the
nature of any amendment to our code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions and (2) the nature of any
waiver, including an implicit waiver, from a provision of our code of ethics
that is granted to one of these specified officers, the name of such person who
is granted the waiver and the date of the waiver on our website in the future.
Risk Factors
EXELIXIS HAS A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES,
AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception, including a net loss
of approximately $86.1 million for the year ended December 31, 2002. As of that
date, we had an accumulated deficit of approximately $287.4 million. We expect
these losses to continue and anticipate negative operating cash flow for the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth, if any, in our license and contract revenues and on the level of
our expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect to spend
significant additional amounts to fund research and development in order to
enhance our core technologies and undertake product development. In 2001, we
acquired a rebeccamycin analogue that is in Phase II clinical development. We
anticipate initiating next development steps, if any, following discussions with
the FDA. Drug substance to be used in Company-sponsored clinical trials has been
manufactured in bulk supply by third-party suppliers. In addition, we are also
preparing to file our first IND for a proprietary compound. As a result, we
expect that our operating expenses will increase significantly in the near term,
and consequently, we will need to generate significant additional revenues to
achieve profitability. Even if we do increase our revenues and achieve
profitability, we may not be able to sustain or increase profitability.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US.
Our future capital requirements will be substantial and will depend on many
factors, including:
- payments received under collaborative agreements;
- the progress and scope of our collaborative and independent research
and development projects;
- our need to expand our product development efforts as well as develop
manufacturing and marketing capabilities to commercialize products;
- the filing, prosecution and enforcement of patent claims; and
- increased costs for clinical activities.
We anticipate that our current cash and cash equivalents, short-term investments
and funding to be received from collaborators will enable us to maintain our
currently planned operations for at least the next two years. Changes to our
current operating plan may require us to consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital when we need it, on favorable terms or at all. If our capital
resources are insufficient to meet future capital requirements, we will have to
raise additional funds. The sale of equity or convertible debt securities in the
future may be dilutive to our stockholders, and debt financing arrangements may
require us to pledge certain assets and enter into covenants that would restrict
our ability to incur further indebtedness. If we are unable to obtain adequate
funds on reasonable terms, we may be required to curtail operations
significantly or to obtain funds by entering into financing, supply or
collaboration agreements on unattractive terms.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH MAY DIVERT RESOURCES AND LIMIT
OUR ABILITY TO SUCCESSFULLY EXPAND OUR OPERATIONS.
We have experienced a period of rapid and substantial growth that has placed,
and our anticipated growth in the future will continue to place, a strain on our
research, administrative and operational infrastructure. As our operations
expand domestically and internationally, we will need to continue to manage
multiple locations and additional relationships with various collaborative
partners, suppliers and other third parties. Our ability to manage our
operations and growth effectively requires us to continue to improve our
operational, financial and management controls, reporting systems and
procedures. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner and
may discover deficiencies in existing systems and controls. In addition,
acquisitions involve the integration of different financial and management
reporting systems. We may not be able to successfully integrate the
administrative and operational infrastructure without significant additional
improvements and investments in management systems and procedures.
WE ARE DEPENDENT ON OUR COLLABORATIONS WITH MAJOR COMPANIES. IF WE ARE UNABLE TO
ACHIEVE MILESTONES, DEVELOP PRODUCTS OR RENEW OR ENTER INTO NEW COLLABORATIONS,
OUR REVENUES MAY DECREASE AND OUR ACTIVITIES MAY FAIL TO LEAD TO COMMERCIALIZED
PRODUCTS.
Substantially all of our revenues to date have been derived from collaborative
research and development agreements. Revenues from research and development
collaborations depend upon continuation of the collaborations, the achievement
of milestones and royalties derived from future products developed from our
research. If we are unable to successfully achieve milestones or our
collaborators fail to develop successful products, we will not earn the revenues
contemplated under such collaborative agreements. In addition, some of our
collaborations are exclusive and preclude us from entering into additional
collaborative arrangements with other parties in the area or field of
exclusivity.
We currently have collaborative research agreements with Bayer, Bristol-Myers
Squibb (two agreements), SmithKlineBeecham, Protein Design Labs, Dow
AgroSciences, Renessen and Bayer CropScience. Our current collaborative
agreement with Bayer is scheduled to expire in 2008, after which it will
automatically be extended for one-year terms unless terminated by either party
upon 12-months written notice. Our agreement permits Bayer to terminate our
collaborative activities prior to 2008 upon the occurrence of specified
conditions, such as the failure to agree on key strategic issues after a period
of years or the acquisition of Exelixis by certain specified third parties. Our
agreement with Bayer is subject to termination at an earlier date if two or more
of our Chief Executive Officer, Chief Scientific Officer, Agricultural
Biotechnology Program Leader and Chief Informatics Officer cease to have a
relationship with us within nine months of each other. Our MOA collaborative
agreement with Bristol-Myers Squibb expires in September 2004. Our cancer
collaborative agreement with Bristol-Myers Squibb expires in July 2004. Our
recent alliance with SmithKlineBeecham is scheduled to expire in October 2008,
but is subject to earlier termination at the discretion of SmithKlineBeecham
starting in 2005 if Exelixis fails to meet certain diligence obligations.
Research funding under our collaborative agreement with Protein Design Labs will
expire in June 2003. Similarly, funding under our arrangement with Dow
AgroSciences is scheduled to expire in July 2003, after which Dow AgroSciences
has the option to renew on an annual basis. Our collaborative research
arrangement with Bayer CropScience is scheduled to expire in September 2004. The
Bayer CropScience arrangement is conducted through a limited liability company,
Agrinomics, which is owned equally by Bayer CropScience and Exelixis. Bayer
CropScience may surrender its interest in Agrinomics and terminate the related
research collaboration prior to the scheduled expiration upon the payment of the
subsequent year's funding commitment. Agrinomics is party to a recent
collaborative agreement with Renessen, which expires in December 2005 but is
subject to earlier termination at the discretion of Renessen prior to October
2003.
If these existing agreements are not renewed or if we are unable to enter into
new collaborative agreements on commercially acceptable terms, our revenues and
product development efforts may be adversely affected. For example, our
agreement with Pharmacia terminated by mutual agreement in February 2002,
eliminated the opportunity for us to earn approximately $9.0 million in research
revenue in each of the next two years. Although we expect to enter into other
collaborations that may offset this loss of revenue, we may not be able to enter
into a new collaborative agreement on similar or superior financial terms than
those under the Pharmacia arrangement, and the timing of new collaborative
agreements may have a significant effect on our ability to continue to
successfully meet our corporate goals and milestones.
CONFLICTS WITH OUR COLLABORATORS COULD JEOPARDIZE THE OUTCOME OF OUR
COLLABORATIVE AGREEMENTS AND OUR ABILITY TO COMMERCIALIZE PRODUCTS.
We are conducting proprietary research programs in specific disease and
agricultural product areas that are not covered by our collaborative agreements.
Our pursuit of opportunities in agricultural and pharmaceutical markets could,
however, result in conflicts with our collaborators in the event that any of our
collaborators take the position that our internal activities overlap with those
areas that are exclusive to our collaborative agreements, and we should be
precluded from such internal activities. Moreover, disagreements with our
collaborators could develop over rights to our intellectual property. In
addition, our collaborative agreements may have provisions that give rise to
disputes regarding the rights and obligations of the parties, including the
rights of collaborators with respect to our internal programs and disease area
research. Any conflict with or among our collaborators could lead to the
termination of our collaborative agreements, delay collaborative activities,
reduce our ability to renew agreements or obtain future collaboration agreements
or result in litigation or arbitration and would negatively impact our
relationship with existing collaborators.
We have limited or no control over the resources that our collaborators may
choose to devote to our joint efforts. Our collaborators may breach or terminate
their agreements with us or fail to perform their obligations thereunder.
Further, our collaborators may elect not to develop products arising out of our
collaborative arrangements or may fail to devote sufficient resources to the
development, manufacture, marketing or sale of such products. Certain of our
collaborators could also become our competitors in the future. If our
collaborators develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain necessary regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of our products,
our product development efforts could be delayed and may fail to lead to
commercialized products.
OUR POTENTIAL THERAPEUTIC PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN
REGULATORY PROCESS THAT MAY NOT RESULT IN THE NECESSARY REGULATORY APPROVALS,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO COMMERCIALIZE PRODUCTS.
The U.S. Food and Drug Administration, or FDA, must approve any drug or biologic
product before it can be marketed in the U.S. Any products resulting from our
research and development efforts must also be approved by the regulatory
agencies of foreign governments before the product can be sold outside of the
U.S. Before a new drug application or biologics license application can be filed
with the FDA, the product candidate must undergo extensive clinical trials,
which can take many years and may require substantial expenditures. The
regulatory process also requires preclinical testing. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. In addition, delays or
rejections may be encountered based upon changes in regulatory policy for
product approval during the period of product development and regulatory agency
review. Completion of clinical trials may take several years or more, but the
length of time generally varies substantially according to the type, complexity,
novelty and intended use of a product candidate. We estimate that typical
clinical trials are completed over the following timelines:
CLINICAL PHASE ESTIMATED COMPLETION PERIOD
-------------- ---------------------------
Phase I 1 Year
Phase II 1-2 Years
Phase III 2-4 Years
However, the duration and the cost of clinical trials may vary significantly
over the life of a project as a result of differences arising during the
clinical trial protocol, including, among others, the following:
- the number of patients that ultimately participate in the trial;
- the duration of patient follow-up that seems appropriate in view of
the results;
- the number of clinical sites included in the trials; and
- the length of time required to enroll suitable patient subjects.
Any clinical trial may fail to produce results satisfactory to the FDA. The FDA
could determine that the design of a clinical trial is inadequate to produce
reliable results. Negative or inconclusive results or adverse medical events
during a clinical trial could cause a clinical trial to be repeated or
development of a product or clinical trial to be terminated. The clinical
development and regulatory approval process is expensive and time consuming. Any
failure to obtain regulatory approval could delay or prevent us from
commercializing products.
Our efforts to date have been primarily limited to identifying targets and
developing small molecule compounds against those targets. Significant research
and development efforts will be necessary before any of our products directed
against such targets can be commercialized. If regulatory approval is granted to
any of our products, the approval may impose limitations on the uses for which a
product may be marketed. Further, even if regulatory approval is obtained, a
marketed product and its manufacturer are subject to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions and sanctions with respect to the product, manufacturer
and relevant manufacturing facility, including withdrawal of the product from
the market.
CLINICAL TESTING OF OUR POTENTIAL PRODUCTS MAY FAIL TO DEMONSTRATE SAFETY AND
EFFICACY, WHICH COULD PREVENT OR SIGNIFICANTLY DELAY REGULATORY APPROVAL.
Clinical trials are inherently risky and may reveal that our potential products
are ineffective or have unacceptable toxicity or other side effects that may
significantly limit the possibility of regulatory approval of the potential
product. The regulatory review and approval process is extensive and uncertain
and typically takes many years to complete. The FDA requires submission of
extensive preclinical, clinical and manufacturing data for each indication for
which approval is sought in order to assess the safety and efficacy of the
potential product. In addition, the results of preliminary studies do not
necessarily predict clinical or commercial success, and larger later-stage
clinical trials may fail to confirm the results observed in the preliminary
studies. With respect to our own proprietary compounds in development, we have
established timelines for manufacturing and clinical development based on
existing knowledge of the compound and industry metrics. We have limited
experience in conducting clinical studies and may not be able to assure that any
specified timelines with respect to the initiation or completion of clinical
studies may be achieved.
In July 2001, we acquired a cancer compound, a rebeccamycin analogue, currently
in Phase II clinical studies. This compound was manufactured by Bristol-Myers
Squibb, and clinical trials to date have been conducted by the National Cancer
Institute, or NCI. We will have to conduct additional clinical testing in order
to meet FDA requirements for regulatory approval. We have no prior experience in
conducting clinical trials, and, in conjunction with the NCI, we expect to
undertake further clinical development of this compound under our own IND in
order to obtain regulatory approval. We may not be able to rapidly or
effectively assume responsibility for further development of this compound. We
do not know whether planned clinical trials will begin on time, will be
completed on schedule, or at all, will be sufficient for registration or will
result in approvable products. Our product development costs will increase if we
have delays in testing or approvals or if we need to perform more or larger
clinical trials than planned. If the delays are significant, our financial
results and the commercial prospects for our products will be harmed, and our
ability to become profitable will be delayed.
WE LACK THE CAPABILITY TO MANUFACTURE COMPOUNDS FOR CLINICAL TRIALS AND WILL
RELY ON THIRD PARTIES TO MANUFACTURE OUR POTENTIAL PRODUCTS, AND WE MAY BE
UNABLE TO OBTAIN REQUIRED MATERIAL IN A TIMELY MANNER OR AT A QUALITY LEVEL
REQUIRED TO RECEIVE REGULATORY APPROVAL.
We currently do not have manufacturing capabilities or experience necessary to
produce materials for clinical trials, including for our Phase II clinical
compound, a rebeccamycin analogue. We intend to rely on collaborators and
third-party contractors to produce materials necessary for preclinical and
clinical testing. We will rely on selected manufacturers to deliver materials on
a timely basis and to comply with applicable regulatory requirements, including
the FDA's current Good Manufacturing Practices, or GMP. These manufacturers may
not be able to produce material on a timely basis or manufacture material at the
quality level or in the quantity required to meet our development timelines and
applicable regulatory requirements. If we are unable to contract for production
of sufficient quantity and quality of materials on acceptable terms, our planned
clinical trials may be delayed. Delays in preclinical or clinical testing could
delay the filing of our INDs and the initiation of clinical trials that we have
currently planned. In addition, our outsourcing efforts with respect to
manufacturing clinical supplies will result in a dependence on our suppliers to
timely manufacture and deliver sufficient quantities of materials produced under
GMP conditions to enable us to conduct planned clinical trials, and if possible
to bring products to market in a timely manner.
WE HAVE NO EXPERIENCE IN DEVELOPING, MANUFACTURING AND MARKETING PRODUCTS AND
MAY BE UNABLE TO COMMERCIALIZE PROPRIETARY PRODUCTS.
Initially, we relied on our collaborators to develop and commercialize products
based on our research and development efforts. We have limited or no experience
in using the targets that we identify to develop our own proprietary products,
or developing small molecule compounds against those targets. Our recent efforts
in applying our drug development capabilities to our proprietary targets in
cancer are subject to significant risk and uncertainty, particularly with
respect to our ability to meet currently estimated timelines and goals for
completing preclinical development efforts and filing an IND for compounds
developed. In order for us to commercialize products, we would need to
significantly enhance our capabilities with respect to product development and
establish manufacturing and marketing capabilities, either directly or through
outsourcing or licensing arrangements. We may not be able to enter into such
outsourcing or licensing agreements on commercially reasonable terms, or at all.
SINCE OUR TECHNOLOGIES HAVE MANY POTENTIAL APPLICATIONS AND WE HAVE LIMITED
RESOURCES, OUR FOCUS ON A PARTICULAR AREA MAY RESULT IN OUR FAILURE TO
CAPITALIZE ON MORE PROFITABLE AREAS.
We have limited financial and managerial resources. This requires us to focus on
product candidates in specific industries and forego opportunities with regard
to other products and industries. For example, depending on our ability to
allocate resources, a decision to concentrate on a particular agricultural
program may mean that we will not have resources available to apply the same
technology to a pharmaceutical project. While our technologies may permit us to
work in both areas, resource commitments may require trade-offs resulting in
delays in the development of certain programs or research areas, which may place
us at a competitive disadvantage. Our decisions impacting resource allocation
may not lead to the development of viable commercial products and may divert
resources from more profitable market opportunities.
OUR COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OUR PRODUCTS AND
TECHNOLOGIES OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by rapid
technological change. In particular, the area of gene research is a rapidly
evolving field. We face, and will continue to face, intense competition from
large biotechnology and pharmaceutical companies, as well as academic research
institutions, clinical reference laboratories and government agencies that are
pursuing research activities similar to ours. Some of our competitors have
entered into collaborations with leading companies within our target markets,
including some of our existing collaborators. Our future success will depend on
our ability to maintain a competitive position with respect to technological
advances.
Any products that are developed through our technologies will compete in highly
competitive markets. Further, our competitors may be more effective at using
their technologies to develop commercial products. Many of the organizations
competing with us have greater capital resources, larger research and
development staffs and facilities, more experience in obtaining regulatory
approvals and more extensive product manufacturing and marketing capabilities.
As a result, our competitors may be able to more easily develop technologies and
products that would render our technologies and products, and those of our
collaborators, obsolete and noncompetitive.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our intellectual property rights from
unauthorized use by third parties only to the extent that our technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the U.S., and many companies have
encountered significant problems in protecting and defending such rights in
foreign jurisdictions. We will continue to apply for patents covering our
technologies and products as and when we deem appropriate. However, these
applications may be challenged or may fail to result in issued patents. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patents. In addition, our patents may be
challenged, invalidated or fail to provide us with any competitive advantages.
We rely on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information and trade secrets, but these measures may not provide adequate
protection. While we seek to protect our proprietary information by entering
into confidentiality agreements with employees, collaborators and consultants,
we cannot assure you that our proprietary information will not be disclosed, or
that we can meaningfully protect our trade secrets. In addition, our competitors
may independently develop substantially equivalent proprietary information or
may otherwise gain access to our trade secrets.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes
and gene fragments, techniques and methodologies relating to model systems and
products and technologies that we have developed or intend to develop. If
patents covering technologies required by our operations are issued to others,
we may have to rely on licenses from third parties, which may not be available
on commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology without
authorization. In addition, third parties may obtain patents that relate to our
technologies and claim that use of such technologies infringes these patents.
Regardless of their merit, such claims could require us to incur substantial
costs, including the diversion of management and technical personnel, in
defending ourselves against any such claims or enforcing our patents. In the
event that a successful claim of infringement is brought against us, we may be
required to pay damages and obtain one or more licenses from third parties. We
may not be able to obtain these licenses at a reasonable cost, or at all.
Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize products.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR OUR ABILITY TO EXPAND OUR OPERATIONS.
We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives and the continuation of existing collaborations.
In addition, recruiting and retaining qualified scientific and clinical
personnel to perform future research and development work will be critical to
our success. We do not currently have sufficient executive management and
technical personnel to fully execute our business plan. There is currently a
shortage of skilled executives and employees with technical expertise, and this
shortage is likely to continue. As a result, competition for skilled personnel
is intense, and turnover rates are high. Although we believe we will be
successful in attracting and retaining qualified personnel, competition for
experienced scientists from numerous companies and academic and other research
institutions may limit our ability to do so.
Our business operations will require additional expertise in specific industries
and areas applicable to products identified and developed through our
technologies. These activities will require the addition of new personnel,
including management and technical personnel and the development of additional
expertise by existing employees. The inability to attract such personnel or to
develop this expertise could prevent us from expanding our operations in a
timely manner, or at all.
OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND
CHANGE.
We work with scientific and clinical advisors and collaborators at academic and
other institutions that assist us in our research and development efforts. These
scientists and advisors are not our employees and may have other commitments
that would limit their availability to us. Although our advisors and
collaborators generally agree not to do competing work, if a conflict of
interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our advisors and collaborators
sign agreements not to disclose our confidential information, it is possible
that valuable proprietary knowledge may become publicly known through them.
SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED
PRODUCTS, WHICH COULD REDUCE DEMAND FOR OUR PRODUCTS.
Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. For
example, research efforts focusing on plant traits may involve either selective
breeding or modification of existing genes in the plant under study. Public
attitudes may be influenced by claims that genetically engineered products are
unsafe for consumption or pose a danger to the environment. Such claims may
prevent our genetically engineered products from gaining public acceptance. The
commercial success of our future products will depend, in part, on public
acceptance of the use of genetically engineered products, including drugs and
plant and animal products.
The subject of genetically modified organisms has received negative publicity,
which has aroused public debate. For example, certain countries in Europe are
considering regulations that may ban products or require express labeling of
products that contain genetic modifications or are "genetically modified."
Adverse publicity has resulted in greater regulation internationally and trade
restrictions on imports of genetically altered products. If similar action is
taken in the U.S., genetic research and genetically engineered products could be
subject to greater domestic regulation, including stricter labeling
requirements. To date, our business has not been hampered by these activities.
However, such publicity in the future may prevent any products resulting from
our research from gaining market acceptance and reduce demand for our products.
LAWS AND REGULATIONS MAY REDUCE OUR ABILITY TO SELL GENETICALLY ENGINEERED
PRODUCTS THAT WE OR OUR COLLABORATORS DEVELOP IN THE FUTURE.
We or our collaborators may develop genetically engineered agricultural and
animal products. The field-testing, production and marketing of genetically
engineered products are subject to regulation by federal, state, local and
foreign governments. Regulatory agencies administering existing or future
regulations or legislation may prevent us from producing and marketing
genetically engineered products in a timely manner or under technically or
commercially feasible conditions. In addition, regulatory action or private
litigation could result in expenses, delays or other impediments to our product
development programs and the commercialization of products. The FDA has released
a policy statement stating that it will apply the same regulatory standards to
foods developed through genetic engineering as it applies to foods developed
through traditional plant breeding. Genetically engineered food products will be
subject to premarket review, however, if these products raise safety questions
or are deemed to be food additives. Our products may be subject to lengthy FDA
reviews and unfavorable FDA determinations if they raise questions regarding
safety or our products are deemed to be food additives.
The FDA has also announced that it will not require genetically engineered
agricultural products to be labeled as such, provided that these products are as
safe and have the same nutritional characteristics as conventionally developed
products. The FDA may reconsider or change its policies, and local or state
authorities may enact labeling requirements, either of which could have a
material adverse effect on our ability or the ability of our collaborators to
develop and market products resulting from our efforts.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
In addition, our collaborators may use hazardous materials in connection with
our collaborative efforts. To our knowledge, their work is performed in
accordance with applicable biosafety regulations. In the event of a lawsuit or
investigation, however, we could be held responsible for any injury caused to
persons or property by exposure to, or release of, these hazardous materials
used by these parties. Further, we may be required to indemnify our
collaborators against all damages and other liabilities arising out of our
development activities or products produced in connection with these
collaborations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are likely to
fluctuate in the future. A number of factors, many of which we cannot control,
could subject our operating results and stock price to volatility, including:
- recognition of upfront licensing or other fees;
- payments of non-refundable upfront or licensing fees to third parties;
- acceptance of our technologies and platforms;
- the success rate of our discovery efforts leading to milestone
payments and royalties;
- the introduction of new technologies or products by our competitors;
- the timing and willingness of collaborators to commercialize our
products;
- our ability to enter into new collaborative relationships;
- the termination or non-renewal of existing collaborations;
- the timing and amount of expenses incurred for clinical development
and manufacturing of our products;
- the impairment of acquired goodwill and other assets; and
- general and industry-specific economic conditions that may affect our
collaborators' research and development expenditures
A large portion of our expenses, including expenses for facilities, equipment
and personnel, are relatively fixed in the short term. In addition, we expect
operating expenses to increase significantly during the next year. Accordingly,
if our revenues decline or do not grow as anticipated due to the expiration of
existing contracts or our failure to obtain new contracts, our inability to meet
milestones or other factors, we may not be able to correspondingly reduce our
operating expenses. Failure to achieve anticipated levels of revenues could
therefore significantly harm our operating results for a particular fiscal
period.
Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. As a result, in some future quarters, our
operating results may not meet the expectations of stock market analysts and
investors, which could result in a decline in the price of our stock.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
We believe the trading price of our common stock will remain highly volatile and
may fluctuate substantially due to factors such as the following:
- the announcement of new products or services by us or our competitors;
- the failure of new products in clinical trials by us or our
competitors;
- quarterly variations in our or our competitors' results of operations;
- failure to achieve operating results projected by securities analysts;
- changes in earnings estimates or recommendations by securities
analysts;
- developments in the biotechnology industry;
- acquisitions of other companies or technologies; and
- general market conditions and other factors, including factors
unrelated to our operating performance or the operating performance of
our competitors.
These factors and fluctuations, as well as general economic, political and
market conditions, may materially adversely affect the market price of our
common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in substantial costs and
divert management's attention and resources, which could have a material and
adverse effect on our business.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS.
We have made, and may in the future make, acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including, but not limited
to:
- difficulties and increased costs in connection with integration of the
personnel, operations, technologies and products of acquired
companies;
- diversion of management's attention from other operational matters;
- the potential loss of key employees of acquired companies;
- the potential loss of key collaborators of the acquired companies;
- lack of synergy, or the inability to realize expected synergies,
resulting from the acquisition; and
- acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of the
acquired company.
Mergers and acquisitions are inherently risky, and the inability to effectively
manage these risks could materially and adversely affect our business, financial
condition and results of operations.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE
SUBSTANTIAL LIABILITIES THAT EXCEED OUR RESOURCES.
We may be held liable if any product our collaborators or we develop causes
injury or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Although we intend to obtain general liability and product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or to otherwise protect ourselves against
potential product liability claims could prevent or inhibit the
commercialization of products developed by our collaborators or us.
OUR HEADQUARTERS FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND
THE OCCURRENCE OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE
DAMAGE TO OUR FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR
CURTAIL OPERATIONS.
Given our headquarters location in South San Francisco, our facilities are
vulnerable to damage from earthquakes. We are also vulnerable worldwide to
damage from other types of disasters, including fire, floods, power loss,
communications failures and similar events. If any disaster were to occur, our
ability to operate our business at our facilities would be seriously, or
potentially completely, impaired. In addition, the unique nature of our research
activities could cause significant delays in our programs and make it difficult
for us to recover from a disaster. The insurance we maintain may not be adequate
to cover our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deemed appropriate. For
example, following an acquisition, a significant number of shares of our common
stock held by new stockholders may become freely tradable. Similarly, shares of
common stock held by existing stockholders prior to our initial public offering
became freely tradable in 2000, subject in some instances to the volume and
other limitations of Rule 144 of the Securities Act. Sales of these shares and
other shares of common stock held by existing stockholders could cause the
market price of our common stock to decline.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND THEIR INTERESTS
COULD CONFLICT WITH THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Due to their combined stock holdings, our officers, directors and principal
stockholders (stockholders holding more than 5% of our common stock) acting
together, may be able to exert significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control of our company, even when a change may
be in the best interests of our stockholders. In addition, the interests of
these stockholders may not always coincide with our interests as a company or
the interests of other stockholders. Accordingly, these stockholders could cause
us to enter into transactions or agreements that you would not approve of.
ITEM 2. PROPERTIES
We currently have commitments to lease an aggregate of 213,967 square feet of
office and laboratory facilities in four buildings in South San Francisco,
California. The first building lease, for 33,000 square feet, expires on July
31, 2005. The second building lease covers three buildings, one for 70,000
square feet, another for 50,000 square feet and the third for 60,967 square
feet. The portion of the lease for the third building is expected to begin in
March 2003. The lease for these three buildings expires in 2017, not including
two five-year options to extend the term prior to expiration. During 2002, we
also subleased two additional facilities totaling 12,000 square feet in South
San Francisco for continued expansion. Leases for these two facilities are set
to expire in 2003.
We lease approximately 17,000 square feet of office and laboratory space in
Portland, Oregon and own a 15-acre farm in Woodburn, Oregon. Greenhouse capacity
at the farm currently totals 50,000 square feet. The lease in Portland expires
on February 28, 2006, and there is an option to renew for an additional five
years.
We lease approximately 2,200 square feet of office and laboratory space in Koln,
Germany and an additional 1,300 square feet of laboratory space in Tubingen,
Germany. These leases expire at dates ranging from March 31, 2004 to October
31, 2007. There is an option to renew all leases for a period ranging from
three to five years.
We lease approximately 41,700 square feet of office and research and development
space in Boulder, Colorado, of which 24,000 is sublet for the remaining term of
the lease. This lease expires in July 2005, and there are two options to renew
for additional five-year terms. We are currently attempting to sublease these
facilities.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Nasdaq National Market under the symbol
"EXEL" since April 11, 2000. The following table sets forth, for the periods
indicated, the high and low bid quotations for our common stock as reported by
the Nasdaq National Market:
Common Stock Price
----------------------
High Low
--------- ---------
Quarter ended December 31, 2002 $9.41 $2.95
Quarter ended September 30, 2002 $7.45 $3.50
Quarter ended June 30, 2002 $13.56 $5.63
Quarter ended March 31, 2002 $16.72 $10.88
Quarter ended December 31, 2001 $17.47 $10.60
Quarter ended September 30, 2001 $19.28 $9.61
Quarter ended June 30, 2001 $19.00 $7.25
Quarter ended March 31, 2001 $16.25 $6.00
On March 5, 2003, the last reported sale price on the Nasdaq National Market for
our common stock was $5.84 per share.
Holders
As of March 5, 2003, there were approximately 1,125 stockholders of record of
Exelixis common stock.
Dividends
Since inception, we have not paid dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and
currently do not plan to pay any cash dividends in the foreseeable future. Any
future determination to pay dividends will be at the discretion of our board of
directors.
Recent Sales of Unregistered Securities
On October 29, 2002, Exelixis entered into a stock purchase agreement with
SmithKlineBeecham Corporation ("GSK") as part of a corporate alliance. Pursuant
to the terms of the stock purchase agreement, on November 1, 2002, Exelixis
issued 2,000,000 shares of common stock at a purchase price of $7.00 per share
to GSK in exchange for $14.0 million in cash. The shares were issued to GSK in
a private placement pursuant to an exemption from registration in reliance upon
Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933.
Uses of Proceeds from Registered Securities
In May 2000, we completed our initial public offering for aggregate proceeds of
approximately $136.0 million. In connection with the offering, we paid a total
of approximately $9.5 million in underwriting discounts and commissions and $2.0
million in other offering costs and expenses. After deducting the underwriting
discounts and commissions and the offering costs and expenses, our net proceeds
from the offering were approximately $124.5 million.
From the time of receipt through December 31, 2002, the proceeds from the
offering were used for research and development activities, capital
expenditures, working capital, merger and acquisition expenses and other general
corporate purposes. All remaining proceeds from the offering were expended
during the fourth quarter of 2002.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated historical information has been derived from
the audited consolidated financial statements of Exelixis. The financial
information as of December 31, 2002 and 2001 and for each of the three years in
the period ended December 31, 2002 are derived from audited consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. The
following Selected Consolidated Financial Data should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8. Consolidated Financial Statements and
Supplementary Data" included elsewhere in this Annual Report on Form 10-K. The
historical results are not necessarily indicative of the results of operations
to be expected in the future.
Year Ended December 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- --------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Total revenues 44,322 41,006 24,759 10,510 2,272
Operating expenses:
Research and development 112,014 82,700 51,685 21,653 12,096
Selling, general and administrative 18,758 19,166 15,678 7,624 5,472
Acquired in-process research and development - 6,673 38,117 - -
Impairment of goodwill - 2,689 - - -
Amortization of goodwill and intangibles 666 5,092 260 - -
Restructuring charge 708 - - - -
---------- ---------- ---------- --------- ---------
Total operating expenses 132,146 116,320 105,740 29,277 17,568
---------- ---------- ---------- --------- ---------
Loss from operations (87,824) (75,314) (80,981) (18,767) (15,296)
Interest and other income (expense), net 3,290 4,128 5,569 46 (50)
Equity in net loss of affiliated company - - - - (320)
Minority interest in subsidiary net loss - - 101 - -
---------- ---------- ---------- --------- ---------
Net loss from continuing operations before
income tax (84,534) (71,186) (75,311) (18,721) (15,666)
Provision for income taxes 345 - - - -
---------- ---------- ---------- --------- ---------
Loss from continuing operations (84,879) (71,186) (75,311) (18,721) (15,666)
Loss from operations of discontinued segment (1,251) - - - -
---------- ---------- ---------- --------- ---------
Net loss $ (86,130) $ (71,186) $ (75,311) $(18,721) $(15,666)
========== ========== ========== ========= =========
Loss per share from continuing operations $ (1.50) $ (1.53) $ (2.43) $ (4.60) $ (7.88)
Loss per share from discontinued operations (0.02) - - - -
---------- ---------- ---------- --------- ---------
Net loss per share, basic and diluted $ (1.52) $ (1.53) $ (2.43) $ (4.60) $ (7.88)
========== ========== ========== ========= =========
Shares used in computing basic and
diluted net loss per share 56,615 46,485 31,031 4,068 1,988
========== ========== ========== ========= =========
December 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- --------- ---------
Balance Sheet Data: (In thousands)
Cash, cash equivalents, short-term investments
and restricted cash $ 221,987 $ 227,700 $ 112,552 $ 6,904 $ 2,058
Working capital (deficit) 173,153 194,242 96,019 (672) 182
Total assets 339,113 346,614 204,914 18,901 8,981
Long-term obligations, less current portion 65,372 48,667 7,976 11,132 2,566
Deferred stock compensation, net (977) (4,137) (10,174) (14,167) (1,803)
Accumulated deficit (287,354) (201,224) (130,038) (54,727) (36,006)
Total stockholders' equity (deficit) 175,920 237,220 162,734 (49,605) (35,065)
ITEM 7. 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 our current expectations, assumptions, estimates and
projections about our business and our industry, and involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied in, or contemplated by, the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan,"
"will," "may," "should," "estimate," "predict," "potential," "continue" or the
negative of such terms or other similar expressions, identify forward-looking
statements. 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, but are not limited to, those discussed in
"Risk Factors" as well as those discussed elsewhere in this Annual Report on
Form 10-K . You should read the following discussion and analysis in conjunction
with the "Selected Consolidated Financial Data" and the financial statements and
notes thereto included in this Annual Report on Form 10-K. Historical operating
results are not necessarily indicative of results that may occur in future
periods. Exelixis undertakes no obligation to update any forward-looking
statement to reflect events after the date of this report.
Overview
We believe that we are a leader in the discovery and validation of high-quality
novel targets for several major human diseases, and a leader in the discovery of
potential new drug therapies, specifically for cancer and other proliferative
diseases. Our primary mission is to develop proprietary human therapeutics by
leveraging our integrated discovery platform to increase the speed, efficiency
and quality of pharmaceutical product discovery and development.
Through our expertise in comparative genomics and model system genetics, we are
able to find new drug targets that we believe would be difficult or impossible
to uncover using other experimental approaches. Our research is designed to
identify novel genes and proteins expressed by those genes that, when changed,
either decrease or increase the activity in a specific disease pathway in a
therapeutically relevant manner. These genes and proteins represent either
potential product targets or drugs that may treat disease or prevent disease
initiation or progression.
Our most advanced proprietary pharmaceutical program focuses on drug discovery
and development of small molecules in cancer. Specifically, the remarkable
evolutionary conservation of the biochemical pathways strongly supports the use
of simple model systems, such as fruit flies, nematode worms, zebrafish and
mice, to identify key components of critical cancer pathways that can then be
targeted for drug discovery. We expect to develop new cancer drugs by
exploiting the underlying "genetic liabilities" of tumor cells to provide
specificity in targeting these cells for destruction, while leaving normal cells
unharmed. We have discovered and are further developing a number of small
molecule drug targets in addition to monoclonal antibody drug targets.
Molecules directed against these targets may selectively kill cancer cells while
leaving normal cells unharmed, and may provide alternatives or supplements to
current cancer therapies.
We believe that our proprietary technologies are also valuable to other
industries whose products can be enhanced by an understanding of DNA or
proteins, including the agrochemical, agricultural and diagnostic industries.
Many of these industries have shorter product development cycles and lower risk
than the pharmaceutical industry, while at the same time generating significant
sales with attractive profit margins. By partnering with companies in multiple
industries, we believe that we are able to diversify our business risk, while at
the same time maximizing our future revenue stream opportunities.
Our strategy is to establish collaborations with major pharmaceutical,
biotechnology and agrochemical companies based on the strength of our
technologies and biological expertise as well as to support additional
development of our proprietary products. Through these collaborations, we
obtain license fees and research funding, together with the opportunity to
receive milestone payments and royalties from research results and subsequent
product development. In addition, many of our collaborations have been
structured strategically to provide us access to technology to advance our
internal programs, saving both time and money, while at the same time retaining
rights to use the same information in different industries. Our collaborations
with leading companies in the agrochemical industries allow us to continue to
expand our internal development capabilities while providing our partners with
novel targets and assays. Since we believe that agrochemical products have
reduced development time and lower risk, we expect to be able to maximize our
potential future revenue stream through partnering in multiple industries. We
have active commercial collaborations with several leading pharmaceutical,
biotechnology and agrochemical companies: Bayer CropScience LP (formerly Aventis
USA LP), Bayer Corporation, Bristol-Myers Squibb Company (two collaborations),
Cytokinetics, Inc., Dow AgroSciences LLC, Elan Pharmaceuticals, Inc., Merck &
Co., Inc. (two collaborations), Protein Design Labs, Inc., Renessen LLC, Scios
Inc., Schering-Plough Research Institute, Inc. and SmithKlineBeecham
Corporation.
In addition to our commercial collaborations, we have relationships with other
biotechnology companies, academic institutions and universities that provide us
access to specific technology or intellectual property for the enhancement of
our business. These include collaborations with leading biotechnology product
developers and solutions providers, among them Affymetrix, GeneMachines, AVI
BioPharma, Inc., Silicon Genetics, Galapagos NV, Genomics Collaborative Inc.,
Accelrys, Inc., Akceli, Inc., Ardais Corp., Cogen BioCognetics, Inc., Impath
Predictive Oncology, Inc., and Virtual Arrays, Inc..
We have a history of operating losses resulting principally from costs
associated with research and development activities, investment in core
technologies and general and administrative functions. As a result of planned
expenditures for future research and development activities, including
manufacturing and development expenses for compounds in pre-clinical and
clinical studies, we expect to incur additional operating losses for the
foreseeable future.
Acquisition of Genomica Corporation
On December 28, 2001, we acquired approximately 94% of the outstanding common
stock of Genomica Corporation ("Genomica"), a bio-informatics software company.
The acquisition of Genomica was completed in January 2002. Upon the
effectiveness of the merger, Genomica became our wholly-owned subsidiary. The
transaction, which was accounted for under the purchase method of accounting,
was effected through the exchange of 0.28309 of a share of our common stock for
each outstanding share of Genomica common stock. A total of approximately 6.9
million shares of our common stock were issued for all of the outstanding shares
of Genomica common stock.
The purchase price for Genomica, which for financial accounting purposes was
valued at $110.0 million, was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition, as determined by management based on an independent valuation. As
a result of this transaction, we recorded net tangible assets of $106.2 million
(including cash and investments of $109.6 million), developed technology of
$400,000, which will be amortized over two years, and goodwill of $3.4 million.
At the same time, we recorded a goodwill impairment charge of $2.7 million,
which was expensed in 2001 to operations. The impairment was calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), by estimating the present value of future cash
flows for the ongoing Genomica licensing business using a risk adjusted discount
rate. The impaired goodwill represented excess purchase price, which we viewed
as economically equivalent to financing costs for the acquired cash and
investments.
In December 2001, in connection with the acquisition of Genomica, Exelixis
adopted an exit plan for Genomica. Under this exit plan, we terminated
Genomica's entire workforce and abandoned its leased facilities in Boulder,
Colorado and Sacramento, California. The estimated costs of the exit plan
amounted to $2.9 million and were included as part of the liabilities assumed in
the acquisition.
In April 2002, we transferred the Genomica software business to Visualize, Inc.
("Visualize") for future consideration of up to $2.4 million in license fees and
royalty payments. Pursuant to the terms of the transaction, Visualize obtained
a license with all rights and obligations to third parties currently licensing
the Genomica software, including the sole right to further develop and license
the software to other third parties. Royalties that Exelixis receives, if any,
will be recorded in the period they are earned as a gain from discontinued
operations. In addition, Visualize assumed our lease obligation for Genomica's
abandoned facility in Sacramento, California. Exelixis retains an internal use
license for the software. As a result of this transaction, we reported the
operating results of Genomica and the estimated loss on the sale of Genomica as
discontinued operations. For the period beginning January 1, 2002 to its
disposal in April 2002, Genomica's operating results consisted of revenues of
approximately $58,000 and an operating loss of approximately $456,000. The loss
on the sale of Genomica includes the write-off of goodwill of approximately
$971,000, partially offset by an adjustment to the estimated lease obligation by
approximately $176,000 related to the Sacramento facility assumed by Visualize.
As of December 31, 2002, the remaining actions to be taken under the exit plan
consisted primarily of residual payments related to the lease obligation for the
facility in Boulder, Colorado, which are expected to continue until the
termination of the lease in 2005, unless the facility is subleased earlier.
Beginning in the first quarter of 2002, we have applied the new rules of
accounting for goodwill and other intangible assets in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Accordingly, goodwill
and other intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests.
Acquisition of Artemis Pharmaceuticals
In May 2001, we acquired a majority of the outstanding capital stock of Artemis
Pharmaceuticals GmbH, a privately held genetics and functional genomics company
organized under the laws of Germany. The transaction, which was accounted for
under the purchase method of accounting, was effected through the exchange of
shares of our common stock for Deutschmark 1.00 of nominal value of Artemis
capital stock, using an exchange ratio of 4.064 to one. Approximately 1.6
million shares of our common stock were issued in exchange for 78% of the
outstanding capital stock of Artemis held by Artemis stockholders. In addition,
we received a call option (the "Call Option") from, and issued a put option (the
"Put Option") to, certain stockholders of Artemis (the "Option Holders") for the
issuance of approximately 460,000 additional shares of our common stock in
exchange for the remaining 22% of the outstanding capital stock of Artemis held
by the Option Holders. We could have exercised the Call Option at any time from
May 14, 2001 through January 31, 2002, and the Option Holders could have
exercised their rights under the Put Option at any time from April 1, 2002
through May 15, 2002. We exercised the Call Option for 131,674 shares and
329,591 shares in December 2001 and January 2002, respectively, which resulted
in an increase to goodwill of approximately $1.9 million and $4.0 million,
respectively, related to the additional purchase price. In addition, we issued
fully vested rights to purchase approximately 187,000 additional shares of our
common stock to Artemis employees in exchange for such employees' vested options
formerly representing the right to purchase shares of Artemis capital stock
pursuant to the Artemis Employee Phantom Stock Option Program. Artemis provides
us with technologies related to the following two species: zebrafish and mice.
These technologies are used in our research and development efforts.
The purchase price for Artemis, which for financial accounting purposes was
valued at $28.2 million, was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition, as determined by management based upon an independent valuation.
As a result of this transaction, we recorded expense associated with the
purchase of in-process research and development of $6.7 million, net tangible
assets of $2.8 million and intangible assets (including goodwill) of $18.7
million, the majority of which was being amortized over 15 years until December
31, 2001. Under SFAS 142, we have applied the new rules of accounting for
goodwill and other intangible assets. Accordingly, goodwill and other
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with SFAS 142.
Since the third quarter of 2002, we have undertaken a strategic initiative with
respect to our mouse business at Artemis, and intend to split off the entity,
including all personnel, and create a separate independent company. This
activity is expected to occur in 2003.
Acquisition of Exelixis Plant Sciences (Formerly Agritope)
In December 2000, we completed our acquisition of Agritope, Inc. As a result of
the acquisition, Agritope became our wholly-owned subsidiary, and we
subsequently changed its name to Exelixis Plant Sciences, Inc. The transaction,
which was accounted for under the purchase method of accounting, was effected
through the exchange of 0.35 of a share of our common stock for each outstanding
share of Agritope capital stock. Approximately 1.7 million shares of our common
stock were issued in connection with the transaction. In addition, unexpired
and unexercised options and warrants to purchase shares of Agritope capital
stock were assumed by us pursuant to the transaction and converted into fully
vested options and warrants to purchase approximately 880,000 shares of our
common stock.
The purchase price for Agritope, which for financial accounting purposes was
valued at $93.5 million, was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition, as determined by an independent valuation. As a result of this
transaction, we recorded expense associated with the purchase of in-process
research and development of $38.1 million, net tangible liabilities of $3.6
million and intangible assets (including goodwill) of $58.9 million, the
majority of which was being amortized over 15 years until December 31, 2001.
Under SFAS 142, we have applied the new rules of accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Accordingly,
goodwill and other intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests in accordance with
SFAS 142.
We acquired Vinifera, Inc. ("Vinifera") in connection with the purchase of
Agritope (which was the parent company of Vinifera). Vinifera was organized as a
majority-owned subsidiary and was engaged in the grape vine propagation
business. Because this business did not fit our strategic objectives, at the
date of the acquisition of Agritope, we committed to a plan to sell the Vinifera
operations. On March 31, 2001, we reduced our ownership interest in Vinifera
from 57% to 19% by selling 3.0 million shares of Vinifera common stock back to
Vinifera in consideration for $2.1 million in interest bearing promissory notes.
As a result of the sale of Vinifera common stock back to Vinifera, we
deconsolidated Vinifera, excluded our share of Vinifera's operating losses for
the first quarter of 2001 of $275,000 and recorded the following amounts as an
adjustment to goodwill recorded in connection with the acquisition of Agritope:
a write-down of the value of acquired developed technology attributable to
Vinifera of $435,000, a gain on sale of Vinifera shares of $590,000 and a
promissory note reserve of $1,700,000. The net adjustment was an increase to
goodwill in the amount of $675,000. Beginning April 1, 2001, we accounted for
our remaining investment in Vinifera using the cost method.
Due to risks associated with collection, as of December 31, 2001, we reserved
for 100% of these promissory notes. Due to a significant decline in the
operating performance of Vinifera, in December 2001, we wrote down our remaining
cost-basis investment in Vinifera to zero. Vinifera ceased operations in 2002.
Critical Accounting Policies
We believe the following are our critical accounting policies:
Revenue Recognition
Most of our revenues are generated from complex research and licensing
arrangements. These research and licensing arrangements may include up-front
non-refundable payments. Although these up-front payments are generally
non-refundable, under U.S. generally accepted accounting principles ("GAAP") we
defer the revenues under these arrangements and recognize the revenues on a
straight-line basis over the relevant periods specified in the agreements,
generally the research term. Our research and license arrangements may also
include milestone payments. Although these milestone payments are generally
non-refundable once the milestone is achieved, we recognize the milestone
revenues on a straight-line basis over the research term of the arrangement.
This typically results in a portion of the milestone being recognized at the
date the milestone is achieved, and the balance being recognized over the
remaining research term of the agreement. It is our understanding that there is
diversity in practice on the recognition of milestone revenue. Other companies
have adopted an alternative acceptable milestone revenue recognition policy
whereby the full milestone fee is recognized upon completion of the milestone.
If we had adopted such a policy, our revenues recorded to date would have
increased and our deferred revenues would have decreased by an immaterial amount
compared to total revenue recognized. Revenues from chemistry collaborations
are generally recognized upon the delivery of accepted compounds.
Exit Costs
Prior to the completion of the December 28, 2001 acquisition of Genomica, we
formulated an exit plan for Genomica to improve the operating efficiency of the
combined company. This plan called for the reduction of substantially all of
Genomica's workforce and the abandonment of leased facilities in Boulder,
Colorado and Sacramento, California. These activities were completed during the
first half of 2002. The actual costs related to the remaining exit activities
may differ from the amounts recorded as of December 31, 2002. For example, we
have reserved $825,000 as of December 31, 2002 for our estimated maximum
obligation under Genomica's remaining operating lease commitment. However, these
operating lease commitments may be resolved in a more favorable manner, such as
the possibility of successfully subleasing the abandoned space.
Goodwill and Intangible Impairment
As of December 31, 2002, our consolidated balance sheet included approximately
$72.2 million of goodwill and other intangible assets. Under U.S. generally
accepted accounting principles, we will evaluate goodwill for impairment on an
annual basis and on an interim basis if events or changes in circumstances
between annual impairment tests indicate that the asset might be impaired. We
will also evaluate other intangible assets for impairment when impairment
indicators are identified. In assessing the recoverability of our goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets.
These estimates include forecasted revenues, which are inherently difficult to
predict. If these estimates or their related assumptions change in the future,
we may be required to record impairment charges for these assets. Furthermore,
our impairment evaluation of goodwill will require management to exercise
judgment in the identification of our reporting units. The impairment test for
goodwill will be performed at the reporting unit level, which may be one level
below the single operating segment disclosed in our current financial
statements, depending upon whether certain criteria are met.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2002, 2001 and 2000
Total Revenues
Total revenues were $44.3 million for the year ended December 31, 2002, compared
to $41.0 million for 2001 and $24.8 million for 2000. The increase from 2001 to
2002 resulted primarily from the impact of our corporate collaborations with
SmithKlineBeecham Corporation ("GlaxoSmithKline" or "GSK"), Bristol-Myers Squibb
Company ("BMS") and Protein Design Labs, Inc. ("PDL") and from compound
deliveries under our chemistry collaborations established with Cytokinetics,
Inc., Elan Pharmaceuticals, Inc., Scios Inc. and Schering-Plough Research
Institute, Inc. to jointly design custom high-throughput screening compound
libraries. This increase was partially offset by a reduction of revenue from
Pharmacia due to the February 2002 conclusion of our collaboration. The increase
from 2000 to 2001 resulted principally from license and contract revenues earned
from the signing of new collaboration agreements with PDL and BMS, additional
revenues under our existing collaborative agreements with Bayer, BMS, Dow
AgroSciences LLC and Bayer CropScience and, to a lesser extent, recognition of
the remaining deferred revenue related to the mutually agreed termination of our
collaboration with Pharmacia, which terminated in February 2002.
Research and Development Expenses
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs, supplies, licenses and
depreciation of facilities and laboratory equipment. Research and development
expenses were $112.0 million for the year ended December 31, 2002, compared to
$82.7 million for 2001 and $51.7 million for 2000. The increase in 2002 over
2001 resulted primarily from the following costs:
- Increased Personnel - Staffing costs in 2002 increased by
approximately 34% from 2001 levels to approximately $43.0 million. The
increase was to support new collaborative arrangements and our
internal proprietary research efforts. Salary, bonuses, related fringe
benefits, recruiting and relocation costs are included in personnel
costs. We expect these personnel costs to increase further as we
continue to build our organization.
- Increased Lab Supplies - As a result of the increase in personnel, our
compound collaborations and the significant expansion of our drug
discovery operations, lab supplies expense increased 41% to $21.8
million during 2002.
- Increased Licenses and Consulting - In order to support new
collaborative arrangements, manufacture the rebeccamycin analog to
ensure adequate clinical supply, complete data analysis for the
ongoing NCI-sponsored Phase II trials, plan for registration trials of
the rebeccamycin analog and to advance XL 784, our lead IND candidate,
through preclinical toxicology testing in anticipation of filing an
IND, license and consulting expenses increased 128% to $12.8 million
during 2002.
We expect that research and development expenses will continue to increase in
absolute dollar amounts in the future, as we continue to advance drug discovery
and development programs, including manufacturing and clinical development
efforts on our maturing pipeline of products.
With respect to the rebeccamycin analogue and our own proprietary compounds, we
are currently relying on collaborators and third-party contractors to produce
materials for clinical trials. We expect clinical costs will increase in the
future as we enter clinical trials for proprietary product candidates and
additional trials for our rebeccamycin analogue, if any. We currently do not
have estimates of total costs to reach the market by a particular drug candidate
or in total. Our potential therapeutic products are subject to a lengthy and
uncertain regulatory process that may not result in the necessary regulatory
approvals, which could adversely affect our ability to commercialize products.
In addition, clinical trials of our potential products may fail to demonstrate
safety and efficacy, which could prevent or significantly delay regulatory
approval.
Our most advanced clinical program is the rebeccamycin analogue ("XL 119"), an
anticancer compound that we in-licensed from BMS in 2001. The rebeccamycin
analogue has completed Phase I testing. The Phase II clinical testing program,
which is being conducted by the National Cancer Institute ("NCI"), is well
advanced. To date, the most pronounced antitumor activity was observed in upper
gastrointestinal tumors (most prominently in bile duct tumors), where several
partial responses and instances of prolonged disease stabilization occurred. We
believe that the compound deserves further development efforts, as there is
currently no approved standard therapy for these rapidly progressing tumors. We
anticipate initiating next development steps, if any, following discussions with
the Food and Drug Administration ("FDA").
XL 784 is the first small molecule compound developed from our proprietary drug
discovery platform. We are currently completing regulatory toxicology studies,
and if the safety profile continues to look acceptable, we expect to file an IND
in 2003.
The increase in research and development expenses from 2001 and 2000 was due
primarily to increased staffing and other personnel-related costs and non-cash
stock compensation expense (as described below). These expenses were incurred
to support new collaborative arrangements and proprietary programs.
- Increased Personnel - Staffing costs in 2001 increased by
approximately 69% to approximately $32.0 million from 2000. The
increase was to support new collaborative arrangements and our
internal proprietary research efforts, including increased expenses
related to staff hired with the acquisition of Artemis in May 2001 and
Agritope in December 2000. Salary, bonuses, related fringe benefits,
recruiting and relocation costs are included in personnel costs.
- Increased Lab Supplies - As a result of the increase in personnel and
the significant expansion of our drug discovery operations, lab
supplies increased 85% to approximately $15.5 million during 2001.
- Increased Licenses and Consulting - To support new collaborative
arrangements and further development of proprietary programs, license
and consulting expenses increased 100% to approximately $5.6 million
during 2001.
General and Administrative Expenses
General and administrative expenses consist primarily of staffing costs to
support our research activities, facilities costs and professional expenses,
such as legal fees. General and administrative expenses were $18.8 million for
the year ended December 31, 2002, compared to $19.2 million for 2001 and $15.7
million for 2000. The decrease in 2002 from 2001 was primarily due to a
decrease in non-cash stock compensation expense of $1.5 million (as described
below), partially offset by costs associated with personnel and facilities to
support expansion in our research and development operations. The increase in
general and administrative expenses in 2001 compared to 2000 was primarily due
to increased staffing in support of our expanded research and development
activities, partially offset by a decrease in non-cash stock compensation
expense of $2.2 million (as described below).
Stock Compensation Expense
Deferred stock compensation for options granted to our employees is the
difference between the fair value for financial reporting purposes of our common
stock on the date such options were granted and their exercise price. Deferred
stock compensation for options granted to consultants has been determined based
upon estimated fair value, using the Black-Scholes option valuation model. As
of December 31, 2002, we have approximately $1.0 million of remaining deferred
stock compensation, related to stock options granted to consultants and
employees. In connection with the grant of stock options to employees and
consultants, we recorded no deferred stock compensation in the years ended
December 31, 2002 and 2001 and $10.0 million in 2000. This amount was recorded
as a component of stockholders' equity and is being amortized as stock
compensation expense over the vesting periods of the options, which is generally
four years. We recognized stock compensation expense of $2.5 million for the
year ended December 31, 2002, compared to $7.4 million for 2001 and $14.0
million for 2000. These amounts are included within research and development
and general and administrative expenses. The decreases in stock compensation
expense in 2002 compared to 2001 and in 2001 compared to 2000 primarily result
from the accelerated amortization method used for accounting purposes.
During April 2001, we granted approximately 545,000 supplemental stock options
("Supplemental Options") under the 2000 Equity Incentive Plan to certain
employees (excluding officers and directors) who had stock options with exercise
prices greater than $16.00 per share under the 2000 Equity Incentive Plan. The
number of Supplemental Options granted was equal to 50% of the corresponding
original grant held by each employee. The Supplemental Options have an exercise
price of $16.00, vest monthly over a two-year period beginning April 1, 2001,
and have a 27-month term. The vesting on the corresponding original stock
options was suspended and will resume in April 2003 following the completion of
vesting of the Supplemental Options. This new grant constitutes a synthetic
repricing as defined in Financial Accounting Standards Board ("FASB")
Interpretation Number 44, "Accounting for Certain Transactions Involving Stock
Compensation," and results in certain options being reported using the variable
plan method of accounting for stock compensation expense until those options are
exercised, forfeited or expire. For the year ended December 31, 2001, we
recorded compensation expense related to these Supplemental Options of $246,000,
of which $242,000 was reversed in 2002 due to a decrease in the market value of
our common stock.
Acquired In-Process Research and Development
The valuation of the purchased in-process research and development related to
the Artemis acquisition of $6.7 million was determined by management based upon
the results of an independent valuation using the income approach for each of
the three significant in-process projects. The in-process projects relate
primarily to the development of technologies that use vertebrate genetic model
organisms, zebra-fish and mice, to identify and functionally validate novel
genes in vivo. These genes can be used as novel screening targets or as the
basis for secreted proteins in clinically and commercially relevant diseases.
The in-process projects have been abandoned or are expected to be completed over
approximately the next two years. The income approach estimates the value of
each acquired in-process project based on its expected future cash flows. The
valuation analysis considered the contribution of the core technology as well as
the percent complete of each in-process research and development project. The
expected present value of the cash flows associated with the in-process research
and development projects was computed using a risk adjusted rate of return of
30%, which is considered commensurate with the overall risk and percent complete
of the in-process projects. The purchased in-process technology was not
considered to have reached technological feasibility, and it has no alternative
future use, and accordingly, it was recorded as a component of operating
expenses.
In connection with the Agritope purchase in fiscal year 2000, we recorded
expense of $38.1 million relating to acquired in-process research and
development. The valuation of the purchased in-process research and development
was based upon the results of an independent valuation using the income approach
for each of the ten projects in-process. The in-process projects relate
primarily to the development of disease and insect resistant fruits and
vegetables and have been abandoned or are expected to be completed over
approximately the next three and one-half years. The income approach estimates
the value of each acquired in-process project based on its expected future cash
flows. The valuation analysis considered the contribution of the core technology
as well as the percent complete of each in-process research and development
project. The expected present value of the cash flows associated with the
in-process research and development projects was computed using a risk adjusted
rate of return of 35%, which is considered commensurate with the overall risk
and percent complete of the in-process projects. The purchased technology was
not considered to have reached technological feasibility, and it has no
alternative future use, accordingly, it was recorded as a component of operating
expense.
Impairment of Goodwill
In 2001, we acquired $3.4 million of goodwill in connection with our Genomica
acquisition. At the same time, we recorded a goodwill impairment charge of $2.7
million, which was expensed in 2001 to operations. The impairment was
calculated in accordance with SFAS 121, by estimating the present value of
future cash flows for the ongoing Genomica licensing business using a risk
adjusted discount rate. The impaired goodwill represented excess purchase
price, which we viewed as economically equivalent to financing costs for the
acquired cash and investments.
We adopted SFAS 142 on January 1, 2002. This accounting standard requires that
goodwill no longer be amortized, and instead, be tested for impairment on a
periodic basis. We completed a transitional impairment test during the first
quarter of 2002, which did not result in impairment of recorded goodwill. We
adopted an annual goodwill impairment test date as of the beginning of the
fourth quarter of 2002. Accordingly, we completed the annual impairment test as
of October 1, 2002, which did not result in impairment of recorded goodwill.
Amortization of Goodwill and Other Intangibles
Goodwill and intangibles result from our acquisitions of Genomica, Artemis and
Agritope (renamed Exelixis Plant Sciences). Amortization of intangibles was
$666,000 for the year ended December 31, 2002, compared to amortization of
goodwill and intangibles of $5.1 million for 2001 and $260,000 for 2000. The
decrease in 2002 from 2001 was primarily related to our adoption of SFAS 142,
whereby goodwill is no longer amortized. The increase in 2001 over 2000 was the
result of amortization of goodwill and intangibles from the Agritope acquisition
for 12 months compared to only one month in 2000 as well as the amortization of
goodwill and intangibles from the acquisition of Artemis.
Restructuring Charge
During the fourth quarter of 2002, we implemented a restructuring plan, which
resulted in a reduction in workforce of 40 employees primarily from our U.S.
research operations. Accordingly, we recorded a restructuring charge of
$708,000 comprised primarily of involuntary termination benefits. The
restructuring plan was implemented in order to facilitate our evolution into a
fully integrated drug discovery company and the reallocation of resources to
permit greater focus on building our expanding portfolio of development
programs.
Other Income (Expense), Net
Other income, net, was $3.3 million for the year ended December 31, 2002,
compared to $4.1 million for 2001 and $5.6 million for 2000. Other income
(expense) consists primarily of interest income earned on cash, cash equivalents
and short-term investments, offset by interest expense incurred on notes
payable, bank obligations and capital lease obligations. The decrease in 2002
from 2001 was the result of a decrease in interest income due to an overall
decline in interest rates coupled with an increase in interest expense related
to notes payable and bank obligations. The decrease in 2001 from 2000 was
primarily attributable to an increase in interest expense related to notes
payable and capital leases.
Discontinued Operations
In April 2002, we transferred the Genomica software business to Visualize for
future consideration of up to $2.4 million in license fees and royalty payments.
Pursuant to the terms of the transaction, Visualize obtained a license with all
rights and obligations to third parties currently licensing the Genomica
software, including the sole right to further develop and license the software
to other third parties. Royalties that we receive, if any, will be recorded in
the period they are earned as a gain in discontinued operations. In addition,
Visualize assumed the lease obligation for Genomica's abandoned facility in
Sacramento, California. We retained an internal use license for the software.
As a result of this transaction, we reported the operating results of Genomica
and the estimated loss on the sale of Genomica as discontinued operations. For
the period beginning January 1, 2002 and ending with the discontinuation of
Genomica's operations in April 2002, Genomica's operating results consisted of
revenues of approximately $58,000 and an operating loss of approximately
$456,000. The loss on the sale of Genomica includes the write-off of goodwill
of approximately $971,000, partially offset by a change in estimate for
Genomica's lease obligation for the Sacramento facility assumed by Visualize of
approximately $176,000.
Minority Interest and Equity in Net Loss of Affiliated Company
On March 31, 2001, we reduced our ownership interest in Vinifera, Inc. to 19%.
Beginning April 1, 2001, we accounted for our remaining investment in Vinifera
using the cost method. Due to a significant decline in the operating
performance of Vinifera, we wrote down our investment in Vinifera to zero in
December 2001.
For 2000, minority interest in subsidiary net loss represents the minority
shareholders' portion of Vinifera's operating loss. Net loss reported by us,
which is attributable to the minority shareholders, was approximately $100,000
in 2000. Since we owned in excess of 50% of Vinifera, we consolidated
Vinifera's operating results, a portion of which was then allocated to the
minority shareholders as minority interest in proportion to their ownership
interest, partially offsetting our operating loss.
Income Taxes
We have incurred net losses since inception and, consequently, have not recorded
any U.S. federal or state income taxes. We have recorded a tax provision of
approximately $345,000 for the year ended December 31, 2002 related to income
earned in our foreign operations.
As of December 31, 2002, we had federal and California net operating loss
carryforwards of approximately $76.6 million and $36.7 million, respectively. We
had federal research and development credit carryforwards of approximately $10.8
million in each jurisdiction. If not utilized, the net operating loss and
credit carryforwards expire at various dates beginning in 2005. Under the
Internal Revenue Code and similar state provisions, certain substantial changes
in our ownership could result in an annual limitation on the amount of net
operating loss and credit carryforwards that can be utilized in future years to
offset future taxable income. Annual limitations may result in the expiration of
net operating loss and credit carryforwards before they are used.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale of
equity, equipment lease financings and other loan facilities and payments from
collaborators. Our initial public offering, completed in the second quarter of
2000, raised $124.5 million in net cash proceeds. In addition, we acquired
Genomica in December 2001, including $109.6 million in cash and investments. As
of December 31, 2002, we had approximately $222.0 million in cash, cash
equivalents, short-term investments and restricted cash.
Our operating activities used cash of $30.9 million for the year ended December
31, 2002, compared to $23.8 million for 2001 and $12.9 million for 2000. Cash
used in operating activities during each year related primarily to funding net
losses, partially offset by an increase in deferred revenue from collaborators,
non-cash charges related to acquired in-process research and development,
depreciation and amortization of deferred stock compensation and intangibles.
Our investing activities provided cash of $46.8 million for the year ended
December 31, 2002, compared to cash provided of $5.4 million for 2001 and cash
used of $96.4 million for 2000. Cash provided in 2002 resulted primarily from
the maturities and sales of short-term investments, offset by purchases of other
short-term investments. The cash provided in 2001 consisted of cash resulting
from the acquisitions of Artemis and Genomica and proceeds from maturities and
sales of short-term investments, partially offset by purchases of short-term
investments and property and equipment. The use of cash for 2000 consisted
primarily of purchases of short-term investments and property and equipment,
partially offset by proceeds from maturities of short-term investments and
proceeds from sale-leaseback of equipment. We expect to continue to make
significant investments in research and development and our administrative
infrastructure, including the purchase of property and equipment to support our
expanding operations.
Our financing activities provided cash of $32.6 million for the year ended
December 31, 2002, compared to $34.4 million for 2001 and $123.5 million for
2000. Cash provided from financing activities in 2002 resulted primarily from
$25.0 million from a convertible note with GSK, in addition to $6.8 million from
the issuance of common stock to GSK, both in accordance with an executed
collaboration agreement. The cash provided from financing activities in 2002
was partially offset by principal payments on capital leases, bank obligations
and notes payable. The cash provided in 2001 consisted of $10.0 million
proceeds from the issuance of common stock to BMS as part of a collaboration
agreement and $30.0 million proceeds from a convertible note with PDL, partially
offset by principal payments on capital leases and notes payable. Cash provided
from financing activities in 2000 consisted primarily of proceeds from our
initial public offering.
We believe that our current cash and cash equivalents, short-term investments
and funding to be received from collaborators, will be sufficient to satisfy our
anticipated cash needs for at least the next two years. Changes in our
operating plan as well as factors described in our "Risk Factors" elsewhere in
this Annual Report on Form 10-K could require us to consume available resources
much sooner than we expect. It is possible that we will seek additional
financing within this timeframe. We may raise additional funds through public
or private financing, collaborative relationships or other arrangements. In
July 2001, we filed a registration statement on Form S-3 to offer and sell up to
$150.0 million of common stock. We have no current commitments to offer or sell
securities with respect to shares that may be offered or sold pursuant to that
filing. We cannot assure you that additional funding, if sought, will be
available or, even if available, will be available on terms favorable to us.
Further, any additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. Our failure to
raise capital when needed may harm our business and operating results.
Commitments
We do not have any "special purpose entities" that are unconsolidated in our
financial statements that are reasonably likely to materially affect liquidity
or the availability or requirements of cash. We are also not involved with
non-exchange traded commodity contracts accounted for at fair value. We have no
commercial commitments with related parties, except for employee loans. We have
contractual obligations in the form of operating and capital leases, notes
payable and licensing agreements. These are described in further detail in
Notes 8 and 12 of the Notes to Consolidated Financial Statements. The following
chart details our contractual obligations (in thousands):
Payments Due by Period
----------------------------------------------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
- -------------------------------------------------------------------------------------------------
Minimum purchase obligations $ 1,150 $ 1,150 $ - $ - $ -
Notes payable and bank obligations 5,813 1,840 3,097 876 -
Licensing agreements 6,581 1,505 2,031 2,030 1,015
Capital lease obligations 14,103 7,321 6,716 66 -
Convertible promissory note and loan 55,000 - 30,000 - 25,000
Operating leases 153,899 11,408 23,768 20,951 97,772
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 236,546 $ 23,224 $ 65,612 $ 23,923 $ 123,787
========== ========== ========== ========== ==========
We had outstanding loans aggregating $904,000 and $937,000 to certain officers
and employees as of December 31, 2002 and 2001, respectively. The notes are
general recourse or collateralized by certain real property assets, bear
interest at rates ranging from 4.6% to 7.0% and have maturities through 2006.
The principal plus accrued interest will be forgiven at various rates over three
to four years from the employees' date of employment with us. If an employee
leaves us, all unpaid and unforgiven principal and interest will be due and
payable within 60 days.
As of December 31, 2002, we had outstanding loans aggregating $1.2 million to
our stockholders. The loans were issued to enable certain employees to purchase
stock pursuant to their employee stock options. The loans bear interest at
rates ranging from 6.13% to 6.50% and mature at various times through February
2004.
Recent Accounting Pronouncements
We implemented SFAS 142 on January 1, 2002. This accounting standard requires
that goodwill no longer be amortized, and instead, be tested for impairment on a
periodic basis. Accordingly, we completed a transitional impairment test during
the first quarter of 2002, which did not result in impairment of recorded
goodwill. We adopted an annual goodwill impairment test date as of the
beginning of the fourth quarter of 2002. Following this approach, we completed
the annual impairment test as of October 1, 2002, which did not result in
impairment of recorded goodwill. We will continue to monitor asset-carrying
values as of October 1, assess if there is a potential impairment and complete
the measurement of impairment, if required. We will perform the impairment
measurement procedures under SFAS No. 142 if it is determined that a potential
impairment of goodwill exists.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," ("SFAS 144") on January 1, 2002 . SFAS 144 supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). The primary objectives of SFAS 144 were
to develop one accounting model based on the framework established in SFAS 121
for long-lived assets to be disposed of by sale and to address significant
implementation issues. The adoption of SFAS 144 did not have a material impact
on our financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which addresses accounting for
restructuring, discontinued operations, plant closing or other exit or disposal
activity. SFAS 146 requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002, although
earlier adoption is permitted. We adopted SFAS 146 in the fourth quarter of
2002, with no significant impact on our financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio and our long-term debt. At December 31, 2002, and 2001,
we had investments in debt securities of approximately $213.8 million and $223.2
million, respectively. Our investments are subject to interest rate risk, and
our interest income may fluctuate due to changes in U.S. interest rates. By
policy, we limit our investments to money market instruments, debt securities of
U.S. government agencies and debt obligations of U.S. corporations. We manage
market risk by our diversification requirements, which limit the amount of our
portfolio that can be invested in a single issuer. We manage credit risk by
limiting our purchases to high-quality issuers. Through our money managers, we
maintain risk management control systems to monitor interest rate risk. The risk
management control systems use analytical techniques, including sensitivity
analysis. At December 31, 2002, and 2001, we had long-term debt outstanding of
approximately $65.3 million and $41.8 million, respectively. Our payment
commitments associated with these debt instruments are fixed during the
corresponding terms and are comprised of interest payments, principal payments,
or a combination thereof. The fair value of our long-term debt will fluctuate
with movements of interest rates, increasing in periods of declining rates of
interest, and declining in periods of increasing rates of interest.
We have estimated the estimated effects on our interest rate sensitive assets
and liabilities based on a one percentage point hypothetical increase or
decrease in interest rates as of December 31, 2002 and 2001. As of December 31,
2002, a decrease in the interest rates of one percentage point would have a net
adverse change in the fair value of interest rate sensitive assets and
liabilities of approximately $1.6 million. As of December 31, 2001, an increase
in the interest rates of one percentage point would have a net adverse change in
the fair value of interest rate sensitive assets and liabilities of
approximately $0.1 million. It is assumed the changes occur immediately and
uniformly to each category of instrument containing interest rate risks.
Significant variations in market interest rates could produce changes in the
timing of repayments due to available prepayment options. The fair value of such
instruments could be affected and, therefore, actual results might differ from
our estimate.
We are exposed to foreign currency exchange rate fluctuations related to the
operations of our German subsidiaries. The revenues and expenses of our German
subsidiaries are denominated in Euro. At the end of each reporting period, the
revenues and expenses of these subsidiaries are translated into U.S. dollars
using the average currency rate in effect for the period, and assets and
liabilities are translated into U.S. dollars using the exchange rate in effect
at the end of the period. Fluctuations in exchange rates, therefore, impact our
financial condition and results of operations as reported in U.S. dollars.
In February 2002, we commenced using derivative financial instruments to reduce
our exposure to foreign currency exchange rate movements on our consolidated
operating results. As of December 31, 2002, we had outstanding an aggregate
notional amount of $5.8 million of written foreign currency put option contracts
and a notional amount of $2.9 million of purchased foreign currency call option
contracts denominated in Euro. Both the put and call option contracts have an
average exercise price of $1.0289 and expire no later than October 10, 2003.
The fair value of these contracts at December 31, 2002 was approximately
$119,000, which is reflected on the balance sheet as an asset. Our hedging
strategy is designed such that any potential losses on these instruments will be
materially offset in earnings by a reduction in Euro denominated costs for our
German operations. We cannot give any assurance that our hedging strategies
will be effective or that transaction losses can be minimized or forecasted
accurately.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXELIXIS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page #
------
Report of Ernst & Young LLP, Independent Auditors 39
Report of PricewaterhouseCoopers LLP, Independent Accountants 40
Consolidated Balance Sheets 41
Consolidated Statements of Operations 42
Consolidated Statements of Stockholders' Equity (Deficit) 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Exelixis, Inc.
We have audited the accompanying consolidated balance sheets of Exelixis, Inc.
as of December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Exelixis, Inc. at
December 31, 2002 and 2001, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 6 of the notes to consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets.
/s/ Ernst & Young LLP
Palo Alto, California
January 31, 2003
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Exelixis, Inc.
In our opinion, the accompanying consolidated statements of operations, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Exelixis, Inc. and its subsidiaries at December 31,
2000, and the results of their operations and their cash flows for the year
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 2, 2001
EXELIXIS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------------
2002 2001
-------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 84,522 $ 35,584
Short-term investments 131,704 192,116
Other receivables 3,325 4,026
Other current assets 3,841 2,873
-------------- ----------
Total current assets 223,392 234,599
Restricted cash 5,761 -
Property and equipment, net 32,406 36,500
Related-party receivables 904 937
Goodwill 67,364 62,357
Other intangibles, net 4,802 7,126
Other assets 4,484 5,095
-------------- ----------
Total assets $ 339,113 $ 346,614
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,717 $ 4,996
Other accrued expenses 7,167 4,744
Accrued bonus 2,504 2,366
Accrued benefits 2,556 3,731
Obligation assumed to exit certain activities of Genomica 825 2,919
Accrued merger and acquisition costs - 2,217
Current portion of capital lease obligations 6,840 5,947
Current portion of notes payable and bank obligations 1,840 1,200
Deferred revenue 23,790 12,237
-------------- ----------
Total current liabilities 50,239 40,357
Capital lease obligations 6,280 11,144
Notes payable and bank obligations 3,973 652
Convertible promissory note and loan 55,000 30,000
Acquisition liability - 6,871
Other long-term liabilities 119 -
Deferred revenue 47,582 20,370
-------------- ----------
Total liabilities 163,193 109,394
-------------- ----------
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized
and no shares issued - -
Common stock, $0.001 par value; 100,000,000 shares authorized;
issued and outstanding: 59,386,500 and 56,150,142 shares
at December 31, 2002 and 2001, respectively 59 56
Additional paid-in-capital 463,764 444,229
Notes receivable from stockholders (1,210) (2,205)
Deferred stock compensation, net (977) (4,137)
Accumulated other comprehensive income 1,638 501
Accumulated deficit (287,354) (201,224)
-------------- ----------
Total stockholders' equity 175,920 237,220
-------------- ----------
Total liabilities and stockholders' equity $ 339,113 $ 346,614
============== ==========
The accompanying notes are an integral part of these consolidated financial statements.
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
------------------------------
2002 2001 2000
--------- --------- ---------
Revenues:
Contract and government grants $ 34,981 $ 33,518 $ 20,983
License 9,341 7,488 3,776
--------- --------- ---------
Total revenues 44,322 41,006 24,759
--------- --------- ---------
Operating expenses:
Research and development (1) 112,014 82,700 51,685
Selling, general and administrative (2) 18,758 19,166 15,678
Acquired in-process research and development - 6,673 38,117
Impairment of goodwill - 2,689 -
Amortization of goodwill and intangibles 666 5,092 260
Restructuring charge 708 - -
--------- --------- ---------
Total operating expenses 132,146 116,320 105,740
--------- --------- ---------
Loss from operations (87,824) (75,314) (80,981)
Other income (expense):
Interest income 5,916 6,316 6,225
Interest expense (2,885) (2,186) (679)
Other income (expense), net 259 (2) 23
--------- --------- ---------
Total other income (expense) 3,290 4,128 5,569
Minority interest in consolidated subsidiary net loss - - 101
--------- --------- ---------
Net loss from continuing operations before income tax (84,534) (71,186) (75,311)
Provision for income taxes 345 - -
--------- --------- ---------
Net loss from continuing operations (84,879) (71,186) (75,311)
Loss from operations of discontinued segment-
Genomica Corporation (including loss on
sale of $795) (1,251) - -
--------- --------- ---------
Net loss $(86,130) $(71,186) $(75,311)
========= ========= =========
Loss per share from continuing operations $ (1.50) $ (1.53) $ (2.43)
Loss per share from discontinued operations (0.02) - -
--------- --------- ---------
Net loss per share, basic and diluted $ (1.52) $ (1.53) $ (2.43)
========= ========= =========
Shares used in computing basic and
diluted net loss per share 56,615 46,485 31,031
========= ========= =========
(1) Includes stock compensation expense of $1,559, $5,004 and $9,433 in 2002, 2001 and
2000, respectively.
(2) Includes stock compensation expense of $898, $2,360 and $4,589 in 2002, 2001 and
2000, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
Notes
Additional Receivable Deferred
Common Stock Paid-in From Stock
Shares Amount Capital Stockholders Compensation
------------- ------- ------------ -------------- --------------
Balance at December 31, 1999 6,258,805 $ 6 $ 19,523 $ (240) $ (14,167)
Issuance of common stock under warrants and
company stock plans, net of repurchases 4,928,299 5 3,782 (1,862) -
Repayment of notes from stockholders for
the exercise of stock options - - - 297 -
Issuance of common stock, net of offering costs 10,465,000 10 124,514 - -
Issuance of common stock for acquisition 1,721,776 2 92,235 - -
Conversion of preferred stock 22,877,656 23 46,757 - -
Conversion of promissory note 480,769 1 7,499 - -
Deferred stock compensation - - 10,029 - (10,029)
Amortization of deferred stock compensation - - - - 14,022
Comprehensive loss:
Net loss - - - - -
Unrealized gain on available-for-sale securities - - - - -
Comprehensive loss
------------- ------- ------------ -------------- --------------
Balance at December 31, 2000 46,732,305 47 304,339 (1,805) (10,174)
Issuance of common stock under warrants and
company stock plans, net of repurchases 708,205 - 4,890 - -
Notes receivable from stockholders, net
of repayments - - - (400) -
Issuance of common stock, BMS collaboration 600,600 1 9,999 - -
Issuance of common stock for acquisition 8,109,032 8 123,672 - -
Variable compensation - - 1,761 - -
Amortization of deferred stock compensation,
net of terminations - - (432) - 6,037
Comprehensive loss:
Net loss - - - - -
Change in unrealized gain on available-
for-sale securities - - - - -
Cumulative translation adjustment - - - - -
Comprehensive loss
------------- ------- ------------ -------------- --------------
Balance at December 31, 2001 56,150,142 56 444,229 (2,205) (4,137)
Issuance of common stock under company stock
plans, net of repurchases 487,905 - 2,764 - -
Notes receivable from stockholders, net
of repayments - - - 995 -
Issuance of common stock, GSK collaboration 2,000,000 2 6,798 - -
Issuance of common stock for acquisition 748,453 1 10,676 - -
Amortization of deferred stock compensation,
net of terminations - - (703) - 3,160
Comprehensive loss:
Net loss - - - - -
Change in unrealized gain on available-
for-sale securities - - - - -
Change in unrealized gain on derivative
instruments - - - - -
Cumulative translation adjustment - - - - -
Comprehensive loss
------------- ------- ------------ -------------- --------------
Balance at December 31, 2002 59,386,500 $ 59 $ 463,764 $ (1,210) $ (977)
============= ======= ============ ============== ==============
Accumulated
Other Total
Accumulated Comprehensive Stockholders'
Deficit Income Equity (Deficit)
------------- --------------- -----------------
Balance at December 31, 1999 $ (54,727) $ - $ (49,605)
Issuance of common stock under warrants and
company stock plans, net of repurchases - - 1,925
Repayment of notes from stockholders for
the exercise of stock options - - 297
Issuance of common stock, net of offering costs - - 124,524
Issuance of common stock for acquisition - - 92,237
Conversion of preferred stock - - 46,780
Conversion of promissory note - - 7,500
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 14,022
Comprehensive loss:
Net loss (75,311) - (75,311)
Unrealized gain on available-for-sale securities - 365 365
-----------------
Comprehensive loss (74,946)
------------- --------------- =================
Balance at December 31, 2000 (130,038) 365 162,734
Issuance of common stock under warrants and
company stock plans, net of repurchases - - 4,890
Notes receivable from stockholders, net
of repayments - - (400)
Issuance of common stock, BMS collaboration - - 10,000
Issuance of common stock for acquisition - - 123,680
Variable compensation - - 1,761
Amortization of deferred stock compensation,
net of terminations - - 5,605
Comprehensive loss:
Net loss (71,186) - (71,186)
Change in unrealized gain on available-
for-sale securities - 236 236
Cumulative translation adjustment - (100) (100)
-----------------
Comprehensive loss (71,050)
------------- --------------- =================
Balance at December 31, 2001 (201,224) 501 237,220
Issuance of common stock under company stock
plans, net of repurchases - - 2,764
Notes receivable from stockholders, net
of repayments - - 995
Issuance of common stock, GSK collaboration - - 6,800
Issuance of common stock for acquisition - - 10,677
Amortization of deferred stock compensation,
net of terminations - - 2,457
Comprehensive loss:
Net loss (86,130) - (86,130)
Change in unrealized gain on available-
for-sale securities - 305 305
Change in unrealized gain on derivative
instruments - 119 119
Cumulative translation adjustment - 713 713
-----------------
Comprehensive loss (84,993)
------------- --------------- =================
Balance at December 31, 2002 $ (287,354) $ 1,638 $ 175,920
============= =============== =================
The accompanying notes are an integral part of these consolidated financial statements.
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
Cash flows from operating activities:
Net loss $ (86,130) $ (71,186) $ (75,311)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 795 - -
Depreciation and amortization 16,036 10,116 4,575
Stock compensation expense 2,457 7,364 14,022
Amortization of goodwill and intangibles 666 5,092 260
Impairment of goodwill - 2,689 -
Acquired in-process research and development - 6,673 38,117
Other 409 (23) (101)
Changes in assets and liabilities:
Other receivables 604 (75) (1,043)
Other current assets (734) (1,689) (2,206)
Related-party receivables 33 (454) 125
Other assets (329) (3,150) (1,053)
Accounts payable and other accrued expenses 643 2,816 240
Obligation assumed to exit certain activities of Genomica Corporation (2,212) - -
Accrued merger and acquisition costs (1,810) - -
Other long-term liabilities (117) - (104)
Deferred revenue 38,765 18,059 9,612
---------- ---------- ----------
Net cash used in operating activities (30,924) (23,768) (12,867)
---------- ---------- ----------
Cash flows provided by (used in) investing activities:
Cash acquired in acquisition - 8,560 265
Purchases of property and equipment (5,851) (9,094) (15,386)
Change in restricted cash (5,761) - -
Proceeds from sale-leaseback of equipment - 268 9,816
Proceeds from maturities of short-term investments 174,424 147,143 44,689
Proceeds from sale of investment before maturity 31,885 9,372 -
Purchases of short-term investments (147,889) (150,844) (135,821)
---------- ---------- ----------
Net cash provided by (used in) investing activities 46,808 5,405 (96,437)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net of offering costs 6,800 10,000 124,524
Proceeds from exercise of stock options and warrants, net of repurchases 33 555 427
Proceeds from convertible notes 25,000 30,000 -
Proceeds from employee stock purchase plan 2,322 2,372 980
Repayment of notes from stockholders 995 296 297
Principal payments on capital lease obligations (6,427) (4,519) (1,212)
Proceeds from bank obligations 5,658 - -
Principal payments on notes payable and bank obligations (1,748) (4,349) (1,560)
---------- ---------- ----------
Net cash provided by financing activities 32,633 34,355 123,456
---------- ---------- ----------
Effect of foreign exchange rates on cash and cash equivalents 421 40 -
---------- ---------- ----------
Net increase in cash and cash equivalents 48,938 16,032 14,152
Cash and cash equivalents, at beginning of year 35,584 19,552 5,400
---------- ---------- ----------
Cash and cash equivalents, at end of year $ 84,522 $ 35,584 $ 19,552
========== ========== ==========
Supplemental cash flow disclosure:
Property and equipment acquired under capital leases $ 2,456 $ 11,175 $ 10,415
Cash paid for interest 2,798 1,041 679
The accompanying notes are an integral part of these consolidated financial statements.
EXELIXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Exelixis, Inc. ("Exelixis" or the "Company") is a biotechnology company whose
primary mission is to develop proprietary human therapeutics by leveraging its
integrated discovery platform to increase the speed, efficiency and quality of
pharmaceutical product discovery and development. The Company uses comparative
genomics and model system genetics to find new drug targets that Exelixis
believes would be difficult or impossible to uncover using other experimental
approaches. The Company's research is designed to identify novel genes and
proteins expressed by those genes, that, when changed, either decrease or
increase the activity in a specific disease pathway in a therapeutically
relevant manner. These genes and proteins represent either potential product
targets or drugs that may treat disease or prevent disease initiation or
progression. The Company's most advanced proprietary pharmaceutical program
focuses on drug discovery and development of small molecules in cancer. While
the Company's proprietary programs focus on drug discovery and development,
Exelixis believes that its proprietary technologies are valuable to other
industries whose products can be enhanced by an understanding of DNA or
proteins, including the agrochemical, agricultural and diagnostic industries.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company records its minority ownership interests in Genoptera LLC and
Agrinomics LLC using the equity method of accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
Cash, Cash Equivalents, Short-Term Investments and Restricted Cash
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company invests its
excess cash in high-grade, short-term commercial paper and money market funds,
which invest in United States ("U.S.") Treasury securities that are subject to
minimal credit and market risk.
All short-term investments are classified as available-for-sale and therefore
carried at fair value. The Company views its available-for-sale portfolio as
available for use in current operations. Accordingly, the Company has classified
all investments as short-term, even though the stated maturity date may be one
year or more beyond the current balance sheet date. Available-for-sale
securities are stated at fair value based upon quoted market prices of the
securities. Unrealized gains and losses on such securities, when material, are
reported as a separate component of stockholders' equity. Realized gains and
losses, net, on available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest income.
The following summarizes available-for-sale securities included in cash and cash
equivalents, short-term investments and restricted cash (in thousands):
December 31,
----------------------
2002 2001
---------- ----------
Money market funds $ 45,724 $ 3,823
Commercial paper 42,112 27,306
U.S. corporate bonds 82,211 157,000
Government debt 21,938 13,016
Market auction securities 27,555 22,100
---------- ----------
Total $219,540 $223,245
========== ==========
As reported:
Cash equivalents $ 82,075 $ 31,129
Short-term investments 131,704 192,116
Restricted cash 5,761 -
---------- ----------
Total $219,540 $223,245
========== ==========
The following is a reconciliation of cash and cash equivalents:
December 31,
----------------------
2002 2001
---------- ----------
Cash equivalents $82,075 $31,129
Cash 2,447 4,455
---------- ----------
$84,522 $35,584
========== ==========
Net unrealized gains were $906,000 and $601,000 as of December 31, 2002 and
2001, respectively. Gross unrealized gains and losses have not been shown
separately as they were immaterial. Realized gains amounted to $65,000 in 2002,
$84,000 in 2001 and none in 2000.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, generally three to seven
years. Leasehold improvements are amortized over the shorter of their estimated
useful life or the remaining term of the lease. Equipment held under capital
lease is stated at the lower of the cost of the related asset or the present
value of the minimum lease payments and is amortized on a straight-line basis
over the estimated useful life of the related asset. Repairs and maintenance
costs are charged to expense as incurred.
Intangible Assets
Intangible assets have been amortized using the straight-line method over the
following estimated useful lives:
Developed technology 3 - 5 years
Patents/core technology 15 years
Assembled workforce (2001 and prior) 3 years
Goodwill (2001 and prior) 15 years
Beginning in 2002, the Company has applied the new rules of accounting for
goodwill and other intangible assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Accordingly, goodwill and other intangible assets deemed to have
indefinite lives are no longer amortized and are subject to annual impairment
tests.
Long-lived Assets
The Company accounts for its long-lived assets under SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") adopted on
January 1, 2002. SFAS 144 supersedes SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows. During 2001, there was an impairment of goodwill under
SFAS 121 related to the Genomica purchase as detailed in Note 2 of the Notes to
Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined on the basis of the
difference between the income tax bases of assets and liabilities and their
respective financial reporting amounts at enacted tax rates in effect for the
periods in which the differences are expected to reverse. A valuation allowance
is established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments, including
cash and cash equivalents and short-term investments approximate fair value due
to their short maturities. Based on borrowing rates currently available to the
Company for loans and capital lease obligations with similar terms, the carrying
value of the Company's debt obligations approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk are primarily cash and cash equivalents, accounts receivable and
investments in marketable securities. Cash equivalents and marketable
securities consist of money market funds, taxable commercial paper, corporate
bonds with high credit quality, U.S. government agency obligations and auction
rate securities. All cash, cash equivalents and marketable securities are
maintained with financial institutions that management believes are
creditworthy. Accounts receivable are typically unsecured and are concentrated
in the pharmaceutical and biotechnology industries. Accordingly, the Company
may be exposed to credit risk generally associated with pharmaceutical and
biotechnology companies. The Company has had no bad debt since inception.
For the year ended December 31, 2002, revenue from two of the Company's
collaborators represented approximately 39% and 25% of total revenue,
respectively. For the year ended December 31, 2001, revenue from three of the
Company's collaborators represented approximately 32%, 31% and 15% of total
revenue, respectively. For the year ended December 31, 2000, revenue from two
of the Company's collaborators represented approximately 53% and 36% of total
revenue, respectively.
Revenue Recognition
License, research commitment and other non-refundable payments received in
connection with research collaboration agreements are deferred and recognized on
a straight-line basis over the relevant periods specified in the agreements,
generally the research term. Contract research revenues are recognized as
services are performed pursuant to the terms of the agreements. Any amounts
received in advance of performance are recorded as deferred revenue. Payments
are not refundable if research is not successful.
Milestone payments are non-refundable and recognized as revenue over the period
of the research arrangement. This typically results in a portion of the
milestone being recognized at the date the milestone is achieved, and the
balance being recognized over the remaining research term of the agreement.
Revenues from chemistry collaborations are generally recognized upon the
delivery of accepted compounds.
Research and Development Expenses
Research and development costs are expensed as incurred and include costs
associated with research performed pursuant to collaborative agreements.
Research and development costs consist of direct and indirect internal costs
related to specific projects as well as fees paid to other entities that conduct
certain research activities on behalf of the Company.
Derivative Financial Instruments
The Company manages exposures to the changes in foreign currency exchange rates
for its foreign operations through a program of risk management adopted in 2002
that includes the use of derivative financial instruments. The Company utilizes
derivative financial instruments solely to hedge identified exposures and by
policy prohibits the use of derivative instruments for speculative or trading
purposes. The Company's derivative financial instruments are recorded at fair
value and are included in other current assets or accrued expenses.
The Company enters into foreign currency exchange combination option contracts
denominated in European Union Euro ("Euro") to minimize the effect of foreign
exchange rate movements on the cash flows related to the Company's payments to
one of its German subsidiaries for services provided by the subsidiary. The
Company has designated these derivatives as foreign currency cash flow hedges.
The effective portion of the gain or loss on the derivative instrument is
reported as a separate component of other comprehensive income and reclassified
into earnings in the same period during which the hedged transaction impacts
earnings. The remaining gain or loss on the derivative instrument in excess of
the cumulative change in the present value of the future cash flows of the
hedged item, if any, is recognized in other income or expense in current
earnings in each reporting period.
If a cash flow hedge were to be discontinued because it is probable that the
original hedged transaction will not occur as anticipated, the unrealized gains
or losses would be reclassified into earnings. Subsequent gains or losses on
the related derivative instrument would be recognized in income in each period
until the instrument matures, is terminated or is sold.
During the year ended December 31, 2002, the Company did not recognize any gain
or loss related to the ineffective portion of the hedging instruments and
reclassified a gain of $227,000 from other comprehensive income into earnings
under the caption, "Research and development expense." As of December 31, 2002,
the Company expects to reclassify $119,000 of net gains on derivative
instruments from accumulated other comprehensive income to earnings over the
next 12 months as a result of the payment of foreign currency to its German
subsidiaries.
Net Loss Per Share
Basic and diluted net loss per share are computed by dividing the net loss for
the period by the weighted average number of shares of common stock outstanding
during the period adjusted for shares that are subject to repurchase. The
calculation of diluted net loss per share excludes potential common stock
because their effect is antidilutive. Potential common stock consists of common
stock subject to repurchase, incremental common shares issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
the convertible promissory note.
The following table sets forth potential shares of common stock that are not
included in the computation of diluted net loss per share because to do so would
be antidilutive for the periods indicated:
Year Ended December 31,
---------------------------------
2002 2001 2000
---------- --------- ----------
Preferred stock - - 6,599,324
Options to purchase common stock 9,005,171 5,198,676 2,187,836
Common stock subject to repurchase 751,054 1,793,627 3,596,114
Conversion of note and loan 6,740,464 783,504 588,942
Warrants 257,053 485,218 524,397
---------- --------- ----------
16,753,742 8,261,025 13,496,613
========== ========= ==========
Foreign Currency Translation
Exelixis' subsidiaries located in Germany operate primarily using local
functional currency. Accordingly, all assets and liabilities of these
subsidiaries are translated using exchange rates in effect at the end of the
period, and revenues and costs are translated using average exchange rates for
the period. The resulting translation adjustments are presented as a separate
component of accumulated other comprehensive income.
Stock-based Compensation
The Company has employee and director stock option plans that are more fully
described in Note 10 of the Notes to Consolidated Financial Statements. The
Company recognizes employee stock-based compensation under the intrinsic value
method of accounting as prescribed by Accounting Principles Board Opinion 25
("APB 25"), "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation expense is recognized in the
Company's financial statements for the stock options granted to employees, which
had an exercise price equal to the fair value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148")
(in thousands, except per share amounts):
Year Ended December 31,
--------------------------------
2002 2001 2000
----------- --------- ---------
Net loss:
As reported $ (86,130) $(71,186) $(75,311)
Add: Stock-based employee compensation expense included
in reported net loss 2,076 5,857 11,023
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards (21,346) (18,246) (11,336)
---------- --------- ---------
Pro forma $(105,400) $(83,575) $(75,624)
========== ========= =========
Net loss per share (basic and diluted):
As reported $ (1.52) $ (1.53) $ (2.43)
========== ========= =========
Pro forma $ (1.86) $ (1.80) $ (2.44)
========== ========= =========
Since options vest over several years and additional option grants are expected
to be made in future years, the pro forma impact on the results of operations
for the three years ended December 31, 2002 is not representative of the pro
forma effects on the results of operations for future periods.
For grants made in 2002 and 2001, the fair value of each option grant was
determined using the Black-Scholes option pricing model with the following
assumptions: volatility of 90% and 88%, respectively; 0% dividend yield;
risk-free interest rate of 3.55% and 4.16%, respectively; and expected lives of
four years. For grants made in 2000 prior to the initial public offering, the
minimum value method was used with the following assumptions: 0% dividend yield;
risk-free interest rate of 6.51%; and expected lives of five years. For grants
made in 2000, subsequent to the initial public offering, the fair value of each
option grant was determined using the Black-Scholes option pricing model with
the following assumptions: volatility of 87%; 0% dividend yield; risk-free
interest rate of 5.70%; and expected lives of four years. The fair value for
shares purchased pursuant to the ESPP was determined using the Black-Scholes
option pricing model with the following assumptions: volatility of 90%, 88% and
87% for 2002, 2001 and 2000, respectively; 0% dividend yield; risk-free interest
rate of 1.99%, 5.74% and 6.08% for 2002, 2001 and 2000, respectively; and
expected lives of six months.
The Company accounts for stock options issued to non-employees in accordance
with the provisions of SFAS 123 and Emerging Issues Task Force 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with, Selling Goods or Services" ("EITF 96-18").
Compensation expense for stock options granted to non-employees has been
determined as the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measured and is
periodically re-measured as the underlying options vest.
Comprehensive Income
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on available-for-sale securities, unrealized gains
and losses on cash flow hedges and cumulative translation adjustments.
Comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000
are as follows (in thousands):
Year Ended December 31,
-------------------------------
2002 2001 2000
--------- --------- ---------
Net loss $(86,130) $(71,186) $(75,311)
Less: Gains reazlied on available-for-sale securities (65) (84) -
Increase in unrealized gains on available-for-sale securities 370 320 365
Increase in unrealized gains on cash flow hedges 119 - -
Increase (decrease) in cumulative translation adjustment 713 (100) -
--------- --------- ---------
Comprehensive loss $(84,993) $(71,050) $(74,946)
========= ========= =========
The components of accumulated other comprehensive income are as follows (in
thousands):
Year Ended December 31,
-------------------------------------
2002 2001 2000
----------- ------------ -----------
Unrealized gains on available-for-sale securities $ 906 $ 601 $ 365
Unrealized gains on cash flow hedges 119 - -
Cumulative translation adjustment 613 (100) -
----------- ------------ -----------
Accumulated other comprehensive income $ 1,638 $ 501 $ 365
=========== ============ ===========
Reclassification
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE 2 ACQUISITIONS
Genomica Corporation
On November 19, 2001, Exelixis and Genomica Corporation ("Genomica"), a
bio-informatics software company, announced a definitive agreement pursuant to
which Exelixis would acquire Genomica in a stock-for-stock transaction valued at
$110.0 million. The transaction was structured as an offer for 100% of
Genomica's outstanding common stock to be followed by a merger of Genomica with
a wholly-owned subsidiary of Exelixis. On December 28, 2001, Exelixis accepted
for payment 22,911,969 shares of Genomica common stock, or 93.94% of the total
number of outstanding shares of common stock of Genomica. On January 8, 2002,
the merger of Genomica was completed. Upon effectiveness of the merger,
Genomica became a wholly-owned subsidiary of Exelixis. The transaction, which
was accounted for under the purchase method of accounting in 2001, was effected
through the exchange of 0.28309 of a share of Exelixis common stock for each
outstanding share of Genomica common stock. A total of approximately 6.9
million shares of Exelixis common stock were issued for all of the outstanding
shares of Genomica common stock.
The total consideration for the acquisition was approximately $110.0 million,
which consisted of Exelixis common stock valued at $108.9 million and estimated
Exelixis transaction costs of $1.1 million. As of December 31, 2001, Exelixis
had issued only 93.94% of the total consideration; accordingly, the Company
recorded the value of the remaining 6.06%, or $6.9 million, as a long-term
liability.
The purchase price for Genomica was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition, as determined by management based on an independent valuation. As
a result of this transaction, Exelixis recorded net tangible assets of $106.2
million (including cash and investments of $109.6 million), developed technology
of $400,000, which would be amortized over three years, and goodwill of $3.4
million. At the same time, Exelixis recorded goodwill impairment charge of $2.7
million, which was expensed in 2001 to operations. The impairment of goodwill
was calculated in accordance with SFAS 121 by estimating the present value of
future cash flows for the ongoing Genomica licensing business using a risk
adjusted discount rate. The goodwill impairment charge represented excess
purchase price that Exelixis viewed as economically equivalent to financing
costs for the acquired cash and investments. Information regarding goodwill is
described in further detail in Note 6 of the Notes to Consolidated Financial
Statements.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of the acquisition (in thousands):
December 28,
2001
-------------
Cash, investments and interest receivable $ 111,302
Other tangible assets (liabilities), net (5,037)
Goodwill 3,382
Developed technologies 400
-------------
Net assets acquired $ 110,047
=============
Prior to the December 28, 2001 acquisition date, Exelixis adopted an exit plan
for Genomica. Under this exit plan, the Company terminated Genomica's entire
workforce and abandoned its leased facilities in Boulder, Colorado and
Sacramento, California. The estimated costs of the exit plan amounted to $2.9
million and were included as part of the liabilities assumed in the acquisition.
As of December 31, 2002, the remaining actions to be taken under the exit plan
consisted primarily of residual payments related to the lease obligation for the
facility in Boulder, Colorado, which are expected to continue until the
termination of the lease in 2005, unless the facility is subleased earlier.
The activity impacting the exit plan accrual during the year ended December 31,
2002, including changes in estimates made by management based on available
information, is summarized in the table below (in thousands):
Balance at Change in Assumed Balance at
December 31, Cash Reserve by December 31,
2001 Payments Estimate Visualize 2002
------------- ---------- -------- ----------- -------------
Severance and benefits $ 1,216 (1,493) 277 - $ -
Lease abandonment 1,703 (719) 17 (176) 825
------------- ---------- -------- ----------- -------------
Total exit costs $ 2,919 (2,212) 294 (176) $ 825
============= ========== ======== =========== =============
In April 2002, Exelixis transferred the Genomica software business to Visualize,
Inc. ("Visualize") for future consideration of up to $2.4 million in license
fees and royalty payments. Pursuant to the terms of the transaction, Visualize
obtained a license with all rights and obligations to third parties currently
licensing the Genomica software, including the sole right to further develop and
license the software to other third parties. Royalties that Exelixis receives,
if any, will be recorded in the period they are earned as a gain from
discontinued operations. In addition, Visualize assumed the lease obligation
for Genomica's abandoned facility in Sacramento, California. Exelixis retains
an internal use license for the software. As a result of this transaction, the
Company reported the operating results of Genomica and the estimated loss on the
sale of Genomica as discontinued operations. For the period beginning January
1, 2002 to Genomica's disposal in April 2002, Genomica's operating results
consisted of revenues of approximately $58,000 and an operating loss of
approximately $456,000. The loss on the sale of Genomica includes the write-off
of remaining goodwill of approximately $971,000, partially offset by the
reversal of Genomica's lease obligation for the Sacramento facility assumed by
Visualize of approximately $176,000.
Artemis Pharmaceuticals GmbH
In May 2001, the Company acquired a majority of the outstanding capital stock of
Artemis Pharmaceuticals GmbH ("Artemis"), a privately held genetics and
functional genomics company organized under the laws of Germany. The
transaction, which was accounted for under the purchase method of accounting,
was effected through the exchange of shares of Exelixis common stock for
Deutschmark 1.00 of nominal value of Artemis capital stock, using an exchange
ratio of 4.064 to one. Approximately 1.6 million shares of Exelixis common stock
were issued in exchange for 78% of the outstanding capital stock of Artemis held
by Artemis stockholders. In addition, Exelixis received a call option (the "Call
Option") from, and issued a put option (the "Put Option") to, certain
stockholders of Artemis (the "Option Holders") for the issuance of approximately
460,000 shares of Exelixis common stock in exchange for the remaining 22% of the
outstanding capital stock of Artemis held by the Option Holders. Exelixis could
exercise the Call Option at any time from May 14, 2001 through January 31, 2002,
and the Option Holders could exercise their rights under the Put Option at any
time from April 1, 2002 through May 15, 2002. Exelixis exercised the Call
Option for 131,674 shares and 329,591 shares in December 2001 and January 2002,
respectively, which resulted in an increase to goodwill of approximately $1.9
million and $4.0 million, respectively. In addition, Exelixis issued fully
vested rights to purchase approximately 187,000 additional shares of Exelixis
common stock to Artemis employees in exchange for such employees' vested options
formerly representing the right to purchase shares of Artemis capital stock
pursuant to the Artemis employee option program.
As of December 31, 2002, the total consideration for the acquisition was
approximately $28.2 million, which consisted of Exelixis common stock and
options valued at $27.3 million and estimated Exelixis transaction costs of
$900,000. Exelixis' transaction costs include financial advisory, legal,
accounting and other fees.
The total purchase price, which for financial accounting purposes was valued at
$28.2 million, was allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the date of acquisition, as determined
by management based upon an independent valuation. As a result of this
transaction, Exelixis recorded expense associated with the purchase of
in-process research and development of $6.7 million, net tangible assets of $2.8
million and intangible assets (including goodwill) of $18.7 million, the
majority of which was being amortized over 15 years until December 31, 2001.
The valuation of the purchased in-process research and development of $6.7
million was based upon the results of an independent valuation using the income
approach for each of the three significant in-process projects. The in-process
projects relate primarily to the development of technologies that use vertebrate
genetic model organisms, zebrafish and mice, to identify and functionally
validate novel genes in vivo. These genes can be used as novel screening
targets or as the basis for secreted proteins in clinically and commercially
relevant diseases. The in-process projects have been abandoned or are expected
to be completed over approximately the next two years. The income approach
estimates the value of each acquired in-process project based on its expected
future cash flows. The valuation analysis considered the contribution of the
core technology as well as the percent complete of each in-process research and
development project. The expected present value of the cash flows associated
with the in-process research and development projects was computed using a risk
adjusted rate of return of 30%, which is considered commensurate with the
overall risk and percent complete of the in-process projects. The purchased
in-process research and development was not considered to have reached
technological feasibility, and it has no alternative future use, and
accordingly, it was recorded as a component of operating expense.
The revenues, expenses, cash flows and other assumptions underlying the
estimated fair value of the acquired in-process research and development involve
significant risks and uncertainties. The risks and uncertainties associated with
completing the acquired in-process projects include the ability to reach future
research milestones since the technologies being developed are unproven, the
ability to retain key personal, the ability to obtain licenses to key technology
and the ability to avoid infringing on patents and propriety rights of third
parties.
Agritope, Inc.
In December 2000, Exelixis completed its acquisition of Agritope, Inc.
("Agritope"). As a result of the acquisition, Agritope became a wholly-owned
subsidiary of Exelixis, and was subsequently renamed Exelixis Plant Sciences,
Inc. ("Exelixis Plant Sciences"). The transaction, which was accounted for
under the purchase method of accounting, was effected through the exchange of
0.35 of a share of Exelixis common stock for each outstanding share of Agritope
capital stock. Approximately 1.7 million shares of Exelixis common stock were
issued in connection with the transaction. In addition, unexpired and
unexercised options and warrants to purchase shares of Agritope capital stock
were assumed by Exelixis pursuant to the transaction and converted into fully
vested options and warrants to purchase approximately 880,000 shares of Exelixis
common stock.
The total consideration for the acquisition was approximately $93.5 million,
which consists of Exelixis common stock, options and warrants valued at $92.2
million and estimated Exelixis transaction costs of $1.3 million. Exelixis'
transaction costs include financial advisory, legal, accounting and other fees.
The purchase price for Agritope, which for financial accounting purposes was
valued at $93.5 million, was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition, as determined by an independent valuation. As a result of this
transaction, Exelixis recorded expense associated with the purchase of
in-process research and development of $38.1 million, net tangible liabilities
of $3.6 million and intangible assets (including goodwill) of $58.9 million, the
majority of which was being amortized over 15 years until December 31, 2001.
The valuation of the purchased in-process research and development of $38.1
million was based upon the results of an independent valuation using the income
approach for each of the ten projects in process. The in-process projects
relate primarily to the development of disease and insect resistant fruits and
vegetables and have been abandoned or are expected to be completed over
approximately the next three and one-half years. The income approach estimates
the value of each acquired in-process project based on its expected future cash
flows. The valuation analysis considered the contribution of the core technology
as well as the percent complete of each in-process research and development
project. The expected present value of the cash flows associated with the
in-process research and development projects was computed using a risk adjusted
rate of return of 35%, which is considered commensurate with the overall risk
and percent complete of the in-process projects. The purchased technology was
not considered to have reached technological feasibility, and it has no
alternative future use, and accordingly, it was recorded as a component
operating expense.
The revenues, expenses, cash flows and other assumptions underlying the
estimated fair value of the acquired in-process research and development involve
significant risks and uncertainties. The risks and uncertainties associated with
completing the acquired in-process projects include obtaining the necessary
regulatory approvals in a timely manner and being able to successfully and
profitably produce, distribute and sell products.
The Company acquired Vinifera, Inc. ("Vinifera") in connection with the purchase
of Agritope (the parent company of Vinifera) in 2000. Vinifera was organized as
a majority-owned subsidiary and was engaged in the grape vine propagation
business. On the date of acquisition, Exelixis committed to a plan to sell the
Vinifera operations because this business did not fit with the strategic
objectives of the Company. On March 31, 2001, the Company reduced its ownership
interest in Vinifera from 57% to 19% by selling 3.0 million shares of Vinifera
common stock back to Vinifera in consideration for $2.1 million in interest
bearing promissory notes. As a result of the sale of Vinifera common stock back
to Vinifera, Exelixis deconsolidated Vinifera, excluded its share of Vinifera's
operating losses for the first quarter of 2001 of $275,000 and recorded the
following amounts as an adjustment to goodwill recorded in connection with the
acquisition of Agritope: a write-down of the value of acquired developed
technology attributable to Vinifera of $435,000, a gain on sale of Vinifera
shares of $590,000 and a promissory note reserve of $1,700,000. The net
adjustment was an increase to goodwill in the amount of $675,000. Beginning
April 1, 2001, the Company accounted for its remaining investment in Vinifera
using the cost method.
As of December 31, 2001, the Company reserved for 100% of these promissory notes
due to risks associated with collection. Due to a significant decline in the
operating performance of Vinifera, in December 2001, the Company wrote down its
remaining cost-basis investment in Vinifera to zero. Vinifera ceased operations
in 2002.
In connection with the Agritope acquisition, Exelixis also acquired interests in
Agrinomics LLC ("Agrinomics"), which is a 50% owned subsidiary that conducts a
gene discovery program, and Superior Tomato Associates, LLC ("Superior Tomato"),
which was a 66-2/3% owned subsidiary formed to develop and market longer-lasting
tomatoes. The Company dissolved Superior Tomato during 2001, which resulted in
no material impact to its financial results. Agrinomics continues in existence.
Pro Forma Results
The Company's audited historical statements of operations include the results of
Genomica, Artemis and Agritope subsequent to the acquisition dates of December
28, 2001, May 14, 2001 and December 8, 2000, respectively. The following pro
forma financial information for the years ended December 31, 2001 and 2000
presents the consolidated results of the Company as if the acquisition of
Genomica, Artemis and Agritope had occurred at the beginning of 2000. The $4.3
million restructuring charge that Genomica recorded in October 2001 is included
in the following pro-forma information since this charge was not related to the
acquisition. All other non-recurring charges relating to the acquisitions, such
as acquired in-process research and development charge and impairment of
goodwill charge, are not reflected in the following pro forma financial
information. This pro forma information is not intended to be indicative of
future operating results (in thousands, except per share data):
Year Ended December 31,
-----------------------
2001 2000
---------- ----------
Total revenues $ 42,858 $ 31,207
Net loss (93,734) (97,355)
Net loss per share, basic and diluted (1.74) (2.04)
NOTE 3 RESEARCH AND COLLABORATION AGREEMENTS
Bayer
In May 1998, the Company entered into a six-year research collaboration
agreement with Bayer AG (including its affiliates, "Bayer") to identify novel
screening targets for the development of new pesticides for use in crop
protection. The Company provided research services directed towards identifying
and investigating molecular targets in insects and nematodes that may be useful
in developing and commercializing pesticide products. The Company received a
$1.2 million license fee upon execution of the agreement that was deferred and
will be recognized as revenue over the term of the agreement.
In December 1999, the Company significantly expanded its relationship with Bayer
by forming a joint venture in the form of a new limited liability company,
Genoptera LLC ("Genoptera"). Under the terms of the Genoptera operating
agreement, Bayer provides 100% of the capital necessary to fund the operations
of Genoptera and has the ability to control the entity with a 60% ownership
interest. The Company owns the other 40% interest in Genoptera without making
any capital contribution and reports its investment in Genoptera using the
equity method of accounting. Bayer's initial capital contributions to Genoptera
were $10.0 million in January 2000 and another $10.0 million in January 2001.
Bayer is required to also contribute cash to Genoptera in amounts necessary to
fund its ongoing operating expenses. Genoptera has incurred losses since
inception. Since the carrying value of this investment is zero and there is no
obligation to fund future losses, Exelixis has not recorded equity method losses
to date for Genoptera.
In January 2000, the Company, Bayer and Genoptera entered into an exclusive
eight-year research collaboration agreement, which superceded the 1998 agreement
discussed above. The Company is required to provide Genoptera with expanded
research services focused on developing insecticides and nematicides for crop
protection. Under the terms of the collaboration agreement, Genoptera paid the
Company a $10.0 million license fee and a $10.0 million research commitment fee.
One-half of these fees were received in January 2000, and the remaining amounts
were received in January 2001. Additionally, Genoptera is required to pay the
Company approximately $10.0 million in annual research funding. The Company can
earn additional payments under the collaboration agreement upon the achievement
of certain milestones. The Company can also earn royalties on the future sale by
Bayer of pesticide products incorporating compounds developed against targets
and assays under the agreement. The agreement also provides Bayer an exclusive
royalty-free option to use certain technology developed under the agreement in
the development of fungicides and herbicides. To the extent permitted under the
collaboration agreement, if the Company were to develop and sell certain human
health or agrochemical products that incorporate compounds developed under the
agreement, it would be obligated to pay royalties to Genoptera. No such
activities are expected for the foreseeable future.
Bristol-Myers Squibb
In September 1999, the Company entered into a three-year research and technology
transfer agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb" or
"BMS") to identify the mechanism of action ("MOA") of compounds delivered to the
Company by BMS. In July 2002, the agreement was extended for an additional two
years. BMS agreed to pay the Company a $250,000 technology access fee, which is
being recognized as revenue over the term of the agreement. Under the terms of
the agreement, the Company is entitled to receive research funding ranging from
$1.3 million in the first year up to as much as $2.5 million annually in future
years. The Company can also earn additional amounts under the agreement upon
the achievement of certain milestones as well as earn royalties on the future
sale by BMS of human products incorporating compounds developed under the
agreement. The agreement also includes technology transfer and licensing terms,
which call for BMS and the Company to license and share certain core
technologies in genomics and lead optimization.
In July 2001, the Company and BMS entered into a collaboration involving three
agreements: (a) a Stock Purchase Agreement; (b) a Cancer Collaboration
Agreement; and (c) a License Agreement. Under the terms of the collaboration,
BMS (i) purchased 600,600 shares of Exelixis common stock in a private placement
at a purchase price of $33.30 per share, for cash proceeds to Exelixis of
approximately $20.0 million; (ii) agreed to pay Exelixis a $5.0 million upfront
license fee and provide Exelixis with $3.0 million per year in research funding
for a minimum of three years; and (iii) granted to Exelixis a worldwide,
fully-paid, exclusive license to an analogue to Rebeccamycin developed by BMS,
which is currently in Phase I and Phase II clinical trials for cancer. Due to
risk and uncertainties with Rebeccamycin, and because the analogue had not
reached technological feasibility and has no alternative use, the analogue was
assigned no value for financial reporting purposes. Exelixis has agreed to
provide BMS with exclusive rights to certain potential small molecule compound
drug targets in cancer identified during the term of the research collaboration.
The premium in excess of fair market value of $10.0 million paid for the common
stock purchased by BMS is being accounted for similar to an upfront license fee
and is being recognized ratably over the life of the contract.
SmithKlineBeecham Corporation
In October 2002, Exelixis and SmithKlineBeecham Corporation ("GSK") established
a collaboration to discover and develop novel therapeutics in the areas of
vascular biology, inflammatory disease and oncology. The collaboration involved
three agreements: (a) a Product Development and Commercialization Agreement; (b)
a Stock Purchase and Stock Issuance Agreement; and (c) a Loan and Security
Agreement. Under the terms of the Product Development and Commercialization
Agreement, GSK has paid the Company $30.0 million in an upfront fee and $10.0
million in annual research funding, and has agreed to pay a minimum of an
additional $80.0 million in research and development funding over the first six
years of the collaboration.
Under the terms of the Stock Purchase and Stock Issuance Agreement, GSK
purchased two million shares of Exelixis' common stock in a private placement at
a purchase price of $7.00 per share, which represented a premium of
approximately 100% to the stock price on the effective date of the agreements.
The Company received cash proceeds of approximately $14.0 million for the
purchase of these shares. Exelixis has the option to sell additional common
shares to GSK in the future.
Under the Loan and Security Agreement, GSK provided a loan facility of up to
$85.0 million for use in the Company's efforts under the collaboration, and the
Company borrowed $25.0 million under that agreement in December 2002. All loan
amounts bear interest at a rate of 4% per annum and are secured by the
intellectual property, technology and equipment created or utilized pursuant to
the collaboration. Principal and accrued interest become due in installments,
beginning on or about the sixth anniversary of the collaboration, unless the
collaboration is earlier terminated by GSK. Repayment of all or any of the
amounts advanced to the Company under this agreement may, at the Company's
election, be in the form of Exelixis' common stock, subject to certain
conditions.
The upfront fee and the premium portion of the equity purchase have been
deferred and will be recognized as revenue over the development term. Exelixis
may also receive clinical and developmental payments based on the number and
timing of compounds reaching specified milestones. Based on the continued
successful development of these compounds, these payments could range from
$219.0 million to $369.0 million, through the compounds' commercialization. Two
years from the start of the collaboration, GSK and Exelixis may elect to expand
the collaboration, and under this option, Exelixis' milestone payments could
double, and the development funding and the loan facility would also be
significantly expanded.
Dow AgroSciences
In July 2000, the Company entered into a three-year research collaboration with
Dow AgroSciences LLC ("Dow AgroSciences") to identify the MOA of herbicides and
fungicides delivered to it under this agreement. The identity and function of
these compounds are not known to the Company prior to their delivery.
Under this agreement, the Company receives access to a collection of proprietary
compounds from Dow AgroSciences that may be useful in the Company's human
therapeutic drug discovery programs.
The Company is required to identify and validate targets and format assays to be
used by Dow AgroSciences to develop new classes of fungicides and herbicides.
Dow AgroSciences will pay the Company research support fees, milestone payments
and royalties based on achievements in the research and commercialization of any
resultant new products.
Protein Design Labs
On May 22, 2001, the Company and Protein Design Labs, Inc. ("PDL") entered into
a collaboration to discover and develop humanized antibodies for the diagnosis,
prevention and treatment of cancer. The collaboration will utilize Exelixis'
model organism genetics technology for the identification of new cancer drug
targets and PDL's antibody and clinical development expertise to create and
develop new antibody drug candidates. PDL is required to provide Exelixis with
$4.0 million in annual research funding until June 2003 and has purchased a
$30.0 million convertible note. The note bears interest at 5.75%, and the
interest thereon is payable annually. The note is convertible at PDL's option
any time after the first anniversary of the note's issuance. The note is
convertible into Exelixis common stock at a conversion price per share equal to
the lower of (i) $28.175 or (ii) 110% of the Fair Market Value (as defined in
the note) of a share of Exelixis common stock at the time of conversion.
Agrinomics
In July 1999, Agritope and Aventis CropScience USA. LP ("Aventis CropScience,"
now Bayer CropScience LP, "Bayer CropScience") formed Agrinomics LLC to conduct
a research, development and commercialization program in the field of
agricultural functional genomics. As a result of the Company's acquisition of
Agritope, the Company owns a 50% interest in Agrinomics, while Bayer CropScience
owns the remaining 50% interest. Bayer CropScience has agreed to make capital
contributions to Agrinomics in cash totaling $20.0 million over a five-year
period, of which $3.0 million and $4.0 million were contributed in 2002 and
2000, respectively. There were no capital contributions made by Bayer
CropScience to Agrinomics in 2001. Agritope contributed certain technology and
a collection of seeds generated using such technology. In connection with the
Company's acquisition of Agritope, no portion of the purchase price was assigned
to Agrinomics. Although the Company is required to account for its investment
in Agrinomics under the equity method, the Company does not expect to include in
its consolidated financial statements its proportionate share of the losses of
Agrinomics until such time, if ever, that the Company makes a capital
contribution to Agrinomics. There is no requirement for the Company to make
capital contributions to Agrinomics.
In December 2002, Agrinomics established an alliance to enhance seed oil content
in commercially valuable crops with Renessen LLC. Renessen is a joint venture
between Monsanto Company and Cargill, Inc. The collaboration combines
Agrinomics' technological leadership in agricultural functional genomics,
high-throughput gene screening and seed trait identification, developed at
Exelixis Plant Sciences, with Renessen's global expertise in quality trait crop
development and commercialization, with the goal of accelerating the development
of novel proprietary crops with improved seed composition traits. This
collaboration leverages the unique capabilities of Agrinomics' powerful ACTTAG
gene activation and selection platform to rapidly discover and validate genes
that can optimize important seed traits in order to increase the commercial
value of many of the world's most significant agricultural crops. Under the
terms of the collaboration, Renessen will provide Agrinomics with committed
annual research funding ranging from $1.3 million in the first year up to as
much as $2.0 million annually in future years, in addition to payments for the
selection of genes and other product options. Agrinomics can also earn
additional amounts under the agreement upon the achievement of certain
milestones, as well as royalties on commercialized products that may emerge from
the collaboration. In addition, Renessen will contribute research and product
development capabilities in taking gene candidates identified by Agrinomics into
crop products that include leading commercial germplasm.
Pharmacia
In February 1999, the Company entered into a research collaboration agreement
with Pharmacia Corporation ("Pharmacia") focused on the identification of novel
targets that may be useful in the development of pharmaceutical products in the
areas of Alzheimer's disease and metabolic syndrome. Pharmacia agreed to pay the
Company a $5.0 million non-refundable license fee, which was being recognized as
revenue over the term of the agreement. Under the terms of the agreement, as
expanded and amended in October 1999, the Company also received an obligation
from Pharmacia to provide future research funding. In July 2001, the Company
announced the reacquisition, effective February 2002, of future rights to the
research programs. Pharmacia retained rights to targets under the existing
agreement selected prior to the reacquisition date, subject to the payment of
milestones for certain of those targets selected and royalties for future
development of products against or using those targets. Pharmacia will have no
other obligations to make payments to the Company, including approximately $9.0
million in annual funding that would have otherwise been payable for an
additional two years if the Company had not elected to reacquire rights to the
research. As a result of this transaction, revenue recognition of upfront
license fees and milestone payments was accelerated over the remaining term of
the agreement.
In connection with entering into the February 1999 agreement, Pharmacia also
purchased 1,875,000 shares of Exelixis Series D preferred stock at $3.00 per
share, resulting in net cash proceeds to the Company of $7.5 million. Further,
Pharmacia loaned the Company $7.5 million in exchange for a non-interest bearing
convertible promissory note. The convertible promissory note was converted into
an aggregate of 480,769 shares of common stock of the Company in July 2000.
Compound Collaborations
The Company entered into collaboration agreements with Cytokinetics, Inc., Elan
Pharmaceuticals, Inc., Schering-Plough Research Institute, Inc. and Scios Inc.
in 2001 and Merck & Co., Inc. in 2002, to jointly design custom high-throughput
screening compound libraries that Exelixis will synthesize and qualify. Each
company is required to pay Exelixis a per-compound fee and has paid an upfront
technology access fee that is creditable towards the future purchase of
compounds. The upfront fees are initially deferred. Revenues under these
collaboration agreements will generally be recognized upon delivery of the
accepted compounds. Each party retains the rights to use the compounds in its
own unique drug discovery programs and in its collaborative efforts with third
parties.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company had outstanding loans aggregating $904,000 and $937,000 to certain
officers and employees at December 31, 2002 and 2001, respectively. The notes
are general recourse or collateralized by certain real property assets, bear
interest at rates ranging from 4.6% to 7.0% and have maturities through 2006.
The principal plus accrued interest will be forgiven at various rates over three
to four years from the employees' date of employment with Exelixis. If an
employee leaves Exelixis, all unpaid and unforgiven principal and interest will
be due and payable within 60 days.
As of December 31, 2002, the Company also had outstanding loans aggregating $1.2
million to its stockholders. The loans were issued to enable certain
non-officer employees to purchase stock pursuant to their employee stock
options. The loans bear interest at rates ranging from 6.13% to 6.50% and
mature at various times through February 2004.
For the years ended, December 31, 2002, 2001 and 2000, the Company recognized
revenues of $13.6 million, $13.1 million and $13.2 million, respectively, under
a collaboration agreement with Bayer through the Company's joint venture with
Genoptera.
For the years ended, December 31, 2001 and 2000, the Company recognized revenues
of $3.8 million and $237,000, respectively, under a collaboration agreement with
Aventis CropScience through the Company's joint venture with Agrinomics. During
2002, Bayer completed the acquisition of Aventis S.A., including Aventis
CropScience. As a result, Bayer assumed Aventis' 50% ownership of Agrinomics.
The Company recognized revenues of $3.8 million under the Agrinomics joint
venture for the year ended, December 31, 2002.
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
----------------------------
2002 2001
------------- -------------
Laboratory equipment $ 31,998 $ 24,884
Computer equipment and software 12,508 13,163
Furniture and fixtures 4,994 4,570
Leasehold improvements 15,810 15,410
Construction-in-progress 239 423
------------- -------------
65,549 58,450
Less accumulated depreciation and amortization (33,143) (21,950)
------------- -------------
$ 32,406 $ 36,500
============= =============
Depreciation and amortization expense for the years ended December 31, 2002,
2001 and 2000 included amortization of $6.5 million, $4.6 million and $1.1
million, respectively, related to equipment under capital leases. Accumulated
amortization for equipment under capital leases was $14.4 million, $7.9 million
and $3.3 million at December 31, 2002, 2001 and 2000, respectively. The
equipment under the capital leases collateralizes the related lease obligations.
NOTE 6 GOODWILL AND OTHER ACQUIRED INTANGIBLES
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which addresses the financial accounting and
reporting standards for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill no longer be
amortized, and instead, be tested for impairment on a periodic basis.
In accordance with SFAS 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. In addition, the Company re-characterized
any unamortized acquired assembled workforce as goodwill because it is no longer
defined as an acquired intangible asset under SFAS No. 141, "Business
Combinations". Accordingly, no goodwill or acquired workforce amortization was
recognized during the year ended December 31, 2002. The provisions of SFAS 142
also required the completion of a transitional impairment test within 12 months
of adoption, with any impairment treated as a cumulative effect of change in
accounting principle. During the first quarter of 2002, the Company completed
the transitional impairment test, which did not result in impairment of recorded
goodwill.
The Company adopted an annual goodwill impairment test date as of the beginning
of the fourth quarter of 2002. Following this approach, the Company will
monitor asset-carrying values as of October 1, assess if there is a potential
impairment and complete the measurement of impairment, if required. The Company
will perform the impairment measurement procedures under SFAS 142 if it
determines that a potential impairment of goodwill exists.
The Company completed the annual impairment test as of October 1, 2002, which
did not result in impairment of recorded goodwill.
A reconciliation of previously reported net loss and net loss per share to the
amounts adjusted for the exclusion of goodwill and assembled workforce
amortization follows (in thousands, except per share amounts):
Year Ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Reported net loss $ (86,130) $ (71,186) $ (75,311)
Add: Goodwill amortization - 4,053 219
Assembled workforce amortization - 592 20
------------- ------------- -------------
Adjusted net loss $ (86,130) $ (66,541) $ (75,072)
============= ============= =============
Net loss per share, basic and diluted $ (1.52) $ (1.53) $ (2.43)
Add: Goodwill amortization - 0.09 0.01
Assembled workforce amortization - 0.01 0.00
------------- ------------- -------------
Adjusted net loss per share, basic and diluted $ (1.52) $ (1.43) $ (2.42)
============= ============= =============
Changes in the carrying amount of goodwill for the year ended December 31, 2002
are as follows (in thousands):
Balance as of December 31, 2001 $62,357
Reclassification of intangible asset - assembled workforce 1,658
Exercise of Artemis call option 4,042
Write-off of goodwill (971)
Other 278
--------
Balance as of December 31, 2002 $67,364
========
The components of the Company's other acquisition-related intangible assets are
as follows (in thousands):
December 31, 2002
--------------------------------------------
Gross
Carrying Accumulated
Amount Amortization Net
------------- -------------- -------------
Developed technology $ 1,640 $ (536) $ 1,104
Patents/core technology 4,269 (571) 3,698
------------- -------------- -------------
Total $ 5,909 $ (1,107) $ 4,802
============= ============== =============
December 31, 2001
--------------------------------------------
Gross
Carrying Accumulated
Amount Amortization Net
------------- -------------- -------------
Developed technology $ 1,640 $ (156) $ 1,484
Patents/core technology 4,269 (285) 3,984
Assembled workforce 2,270 (612) 1,658
------------- -------------- -------------
Total $ 8,179 $ (1,053) $ 7,126
============= ============== =============
Amortization expense related to the other acquisition-related intangible assets
was $666,000, $448,000 and $21,000 for the years ended December 31, 2002, 2001
and 2000, respectively. The expected future annual amortization expense of the
other acquisition-related intangible assets is as follows (in thousands):
Amortization
Year Ending December 31, Expense
- -------------------------------------- ---------------
2003 666
2004 666
2005 533
2006 377
2007 285
Thereafter 2,275
---------------
Total expected future amortization $ 4,802
===============
NOTE 7 RESTRUCTURING CHARGE
In November 2002, the Company implemented a restructuring plan. This
restructuring plan was designed to facilitate the Company's evolution into a
fully integrated drug discovery company by reallocating resources to permit
greater focus on building the Company's expanding portfolio of development
programs. The restructuring resulted in a reduction in workforce of 40
employees, primarily from the Company's U.S. research operations. Accordingly,
the Company has recorded a restructuring charge in the fourth quarter of 2002 of
$708,000, consisting primarily of involuntary termination benefits. As of
December 31, 2002, substantially all amounts under the restructuring have been
paid.
NOTE 8 DEBT
Under the Loan and Security Agreement executed in connection with the GSK
collaboration, GSK provided a loan facility of up to $85.0 million for use in
the Company's efforts under the collaboration. The Company borrowed $25.0
million under that agreement in December 2002. All loan amounts bear interest at
a rate of 4% per annum and are secured by the intellectual property, technology
and equipment created or utilized pursuant to the collaboration. Principal and
accrued interest become due in installments, beginning on or about the sixth
anniversary of the collaboration, unless the collaboration is earlier terminated
by GSK. Repayment of all or any of the amounts advanced to the Company under
this agreement may, at the Company's election, be in the form of Exelixis'
common stock, subject to certain conditions.
In May 2002, the Company entered into a loan and security agreement with a bank
for an equipment line of credit of up to $16.0 million with a drawdown period of
one year. Each draw on the line of credit has a payment term of 48 months and
bears interest at the bank's published prime rate (4.25% at December 31, 2002).
At December 31, 2002, approximately $5.1 million was outstanding under the line
of credit, and $10.9 million remained available on the line of credit. Pursuant
to the terms of the line of credit, the Company is required to maintain a first
priority security interest in the form of a deposit or securities account at the
bank equal to 110% of the outstanding obligation under the line of credit. This
collateral account is managed in accordance with the Company's investment policy
and is restricted as to withdrawal. As of December 31, 2002, the collateral
account had a cash balance of approximately $5.8 million, and the Company
recorded this amount in the balance sheet as restricted cash.
In connection with the acquisition of Artemis in May 2001, the Company assumed a
loan agreement with the Federal Republic of Germany. The $254,000 loan, all of
which is outstanding at December 31, 2002, requires the entire principal to be
paid in one payment in January of 2004. The loan has an interest rate of 1% per
annum to be paid quarterly.
In May 2001, the Company issued a $30.0 million convertible promissory note to
PDL in connection with a collaboration agreement (see Note 3). The note bears
interest at 5.75%, payable annually. The note, which matures in July 2006, is
convertible at PDL's option any time after the first anniversary of the note.
The note is convertible into Exelixis common stock at a conversion price per
share equal to the lower of (i) $28.175 or (ii) 110% of the Fair Market Value
(as defined in the note) of a share of Exelixis common stock at the time of
conversion. The full amount of the note remained outstanding as of December 31,
2002 and 2001.
In connection with the acquisition of MetaXen in September 1999, the Company
assumed a loan agreement that provided for the financing of equipment purchases.
Borrowings under the agreement are collateralized by the assets financed and are
subject to repayment over 36 to 48 months, depending on the type of asset
financed. Borrowings under the agreement bear interest at the U.S. Treasury note
rate plus a number of basis points determined by the type of asset financed. As
of December 31, 2001, there was approximately $143,000 outstanding under this
loan agreement, which was paid in full during the year ended December 31, 2002.
In July 1998, the Company entered into a $5.0 million equipment and tenant
improvements lending agreement of which the drawdown period expired in January
2000. As of December 31, 2002 and 2001, there was approximately $426,000 and
$1.5 million, respectively, outstanding under the lending agreement. Borrowings
under the agreement have a payment term of 42 months, bear interest at 14.5% per
year and are collateralized by the financed equipment.
Aggregate future principal payments of the convertible promissory note, notes
payable and bank obligations at December 31, 2002 are as follows (in thousands):
Year Ending December 31,
- ---------------------------
2003 $ 1,840
2004 1,682
2005 1,415
2006 30,876
2007 -
Thereafter 25,000
---------
60,813
Less current portion (1,840)
---------
$ 58,973
=========
NOTE 9 COMMON STOCK AND WARRANTS
Initial Public Offering
On April 14, 2000, the Company completed an initial public offering in which it
sold 9,100,000 shares of common stock at $13.00 per share for net cash proceeds
of approximately $108.0 million, net of underwriting discounts, commissions and
other offering costs. Upon the closing of the offering, all the Company's
mandatorily redeemable convertible preferred stock converted into 22,877,656
shares of common stock. After the offering, the Company's authorized capital
consisted of 100,000,000 shares of common stock, $0.001 par value, and
10,000,000 shares of preferred stock, $0.001 par value. On May 1, 2000, the
underwriters exercised the over-allotment option to purchase an additional
1,365,000 shares, resulting in net cash proceeds of approximately $16.5 million.
Stock Repurchase Agreements
Under the terms of the Company's stock option plans, options are exercisable
when granted, and, if exercised, the related shares are subject to repurchase
upon termination of employment. Repurchase rights lapse over the vesting
periods, which are generally four years. Should the employment of the holders of
common stock subject to repurchase terminate prior to full vesting of the
outstanding shares, the Company may repurchase all unvested shares at a price
per share equal to the original exercise price. At December 31, 2002 and 2001,
378,471 and 1,253,226 shares, respectively, were subject to such repurchase
terms.
Warrants
Historically, the Company has granted warrants to purchase shares of capital
stock to certain preferred stockholders and third parties in connection with
financing and operating lease arrangements. In addition, in connection with the
Agritope acquisition (refer to Note 2), the Company assumed warrants to purchase
239,167 shares of Company common stock. All of the Agritope warrants expired
unexercised on December 31, 2001.
At December 31, 2002, the following warrants to purchase common stock were
outstanding and exercisable:
Number Exercise Price Date Expiration
of Shares per Share Issued Date
- --------- --------------- -------------------- --------------
71,428 $ 1.13 January 24, 1996 April 14, 2005
106,875 $ 4.00 May 1, 1999 April 14, 2005
78,750 $ 13.00 April 1, 2000 April 14, 2005
- ---------
257,053
=========
The Company determines the fair value of warrants issued using the Black-Scholes
option pricing model. Prior to 1999, the fair value of warrants issued was not
material, and accordingly, no value has been ascribed to them for financial
reporting purposes.
The Company determined the fair value of the warrants issued during 1999,
related to a building lease, using the Black-Scholes option pricing model with
the following assumptions: expected life of five years; a weighted average
risk-free interest rate of 6.1%; expected dividend yield of zero; volatility of
70%; and a deemed value of the common stock of $5.71 per share. The fair value
of the warrants of $391,000 has been capitalized and is being amortized as rent
expense over the term of the lease.
The Company determined the fair value of the warrants issued during 2000,
related to a building lease, using the Black-Scholes option pricing model using
the following assumptions: expected life of five years; a weighted average
risk-free interest rate of 6.38%; expected dividend yield of zero; volatility of
70%; and a deemed value of the common stock of $11.00 per share. The fair value
of the warrants of $518,000 has been capitalized and is being amortized as rent
expense over the term of the lease.
Reserved Shares
At December 31, 2002, the Company had approximately 19.1 million shares of
common stock reserved for future issuance related to its stock plans, 401(k)
plan, convertible note and loan and the exercise of outstanding warrants.
NOTE 10 EMPLOYEE BENEFIT PLANS
Stock Based Benefit Plans
Stock Option Plans. In January 1995, the Company adopted the 1994 Employee,
Director and Consultant Stock Option Plan ("1994 Plan"). The 1994 Plan provides
for the issuance of incentive stock options, non-qualified stock options and
stock purchase rights to key employees, directors, consultants and members of
the Scientific Advisory Board ("SAB"). In September 1997, the Company adopted
the 1997 Equity Incentive Plan ("1997 Plan"). The 1997 Plan amends and
supercedes the 1994 Plan. In January 2000, the Company adopted the 2000 Equity
Incentive Plan ("2000 Plan") to replace the 1997 Plan. A total of 3,000,000
shares of Exelixis common stock were initially authorized for issuance under the
2000 Plan. On the last day of each year for ten years, starting in 2000, the
share reserve will automatically be increased by a number of shares equal to the
greater of: 5% of the Company's outstanding shares on a fully-diluted basis; or
that number of shares subject to stock awards granted under the 2000 Plan during
the prior 12-month period.
The Board of Directors or a designated Committee of the Board is responsible for
administration of the Company's employee stock option plans and determines the
term, exercise price and vesting terms of each option. Incentive stock options
may be granted at an exercise price per share at least equal to the estimated
fair value per underlying common share on the date of grant (not less than 110%
of the estimated fair value in the case of holders of more than 10% of the
Company's voting stock). Options granted under the 1997 and 2000 Plans are
exercisable when granted and generally expire ten years from the date of grant
(five years for incentive stock options granted to holders of more than 10% of
the Company's voting stock).
In January 2000, the Company adopted the 2000 Non-Employees Directors' Stock
Option Plan ("Director Plan"). The Director Plan provides for the automatic
grant of options to purchase shares of common stock to non-employee directors. A
total of 500,000 shares of the Company's common stock were initially authorized
for issuance under the Director Plan. On the last day of each year for ten
years, starting in 2000, the share reserve will automatically be increased by a
number of shares equal to the greater of: 0.75% of the Company's outstanding
shares on a fully-diluted basis; or that number of shares subject to options
granted under the Director Plan during the prior 12-month period. Each person
who is a non-employee director will automatically receive an initial grant for
25,000 shares. The initial grant is exercisable immediately but will vest at the
rate of 25% of the shares on the first anniversary of the grant date and monthly
thereafter over the next three years. In addition, on the day after each annual
meeting of the Exelixis stockholders, each non-employee director will
automatically receive an annual grant for 5,000 shares. This annual grant is
exercisable immediately but will vest monthly over the following year.
In connection with the acquisition of Agritope in December 2000, the Company
assumed all the options granted and outstanding to consultants and employees
under the Agritope, Inc. 1997 Stock Award Plan. Each outstanding Agritope stock
option was converted into the right to purchase the number of shares of the
Company's common stock as determined using the applicable exchange ratio of 0.35
(refer to Note 2). All other terms and conditions of the Agritope stock options
did not change and such options will operate in accordance with their terms.
During April 2001, Exelixis granted approximately 545,000 supplemental stock
options ("Supplemental Options") under the 2000 Equity Incentive Plan to certain
employees (excluding officers and directors) who had stock options with exercise
prices greater than $16.00 per share under the 2000 Equity Incentive Plan. The
number of Supplemental Options granted was equal to 50% of the corresponding
original grant held by each employee. The Supplemental Options have an exercise
price of $16.00, vest monthly over a two-year period beginning April 1, 2001 and
have a 27-month term. The vesting on the corresponding original stock options
was halted and will resume in April 2003 following the completion of vesting of
the Supplemental Options. This new grant constitutes a synthetic repricing as
defined in Financial Accounting Standards Board Interpretation Number ("FIN")
44, "Accounting for Certain Transactions Involving Stock Compensation," and will
result in certain options being reported using the variable plan method of
accounting for stock compensation expense until they are exercised, forfeited or
expire. For the years ended December 31, 2002 and 2001, the cumulative
compensation expense recorded for the Supplemental Options was approximately
($242,000) and $246,000, respectively.
A summary of all option activity is presented below:
Weighted Average
Shares Exercise Price
----------------- ----------------
Options outstanding at December 31, 1999 4,466,527 $ 0.29
Granted 4,992,725 16.35
Exercised (4,683,309) 0.53
Cancelled (283,108) 3.62
-----------------
Options outstanding at December 31, 2000 4,492,835 17.70
Granted 3,160,628 14.47
Exercised (204,125) 2.75
Cancelled (270,902) 19.92
-----------------
Options outstanding at December 31, 2001 7,178,436 16.63
Granted 3,879,981 11.25
Exercised (134,743) 0.77
Cancelled (868,058) 18.48
-----------------
Options outstanding at December 31, 2002 10,055,616 14.60
=================
At December 31, 2002, a total of 1,306,559 shares were available for grant under
the Company's stock option plans.
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2002:
Options Outstanding and Exercisable
--------------------------------------------------
Weighted Average Weighted
Remaining Average
Contractual Life Exercise
Exercise Price Range Number (Years) Price
- ---------------------------------- -------------- ----------------- ---------------
0.01-$0.01 1,125 3.8 $ 0.01
0.27-$0.40 371,821 5.6 0.28
1.33-$1.33 52,572 7.0 1.33
3.35-$4.95 216,917 9.7 4.41
5.05-$7.53 415,953 8.2 6.55
7.75-$11.47 2,335,764 8.9 9.16
11.94-$16.99 4,826,752 7.5 15.20
18.80-$24.25 1,155,799 7.5 19.76
29.75-$40.50 633,413 7.6 36.71
45.00-$47.00 45,500 7.6 46.54
--------------
10,055,616 7.8 14.60
==============
At December 31, 2002, a total of 378,471 shares of common stock purchased under
the 1994, 1997 and 2000 Plans were subject to repurchase by the Company at a
weighted average price of $0.92 per share. The weighted-average grant date fair
value of options granted during the years ended December 31, 2002, 2001 and 2000
was $7.38, $8.86 and $10.01 per share, respectively.
Deferred Stock Compensation. During the period from January 1, 1999 through
December 31, 2002, the Company recorded $29.9 million of deferred stock
compensation related to stock options granted to consultants and employees in
accordance with APB 25, SFAS 123 and EITF 96-18. For options granted to
consultants, the Company determined the fair value of the options using the
Black-Scholes option pricing model with the following weighted-average
assumptions: (a) no dividends; (b) expected volatility of 88%, 87% and 79% for
2002, 2001 and 2000, respectively; (c) risk-free interest rate of 4.16% for
2002, 5.70% for 2001 and 5.75% for 2000; and (d) expected lives of five and ten
years for 2002, ten years for 2001 and four years for 2000. Stock compensation
expense is being recognized in accordance with FIN 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans," over the
vesting periods of the related options, generally four years. The Company
recognized stock compensation expense of $2.5 million, $7.4 million, $14.0
million for the years ended December 31, 2002, 2001 and 2000, respectively.
Stock Purchase Plan. In January 2000, the Company adopted the 2000 Employee
Stock Purchase Plan (the "ESPP"). The ESPP allows for qualified employees (as
defined in the ESPP) to purchase shares of the Company's common stock at a price
equal to the lower of 85% of the closing price at the beginning of the offering
period or 85% of the closing price at the end of each purchase period. The
Company issued 388,770 shares, 224,780 shares and 88,683 shares of common stock
during 2002, 2001 and 2000, respectively, pursuant to the ESPP at an average
price per share of $5.97, $10.56 and $11.05, respectively. The weighted average
per share fair value for shares purchased pursuant to the ESPP during 2002, 2001
and 2000 was $4.45, $6.60 and $5.08, respectively. A total of 300,000 shares of
common stock were initially authorized for issuance under the ESPP. On the last
day of each year for ten years, starting in 2000, the share reserve will
automatically be increased by a number of shares equal to the greater of: 0.75%
of the Company's outstanding shares on a fully-diluted basis; or that number of
shares subject to stock awards granted under the plan during the prior 12-month
period.
401(k) Plan
The Company sponsors a 401(k) Retirement Plan whereby eligible employees may
elect to contribute up to the lesser of 20% of their annual compensation or the
statutorily prescribed annual limit allowable under Internal Revenue Service
regulations. The 401(k) Plan permits the Company to make matching contributions
on behalf of all participants. Beginning in 2002, the Company matched 50% of
the first 4% of participant contributions into the 401(k) Plan in the form of
Company stock. The Company expensed approximately $521,000 related to the stock
match for the year ended December 31, 2002.
NOTE 11 INCOME TAXES
The Company has incurred net losses since inception and, consequently, has not
recorded any U.S. federal or state income taxes. The Company has recorded a tax
provision of approximately $345,000 for the year ended December 31, 2002 related
to income earned in its foreign operations.
At December 31, 2002, the Company had federal and California net operating loss
carryforwards of approximately $76.6 million and $36.7 million, respectively,
which expire at various dates beginning in the year 2003. The Company also had
federal and California research and development credit carryforwards of
approximately $10.8 million in each jurisdiction, which expire at various dates
beginning in the year 2010.
Under the Internal Revenue Code, certain substantial changes in the Company's
ownership could result in an annual limitation on the amount of net operating
loss carryforwards that can be utilized in future years to offset future taxable
income. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Deferred tax assets and liabilities reflect the net tax effects of net operating
loss and credit carryforwards and of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and the amounts used
for income tax purposes.
The Company's deferred tax assets and liabilities consist of the following (in
thousands):
December 31,
---------------------
2002 2001
---------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 76,600 $ 36,700
Capitalized start-up and organizational costs, net 200 787
Tax credit carryforwards 10,770 5,070
Capitalized research and development costs 5,310 3,587
Deferred revenue 28,550 8,148
Other 2,640 1,562
---------- ---------
Total deferred tax assets 124,070 55,854
Valuation allowance (122,150) (53,004)
---------- ---------
Net deferred tax assets $ 1,920 $ 2,850
Deferred tax liabilities:
Purchased intangibles (1,920) (2,850)
---------- ---------
Net deferred taxes $ - $ -
========== =========
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $69.1 million, $8.9 million and $27.8 million during 2002, 2001 and
2000, respectively.
NOTE 12 COMMITMENTS
Leases
The Company leases office and research space and certain equipment under
operating and capital leases that expire at various dates through the year 2017.
Certain operating leases contain renewal provisions and require the Company to
pay other expenses. Aggregate future minimum lease payments under operating and
capital leases are as follows (in thousands):
Operating Capital
Year Ending December 31, Leases Leases
- ------------------------ ------------- -------------
2003 $ 11,408 $ 7,321
2004 12,221 4,899
2005 11,547 1,817
2006 10,548 66
2007 10,403 -
Thereafter 97,772 -
------------- -------------
$ 153,899 14,103
=============
Less amount representing interest (983)
-------------
Present value of minimum lease payments 13,120
Less current portion (6,840)
-------------
Long-term portion $ 6,280
=============
Rent expense under noncancellable operating leases was approximately $7.6
million, $5.8 million and $3.9 million for the years ended December 31, 2002,
2001 and 2000, respectively.
In September 2000, the Company entered into a master lease agreement (the
"Master Lease") with a third-party lessor for a secured equipment lease line of
up to $13.1 million. The Master Lease provided for quarterly borrowings and
expired in June 2001. Each quarterly borrowing has a 3.5 year repayment term.
At December 31, 2002, $5.5 million was outstanding under the Master Lease.
Under the Master Lease, the Company is subject to certain financial covenants.
As of December 31, 2002, the Company was in compliance with these covenants.
During 2000, the Company entered into an equipment sale-leaseback agreement
under the Master Lease resulting in proceeds to the Company of approximately
$9.8 million.
During April 2001, the Company entered into a master lease agreement with a
third-party lessor for a secured equipment lease line of credit of up to $12.0
million, which expired on March 31, 2002. The master lease agreement provides
for a periodic delivery structure. Each delivery has a payment term of 36 or 48
months depending on the type of the equipment purchased under the lease. At
December 31, 2002, $7.4 million was outstanding under the equipment lease line
of credit. Under the master lease agreement, the Company is subject to certain
financial covenants. As of December 31, 2002, the Company was in compliance with
all such covenants.
Licensing Agreements
The Company has entered into several licensing agreements with various
universities and institutions under which it obtained exclusive rights to
certain patent, patent applications and other technology. Aggregate future
payments pursuant to these agreements are as follows (in thousands):
Year Ending December 31,
- ------------------------
2003 $ 1,505
2004 1,016
2005 1,015
2006 1,015
2007 1,015
Thereafter 1,015
---------
$ 6,581
=========
In addition to the payments summarized above, the Company is required to make
royalty payments based upon a percentage of net sales of any products or
services developed from certain of the licensed technologies and milestone
payments upon the occurrence of certain events as defined by the related
agreements. No such royalties or milestones have been paid through December 31,
2002.
Minimum Purchase Obligation
During November 2002, the Company entered into a manufacturing and supply
agreement with BMS. BMS will manufacture bulk supply of the rebeccamycin analog
for Exelixis. The Company placed an initial order totaling $1.2 million. This
initial order may not be cancelled and the Company is obligated to pay the
purchase price for that order. The parties agreed that the purchase price for
the initial order would be paid in two equal installments on April 1, 2003 and
July 1, 2003.
Indemnification Agreements
The Company has certain collaboration licensing agreements, which contain
standard indemnification clauses. Such clauses typically indemnify the customer
or vendor for an adverse judgment in a lawsuit in the event of the Company's
misuse or negligence. The Company considers the likelihood of an adverse
judgment related to an indemnification agreement to be remote. Furthermore, in
the event of an adverse judgment, any losses under such an adverse judgment may
be substantially offset by corporate insurance.
NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize the unaudited quarterly financial data for the
last two fiscal years (in thousands, except per share data):
Fiscal 2002 Quarter End
------------------------------------------------------------------
March 31,(1) June 30, September 30, December 31,
--------------- --------------- --------------- ---------------
Total revenues $ 11,541 $ 9,897 $ 10,430 $ 12,454
Loss from operations (19,491) (24,416) (22,976) (20,941)
Net loss (18,421) (23,904) (22,943) (20,862)
Basic and diluted net loss per share $ (0.33) $ (0.43) $ (0.41) $ (0.36)
Fiscal 2001 Quarter End
------------------------------------------------------------------
March 31, June 30,(2) September 30, December 31,(3)
--------------- --------------- --------------- ---------------
Total revenues $ 7,734 $ 8,551 $ 11,928 $ 12,793
Loss from operations (14,391) (24,879) (17,296) (18,748)
Net loss (12,719) (23,708) (16,490) (18,269)
Basic and diluted net loss per share $ (0.29) $ (0.52) $ (0.35) $ (0.38)
(1) Amounts have been adjusted to reflect discontinued operations of Genomica.
(2) Includes a charge of $6.7 million relating to acquired in-process research
and development recorded in connection with the acquisition of Artemis.
(3) Includes a charge of $2.8 million relating to impairment of goodwill
recorded in connection with the acquisition of Genomica.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 14, 2001, the Company filed a Current Report on Form 8-K announcing
the dismissal of PricewaterhouseCoopers LLP ("PwC") as the independent
accountants of the Company and the appointment of Ernst & Young LLP as its
independent auditors. The decision to change independent accountants was
approved by the Audit Committee under authority granted by the Board of
Directors of the Company.
The independent accountants' report on the Company's financial statements for
the fiscal year ended December 31, 2000 did not contain an adverse opinion or
disclaimer of opinion, nor was the report qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with its audit for the fiscal year ended December 31, 2000 and
through December 14, 2001, there were no disagreements as defined by Item 304
(a)(1)(iv) of Regulation S-K between the Company and PwC on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
PwC, would have caused PwC to make reference thereto in their reports on the
financial statements for such years.
During the fiscal year ended December 31, 2000, and through December 14, 2001,
there were no reportable events as that term is defined in Item 304 (a)(1)(v) of
Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item will be contained under the captions "Election
of Class I Directors," "Section 16(a) Beneficial Ownership Reporting Compliance"
and "Executive Compensation" in Exelixis' definitive proxy statement with
respect to our 2003 Annual Meeting of Stockholders to be filed with the SEC (the
"Proxy Statement"), and is hereby incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Proxy Statement under
the caption "Executive Compensation," and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item will be contained in the Proxy Statement under
the captions "Security Ownership of Certain Beneficial Owners and Management"
and "Securities Authorized for Issuance Under Equity Compensation Plans," and is
hereby incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Proxy Statement under
the caption "Certain Transactions," and is hereby incorporated by reference
thereto.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this report, our
principal executive officer and principal financial officer have concluded that
Exelixis' disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are sufficiently effective to ensure that the information required to be
disclosed by Exelixis in the reports that we file under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness.
Changes in internal controls. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above, nor were
there any significant deficiencies or material weaknesses in Exelixis' internal
controls. Accordingly, no corrective actions were required or undertaken.
Limitations on the effectiveness of controls. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within a company have been
detected.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are being filed as part of this report:
(1) The following financial statements of the Company and the Report
of the Independent Auditors are included in Part II, Item 8:
Page #
--------
Report of Ernst & Young LLP, Independent Auditors 39
Report of PricewaterhouseCoopers LLP, Independent Accountants 40
Consolidated Balance Sheets 41
Consolidated Statements of Operations 42
Consolidated Statements of Stockholders' Equity (Deficit) 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45
(2) All financial statement schedules are omitted because the
information is inapplicable or presented in the Notes to Consolidated
Financial Statements.
(3) The items listed on the Index to Exhibits on pages 72 through 75
are incorporated herein by reference.
(b) Reports on Form 8-K.
On October 28, 2002, the Company filed an Item 5 Current Report on Form 8-K
announcing the signing of an alliance agreement with SmithKlineBeecham
Corporation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of South San Francisco, State of California, on March 6,
2003.
EXELIXIS, INC.
By: /s/ George A. Scangos, Ph.D.
----------------------------------
George A. Scangos, Ph.D. President
and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints GEORGE A. SCANGOS and GLEN Y. SATO, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report on Form 10-K has been signed by the following persons on behalf of
the Registrant and of the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/George A. Scangos, Ph.D.
- --------------------------------
George A. Scangos, Ph.D. President, Chief Executive Officer March 6, 2003
and Director
(Principal Executive Officer)
/s/Glen Y. Sato
- --------------------------------
Glen Y. Sato Chief Financial Officer March 6, 2003
(Principal Financial/Accounting Officer)
/s/Stelios Papadopoulos, Ph.D.
- --------------------------------
Stelios Papadopoulos, Ph.D. Chairman of the Board of Directors March 6, 2003
/s/Charles Cohen, Ph.D.
- --------------------------------
Charles Cohen, Ph.D. Director March 6, 2003
/s/Geoffrey Duyk, M.D., Ph.D.
- --------------------------------
Geoffrey Duyk, M.D., Ph.D. Director March 6, 2003
/s/Jason S. Fisherman, M.D.
- --------------------------------
Jason S. Fisherman, M.D. Director March 6, 2003
/s/Jean Francois Formela, M.D.
- --------------------------------
Jean-Francois Formela, M.D. Director March 6, 2003
/s/Vincent Marchesi, M.D., Ph.D.
- --------------------------------
Vincent Marchesi, M.D., Ph.D. Director March 6, 2003
/s/Peter Stadler, Ph.D.
- --------------------------------
Peter Stadler, Ph.D Director March 6, 2003
/s/Lance Willsey, M.D.
- --------------------------------
Lance Willsey, M.D. Director March 6, 2003
CERTIFICATION
I, George A. Scangos, Ph.D., Chief Executive Officer of Exelixis, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Exelixis, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 6, 2003
---------------
/s/ George A. Scangos
- -----------------------------------------
George A. Scangos
President and Chief Executive Officer
CERTIFICATION
I, Glen Y. Sato, Chief Financial Officer of Exelixis, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Exelixis, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 6, 2003
---------------
/s/ Glen Y. Sato
- -------------------
Glen Y. Sato
Chief Financial Officer, Vice President
of Legal Affairs and Secretary
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger and Reorganization, dated September 7,
2000, by and among Exelixis, Inc., Athens Acquisition Corp. and
Agritope, Inc. (1)
2.2 Share Exchange and Assignment Agreement, dated April 23, 2001, by and
among Exelixis, Inc. and the Artemis stockholders named therein (2)
2.4 Agreement and Plan of Merger and Reorganization, dated as of November
19, 2001, by and among Exelixis, Inc., Bluegreen Acquisition Sub, Inc.
and Genomica Corporation. (3)
2.5 Agreement of Merger, dated as of June 28, 2002, between Exelixis, Inc.
and Genomica Corporation. (13)
3.1 Amended and Restated Certificate of Incorporation of Exelixis, Inc.
(4)
3.2 Amended and Restated Bylaws of Exelixis, Inc. (4)
4.1 Specimen Common Stock Certificate. (4)
4.2 Fourth Amended and Restated Registration Rights Agreement, dated
February 26, 1999 among Exelixis, Inc. and Certain Stockholders of
Exelixis, Inc. (4)
4.3 Warrant, dated August 17, 1998, to purchase 125,796 post-split shares
of Exelixis, Inc. Series A preferred stock in favor of Comdisco, Inc.
(4)
4.4 Warrant, dated August 17, 1998, to purchase 15,365 post-split shares
of Exelixis, Inc. Series A preferred stock in favor of Greg Stento.
(4)
4.5 Warrant, dated January 24, 1996, to purchase 267,857 post-split shares
of Exelixis, Inc. Series B convertible stock in favor of MMC/GATX
Partnership No. 1. (4)
4.6 Warrant, dated September 25, 1997, to purchase 63,750 post-split
shares of Exelixis, Inc. common stock in favor of MMC/GATX Partnership
No. 1. (4)
4.7 Warrant, dated November 15, 1999, to purchase 9,000 post-split shares
of Exelixis, Inc. common stock in favor of Bristow Investments, L.P.
(4)
4.8 Warrant, dated November 15, 1999, to purchase 101,250 post-split
shares of Exelixis, Inc. common stock in favor of Slough Estates USA,
Inc. (4)
4.9 Warrant, dated November 15, 1999, to purchase 2,250 post-split shares
of Exelixis, Inc. common stock in favor of Laurence and Magdalena
Shushan Trust. (4)
4.10 Warrant, dated April 1, 2000, to purchase 70,875 shares of Exelixis,
Inc. common stock in favor of Slough Estates USA, Inc. (5)
4.11 Warrant, dated April 1, 2000, to purchase 6,300 shares of Exelixis,
Inc. common stock in favor of Bristow Investments, L.P. (5)
4.12 Warrant, dated April 1, 2000, to purchase 1,575 shares of Exelixis,
Inc. common stock in favor of Laurence and Magdalena Shushan Family
Trust. (5)
4.13 Form of Convertible Promissory Note, dated May 22, 2001 by and between
Exelixis, Inc. and Protein Design Labs, Inc. (6)
4.14 Form of Note Purchase Agreement, dated May 22, 2001 by and between
Exelixis, Inc. and Protein Design Labs, Inc. (6)
10.1 Form of Indemnity Agreement. (4)
10.2* 1994 Employee, Director and Consultant Stock Plan. (4)
10.3* 1997 Equity Incentive Plan. (4)
10.4* 2000 Equity Incentive Plan. (4)
10.5* 2000 Non-Employee Directors' Stock Option Plan. (4)
10.6* 2000 Employee Stock Purchase Plan. (4)
10.7 Agritope, Inc. 1997 Stock Award Plan. (7)
10.8** Collaboration Agreement, dated December 16, 1999, between Exelixis,
Inc., Bayer Corporation and Genoptera LLC. (4)
10.9** Operating Agreement, dated December 15, 1999, between Exelixis, Inc.,
Bayer Corporation and Genoptera LLC. (4)
10.10 Cooperation Agreement, dated September 15, 1998, between Exelixis,
Inc. and Artemis Pharmaceuticals GmbH. (4)
10.11 Sublease Agreement, dated June 1, 1997, between Arris Pharmaceutical
Corporation and Exelixis, Inc. (4)
10.12 Lease, dated May 12, 1999, between Britannia Pointe Grand Limited
Partnership and Exelixis, Inc. (4)
10.13 First Amendment to Lease, dated March 29, 2000, between Britannia
Pointe Grand Limited Partnership and Exelixis, Inc. (5)
10.14 Master Lease Agreement, dated August 2, 2000, between Comdisco, Inc,
and Exelixis, Inc. (8).
10.15 Addendum, dated as of August 31, 2000, to the Master Lease Agreement.
(8)
10.16 Amendment No. 1 to the Master Lease Agreement, dated August 2, 2000,
between Comdisco, Inc. and Exelixis, Inc. (8)
10.17 Purchase-Leaseback Agreement, dated August 2, 2000, between Comdisco,
Inc. and Exelixis, Inc. (8)
10.18 Master Services Agreement, dated November 15, 1999, between Artemis
Pharmaceuticals GmbH and Exelixis, Inc. (4)
10.19** Research Collaboration and Technological Transfer Agreement, dated
September 14, 1999, between Bristol-Myers Squibb and Exelixis, Inc.
(4)
10.20** Corporate Collaboration Agreement, dated February 26, 1999, between
Pharmacia & Upjohn AB and Exelixis, Inc. (4)
10.21** Amendment to Corporate Collaboration Agreement, dated October, 1999,
between Pharmacia & Upjohn AB and Exelixis, Inc. (4)
10.22** Mechanism of Action Collaboration Agreement, dated July 11, 2000
between Exelixis, Inc. and Dow AgroSciences LLC. (9)
10.23 Asset Purchase Agreement, dated July 11, 1999, between MetaXen/Xenova
and Exelixis, Inc. (4)
10.24* Employment Agreement, dated September 13, 1996, between George
Scangos, Ph.D. and Exelixis, Inc. (4)
10.25* Employment Agreement, dated April 14, 1997, between Geoffrey Duyk,
M.D., Ph.D. and Exelixis, Inc. (4)
10.26* Employment Agreement, dated October 19, 1999, between Glen Y. Sato,
Chief Financial Officer and Vice President, Legal Affairs and
Exelixis, Inc. (4)
10.27 Master Lease Agreement, dated April 9, 2001, between GE Capital
Corporation and Exelixis, Inc. (10)
10.28** Collaboration Agreement, dated May 22, 2001, by and between Exelixis,
Inc. and Protein Design Labs, Inc. (6)
10.29 Form of Stock Purchase Agreement, dated as of July 17, 2001, by and
between Exelixis, Inc. and Bristol-Myers Squibb Company. (15)
10.30** Cancer Collaboration Agreement, dated July 17, 2001, by and between
Exelixis, Inc. and Bristol-Myers Squibb Company. (11)
10.31** License Agreement, dated July 17, 2001, by and between Exelixis, Inc.
and Bristol-Myers Squibb Company. (11)
10.32 Sublease, dated March 8, 2002, by and between Tularik, Inc. and
Exelixis, Inc. (12)
10.33 Sublease, dated April 12, 2002, by and between Toshiba America Medical
Systems, Inc. and Exelixis, Inc. (13)
10.34 Loan and Security Agreement, dated May 22, 2002, by and between
Silicon Valley Bank and Exelixis, Inc. (13)
10.35 Software License and Asset Acquisition Agreement, dated April 4, 2002,
by and between Visualize, Inc. and Exelixis, Inc. (13)
10.36** Product Development and Commercialization Agreement, dated as of
October 28, 2002, by and between SmithKlineBeecham Corporation and
Exelixis, Inc. (14)
10.37** Stock Purchase and Stock Issuance Agreement, dated as of October 28,
2002, by and between SmithKlineBeecham Corporation and Exelixis, Inc.
(14)
10.38** Loan and Security Agreement, dated as of October 28, 2002, by and
between SmithKlineBeecham Corporation and Exelixis, Inc. (14)
10.39 Lease Amendment, dated November 7, 2002, by and between Pacific Realty
Associates, L.P. and Exelixis, Inc.
10.40 Employment Agreement, dated January 4, 2002, between Robert Myers and
Exelixis, Inc.
16.1 Letter from PricewaterhouseCoopers LLP regarding its concurrence with
Exelixis, Inc.'s statement regarding change of accountants. (16)
21.1 Subsidiaries of Exelixis, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (contained on signature page).
99.1*** Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- -----------------------------
* Management contract or compensatory plan.
** Confidential treatment granted for certain portions of this exhibit.
*** This certification accompanies this Annual Report on Form 10-K and shall not
be deemed "filed" by Exelixis, Inc. for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
1. Filed as Annex A to Exelixis, Inc.'s Registration Statement on Form S-4
(File No. 333-47710), filed with the Securities and Exchange Commission on
October 11, 2000, and incorporated herein by reference.
2. Filed as an Exhibit to Exelixis, Inc.'s Current Report on Form 8-K, as
filed with the Securities and Exchange Commission on May 15, 2001 and
incorporated herein by reference.
3. Filed as an Annex A to Exelixis, Inc.'s Registration Statement on Form S-4
(File No. 333-74120), as filed with the Securities and Exchange Commission
on November 29, 2001 and incorporated herein by reference.
4. Filed as an Exhibit to Exelixis, Inc.'s Registration Statement on Form S-1
(File No. 333-30978), as filed with the Securities and Exchange Commission
on February 7, 2000, as amended, and incorporated herein by reference.
5. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000, filed with the Securities Exchange
Commission on May 15, 2000 and incorporated herein by reference.
6. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, as filed with the Securities and Exchange
Commission on August 14, 2001 and incorporated herein by reference.
7. Filed as an Exhibit to Exelixis, Inc.'s Registration Statement on Form S-8
(File No. 333-52434), as filed with the Securities Exchange Commission on
December 21, 2000 and incorporated herein by reference.
8. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, filed with the Securities Exchange
Commission on November 14, 2000 and incorporated herein by reference.
9. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, filed with the Securities and Exchange
Commission on August 14, 2000 and incorporated herein by reference.
10. Filed as a Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, filed with the Securities and Exchange
Commission on May 15, 2001 and incorporated herein by reference.
11. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001, filed with the Securities and
Exchange Commission on November 14, 2001 and incorporated herein by
reference.
12. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002, filed with the Securities and Exchange
Commission on May 13, 2002 and incorporated herein by reference.
13. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, filed with the Securities and Exchange
Commission on August 6, 2002 and incorporated herein by reference.
14. Filed as an Exhibit to Exelixis, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002, filed with the Securities and
Exchange Commission on November 8, 2002 and incorporated herein by
reference.
15. Filed as an Exhibit to Exelixis' Registration Statement on Form S-3 (File
No. 333-68436), as filed with the Securities and Exchange Commission on
August 27, 2001 and incorporated herein by reference.
16. Filed as an Exhibit to Exelixis' Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 20, 2001 and incorporated
herein by reference.
Exhibit 10.39
LEASE AMENDMENT
DATED: MARCH 3, 2003
BETWEEN: PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership LANDLORD
AND: EXELIXIS PLANT SCIENCES, INC.,
a wholly owned subsidiary of Exelixis, Inc.,
a Delaware corporation TENANT
Pacific Realty Associates, L.P., a Delaware limited partnership, as
Landlord, and American Show Management, Inc. as Original Tenant, entered into a
written lease dated October 4, 1995, consisting of approximately 11,059 square
feet of office and warehouse space located in Building C, PacTrust Business
Center, 16160 S.W. Upper Boones Ferry Road, Portland, Oregon 97224. By Lease
Amendment dated June 3, 1996, the Lease was amended. By Assignment and
Modification of Lease, dated November 7, 1997, Original Tenant assigned the
Lease to Agritope, Inc. By Lease Amendment dated September 9, 1999, Agritope,
Inc. leased an additional approximately 6,801 square feet of office and
warehouse space. Agritope, Inc.'s leased area now totals approximately 17,860
total square feet of office and warehouse space (hereinafter referred to as the
"Premises"). By facsimile dated November 5, 2002, Agritope, Inc. notified
Landlord that it had been acquired by Exelixis, Inc. effective December 8, 2000,
and changed its name to Exelixis Plant Sciences, Inc., a wholly owned subsidiary
of Exelixis, Inc. (hereinafter referred to as "Tenant"). Such documents are
hereinafter jointly referred to as "the Lease." The Lease expires February 28,
2003.
Tenant now wishes to extend the term of the Lease.
NOW, THEREFORE, the parties agree as follows:
1. The term of the Lease shall be extended for an additional thirty-six
(36) months commencing March 1, 2003 and continuing through February 28, 2006.
2. Commencing March 1, 2003 and continuing through the extended term,
Tenant shall pay base rent according to the following schedule:
BASE RENT
PERIOD PER MONTH
- --------------------------------------- ----------
March 1, 2003 through February 29, 2004 $16,610.00
- --------------------------------------- ----------
March 1, 2004 through February 28, 2005 $17,146.00
- --------------------------------------- ----------
March 1, 2005 through February 28, 2006 $17,681.00
- --------------------------------------- ----------
3. Except as expressly modified hereby, all terms of the Lease shall remain
in full force and effect and shall continue through the extended term.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the respective dates set opposite their signatures below, but this
Agreement on behalf of such party shall be deemed to have been dated as of the
date first above written.
LANDLORD:
PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership
By: PacTrust Realty, Inc.,
a Delaware corporation,
its General Partner
Date: November 14, 2002 By: /s/ Sam K. Briggs
Sam K. Briggs
Vice President
TENANT:
EXELIXIS PLANT SCIENCES, INC.,
a wholly owned subsidiary of Exelixis, Inc.,
a Delaware corporation
Date: November 14, 2002 By: /s/ Matthew G. Kramer
Name: Matthew G. Kramer
Title: General Manager
Exhibit 10.40 January 4, 2002 Dear Bob: We are proud to invite you to join our team. Our offer of employment is to join Exelixis, Inc. as Executive Vice President of Pharmaceuticals reporting directly to me. Other terms of employment include: Compensation: Your initial bi-monthly salary will be thirteen thousand five hundred forty one dollars and sixty-six cents ($13,541.66). Additionally, you will receive a sign-on bonus of fifty thousand dollars ($50,000) payable the first pay date after hire. Should you elect to voluntarily terminate employment with the Company within twelve (12) months of your hire date, the sign-on bonus will be entirely re-paid by you to the Company. This re-payment of the sign-on bonus shall occur within thirty (30) days of termination. Loan: We will make available a loan to you in an amount up to two hundred thousand dollars ($200,000.00). The loan will have a term of four (4) years and bear interest at the lowest rate available for a loan of this term in effect as of the date of the loan published under the rules and regulations of the U.S. Treasury. Interest will accrue and be payable annually within five (5) days of each anniversary date. The principal on the loan will be subject to forgiveness as follows: (a) fifty percent of the outstanding loan balance or one hundred thousand dollars ($100,000) upon your second anniversary of full-time employment; and (b) twenty five percent of the initial loan balance or fifty thousand dollars ($50,000) upon your third anniversary of full-time employment; and (c) the remaining twenty five percent of the initial loan balance or fifty thousand dollars ($50,000) on your fourth anniversary of full-time employment provided that the loan has not otherwise been repaid or required to be repaid. All unpaid and unforgiven portions of the principal will be subject to repayment prior to maturity upon termination of your employment prior to your fourth anniversary date. All forgiven amounts will be subject to withholding and reported on your Form W-2 in the year of forgiveness. Performance Review: Your performance will be formally reviewed no less than annually you will be eligible to receive an incentive bonus of up to thirty percent (35%) of your annual salary based on achievement of key milestones. Benefits: All full-time employees of Exelixis, Inc. enjoy a generous benefits package as is outlined on the attached Summary of Benefits. Review: Your performance will be formally reviewed no less than annually. Confidentiality: As you are aware, it is very important for us to protect our confidential information and proprietary material. Therefore, as a condition of employment, you will need to sign the attached Proprietary Information and Inventions Agreement. Start Date: January 22, 2002. Options for Equity: You will also be eligible to receive a stock option grant for two hundred twenty five thousand (225,000) shares of Exelixis stock pursuant to our 2000 Equity Incentive Plan pursuant to the standard form of stock option agreement at the closing price on your start date, subject to approval by the Board of Directors. Shares subject to options vest at the rate of 1/4th after one year of employment and 1/48th every month thereafter over a total of four years. Termination: In the event of termination of your employment by the Company without Cause, the Company will continue to pay you your base salary for a period after the date of such termination equal to six months. In addition, you will be entitled to receive the amount of any declared but unpaid bonus as at the date of such termination and the Company shall continue to make available to you such fringe benefits as required by law. Other: In addition to performing the duties and responsibilities of your position, you will be expected to perform other duties and responsibilities that may be assigned to you from time to time. No provision of this letter shall be construed to create an express or implied employment contract for a specific period of time. Either you or the Company may terminate this employment relationship at any time, with or without cause. This letter shall be governed by the laws of the State of California. Also, by signing this letter, you are indicating that you are legally authorized to work in the U.S.You may accept this offer of employment by signing both copies of this letter and Proprietary Information and Invention Agreements and returning one of each to me. Bob, we look forward to your coming on board! Sincerely, /s/ George Scangos George Scangos, Ph.D. President and CEO ACCEPTED BY: /s/ Bob Myers 15th Jan 2002 - ---------------------------- --------------- Robert Myers ENCLOSURES: Benefit Summary Direct Deposit Form (optional) Confidentiality Agreement Employee Information Form DE-4 (optional) I-9 Insider Trading Policy W-4
EXHIBIT 21.1
SUBSIDIARIES OF EXELIXIS
Exelixis Plant Sciences, Inc.
Artemis Pharmaceuticals GmbH
Exelixis Duetschland GmbH
Genomica Corporation
Cellfate, Inc.
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 pertaining to the Exelixis, Inc. 401(k) Plan, the 2000 Equity Incentive
Plan, the 2000 Employee Stock Purchase Plan, and the 2000 Non-Employee
Directors' Stock Option Plan of Exelixis, Inc. and the Registration Statement
(Form S-3 No. 333-66134) and in the related Prospectus of our report dated
January 31, 2003, with respect to the 2002 and 2001 consolidated financial
statements of Exelixis, Inc. included in this Annual Report on Form 10-K for the
year ended December 31, 2002.
/s/ Ernst & Young LLP
Palo Alto, California
March 5, 2003
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 and Form S-3 of Exelixis, Inc., of our report dated
February 2, 2001 relating to the consolidated statements of operations, of
stockholders' equity and of cash flows for the year ended December 31, 2000 of
Exelixis, Inc., which appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 7, 2003
EXHIBIT 99.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350, as
adopted), George A. Scangos, Chief Executive Officer of Exelixis, Inc. (the
"Company"), and Glen Y. Sato, Chief Financial Officer of the Company, each
hereby certify that, to the best of their knowledge:
1. The Company's Annual Report on Form 10-K for the period ended December 31,
2002, to which this Certification is attached as Exhibit 99.1 (the "ANNUAL
REPORT") fully complies with the requirements of section 13(a) or section 15(d)
of the Securities Exchange Act of 1934, and
2. The information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 6th
day of March, 2003.
/s/ George A. Scangos /s/ Glen Y. Sato
----------------------------- -----------------------------
George A. Scangos Glen Y. Sato
President and Chief Executive Chief Financial Officer, Vice President,
Officer Legal Affairs and Secretary