Washington, D.C. 20549
210 East Grand Ave.
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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 29, 2017,30, 2018, in connection with the registrant’s 20172018 Annual Meeting of Stockholders are incorporated herein by reference into Part III of this Annual Report on Form 10-K.
EXELIXIS, INC.
Some of the statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this Annual Report on Form 10-K are 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 company’s 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,” “focus,” “goal,” “objective,” “will,” “may,” “would,” “could,” “estimate,” “predict,” “target,” “potential,” “continue,” “encouraging” or the negative of such terms or other similar expressions identify forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2014, a 53-week year, ended on January 2, 2015; fiscal year 2015 a 52-week year, ended on January 1, 2016; fiscal year 2016 a 52-week year, ended on December 30, 2016; fiscal year 2017 ended on December 29, 2017; and fiscal year 2017, a 52-week year,2018 will end on December 29, 2017.28, 2018. For convenience, references in this report as of and for the fiscal years ended January 2, 2015, January 1, 2016, December 30, 2016 and December 30, 201629, 2017 are indicated as being as of and for the years ended December 31, 2014, 2015, 2016 and 2016,2017, respectively. The quarterly period ended January 2, 2015 is a 14-weekAll annual periods presented are 52-week fiscal quarter;years and all other interim periods presented are 13-week fiscal quarters.
The following is a summary of important information about our internally-discovered, marketed products:
COMETRIQ (cabozantinib),our first marketed product, was approved by the FDA on November 29, 2012 |
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| CABOMETYX (cabozantinib) was first approved by the U.S. Food and Drug Administration, or FDA, on April 25, 2016, for the treatment of patients with progressive, metastatic medullary thyroid carcinoma, or MTC. In March 2014, the EC granted COMETRIQ a similar, conditional marketing authorization for the treatment of adult patients with progressive, unresectable locally advanced or metastatic MTC. COMETRIQ is now commercialized in the European Union by Ipsen. In 2016, we generated $39.4 million in net product revenue from sales of COMETRIQ in the United States and received $2.5 million in product revenue from sales of COMETRIQ by our former distribution partner, Swedish Orphan Biovitrum, or Sobi. Cabozantinib has shown clinical anti-tumor activity in more than 20 forms of patients with advanced RCC who have received prior anti-angiogenic therapy and by the European Commission, or EC, on September 9, 2016, similarly for the treatment of advanced RCC in adults following prior VEGF targeted therapy. On December 19, 2017, the FDA approved the expanded indication for CABOMETYX to include previously untreated patients with advanced RCC, and on September 8, 2017, the European Medicines Agency, or EMA, validated the regulatory dossier for cabozantinib as a treatment for patients with previously untreated advanced RCC in the European Union, or EU. Outside the U.S. and Japan, CABOMETYX is marketed by our collaboration partner Ipsen Pharma SAS, or Ipsen. Should CABOMETYX be approved in Japan, it would be marketed by our collaboration partner Takeda Pharmaceutical Company Limited, or Takeda. In 2017, we generated $323.1 million in net product revenues from sales of CABOMETYX in the U.S.
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| COMETRIQ (cabozantinib), our first marketed product, was approved by the FDA on November 29, 2012, for the treatment of patients with progressive, metastatic MTC. In March 2014, the EC granted COMETRIQ a similar, conditional marketing authorization for the treatment of adult patients with progressive, unresectable locally advanced or metastatic MTC. COMETRIQ is commercialized in the EU by Ipsen. In 2017, we generated $25.0 million in net product revenues from sales of COMETRIQ in the U.S.
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| COTELLIC (cobimetinib) was approved by the FDA on November 10, 2015, in combination with vemurafenib for the treatment of patients with BRAF V600E or V600K mutation-positive advanced melanoma in the U.S. It has also been approved in combination with vemurafenib in multiple other territories including the EU, Switzerland, Canada, Australia and Brazil. In 2017, we recognized $6.4 million of royalties on ex-U.S. sales of COTELLIC and recorded a net loss of $2.1 million related to our profit share from sales of COTELLIC in the U.S. under our collaboration agreement with Genentech. Cobimetinib is being evaluated in a broad development program consisting of more than 50 trials by Genentech. For additional information on the cobimetinib development program, see “Cobimetinib Development Program.” |
cancer, soIn support of our effort to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers, we are focused on advancingmaximizing the broad cabozantinib clinical development program in order to advance commercial opportunities beyond advanced RCC and MTC. For additional information, see “Cabozantinib Development Program.”
Cotellic(cobimetinib) was approved by the FDA on November 10, 2015, in combination with vemurafenib for the treatment of patients with BRAF V600E or V600K mutation-positive advanced melanoma in the United States. It has also been approved in combination with vemurafenib in multiple other territories including the European Union, Switzerland, Canada, Australia and Brazil. In 2016, we recognized $2.8 million in collaboration revenue as a result of royalties on ex-U.S. sales of Cotellic and beginning in the fourth quarter of 2016, we also recognized a small net profitopportunity for our share of U.S. activities under the collaboration agreement. Genentech has an extensive clinical development program for this compound. For additional information on the cobimetinib development program, see “Cobimetinib Development Program.”
Our immediate business objective is to maximize the clinicaltwo internally discovered compounds, cabozantinib and commercial potential of CABOMETYX, COMETRIQ and Cotellic.cobimetinib. Over the course of 2016,2017, the revenuerevenues generated from the sale of these products and from our collaboration agreements, coupled with disciplined expense management and reducedelimination of the debt on our balance sheet, hashave created a capital structure upon which we believe Exelixiswe can continue to grow in a sustainable manner. As a result, we believe we are increasingly well positioned to drive the expansion and depth of our product offerings through the continued development of cabozantinib, both alone and in combination with other therapies, Genentech’s cobimetinib development program, the measured resumption of our internal drug discovery activities, and the evaluation and execution of in-licensing and acquisition opportunities that align with our oncology drug development expertise.
RecentKey Developments
During 2017, we achieved numerous commercial, regulatory, financial and business development milestones. We also continued to build the infrastructure necessary to support anticipated corporate growth and product development beyond our current pipeline. The key developments impacting our business in 2017 include:
Commercialization of CABOMETYX for Previously Treated Advanced RCC
The American Cancer Society’s 2016 statistics cite kidney cancer as amongIn 2017, we continued to execute on the ten most commonly diagnosed formscommercial launch of cancer among both men and women in the United States.The second and later-line RCC market is large and growing; published studies suggest that the drug-eligible patient population encompasses approximately 17,000 individuals in the United States and 37,000 globally.
CABOMETYX for previously treated patients with advanced RCC. When the FDA approved our novel tyrosine kinase inhibitor, or TKI, CABOMETYX,for this indication based on the results of the phase 3 METEOR trial in April 2016, we were prepared to engage with the advanced RCC treating community and bring CABOMETYX to market forwith field sales, medical affairs and market access personnel of the benefithighest caliber, experience and professionalism. Following the initial success of patients. Experiencedthe CABOMETYX launch in 2016 and professional oncology sales, marketing, marketin an effort to provide patients with greater access to CABOMETYX, during 2017, we expanded our distribution channel. Meanwhile our promotional and medical affairs teams were in place and our supply chain and distribution arrangements were substantially complete. Our educational efforts beganhave continued to familiarizefocus on educating physicians withon CABOMETYX’s unique product profile, although physicians were already largely familiar with the TKI class.
profile. CABOMETYX is distinct from other approved treatment options for previously treated patients with advanced RCC because it is the first single agent therapy approved for this indication to demonstrate robuststatistically significant and clinically meaningful improvements in all three key efficacy parameters -parameters: overall survival, or OS,OS; progression-free survival, or PFS,PFS; and objective response rate, or ORR -ORR--in a global pivotal trial. This profile translated into strong product demand in that indication. The FDA recognized this during its regulatory review, when it granted2017 as certain physicians prescribed CABOMETYX Fast Track and Breakthrough Therapy designations.as a preferred new therapeutic option despite numerous competing products approved to treat advanced RCC. For additional information about CABOMETYX’s profile as expressed in METEOR, (Metastatic RCC Phase 3 Study Evaluating Cabozantinib vs. Everolimus), the phase 3 pivotal trial upon which the approval of CABOMETYX was based, see “Cabozantinib Development Program - Exelixis Sponsored Trials - RCC - METEOR.”
A reviewIn markets outside the U.S. and Japan in 2017, we worked closely with our partner Ipsen in support of its regulatory strategy and commercialization efforts for CABOMETYX. Utilizing its established international oncology marketing expertise, Ipsen continues to execute its commercialization plans, most recently receiving regulatory approval in Australia, Switzerland
and South Korea, and having launched in France, Germany, Italy, Spain and the United Kingdom. Pricing and reimbursement negotiations have been completed or are actively ongoing in the majority of EU member states.
Expansion of CABOMETYX Label as a Treatment for Previously Untreated Advanced RCC
On December 19, 2017, approximately two months ahead of the launchassigned Prescription Drug User Fee Act, or PDUFA, action date, the FDA approved CABOMETYX for an expanded indication to date showsinclude previously untreated patients with advanced RCC, the most common form of advanced kidney cancer in adults. Published studies indicate that physiciansthere are rapidly adopting CABOMETYX, demonstrated by increasing demand andapproximately 30,000 patients initiating therapy, despite the large number of competing products approved to treat advanced RCC. The clinical profile and initial success of CABOMETYX in the United States has enabled us to continue to attract top talentU.S. and further build68,000 patients globally with advanced kidney cancer who are drug-eligible, with an estimated 14,000 patients in the U.S. in the first-line setting. Utilizing our existing commercial and medical affairs organizations and established distribution network, we were prepared to bring CABOMETYX to all eligible patients in the U.S. who may benefit from this treatment option immediately upon approval of considerable sizethe expanded indication.
The FDA’s priority review and experience. Asearly approval of CABOMETYX for this indication was based on CABOSUN, a result, we believe that we are well positioned to support the growthrandomized phase 2 trial of cabozantinib versus sunitinib in patients with previously untreated advanced RCC, which was conducted by The Alliance for Clinical Trials in Oncology, or The Alliance, as part of our development pipeline.Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute’s Cancer Therapy Evaluation Program, or NCI-CTEP. Cabozantinib met the study’s primary endpoint of improving PFS, as compared to sunitinib in patients with intermediate- or poor-risk disease. For additional information on the results of CABOSUN, see “Cabozantinib Development Program - Clinical Trials Supporting Regulatory Approvals.”
In Europe,Initiating the regulatory approval process outside of the U.S., Ipsen submitted to the EMA the regulatory dossier for CABOMETYX as a treatment for previously untreated, advanced or metastatic RCC in the EU on August 28, 2017 based on the CABOSUN trial results; the filing was subsequently validated on September 8, 2017.
Positive Results from the CELESTIAL Trial in Previously Treated Advanced HCC following Second Interim Analysis
On October 16, 2017, we announced that CELESTIAL, our company-sponsored, global phase 3 trial comparing cabozantinib to placebo in patients with advanced hepatocellular carcinoma, or HCC, who had previously progressed on or were intolerant to sorafenib and up to one additional therapy, met its primary endpoint, with cabozantinib providing a statistically significant and clinically meaningful improvement in OS compared to placebo. Based on the results of CELESTIAL, we plan to submit a supplemental New Drug Application, or sNDA, to the FDA in the first quarter of 2018, for CABOMETYX as a treatment for patients with previously treated advanced HCC. Ipsen has made significant progress since September 2016, wheninformed us that it intends to submit the ECregulatory application in the EU for CABOMETYX as a treatment for patients with previously treated advanced HCC in the first half of 2018.
Published studies indicate that an estimated 800,000 new cases of HCC present each year worldwide, with 41,000 of these cases in the U.S. While patients with localized disease may be candidates for surgery or other therapies such as embolization, treatment options for advanced disease are limited. Currently, sorafenib is the only approved CABOMETYX tabletsagent for the first-line treatment of advanced, unresectable HCC. Despite sorafenib treatment, however, patients with HCC typically progress, and only regorafenib and nivolumab are approved as treatment options for sorafenib-pretreated patients. Thus, previously treated advanced HCC still represents an area of substantial unmet medical need.
Evaluation of Cabozantinib in Combination with Multiple Immune Checkpoint Inhibitors
Cabozantinib has shown clinical anti-tumor activity in more than 20 forms of cancer; therefore, we are focused on advancing a broad cabozantinib clinical development program in order to fully investigate its therapeutic potential both alone and in combination with other therapies and potentially serve additional patient populations. In particular, given that clinical observations from an ongoing phase 1 trial evaluating cabozantinib in combination with Bristol-Meyers Squibb Company’s, or BMS’s, nivolumab, with or without ipilimumab, in patients with previously treated genitourinary tumors suggest treatment with cabozantinib results in a more immune-permissive tumor environment, we are interested in exploring the therapeutic potential of cabozantinib in combination with immune checkpoint inhibitors to treat a variety of types of cancer. Data from this trial showed that cabozantinib in combination with nivolumab demonstrated promising efficacy across a diverse range of genitourinary tumors, and also that patients can tolerate these drug combinations. We believe these promising early-stage clinical findings support continued, broad investigation of cabozantinib in combination with nivolumab and other immune checkpoint inhibitors. To that end, in collaboration with BMS, in July 2017, we initiated a phase 3 pivotal trial in previously untreated, advanced or metastatic RCC, which, pursuant to its amended protocol, is evaluating the combination of cabozantinib with BMS’s immune checkpoint inhibitor, nivolumab. We also initiated a phase 1/2 trial in adults following prior VEGF targeted therapy. By the end of 2016, Ipsen recorded its first commercial salescollaboration with BMS in Europepatients with both previously treated and is now preparing to potentially market CABOMETYX in all 28 member states of the European Union, Norway, Iceland, and elsewhere.previously untreated advanced HCC,
Establishmentcheckpoint inhibitors and Expansion of Global Partnerships for Cabozantinibcabozantinib in various other tumor types, including bladder cancer.
On February 29, 2016,We have not limited our clinical investigations to a single checkpoint inhibitor. In June 2017, we entered intoinitiated a collaboration and license agreementphase 1b trial with Ipsen, a specialty pharmaceutical company already engaged in the global distribution of oncology medicines. Our collaboration focuses on the further development ofvarious expansion cohorts evaluating cabozantinib and provides Ipsen exclusive rights to commercialize currentatezolizumab, Roche’s PD-L1 checkpoint inhibitor, in patients with advanced genitourinary malignancies, including RCC and potential future cabozantinib indications outside ofurothelial carcinoma, or UC. We subsequently amended the United States, Canada and Japan. On December 20, 2016, we agreedprotocol in January 2018 to add Canadafour new expansion cohorts to the Ipsen territories because Ipsenthis trial, which will now also has substantial business resourcesinclude patients with non-small cell lung cancer, or NSCLC, and castration-resistant prostate cancer, or CRPC, in that country. The upfront paymentsaddition to previously included patients with RCC and regulatory milestones we received from Ipsen during 2016 were essential to our commercial success because they provided us with the financial resources to successfully commercialize CABOMETYX in the United States without having to access alternative sources of capital.UC. For additional information on our clinical collaboration agreements with Ipsen,BMS and Roche, see “Collaborations“Cabozantinib Development Program - - Cabozantinib Collaborations - Ipsen Collaboration.Trials Conducted Under our Clinical Collaboration Agreements.”
Expansion of Global Partnership for Cabozantinib to Japan
On January 30, 2017, we continued to advance the global development and commercialization of cabozantinib by entering into a collaboration and license agreement with Takeda for the commercialization and further clinical development of cabozantinib in Japan. Pursuant to the terms of thethis collaboration agreement, Takeda has exclusive commercialization rights for currently developed and potential future cabozantinib indications in Japan. The parties haveJapan, and has also agreed to collaborate on thecabozantinib’s future clinical development of cabozantinib.development. In December 2017, Takeda confirmed that the first patient was enrolled in its bridging study evaluating cabozantinib in second-line advanced RCC in Japan. For additional information on our collaboration with Takeda, see “Collaborations - Cabozantinib Collaborations - Takeda Collaboration.”
Submission Planning for Supplemental New Drug Application, or sNDA, for Cabozantinib as a Treatment for First-Line Advanced RCC
Continued Development of COTELLIC and Resolution of Genentech Arbitration
On May 23, 2016, we announced that CABOSUN, a randomized phase 2 trial of cabozantinib in patients with previously untreated advanced RCC being conducted by The Alliance for Clinical Trials in Oncology, or The Alliance, as part of our Cooperative Research and Development Agreement, or CRADA, with the National Cancer Institute’s Cancer Therapy Evaluation Program, or NCI-CTEP, met its primary endpoint, demonstrating a statistically significant and clinically meaningful improvement in PFS compared with sunitinib in patients with intermediate- or poor-risk disease. Based on these results, we are working towards the submission of a sNDA in 2017 for cabozantinib as a treatment for first-line advanced RCC. For additional information on the results of CABOSUN, see “Cabozantinib Development Program - Trials Conducted through our CRADA with NCI-CTEP and our IST Program -RCC - CABOSUN.”
Expanded Development and Commercialization of Cotellic
During 2016, our collaboration partner, Genentech received additional approvals for Cotellic in combination with vemurafenib for the treatment of patients with unresectable or metastatic melanoma with a BRAF V600E mutation in multiple countries, including Australia and Brazil. Genentech also advancedcontinues to advance the development program for cobimetinib, during 2016, through the initiation and announcement of multiplewith three phase 3 pivotal trials currently underway exploring the combination of cobimetinib with other targetedatezolizumab or atezolizumab alone in colorectal carcinoma, or CRC, (IMblaze370) and immuno-oncology agentsBRAF wild type melanoma (IMspire170), and the combination of cobimetinib with atezolizumab and vemurafenib in BRAF V600 mutant melanoma (IMspire150). Enrollment for IMblaze370 was completed in the first quarter of 2017, and Genentech has announced that top-line results for the treatmenttrial are expected during the first half of melanoma and colorectal cancer, or CRC. Cobimetinib has the potential to provide us with a meaningful second significant source of revenue.2018. For additional information on the cobimetinib development program, see “Cobimetinib Development Program.”
In July 2017, we amended our collaboration agreement with Genentech in connection with the final resolution of claims asserted in an arbitration proceeding by us against Genentech related to the development, pricing and commercialization of COTELLIC. The amendment provides for a favorably revised revenue and cost-sharing arrangement, that became effective as of July 1, 2017, and that is applicable to current and all potential future commercial uses of COTELLIC. Should the ongoing IMblaze370, IMspire170 and IMspire150 clinical trials prove positive and Genentech obtain regulatory approvals based on such positive results, we believe that with the revised revenue and cost-sharing arrangement, cobimetinib could provide us with another meaningful source of revenue.
Extinguishment of Convertible Debt
All Outstanding Indebtedness
During 2016,2017, we retired all of our 4.25%outstanding debt, beginning with the repayment of our $80.0 million term loan with Silicon Valley Bank in March 2017. This repayment was followed by the June 2017 retirement of the Secured Convertible Senior Subordinated Notes due 2019,2018 held by entities associated with Deerfield Management Company, L.P., or the 2019 Notes. This was accomplished by first entering into privately negotiated exchange transactions pursuant to which $239.4Deerfield Notes, in consideration for a payment of $123.8 million. The Deerfield Notes were retired one year ahead of their July 2018 maturity date providing us with a savings of approximately $12.2 million in interest expense, net of the 2019 Notes were exchanged for an aggregate of approximately 45 million shares of our common stock and an aggregate cash payment of approximately $2.4 million. Following completion of these exchange transactions, we issued a redemption notice for the remaining $48.1 million of the outstanding 2019 Notes.termination fee. As a result of the redemption, $47.5 millionelimination of the 2019 Notes were converted into shares ofthis indebtedness and increasing cash flow, we began to fund our common stockongoing business and the remaining $0.6 million of the 2019 Notes were redeemed in cash for 100% of the principal amount thereof, plus accrued and unpaid interest through the end of the redemption period. As a result of the successful completion of the exchange transactions and redemption of the 2019 Notes, we significantly reduced our outstanding debt and strengthened our capital structure to support potential future growth.growth primarily from business operations. For additional information on the exchange transactionsrepayment of our term loan with Silicon Valley Bank and redemptionthe retirement of the 2019Deerfield Notes, see “Note 7, Debt,”6. Debt” to our Notes“Notes to Consolidated Financial StatementsStatements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Evaluation of Cabozantinib in Combination with Immune-oncology Agents in Various Indications, Including a Phase 3 Trial in First Line Advanced RCC
Cabozantinib has demonstrated clinical activity as a single agent in advanced RCC, and we are interested in further examining its potential in combination with immunotherapies to treat this serious disease. Building on the available preclinical and clinical observations that suggest treatment with cabozantinib results in a more immune-permissive tumor environment potentially resulting in cooperative activity of cabozantinib in combination with immune check point inhibitors, in collaboration with Bristol Meyers Squibb Company, or BMS, we intend to evaluate the combination of cabozantinib with nivolumab or nivolumab and ipilimumab in various tumor types, including bladder cancer, hepatocellular carcinoma, or HCC, and a phase 3 trial in first-line advanced RCC. The combination of cabozantinib with nivolumab or nivolumab and ipilimumab is being evaluated in a phase 1b trial that has demonstrated an acceptable safety profile and clinical activity in patients with heavily pre-treated genitourinary malignancies, as reported at the European Society of Medical Oncology, or ESMO, 2016 Congress and, more recently at the 2017 Genitourinary Cancers Symposium. Additionally, we are planning to initiate a phase 1b trial with various expansion cohorts evaluating cabozantinib and atezolizumab, Roche’s PD-L1 targeting antibody, in patients with advanced genitorurinary malignancies, including RCC and bladder cancer. For additional information on our clinical collaboration agreements with BMS and Roche, see “Cabozantinib Development Program.”
Resumption of Discovery Activities
We have recently resumed internal drug discovery efforts with the goal of identifying novel and promising therapeutic candidates to advance into clinical trials. From 2000 until 2012, we had an active Discovery group that advanced 22 compounds to Investigational New Drug, or IND stage, either independently or with collaboration partners, including cabozantinib and cobimetinib. We built a significant infrastructure, including a library of 4.6 million compounds, and gained extensive experience in the identification and optimization of drug candidates against multiple target classes for oncology, inflammation and metabolic diseases.
Our new discovery organization will leverage that history, but will be more focused and measured. We intend to concentrate our in-house work on the most sensitive and demanding aspects of lead optimization and use contract research organizations, or CROs, to support more routine activities, thereby minimizing our internal footprint while still maintaining an agile, competitive approach. We intend to be judicious in the selection of targets and focus on those with the most robust preclinical validation datasets. We anticipate that our experience and ability to identify high quality lead compounds through use of our propriety compound library will permit us to prosecute competitive and productive discovery programs in areas of high potential.
Cabozantinib Development Program
Cabozantinib inhibits the activity of tyrosine kinases, including MET, AXL, VEGF receptors, and RET. These receptor tyrosine kinases are involved in both normal cellular function and in pathologic processes such as oncogenesis, metastasis, tumor angiogenesis, drug resistance and maintenance of the tumor microenvironment. Objective tumor responses have been observed in patients treated with cabozantinib in more than 20 individual tumor types investigated in phase 1 and 2 clinical trials to date, reflecting the medicine’s broad clinical potential. We are currently evaluating cabozantinib, both as a single agent and in combination with immune checkpoint inhibitors, in a broad development program comprising over 45 70
ongoing or planned clinical trials across multiple indications. We, are thealong with our clinical and commercial collaboration partners, sponsor of some of those trials, including CELESTIAL (Cabozantinib Phase 3 Controlled Study In Hepatocellular Carcinoma), our phase 3 pivotal trial comparing cabozantinib to placebo in patients with advanced HCC who had received previous treatment with sorafenib, withwhile the remaining trials beingare conducted through our CRADA with NCI-CTEP or our investigator sponsored trial, or IST program. Beginning in February 2017, we also entered into individual clinical collaboration agreements with BMS and Roche, for the purpose
Two summary tables of conducting clinical studies combining cabozantinib with BMS’s PD-1 and CTLA-4 immune checkpoint inhibitors and Roche’s anti-PD-L1 immunotherapy compound.
A select summary of our cabozantinib clinical development activities, isone listing studies evaluating the potential of cabozantinib as a single-agent, and another listing studies evaluating the potential of cabozantinib in combination with one or more immune checkpoint inhibitors, are below:
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| CLINICAL DEVELOPMENT PROGRAM FOR CABOZANTINIB, SINGLE-AGENT |
| Indication | Combination Regimen | Status Update |
Progressive, Metastatic Medullary Thyroid Cancer (MTC) |
| Progressive, metastatic medullary thyroid cancer | Approved in USU.S. and EU (EXAM) |
| Progressive, metastatic medullary thyroid cancer | Post-marketing study (EXAMINER) |
| Differentiated thyroid cancer | Phase 2* |
| Renal Cell Carcinoma (RCC) |
Second-line | Second- and later-line advanced RCC | Approved in USU.S. and EU (METEOR) |
First-line (intermediate- or poor-risk classification)Advanced RCC (including previously untreated RCC) | | Preparing to file sNDAApproved in 2017 basedU.S. on results from CABOSUN† trialDecember 19, 2017; filing accepted in EU, currently under regulatory review (CABOSUN) |
First-lineFirst- or second-line papillary RCC | + nivolumab +/- ipilimumabRandomized phase 2† (PAPMET) |
| Hepatocellular Carcinoma (HCC) |
| Second- and later-line advanced HCC | Phase 3 pivotal trial expected to begin in 2017, co-sponsored with Bristol-Myers Squibb |
Hepatocellular Carcinoma |
Second-line | | Phase 3 (CELESTIAL), data anticipated in 2017 positive results; sNDA filing planned for Q1 2018 and EMA filing planned for 1H 2018 (Ipsen) |
| Non-Small Cell Lung Cancer (NSCLC) |
| EGFR wild-type | | Phase 2† |
| Molecular alterations in RET, ROS1, MET, AXL, or NTRK1 | Phase 2* |
| Additional Trials |
| Metastatic urothelial cancer | Phase 2 * |
| Breast cancer with brain metastases | Phase 2* |
| Colorectal cancer | Phase 1* |
| High-grade uterine sarcomas | Phase 2 § |
| Metastatic gastrointestinal stromal tumor | Phase 2 (CABOGIST)§ |
| Pancreatic neuroendocrine tumors and carcinoid tumors | Phase 2† |
| Plexiform neurofibromas (pediatric and adult cohorts) | Phase 2* |
| Relapsed osteosarcoma or Ewing sarcoma | Phase 2† |
| Soft-tissue sarcomas | Phase 2† |
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| * | Trial conducted through our IST program. |
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| † | Trial conducted through collaboration with NCI-CTEP. |
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| § | Trial sponsored by the European Organization for Research and Treatment of Cancer. |
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| CLINICAL DEVELOPMENT PROGRAM FOR CABOZANTINIB, IN COMBINATION WITH IMMUNE CHECKPOINT INHIBITORS |
| Indication | Combination Regimen | Status Update |
| RCC |
| First-line advanced RCC | + nivolumab | Phase 3 pivotal trial (CheckMate 9ER) |
| HCC |
| Second- and later-line advanced HCC | + nivolumab ± ipilimumab | Phase 1/2 (Checkmate 040) |
| Neoadjuvant locally advanced HCC | ± nivolumab | Phase 1b* |
| NSCLC |
| Advanced solid tumors | + atezolizumab | Phase 1b started in 2017, eight planned expansion cohorts including NSCLC |
Trials in Genitourinary Tumors, including BladderRCC, Urothelial Carcinoma (UC), and Urothelial CancersCastration-Resistant Prostate Cancer (CRPC) |
| Genitourinary tumors | + nivolumab +/-± ipilimumab | Phase 1† |
| Advanced solid tumors | + atezolizumab | Phase 1B* trial to begin1b started in 2017, eight planned expansion cohorts inincluding RCC, UC, and urothelial carcinomaCRPC |
Signal Search Opportunities to Inform Potential Development |
Pancreatic neuroendocrine and carcinoid tumors | | Phase 2*Additional Clinical Trials |
| Endometrial cancer | + nivolumab | Phase 2† |
Differentiated thyroid cancer | | Phase 2* |
Metastatic gastrointestinal stromal tumor | | Phase 2 (CABOGIST)§ |
Breast cancer with brain metastases | +/- trastuzumab | Phase 2* |
Metastatic, hormone-receptor-positive breast cancer | + fulvestrant | Phase 2* |
| Metastatic, triple negative breast cancer | + nivolumab | Phase 2* |
Soft-tissue sarcomas | | Phase 2† |
High-grade uterine sarcomas | | Phase 2§ |
Relapsed osteosarcoma or Ewing sarcoma | | Phase 2† |
Colorectal cancer | +/- panitumumab | Phase 1* |
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| * | Trial conducted through Exelixis' Investigator-Sponsored Trialour IST program. |
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| † | Trial conducted through collaboration with NCI’s Cancer Therapy Evaluation Program.NCI-CTEP. |
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| § | Trial sponsored by the European Organization for Research and Treatment of Cancer (EORTC).Cancer. |
Exelixis SponsoredClinical Trials
Supporting Regulatory Approvals
MTC - EXAM
COMETRIQ’s safety and efficacy were assessed in an international, multi-center, randomized double-blinded controlled trial of 330 patients with progressive, metastatic MTC, known as EXAM (Efficacy of XL184 (Cabozantinib) in Advanced Medullary Thyroid Cancer).EXAM. Patients were required to have evidence of progressive disease within 14 months prior to study entry. This assessment was performed by an independent radiology review committee, or IRRC, in 89% of patients and by the treating physicians in 11% of patients. Patients were randomized 2:1 to receive COMETRIQ 140 mg (n = 219) or placebo (n = 111) orally, once daily until disease progression determined by the treating physician or until intolerable toxicity. Randomization was stratified by age (≤ 65 years vs. > 65 years) and prior use of a TKI. No cross-over was allowed at the time of progression. The primary endpoint was to compare PFS in patients receiving COMETRIQ versus patients receiving placebo. Secondary endpoints included ORR and OS. The main efficacy outcome measures of PFS, ORR and response duration were based on IRRC-confirmed events using modified Response Evaluation Criteria in Solid Tumors, or RECIST, which is a widely used set of rules that defines when cancer patients improve (“respond”), stay the same (“stabilize”) or worsen (“progress”) during treatments.
EXAM served as the basis for the regulatory approval of COMETRIQ in the United StatesU.S. and European Union.EU. A statistically significant and clinically meaningful prolongation in PFS was demonstrated among COMETRIQ-treated patients compared to those receiving placebo [HR 0.28 (95% CI: 0.19-0.40);(hazard ratio, or HR, 0.28; 95% confidence interval, or CI, 0.19-0.40; p<0.0001]0.0001), with median PFS of 11.2 months in the COMETRIQ arm and 4.0 months in the placebo arm. Partial responses, or PRs, were observed only among patients in the COMETRIQ arm (27% vs. 0%; p<0.0001). The median duration of objective response was 14.7 months (95% CI:CI 11.1-19.3) for patients treated with COMETRIQ. The most commonly reported adverse drug reactions occurring in at least 25% of patients were diarrhea, stomatitis, palmar-plantar erythrodysesthesia syndrome, or PPES, decreased weight, decreased appetite, nausea, fatigue, oral pain, hair color changes, dysgeusia, hypertension, abdominal pain, and constipation. In November 2014, we announced completion of the OS analysis, the secondary endpoint of the study. Consistent with an earlier interim analysis, there was no statistically significant difference in OS between the treatment arms. The median OS was 26.6 months for the COMETRIQ arm and 21.1 months for the placebo arm (HR = 0.85; 95% CI 0.64-1.12; p = 0.2409). The subgroup analysis by RET M918T mutation status, a known negative prognostic factor in MTC, revealed a largean improvement in OS of 25.4 months for COMETRIQ-treated patients positive for the RET M918T mutation; the median OS was 44.3 months for the COMETRIQ arm and 18.9 months for the placebo arm (HR = 0.60; 95% CI 0.38-0.95; p =
0.026, not adjusted for multiple subgroup testing). We presented the final results at the American Society of Clinical Oncology, or ASCO, 2015 Annual Meeting and submitted the results to regulatory authorities to satisfy post-marketing commitments.
In connection with the approval of COMETRIQ for the treatment of progressive, metastatic MTC, we were subject to post-marketing requirements, all of which have been satisfied, other than a requirement to conduct a clinical study comparing a lower dose of COMETRIQ with the labeled dose of 140 mg. This study is evaluating safety and PFS in progressive, metastatic MTC patients and is ongoing.
RCC - METEOR
In July 2015, we announced positive results of METEOR, a phase 3 pivotal trial comparing CABOMETYX to everolimus in patients with advanced RCC who have experienced disease progression following treatment with at least one prior VEGF receptor inhibitor. METEOR was initiated in May 2013. The trial was designed to enroll 650 patients at approximately 200 sites. Patients were stratified based on the number of prior VEGF receptor inhibitors received, and on commonly applied RCC risk criteria. Patients were randomized 1:1 to receive 60 mg of CABOMETYX daily or 10 mg of everolimus daily and no cross-over was allowed between the study arms. The METEOR trial was designed to provide adequate power to assess both the primary endpoint of PFS, and the secondary endpoint of OS. The trial protocol specified that the primary analysis of PFS would be conducted among the first 375 patients randomized while the secondary endpoint of OS would be conducted among all 650 patients randomized. This design was employed to ensure sufficient follow-up and a PFS profile that would not be primarily weighted toward early events. Such disproportionate weighting of events was a potential risk if the entire study population required for the secondary endpoint analysis of OS had also served as the population for the primary analysis of PFS. On September 26, 2015, The New England Journal of Medicine published the complete, detailed positive results from the primary analysis of METEOR, and these results were also presented during the Presidential Session I at the European Cancer Congress 2015. The trial met its primary endpoint, demonstrating a statistically significant and clinically meaningful increase in PFS for CABOMETYX, as determined by an IRRC among the first 375 patients enrolled. The median PFS was 7.4 months for the CABOMETYX arm versus 3.8 months for the everolimus arm, and the hazard ratio [HR]HR was
0.58 (95% confidence interval [CI] 0.45-0.75,CI 0.45-0.75; p<001), corresponding to a 42% reduction in the rate of disease progression or death for CABOMETYX compared to everolimus. The trial also showed that CABOMETYX significantly improved the ORR. The most commonly reported adverse drug reactions occurring in at least 25% of patients were diarrhea, fatigue, nausea, decreased appetite, PPES, hypertension, vomiting, weight decreased, and constipation.
A review of adverse events, or AEs, demonstrated that the frequency of AEs of any grade regardless of causality was approximately balanced between study arms, and the rate of treatment discontinuation due to adverse eventsAEs was 9% and 10% for CABOMETYX and everolimus, respectively. With additional follow-up for OS, the study also met its secondary endpoint of OS as presented in June 2016 at the ASCO 2016 Annual Meeting and published in Lancet Oncology. Compared with everolimus, CABOMETYX was associated with a 34% reduction in the rate of death and median OS was 21.4 months for patients receiving CABOMETYX versus 16.5 months for those receiving everolimus (HR=0.66,(HR 0.66; 95% CI 0.53-0.83, P=0.53-0.83; p=0.0003).
In January 2016, an analysis of PFS among all 658 patients enrolled was presented at the 2016 ASCO Genitourinary Cancers Symposium, and revealed consistent results with the primary analysis showing a median PFS of 7.4 months for the CABOMETYX arm versus 3.9 months for the everolimus arm, and athe HR ofwas 0.52 (95% CI 0.43-0.64,0.43-0.64; p<0.001), corresponding to a 48% reduction in the rate of disease progression or death for CABOMETYX as compared to everolimus. In addition, subgroup analyses for PFS showed consistent beneficial effect of CABOMETYX versus everolimus; subgroups included: ECOG performance status; commonly applied RCC risk groups as described by Motzer et al.; organ involvement, including bone and visceral metastases and overall tumor burden; extent and type of prior VEGF receptor inhibitor therapy; and prior PD-1/PD-L1 therapy. For patients without prior PD-1/PD-L1 therapy, median PFS was 7.4 months for CABOMETYX and 3.9 months for everolimus (HR = 0.54,0.54; 95% CI 0.44-0.66). For patients who had received prior PD-1/PD-L1 therapy, the median PFS for CABOMETYX was not reached, and the median PFS for everolimus was 4.1 months (HR = 0.22,0.22; 95% CI 0.07-0.65). Subgroup analyses for ORR also showed consistent benefit for CABOMETYX as compared to everolimus.
On the basis of the data from the METEOR trial, CABOMETYX wasthe FDA approved by the FDACABOMETYX for the treatment of patients with advanced RCC following prior antiangiogenic therapy, and by the ECEMA approved CABOMETYX for the treatment of advanced RCC in adults following prior VEGF targeted therapy.
RCC - CABOSUN
In October 2016, we announced detailed results from CABOSUN, a randomized phase 2 trial of cabozantinib in patients with previously untreated advanced RCC with intermediate- or poor-risk disease conducted by The Alliance under
our CRADA with NCI-CTEP. CABOSUN was a randomized, open-label, active-controlled phase 2 trial that enrolled 157 patients with advanced RCC. Patients were randomized 1:1 to receive cabozantinib (60 mg once daily) or sunitinib (50 mg once daily, 4 weeks on followed by 2 weeks off). The primary endpoint was PFS. Secondary endpoints included OS and ORR. Eligible patients were required to have locally advanced or metastatic clear-cell RCC, ECOG performance status 0-2, and had to be intermediate or poor risk per the International Metastatic Renal Cell Carcinoma Database Consortium, or IMDC criteria (Heng, Journal of Clinical Oncology, 2009).
CABOSUN met its primary endpoint, demonstrating a statistically significant and clinically meaningful improvement in investigator-assessed PFS compared with sunitinib. With a median follow-up of 21.4 months, cabozantinib demonstrated a 34% reduction in the rate of disease progression or death (HR 0.66; 95% CI 0.46-0.95; one-sided p=0.012). The median PFS for cabozantinib was 8.2 months versus 5.6 months for sunitinib, corresponding to a 2.6 months (46%) improvement favoring cabozantinib over sunitinib. PFS benefits were independent of the IMDC risk group (intermediate or poor risk) and presence or absence of bone metastases at baseline. The results for sunitinib were in line with a previously published retrospective analysis of 1,174 intermediate- and poor-risk RCC patients from the IMDC database, which documented a median PFS of 5.6 months with a first-line targeted therapy, mainly sunitinib, in this patient population. Investigator-assessedORR was also significantly improved, at 33% (95% CI 23% - 44%) for cabozantinib versus 12% (95% CI 5.4% - 21%) for sunitinib. With a median follow-up of 22.8 months, median OS was 30.3 months for cabozantinib versus 21.8 months for sunitinib (HR 0.80; 95% CI 0.50 - 1.26). The most common grade 3 or 4 AEs with cabozantinib were hypertension (28%), diarrhea (10%), PPES (8%), and fatigue (6%); with sunitinib, they were hypertension (22%), fatigue (15%), diarrhea (11%), and thrombocytopenia (11%). Grade 5 AEs occurred in four patients (5%) in the cabozantinib group and five patients (7%) in the sunitinib group. Treatment-related grade 5 events occurred in three patients in the cabozantinib group (acute kidney injury, sepsis, and jejunal perforation) and three patients in the sunitinib group (sepsis, respiratory failure, and vascular disorders). The rate of treatment discontinuation because of AEs was 20% (n = 16) and 21% (n = 16) in the cabozantinib and sunitinib groups, respectively.
On September 19, 2017, updated results from CABOSUN were presented at the European Society for Medical Oncology, or ESMO, 2017 Congress. The results included the analysis from a blinded IRC, which confirmed the primary efficacy endpoint results of investigator-assessed PFS, as well as an updated investigator-assessed analysis. Per the IRC analysis, cabozantinib demonstrated a statistically significant and clinically meaningful 52% reduction in the rate of disease progression or death (HR 0.48; 95% CI 0.31-0.74; two-sided p=0.0008). The median PFS for cabozantinib was 8.6 months versus 5.3 months for sunitinib, corresponding to a 3.3 month (62%) improvement favoring cabozantinib over sunitinib. The updated data sets and methods differ from the initial investigator analyses presented in 2016. The comprehensive image collection for IRC review used a later cut-off point (5 months) than the initial investigator analysis and followed a rigorous IRC review process. The analysis of IRC data applied FDA guidance for PFS analyses in oncology studies, including recommended censoring rules. Both the updated investigator assessment and IRC analysis demonstrated consistent and statistically significant improvement of PFS with cabozantinib as compared to sunitinib. The updated OS analysis had a data cut-off of July 1, 2017, and showed a favorable trend for patients randomized to cabozantinib compared to sunitinib that was not statistically significant. Median OS was 26.6 months for patients receiving cabozantinib versus 21.2 months for those receiving sunitinib (HR 0.80; 95% CI 0.53-1.21; two-sided p=0.29). The most common all-causality grade 3 or 4 AEs in more than 5% of patients for cabozantinib (N=78) and sunitinib (N=72), respectively, were diarrhea (10% vs. 11%), hypertension (28% vs. 21%), fatigue (6% vs. 17%), increased alanine aminotransferase (5% vs. 0%), decreased appetite (5% vs. 1%), PPES (8% vs. 4%), decreased platelet count (1% vs. 11%) and stomatitis (5% vs. 6%). 21% of patients in the cabozantinib arm and 22% of patients in the sunitinib arm discontinued treatment due to AEs.
On the basis of the data from the CABOSUN trial, the FDA approved CABOMETYX for the treatment of patients with previously untreated, advanced or metastatic RCC on December 19, 2017, and we commenced our commercial launch of CABOMETYX for this new indication upon such approval. Additionally, on September 8, 2017, the EMA validated the regulatory dossier for cabozantinib as a treatment for previously untreated, advanced or metastatic RCC in the EU.
Exelixis Sponsored Trials
HCC - CELESTIAL
Published studies indicate that an estimated 700,000 new cases of HCC present each year worldwide, with 39,000 of these cases in the United States. While patients with localized disease may be candidates for surgery or other therapies such as embolization, treatment options for advanced disease are limited. Currently, sorafenib is the only approved agent for the first line treatment of advanced, unresectable HCC. However, patients typically progress despite sorafenib treatment, at which point there is no approved therapy available to them. While a number of VEGF receptor targeting agents have been tested in phase 2/3 trials in the post-sorafenib setting, only one phase 3 trial has shown positive results. In 2016 results from a study comparing regorafenib and placebo in the second line treatment of HCC has reportedOctober 2017, we announced positive results and data are currently under review by regulatory agencies. Thus, second-line advanced HCC still represents an area of substantial unmet medical need.
MET is the tyrosine kinase receptor for hepatocyte growth factor, and plays a crucial role in liver development and regeneration. Expression of MET is elevated in HCC, particularly in metastatic HCC, and high MET levels are associated with reduced OS and resistance to sorafenib treatment. In preclinical models, upregulation of MET has been shown to drive escape from VEGF receptor inhibition, and to promote an increase in invasion and metastasis. Consistent with this, treatment of HCC patients with sorafenib can result in increases in tumor MET expression. These findings provide a strong parallel with the RCC setting, where high levels of MET expression and activation are also associated with poor prognosis and resistance to and escape from first-line treatment with VEGF receptor inhibitors.
We believe that targeting both MET and VEGF receptors with cabozantinib in HCC may provide benefit in second-line HCC by maintaining VEGF receptor inhibition while also inhibiting MET-driven oncogenic and resistance pathways. In an initial test of this hypothesis, a cohort of HCC patients, including a subset whose disease had progressed despite prior sorafenib treatment, was enrolled in our phase 2 randomized discontinuation trial. Based on the encouraging data that emerged from this trial, we launched CELESTIAL, our phase 3 pivotal trial comparing cabozantinib to placebo in patients with advanced HCC who had received previous treatment with sorafenib. The CELESTIAL trial, iswhich we initiated in September 2013, was designed to enroll 760 patients atwho were intolerant to or who had received prior systemic therapy with sorafenib, could have received up to 200 sites.two prior systemic cancer therapies for advanced HCC, and must have progressed following at least one prior therapy. The CELESTIAL trial was conducted at more than 100 sites globally in 19
countries and enrollment was completed in September 2017. Patients are beingwere randomized 2:1 to receive 60 mg of cabozantinib daily or placebo. placebo and were stratified based on etiology of the disease (hepatitis C, hepatitis B or other), geographic region (Asia versus other regions) and presence of extrahepatic spread and/or macrovascular invasion (yes or no). No cross-over was allowed between the study arms.
The primary endpoint for CELESTIAL isthe trial was OS, and the secondary endpoints includeincluded ORR and PFS. In September 2016, followingExploratory endpoints include patient-reported outcomes, biomarkers and safety. A total of 621 events provided the study with 90% power to detect a 32% increase in median OS (HR 0.76) at the final analysis. Two interim analyses were planned to be conducted at 50% and 75% of the planned 621 events. Following the first planned
interim analysis, for CELESTIAL, the trial’s Independent Data Monitoring Committee,on September 6, 2016, we announced that CELESTIAL’s independent data monitoring committee, or IDMC, determined that the study should continue without modifications per the study protocol. We anticipate top-lineprotocol for a second interim analysis to take place once 75% of events had been observed. Subsequently, on October 16, 2017, following the second interim analysis, the IDMC, recommended that CELESTIAL be stopped for efficacy, providing a statistically significant and clinically meaningful improvement versus placebo in OS. On January 19, 2018, statistically significant and clinically meaningful positive results from the second interim analysis of CELESTIAL were presented during an oral session at the 2018 American Society of Clinical Oncology’s Gastrointestinal Cancers Symposium. In the total population of second- and third-line patients, median OS was 10.2 months with cabozantinib versus 8.0 months with placebo (HR 0.76; 95% CI 0.63-0.92; p=0.0049). Median PFS was more than doubled, at 5.2 months with cabozantinib and 1.9 months with placebo (HR 0.44; 95% CI 0.36-0.52; p<0.0001). ORR was 4% with cabozantinib and 0.4% with placebo (p=0.0086). Disease control (PR or stable disease, or SD) was achieved by 64% of the cabozantinib group compared with 33% of the placebo group. In a subgroup analysis of patients whose only prior therapy for advanced HCC was sorafenib (70% of patients in 2017.the study), median OS was 11.3 months with cabozantinib versus 7.2 months with placebo (HR 0.70; 95% CI 0.55-0.88). PFS in the subgroup was 5.5 months with cabozantinib versus 1.9 months with placebo (HR 0.40; 95% CI 0.32-0.50). The most commonly reported grade 3 or 4 AEs occurring in at least 10% of the patients were PPES, hypertension, increased aspartate aminotransferase, fatigue and diarrhea. Treatment-related grade 5 AEs occurred in six patients in the cabozantinib group and included, hepatic failure, esophagobronchial fistula, portal vein thrombosis, upper gastrointestinal hemorrhage, pulmonary embolism and hepatorenal syndrome and in one patient in the placebo group (hepatic failure).
Based on the results of CELESTIAL, we plan to submit a sNDA to the FDA in the first quarter of 2018, for CABOMETYX as a treatment for patients with previously treated advanced HCC. Our partner, Ipsen, has informed us that it intends to submit a regulatory dossier for CABOMETYX as a treatment for patients with previously treated advanced HCC to the EMA in the first half of 2018.
Trials Conducted Under our Clinical Collaboration Agreements
Bladder Cancer, HCC and First-Line Advanced RCC - Combination StudiesClinical observations from an ongoing phase 1 trial evaluating cabozantinib in combination with BMS
Building onnivolumab, with or without ipilimumab, in patients with previously treated genitourinary tumors suggest that when cabozantinib is given with immune checkpoint inhibitors, the available preclinical and clinical observations that cabozantinib resultscombination may result in a more immune-permissive tumor environment potentially resulting in cooperative activityenvironment. In consideration of cabozantinib in combination with immune check point inhibitors,those results, in February 2017, we entered into individual clinical collaboration agreements with BMS and Roche, for the purpose of conducting clinical studies combining cabozantinib with BMS’s PD-1 and CTLA-4 immune checkpoint inhibitors and Roche’s anti-PD-L1 immune checkpoint inhibitor.
Combination Studies with BMS
We entered into a clinical trial collaboration agreement with BMS in February 2017 for the purpose of evaluatingexploring the combinationtherapeutic potential of cabozantinib in combination with BMS’s immune checkpoint inhibitors, nivolumab and/or cabozantinib with nivolumab and ipilimumab, into treat a variety of types of cancer. As part of the collaboration, we are evaluating various tumor types, including,forms of these combinations in a planned phase 3 pivotal trial in first-linepreviously untreated or metastatic advanced RCC and in potential additional trialsa phase 1/2 trial in both previously treated and previously untreated advanced HCC. We also intend to evaluate these combinations in various other tumor types, including bladder cancer and HCC. cancer.
Pursuant to the terms of the collaboration agreement with BMS, each party will grantgranted to the other a non-exclusive, worldwide (within the collaboration territory as defined in the collaboration agreement), non-transferable, royalty-free license to use the other party’s compounds in the conduct of each clinical trial. The parties’ efforts will beare governed through a joint development committee established to guide and oversee the collaboration’s operation. Each trial will be conducted under a combination Investigational New Drug, or IND, application, unless otherwise required by a regulatory authority. Each party will be responsible for supplying drug product for the applicable clinical trial and unless otherwise agreed between the parties, costs for each such trial will be shared equally between the parties, unless two BMS compounds will
be utilized in such trial, in which case BMS will bear two-thirds of the costs for such study treatment arms and we will bear one-third of the costs. Unless earlier terminated, the collaboration agreement shallwill remain in effect until the completion of all clinical trials under the collaboration, all related trial data has been delivered to both parties and the completion of any then agreed upon analysis. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. Upon termination by either party, the licenses granted to each party to conduct a combined therapy trial will terminate.
RCC - CheckMate 9ER
CheckMate 9ER is an open-label, randomized, multi-national phase 3 pivotal trial evaluating nivolumab in combination with cabozantinib or nivolumab and ipilimumab in combination with cabozantinib versus sunitinib in patients with previously untreated, advanced or metastatic RCC. The original trial protocol required patients to be randomized 1:1:1 to one of three arms: cabozantinib and nivolumab; cabozantinib, nivolumab and ipilimumab; or sunitinib. However, following the positive results of CheckMate 214, BMS’s phase 3 trial evaluating nivolumab combined with ipilimumab versus sunitinib monotherapy in patients with previously untreated metastatic RCC and in an effort to accelerate the development of the cabozantinib and nivolumab combination, the trial protocol was amended to remove the triplet combination. The triplet combination continues to be evaluated in an ongoing phase 1b trial in patients with advanced genitourinary malignancies and a separate phase 3 trial evaluating the triplet combination versus nivolumab and ipilimumab is under evaluation. The modified protocol for the trial aims to enroll approximately 580 patients with previously untreated, advanced or metastatic RCC of all risk groups. Patients are being randomized 1:1 to receive 40 mg of cabozantinib daily and 240 mg of nivolumab every 2 weeks or 50 mg of sunitinib daily on a 4 week/2 week off schedule. The primary endpoint for the trial is PFS and the secondary endpoint is OS.
HCC - Checkmate 040
CheckMate 040 is a phase 1/2 trial evaluating treatment regimens including cabozantinib in combination with nivolumab and in combination with both nivolumab and ipilimumab versus sorafenib in patients with previously treated and previously untreated advanced HCC. The protocol for the trial aims to enroll approximately 30 patients each to cohorts that will receive either 40 mg of cabozantinib daily and 3 mg of nivolumab every two weeks or 40 mg of cabozantinib daily, 3 mg of nivolumab every two weeks, and 1 mg ipilimumab every 3 weeks for a total of 4 administrations. The primary objectives for the cohorts are safety and tolerability, ORR and duration of response, or DOR, and the secondary objectives include time to progression, PFS and OS.
Combination Study with Roche - Locally Advanced or Metastatic Solid Tumors - Combination Study
In February 2017, we entered into a master clinical supply agreement with Roche
We are also planning for the purpose of evaluating cabozantinib and atezolizumab in locally advanced or metastatic solid tumors. Pursuant to initiatethe terms of this agreement with Roche, in June 2017, we initiated a phase 1b dose escalation study that will evaluateis evaluating the safety and tolerability of cabozantinib in combination with Roche’s atezolizumab in patients with locally advanced or metastatic solid tumors. Based on the dose-escalation results,We are the trial hassponsor, and Roche is providing atezolizumab free of charge.
The study is divided into two parts: a dose-escalation phase and an expansion cohort phase. The dose-escalation phase of the potentialtrial is enrolling up to 36 patients either with advanced RCC with or without prior systemic therapy or with inoperable, locally advanced, metastatic or recurrent UC (including renal, pelvis, ureter, urinary bladder and urethra) after prior platinum-based therapy. The primary objective is to determine the optimal dose and schedule of daily oral administration of cabozantinib when given in combination with atezolizumab to inform the trial’s subsequent expansion stage. Cabozantinib doses of 40 mg daily and 60 mg daily are being evaluated. All patients will receive the standard atezolizumab dosing regimen of 1200 mg infusion once every 3 weeks.
In January 2018, we amended the protocol to add four new expansion cohorts to the trial, which will now also include patients with NSCLC and CRPC, in addition to previously included patients with RCC and UC. The primary objective in the expansion stage of this trial remains to determine the ORR in each cohort. Once the recommended dose and schedule are determined, which is anticipated to occur in the first half of 2018, the trial will begin to enroll the eight expansion cohorts, which are as follows:
patients with advanced non-squamous NSCLC without a defined tumor genetic alteration (EGFR, ALK, ROS1, or BRAF) who have not received prior therapy with an immune checkpoint inhibitor;
patients with NSCLC without a defined tumor genetic alteration who have progressed following treatment with an immune checkpoint inhibitor;
patients with UC who have progressed following treatment with an immune checkpoint inhibitor;
patients with CRPC who have previously received enzalutamide and/or abiraterone acetate and experienced radiographic disease progression in soft tissue;
patients with RCC with clear cell histology who have not had prior systemic anticancer therapy;
patients with UC who have progressed on or after platinum-containing chemotherapy;
patients with UC who are ineligible for cisplatin-based chemotherapy and have not received prior systemic chemotherapy for inoperable, locally advanced or metastatic disease; and
patients with UC who are eligible for cisplatin-based chemotherapy and have not received prior systemic chemotherapy for inoperable, locally advanced or metastatic disease.
Each expansion cohort will initially enroll approximately 30 patients, although the cohorts of patients with UC or NSCLC who have been previously treated with an immune checkpoint inhibitor may enroll up to four expansion cohorts, including80 each, for a cohorttotal of patients with previously untreated advanced clear cell RCC and three cohorts of urothelial carcinoma, namely platinum eligible first-line patients, first or second-line platinum ineligible patients and patients previously treated with platinum-containing chemotherapy. Enrollment for this trial is scheduledup to begin mid-year 2017. We will be the sponsor of the trial, and Roche will provide atezolizumab.
340 patients.
Trials Conducted through our CRADA with NCI-CTEP and our IST Program
In October 2011, we entered into a CRADA with NCI-CTEP for the clinical development of cabozantinib. Through our CRADA with NCI-CTEP and our IST program we have been able to expand the cabozantinib development program dramatically while avoiding over-burdening our internal development resources. Our CRADA reflects a major commitment by NCI-CTEP to support the broad exploration of cabozantinib’s potential in a wide variety of cancers, each representing a substantial unmet medical need. Through this mechanism, NCI-CTEP provides funding for as many as 20 active clinical trials of cabozantinib each year for a five-year period. The term of the CRADA was extended in October 2016 for an additional five-year period through October 2021, provided that both parties maintain the right to terminate the CRADA for any reason upon sixty days’ notice, for an uncured material breach upon thirty days’ notice and immediately for safety concerns. IND applications for trials under the CRADA are held by NCI-CTEP. NCI-CTEP also retains rights to any inventions made in whole or in part by NCI-CTEP investigators. However, for inventions that claim the use and/or the composition of cabozantinib, we have an automatic option to elect a worldwide, non-exclusive license to cabozantinib inventions for commercial purposes, with the right to sublicense to affiliates or collaborators working on our behalf, as well as an additional, separate option to negotiate an exclusive license to cabozantinib inventions. Further, before any trial proposed under the CRADA may commence, the protocol is subject to our review and approval, and the satisfaction of certain other conditions. We believe our CRADA with NCI-CTEP has and will enable us to continue to expand the cabozantinib development program broadly in a cost-efficient manner.
RCC - CABOSUN
In October 2016, we announced detailed results from CABOSUN, a randomized phase 2 trial of cabozantinib in patients with previously untreated advanced RCC with intermediate- or poor-risk disease conducted by The Alliance under our CRADA with NCI-CTEP. CABOSUN was a randomized, open-label, active-controlled phase 2 trial that enrolled 157 patients with advanced RCC. Patients were randomized 1:1 to receive cabozantinib (60 mg once daily) or sunitinib (50 mg once daily, 4 weeks on followed by 2 weeks off). The primary endpoint was PFS. Secondary endpoints included OS and ORR. Eligible patients were required to have locally advanced or metastatic clear-cell RCC, ECOG performance status 0-2, and had to be intermediate or poor risk per the International Metastatic Renal Cell Carcinoma Database Consortium, or IMDC, criteria (Heng, Journal of Clinical Oncology, 2009).
CABOSUN met its primary endpoint, demonstrating a statistically significant and clinically meaningful improvement in PFS compared with sunitinib. With a median follow-up of 21.4 months, cabozantinib demonstrated a 34 percent reduction in the rate of disease progression or death [HR 0.66, 95% CI (0.46-0.95), one-sided P=0.012]. The median PFS for cabozantinib was 8.2 months versus 5.6 months for sunitinib, corresponding to a 2.6 months (46 percent) improvement favoring cabozantinib over sunitinib. PFS benefits were independent of the IMDC risk group (intermediate or poor risk) and presence or absence of bone metastases at baseline. The results for sunitinib were in line with a previously published retrospective analysis of 1,174 intermediate- and poor-risk RCC patients from the IMDC database, which documented a median PFS of 5.6 months with a first-line targeted therapy, mainly sunitinib, in this patient population.ORR was also significantly improved, at 46 percent (95% CI 34% - 57%) for cabozantinib versus 18 percent (95% CI 10% to 28%) for sunitinib. With a median follow-up of 22.8 months, median OS was 30.3 months for cabozantinib versus 21.8 months for sunitinib [HR 0.80, 95% CI (0.50 - 1.26)]. The most common grade 3 or 4 adverse events with cabozantinib were hypertension (28%), diarrhea (10%), palmar-plantar erythrodysesthesia (8%), and fatigue (6%); with sunitinib, they were hypertension (22%), fatigue (15%), diarrhea (11%), and thrombocytopenia (11%). Grade 5 adverse events occurred in four patients (5%) in the cabozantinib group and five patients (7%) in the sunitinib group. Treatment-related grade 5 events occurred in three patients in the cabozantinib group (acute kidney injury, sepsis, and jejunal perforation) and three patients in the sunitinib group (sepsis, respiratory failure, and vascular disorders). The rate of treatment discontinuation because of adverse events was 20% (n = 16) and 21% (n = 16) in the cabozantinib and sunitinib groups, respectively.
Based on these results, we plan to submit a sNDA for cabozantinib as a treatment of first-line advanced RCC, and are working with The Alliance so that we can develop the appropriate regulatory filings.
Advanced Genitourinary Tumors
Results from a phase 1 trial ofevaluating cabozantinib in combination with nivolumab in patients with previously treated genitourinary tumors being conducted under our CRADA with NCI-CTEP were first presented at the ESMO 2016 Congress in October 2016 and most recently updated at the 20172018 ASCO Genitourinary Cancers Symposium in February 2017.
Between July 22, 2015 and December 31, 2016, 48 patients were accrued with previously treated metastatic urothelial carcinoma, or mUC, (n=19), urachal adenocarcinoma (n=4), squamous cell carcinoma2018. The primary endpoint of the bladdertrial is to determine the dose-limiting toxicity and recommended doses of the doublet and triplet combinations for later stage clinical studies. The secondary endpoint is clinical response rate as assessed by RECIST 1.1.
The updated data reported results from 78 patients treated with either cabozantinib and nivolumab with or urethra (n=2), germ cell tumor (n=4), castration-resistant prostate cancer (n=9), RCC (n=4), trophoblastic tumor (n=1), sertoli cell tumor (n=1) or penile squamous cell carcinoma (n=4) and treated in two parts.without ipilimumab. The initial part of the study determined the recommended dose for each treatment at four dose levels. In Part I, 30all, 49 patients were treated with the doublet combination of cabozantinib and nivolumab at four dose levels. In Part II, 18and 29 patients were treated with the triplet combination of cabozantinib, nivolumab and ipilimumabipilimumab. Nineteen patients with metastatic UC were evaluable for response with a median follow up of 15.7 months. Thirteen patients with previously treated metastatic RCC were evaluable for response.
For the metastatic UC cohort, the ORR across all treatment groups was 42% (2 complete responses, or CRs, and 6 PRs of 19 patients) and the disease control rate, or DCR, (DCR = CR, PR and SD) was 84%. Seven of eight (88%) metastatic UC patients with an objective response had not progressed at three dose levels.
the time of the data cut-off. Median PFS in this patient population was 12.8 months and the OS rate at 12 months was 77%. Among the 4313 patients with metastatic RCC who were evaluable for response, ORR was 54 percent (7 PRs of 13 patients) and the DCR was 100 percent. In the overall study the ORR for all tumor typesin 64 evaluable patients was 30% (38%36% (3 CRs and 20 PRs) with a median DOR of 24 months. 78 patients were included in the safety analysis. Expected immune-related events including colitis, meningitis, hepatitis, pneumonitis, and endocrine disorders occurred at a low frequency. No dose-limiting toxicity was observed in the study. Based on general tolerability, the
recommended cabozantinib dose for the doublet dosing scheduleexpanded dose cohorts and 18% for the triplet dosing schedule)future late stage evaluation has been determined as cabozantinib at 40 mg daily oral dose combined with a 7% complete response,nivolumab at 3 mg/kg every 2 weeks and ipilimumab at 1 mg/kg every 3 weeks for 4 doses.
Treatment-related grade 3 or CR, rate and a 23% PR rate. Stable disease, or SD, was reported in 56% of patients. The ORR for patients with mUC was 38%, and 2 of 16 patients achieved a CR, while 2 patients with squamous cell carcinoma of the bladder had objective responses (1 CR and 1 PR). In the mUC cohort, 15 of 16 patients had a CR, PR or SD as their best response.
Grade 3 adverse events4 AEs (>5% of patients) observed in the doublet combination included neutropenia (17%lipase increased (16%), hypophosphatemia (13%(14%), neutrophil count decreased (12%), hypertension (10%), lipase increase (7%), fatigue (7%), diarrhea (7%(8%) and dehydration (7%fatigue (6%). Grade 3 adverse eventsor 4 AEs (>5% of patients) observed in the triplet combination included hypertension (17%hypophosphatemia (21%), hypophosphatemia (17%lymphocyte count decreased (14%), ALT increased (14%), lipase increased (14%), AST increased (10%), hypertension (10%), diarrhea (10%), hypokalemia (10%), fatigue (13%(7%), hyponatremia (13%), lipase increase (13%), nausea (13%(7%) and rash (6%amylase increased (7%). Grade 3 or 4 immune-related AEs for the doublet combination included colitis, aseptic meningitis, and hepatitis (one patient each) and for the triplet combination colitis (one patient) and hepatitis (two patients). There were limited numbers of grade 4 adverse events (10% including thrombocytopenia and lipase increase in the doublet combination, and 6% (lipase increase) in the triplet combination), and no grade 5 adverse events observed in either part of the trial.
The recommended doses for the ongoing expansion cohorts were determined to be cabozantinib 40 mg daily plus nivolumab 3 mg/kg once every 2 weeks for the doublet and cabozantinib 40 mg daily, nivolumab 3 mg/kg plus ipilimumab 1 mg/kg every 3 weeks for 4 doses, then nivolumab 3 mg/kg every 2 weeks for the triplet.treatment-related deaths.
We believe these promising early stage clinical findings support further investigation of cabozantinib in combination with nivolumab and other immune checkpoint inhibitors in a number of genitourinary tumors. Based on these phase 1 trial results, we initiated CheckMate 9ER, a phase 3 pivotal trial in patients with previously untreated, advanced or metastatic RCC, which, pursuant to its amended protocol, is evaluating the combination of cabozantinib with BMS’s nivolumab.
Non-Small Cell Lung Cancer (NSCLC)NSCLC
In November 2014, we announced positive top-line results from a randomized phase 2 trial of cabozantinib and erlotinib alone or in combination as second- or third-line therapy in patients with stage IV EGFR wild-type NSCLC. This trial (Study E1512) was sponsored through our CRADA with NCI-CTEP and was conducted by the ECOG-ACRIN Cancer Research Group. It enrolled 125 patients with EGFR wild-type metastatic NSCLC who had received at least one or two prior chemotherapy regimens; of these, 111 patients were evaluable for efficacy and 118 patients were evaluable for safety. Patients were randomized 1:1:1 to receive erlotinib (150 mg daily), cabozantinib (60 mg daily), or the combination of erlotinib plus cabozantinib (150 mg plus 40 mg daily).
The positive results from this trial were reported at the ASCO 2015 Annual Meeting on May 31, 2015, and subsequently published online in Lancet Oncology on November 4, 2016. The study met its primary endpoint, demonstrating significant increases in PFS for cabozantinib and the combination of cabozantinib plus erlotinib when individually compared to the erlotinib arm. The median PFS for the combination of cabozantinib and erlotinib was 4.7 months versus 1.8 months for erlotinib alone, a more than two-fold increase. The HR was 0.37 (80% CI 0.25-0.53, p=0.0003), which corresponds to a 63% reduction in the rate of disease worsening. The median PFS for cabozantinib monotherapy was 4.3 months versus 1.8 months for erlotinib alone, and the HR was 0.39 (80% CI 0.27-0.55, p=0.0003), corresponding to a 61% reduction in the rate of disease worsening. OS was a secondary endpoint of the trial. Median OS was 13.3 months for the combination of cabozantinib and erlotinib, and 9.2 months for cabozantinib alone, as compared to 5.1 months for erlotinib alone. When individually compared to the erlotinib arm, HR for OS was 0.51 (p=0.011), corresponding to a 49% reduction in the rate of death for the combination of cabozantinib plus erlotinib, and 0.68 (p=0.071), corresponding to a 32% reduction in the rate of death for the cabozantinib monotherapy arm. ORR, another secondary endpoint, was 3% for the combination arm (1 PR), 11% (4 PRs) for the cabozantinib monotherapy arm, and 3% (1 PR) for the erlotinib arm. SD as a best response was observed in 46% of patients in the combination arm and 50% in the cabozantinib monotherapy arm, compared with 16% in the erlotinib arm. One hundred and nineteen119 patients were evaluable for safety. The most common treatment-related adverse events, or AEs grade 3 or higher, for the combination arm (n=39) were: diarrhea (28%), fatigue (15%), and anorexia (8%). For the cabozantinib monotherapy arm, the most common AEs, grade 3 or higher, were: hypertension (25%), fatigue (15%), mucositis (10%), diarrhea (8%), and thromboembolic events (8%). The most common AEs, grade 3 or higher, for the erlotinib arm were fatigue (13%) and diarrhea (8%). Overall, the rate of grade 3 or higher adverse eventsAEs was 72% in the combination arm, 70% in the cabozantinib monotherapy arm, and 33% in the erlotinib arm.
Informed by these clinical results, we are working with clinical collaborators to explore cabozantinib’s further development in NSCLC, including potential combination approaches with immuno-oncology agents.
immune checkpoint inhibitors, such as within one of the expansion cohorts of our phase 1b study with Roche evaluating the combination of cabozantinib and atezolizumab.
Other Cancer Indications
OtherThere are 31 ongoing and 29 planned externally sponsored trials evaluating the clinical trials approved to date under the CRADA include the following:
Phase 2 or phase 1/2 clinical trials to help prioritize future pivotal trialsand therapeutic potential of cabozantinib, in disease settings where there is substantial unmet medical needincluding those administered through our CRADA with NCI-CTEP and in which cabozantinib has previously demonstrated clinical activity, consisting of randomized phase 2 clinical trials in ocular melanoma, prostate cancer and second/third line EGFR-wt NSCLC;
Additional phase 2 or phase 1/2 clinical trials to explore cabozantinib’s potential utility in other tumor types, including endometrial cancer, bladder cancer, sarcomas, NSCLC (EGFR-activating mutation positive), differentiated thyroid cancer, triple-negative breast cancer, hormone-receptor-positive breast cancer, cutaneous melanoma (molecularly selected patients), pancreatic neuroendocrine and carcinoid tumors. Positive results in these indications could lead to further study in randomized phase 2 or phase 3 clinical trials; and
Additional phase 1 clinical trials to further evaluate cabozantinib, consisting of a combination trial of cabozantinib and immuno-oncology agents (nivolumab with or without ipilumumab) in genitourinary tumors,
a trial to evaluate the safety and pharmacokinetics of cabozantinib in pediatric patients, and a trial of cabozantinib in patients with advanced solid tumors and human immunodeficiency virus.
In addition to supporting the further development of cabozantinib, our medical affairs department receives and responds to unsolicited physician inquiries with appropriate scientific and medical information, supports scientific presentations and publications, and oversees the IST process.program. Like our CRADA with NCI-CTEP, our IST program helps us to continue to evaluate cabozantinib across a broad range of tumor types,types.
These externally sponsored trials include signal seeking studies of single-agent cabozantinib, novel combinations, and randomized trials. The monotherapy trials are focused on solid tumors including NSCLC, bladder cancer, melanoma, breast cancer, differentiated thyroidgenitourinary neoplasms, gastrointestinal malignancies, lung cancer and others,a variety of less common tumor types. The combination studies include trials combining cabozantinib with several different immune checkpoint inhibitors, as well as studies adding cabozantinib to support further prioritizationmonoclonal antibodies and small molecules which target specific cellular pathways. Randomized trials within the CRADA include a phase 3 study in neuroendocrine tumors and phase 2 trials in both endometrial cancer in combination with checkpoint inhibitors and in prostate cancer in combination with docetaxel.
A complete listing of our clinical and commercial options. Currently there are 25 active IST or CTEPall ongoing cabozantinib trials and 16 trials are in advanced planning stage.can be found at www.ClinicalTrials.gov.
Cobimetinib Development Program
In addition to the advances made under our cabozantinib development program, significant progress continues to be made with respect to the clinical development, regulatory status and commercial potential of cobimetinib. Cobimetinib is a potent, highly selectivereversible inhibitor of MEK, a kinase that is a component of the RAS/RAF/MEK/ERK pathway. This pathway mediates signaling downstream of growth factor receptors, and is prominently activated in a wide variety of human tumors. Cobimetinib is being evaluated in a broad development program consisting of more than 50 clinical trials by Genentech.Genentech or through Genentech’s investigator sponsored trial program.
A select summary table of Genentech’s ongoing phase 3 cobimetinib development activities, all of which are sponsored by Roche/Genentech, is provided below:
|
| | |
| Indication | Combination Regimen | Status Update |
| Metastatic or Unresectable Locally Advanced Melanoma |
| BRAF mutation-positive | + vemurafenib | Approved in US,U.S., EU and other territories |
| First-line BRAF mutation-positive | + atezolizumab + vemurafenib | Phase 3 (IMspire150 TRILOGY)(IMspire150) |
| First-line BRAF wild-type | + atezolizumab | Phase 3 (IMspire170) planned for 2017 |
| Colorectal Cancer |
| Third-line advanced or metastatic disease | + atezolizumab | Phase 3 (IMblaze370) |
Second/third-line metastatic disease | + atezolizumab + bevacizumab | Phase 1 |
Breast Cancer |
First-line metastatic triple negative disease | + taxane +/- atezolizumab | Phase 1/2(COLET)
; data expected in H1 2018 (per Genentech guidance) |
Melanoma - coBRIM
In July 2014, we announced positive top-line results from coBRIM, the phase 3 pivotal trial conducted by Genentech evaluating cobimetinib in combination with vemurafenib in previously untreated patients with unresectable locally advanced or metastatic melanoma harboring a BRAF V600E or V600K mutation. Data were subsequently presented at European Society for Medical OncologyESMO in September 2014. The trial met its primary endpoint of demonstrating a statistically significant increase in investigator-determined PFS. The median PFS was 9.9 months for the combination of cobimetinib and vemurafenib versus 6.2 months for vemurafenib alone (HR=0.51,(HR 0.51; 95 percent CI 0.39-0.68; p<0.0001), demonstrating the combination reduced the risk of the disease worsening by half (49 percent). The median PFS as established by an IRRC, a secondary endpoint, was 11.3 months for the combination arm compared to 6.0 months for the control arm (HR=0.60,(HR 0.60; 95 percent CI 0.45-0.79; p=0.0003). ORR, another secondary endpoint, was 68% for the combination versus 45% for vemurafenib alone (p<0.0001). Updated results for PFS and ORR from coBRIM were presented at the ASCO 2015 Annual Meeting and showed a median PFS of 12.3 months for vemurafenib plus cobimetinib versus 7.2 months for vemurafenib alone (HR=0.58,(HR 0.58; 95 percent CI 0.46-0.72) and an ORR of 70% for the combination of vemurafenib and cobimetinib versus 50% for vemurafenib alone. In November 2015, we announced that the coBRIM trial also met its OS secondary endpoint, demonstrating a statistically significant increase in OS for the combination of cobimetinib and vemurafenib compared to vemurafenib monotherapy. The median OS was 22.3 months for the combination of cobimetinib and vemurafenib versus 17.4 months for vemurafenib alone, corresponding to a 30% reduction in the rate of death for the combination as compared to vemurafenib alone (HR=0.70,(HR 0.70; 95 percent CI 0.55-0.90,0.55-0.90; p= 0.005). The safety profile of the
combination was consistent with that observed in a previous study. The most common adverse drug reactions for COTELLIC occurring in at least 20% of patients were diarrhea, photosensitivity reaction, nausea, pyrexia, and vomiting.
CoBRIM served as the basis for the regulatory approval of CotellicCOTELLIC in combination with Zelboraf as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma in the United States,U.S., Switzerland, the European Union,EU, Canada, Australia, Brazil and other countries.
CRC - IMblaze370
In June 2016, Genentech initiated IMblaze370, a phase 3 pivotal trial evaluating the combination of cobimetinib and atezolizumab, an anti-PD-L1 antibody, or atezolizumab alone versus regorafenib, in unresectable locally advanced or metastatic CRC patients who have received at least two lines of prior cytotoxic chemotherapy. IMblaze370 was informed by results from Genentech’s ongoing phase 1b trial of the same combination in advanced CRC.
The trial is designed to enroll 360 patients who have received at least two prior chemotherapies in the metastatic disease setting. Enrollment for IMblaze370 was completed in the first quarter of 2017, and Genentech has announced that top-line results for the trial are expected during the first half of 2018. The primary endpoint of the trial is OS.
Melanoma - IMspire150TRILOGY and IMspire170
In January 2017, Genentech initiated IMspire150,TRILOGY, a phase 3 pivotal trial evaluating the combination of cobimetinib, vemurafenib and atezolizumab vs. cobimetinib plus vemurafenib in previously untreated BRAF V600 mutation positive patients with metastatic or unresectable locally advanced melanoma. This trial was based on the results of Genentech’s ongoing phase 1b trial in the same patient population. The trial is designed to enroll 500 patients, and the primary endpoint is PFS.
Melanoma - IMspire170
In October 2017, Genentech has also plans to initiateinitiated IMspire170, a phase 3 trial comparing cobimetinib plus atezolizumab to pembrolizumab in previously untreated BRAF WT patients with metastatic or unresectable locally advanced melanoma in the second quarter of 2017.melanoma. IMspire170 was based on the results of Genentech’s ongoing phase 1b trial in the same patient population. The trial is designed to enroll 500 patients with primary endpoints of PFS and OS.
OS, and the first patient was enrolled in December 2017.
Other Cancer Indications
In addition to coBRIM, IMblaze370, IMspire150 and TRILOGY,IMspire170, additional earlier-stage clinical trials are ongoing studying the combination of cobimetinib with a variety of agents in multiple tumor types. These include:
Thethe combination of cobimetinib and vemuarfenibvemurafenib in additional melanoma patient populations and settings;
Aa phase 2 trial of cobimetinib in combination with taxanes, with or without atezolizumab in first linefirst-line triple negative breast cancer (COLET);
Phase 12 studies of cobimetinib in combination with atezolizumab in RCC, head and neck squamous cell carcinoma, UC and hormone receptor positive, HER2 negative breast cancer;
Phase 1/2 studies of cobimetinib in combination with atezolizumab in melanoma and NSCLC, in combination with vemurafenib and atezolizumab in melanoma, and in combination with venetoclax in relapsed or refractory acute myeloid leukemia;leukemia and multiple myeloma;
Aa phase 1b study evaluating the safety, tolerability and pharmacokinetics of cobimetinib in combination with atezolizumab and bevacizumab in patients with metastatic CRC.CRC; and
a phase 1b/2 study of cobimetinib in combination with atezolizumab (one arm of a randomized umbrella study) in metastatic pancreatic ductal adenocarcinoma.
A complete listing of all ongoing cobimetinib trials can be found at www.ClinicalTrials.gov.
XL888 Development Program
XL888 is an Exelixis-discovered highly potent small molecule oral inhibitor of Heat Shock Protein 90, (HSP90), a molecular chaperone protein that affects the activity and stability of a range of key regulatory proteins, including kinases such as BRAF, MET and VEGFR2, which are implicated in cancer cell proliferation and survival. After completing phase 1 testing of the compound, we deprioritized XL888 and our other pipeline assets to focus our limited resourcesBased on our lead compound, cabozantinib. Investigatorsclinical data, investigators at the H. Lee Moffitt Cancer Center went on to conduct additional preclinical work showing activity of XL888 in vemurafenib-resistant melanoma models, the results of which provided the rationale for the initiation ofinitiated an investigator-sponsored phase 1 trial, conducted by investigators at the Moffitt Cancer Center.
In November 2014, we announced positive preliminary results from this phase 1 trial, which evaluatedevaluating the safety and activity of XL888 in combination with vemurafenib in patients with unresectable stage III/IV BRAF V600 mutation-
mutation-positive melanoma. In November 2014, we announced positive melanoma.preliminary results from this phase 1 trial. The primary endpoint of the trial was to determine the safety and tolerability of the combination, including determination of a maximum tolerated dose, or MTD, for XL888. Secondary endpoints included ORR (RECIST-1 criteria), estimates of PFS and OS, and analysis of pharmacodynamic biomarkers. The trial had enrolled fifteen subjects, and at the time of data cut-off, objective tumor regression was observed in 11 of 12 response-evaluable patients (two CRs and nine PRs), for an ORR of 92%. Safety data for the combination identified tolerable dose levels of XL888 with full dose vemurafenib.
Based on these results, as well as findings from coBRIM, the phase 3 pivotal trial of cobimetinib, an Exelixis-discovered MEK inhibitor, and vemurafenib in previously untreated metastatic melanoma patients with a BRAF V600E or V600K mutation, investigators at the Moffitt Cancer Center initiated a phase 1b IST of the triple combination of vemurafenib, cobimetinib, and XL888 in a similar patient population during the second quarter of 2016.
Drug Discovery and Business Development Programs
We are actively focused on expanding our pipeline through internal drug discovery and targeted business development activities.
Drug Discovery
In 2016, we resumed internal drug discovery efforts with the goal of identifying novel and promising therapeutic candidates to advance into clinical trials. From 2000 until 2012, we had an active Discovery group that advanced 22 compounds to the IND stage, either independently or with collaboration partners, including cabozantinib and cobimetinib. We built significant infrastructure, including a library of 4.6 million compounds, and gained extensive experience in the identification and optimization of drug candidates against multiple target classes for oncology, inflammation and metabolic diseases.
Our new discovery organization is leveraging that history in a focused and measured manner. We are concentrating our in-house work on the most demanding aspects of lead optimization and use contract research organizations to support more routine activities, thereby minimizing our internal footprint while still maintaining an agile, competitive approach. We are and will continue to be judicious in the selection of targets, focusing on those with robust preclinical validation datasets. We anticipate that our experience and ability to identify high quality lead compounds through use of our propriety compound library will permit us to prosecute competitive and productive discovery programs in areas of high potential.
Business Development
Building upon our existing collaborative relationships, we are focused on entering into additional partnerships or licensing agreements for attractive oncology assets that would augment our development pipeline thereby utilizing our established and validated clinical development infrastructure. In addition we are seeking external partnerships around assets and new technologies that complement our in house drug discovery efforts. These partnerships are aimed at expanding our ability to discover, develop and commercialize novel therapies with the aim of providing new treatment options for cancer patients and their physicians.
In January 2018, we entered into an exclusive collaboration and license agreement with StemSynergy Therapeutics, Inc. for the discovery and development of novel oncology compounds targeting Casein Kinase 1 alpha, or CK1α, a component of the Wnt signaling pathway implicated in key oncogenic processes. Activation of β-catenin, a key downstream component of the pathway, is increased in multiple tumors, including a majority of colorectal cancers, where mutations in the APC gene that result in β-catenin stabilization are prevalent. Compounds targeting CK1α have also been shown to induce degradation of β-catenin and pygopus, another member of the pathway, in preclinical CRC models, and to inhibit the growth of tumors. Importantly, their GI-sparing qualities may help overcome limitations of other approaches targeting the Wnt pathway. Under the terms of the agreement, we will partner with StemSynergy to conduct preclinical and clinical studies with compounds targeting CK1α.
Collaborations
We have established collaborations with Ipsen and Takeda for cabozantinib, Genentech for cobimetinib, and other collaborations with leading pharmaceutical companies including, Daiichi Sankyo Company Limited, or Daiichi Sankyo, Merck (known as MSD outside of the United StatesU.S. and Canada), BMS, and Sanofi for compounds and programs in our portfolio. Under each of our collaborations, we are entitled to receive milestones and royalties or, in the case of cobimetinib, royalties from sales outside the U.S. and a share of profits (or losses) from commercialization.commercialization in the U.S. For information on our collaboration agreements focused solely on the clinical development of cabozantinib in combination with immune checkpoint inhibitors, see “Cabozantinib Development Program - Trials Conducted Under our Clinical Collaboration Agreements.”
Cabozantinib Collaborations
Ipsen Collaboration
In February 2016, we entered into a collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the collaboration agreement, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the United States,U.S., Canada and Japan. The collaboration agreement was subsequently amended in December 2016 to include commercialization rights in Canada. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications. The parties’ efforts are governed through a joint steering committee and appropriate subcommittees established to guide and oversee the collaboration’s operation and strategic direction; provided, however, that we retain final decision-making authority with respect to cabozantinib’s ongoing development.
In consideration for the exclusive license and other rights contained in the collaboration agreement, including commercialization rights in Canada, Ipsen paid us anaggregate upfront paymentpayments of $200.0$210.0 million. As of December 31, 2017, we achieved aggregate milestone payments of $125.0 million in March 2016. Additionally, as a resultrelated to regulatory and commercial progress by Ipsen since the inception of the amendment to the collaboration agreement, we received a $10.0 million upfront payment from Ipsen in December 2016. As a result of the approval of cabozantinib in second-line RCC by the EC in September 2016, we received a $60.0 million milestone payment in November 2016.agreement. We are also eligible to receive additionalfuture development and regulatory milestone payments, totaling up to $254.0an additional $209.0 million, including milestone payments of $10.0 million and $40.0 million upon theEMA filing and the approval of cabozantinib in second-lineas a treatment for patients with previously treated advanced HCC with the European Medicines Agency, or EMA, and additional milestone payments for other future indications and/or jurisdictions. In the fourth quarter of 2016 we earned two $10.0 million milestone payments for the first commercial sales of CABOMETYX in Germany and the United Kingdom. The collaboration agreement also provides that we will be eligible to receive contingent payments of up to $544.7$546.0 million associated with the achievement of specified levels of Ipsen sales to end users. We will also receive royalties on net sales of cabozantinib by Ipsen outside of the United StatesU.S. and Japan. We will receiveExcluding Ipsen sales in Canada, we received a 2% royalty on the initialfirst $50.0 million of net sales, which was achieved in the fourth quarter of 2017, and are entitled to receive a 12% royalty on the next $100.0 million of net sales. After thesales, and following this initial $150.0 million of net sales, we willare then entitled to receive a tiered royalty of 22% to 26% on annual net sales; thesesales. These tiers will reset each calendar year. In Canada, we are entitled to receive a tiered royalty of 22% on the first CAD$30.0 million of annual net sales and a tiered royalty thereafter to 26% on annual net sales; these tiers will also reset each calendar year. As of December 31, 2017, we have earned royalties of $4.0 million on net sales of cabozantinib by Ipsen since the inception of the collaboration agreement.
We are primarily responsible for funding cabozantinib relatedcabozantinib-related development costs for existing trials;those trials in existence at the time we entered into the collaboration agreement with Ipsen; global development costs for potential futureadditional trials are shared between the parties, provided Ipsen opts in to participate in such trials, with Ipsen to reimbursereimbursing us for 35% of such costs.costs, provided Ipsen chooses to opt into such trials. In accordance with the collaboration agreement, Ipsen has opted into and is co-funding: CheckMate 9ER, subject to participate in and co-fund in accordance with our collaboration agreementre-confirmation following the future first line RCC phase 3protocol amendment; CheckMate 040 (except for the triplet arm of the study evaluating cabozantinib in combination with the immune checkpoint inhibitors nivolumab and ipilimumab that we are planning in collaboration with BMS, as well asipilimumab); and the phase 1b trial evaluating cabozantinib in combination with atezolizumab in genitorurinary malignancies that we are planning to initiate mid-year. locally advanced or metastatic solid tumors being conducted in collaboration with Roche.
We remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. As part ofIn connection with the collaboration agreement, we entered into a supply agreement that provides that through the end of the second quarter of 2018,with Ipsen in February 2016, which, pursuant to its amended terms, effective October 2017, we will supply finished, labeled drug product to Ipsen for distribution in the territories outside of the United States and Japan. From the end of the second quarter of 2018 forward, we will continue to manufacture cabozantinib tablets and capsules while Ipsen will be responsible for packaging and labeling the products in territories where they have been approved outside of the United StatesU.S. and Japan, as applicable.
indefinitely.
Unless terminated earlier, the collaboration agreement has a term that continues, on a product-by-product and country-by-country basis, until the latter of (i) the expiration of patent claims related to cabozantinib, (ii) the expiration of regulatory exclusivity covering cabozantinib or (iii) ten years after the first commercial sale of cabozantinib, other than COMETRIQ. The supply agreement will continue in effect until expiration or termination of the collaboration agreement. The collaboration agreement may be terminated for cause by either party based on uncured material breach of either the collaboration agreement or the supply agreement by the other party, bankruptcy of the other party or for safety reasons. We may terminate the collaboration agreement if Ipsen challenges or opposes any patent covered by the collaboration agreement. Ipsen may terminate the collaboration agreement if the FDA or EMA orders or requires substantially all cabozantinib clinical trials to be terminated or if the EMA refuses to approve our marketing authorization application, or MAA, for cabozantinib in advanced RCC in such region.terminated. Ipsen also has the right to terminate the collaboration agreement on a region-by-region basis after the first commercial sale of cabozantinib in advanced RCC in the given region. Upon termination by either party, all licenses granted by us to Ipsen will automatically terminate, and, except in the event of a termination by Ipsen for our material breach, the licenses granted by Ipsen to us shall survive such termination and shall automatically become worldwide, or, if Ipsen terminated only for a particular region, then for the terminated region. Following termination by us for Ipsen’s material breach, or termination by Ipsen without cause or because we undergo a change of control by a party engaged in a competing program, Ipsen is prohibited from competing with us for a period of time.
Takeda Collaboration
In January 2017, we entered into a collaboration and license agreement with Takeda for the commercialization and further clinical development of cabozantinib in Japan. Pursuant to the terms of the collaboration agreement, Takeda has exclusive commercialization rights for currently developedcurrent and potential future cabozantinib indications in Japan. The parties have also agreed to collaborate on the future clinical development of cabozantinib in Japan. The operation and strategic direction of the parties’ efforts arecollaboration is governed through a joint executive committee and appropriate subcommittees established to guide and oversee the collaboration’s operation and strategic direction.subcommittees.
In consideration for the exclusive license and other rights contained in the collaboration agreement, we received a $50.0 million upfront nonrefundable payment from Takeda in February 2017.Takeda. We are eligible to receive development, regulatory and first-salesfirst-sale milestone payments of up to $95.0 million related to second-line RCC, first-line RCC and second-line HCC, as well as additional development, regulatory and first-salesfirst-sale milestones payments for potential future indications. The collaboration agreement also provides that we are eligible to receive pre-specified payments of up to $83.0 million associated with potential sales milestones. We will also receive royalties on net sales of cabozantinib in Japan at an initialJapan. We are entitled to receive a tiered rateroyalty of 15% to 24% on net sales for the firstinitial $300.0 million of cumulative net sales. Thereafter, thesales, and following this initial $300.0 million of net sales, we are then entitled to receive a tiered royalty rate will be adjusted toof 20% to 30% on annual net sales. These tiers will reset each calendar year.
Takeda is responsible for 20% of the costs associated with the global cabozantinib development plan,plan’s current and future trials, provided Takeda opts in to participate ininto such trials, and 100% of costs associated with the cabozantinib development activities that are exclusively for the benefit of Japan. Pursuant to the terms of the collaboration agreement, we remainare responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration. As part of the collaboration, the parties intend to enterand consequently, we entered into a clinical supply agreement covering the manufacture and supply of cabozantinib to Takeda and a quality agreement setting forth in detail the quality assurance arrangements and procedures for our manufacture of cabozantinib.Takeda.
Unless earlier terminated, the collaboration agreement has a term that continues, on a product-by-product basis, until the earlier of (i) two years after first generic entry with respect to such product in Japan or (ii) the later of (A) the expiration of patent claims related to cabozantinib and (B) the expiration of regulatory exclusivity covering cabozantinib in Japan. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. For clarity, Takeda’s failure to achieve specified levels of commercial performance, based upon sales volume and/or promotional effort, during the first six years of the collaboration shallwill constitute a material breach of the collaboration agreement. We may terminate the agreement if Takeda challenges or opposes any patent covered by the collaboration agreement. At any time prior to August 1, 2023, the parties may mutually agree to terminate the collaboration agreement if Japan’s Pharmaceuticals and Medical Devices Agency is unlikely to grant any approval of the marketing authorization application, or MAA, in any cancer indication in Japan. After the commercial launch of cabozantinib in Japan, Takeda may terminate the collaboration agreement upon twelve months’ prior written notice following the third anniversary of the first commercial sale of cabozantinib in Japan. Upon termination by either party, all licenses granted by us to Takeda will automatically terminate, and the licenses granted by Takeda to us shall survive such termination and shall automatically become worldwide.
Cobimetinib Collaboration
In December 2006, we out-licensed the further development and commercialization of cobimetinib to Genentech pursuant to a worldwide collaboration agreement. Genentech paid upfront and milestone payments of $25.0 million in December 2006 and $15.0 million in January 2007 upon signing of the collaboration agreement and with the submission of the IND application for cobimetinib. Under the terms of the collaboration agreement, we were responsible for developing cobimetinib through the determination of the maximum-tolerated dose, or MTD in a phase 1 clinical trial, and Genentech had the option to co-develop cobimetinib, which Genentech could exercise after receipt of certain phase 1 data from us. In March 2008, Genentech exercised its option to co-develop cobimetinib, triggering a payment to us of $3.0 million. Inand in March 2009, we granted to Genentech an exclusive worldwide revenue-bearing license to cobimetinib, at which point Genentech became responsible for completing the phase 1 clinical trial and subsequent clinical development. We received an additional $7.0aggregate upfront and milestone payments of $50.0 million payment in March 2010under our collaboration agreement with Genentech and are not eligible for any additional milestone payments.
On November 10, 2015, the FDA approved cobimetinib, under the brand name COTELLIC, in combination with Zelboraf as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. COTELLIC in combination with Zelboraf has also been approved in Switzerland, the EU, Canada, Australia, Brazil and multiple additional countries for use in the same indication. Prior to the FDA’s approval of COTELLIC, in November 2013, we exercised an option under the collaboration agreement to co-promote COTELLIC in the U.S., which allows for us to provide up to 25% of the total sales force for approved cobimetinib indications in the U.S. Between November 2015 and December 2017, we fielded 25% of the sales force promoting COTELLIC in combination with Zelboraf as a treatment for patients with BRAF mutation-
positive advanced melanoma in the U.S. However, following a recent commercial review, commencing in January 2018, we and Genentech scaled back the personal promotion of COTELLIC in this indication in the U.S. This decision is not indicative of any change in our intention to promote COTELLIC for other therapeutic indications for which it may be approved in the future.
Under the terms of our collaboration agreement, with Genentech for cobimetinib,as amended in July 2017, we are entitled to a share of U.S.in the profits and losses received or incurred in connection with COTELLIC’s commercialization of cobimetinib. Thein the U.S. This profit and loss share has multiple tiers: we are entitled toreceive 50% of profits and losses from the first $200.0 million of U.S. actual sales, decreasing to 30% of profits and losses from U.S. actual sales in excess of $400.0 million. These tiers will reset each calendar year. The revenue for each sale of COTELLIC applied to the profit and loss statement for the collaboration agreement, or the Genentech Collaboration P&L, is calculated using the average of the quarterly net selling prices of COTELLIC and any additional branded Genentech product(s) prescribed with COTELLIC in such sale. U.S. commercialization costs for COTELLIC are then applied to the Genentech Collaboration P&L, subject to reduction based on the number of Genentech products in any given combination including COTELLIC. In addition to our profit share in the U.S., under the terms of the collaboration agreement, we are entitled to low double-digit royalties on ex-U.S. net sales. In November 2013, we exercised an option under the collaboration agreement to co-promote insales of COTELLIC outside the U.S. The FDA approved cobimetinib in the U.S. under the brand name Cotellic on November 10, 2015. Cotellic is indicated in combination with Zelboraf as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. Following FDA approval of Cotellic in November 2015, we began fielding 25% of that product sales force. Cotellic in combination with Zelboraf has also been approved in Switzerland, the European Union, Canada, Australia, Brazil and multiple additional countries for use in the same indication.
We believe that cobimetinib has the potential to provide us with a second significant source of revenue. Our objective, therefore, is and has been to work with Genentech on the execution of the U.S. Cotellic commercial plan in order to maximize the product’s revenue potential. However, we believe Genentech’s pricing of, and cost and revenue allocations for, Cotellic, as determined exclusively by Genentech, have been contrary to the applicable terms of the collaboration agreement. We raised this concern with Genentech, along with other material concerns regarding Genentech’s performance under the collaboration agreement, but were unable to come to resolution on any of these issues. Accordingly, on June 3, 2016, following a 30 day dispute resolution period, we filed a demand for arbitration asserting claims against Genentech related to its clinical development, pricing and commercialization of Cotellic, and cost and revenue allocations in connection with Cotellic’s commercialization in the United States. On July 13, 2016, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest related to the cost allocations under the collaboration agreement. On December 29, 2016, Genentech withdrew its counterclaim against us and stated that it would unilaterally change its approach to allocation of promotional expenses arising from commercialization of the Cotellic plus Zelboraf combination therapy, both retrospectively and prospectively. We believe this revised allocation approach substantially reduced our exposure to costs associated with promotion of the Cotellic plus Zelboraf combination in the United States. Notwithstanding Genentech’s change of approach, other significant issues remain in dispute between the parties. Genentech’s action does not address the claims in our demand for arbitration related to Genentech’s clinical development of cobimetinib, or pricing and promotional costs for Cotellic in the United States, nor does it fully resolve claims over revenue allocation. And, Genentech has not clarified how it intends to allocate promotional costs incurred with respect to the promotion of other combination therapies that include cobimetinib for other indications that will be developed or are in development and may be approved. As a result, we will continue to press our position for the arbitral panel to obtain a just resolution of these claims. The ultimate outcome of the arbitration is difficult to predict.
Unless earlier terminated, the collaboration agreement has a term that continues until the expiration of the last payment obligation with respect to the licensed products under the collaboration. Genentech has the right to terminate the collaboration agreement without cause at any time. If Genentech terminates the collaboration agreement without cause, all licenses that were granted to Genentech under the agreement terminate and revert to us. Additionally, if Genentech terminates the collaboration agreement without cause, or we terminate the collaboration agreement for cause, we would receive, subject to certain conditions, licenses from Genentech to research, develop and commercialize reverted product candidates. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party.
Other Collaborations
Prior to the commercialization of our first product, COMETRIQ, our primary business strategy was focused on the development and out-license of compounds to pharmaceutical and biotechnology companies under collaboration agreements
that allowed us to retain economic participation in compounds and support additional development of our proprietary products. Our collaboration agreements with Daiichi Sankyo, Merck, BMS and Sanofi described below are representative of this historical strategy. We have since evolved and are now a fully-integrated biopharmaceutical company focused on maximizing the clinicalopportunity for our two internally discovered compounds, cabozantinib and commercial potential of CABOMETYX, COMETRIQcobimetinib, to improve care and Cotellic.outcomes for people with cancer around the world. While our historical collaboration agreements described below have the potential to provide meaningful future revenue in the aggregate, we do not expect to receive substantial revenues from these historical collaboration agreements unless and until our partnered compounds enter late-stage clinical development and/or receive marketing approval from the FDA, if ever, when the milestone payments, royalties or other rights and benefits under our historical collaboration agreements become more substantial and material to our business.
With respect to our partnered compounds, other than cabozantinib and cobimetinib, we are eligible to receive potential contingent payments totaling approximately $2.2$1.9 billion in the aggregate on a non-risk adjusted basis, of which 9% are related to clinical development milestones, 42%49% are related to regulatory milestones and 49%42% are related to commercial milestones, all to be achieved by the various collaborators, which may not be paid, if at all, until certain conditions are met. Since we do not control the research, development or commercialization of any of our other partnered compounds that would generate these milestones, we are not able to reasonably estimate when, if at all, any milestone payments or royalties may be payable by our collaborators. In addition, most of the collaborations for our other partnered compounds are at early stages of development. Successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing it is a significantly lengthy and highly uncertain process which entails a significant risk of failure. In addition, business combinations, changes in a collaborator’s business strategy and financial difficulties or other factors could result in a collaborator abandoning or delaying development of a partnered compound. As such, the remaining potential contingent payments associated with our historical collaboration agreements involve a substantial degree of risk to achieve and may never be received. Accordingly, we do not expect, and investors should not assume, that we will receive all of the potential contingent payments described above and it is possible that we may never receive any additional significant milestone or other payments under these historical collaboration agreements.
Daiichi Sankyo
In March 2006, we entered into a collaboration agreement with Daiichi Sankyo for the discovery, development and commercialization of novel therapies targeted against the mineralocorticoid receptor, or MR, a nuclear hormone receptor implicated in a variety of cardiovascular and metabolic diseases. Under the terms of the agreement, we granted to Daiichi Sankyo an exclusive, worldwide license to certain intellectual property primarily relating to compounds that modulate MR, including CS-3150/esaxerenone (a specific rotational isomer of XL550). Daiichi Sankyo is responsible for all further preclinical and clinical development, regulatory, manufacturing and commercialization activities for the compounds and we do not have rights to reacquire such compounds, except as described below.
During the research term, which concluded in November 2007, we jointly identified drug candidates with Daiichi Sankyo for further development. For each product from the collaboration, we are entitled to receive payments upon attainment of pre-specified development, regulatory and commercialization milestones. To date,As of December 31, 2017, we have received an aggregate of $25.5 million in development milestone payments related to CS-3150, an oral, non-steroidal, selective mineralocorticoid receptorMR antagonist including a $15.0 million milestone payment in October 2016 in connection withover there life of the initiation of acollaboration agreement. In September 2017, Daiichi Sankyo reported positive top-line results from the phase 3 pivotal trial of CS-3150/esaxerenone and communicated its intention to evaluate CS-3150 assubmit a treatmentJapanese regulatory application for CS-3150/esaxerenone for an essential hypertension indication in Japanese patients.the first quarter of 2018. We are eligible to receive additional development, regulatory and commercialization milestone payments of up to $130.0 million. In addition, we are also entitled to receive royalties on any sales of certain products commercialized under the collaboration. Daiichi Sankyo may terminate the agreement upon ninety days’ written notice in which case Daiichi Sankyo’s payment obligations would cease, its license relating to compounds that modulate MR would terminate and revert to us and we would receive, subject to certain terms and conditions, licenses from Daiichi Sankyo to research, develop and commercialize compounds that were discovered under the collaboration.
Merck
In December 2011, we entered into an agreement with Merck pursuant to which we granted Merck an exclusive worldwide license to our phosphoinositide-3 kinase-delta, or PI3K-d, program, including XL499 and other related compounds. Pursuant to the terms of the agreement, Merck has sole responsibility to research, develop, and commercialize compounds from our PI3K-d program. In July 2015 we received a $3.0 million milestone payment from Merck in connection with Merck’s selection of a compound from our PI3K-d program to advance into clinical trials and in April 2016, we received a milestone payment of $5.0 million in connection with the initiation of a phase 1 clinical trial for the compound. We will be eligible to receive additional payments associated with the successful achievement of potential development and regulatory
milestones for multiple indications of up to $231.0 million. We will also be eligible to receive payments for combined sales performance milestones of up to $375.0 million and royalties on net-sales of products emerging from the agreement.
Merck may at any time, upon specified prior notice to us, terminate the license. In addition, either party may terminate the agreement for the other party’s uncured material breach. In the event of termination by Merck at will or by us for Merck’s uncured material breach, the license granted to Merck would terminate. In the event of a termination by us for Merck’s uncured material breach, we would receive a royalty-free license from Merck to develop and commercialize certain joint products. In the event of termination by Merck for our uncured material breach, Merck would retain the licenses from us, and we would receive reduced royalties from Merck on commercial sales of products.
Bristol-Myers SquibbBMS - ROR Collaboration Agreement
In October 2010, we entered into a worldwide collaboration with BMS pursuant to which each party granted to the other certain intellectual property licenses to enable the parties to discover, optimize and characterize ROR antagonists that may subsequently be developed and commercialized by BMS. Under the terms of the collaboration agreement, we were responsible for activities related to the discovery, optimization and characterization of the ROR antagonists during the collaborative research period which began on October 8, 2010 and ended on July 8, 2013. Since the end of the collaborative research period, BMS has and will continue to have sole responsibility for any further research, development, manufacture and commercialization of products developed under the collaboration and will bear all costs and expenses associated with those activities.
For each product developed by BMS under the collaboration, we will be eligible to receive payments upon the achievement by BMS of development and regulatory milestones. In FebruaryAs of December 31, 2017, we receivedhave earned aggregate development and regulatory milestones of $12.5 million, including a $2.5 million development milestone payment in February 2017 in connection with the achievement of certain preclinical milestones set forth in the collaboration agreement.agreement and a $10.0 million regulatory milestone payment in October 2017 in connection with BMS’s filing of a Clinical Trial
Authorization in Europe for a first in-human study of an RORγ inverse agonist. We are eligible for additional development and regulatory milestone payment of up to $250.0$240.0 million in the aggregate and commercialization milestones of up to $150.0 million in the aggregate, as well as royalties on commercial net sales, depending on the advancement of any such products.the product candidate and eventual product.
The collaboration agreement was amended and restated in April 2011 in connection with an assignment of patents to a wholly-owned subsidiary. BMS may, at any time, terminate the collaboration agreement upon certain prior notice to us on a product-by-product and country-by-country basis. In addition, either party may terminate the agreement for the other party’s uncured material breach. In the event of termination by BMS at will or by us for BMS’s uncured material breach, the license granted to BMS would terminate, the right to such product would revert to us and we would receive a royalty-bearing license for late-stage reverted compounds and a royalty-free license for early-stage reverted compounds from BMS to develop and commercialize such product in the related country. In the event of termination by BMS for our uncured material breach, BMS would retain the right to such product, subject to continued payment of milestones and royalties.
Bristol-Myers Squibb - LXR Collaboration
In December 2005, we entered into a collaboration agreement with BMS for the discovery, development and commercialization of novel therapies targeted against LXR, a nuclear hormone receptor implicated in a variety of cardiovascular and metabolic disorders. The collaboration agreement became effective in January 2006, at which time we granted BMS an exclusive worldwide license with respect to certain intellectual property primarily relating to compounds that modulate LXR, including BMS-852927 (XL041). During the research term, we jointly identified drug candidates with BMS that were ready for IND-enabling studies. After the selection of a drug candidate for further clinical development by BMS, BMS agreed to be solely responsible for further preclinical development as well as clinical development, regulatory, manufacturing and sales/marketing activities for the selected drug candidate. We do not have rights to reacquire the drug candidates selected by BMS. The research term expired in January 2010 and we transferred the technology to BMS in 2011 to enable it to continue the LXR program. BMS has terminated development of XL041 and we have been advised that BMS is continuing additional preclinical research on the program. The collaboration agreement was amended and restated in April 2011 in connection with an assignment of patents to a wholly-owned subsidiary.
Under the collaboration agreement, BMS is required to pay us contingent amounts associated with development and regulatory milestones of up to $53.0 million per product for up to two products from the collaboration. In addition, we are also entitled to receive payments associated with sales milestones of up to $310.0 million and royalties on sales of any products commercialized under the collaboration.
Sanofi
In May 2009, we entered into a global license agreement with Sanofi for SAR245408 (XL147) and SAR245409 (XL765), leading inhibitors of phosphoinositide-3 kinase, or PI3K, and a broad collaboration for the discovery of inhibitors of PI3K for the treatment of cancer. The license agreement and collaboration agreement became effective on July 7, 2009. Under the license agreement, Sanofi received a worldwide exclusive license to SAR245408 (XL147) and SAR245409 (XL765), which entered into a series of phase 1, phase 1b/2 or phase 2 clinical trials, and has sole responsibility, including funding, for all subsequent clinical, regulatory, commercial and manufacturing activities. We were notified by Sanofi that the initial clinical trials involving XL147 or XL765 have been terminated or are in the process of concluding, and that Sanofi is still considering whether to initiate any further trials. We will be eligible to receive contingent payments associated with development, regulatory and commercial milestones under the license agreement of $745.0 million in the aggregate, as well as royalties on sales of any products commercialized under the license. Sanofi may, upon certain prior notice to us, terminate the license as to products containing SAR245408 (XL147) and SAR245409 (XL765). In the event of such termination election, Sanofi’s license relating to such product would terminate and revert to us, and we would receive, subject to certain terms, conditions and potential payment obligations, licenses from Sanofi to research, develop and commercialize such products.
In December 2011, we entered into an agreement with Sanofi pursuant to which the parties terminated the discovery collaboration agreement and released each other from any potential liabilities arising under the collaboration agreement prior to effectiveness of the termination in December 2011. Each party retains ownership of the intellectual property that it generated under the collaboration agreement, and we granted Sanofi covenants not-to-enforce with respect to certain of our intellectual property rights. If either party or its affiliate or licensee develops and commercializes a therapeutic product containing an isoform-selective PI3K inhibitor that arose from such party’s work (or was derived from such work) under the collaboration agreement, then such party will be obligated to pay royalties to the other party based upon the net sales of such products. The termination agreement provides that Sanofi will make a one-time payment to us upon the first receipt by Sanofi or its affiliate or licensee of marketing approval for the first therapeutic product containing an isoform-selective PI3K inhibitor that arose from Sanofi’s work (or was derived from such work) under the collaboration agreement.
Manufacturing and Product Supply
We do not own or operate manufacturing or distribution facilities or resources for clinical or commercial production and distribution of CABOMETYX and COMETRIQ. Instead, we have multiple contractual agreements in place with third partythird-party contract manufacturing organizations or CMOs, who, on our behalf, manufacture clinical and commercial supplies of CABOMETYX and COMETRIQ, andCOMETRIQ. This will continue to do so forin the foreseeable future.future for both our current and future commercial products. We have selected well-established and reputable global CMOsthird-party contract manufacturers for our drug substance and drug product manufacturing that have good regulatory standing, large manufacturing capacities and multiple manufacturing sites within their business footprint. These third parties must comply with applicable regulatory requirements, including the FDA’s Current Good Manufacturing Practices the EC’s Guidelines on Good Distribution Practice, as well as other stringent regulatory requirements enforced by the FDA or foreign regulatory agencies, as applicable, and are subject to routine inspections by such regulatory agencies. We monitor and evaluate the performance of our third-party contract manufacturers on an ongoing basis to ensure compliance with these requirements and to affirm their continuing capabilities to meet both our commercial and clinical needs. We also have contracted with a third partythird-party logistics provider, with twomultiple distribution locations, to provide shipping and warehousing services for our commercial supply of both
CABOMETYX and COMETRIQ in the United States.U.S. We employ highly skilled personnel with both technical and manufacturing experience to diligently manage the activities at our CMOs. Ourthird-party contract manufacturers, and our quality department audits these suppliersthem on a periodic basis. Our commercial suppliers are subject to routine inspections by regulatory agencies. We work closely with our third party manufacturers to ensure compliance with current good manufacturing practices, or cGMP, and other stringent regulatory requirements enforced by the FDA or foreign regulatory agencies in other territories, as applicable.
We source raw materials that are used to manufacture our drug substance from multiple third-party suppliers in Asia and Europe. We stock sufficient quantities of these materials and provide them to our third partythird-party drug substance contract manufacturers to ensure they can manufacture adequate drug substance quantities per our requirements, for both clinical and commercial purposes. We then store drug substance at third partythird-party facilities and provide appropriate amounts to our third partythird-party drug product contract manufacturers, who then manufacture, package and label our specified quantities of finished goods for COMETRIQ and CABOMETYX, respectively. OurIn addition, we rely on our third-party contract manufacturers also need to obtainsource materials such as excipients, components and reagents, which are required to manufacture our drug substance and finished drug products.product.
Within our supply chain, we have established safety stock amounts for both our drug substance and drug products, and store these quantities in multiple locations. The quantities that we store are based on our business needs and take into account scenarios for market demand, production lead times, potential supply interruptions and shelf life for our drug substance and drug products. In parallel, for business continuity reasons, we are in the process of evaluating and expect to establish additional suppliers for our drug substance and drug product manufacturers in the near future.soon. We believe that our current manufacturing network has the appropriate capacity to produce sufficient commercial quantities of CABOMETYX to
support the currentcurrently approved indication of advanced RCC indications, as well as potential indications, of first-line RCC and second lineincluding previously treated HCC, if those indications prove to be successful and gain regulatory approval in the future.
Marketing, Sales and Distribution
We have a fully integrated commercial team consisting of sales, marketing, market access, and commercial operations functions. Our sales team promotes CABOMETYX and COMETRIQ in the United States,U.S. In addition, although we currently do not co-promote COTELLIC alongside Genentech, we have the right to do so and will do so if we, co-promote Cotellic in associationconsultation with Genentech.Genentech, deem it useful and appropriate to realize COTELLIC’s commercial objectives. We use customary pharmaceutical company practices to market our products in the U.S. and concentrate our efforts on oncologists, oncology nurses and pharmacists. While we have expanded our U.S.Our finished products of CABOMETYX and COMETRIQ are sold initially through wholesale distribution and specialty pharmacy channels in connection with the approval ofand then, if applicable, resold to hospitals and other organizations that provide CABOMETYX by the FDA, we still rely on a relatively limited distribution networkand COMETRIQ to dispense COMETRIQ in fulfillment of prescriptionsend-user patients. To facilitate our commercial activities in the United States. Furthermore,U.S., we also employ various third-party vendors, such as advertising agencies, market research firms and other sales-support related services as needed. We believe that our commercial team and distribution practices are sufficient to ensure our marketing efforts reach our target audience and deliver our products to patients in a timely and compliant fashion.
In addition, we rely on Ipsen and Takeda for the commercialization and distribution of CABOMETYX and COMETRIQ in territories outside of the United States,U.S., as well as for access and distribution activities for the approved products under our named patient use programs or NPU, program. Wesimilar programs with the effect of introducing earlier patient access to CABOMETYX, and we also rely on Ipsen for these same activities with respect to the commercialization and distribution of COMETRIQ outside of the U.S. For COTELLIC, we rely on Genentech, as our collaboration partner, for Cotellic, for all current and future commercialization and marketing activities, with the exception of the limited co-promotion activities highlighted above.
To help ensure that all eligible patients in the United StatesU.S. have appropriate access to CABOMETYX and COMETRIQ, we have established a comprehensive reimbursement and patient support program called Exelixis Access Services, or EASE. Through EASE, we provide co-pay assistance to qualified, commercially insured patients to help minimize out-of-pocket costs and provide free drug to uninsured or under-insured patients who meet certain clinical and financial criteria. In addition, EASE is designed to provide comprehensive reimbursement support services, such as prior authorization support, benefits investigation and, if needed, appeals support.
Seasonal Operations and Backlog
Sales of our marketed products do not reflect any significant degree of seasonality.
The markets in which we operate are characterized by short lead times and the absence of significant backlogs. We do not believe that backlog information is material to our business as a whole.
Environment, Health and Safety
In support of the development and expansion of our product pipeline, we have resumed discovery activities. Our research and development processes involve the controlled use of certain hazardous materials and chemicals. We are subject to federal, state and local environmental, health and workplace safety laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products.materials. While we have incurred, and may continue to incur, expenditures to ensure we are in compliance with these laws and regulations, we do not expect the cost of complying with these laws and regulations to be material.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate, among other things, research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, distribution, export, import, record keeping, approval, advertising and promotion of our products.
The process required by the FDA before product candidates may be marketed in the United StatesU.S. generally involves the following:
preclinical laboratory and animal tests that must be conducted in accordance with Good Laboratory Practices;
submission of an IND, which must become effective before clinical trials may begin;
adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug candidate for its intended use;
submission of a New Drug Application, or NDA, to FDA for commercial marketing, or of a sNDA, for approval of a new indication if the product is already approved for another indication;
pre-approval inspection of manufacturing facilities and selected clinical investigators for their compliance with Good Manufacturing Practices, or GMP, and Good Clinical Practices, or GCP;Practices;
if FDA convenes an advisory committee, satisfactory completion of the advisory committee review; and
FDA approval of the NDA or sNDA.
The testing and approval process requires substantial time, effort and financial resources. Prior to commencing the first clinical trial with a product candidate, we must submit an IND to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development. Further, an independent institutional review board for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial and provide its informed consent form before the trial commences at that center. Regulatory authorities or an institutional review board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
For purposes of NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap.
Phase 1 - Studies, which involve the initial introduction of an IND into humans, are initially conducted in a limited number of subjects to test the product candidate for safety, dosage tolerance, absorption, metabolism, distribution and excretion in healthy humans or patients.
Phase 2 - Studies are conducted with groups of patients afflicted with a specified disease in order to provide enough data to evaluate the preliminary efficacy, optimal dosages and expanded evidence of safety. Multiple phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive phase 3 clinical trials. Phase 2 studies are typically well controlled, closely monitored, and conducted in a relatively small number of patients, usually involving no more than several hundred subjects. In some cases, a sponsor may decide to run what is referred to as a “phase 2b” evaluation, which is a second, confirmatory phase 2 trial that could, if positive, serve as a pivotal trial in the approval of a product candidate.
Phase 3 - When phase 2 evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile, phase 3 trials are performed to gather the additional information about effectiveness
and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase 3 trials are undertaken in large patient populations to further evaluate dosage, to provide replicate statistically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple clinical trial sites.
The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called phase 4 studies may be made a condition to be satisfied after a drug receives approval. Failure to satisfy such post-marketing commitments can result in FDA enforcement action, up to and including withdrawal of NDA approval. The results of phase 4 studies can confirm the effectiveness of a product candidate and can provide important safety information to augment the FDA’s adverse drug reaction reporting system. The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA, or as part of an sNDA. The submission of an NDA or sNDA requires payment of a substantial user fee to the FDA. The FDA may convene an advisory committee to provide clinical insight on NDA review questions. Although the FDA is not required to follow the recommendations of an advisory committee, the agency usually does so. The FDA may deny approval of an NDA or sNDA by way of a Complete Response letter if the applicable regulatory criteria are not satisfied, or it may require additional clinical data and/or an additional pivotal phase 3 pivotal clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA or sNDA does not satisfy the criteria for approval. An NDA may be approved with significant restrictions on its labeling, marketing and
distribution under a Risk Evaluation and Mitigation Strategy. Once issued, the FDA may withdraw product approval if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.
Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of product candidates or new diseases for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for new indications for our product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Targets and pathways identified in vitro may be determined to be less relevant in clinical studies and results in animal model studies may not be predictive of human clinical results. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. Even if a product candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.
Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with GMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers.
The FDA closely regulates the marketing and promotion of drugs, including restricting the promotion of uses for which a drug is not approved by the agency. Not only must a company have appropriate substantiation to support claims made about a drug, under the FDA’s current interpretation of the relevant laws, a company can make only those claims relating to safety and efficacy that are for indications for which FDA has approved the drug and that are otherwise consistent with the FDA-approved label for the drug. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may, in their independent medical judgment, prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturers’ communications on the subject of off-label use. Additionally, a significant number of pharmaceutical companies have been the target of inquiries and investigations by various U.S. federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for off-label uses and other sales practices. These investigations have alleged violations of various U.S. federal and state laws and regulations, including claims asserting antitrust violations, violations of the Food, Drug and Cosmetic Act, false claims laws, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement.
In the United States,U.S., the Orphan Drug Act of 1983, as amended, is intended to incentivize the development of drugs and biological products for rare diseases or conditions that affect fewer than 200,000 people in the U.S. (or that affects more than 200,000 persons in the U.S. and for which there is no reasonable expectation that the cost of developing and making available the drug in the U.S. for such disease or condition will be recovered from sales of the drug in the U.S.). If a drug is being developed for a rare disease of condition, to be eligible for designation as an orphan drug, the FDA must not have previously approved a drug considered the “same drug”drug,” as defined in the FDA’s orphan drug regulations, for the same orphanorphan-designated indication. If the FDA has previously approved another same drug for the same indication, to obtain orphan drug designation, the sponsor of the subsequent drug would be required to provide a plausible hypothesis of clinical superiority over the previously approved drug to obtain an orphan designation. Upon FDA receipt of Orphan Drug Designation, the sponsor is eligible for tax credits of up to 50% for qualified clinical trial expenses, the ability to apply for grant funding, and waiver of the Prescription Drug User FeePDUFA application fee. Following the passage of the Tax Cuts and Jobs Act application fee.of 2017, for clinical trial expenses incurred in tax years 2018 and going forward, the tax credit is reduced to 25%. In addition, upon marketing approval, an orphan-designated drug could be eligible for seven years of market exclusivity for the approved orphan-designated indication. Such orphan drug exclusivity, if awarded, would only block the approval of any drug considered the same drug for the same orphan indication. Moreover, a subsequent same drug could break a previously approved drug’s orphan exclusivity through a demonstration of clinical superiority over the previously approved drug.
The FDA has various programs, including Fast Track, priority review and accelerated approval, which are intended to expedite or simplify the process for developing and reviewing promising drugs, or to provide for the approval of a drug on the basis of a surrogate endpoint. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give drugs that treat serious conditions and that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months of NDA filing as compared to a standard review time of 10 months from NDA filing. Certain other types of drug applications are also eligible for priority review. Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated drug and expedite review of the application for a drug designated for priority review. Accelerated approval provides for an earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet medical need based on a surrogate endpoint. As a condition of approval, the FDA may require that a sponsor of a product candidate receiving accelerated approval perform post-marketing clinical trials to confirm the clinically meaningful outcome as predicted by the surrogate marker trial. In addition to the Fast Track, accelerated approval and priority review programs, the FDA also designates Breakthrough Therapy status to drugs that are intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA will seek to ensure the sponsor of a breakthrough therapy product candidate receives: intensive guidance on an efficient drug development program; intensive involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review; and rolling review.
Additional programs intended to expedite the development of drug products were included in the recently enacted 21st Century Cures Act, or the Cures Act. Signed into law on December 13, 2016, the Cures Act includes various provisions to accelerate the development and delivery of new treatments, such as those intended to expand the types of evidence manufacturers may bring to the FDA to support drug approval, to encourage patient-centered drug development, to liberalize the communication of healthcare economic information, or HCEI, to payers, and to create greater transparency with regard to manufacturer expanded access programs. Central to the Cures Act are provisions that enhance and accelerate the FDA’s processes for reviewing and approving new drugs and supplements to approved NDAs, including provisions that:
require the FDA to establish a program to evaluate the potential use of real world evidence to help to support the approval of a new indication for an approved drug and to help to support or satisfy post-approval study requirements;
provide that the FDA may rely upon qualified data summaries to support the approval of a supplemental application with respect to a qualified indication for an already approved drug;
require FDA to issue guidance for purposes of assisting sponsors in incorporating complex adaptive and other novel trial designs into proposed clinical protocols and applications for new drugs; and
require FDA to establish a process for the qualification of drug development tools for use in supporting or obtaining FDA approval for or investigational use of a drug.
As to dissemination of HCEI, the Cures Act amends Section 114 of the Food and Drug Administration Modernization Act of 1997 to help clarify and facilitate the dissemination of HCEI, including by broadening the definition of HCEI, expressly extending the dissemination of HCEI to payors, and clarifying that HCEI must only “relate” to an FDA-approved indication rather than “directly” relate to the indication.
The Hatch-Waxman Act
The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, established two abbreviated approval pathways for drug products in which potential competitors may rely upon the FDA’s prior approval of the same or similar drug product.
ANDA. An abbreviated new drug application,Abbreviated New Drug Application, or ANDA, may be approved by the FDA if the applicant demonstrates that the proposed generic product is the same as the approved drug, which is referred to as the “reference listed drug,”Reference Listed Drug, or RLD. Generally, an ANDA must contain data and information showing that the proposed generic product and RLD (1) have the same active ingredient, in the same strength and dosage form, to be delivered via the same route of administration, (2) are
intended for the same uses, and (3) are bioequivalent. This is instead of independently demonstrating the proposed product’s safety and effectiveness, which are inferred from the fact that the product is the same as the RLD, which the FDA previously found to be safe and effective. Furthermore, conducting bioequivalence testing is generally less time consuming and costly than conducting a full set of clinical trials in humans.
505(b)(2) NDAs. A 505(b)(2) application is one for which one or more of the investigations relied upon by the applicant for approval were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. Under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FDCA, an applicant may rely, in part, on the FDA’s previous approval of a similar product, or published literature, in support of its application. If the 505(b)(2) applicant establishes that reliance on FDA’s prior findings of safety and efficacy for an approved product is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies. The FDA may require additional studies or measurements, including comparability studies.
Unlike a full NDA for which the sponsor has conducted or obtained a right of reference to all the data essential to approval, the filing of both an ANDA application and a 505(b)(2) application may be delayed due to patent or exclusivity protections covering an approved product. The Hatch-Waxman Act provides five years of data exclusivity for the first approval of a new chemical entity, and three years of data exclusivity for supplemental applications containing clinical studies essential to the approval of the sNDA.
Orange Book Listing. An NDA sponsor must identify to the FDA patents that claim the drug substance or drug product or approved method of using the drug. When the drug is approved, those patents are among the information about the product that is listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations, which is referred to as the Orange Book. Any applicant who files an ANDA or a 505(b)(2) NDA must certify, for each patent listed in the Orange Book for the RLD that (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA, (2) such patent has expired, (3) the listed patent will expire on a particular date and approval is sought after patent expiration, or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. The fourth certification described above is known as a Paragraph IV certification. A notice of the Paragraph IV certification must be provided to each owner of the patent that is the subject of the certification and to the reference NDA holder. The reference NDA holder and patent owners may initiate a patent infringement lawsuit in response to the Paragraph IV notice. Filing such a lawsuit within 45 days of the receipt of the Paragraph IV certification notice prevents the FDA from approving the ANDA or 505(b)(2) NDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA or 505(b)(2) applicant. The ANDA or 505(b)(2) application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the RLD has expired. We intend to defend vigorously any patents for our approved products.
Regulation Outside of the United States
In addition to regulations in the United States,U.S., we are subject to regulations of other countries governing clinical trials and the manufacturing, commercial sales and distribution of our products outside of the United States.U.S. Whether or not we obtain FDA
approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the United StatesU.S. before we can commence clinical trials in such countries and approval of the regulators of such countries or economic areas, such as the European Union,EU, before we may market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.
The way clinical trials are conducted in the EU will undergo a major change when Regulation (EU) 536/2014 governing clinical trials in the EU, repealing the existing Directive 2001/20/EC comes into application in 2019. This regulation harmonizes the assessment and supervision processes for clinical trials throughout the EU, via an EU portal and database. The EMA will set up and maintain the portal and database, in collaboration with the Member States and the EC.
Under European UnionEU regulatory systems, a company may submit MAAs either under a centralized or decentralized procedure. Under the centralized procedure, MAAs are submitted to the EMA whose Committee for Medicinal Products for Human Use reviews the application and issues an opinion on it. The opinion is considered by the EC which is responsible for deciding applications. If the application is approved, the EC grants a single marketing authorization that is valid for all European UnionEU member states as well as Iceland, Liechtenstein and Norway, collectively the European Economic Area, or the EEA. The national authorization procedures, the decentralized and mutual recognition procedures, as well as national applications, are available for products for which the centralized procedure is not compulsory. The mutual recognition procedure provides for the European UnionEU member states selected by the applicant to mutually recognize a national marketing authorization that has already been granted by the competent authority of another member state, referred to as the Reference Member State, or RMS. The decentralized procedure is used when the product in question has yet to be granted a marketing authorization in any member state. Under this procedure the applicant can select the member state that will act as the RMS. In both the mutual recognition and decentralized procedures, the RMS reviews the application and submits its assessment of the application to the member states where marketing authorizations are being sought, referred to as Concerned Member States or CMS. Within
90 days of receiving the application and assessment report, each CMS must decide whether to recognize the RMS assessment. If a member state does not agree with the assessment, and the disputed points cannot be resolved the matter is eventually referred to the EC, whoseCoordination Group on Mutual Recognition and Decentralised procedures in the first instance to reach an agreement and failing to reach such an agreement, a referral to the EMA and the Committee for Medicinal Products for Human Use for arbitration that will result in an opinion to form the basis of a decision isto be issued by the EC binding on all member states. If the application is successful national marketing authorizations will be granted by the competent authorities in each of the member states chosen by the applicant.
Conditional marketing authorizations may be granted for a limited number of medicinal products for human use referenced in European UnionEU law applicable to conditional marketing authorizations where the clinical dataset is not comprehensive, if (1) the risk-benefit balance of the product is positive, (2) it is likely that the applicant will be in a position to provide the required comprehensive clinical trial data, (3) unmet medical needs will be fulfilled and (4) the benefit to public health of the immediate availability on the market of the medicinal product outweighs the risk inherent in the fact that additional data are still required. Specific obligations, such as the completion of ongoing or new studies and obligations relating to the collection of pharmacovigilance data, may be amongst the conditions stipulated in the marketing authorization.
As in the United States,U.S., we may apply for designation of a product as an Orphan drug for the treatment of a specific indication in the European UnionEU before the application for marketing authorization is made. In the European UnionEU orphan designation is available for products in development which are either: (a) intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in the European Union,EU, or (b) intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition in the Community and when, without incentives, it is unlikely that sales of the drug in the European UnionEU would be sufficient to justify the necessary investment in developing the medicinal product. Additionally, the sponsor of an application for orphan drug designation must establish that there exists no satisfactory authorized method of diagnosis, prevention, or treatment of the condition or even if such treatment exists, the product will be of significant benefit to those affected by that condition.
Orphan drugs in the European UnionEU enjoy economic and marketing benefits, including up to ten years of market exclusivity for the approved indication unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan-designated product. The period of market exclusivity may be reduced to six years if at the end of the fifth year it is established that the criteria for orphan designation are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.
Healthcare Regulation
Federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, also apply to our business. If we fail to comply with those laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected. The laws that may affect our ability to operate include, but are not limited to: the federal Anti‑Kickback Statute, which prohibits. among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; and federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third‑party payers that are false or fraudulent. Additionally, we are subject to state law equivalents of each of the above federal laws, which may be broader in scope and apply regardless of whether the payer is a federal healthcare program, and many of which differ from each other in significant ways and may not have the same effect, further complicate compliance efforts.
Numerous federal and state laws, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information, are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology and Clinical Health Act, or HIPAA. Although we are not directly subject to HIPAA, we could be subject to criminal penalties if we obtain and/or disclose individually identifiable health information from a HIPAA-covered entity, including healthcare providers, in a manner that is not authorized or permitted by HIPAA. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing business. International laws, such as the EU Data Privacy Directive (95/46/EC) and Swiss Federal Act on Data Protection, regulate the processing of personal data within the European UnionEU and between countries in the European UnionEU and countries outside of the European Union,EU, including the United States. FailureU.S. On April 27, 2016, the EU legislature adopted Regulation (EU) 2016/679, the General Data Protection Regulation, or GDPR. The GDPR will replace Directive 95/46/EC when it takes effect on May 25, 2018, and it will apply in all Member States without the need for implementing national legislation, as well as extra-territorially outside the EU. Furthermore, in October 2015, the Court of Justice of the EU declared the previous framework, the International Safe Harbor Privacy Principles, or Safe Harbor, invalid for data transfer between the U.S. and the EU. The Safe Harbor has now been replaced by the EU-U.S. Privacy Shield, a framework for transatlantic exchanges of personal data for commercial purposes between the EU and the U.S. in accordance with the principles of the GDPR. Accordingly, there may be an immediate impact on companies located in the U.S. as they devote resources to provide adequate privacy
protections and maintain compliance with safe harbor mechanisms could jeopardize business transactions across borders and result in significant penalties.the various Member States to impose fines for certain infringements, including the breach of requirements relating to international transfers or the basic principles for processing of personal data (such as conditions for obtaining consent from that individual whose data is being transferred). The severity of these fines may be up to the higher of 4% of annual worldwide revenue or €20 million.
In addition, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, created a federal requirement under the federal Open Payments program, that requires certain manufacturers to track and report to the Centers for Medicare and Medicaid Services or CMS, annually certain payments and other transfers of value provided to physicians and teaching hospitals made in the previous calendar year. In addition, there are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.
For those marketed products which are covered in the United StatesU.S. by the Medicaid programs, we have various obligations, including government price reporting and rebate requirements, which generally require products be offered at substantial rebates/discounts to Medicaid and certain purchasers (including “covered entities” purchasing under the 340B Drug Discount Program). We are also required to discount such products to authorized users of the Federal Supply Schedule of the General Services Administration, under which additional laws and requirements apply. These programs require submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations, and the guidance governing
such calculations is not always clear. Compliance with such requirements can require significant investment in personnel, systems and resources, but failure to properly calculate prices, or offer required discounts or rebates could subject us to substantial penalties. Subject to the application in the European UnionEU of the Transparency Directive 89/105/EEC, which aims to ensure the transparency of measures adopted to control pricing and reimbursement, pricing and reimbursement in the EU/EEA is governed by national rules and policy and may vary from Member State to Member State.
Reimbursement
Sales of our approved products and any future products of ours will depend, in part, on the extent to which their costs will be covered by third-party payers, such as government health programs, commercial insurance and managed healthcare organizations. Patients may be less likely to use our products if coverage is not provided and reimbursement is inadequate to cover a significant portion of the cost of our products. In addition, although to date qualified patients who would not otherwise be able to afford our products have been able to receive financial support from us in some cases, and from independent patient support foundations in other cases, these programs have recently been subject to significant government scrutiny, and in the future these patients may no longer be able to use our products. Third-party payers may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. Moreover, a third-party payer’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Additionally, a third-party payer’s decision to cover a particular drug product does not ensure that other payers will also provide coverage for the drug product, or will provide coverage at an adequate reimbursement rate.
In the United StatesU.S. and other potentially significant markets for our products, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resultedmay result in lower average selling prices. In some cases, for example, third-party payers try to encourage the use of less expensive generic products through their prescription benefits coverage and reimbursement and co-pay policies. Further, the increased emphasis on managed healthcare in the United StatesU.S. and on country-specific and national pricing and reimbursement controls in the European UnionEU will put additional pressure on product pricing, reimbursement and usage, which may adversely affect our future product sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing coverage and/or reimbursement controls and measures, could have a material adverse impact on our net product revenues and results of operations.
The United StatesU.S. and some foreign jurisdictions are considering proposals or have enacted legislative and regulatory changes the healthcare system that could affect our ability to sell our products profitably. Among policy makers and payers in the United StatesU.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. There has been particular and increasing legislative and enforcement interest in the United StatesU.S. with respect to drug pricing practices, particularly with respect to drugs that have been subject to relatively large price increases over relatively short time periods. ThereAt the federal level, there have been several U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and bulk purchasing. In the United States,U.S., the pharmaceutical industry has already been significantly affected by major legislative initiatives, including, for example, the PPACA. InSince January 2017, Congress votedPresident Trump has signed two Executive Orders designed to adopt a
budget resolution for fiscal year 2017, or the Budget Resolution, that authorizesdelay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal portionsor repeal and replace all or part of the PPACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the PPACA recently have been enacted. The Budget ResolutionTax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is not a law, however, it is widely viewedcommonly referred to as the first step toward the passage of legislation that would repeal certain aspects of PPACA. Further,“individual mandate”. Additionally, on January 20, 2017,23, 2018, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under PPACA to waive, defer, grant exemptions from, or delaya continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of any provision of PPACA that would impose a fiscal or regulatory burdencertain PPACA-mandated fees, including the so-called “Cadillac” tax on states, individuals, healthcarecertain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers health insurers, or manufacturers of pharmaceuticals orbased on market share,
and the medical device excise tax on non-exempt medical devices. It is expected that Congress also couldwill continue to consider subsequent legislation to repeal and replace some or all elements of PPACA that are repealed.the PPACA. We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal, state and foreign legislative and regulatory developments are likely, and we expect ongoing initiatives to increase pressure on drug pricing, which could have a negative impact on our revenue or sales of any products or future approved products.
Other legislative changes have also been proposed and adopted since the PPACA was enacted. For example, the Budget Control Act of 2011 resulted in aggregate reductions in Medicare payments to providers of up to 2% per fiscal year, starting in 2013, and the American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Such laws, and others that may affect our business that have been recently enacted or may in the future be enacted, may result in additional reductions in Medicare and other healthcare funding. In the future, there will likely continue to be additional proposals relating to the reform of the United StatesU.S. healthcare system, some of which could further limit coverage and reimbursement of drug products, including our approved products and any future approved products. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.
In addition, in some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before its cost may be funded within the respective national healthcare system. The requirements governing drug pricing vary widely from country to country. For example, European UnionEU member states may restrict the range of medicinal products for which their national healthcare systems provide reimbursement and may control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profits the medicinal product generates for the company placing it on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products on cost-effectiveness grounds. Historically, products launched in countries in the European UnionEU do not follow the price structures of the United StatesU.S. and they generally tend to be priced significantly lower.
Competition
There are many companies focused on the development of small molecules and antibodies for cancer. Our competitors and potential competitors include major pharmaceutical and biotechnology companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing research activities similar to ours. Many of our competitorsthe organizations competing with us have greater capital resources, larger research and potential competitors have significantlydevelopment staff and facilities, more financial, technicalexperience in obtaining regulatory approvals and other resourcesmore extensive product manufacturing and commercial capabilities than we do, which may allow them to have a competitive advantage.
Competition for Cabozantinib
We believe that our ability to successfully compete will depend on, among other things:
efficacy, safety and reliability of cabozantinib;
timing and scope of regulatory approval;
the speed at which we develop cabozantinib for the treatment of additional tumor types beyond its approved indications;
our ability to complete preclinical testing and clinical development and obtain regulatory approvals for cabozantinib;
our ability to manufacture and sell commercial quantities of cabozantinib product to the market;
our ability to successfully commercialize cabozantinib and secure coverage and adequate reimbursement in approved indications;
product acceptance by physicians and other health care providers;
the level of our collaboration partners’ investments in the resources necessary to successfully commercialize cabozantinib in territories where it is approved outside of the United States;U.S.;
skills of our employees and our ability to recruit and retain skilled employees;
protection of our intellectual property; and
the availability of substantial capital resources to fund development and commercialization activities.
We believe that the quality and breadth of activity observed with cabozantinib, the skill of our employees and our ability to recruit and retain skilled employees, our patent portfolio and our capabilities for research and drug development are competitive strengths. However, many large pharmaceutical and biotechnology companies have significantly larger intellectual property estates than we do, more substantial capital resources than we have, and greater capabilities and experience than we do in preclinical and clinical development, sales, marketing, manufacturing and regulatory affairs.
The markets for which we intend to pursue regulatory approval of cabozantinib are highly competitive. We are aware of products in research or development by our competitors that are intended to treat all of the tumor types we are targeting, and should they demonstrate suitable clinical evidence, any of these products may compete with cabozantinib. OurWe believe our future success will depend upon our ability to maintain a competitive position with respect to technological advances and the shifting landscape of therapeutic strategy following the advent of immunotherapy. Our productsCABOMETYX in particular may become less marketable if we are unable to successfully adapt our development strategy to address the likelihoodfact that this newrecent approach to treating cancer with immuno-oncoloy agentsimmune checkpoint inhibitors has and will continue to become more prevalent in indications for which our products areCABOMETYX is approved, most notably advanced RCC, and in additional indications where we mayintend to seek regulatory approval.approval, such as previously treated advanced HCC. Furthermore, the complexities of such a strategy has and may continue to require collaboration with some of our competitors.
CABOMETYX: We believe the principal competition for CABOMETYX in advanced RCC includes: BMS’s nivolumab and ipilimumab;nivolumab; Pfizer’s axitinib, sunitinib and temsirolimus; Novartis’ everolimus and pazopanib; Bayer’s and Onyx Pharmaceuticals’ (a wholly-owned subsidiary of Amgen) sorafenib; Genentech’s bevacizumab and atezolizumab; Eisai’s lenvatinib; and AVEO Pharmaceutical’s tivozanib. Additionally, there are a variety of combination therapies being developed for RCC, including, Roche’s bevacizumab and atezolizumab, BMS’s ipilimumab and nivolumab, Merck’s pembrolizumab and Eisai’s lenvatinib. lenvatinib, Merck’s pembrolizumab and Pfizer’s axitinib, Pfizer’s avelumab and axitinib, Merck’s pembrolizumab and Roche’s bevacizumab, Merck’s pembrolizumab and Incyte’s epacadostat and Eisai’s lenvatinib and Novartis’ everolimus.
The competition we currently face from BMS’s nivolumab in previously treated advanced RCC is particularly significant. Nivolumab was approved for theas a second-line treatment of advanced RCC on November 23, 2015, following a rapid review by the FDA. That approval was based in large part on the results of BMS’s phase 3 trial comparing nivolumab to everolimus in patients who had received previous antiangiogenic therapy for advanced RCC (Checkmate 025)(CheckMate-025), in which nivolumab met its primary endpoint of showing a statistically-significant improvement in OS over everolimus, a current standard of care for the treatment of second linesecond-line RCC patients. NivolumabWhile nivolumab failed to demonstrate a statistically-significant PFS benefit over everolimus. Nivolumab alsoeverolimus, it demonstrated an acceptable safety profile. Additionally, there are
For previously untreated, advanced or metastatic RCC, we expect to face significant competition from BMS’s combination of nivolumab and ipilimumab, if approved by the FDA. In September 2017, BMS announced that its phase 3 study evaluating nivolumab and ipilimumab in patients with previously untreated advanced or metastatic RCC (CheckMate-214) met its co-primary endpoint, demonstrating OS compared to sunitinib, the current standard of care, in intermediate-and poor-risk patients. The combination also met a varietysecondary endpoint of improved OS versus sunitinib in all randomized patients. On the basis of this data, BMS filed a supplemental Biologics License Application, or sBLA, for use of the combination therapies being developedof nivolumab and ipilimumab as a first-line treatment for intermediate-and poor-risk patients with advanced RCC, including, Roche’s bevacizumab and atezolizumab, BMS’s ipilimumab and nivolumab, Merck’s pembrolizumab and Eisai’s lenvatinib, Merck’s pembrolizumab and Pfizer’s axitinib, Pfizer’s avelumab and axitinib, and Merck’s pembrolizumab and Roche’s bevacizumab.in December 2017, the FDA granted a priority review to the sBLA. The FDA is scheduled to make its final decision on the sBLA on or before April 16, 2018.
COMETRIQ: We believe that the principal competing anti-cancer therapy to COMETRIQ in progressive, metastatic MTC is Genzyme’sGenzyme��s RET, VEGFR and EGFR inhibitor vandetanib, which has been approved by the FDA and the EC for the treatment of symptomatic or progressive MTC in patients with unresectable, locally advanced, or metastatic disease. In addition, we believe that COMETRIQ also faces competition as a treatment for progressive, metastatic MTC from off-label use of Bayer’s and Onyx Pharmaceuticals’ (a wholly-owned subsidiary of Amgen) multikinase inhibitor sorafenib, Pfizer’s multikinase inhibitor sunitinib, Ariad Pharmaceutical’sTakeda’s multikinase inhibitor ponatinib, Novartis’ multikinase inhibitor pazopanib, and Eisai’s multikinase inhibitor lenvatinib.
Potential Cabozantinib Indications Beyond RCC and MTC:MTC, Including Advanced HCC: Based on the results of CELESTIAL, we plan to submit a sNDA to the FDA in the first quarter of 2018, for CABOMETYX as a treatment for patients with previously treated advanced HCC. However, we face a rapidly evolving treatment landscape for the treatment of advanced HCC, as other therapies have recently received regulatory approval or are in advanced stages of clinical development, which may impair the relative value of CABOMETYX for this indication. Should cabozantinib be approved for the treatment of patients with previously treated advanced HCC, we believe its principal competition may include Bayer’s and Onyx Pharmaceuticals’ sorafenib, Bayer’s regorafenib, BMS’s nivolumab, Eisai’s lenvatinib, BMS’s nivolumab, Merck’s pembrolizumab, Lilly’s ramucirumab and Lilly’s ramucirumab. In particular, Bayer recently announced positive results from a Phase 3 trial that compared regorafenib to placebo in the same HCC patient population that is being enrolled in our Phase 3 trial.AstraZeneca’s durvalumab
and tremelimumab. Examples of potential competition for cabozantinib in other cancer indications include: other VEGF pathway inhibitors, including Genentech’s bevacizumab; other RET inhibitors including Eisai’s lenvatinib and Ariad’sTakeda’s ponatinib; and other MET inhibitors, including Amgen’s AMG 208,Astra Zeneca’s savolitinib, Pfizer’s crizotinib ArQule’s tivantinib, and Mirati’s glesatinib; and immunotherapies such as BMS’s ipilimumab and nivolumab, Merck’s pembrolizumab and Roche’s atezolizumab.
Competition for Cobimetinib
We believe that cobimetinib’s principal competition amongst targeted agents includes Novartis’ trametinib and dabrafenib, and Array’s encorafenib and binimetinib; and within the class of immunotherapies, BMS’s ipilimumab and
nivolumab and Merck’s pembrolizumab. The second category, immunotherapies, are of particular competitive importance vis-a-vis cobimetinib in advanced melanoma as they are already FDA approved in melanoma patient populations that overlap with those that may be eligible for cobimetinib, they have been rapidly incorporated into the National Comprehensive Cancer Network treatment guidelines, and they are viewed with a high degree of enthusiasm by physicians and key opinion leaders. Ongoing and future trials incorporating immuno-oncology agents,immune checkpoint inhibitors, including combination trials, may further impact usage of cobimetinib in melanoma and potentially in additional tumor types in which cobimetinib may ultimately gain approval.
Should cobimetinib in combination with atezolizumab be approved for the treatment of unresectable locally advanced or metastatic CRC, we believe its principal competition may include Bayer’s regorafenib, Taihio Oncology’s trifluridine and tipiracil, Lilly’s cetuximab and Amgen’s panitumumab.
Financial Information and Significant Customers
We operate as a single business segment and have operations solely in the United States.U.S. During the year ended December 31, 2016,2017, we derived 33%approximately 18% of our revenues from Diplomat Specialty Pharmacy, approximately 16% of our revenues from Caremark L.L.C. and approximately 11% of our revenues from each of Accredo Health, Incorporated and affiliates of McKesson Corporation, all of which isare located in the United StatesU.S. and 17%approximately 15% of our revenues in connection with our collaboration with Ipsen which is located in the European Union.Europe. Information regarding total revenues, including geographic regions in which they are earned, net loss, total assets and totalthe location of our long-lived assets for the years ended December 31, 2017, 2016 2015 and 20142015 is set forth in “Note 14. Concentrations of Credit Risk”13. Segment Information” in our “Consolidated Financial Statements” includedcontained in Part II, Item 8 of this Annual Report on Form 10-K.
Research and development expenses were $112.2 million for the year ended December 31, 2017, compared to $96.0 million orfor the year ended December 31, 2016 compared toand $96.4 million for the year ended December 31, 2015 and $189.1 million for the year ended December 31, 2014.2015. Additional information about our research and development expenses in each of the last three fiscal years is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Patents and Proprietary Rights
We actively seek patent protection in the United States, the European Union,U.S., Europe and selected other foreign countries to cover our drug candidates and related technologies. Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country. We have numerous patents and pending patent applications that relate to methods of screening drug targets, compounds that modulate drug targets, as well as methods of making and using such compounds.
While many patent applications have been filed relating to the drug candidates that we have developed, the majority of these are not yet issued or allowed. We own all global patents associated with cabozantinib and cobimetinib that are referenced below.
Cabozantinib is covered by six10 issued patents in the United States,U.S., including U.S. Pat. No. 7,579,473, for the composition-of-matter of cabozantinib and pharmaceutical compositions thereof. U.S. Pat. No. 7,579,473 would normally expire in September 2024, but we have been granted a patent term extension to extend the term to August 2026. The additional issued U.S. patents will expire between 2024 and 2032. We own the rights to the six issued U.S. patents.2033. Cabozantinib is also covered by an issued patent in Europe (covering cabozantinib’sthe composition-of-matter of cabozantinib and certain methods of use) and an issued patent in Japan (covering cabozantinib composition-of-matter)the composition-of-matter of cabozantinib). These issued patents would normally expire in September 2024, but we have applied for and are obtaining Supplementary Protection Certificates in Europe to extend the term to 2029. We intend to apply for patent term extension in Japan to extend the term to 2029. Foreign counterparts of the issued United StatesU.S. and European patents are issued in Australia and Canada, which are anticipated to expire in 2024. We have patent applications pending in
the United States, the European Union,U.S., Europe, Australia, Japan and Canada covering certain synthetic methods related to making cabozantinib, which, if issued, are anticipated to expire in 2024. We have filed patent applications in the United StatesU.S. and other selected countries covering certain salts, polymorphs and formulations of cabozantinib that, if issued, are anticipated to expire in approximately 2030.2035. We have filed several patent applications in the United StatesU.S. and other selected countries relating to combinations of cabozantinib with certain other anti-cancer agents that, if issued, are anticipated to expire in approximately 2030.2035. Cabozantinib is licensed to Takeda in Japan and elsewhere, except the U.S., to Ipsen, in accordance with our collaboration agreements with Takeda and Ipsen.
Cobimetinib is covered by three issued patents in the United States,U.S., including U.S. Pat. No 7,803,839 for the composition of matter of cobimetinib and pharmaceutical compositions thereof. U.S. Pat. No 7,803,839 would normally expire in February 2027, but we have applied for a patent term extension to extend the term to November 2029. We own the rights to the three issued patents. Cobimetinib is also covered by an issued patent in Europe (covering cobimetinib’sthe composition-of-matter of cobimetinib and certain methods of use), which would normally expire in October 2026, but we have applied for and are obtaining Supplementary Protection Certificates to extend the term to November 2030. Foreign counterparts of the issued United StatesU.S. and European patents are issued or pending in Australia, Brazil, Canada, China, Colombia, the Eurasian Patent Organization, Georgia, Hong Kong, India, Indonesia, Israel, Japan, Mexico, Malaysia, New Zealand, Philippines, Singapore, South Africa, South Korea, and Ukraine. We have filed patent applications in the United StatesU.S. and other selected countries covering
certain salts and polymorphs of cobimetinib that, if issued, are anticipated to expire in approximately 2036. We have filed patent applications in the United StatesU.S. and other selected countries covering certain synthetic methods related to making cobimetinib whichthat, if issued, are anticipated to expire in approximately 2033. Cobimetinib is licensed to Genentech in the United StatesU.S. and to Roche outside of the United States.U.S.
We have pending patent applications in the United StatesU.S. and European UnionEurope covering the composition-of-matter of our other drug candidates in clinical or preclinical development that, if issued, are anticipated to expire between 2023 and 2030.
We have obtained licenses from various parties that give us rights to technologies that we deem to be necessary or desirable for our research and development. These licenses (both exclusive and non-exclusive) may require us to pay royalties as well as upfront and milestone payments.
Employees
As of December 31, 2016,2017, we had 287372 full-time equivalent employees, all of which are located in the U.S. None of our employees are represented by a labor union, and we consider our employee relations to be good.
Corporate Information
We were incorporated in Delaware in November 1994 as Exelixis Pharmaceuticals, Inc. and changed our name to Exelixis, Inc. in February 2000. Our principal executive offices are located at 210 East Grand Ave., South San Francisco, California 94080. Our telephone number is (650) 837-7000. We maintain a site on the worldwide web at www.exelixis.com; however, 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 Securities and Exchange Commission, or SEC, filings, including our annual report on 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 Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further, copies of our filings with the SEC are available at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a site on the worldwide web that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
Item 1A. Risk Factors
In addition to the factors discussed elsewhere in this report, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by us or on our behalf. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we deem immaterial also may impair our business operations. If any of the following risks or such other risks actually occur, our business could be harmed.
Risks Related to Our Business and Industry
Our future prospects are critically dependent upon the commercial success of CABOMETYX for advanced RCCin its approved indications and the further clinical development, regulatory approval and commercial success of cabozantinib in additional indications.
Our mission is to maximize the clinical and commercial potential of cabozantinib and cobimetinib, and to position the Exelixis businessus for future growth through the resumption of our discovery efforts and the expansion of our development pipeline. We anticipate that for the foreseeable future our ability to generate meaningful revenueunrestricted cash flow to fund our commercial operations and our development and discovery programs is dependent upon the successful commercialization of CABOMETYX for the treatment of advanced RCC in territories where it has been or may soon be approved.approved and in potential other indications for which we are in late-stage development or we otherwise intend to seek regulatory review. The commercial potential ofopportunity for CABOMETYX for theas a treatment offor advanced RCC remains subject to a variety of factors, most importantly, CABOMETYX’s perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or currently in development for the treatment of advanced RCC. If revenue from CABOMETYX decreases or remains flat, or if we fail to achieve anticipated product royalties and collaboration milestones, we may need to reduce our operating expenses, access other sources of cash or raise additional funds to executeotherwise modify our business plan, which wouldmay have a material adverse effect on our business and financial condition, results of operations and growth prospects. Furthermore, as a consequence of our
exclusive collaboration agreementagreements with Ipsen and Takeda, we rely heavily upon Ipsen’stheir regulatory, commercial, medical affairs, and other expertise and resources for commercialization of CABOMETYX in territories outside of the United States and Japan.U.S. If Ipsen isour collaborators are unable to, or doesdo not invest the resources necessary to successfully commercialize CABOMETYX for the treatment of advanced RCC in the European UnionEU and other international territories where it may be approved, this could reduce the amount of revenue we are due to receive under ourthese collaboration agreement with Ipsen,agreements, thus resulting in harm to our business and operations.
We also believe that there are commercial opportunities for cabozantinib in therapeutic indications beyond advanced RCC, and we are pursuing these opportunities by dedicating substantial proprietary resources to developing cabozantinib into a broad and significant oncology franchise. Even following the approval of CABOMETYX for the treatment of advanced RCC in the United StatesU.S. and European Union,EU, our success remains contingent upon, among other things, successful clinical development, regulatory approval and market acceptance of cabozantinib, the compound from which CABOMETYX is derived, in potential additional indications, such as first-line RCC, advanced HCC, NSCLC, and other forms of cancer. With top-line results from CELESTIAL anticipated in 2017, we expect growth of the cabozantinib oncology franchise toHCC. We cannot be most immediately impacted bycertain that that the clinical trial results of cabozantinibtrials we and our collaboration partners are currently conducting, or may conduct in advanced HCC. However, the historical rate of failures for product candidatesfuture, will demonstrate adequate safety and efficacy in clinical development is high.testing to receive regulatory approval. Should we prove unsuccessful in advancing the further clinical development and commercialization of cabozantinib beyond MTC or advanced RCC,its approved indications, we may be unable to execute our business plan and our revenuesfinancial results and financial condition wouldcould be materially adversely affected.
We are heavily Even if we and our partners receive the required regulatory approvals to market cabozantinib for any additional indications or in additional jurisdictions, we and our partners may not be able to effectively commercialize CABOMETYX. Our ability to grow CABOMETYX product sales in future periods is also dependent on our partner, Genentech (a memberprice increases and we periodically increase the price of the Roche group), for the successful development, regulatory approvalCABOMETYX. Price increases on CABOMETYX and commercializationnegative publicity regarding drug pricing and price increases generally, whether on CABOMETYX or products distributed by other pharmaceutical companies, could negatively affect market acceptance of, cobimetinib.
The terms of our collaboration agreement with Genentech provide them with exclusive authority over the global development and commercialization plans for cobimetinib and the execution of those plans. We have no effective influence over those plans and are heavily dependent on Genentech’s decision making. The collaboration agreement provides that we are entitled to a share of U.S. profits and losses received in connection with commercialization of cobimetinib. We are also entitled to low double-digit royalties on ex-U.S. net sales of, cobimetinib.CABOMETYX. In both cases,any event, we are heavily dependent on Genentech’s internal accounting procedures for determining how much, if any, profitcannot assure you that price increases we have taken or may derive from the collaboration. In connection with the commercialization of Cotellic, we believed Genentech’s pricing of, and cost and revenue allocations for, Cotellic, as determined exclusively by Genentech, have been contrary to the applicable terms of the collaboration agreement. We raised this concern with Genentech, along with other material concerns regarding Genentech’s performance under the collaboration agreement, but were unable to come to resolution on any of these issues. Accordingly, on June 3, 2016, following a 30 day dispute resolution period, we filed a demand for arbitration asserting claims against Genentech related to its clinical development, pricing and commercialization of Cotellic, and cost and revenue allocations in connection with Cotellic’s commercializationtake in the United States. Soon thereafter, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest related to the cost allocations under the collaboration agreement. On December 29, 2016, Genentech withdrew its counterclaim against us and stated that it would unilaterally change its approach to allocation of promotional expenses arising from commercialization of the Cotellic plus Zelboraf combination therapy, both retrospectively and prospectively. Notwithstanding Genentech’s change of approach, other significant issues remain in dispute between the parties. Genentech’s action doesfuture will not address the claims in our demand for arbitration related to Genentech’s clinical development of cobimetinib, or pricing and promotional costs for Cotellic in the United States, nor does it fully resolve claims over revenue allocation. And, Genentech has not clarified how it intends to allocate promotional costs incurred with respect to the promotion of other combination therapies that include cobimetinib for other indications that will be developed or are in development and may be approved. As a result, we will continue to press our position for the arbitral panel to obtain a just resolution of these claims. The ultimate outcome and timing of the arbitration is difficult to predict.
We are also completely dependent upon Genentech to develop cobimetinib further. Any significant changes to Genentech’s business strategy and priorities, over which we have no control, could adverselyfuture negatively affect Genentech’s willingness or ability to complete their obligations under our collaboration agreement and result in harm to our business and operations. Subject to contractual diligence obligations, Genentech has complete control over and financial responsibility for cobimetinib’s development program and regulatory strategy and execution, and we are not able to control the amount or timing of resources that Genentech will devote to the product. Of particular significance are Genentech’s development efforts with respect to the combination of cobimetinib with immuno-oncology agents, a promising and competitive area of clinical research. Regardless of Genentech’s efforts and expenditures for the further development of cobimetinib, the results of such additional clinical investigation may not prove positive and may not produce label expansions or approval in additional indications.
CABOMETYX sales.
The commercial success of cabozantinib, as CABOMETYX tablets for advanced RCC and as COMETRIQ capsules for MTC, or if approved for additional indications, will depend upon the degree of market acceptance among physicians, patients, health care payers, and the medical community.
Our ability to successfully commercialize cabozantinib, as CABOMETYX tablets for advanced RCCits approved indications is, and COMETRIQ capsules for MTC, or if approved for additional indications will be, highly dependent upon the extent to which cabozantinibCABOMETYX gains market acceptance among physicians, patients, government health care payers such as Medicare and Medicaid, and commercial health care plans and the medical community. If cabozantinibCABOMETYX does not achieve an adequate level of acceptance, we may not generate significant future product revenues. The degree of market acceptance of CABOMETYX COMETRIQ and other cabozantinib products, if approved, will depend upon a number of factors, including:
the effectiveness, or perceived effectiveness, of cabozantinibCABOMETYX in comparison to competing products;
the safety of cabozantinib,CABOMETYX, including the existence of serious side effects of cabozantinibCABOMETYX and their severity in comparison to those of any competing products;
cabozantinib’sCABOMETYX’s relative convenience and ease of administration;
potential unexpected results connected with analysis of data from future or ongoing clinical trials;trials of cabozantinib;
the timing of cabozantinibCABOMETYX label expansions for additional indications, if any, relative to competitive treatments;
the price of cabozantinibCABOMETYX relative to competitive therapies and any new government initiatives affecting pharmaceutical pricing;
the strength of CABOMETYX sales efforts, marketing, medical affairs and distribution support;
the sufficiency of commercial and government insurance coverage and reimbursement;reimbursement for CABOMETYX; and
our ability to enforce our intellectual property rights with respect to CABOMETYX.
Our competitors may develop products and technologies that impair the relative value of our marketed products and any future product candidates.
The pharmaceutical, biopharmaceutical and biotechnology industries are competitive, highly diversified and are characterized by rapid technological change, particularly in the area of novel oncology therapies. Many of the organizations competing with us have greater capital resources, larger research and development staff and facilities, more experience in obtaining regulatory approvals and more extensive product manufacturing and commercial capabilities than we do, which may allow them to have a competitive advantage. Further, our competitors may be more effective at using their technologies to develop commercial products. 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. There may also be drug candidates that we are not aware of at an earlier stage of development that may compete with our marketed products and product candidates. We face, and will continue to face, intense competition from biotechnology, biopharmaceutical and pharmaceutical companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing research activities similar to ours. Delays in the development of cabozantinib or cobimetinib for the treatment of additional tumor types, for example, could allow our competitors to bring products to market before us.
Specifically, the advanced RCC indications, for which CABOMETYX is approved, are highly competitive, and several novel therapies and combinations of therapies are in advanced stages of clinical development or under expedited regulatory review in these indications, and are expected to compete with CABOMETYX. We believe our future success will depend upon our ability to maintain a competitive position with respect to technological advances and the shifting landscape of therapeutic strategy following the advent of immunotherapy. CABOMETYX in particular may become less marketable if we are unable to successfully adapt our development strategy to address the fact that this recent approach to treating cancer with immune checkpoint inhibitors has and will continue to become more prevalent in indications for which our products are approved, most notably advanced RCC, and in additional indications where we intend to seek regulatory approval, such as previously treated advanced HCC. Furthermore, the complexities of such a strategy has and may continue to require collaboration with some of our competitors.
We also may in the future face competition from manufacturers of generic versions of our marketed products. In this regard, in February 2018, the FDA published draft guidance containing product-specific bioequivalence recommendations for drug products containing cabozantinib, the active ingredient in CABOMETYX and COMETRIQ. The FDA regularly issues product specific bioequivalence guidance for products following their approval. The February 2018 draft guidance for drug products containing cabozantinib could have been issued by the FDA as a matter of its own standard practice; it could also indicate that a generic drug manufacturer is investigating whether to submit an ANDA for cabozantinib. The ANDA process is discussed in more detail above under the heading "Government Regulation-The Hatch-Waxman Act”. Generic competition often results in decreases in the prices at which branded products can be sold.
If we are unable to maintain or scale adequate sales, marketing, market access and distribution capabilities for CABOMETYX or enter into or maintain agreements with third parties to do so, we may be unable to commercialize cabozantinib successfully.maximize product revenues and our business, financial condition, results of operations and prospects may be adversely affected.
In connection with the FDA’s approval of CABOMETYX for the treatment of patients with advanced RCC, we substantially increasedMaintaining our sales, marketing, market access, medical affairs and product distribution capabilities. Establishingcapabilities requires significant resources, and maintaining these capabilitiesthere are expensivenumerous risks involved with managing such a commercial organization, including our potential inability to successfully recruit, train, retain and time-consuming. Such expenses may be disproportionate comparedincentivize adequate numbers of qualified and effective sales and marketing personnel. We are competing for talent with numerous commercial-stage oncology-focused biotech companies seeking to the revenuesbuild out their commercial organizations, as well as other large pharmaceutical organizations that have extensive, well-funded, and more experienced sales and marketing operations, and we may be ableunable to generate onmaintain or adequately scale our commercial organization as a result of such competition. If we cannot maintain effective sales, marketing, market access, medical affairs and product distribution capabilities, we may be unable to maximize the commercial potential of cabozantinib, which may have an adverse impact on our results of operations.CABOMETYX and COMETRIQ in their approved indications. Also, to the extent that the commercial opportunities for cabozantinib growsCABOMETYX grow over time, we may not properly judge the requisite size and experience of the commercialization teams
or the scale of distribution necessary to market and sell cabozantinibCABOMETYX successfully. If we are unable to maintain or scale our organization appropriately, we may not be able to maximize product revenues and our business, financial condition, results of operations and prospects may be adversely affected.
Our ability to successfully commercialize CABOMETYX and COMETRIQ will depend, in part, on the extent to which we are able to adequately distribute the products to eligible patients. We currently rely on a single third party logistics provider (with two distribution locations)third-party providers to handle shippingstorage and warehousingdistribution for our commercial supply of both CABOMETYX and COMETRIQ in the U.S. While we have expanded our U.S. distribution and pharmacy channels in connection with the approval of CABOMETYX by the FDA for the treatment of patients with advanced RCC in the United States, we still rely on a relatively limited distribution network to dispense COMETRIQ in fulfillment of prescriptions in the United States. Furthermore, we rely on our collaboration partners for the commercialization and distribution of CABOMETYX and COMETRIQ in territories outside of the United States,U.S., as well as for access and distribution activities for the approved products under named patient use programs (or similar programs) with the NPU program.effect of introducing earlier patient access to COMETRIQ and CABOMETYX.
Our current and anticipated future dependence upon the activities, support, and legal and regulatory compliance of these or other third parties may adversely affect our future profit margins and our ability to supply cabozantinib to the marketplace on a timely and competitive basis. For example, if a warehouse of our third party logistics provider suffers a fire or damage from another type of disaster, a significant portion of the commercial supply of CABOMETYX and COMETRIQ could be destroyed, resulting in a disruption in our commercialization efforts. These or other third parties may not be able to provide services in the time we requirerequired to meet our commercial timelines and objectives or to meet regulatory requirements. We may not be able to maintain or renew our arrangements with third parties, or enter into new arrangements, on acceptable terms, or at all. Third parties could terminate or decline to renew our arrangements based on their own business priorities, at a time that is costly or inconvenient for us.priorities. If we are unable to contract for logisticsthese third-party services orrelated to the distribution of cabozantinib on acceptable terms, our commercialization efforts and those of our collaboration partners may be delayed or otherwise adversely affected.
operations and prospects.
We are subject to certain healthcare laws, regulation and enforcement; our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.
We are subject to certain healthcare laws and regulations and enforcement by the federal government and the states in which we conduct our business. TheShould our compliance controls prove ineffective at preventing or mitigating the risk and impact of improper conduct, the laws that may affect our ability to operate include, without limitation:
the federal Anti-Kickback Statute, or AKS, which governs our business activities, including our marketing practices, educational programs, pricing policies, and relationships with healthcare providers or other entities. The AKS prohibits,has been broadly interpreted to apply to manufacturer arrangements with prescribers, purchasers and formulary managers, among others. Among other things, this statute prohibits persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs. Remuneration is not defined in the AKS and has been broadly interpreted to include anything of value, including for example, gifts, discounts, coupons, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. The AKS has been broadly interpreted to apply to manufacturer arrangements with prescribers, purchasers and formulary managers, among others;value;
the FDCA and its regulations, which prohibit, among other things, the introduction or delivery for introduction into interstate commerce of any food, drug device, or cosmetic that is adulterated or misbranded;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
the Health Insurance PortabilityHIPAA and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and theirits implementing regulations, which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information;
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;
the Foreign Corrupt Practices Act, a U.S. law, which regulates certain financial relationships with foreign government officials (which could include, for example, certain medical professionals); and its foreign equivalents;
federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
federal and state government price reporting laws, thatwhich require us to calculate and report complex pricing metrics to government programs, where such reported prices may be used in the calculation of reimbursement and/or discounts on our marketed drugs, (participationas well as certain state and municipal government price reporting laws that require us to provide justifications where drug prices exceed a certain price increase threshold (and participation in these programs and compliance with the applicable requirements may subject us to potentially significant discounts on our products, increased infrastructure costs, and could potentially affect our ability to offer certain marketplace discounts); and
federal and state financial and drug pricing transparency laws, which generally require certain types of expenditures in the United StatesU.S. to be tracked and reported (compliance(and compliance with such requirements may require investment in infrastructure to ensure that tracking is performed properly, and some of these laws result in the public disclosure of various types of payments and relationships with healthcare providers and healthcare entities, which could potentially have a negative effect on our business and/or increase enforcement scrutiny of our activities).
In addition, certain marketing practices, including off-label promotion, may also violate certainThese federal and state healthcare fraud and abuse laws, FDA rules and regulations, as well as false claims laws, including the civil False Claims Act. Suits filed under the civil False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical device and other healthcare companies to have to defend a civil False Claims Act action. When an entity is determined to have violated the civil False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim.
govern certain marketing practices, including off-label promotion. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we, or our officers or employees, may be subject to penalties, including administrative civil and criminal penalties, damages, fines, withdrawal of regulatory approval,penalties, the curtailment or restructuring of our operations, the exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs, individual imprisonment, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement, to resolve allegations of non-compliance with these laws, any of which couldwould adversely affect our ability to sell our products orand operate our business and also adversely affect our financial results. Of particular concern are suits filed under the civil False Claims Act, known as “qui tam” actions, which can be brought by any individual on behalf of the government. Such individuals, commonly known as relators or “whistleblowers,” may potentially then share in amounts paid by the entity to the government in fines or settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical device and other healthcare companies to have to defend civil False Claims Act actions. When an entity is determined to have violated the civil False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
Numerous federalThe legislative and state laws,regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, that govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information are subject to privacy and security requirements under HIPAA. Although we are not directly subject to HIPAA, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. The legislativeOther countries also have, or are developing, laws governing the collection, use and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amounttransmission of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing business. International laws, such aspersonal information. For example, the EU Data Privacy Directive (95/46/EC) and implementing legislation in the various national Member States of the EU, which will be replaced on May 25, 2018 by the more restrictive GDPR (Regulation (EU) 2016/679) and the Swiss Federal Act on Data Protection, regulate the processing of personal data within the European UnionEU and between countries in the European UnionEU and countries outside of the European Union,EU, including the United States.U.S. We are currently reviewing all privacy and other regulations in connection with these new laws to assess whether additional procedural safeguards are warranted, including compliance with the EU-U.S. Privacy Shield framework, which will replace the previous safe harbor mechanism. Failure to provide adequate privacy protections and maintain compliance with safe harbor mechanismsthese laws and regulations could jeopardize business transactions across borders, and result in significant penalties.create liability for us, including the imposition of sanctions or other penalties, and/or could increase our cost of doing business.
If we are unable to obtain both adequate coverage and adequate reimbursement from third-party payers for CABOMETYX or COMETRIQ, our revenues and prospects for profitability will suffer.
Our ability to successfully commercialize CABOMETYX or COMETRIQ successfully is highly dependent on the extent to which coverage and reimbursement is, and will be, available from third-party payers, including governmental payers, such as Medicare and Medicaid, and private health insurers. Patients may not be capable of paying for CABOMETYX or COMETRIQ
themselves and may rely on third-party payers to pay for, or subsidize, the costs of their medications, among other medical costs. If third-party payers do not provide coverage or reimbursement for CABOMETYX or COMETRIQ, our revenues and prospects for profitability will suffer. In addition, even if third-party payers provide some coverage or reimbursement for CABOMETYX or COMETRIQ, the availability of such coverage or reimbursement for prescription drugs under private health insurance and managed care plans, which often varies based on the type of contract or plan purchased. purchased, may not be sufficient for patients to afford CABOMETYX or COMETRIQ. Third-party payers continue to scrutinize and manage the prices charged for pharmaceutical products and services and many also limit reimbursement for newly-approved products and indications.
There has been negative publicity regarding, and increasing legislative adand enforcement interest in the United StatesU.S. with respect to, drug pricing, and the use of specialty pharmacies, and the effect of free drug programs and programs designed to help patients afford and defray the cost of their medications, which may result in physicians being less willing to participate in our patient accessthese programs and thereby limit our ability to increase patient access and adoption of cabozantinib.CABOMETYX. Specifically, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the price of drugs under Medicare, and reform government program reimbursement methodologies for drugs. There have also been similar laws enacted at the state level, including legislation signed by California Governor Jerry Brown in October 2017, currently being challenged in court, which requires pharmaceutical manufacturers to disclose information and justifications with respect to certain price increases. If future legislation were to impose direct governmental price controls and access restrictions, it could have a significant adverse impact on our business and financial results.
In addition, in some foreign countries, particularly in the European Union,EU, the pricing of prescription pharmaceuticals is subject to governmental control.control under the respective national health system. In these countries, price negotiations with governmental authorities or payers can take six to twelve months or longer after marketing authorization is granted for a product, which has the potential to substantially delay broad availability of the product in some of those countries. To obtain reimbursement and/or pricing approval in some countries, we and our collaboration partner, Ipsen, may be required to conduct a clinical trialstudy that comparesseeks to establish the cost effectiveness of CABOMETYX tocompared with other available therapies.established therapies to support health technology appraisal. The conduct of such a clinical trialstudy could be expensive and result in delays in the commercialization of CABOMETYX. Third-party payers are challenging the prices charged for medical products and services, and many third-party payers limit reimbursement for newly-approved health care products. In particular, third-party payers may limit the indications for which they will reimburse patients who use CABOMETYX or COMETRIQ. Cost-controlAdditionally, cost-control initiatives could decrease the price we and our collaboration partner, Ipsen, might establish for CABOMETYX, which would result in lower productlicense revenues to us.
Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to sell CABOMETYX and COMETRIQ profitably.
The United StatesU.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell CABOMETYX and COMETRIQ profitably. Among policy makers and payers in the United StatesU.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States,U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.
InSince its enactment, there have been judicial and Congressional challenges to numerous provisions of the PPACA,as well as recent efforts by the Trump administration and Congress to repeal or replace certain aspects of the PPACA. Since January 2017, Congress votedPresident Trump has signed two Executive Orders designed to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizesdelay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal portionsor repeal and replace all or part of the PPACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the PPACA have been enacted. The Budget ResolutionTax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is not a law; however, it is widely viewedcommonly referred to as the first step toward the passage of legislation that would repeal certain aspects of PPACA. Further,“individual mandate”. Additionally, on January 20, 2017,23, 2018, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under PPACA to waive, defer, grant exemptions from, or delaya continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of any provision of PPACA that would impose a fiscal or regulatory burdencertain PPACA-mandated fees, including the so-called “Cadillac” tax on states, individuals, healthcarecertain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers health insurers, or manufacturers of pharmaceuticals orbased on market share, and the medical device excise tax on non-exempt medical devices. It is expected that Congress also couldwill continue to consider subsequent legislation to repeal and replace some or all elements of PPACA that are repealed.the PPACA. Moreover, certain politicians, including the President, have announced plans to regulate the prices of pharmaceutical products. Congress has also signaled an intent to address pharmaceutical pricing, with Senate hearings to examine the cost of prescription drugs held on June 13 and October 17, 2017. Federal legislators previously proposed legislation that would require pharmaceutical manufacturers to report price
increases and provide a public justification for increases that exceed given benchmarks and authorize the U.S. Department of Health and Human Services to negotiate the price of Part D prescription drugs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and bulk. We cannot know what form any such legislationmeasures may take or the market’s perception of how such legislationproposals and provisions would affect us. Any reduction in reimbursement from government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may limit our ability to generate revenue or commercialize our current products and/or those for which we may receive regulatory approval in the future.
In August 2017, President Trump signed the FDA Reauthorization Act of 2017, which will reauthorize the FDA user fee programs for prescription drugs, generic drugs, medical devices, and biosimilars, under which manufacturers of such products partially pay for the FDA’s pre-market review of their product candidates. The legislation includes, inter alia, measures to expedite the development and approval of generic products, where generic competition is lacking even in the absence of exclusivities or listed patents. The FDA has also released a Drug Competition Action Plan, which proposes actions to broaden access to generic drugs and lower consumers’ health care costs by, among other things, improving the efficiency of the generic drug approval process and supporting the development of complex generic drugs. In January 2018, the FDA took steps to implement the Drug Competition Action Plan and released guidance to streamline aspects of the submission and review of ANDAs for generic drugs. We cannot currently predict the specific outcome or impact on our business of such regulatory actions.
As a result of the overall trend towards cost-effectiveness criteria and managed healthcare in the United States,U.S., third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs. They may useThese entities could refuse or limit coverage for CABOMETYX and COMETRIQ, such as by using tiered reimbursement, and maywhich would adversely affect demand for CABOMETYX or COMETRIQ by placing a particular product in an expensive tier.and COMETRIQ. They may also refuse to provide any coverage for uses of approved productsCABOMETYX and COMETRIQ for medical indications other than those for which the FDA has granted market approvals.approval. As a result, significant uncertainty exists as to whether and how much third-party payers will reimburse forcover newly approved drugs, which in turn will put pressure on the pricing of drugs. We also anticipate pricing pressures in connection with the sale of CABOMETYX and COMETRIQ due to the increasing influence of health maintenance organizations and additional legislative proposals. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of any unforeseen or unknown legislative, regulatory, third-party payer or policy actions, which may include cost containment and healthcare reform measures. Such policy actions could have a material adverse impact on our revenues and prospects for profitability.
Pricing for pharmaceutical products has come under increasing scrutiny by governments, legislative bodies and enforcement agencies. These activities may result in actions that have the effect of reducing our revenue or harming our business or reputation.
Many companies in our industry have received a governmental request for documents and information relating to drug pricing and patient support programs. We may become subject tocould receive a similar requests,request, which would require us to incur significant expense and result in distraction for our management team. Additionally, to the extent there are findings, or even allegations, of improper conduct on the part of the company, such findings could further harm our business, reputation and/or prospects. It is possible that such inquiries could result inin: negative publicity or other negative actions that could harm our reputation; changes in our product pricing and distribution strategies; reduced demand for our approved productsproducts; and/or reduced reimbursement of approved products, including by federal health care programs such as Medicare and Medicaid and state health care programs.
In addition, the Trump Administration has indicated an interest in taking measuresregulatory and other policy actions pertaining to drug pricing, including potential proposals relating to Medicare price negotiations, and importation of drugs from other countries.countries and facilitating value-based arrangements between manufacturers and payers. At this time, it is unclear whether any of these proposals will be pursued and how they would impact our products or our future product candidates.
Our competitors may develop productsState and technologies that impairlocal governments continue to consider prescription drug pricing transparency proposals. In October 2017, California Governor Jerry Brown signed legislation requiring pharmaceutical manufacturers to disclose and provide justification for certain price increases; however, the value of cabozantinib, cobimetinib and any future product candidates.
The pharmaceutical, biopharmaceutical and biotechnology industries are highly diversified and are characterized by rapid technological change. In particular, the area of novel oncology therapies is a rapidly evolving and competitive field. Specifically, the indication of advanced RCC is highly competitive and several novel therapies and combinations of therapies are in advanced stages of clinical development in this indication, and may compete with or displace cabozantinib. We face,regulations under which we will be required to operate have not yet been promulgated. While we have taken and will continue to face, intense competition from biotechnology, biopharmaceuticaltake appropriate actions to ensure compliance with this new law, without knowing the final regulations applicable to us, we cannot comprehensively assess the potential impact on our business. Additionally, Ohio voters considered, but rejected, a ballot initiative in November 2017, which would have required state agencies to pay no more for prescription drugs than the price paid by the U.S. Department of Veterans
Affairs. While this particular initiative in Ohio failed to become law, additional legislation or ballot initiatives may be proposed by various states and pharmaceutical companies,municipalities in the future, and we cannot predict the outcome of any future proposals, the market’s perception of them or their potential impact on us.
We are heavily dependent on our partner, Genentech (a member of the Roche group), for the successful development, regulatory approval and commercialization of cobimetinib, marketed as COTELLIC.
The terms of our collaboration agreement with Genentech provide Genentech with exclusive authority over the global development and commercialization plans for cobimetinib and the execution of those plans. We have limited effective influence over those plans and are heavily dependent on Genentech’s decision making. Any significant changes to Genentech’s business strategy and priorities, over which we have no control, could adversely affect Genentech’s willingness or ability to complete their obligations under our collaboration agreement and result in harm to our business and operations. Subject to contractual diligence obligations, Genentech has complete control over and financial responsibility for cobimetinib’s development program, as well as
academic research institutions, clinical reference laboratories and government agenciesresources that Genentech will devote to the product. Of particular significance 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. Some of our competitors are further along in theGenentech’s development of their products than we are. Delays in the development of cabozantinib or cobimetinib for the treatment of additional tumor types, for example, could allow our competitors to bring products to market before us. Our future success will depend upon our ability to maintain a competitive positionefforts with respect to technological advancesthe combination of cobimetinib with immune checkpoint inhibitors, a competitive area of clinical research. Regardless of Genentech’s efforts and expenditures for the shifting landscapefurther development of therapeutic strategy followingcobimetinib, the adventresults of immunotherapy. Our productssuch additional clinical investigation may become less marketable if we are unable to successfully adapt our development strategy to address the likelihood that this new approach to treating cancer with immuno-oncology agents will become prevalent in indications for which our products are approved, most notably advanced RCC,not prove positive and may not produce label expansions or approval in additional indications, where we may seek regulatory approval. Furthermore,which could have a material adverse impact on our long-term revenue prospects. For instance, top-line results from IMblaze370, Genentech’s phase 3 pivotal trial evaluating the complexitiescombination of such a strategy may require collaboration with some of our competitors.
The markets for which we intend to pursue regulatory approval of cabozantinib and for which Roche and Genentech intend to pursue regulatory approval for cobimetinib are highly competitive. 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 staff and facilities, more experience in obtaining regulatory approvals and more extensive product manufacturing and commercial capabilities than we do. 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. There may also be drug candidates of which we are not aware at an earlier stage of development that may compete with cabozantinib, cobimetinib and atezolizumab or atezolizumab alone versus regorafenib, in unresectable locally advanced or metastatic CRC patients who have received at least two lines of prior cytotoxic chemotherapy, are expected in the first half of 2018; should Genentech obtain negative or inconclusive results in this trial, cobimetinib’s prospects, and its ability to contribute meaningfully to our other product candidates.business, will be substantially impaired.
If competitors use litigation and regulatory means to obtain approval for generic versions of cabozantinib,our marketed products, our business will suffer.
Under the FDCA, the FDA can approve an ANDA for a generic version of a branded drug without the applicant undertaking the human clinical testing necessary to obtain approval to market a new drug. In this regard, in February 2018, the FDA published draft guidance containing product-specific bioequivalence recommendations for drug products containing cabozantinib, the active ingredient in CABOMETYX and COMETRIQ. The FDA regularly issues product specific bioequivalence guidance for products following their approval. The February 2018 draft guidance for drug products containing cabozantinib could have been issued by the FDA as a matter of its own standard practice; it could also indicate that a generic drug manufacturer is investigating whether to submit an ANDA for cabozantinib. The FDA can also approve a 505(b)(2) NDA that relies on the agency’s findings of safety and/or effectiveness for a previously approved drug. The filing of an ANDA or 505(b)(2) NDAIn either case, we will have to engage in litigation with respecta potential generic competitor to cabozantinibprotect our patent rights, which would require us to incur significant expense and result in distraction for our management team, and could also have an adverse impact on our stock price. Moreover, if any such ANDAs or 505(b)(2) NDAs were to be approved and the patents covering cabozantinib were not upheld in litigation, or if a generic competitor is found not to infringe these patents, the resulting generic competition would negatively affect our business, financial condition and results of operations. In this regard, generic equivalents, which must meet the same quality standards as the branded drugs, would be significantly less costly than ours to bring to market. Companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, regardless of the regulatory approval pathway, after the introduction of a generic competitor,version of any of our marketed products could result in a significant percentage ofdecrease in the sales of any branded product are typically lost to the generic product.these marketed products and materially harm our business and financial condition.
Clinical testing of product candidates is a lengthy, costly, complex and uncertain process and may fail to demonstrate safety and efficacy.
Clinical trials are inherently risky and may reveal that a product candidate, even if it is approved for other indications, is ineffective or has an unacceptable safety profile that may significantly decrease the likelihood of regulatory approval in a new indication. For example, COMET-1 and COMET-2, our two phase 3 pivotal trials of cabozantinib in metastatic castration-resistant prostate cancer, or mCRPC, failed to meet their respective primary endpoints of demonstrating a statistically significant increase in OS for patients treated with cabozantinib as compared to prednisone and to demonstrate improvement in pain response for patients treated by cabozantinib as compared to mitoxantrone/prednisone. Based on the outcome of the COMET trials, we deprioritized the clinical development of cabozantinib in mCRPC.
The results of preliminary studies do not necessarily predict clinical or commercial success, and later-stage clinical trials may fail to confirm the results observed in earlier-stage trials or preliminary studies.
Although we have established timelines for manufacturing and clinical development of our product candidates based on existing knowledge of our compounds in development and industry metrics, we may not be able to meet those timelines.
timelines. We may experience numerous unforeseen events, during or as a result of clinical testing, that could delay or prevent commercialization of oursuch product candidates, including:
lack of efficacy or harmful side effects;
negative or inconclusive clinical trial results may require us to conduct further testing or to abandon projects that we had expected to be promising;
our competitors may discover or commercialize other compounds or therapies that show significantly improved safety or efficacy compared to our product candidates;
our inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs;
patient registration or enrollment in our clinical testing may be lower than we anticipate, resulting in the delay or cancellation of clinical testing;
failure by our collaborators to provide us on a timely basis with an adequate supply of product that complies with the applicable quality and regulatory requirements for a combination trial;
failure of our third-party contract research organization or investigators to satisfy their contractual obligations, including deviating from trial protocol; and
regulators or institutional review boards may withhold authorization to commence or conduct clinical trials of a product candidate, or delay, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their determination that participating patients are being exposed to unacceptable health risks.
If we were to have significant delays in or termination of our clinical testing of our product candidates as a result of any of the events described above or otherwise, our expenses could increase and our ability to generate revenues could be impaired, either of which could adversely impact our financial results. Furthermore, we rely on our clinical and commercial collaboration partners to fund a significant portion of the clinical development of cabozantinib and our product candidates. Should one or all of our collaboration partners decline to support future planned clinical trials, we will be entirely responsible for the financial obligations associated with the further development of such product candidates, and as a result, we may be unable to execute our business plan, and our financial results could be materially adversely affected.
We may not be able to rapidly or effectively continue the further development of our product candidates or meet current or future requirements of the FDA or regulatory authorities in other jurisdictions, including those identified based on our discussions with the FDA or such other regulatory authorities. Our planned clinical trials may not begin on time, or at all, may not be completed on schedule, or at all, may not be sufficient for registration of our product candidates or may not result in an approvable product.
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 the product candidate. The duration and the cost of clinical trials may vary significantly over the life of a project as a result of factors relating to the clinical trial, including, among others:
the number of patients who ultimately participate in the clinical trial;
the duration of patient follow-up that is appropriate in view of the results or required by regulatory authorities;
the number of clinical sites included in the trials; and
the length of time required to enroll suitable patient subjects.
Any delay could limit our ability to generate revenues, cause us to incur additional expense and cause the market price of our common stock to decline significantly. Our partners under our collaboration agreements may experience similar risks with respect to the compounds we have out-licensed to them. If any of the events described above were to occur with such programs or compounds, the likelihood of receipt of milestones and royalties under such collaboration agreements could decrease.
The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy and uncertain, and may not result in the necessary regulatory approvals for our product candidates, which could adversely affect our business.
The activities associated with the research, development and commercialization of our products and product candidates, are subject to extensive regulation by the FDA and other regulatory agencies in the United StatesU.S. and by comparable authorities in other countries. We have only limited experience in preparing and filing the applications necessary to gain regulatory approvals. The process of obtaining regulatory approvals in the United StatesU.S. and other foreign jurisdictions is expensive, and often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. For example, before an NDA or sNDA can be submitted to the FDA, or a MAA to the EMA or any application or submission to regulatory authorities in other jurisdictions, the product candidate must undergo extensive clinical trials, which can take many years and require substantial expenditures.
Any clinical trial may fail to produce results satisfactory to the FDA or regulatory authorities in other jurisdictions. For example, the FDA could determine that the design of a clinical trial is inadequate to produce reliable results. The regulatory process also requires preclinical testing, and data obtained from preclinical and clinical activities are susceptible to varying interpretations. The FDA has substantial discretion in the approval process and may refuse to approve any NDA or decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. For example, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of cabozantinib for any individual, additional indications.
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, which may cause delays in the approval or rejection of an application for our product candidates.
Even if the FDA or a comparable authority in another jurisdiction approves cabozantinib for an indicationone or more indications beyond advanced RCC and MTC, or one of our other product candidates, the approval may be limited, imposing significant restrictions on the indicated uses, conditions for use, labeling, distribution, advertising, promotion, marketing and/or production of the product and could impose ongoing requirements for post-approval studies, including additional research and development and clinical trials. For example, in connection with the FDA’s approval of COMETRIQ for the treatment of progressive, metastatic MTC, we are subject to a post-marketing requirement to conduct a clinical study comparing a lower dose of cabozantinib to the approved dose of 140 mg daily cabozantinib in progressive, metastatic MTC. Failure to complete any post-marketing requirements in accordance with the timelines and conditions set forth by the FDA could significantly increase costs or delay, limit or eliminate the commercialization of cabozantinib. Further, these agencies may also impose various administrative, civil or criminal sanctions for failure to comply with regulatory requirements, including withdrawal of product approval.
We may be unable to expand our development pipeline, which could limit our growth and revenue potential.
We are committed toOur business is focused on the discovery, development and promotioncommercialization of new medicines with the potential to improve care and outcomes for people with cancer.difficult-to-treat cancers. In this regard, we recently resumedare pursuing internal drug discovery efforts with the goal of identifying new product candidates to advance into clinical trials. Internal discovery efforts to identify new product candidates require substantial technical, financial and human resources. These internal discovery efforts may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including where the research methodology used may not be successful in identifying potential product candidates, or where potential product candidates may, on further study, be shown to have inadequate efficacy, harmful side effects, suboptimal pharmaceutical profile or other characteristics suggesting that they are unlikely to be effective products.
Apart from our internal discovery efforts, our strategy to expand our development pipeline is also dependent on our ability to successfully identify and acquire or in-license relevant product candidates. However, the in-licensing and acquisition of product candidates is a competitive area, and many other companies are pursuing the same or similar product candidates to those that we may consider attractive. Established companies, in particular, may have a competitive advantage over us due to their size, financial resources and more extensive clinical development and commercialization capabilities. Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We may also be unable to in-license or acquire aadditional relevant product candidatecandidates on acceptable terms that would allow us to realize an appropriate return on our investment. If we are unable to develop suitable product candidates through internal discovery effort or if we are unable to successfully obtain rights to suitable product candidates, our business, financial condition and prospects for growth could suffer. Even if we succeed in our efforts to obtain rights to suitable
product candidates, the competitive business environment may result in higher acquisition or licensing costs.costs, and our investment in these potential products will remain subject to the inherent risks associated with the development and commercialization of new medicines. In certain circumstances, we may also be reliant on the licensor for the continued development of the in-licensed technology and their efforts to safeguard their underlying intellectual property.
With respect to acquisitions, we may not be able to integrate the target company successfully into our existing business, maintain the key business relationships of the target, or retain key personnel of an acquired business. Furthermore, we could assume unknown or contingent liabilities or incur unanticipated expenses. Any acquisitions or investments made by us also could result in our spending significant amounts, issuing dilutive securities, assuming or incurring significant debt obligations and contingent liabilities, incurring large one-time expenses and acquiring intangible assets that could result in significant future amortization expense and significant write-offs, any of which could harm our operating results.
Increasing use of social media could give rise to liability and result in harm to our business.
We and our employees are increasingly utilizing social media tools and our website as a means of communication. Despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that the unauthorized use of social media by us or our employees to communicate about our products or business may cause us to be found in violation of applicable laws and regulations, which may give rise to liability and result in harm to our business. In addition, there is also risk of inappropriate disclosure of sensitive information which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business. Furthermore, negative posts or comments about us or our products in social media could seriously damage our reputation, brand image, and goodwill.
Risks Related to Our Capital Requirements and Financial Results
We may be unable to maintain or increase profitability.
Although we reported net income of $154.2 million for the year ended December 31, 2017, we may not be able to maintain or increase profitability on a quarterly or annual basis, and we are unable to accurately predict the extent of long-range future profits or losses. The amount of our net profits or losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the U.S.; achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ outside of the U.S. under our collaboration agreements with Ipsen and Takeda; our share of the net profits and losses for the commercialization of COTELLIC in the U.S. under our collaboration with Genentech; the amount of royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and the level of our expenses, including development and commercialization activities for cabozantinib and any pipeline expansion efforts. We have limited commercialization experience and expect to continue to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we will continue to expand our product pipeline through our drug discovery efforts and the evaluation of in-licensing and acquisition opportunities that align with our oncology drug expertise, which efforts could involve substantial costs. If we are unable to maintain or increase profitability, the market value of our common stock may decline.
If additional capital is not available to us when we need it, we may be forced to limit the expansion of our product development programs or commercialization efforts.
As of December 31, 2016,2017, we had $479.6$457.2 million in cash and investments, which included $393.8$452.0 million available for operations, $81.6 million of compensating balance investments that we are required to maintain on deposit with Silicon Valley Bank, and $4.2 million of long-term restricted investments.operations. Our business operations grew substantially during 2016. In order to continue to grow the2017. To maintain business growth and maximize the clinical and commercial opportunities for cabozantinib, and cobimetinib, we plan to continue to execute on the U.S. launch ofcommercialization plans for CABOMETYX, while reinvesting in our product pipeline through the continued development of cabozantinib, continuedboth alone and in combination with other therapies, research and development efforts,activities, as well as through in-licensing and acquisition efforts. Our ability to execute on these business objectives will depend on many factors including but not limited to:
the commercial success of both CABOMETYX and COMETRIQ and the revenues we generate from those approved products;
costs associated with maintaining our expanded sales, marketing, medical affairs and distribution capabilities for CABOMETYX in advanced RCC and COMETRIQ in the approved MTC indications;COMETRIQ;
the achievement of stated regulatory and commercial milestones under our collaboration agreements with Ipsen;
Ipsen and Takeda;
the commercial success of CotellicCOTELLIC and the calculation ofrevenues generated through our share of related profits and losses for the commercialization of CotellicCOTELLIC in the U.S. and royalties from CotellicCOTELLIC sales outside the U.S. under our collaboration with Genentech;
the outcome of our arbitration against Genentech in which we have asserted claims relatedability to Genentech’s clinical development, pricingtimely prepare and commercialization of Cotellic, and cost and revenue allocations arising from Cotellic’s commercialization in the United States;
the potential regulatory approval ofsubmit an sNDA for cabozantinib as a treatment for patients with previously untreatedtreated advanced RCC and in other indications, both in the United States and abroad;HCC;
future clinical trial results, notably the results from CELESTIAL, our phase 3 pivotal trial in patients with advanced HCC;results;
our future investments in the expansion of our pipeline through drug discovery and corporate development activities;
our repayment and any potential mandatory prepayment of the Secured Convertible Notes due 2018, or the Deerfield Notes, (see “Note 7. Debt” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for a description of these notes), which mature on July 1, 2018, and which we intend to repay on or about July 1, 2017;
our ability to control costs;
our ability to remain in compliance with, or amend or cause to be waived, financial covenants contained in agreements with third parties;
the cost of clinical drug supply for our clinical trials;
trends and developments in the pricing of oncologic therapeutics in the United StatesU.S. and abroad, especially in the European Union;EU;
scientific developments in the market for oncologic therapeutics and the timing of regulatory approvals for competing oncologic therapies; and
the filing, maintenance, prosecution, defense and enforcement of patent claims and other intellectual property rights.
We have a historyOur commitment of net lossescash resources to CABOMETYX and may incur net lossesthe reinvestment in the future, and may be unable to achieve and maintain profitability.
We have incurred net losses since inception through December 31, 2016, with the exception of the 2011 fiscal year. For the year ended December 31, 2016, we incurred a net loss of $70.2 million and as of December 31, 2016, we had an accumulated deficit of $2.0 billion. These losses have had an adverse effect on our stockholders’ equity (deficit) and working capital. Because of the numerous risks and uncertainties associated with developing and commercializing drugs, we are unable to predict the extent of any future losses. Excluding fiscal 2011, our research and development expenditures and selling, general and administrative expenses have exceeded our revenues for each fiscal year, and we expect to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we plan to expand our product pipeline through the resumptioncontinued development of cabozantinib, increasing drug discovery activities as well as through in-licensing and product acquisition and in-licensing. As a result, we expectefforts, could require us to continue to incur substantial operating expenses and, consequently, we will need to generate substantial revenues to achieve and maintain profitability.
Since the launch of our first commercial product in January 2013,obtain additional capital. We may seek such additional capital through December 31, 2016, we have generated an aggregate of $209.7 million in net product revenues, including $135.4 million for the year ended December 31, 2016. Other than sales of CABOMETYX and COMETRIQ, we have derived substantiallysome or all of our revenues since inception from collaborativethe following methods: corporate collaborations, licensing arrangements, including upfront and milestone payments and research funding we earn from any products developed from the collaborative research. The amount of our net profitspublic or losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the United States; achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ under our collaboration with Ipsen; our share of the net profits and losses for the commercialization of Cotellic in the U.S. under our collaboration with Genentech; the amount of royalties from Cotellic sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and, the level of our expenses, including commercialization activities for cabozantinib and any pipeline expansion efforts.
Our significant level of indebtednesscould limit cash flow available for our operations and expose us to risks that could adversely affect our business, financial condition and results of operations.
We have significant indebtedness and substantialprivate debt service requirements as a result of the Deerfield Notes and our loan and security agreement with Silicon Valley Bank. As of December 31, 2016, our total consolidated indebtedness through
maturity was $205.0 million (excluding trade payables).or equity financings. Our outstanding debt under our loan and security agreement with Silicon Valley Bank of $81.6 million will become due and payable in May 2018. We may also incur additional indebtedness to meet future financing needs. If we incur additional indebtedness, it would increase our interest expense, leverage and operating and financial costs.
Our current and any potential future indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:
increasing our vulnerability to adverse economic and industry conditions;
limiting our ability to obtain additional financing;
requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes, including clinical trials, researchcapital may depend on prevailing economic conditions and development, capital expenditures, working capitalfinancial, business and other general corporate purposes;
limitingfactors beyond our flexibilitycontrol. Disruptions in planning for,the U.S. and global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise money in the capital markets. Economic conditions have been, and continue to be, volatile. Continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business. Accordingly, we do not know whether additional capital will be available when needed, or reacting to, changes in our business;
dilution experienced by our existing stockholders as a result of a conversion of the Deerfield Notes, at our discretion, into shares of common stock; and
placing us at a possible competitive disadvantage with less leveraged competitors and competitors that, may have better access to capital resources.
We cannot assure you thatif available, we will continueobtain additional capital on terms favorable to maintain sufficient cash reservesus or that our business will generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase.stockholders. If we are unable to generate sufficient cash flowraise additional funds when we need them, we may be required to limit the expansion of our product development programs or otherwise obtain funds necessary to make required payments or planned early repayments, or if we fail to comply with the various covenants imposed under the terms of the Deerfield Notes, or any indebtednesscommercialization efforts, which we have incurred or may incur in the future, we would be in default, which would permit the holders of the Deerfield Notes or other indebtedness to accelerate the maturity of such notes or other indebtedness and could cause defaults under the Deerfield Notes, or our other indebtedness. Any default under the Deerfield Notes, or any indebtedness that we have incurred or may incur in the future could have a material adverse effect on our business results of operations and financial condition.
We are exposed to risks related to foreign currency exchange rates.
Most of our foreign expenses incurred are associated with establishing and conducting clinical trials for cabozantinib. The amount of these expenses will be impacted by fluctuations in the currencies of those countries in which we conduct clinical trials. Our agreements with the foreign sites that conduct such clinical trials generally provide that payments for the services provided will be calculated in the currency of that country, and converted into U.S. dollars using various exchange rates based upon when services are rendered or the timing of invoices. When the U.S. dollar weakens against foreign currencies, the U.S. dollar value of the foreign-currency denominated expense increases, and when the U.S. dollar strengthens against these currencies, the U.S. dollar value of the foreign-currency denominated expense decreases. Consequently, changes in exchange rates may affect our financial position and results of operations.
Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents, short-term investments or long-term investments and our ability to meet our financing objectives.
Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term and long-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this report we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents, short-term investments or long-term investments since December 31, 2016, no assurance can be given that a deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or investments or our ability to meet our financing objectives.growth prospects.
Our financial results are impacted by management’s selection of accounting methods, and certain assumptions and estimates.estimates and future changes in accounting standards.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to the presentation of our financial condition and results of operations. The preparation of our financial statements requires us to make significant estimates, assumptions and judgments that affect the amounts of assets, liabilities, revenues and expenses and related disclosures. Significant estimates that may be made by us include assumptions used in the determination of revenue recognition, discounts and allowances from gross revenue, inventory and stock-based compensation. Although we base our estimates and judgments on historical experience, our interpretation of existing accounting literature and on various other assumptions that we believe to be reasonable under the circumstances, if our assumptions prove to be materially incorrect, actual results may differ materially from these estimates.
In addition, future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency in the past and are expected to occur again in the future, and as a result we may be required to make changes in our accounting policies. Those changes could adversely affect our reported revenues and expenses, prospects for profitability or financial position. For example, in May 2014, the Financial Accounting Standards
Board, or FASB, issued an Accounting Standards Update entitled Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which will replace existing revenue recognition guidance in U.S. generally accepted accounting pronouncements when it becomes effective for us in the first quarter of fiscal year 2018. We do not expect that ASU 2014-09 will not have a material impact on the recognition of revenue from product sales.sales; however, ASU 2014-09 will materially impact the timing of recognition of revenue for our collaboration agreements with Ipsen and Takeda. We are stillwill record a net adjustment of approximately $260 million to accumulated deficit (a concept known as “lost revenue”) for amounts associated with these collaboration agreements upon recording our transition adjustment in the processfirst quarter of evaluating2018, primarily due to the effecttiming of recognition of revenue related to intellectual property licenses that thiswe have transferred for development and commercialization of our products. Additionally, for all of our collaboration agreements, the timing of recognition of certain of our development and regulatory milestones could change as a result of the variable consideration guidance included in ASU 2014-09. For a more detailed description of the impact that ASU 2014-09 and other new accounting standards will have on revenue recognition from our collaborationreported results, see “Note 1. Organization and license agreements, such asSummary of Significant Accounting Policies - Recent Accounting Pronouncements” to our arrangements with Ipsen and Genentech. In any event, we will continue“Notes to evaluate the impactConsolidated Financial Statements” contained in Part II, Item 8 of the new standardthis Annual Report on all of our revenues, including those mentioned above, and our preliminary assessments may change in the future based on our continuing evaluation.Form 10-K. The application of existing or future financial accounting standards, particularly those relating to the way we account for revenues and costs, could have a significant impact on our reported results.
Risks Related to Our Relationships with Third Parties
We are dependent upon our collaborations with major companies, which subjects us to a number of risks.
We have established collaborations with leading pharmaceutical and biotechnology companies, including, Ipsen, Takeda, Genentech, Daiichi Sankyo, Merck (known as MSD outside of the United StatesU.S. and Canada), BMS and Sanofi for the development and ultimate commercialization of certain compounds generated from our research and development efforts. Our dependence on our relationships with existing collaborators for the development and commercialization of compounds under the collaborations subjects us to, and our dependence on future collaborators for development and commercialization of additional compounds will subject us to a number of risks, including:
we are not able to control the amount and timing of resources that our collaborators or potential future collaborators will devote to the development or commercialization of drug candidates or to their marketing and distribution;
we are not able to control the U.S. commercial resourcing decisions made and resulting costs incurred by Genentech for cobimetinib, which reasonable costs we are obligated to share, in part, under our collaboration agreement with Genentech;
collaborators may delay clinical trials, fail to supply us on a timely basis with the product required for a combination trial, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a drug candidate, repeat or conduct new clinical trials or require a new formulation of a drug candidate for clinical testing;
disputes may arise between us and our collaborators that result in the delay or termination of the research, development or commercialization of our drug candidates, or that diminish or delay receipt of the economic benefits we are entitled to receive under the collaboration, or that result in costly litigation or arbitration that diverts management’s attention and resources;
collaborators may experience financial difficulties;
collaborators may not be successful in their efforts to obtain regulatory approvals in a timely manner, or at all;
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
collaborators may not comply with applicable healthcare regulatory laws;
business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
a collaborator could independently move forward with a competing drug candidate developed either independently or in collaboration with others, including our competitors;
we may be precluded from entering into additional collaboration arrangements with other parties in an area or field of exclusivity;
future collaborators may require us to relinquish some important rights, such as marketing and distribution rights; and
collaborations may be terminated or allowed to expire, which would delay, and may increase the cost of development of our drug candidates.
If any of these risks materialize, we may not receive collaboration revenuerevenues or otherwise realize anticipated benefits from such collaborations, our product development efforts could be delayed and our business, operating results and financial condition could be adversely affected.
If third parties upon which we rely to perform clinical trials for cabozantinib do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize cabozantinib for the treatment of additional indications beyond advanced RCC and MTC.
We do not have the ability to conduct clinical trials for cabozantinib independently, including our post-marketing commitments in connection with the approvalsapproval of CABOMETYX in advanced RCC and COMETRIQ in progressive, metastatic MTC, so we rely on independent third parties for the performance of these trials, such as the U.S. federal government (including NCI-CTEP, a department of the NIH,National Institutes of Health, with whom we have our CRADA), third-party contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, or if the third parties must be replaced or if the quality or accuracy of the data they generate or provide is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or commercialize cabozantinib for additional indications beyond its approved indications. In addition, due to the advanced RCCcomplexity of our research initiatives, we may be unable to engage with third-party contract research organizations that have the necessary experience and MTC.sophistication to further our drug discovery efforts, which would impede our ability to identify, develop and commercialize our product candidates.
We lack theinternal manufacturing capabilities necessary for us to produce cabozantinib for clinical development or for commercial sale and rely on third parties to do so, which subjects us to various risks.
We do not own or operate manufacturing or distribution facilities or resources for clinical or commercial production and distribution of CABOMETYX and COMETRIQ. Instead, we have multiple contractual agreements in place with third party CMOs who,third-party contract manufacturing organizations that, on our behalf, manufacture clinical and commercial supplies of CABOMETYX and COMETRIQ, andCOMETRIQ. We expect that this will continue to do so for the foreseeable future.future for both our current and future commercial products. To establish and manage this supply chain requires a significant financial commitment, and the creation and maintenance of numerous third-party contractual relationships.relationships and continued oversight of these third parties to ensure compliance with applicable regulatory requirements. Although we maintain significant resources to directly oversee the business activities and relationships with the companies in our supply chain effectively, we do not have direct control over their operations. Our third partythird-party contract manufacturers may not be able to produce material on a timely basis or manufacture material with the required quality standards, or in the quantity required to meet our development and commercial needs and applicable regulatory requirements. Additionally, as part of our collaboration with Ipsen, we are responsible for the manufacturing and supply of finished, labeled cabozantinib products to Ipsen through the end of the second quarter of 2018. Failure to meet our supply obligations under the collaboration would impair Ipsen’s ability to successfully commercialize cabozantinib and reduce revenues to which we are entitled under the collaboration.
If our third partythird-party contract manufacturers and suppliers do not continue to supply us with our products or product candidates in a timely fashion and in compliance with applicable quality and regulatory requirements, or otherwise fail or refuse to comply with their obligations to us under our supply and manufacturing arrangements, we may not have adequate remedies for any breach, and their failure to supply us could impair or preclude our ability to meet our and/or Ipsen’s commercial needs,supply requirements, or our supply needs for clinical trials.trials, including those being conducted in collaboration with our partners, which could delay our product development efforts and our business, operating results and financial condition could be adversely affected. Additionally, as part of our collaboration agreements with Ipsen and Takeda, we are responsible for the manufacturing and supply of cabozantinib products for global development and commercial purposes. Failure to meet our supply obligations under these collaboration agreements could impair our collaborators’ ability to successfully develop and commercialize cabozantinib and generate revenues to which we are entitled under the collaborations.
Our collaborations with outside scientific advisors and collaborators 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 advisors and collaborators are not our employees and may have other commitments that limit their availability to us. Although these 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 such a circumstance, we may lose work performed by them, and our development efforts with respect to the matters on which they were working may be significantly delayed or otherwise adversely affected. 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.
Risks Related to Our Intellectual Property
Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.
In the ordinary course of our business, we collect, maintain and transmit sensitive data on our networks and systems, including our intellectual property and proprietary or confidential business information (such as research data and personal information) and confidential information with respect to our customers, clinical trial patients and our business partners. We have also outsourced significant elements of our information technology infrastructure and, as a result, third parties may or could have access to our confidential information. The secure maintenance of this information is critical to our business and reputation.reputation, and while we have enhanced our cyber-security efforts commensurate with the growth and complexity of our business, our systems and those of third-party service providers may be vulnerable to a cyber-attack. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. In fact, although the aggregate impact on our operations and financial condition has not been material to date, we have been the target of threats of this nature and expect them to continue. These threats can come from a variety of sources, ranging in sophistication from an
individual hacker to a state-sponsored attack and motive (including corporate espionage). Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber-attacks continue to become more prevalent and much harder to detect and defend against. Our network and storage applications and those of our vendors may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose sensitive business information. A data security breach could also lead to public exposure of personal information of our clinical trial patients, customersemployees and others. Any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation and business, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could disrupt our business, result in increased costs or loss of revenue, and/or result in significant legal and financial exposure. Cyber-attacks could cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. Our network security and data recovery measures and those of our vendors may not be adequate to protect against such security breaches and disruptions. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business.
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 upon our ability to obtain patents and maintain adequate protection of the intellectual property related to our technologies and products. The patent positions of biopharmaceutical 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. We will continue to apply for patents covering our technologies and products as, where and when we deem lawful and appropriate. However, these applications may be challenged or may fail to result in issued patents. Our issued patents have been and may in the future be challenged by third parties as invalid or unenforceable under U.S. or foreign laws, or they may be infringed by third parties. As a result,parties, and we are from time to time involved in the defense and enforcement of our patents or other intellectual property rights in a court of law, U.S. Patent and Trademark Office inter partes review or reexamination proceeding, foreign opposition proceeding or related legal and administrative proceeding in the United StatesU.S. and elsewhere. The costs of defending our patents or enforcing our proprietary rights in post-issuance administrative proceedings and litigation maycan be substantial and the outcome can be uncertain. An adverse outcome may allow third parties to use our intellectual property without a license and/or allow third parties to introduce generic and other competing products, any of which would negatively impact our business. Third parties may also attempt to invalidate or design around our patents, or assert that they are invalid or otherwise unenforceable, and seek to introduce generic versions of cabozantinib. Notwithstanding our patents, it is possible that a third party that receives FDA approval of an ANDA for a generic version of cabozantinib or an 505(b)(2) NDA with
respect to cabozantinib could introduce a generic version of cabozantinib or other such 505(b)(2) product before our patents expire.
In addition, because patent applications can take many years to issue, third parties may have pending applications, unknown to us, which may later result in issued patents that cover the production, manufacture, commercialization or use of our product candidates. 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 or invalidated or may fail to provide us with any competitive advantages, if, for example, others were the first to invent or to file patent applications for closely related inventions.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States,U.S., and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the invention in that country or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. CompulsoryInitiatives seeking compulsory licensing of life-saving drugs isare also becoming increasingly popularprevalent in developing countries either through direct legislation or international initiatives. SuchGovernments in those developing countries could require that we grant compulsory licenses could be extended to includeallow competitors to manufacture and sell their own versions of our products or product candidates, which could limitthereby reducing our potential revenue opportunities.product sales. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement. We rely on trade secret protection for some of 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 upon our ability to avoid infringing patents and proprietary rights of third parties and not to breach any licenses that we have entered into with regard to our technologies and the technologies of third parties. Other parties have filed, and in the future are likely to file, patent applications covering 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 obtain licenses from third parties, which may not be available on commercially reasonable terms, or at all, and may require us to pay substantial royalties, grant a cross-license to some of our patents to another patent holder or redesign the formulation of a product candidate so that we do not infringe third-party patents, which may be impossible to obtainaccomplish or could require substantial time and expense. 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 on their patents.patents or otherwise employs their proprietary technology without authorization. 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 own 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 these third parties.parties, subjecting us to substantial royalty payment obligations. We may not be able to obtain these licenses at aon commercially reasonable cost,terms, 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.
We may be subject to damages resulting from claims that we, our employees or independent contractors have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees and independent contractors were previously employed at universities or other biotechnology, biopharmaceutical or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, independent contractors or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers, or used or sought to use patent
inventions belonging to their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and divert management’s attention. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key research personnel and/or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.
Risks Related to Employees and Location
We plan to move our headquarters and may face disruption and turnover of employees.
In the first half of 2018, we plan to move our corporate headquarters from South San Francisco, California to Alameda, California. As a result, we expect to incur additional expenses, including those related to tenant improvements, furniture and equipment for the new corporate headquarters, as well as moving and exit costs, and may encounter disruption of operations related to the move, all of which could have an adverse effect on our financial condition and results of operations. In addition, relocation of our corporate headquarters may make it more difficult to retain certain employees, and any resulting loss of talent and need to recruit and train new employees could be disruptive to our business.
If we are unable to manage our growth, our business, financial condition, results of operations and prospects may be adversely affected.
We have experienced and expect to continue to experience growth in the number of our employees and in the scope of our operations. This growth places significant demands on our management, operational and financial resources, and our current and planned personnel, systems, procedures and controls may not be adequate to support our growth. To effectively manage our growth, we must continue to improve existing, and implement new, operational and financial systems, procedures and controls and must expand, train and manage our growing employee base, and there can be no assurance that we will effectively manage our growth without experiencing operating inefficiencies or control deficiencies. We expect that we may need to increase our management personnel to oversee our expanding operations, and recruiting and retaining qualified individuals is difficult. In addition, the physical expansion of our operations and change of location of our corporate headquarters may lead to significant costs and may divert our management and capital resources. If we are unable to manage our growth effectively, or are unsuccessful in recruiting qualified management personnel, our business, financial condition, results of operations and prospects may be adversely affected.
The loss of key personnel or the inability to retain and, where necessary, attract additional personnel could impair our ability to operate and expand our operations.
We are highly dependent upon the principal members of our management, as well as clinical, commercial and scientific staff, the loss of whose services might adversely impact the achievement of our objectives. Also, we may not have sufficient personnel to execute our business plan. Retaining and, where necessary, recruiting qualified clinical, commercial and scientific personnel will be critical to support activities related to advancing the development program for cabozantinib and our other compounds, successfully executing upon our commercialization plan for cabozantinib and our internal proprietary research and development efforts. Competition is intense for experienced clinical, commercial and scientific personnel, and we may be unable to retain or recruit such personnel with the expertise or experience necessary to allow us to successfully develop and commercialize our products. Further, all of our employees are employed “at will” and, therefore, may leave our employment at any time.
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 advisors and collaborators are not our employees and may have other commitments that limit their availability to us. Although these 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 such a
circumstance, we may lose work performed by them, and our development efforts with respect to the matters on which they were working may be significantly delayed or otherwise adversely affected. 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.
Our headquarters are located near known earthquake fault zones, and the occurrence of an earthquake or other disaster could damage our facilities and equipment, which could harm our operations.
Our current headquarters in South San Francisco and the planned headquarters in Alameda are located in Souththe San Francisco Bay Area, California and, therefore our facilities are vulnerable to damage from earthquakes. We dohave limited earthquake insurance, which may not carry earthquake insurance.cover all of the damage we may suffer in the event of an earthquake. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures, terrorism and similar events since any insurance we may maintain may not be adequate to cover our losses. If any disaster were to occur, our ability to operate our business at our facilities could 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. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.
Facility security breaches may disrupt our operations, subject us to liability and harm our operating results.
Any break-in or trespass at our facilities that results in the misappropriation, theft, sabotage or any other type of security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in damage to our research and development equipment and assets, could subject us to liability and have a material adverse impact on our business, operating results and financial condition.
Risks Related to Environmental and Product Liability
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 face liability for any injury or contamination that results from our use or the use by third parties of these materials, and such 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. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, theseany 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 face potential product liability exposure far in excess of our limited insurance coverage.
We may be held liable if any product we or our collaborators develop or commercialize causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of merit or eventual outcome, product liability claims could result in decreased demand for our products and product candidates, injury to our reputation, withdrawal of patients from our clinical trials, product recall, substantial monetary awards to third parties and the inability to commercialize any products that we may develop.develop in the future. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling or testing our products. We have obtained limited product liability insurance coverage for our clinical trials and commercial activities for cabozantinib in the amount of $20.0 million per occurrence and $20.0 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we may suffer. Moreover, if insurance coverage becomes more expensive, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, juries have awarded large judgments in class action lawsuits for claims based on drugs that had unanticipated side effects. In addition, the pharmaceutical, biopharmaceutical and biotechnology industries, in general, have been subject to significant medical malpractice litigation. A successful product liability claim or series of claims brought against us could harm our reputation and business and would decrease our cash reserves.
Risks Related to Our Common Stock
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 to volatility, including:
the commercial success of both CABOMETYX and COMETRIQ and the revenues we generate from those approved products;
customer ordering patterns for CABOMETYX and COMETRIQ, which may vary significantly from period to period;
the overall level of demand for CABOMETYX and COMETRIQ, including the impact of any competitive products and the duration of therapy for patients receiving CABOMETYX or COMETRIQ;
the commercial success of COTELLIC and the revenues generated through our share of related profits and losses for the commercialization of COTELLIC in the U.S. and royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech;
changes in the amount of deductions from gross sales, including changes to the discount percentage of rebates and chargebacks mandated by the government programs in which we participate, including increases in the government discount percentage resulting from price increases we have taken or may take in the future, or due to different levels of utilization by entities entitled to government rebates and chargebacks and changes in patient demographics;
costs associated with maintaining our expanded sales, marketing, medical affairs and distribution capabilities for CABOMETYX, COMETRIQ and Cotellic;COTELLIC;
our ability to obtain regulatory approvaltimely prepare and submit an sNDA for cabozantinib as a treatment of first-linefor patients with previously treated advanced RCC;HCC;
the achievement of stated regulatory and commercial milestones, under our collaboration with Ipsen;
the outcome of our arbitration against Genentech in which we have asserted claims related to Genentech’s clinical development, pricing and commercialization of Cotellic, and cost and revenue allocations arising from Cotellic’s commercialization in the United States;agreements;
the progress and scope of other development and commercialization activities for cabozantinib and our other compounds;
future clinical trial results, notably the results from CELESTIAL, our phase 3 pivotal trial in patients with advanced HCC;results;
our future investments in the expansion of our pipeline through drug discovery and corporate development activities;
the inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;
recognition of upfront licensing or other fees or revenues;
payments of non-refundable upfront or licensing fees, or payment for cost-sharing expenses, to third parties;
the introduction of new technologies or products by our competitors;
the timing and willingness of collaborators to further develop or, if approved, commercialize our product candidates out-licensed to them;
the termination or non-renewal of existing collaborations or third partythird-party vendor relationships;
regulatory actions with respect to our product candidates and any approved products or our competitors’ products;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
the timing and amount of expenses incurred for clinical development and manufacturing of cabozantinib;
adjustments to expenses accrued in prior periods based on management’s estimates after the actual level of activity relating to such expenses becomes more certain;
the impairment of acquired goodwill and other assets;
additions and departures of key personnel;
significant fluctuations in interest rates or foreign currency exchange rates;
general and industry-specific economic conditions that may affect our or our collaborators’ research and development expenditures; and
other factors described in this “Risk Factors” section.
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 securities analysts and investors, which could result in a decline in the price of our common stock.
Our stock price has been and may in the future be extremelyhighly volatile.
The trading price of our common stock has been highly volatile, and we believe the trading price of our common stock will remain highly volatile and may fluctuate substantially due to factors such as the following, many of which we cannot control:
adverse results or delays in our or our collaborators’ clinical trials;
the announcement of FDA approval or non-approval, or delays in the FDA review process ofwith respect to cabozantinib, or our collaborators’ product candidates or those of our competitors or actions taken by regulatory agenciesbeing developed in combination with respect to our, our collaborators’cabozantinib, or our competitors’ clinical trials;product candidates;
the commercial success of both CABOMETYX and COMETRIQ and the revenues we generate from those approved products;
the timing of achievement of our clinical, regulatory, partnering and other milestones, such as the commencement of clinical development, the completion of a clinical trial, the filing for regulatory approval or the establishment of collaborative arrangements for cabozantinib or any of our other programs or compounds;
actions taken by regulatory agencies, both in the U.S. and abroad, with respect to cabozantinib or our clinical trials for cabozantinib;
unanticipated regulatory actions taken by the FDA as a result of changing FDA standards and practices concerning the review of product candidates at earlier stages of clinical development or with lesser developed data sets and the speed with which the FDA is conducting regulatory reviews;
the announcement of new products by our competitors;
the announcement of regulatory applications seeking a path to U.S. approval of generic versions of our marketed products;
quarterly variations in our or our competitors’ results of operations;
developments in our relationships with our collaborators, including the termination or modification of our agreements;
the announcement of an in-licensed product candidate or strategic acquisition;
conflicts or litigation with our collaborators, including the outcome of our arbitration with Genentech regarding Cotellic;collaborators;
litigation, including intellectual property infringement and product liability lawsuits, involving us;
failure to achieve operating results projected by securities analysts;
changes in earnings estimates or recommendations by securities analysts;
the satisfaction of outstanding debt obligations or entry into new financing arrangements;
developments in the biotechnology, biopharmaceutical or pharmaceutical industry;
sales of large blocks of our common stock or sales of our common stock by our executive officers, directors and significant stockholders;
departures of key personnel or board members;
FDA or international regulatory actions;
third-partythe extent to which coverage and reimbursement policies;is available for both CABOMETYX and COMETRIQ from government and health administration authorities, private health insurers, managed care programs and other third-party payers;
disposition of any of our technologies or compounds; and
general market, economic and political conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
These factors, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock. In addition, the stock markets in general, and the markets for biotechnology and pharmaceutical stocks in particular, have historically experienced significant volatility that has often been unrelated or disproportionate to the operating performance of particular companies. For example, negative publicity regarding drug pricing and price increases by pharmaceutical companies has negatively impacted, and may continue to negatively impact, the markets for biotechnology and pharmaceutical stocks. Likewise, as a result of the United Kingdom’s pending withdrawal from the European UnionEU and/or significant changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade and health care spending and delivery, including the repeal of the individual mandate and the potential repeal and/or replacement of other portions or all or portions of the PPACA, or greater restrictions on free trade stemming from Trump Administration policies, the financial markets could experience significant volatility that could also negatively impact the markets for biotechnology and pharmaceutical stocks. These broad market fluctuations have adversely affected and may in the future adversely affect the trading price of our common stock. Excessive volatility may continue for an extended period of time following the date of this report.
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.
Future sales of our common stock or conversion of the Deerfield Notes, or the perception that such sales or conversions may occur, may depress our stock price.
A substantial number of shares of our common stock are reserved for issuance upon the exercise of stock options, upon vesting of restricted stock unit or RSU, awards and upon a purchase under our employee stock purchase program, upon exercise of certain outstanding warrants and upon conversion of the Deerfield Notes.plan. The issuance and sale of substantial amounts of our common stock including upon conversion of the Deerfield Notes, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-related securities in the future at a time and price that we deem appropriate.
Certain provisions applicable to the Deerfield Notes could delay or prevent an otherwise beneficial takeover or takeover attempt.
Certain provisions applicable to the Deerfield Notes and the note purchase agreement governing the Deerfield Notes, could make it more difficult or more expensive for a third party to acquire us. For example, if an acquisition event constitutes a Major Transaction under the note purchase agreement governing the Deerfield Notes, holders of the Deerfield Notes will have the right to require us to purchase their notes in cash. In this case, and in other cases, our obligations under the Deerfield Notes and the note purchase agreement governing the Deerfield Notes, could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent or deter attempts by our stockholders to replace or remove our current management, which could cause the market price of our common stock to decline.
Provisions in our corporate charter and bylaws may discourage, delay or prevent an acquisition of us, a change in control, or attempts by our stockholders to replace or remove members of our current Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:
a classified Board of Directors;
a prohibition on actions by our stockholders by written consent;
the inability of our stockholders to call special meetings of stockholders;
the ability of our Board of Directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors;
limitations on the removal of directors; and
advance notice requirements for director nominations and stockholder proposals.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 that significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The Tax Cuts and Jobs Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction of future net operating losses to 80% of current year taxable income and elimination of net operating loss carry-backs, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new capital investments instead of deductions for depreciation expense over time, and modifying, reducing or repealing many business deductions and credits (including reducing the business tax credit for certain clinical trial expenses incurred in the testing of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. The Tax Cuts and Jobs Act could be amended or subject to technical correction, which could change the financial impacts that were recorded at December 31, 2017, or are expected to be recorded in future periods. Additionally, further guidance may be forthcoming from the FASB and SEC, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.
We are subject to taxation in numerous U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Our effective tax rate, however, may be different than experienced in the past due to numerous factors, including the passage of the Tax Cuts and Jobs Act, changes in the mix of our profitability from state to state, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, our utilization of federal and state net operating losses, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.
Our ability to use net operating losses to offset future taxable income may be subject to limitations.
UnderAs of December 31, 2017, we had federal and state net operating loss carry-forwards of approximately $1,529 million. The federal and state net operating loss carry-forwards will begin to expire, if not utilized, beginning in 2024 for federal income tax purposes and 2028 for California state income tax purposes. These net operating loss carry-forwards could expire unused and be unavailable to offset future income tax liabilities. While the Internal Revenue Code, orTax Cuts and Jobs Act allows for federal net operating losses incurred in 2018 and in future years to be carried forward indefinitely, the deductibility of such federal net operating losses incurred in 2018 and in future years will be limited. In addition, under the Code and similar state provisions, certain substantial changes in our ownership could result in an annual limitation on the amount of net operating loss carry-forwards 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 credit carry-forwards before utilization. WeBased on our review and analysis, we concluded, as of December 31, 2016,2017, that an ownership change, as defined under Section 382, had not occurred. However, if there is an ownership change under Section 382 of the Code in the future, we may not be able to utilize a material portion of our net operating losses, or NOLs.losses. Furthermore, our ability to utilize our NOLsnet operating losses other than the net operating losses expected to be utilized to offset income in 2017, is conditioned upon our attainingmaintaining profitability and generating United StatesU.S. federal taxable income. As described above, we have incurred significant net losses since our inception; thus, weWe do not know whether or when we will generate the United StatesU.S. federal taxable income necessary to utilize our NOLs.remaining net operating losses. A full valuation allowance has been provided for the entire amount of our NOLs.remaining net operating losses.
Item 1B. Unresolved Staff Comments
None.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.Item 2. Properties
We lease a total of 247,027246,624 square feet of office and laboratoryresearch facilities in Souththe San Francisco California.Bay Area. The leased premises comprise fourfive buildings and are covered by threetwo lease agreements, as follows:
The first two leases cover two buildings for a total of 130,964 square feet and expire in May 2017. We have subleased a total of 93,243 square feet of portions of these buildings to five different subtenants. The terms of the subleases expire at the end of our lease terms.
The third lease covers two buildings forin South San Francisco, California with a total area of 116,063 square feet and expires in JuneJuly 2018.
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| • | The second lease covers three buildings in Alameda, California with a total area of 130,561 square feet and expires in January 2028. We have twofive-year options to extend the lease and a one-time option to terminate the lease without cause on the last day of the 8th year of the initial term. |
We have one five-year optionsentered into the Alameda lease in order to extendreplace the termfacilities in South San Francisco prior to the expiration of the lease prior to expiration.
for those facilities. We believe that our leased facilities have sufficient space to accommodate our current needs.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings. We may from time to time become a party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Some of these proceedings have involved, and may involve in the future, claims that are subject to substantial uncertainties and unascertainable damages.
On June 3, 2016, we filed a Demand for Arbitration before JAMS in San Francisco, California asserting claims against Genentech (a member of the Roche Group) related to its clinical development, pricing and commercialization of Cotellic, and cost and revenue allocations arising from Cotellic’s commercialization in the United States.Item 4. Mine Safety Disclosures
In December 2006, we entered into a worldwide collaboration for the development and commercialization of cobimetinib with Genentech. The terms of the collaboration agreement provide Genentech with authority over the global development and commercialization plans for cobimetinib and the execution of those plans. The collaboration agreement further provides that we are entitled to an initial equal share of U.S. profits and losses for cobimetinib, with our share decreasing as sales increase, as well as low double-digit royalties on ex-U.S. net sales of cobimetinib. To date, cobimetinib has been approved for use exclusively in combination with Zelboraf (vemurafenib) and launched by Genentech in the United States and multiple other territories, including the European Union, Canada, Australia and Brazil as a treatment for patients with advanced melanoma harboring a BRAF V600E or V600K mutation. It is marketed as Cotellic.
Our arbitration demand asserts that Genentech has breached the parties’ contract for, amongst other breaches, failing to meet its diligence and good faith obligations. The demand seeks various forms of declaratory, monetary, and equitable relief, including without limitation that the cost and revenue allocations for Cotellic be shared equitably consistent with the collaboration agreement’s terms, along with attorneys’ fees and costs of the arbitration.
On July 13, 2016, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest related to the cost allocations under the collaboration agreement. On December 29, 2016, Genentech withdrew its counterclaim against us and stated that it would unilaterally change its approach to allocation of promotional expenses arising from commercialization of the Cotellic plus Zelboraf combination therapy, both retrospectively and prospectively. We believe this revised allocation approach substantially reduced our exposure to costs associated with promotion of the Cotellic plus Zelboraf combination in the United States. Notwithstanding Genentech’s change of approach, other significant issues remain in dispute between the parties. Genentech’s action does not address the claims in our demand for arbitration related to Genentech’s clinical development of cobimetinib, or pricing and promotional costs for Cotellic in the United States, nor does it fully resolve claims over revenue allocation. And, Genentech has not clarified how it intends to allocate promotional costs incurred with respect to the promotion of other combination therapies that include cobimetinib for other indications that will be developed or are in development and may be approved. As a result, we will continue to press our position for the arbitral panel to obtain a just resolution of these claims. The ultimate outcome and timing of the arbitration is difficult to predict.
We may from time to time become a party to other legal proceedings arising in the ordinary course of business.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock has traded on the Nasdaq Global Select Market under the symbol “EXEL” since April 11, 2000. The following table sets forth, for the periods indicated, the high and low intraday sales prices for our common stock as reported by the Nasdaq Global Select Market:
|
| | | | | | | |
| | Common Stock Price |
| | High | | Low |
| Year ended December 29, 2017: | | | |
| Quarter ended March 31, 2017 | $ | 23.49 |
| | $ | 14.22 |
|
| Quarter ended June 30, 2017 | $ | 25.22 |
| | $ | 18.03 |
|
| Quarter ended September 29, 2017 | $ | 29.50 |
| | $ | 23.18 |
|
| Quarter ended December 29, 2017 | $ | 32.50 |
| | $ | 23.85 |
|
| Year ended December 30, 2016: | | | |
| Quarter ended April 1, 2016 | $ | 5.85 |
| | $ | 3.55 |
|
| Quarter ended July 1, 2016 | $ | 8.19 |
| | $ | 4.11 |
|
| Quarter ended September 30, 2016 | $ | 15.58 |
| | $ | 7.93 |
|
| Quarter ended December 30, 2016 | $ | 18.29 |
| | $ | 10.04 |
|
Holders
On February 12, 2018, there were 420 holders of record of our common stock. The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.
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.
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of ours under the Securities Act of 1933, as amended.
The following graph compares, for the five year period ended December 31, 2017, the cumulative total stockholder return for our common stock, the Nasdaq Stock Market (U.S. companies) Index, or the Nasdaq Market Index, and the Nasdaq Biotechnology Index. The graph assumes that $100 was invested on December 31, 2012 in each of our common stock, the Nasdaq Market Index and the Nasdaq Biotechnology Index and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
|
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Exelixis, Inc. | 100 |
| | 131 |
| | 37 |
| | 125 |
| | 331 |
| | 674 |
|
| Nasdaq Market Index | 100 |
| | 140 |
| | 160 |
| | 169 |
| | 182 |
| | 233 |
|
| Nasdaq Biotechnology Index | 100 |
| | 168 |
| | 228 |
| | 251 |
| | 197 |
| | 238 |
|
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock has traded on the NASDAQ Global Select Market (formerly 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 intraday sales prices for our common stock as reported by the NASDAQ Global Select Market:
|
| | | | | | | |
| | Common Stock Price |
| | High | | Low |
| Year ended December 30, 2016: | | | |
| Quarter ended April 1, 2016 | $ | 5.85 |
| | $ | 3.55 |
|
| Quarter ended July 1, 2016 | $ | 8.19 |
| | $ | 4.11 |
|
| Quarter ended September 30, 2016 | $ | 15.58 |
| | $ | 7.93 |
|
| Quarter ended December 30, 2016 | $ | 18.29 |
| | $ | 10.04 |
|
| Year ended January 1, 2016: | | | |
| Quarter ended April 3, 2015 | $ | 3.16 |
| | $ | 1.54 |
|
| Quarter ended July 3, 2015 | $ | 4.18 |
| | $ | 2.51 |
|
| Quarter ended October 2, 2015 | $ | 6.81 |
| | $ | 3.31 |
|
| Quarter ended January 1, 2016 | $ | 6.42 |
| | $ | 4.70 |
|
On February 16, 2017, the last reported sale price on the NASDAQ Global Select Market for our common stock was $22.65 per share.
Holders
On February 16, 2017, there were 448 holders of record of our common stock. The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.
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. Our loan and security agreement with Silicon Valley Bank restricts our ability to pay dividends and make distributions. In addition, our note purchase agreement with Deerfield restricts our ability to make distributions.
Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of ours under the Securities Act of 1933, as amended.Item 6. Selected Financial Data
The following graph compares, for the five year period ended December 31, 2016, the cumulative total stockholder return for our common stock, the NASDAQ Stock Market (U.S. companies) Index, or the NASDAQ Market Index, and the NASDAQ Biotechnology Index. The graph assumes that $100 was invested on December 31, 2011 in each of our common stock, the NASDAQ Market Index and the NASDAQ Biotechnology Index and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
|
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
| Exelixis, Inc. | 100 |
| | 95 |
| | 125 |
| | 35 |
| | 119 |
| | 315 |
|
| NASDAQ Market Index | 100 |
| | 114 |
| | 160 |
| | 181 |
| | 192 |
| | 207 |
|
| NASDAQ Biotechnology Index | 100 |
| | 130 |
| | 218 |
| | 295 |
| | 326 |
| | 256 |
|
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial informationSelected Financial Data has been derived from our audited Consolidated Financial Statements and should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8. “Financial Statements and Supplementary Data” contained in this Annual Report on Form 10-K. The consolidated financial statements. The financial information as of December 31, 20162017 and 20152016 and for the years ended, December 31, 2017, 2016, 2015, and 20142015 are derived from audited consolidated financial statementsConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The consolidated financial information as of December 31, 2015, 2014 2013 and 2012,2013, and for each of the years ended December 31, 20132014 and 2012,2013, are derived from audited consolidated financial statementsConsolidated Financial Statements not included in this Annual Report on Form 10-K, which have been revised as described below. The following Selected Financial Data should be read in conjunction with “Item10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In thousands, except per share data) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Revenues | $ | 452,477 |
| | $ | 191,454 |
| | $ | 37,172 |
| | $ | 25,111 |
| | $ | 31,338 |
|
| Operating expenses: | | | | | | | | | |
| Cost of goods sold | 15,066 |
| | 6,552 |
| | 3,895 |
| | 2,043 |
| | 1,118 |
|
| Research and development | 112,171 |
| | 95,967 |
| | 96,351 |
| | 189,101 |
| | 178,763 |
|
| Selling, general and administrative | 159,362 |
| | 116,145 |
| | 57,305 |
| | 50,829 |
| | 50,958 |
|
| Restructuring (recovery) charge | (32 | ) | | 914 |
| | 1,042 |
| | 7,596 |
| | 1,231 |
|
| Total operating expenses | 286,567 |
| | 219,578 |
| | 158,593 |
| | 249,569 |
| | 232,070 |
|
| Income (loss) from operations | 165,910 |
| | (28,124 | ) | | (121,421 | ) | | (224,458 | ) | | (200,732 | ) |
| Other income (expenses), net | (7,333 | ) | | (42,098 | ) | | (40,268 | ) | | (37,021 | ) | | (37,556 | ) |
| Income (loss) before income taxes | 158,577 |
| | (70,222 | ) | | (161,689 | ) | | (261,479 | ) | | (238,288 | ) |
| Income tax provision (benefit) | 4,350 |
| | — |
| | 55 |
| | (182 | ) | | (96 | ) |
| Net income (loss) | $ | 154,227 |
| | $ | (70,222 | ) | | $ | (161,744 | ) | | $ | (261,297 | ) | | $ | (238,192 | ) |
| Net income (loss) per share, basic | $ | 0.52 |
| | $ | (0.28 | ) | | $ | (0.77 | ) | | $ | (1.34 | ) | | $ | (1.29 | ) |
| Net income (loss) per share, diluted | $ | 0.49 |
| | $ | (0.28 | ) | | $ | (0.77 | ) | | $ | (1.34 | ) | | $ | (1.29 | ) |
| Shares used in computing net income (loss) per share, basic | 293,588 |
| | 250,531 |
| | 209,227 |
| | 194,299 |
| | 184,062 |
|
| Shares used in computing net income (loss) per share, diluted | 312,003 |
| | 250,531 |
| | 209,227 |
| | 194,299 |
| | 184,062 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In thousands) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and investments | $ | 457,176 |
| | $ | 479,554 |
| | $ | 253,310 |
| | $ | 242,760 |
| | $ | 415,862 |
|
| Working capital (deficit) | $ | 369,704 |
| | $ | 200,215 |
| | $ | 126,414 |
| | $ | (3,188 | ) | | $ | 178,756 |
|
| Total assets | $ | 655,294 |
| | $ | 595,739 |
| | $ | 332,223 |
| | $ | 323,256 |
| | $ | 497,940 |
|
| Long-term obligations | $ | 255,163 |
| | $ | 237,635 |
| | $ | 420,897 |
| | $ | 312,163 |
| | $ | 395,599 |
|
| Accumulated deficit | $ | (1,829,172 | ) | | $ | (1,983,147 | ) | | $ | (1,912,925 | ) | | $ | (1,751,181 | ) | | $ | (1,489,884 | ) |
| Total stockholders’ equity (deficit) | $ | 284,961 |
| | $ | 89,318 |
| | $ | (140,806 | ) | | $ | (159,324 | ) | | $ | 14,498 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the statements under in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are 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 company’s 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,” “focus,” “goal,” “objective,” “will,” “may” “would,” “could,” “estimate,” “predict,” “target,” “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 those discussed in “Item 8. Financial Statements and Supplementary Data” included1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2015 ended on January 1, 2016; fiscal year 2016 ended on December 30, 2016; fiscal year 2017 ended on December 29, 2017; and fiscal year 2018 will end on December 28, 2018. For convenience, references in this report as of and for the fiscal years ended January 1, 2016, December 30, 2016 and December 29, 2017 are indicated as being as of and for the years ended December 31, 2015, 2016 and 2017, respectively. All annual periods presented are 52-week fiscal years and all interim periods presented are 13-week fiscal quarters.
Overview
We are a biotechnology company committed to the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Since our founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the marketplace. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET: CABOMETYX approved for advanced RCC and COMETRIQ approved for progressive, metastatic MTC. The historical resultsthird product, COTELLIC, is a formulation of cobimetinib and is an inhibitor of MEK, marketed under a collaboration with Genentech, and is approved as part of a combination regimen to treat advanced melanoma. Both cabozantinib and cobimetinib have shown potential in a variety of forms of cancer and are not necessarily indicativethe subject of broad clinical development programs for multiple potential oncology indications.
We have and continue to be highly focused on the execution of the commercial launch of CABOMETYX for previously treated patients with advanced RCC, originally approved by the FDA in April 2016. On December 19, 2017, approximately two months ahead of the assigned PDUFA action date, the FDA approved CABOMETYX for an expanded indication to include previously untreated patients with advanced RCC. Utilizing our existing commercial and medical affairs organizations and established distribution network, we were prepared to bring CABOMETYX to all eligible patients in the U.S. who may benefit from this treatment option immediately upon approval of the expanded indication.
While our commercialization efforts for CABOMETYX and COMETRIQ are focused in the U.S. we have licensed development and commercialization rights to cabozantinib outside of the U.S. to Ipsen and Takeda. Ipsen has been granted rights to cabozantinib outside of the U.S. and Japan, and Takeda has been granted rights to cabozantinib in Japan. Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of cabozantinib in other potential indications, and we are working closely with them on these activities.
Beyond our currently approved indications for advanced RCC and for MTC, we are pursuing other indications that have the potential to expand the number of cancer patients that could benefit from cabozantinib. Most advanced in the cabozantinib development program is our evaluation of CABOMETYX as a treatment for patients with advanced HCC who have previously been treated with sorafenib. On October 16, 2017, we announced that, at the time of the second planned interim analysis, the study’s IDMC had recommended that CELESTIAL, our company-sponsored, global phase 3 trial comparing cabozantinib to placebo in patients with advanced HCC who had previously progressed on or were intolerant to sorafenib and up to one additional therapy, be stopped because it had met its primary endpoint, with cabozantinib providing a statistically significant and clinically meaningful improvement in OS compared to placebo. Safety data from the study were consistent with the established profile of cabozantinib. Based on the results of operationsCELESTIAL, we plan to submit a sNDA to the FDA in the first quarter of 2018, for CABOMETYX as a treatment for patients with previously treated advanced
HCC. Our partner, Ipsen, has informed us that it intends to submit a regulatory dossier for CABOMETYX as a treatment for patients with previously treated advanced HCC to the EMA in the first half of 2018.
We believe that the available clinical data demonstrate that cabozantinib has the potential to be expecteda broadly active anti-cancer agent that can make a meaningful difference in the future.lives of patients. Accordingly, we are currently evaluating cabozantinib, both as a single agent and in combination with immune checkpoint inhibitors, in a broad development program comprising over 70 ongoing or planned clinical trials across multiple indications. We, along with our clinical and commercial collaboration partners, sponsor some of the trials, while the remaining trials are conducted through our CRADA with NCI-CTEP or our IST program. We are particularly interested in examining cabozantinib’s potential in combination with immunotherapies to determine if such combinations further improve outcomes for patients. Building on clinical observations that cabozantinib creates a more immune-permissive tumor environment potentially resulting in the cooperative activity of cabozantinib in combination with these products, we are evaluating cabozantinib in combination with a variety of immune checkpoint inhibitors in multiple clinical trials. The most advanced of these combination studies includes a phase 3 pivotal trial evaluating cabozantinib in combination with nivolumab in previously untreated, advanced or metastatic advanced RCC and a phase 1/2 trial evaluating cabozantinib in combination with nivolumab and in combination with both nivolumab and ipilimumab in patients with both previously treated and previously untreated advanced HCC, each in collaboration with BMS. As a further part of our clinical collaboration with BMS, we also plan to evaluate cabozantinib and nivolumab with or without ipilimumab in various other tumor types, including in bladder cancer. Diversifying our exploration of immunotherapy combinations, we have also initiated a phase 1b dose escalation study that is evaluating the safety and tolerability of cabozantinib in combination with Roche’s atezolizumab in patients with locally advanced or metastatic solid tumors.
Significant progress also continues to be made under our December 2006 worldwide collaboration agreement with Genentech with respect to the phase 3 clinical development program for our second approved cancer agent, cobimetinib. Genentech is now conducting three phase 3 pivotal trials exploring the combination of cobimetinib with atezolizumab or atezolizumab alone in CRC (IMblaze370) and BRAF wild type melanoma population (IMspire170), and the combination of cobimetinib with atezolizumab and vemurafenib in BRAF V600 mutant melanoma (IMspire150). Enrollment for IMblaze370 was completed in the first quarter of 2017, and Genentech has announced that top line results for the trial are expected during the first half of 2018. Additionally, the first patient for IMspire170 was enrolled in December 2017. Should these trials prove positive and Genentech obtain regulatory approvals based on such positive results, we believe that cobimetinib could provide us with another meaningful source of revenue.
As we continue to work to maximize the clinical, therapeutic and commercial potential of cabozantinib and cobimetinib, we remain committed to discovering and developing new cancer therapies for patients. In this regard, we have resumed internal drug discovery efforts with the goal of identifying new product candidates to advance into clinical trials. Notably, these efforts are led by some of the same experienced scientists responsible for the discovery of cabozantinib and cobimetinib, which have been approved for commercialization by regulatory authorities, as well as other promising Exelixis compounds, many of which are in earlier stages of clinical and regulatory development, pursuant to our collaborations with Daiichi Sankyo, Merck, BMS and Sanofi.
Additional information regarding our business is included in Part I, Item 1, “Business,” included in this Annual Report on Form 10-K.
During 2017, we executed on our commercial, development and financial objectives, generating significant revenue from operations and positioning the business to be able to maximize the clinical and commercial potential of CABOMETYX, COMETRIQ and COTELLIC and to expand the product pipeline. Below is a summary of our significant business developments and financial highlights for 2017:
Business Development Updates
In January 2017, we entered into a collaboration and license agreement with Takeda for the commercialization and further clinical development of cabozantinib in Japan. Pursuant to the terms of the collaboration agreement, Takeda received exclusive commercialization rights for current and potential future cabozantinib indications in Japan.
In February 2017, we entered into a clinical trial collaboration agreement with BMS for the purpose of examining cabozantinib’s potential in combination with immunotherapies. Pursuant to this collaboration, in July 2017, we initiated CheckMate 9ER, a phase 3 pivotal trial evaluating the combination of cabozantinib with nivolumab in previously untreated, advanced or metastatic RCC. We also initiated CheckMate 040 in July 2017,
evaluating the same combination and also cabozantinib with both nivolumab and ipilimumab in a phase 1/2 trial in both previously treated and previously untreated advanced HCC. Ipsen has opted in to participate in CheckMate 9ER and will have access to the results to support potential future regulatory submissions. Ipsen may also participate in future studies at its choosing.
In February 2017, we entered into a clinical trial collaboration with Roche pursuant to which are evaluating cabozantinib and atezolizumab in locally advanced or metastatic solid tumors and in June 2017, we initiated a phase 1b trial evaluating this combination in patients with advanced genitorurinary malignancies, including RCC and UC. The trial is divided in two parts: a dose-escalation phase and an expansion cohort phase. The primary objective is to determine the optimal dose and schedule of daily oral administration of cabozantinib when given in combination with atezolizumab to inform the trial’s subsequent expansion stage. We subsequently amended the protocol in January 2018 to add four new expansion cohorts to the trial, which will now also include patients with NSCLC and CRPC in addition to previously included patients with RCC and UC.
In May 2017, we entered into a lease agreement for an aggregate of 110,783 square feet of space in office and research facilities in Alameda, California, which will become our corporate headquarters in 2018. The lease agreement was amended in October 2017 to include an additional 19,778 square feet.
In July 2017, we entered into an amendment to our collaboration agreement with Genentech in connection with the final resolution of claims asserted in an arbitration proceeding by us against Genentech related to the development, pricing and commercialization of COTELLIC. The amendment provides for a favorably revised revenue and cost-sharing arrangement, that became effective as of July 1, 2017, and that is applicable to current and all potential future commercial uses of COTELLIC.
In September 2017, Ipsen received validation from the EMA for the application for variation to the CABOMETYX marketing authorization for the addition of a new indication in previously untreated, advanced or metastatic RCC in adults.
In September 2017, we announced that our partner Daiichi Sankyo reported positive top-line results from ESAX-HTN, a phase 3 pivotal trial of esaxerenone, a product of the companies’ prior research collaboration, in patients with essential hypertension in Japan. With the trial achieving its primary endpoint, Daiichi Sankyo communicated its intention to submit a Japanese regulatory application for esaxerenone for an essential hypertension indication in the first quarter of 2018.
In October 2017, we announced that BMS filed a Clinical Trial Authorization in Europe for a first-in-human study of a RORγ inverse agonist.
In October 2017, we announced that CELESTIAL met its primary endpoint of OS, with cabozantinib providing a statistically significant and clinically meaningful improvement in OS compared to placebo in patients with previously treated advanced HCC. Median OS was 10.2 months with cabozantinib versus 8.0 months with placebo (HR 0.76; 95% CI 0.63-0.92; p=0.0049). Based on these results, we plan to submit an sNDA to the FDA in the first quarter of 2018 for CABOMETYX as a treatment for patients with previously treated advanced HCC. Ipsen has informed us that it intends to submit a regulatory dossier for CABOMETYX as a treatment for patients with previously treated advanced HCC to the EMA in the first half of 2018.
In December 2017, following a priority review and approximately two months ahead of the assigned PDUFA target action date, the FDA approved CABOMETYX for the expanded indication of patients with previously untreated advanced RCC, the most common form of kidney cancer in adults. The FDA’s priority review and early approval of CABOMETYX was based on results from the randomized phase 2 CABOSUN trial in patients with previously untreated RCC, which demonstrated a statistically significant and clinically meaningful improvement in PFS versus sunitinib, a current standard of care.
In February 2018, we announced updated results from the NCI-CTEP-sponsored phase 1 trial of cabozantinib in combination with nivolumab, with or without ipilimumab, in patients with refractory genitourinary tumors. The updated results demonstrated an acceptable tolerability profile and high rates of durable responses in the previously treated metastatic UC and metastatic RCC cohorts.
In February 2018, updated data from a phase 2 IST of cabozantinib in patients with previously untreated radioiodine-refractory differentiated thyroid carcinoma, or DTC, was presented at the 2018 Multidisciplinary Head and Neck Cancers Symposium. Based on the encouraging efficacy results and manageable safety profile in this phase 2 trial and other prior phase 2 trials in previously treated DTC, we plan to initiate a phase 3 pivotal trial evaluating cabozantinib as a treatment for patients with advanced DTC in 2018.
2017 Financial Highlights
Our net product revenues increased by $213.6 million, or 158%, to $349.0 million in 2017 compared to 2016, which primarily reflects the growth in product sales of CABOMETYX since the product’s launch in late April 2016 and an increase in market share.
Our collaboration revenues increased by $47.4 million, or 85%, to $103.5 million in 2017 compared to 2016, primarily due to increases in milestone, license, development, royalty and product supply revenues recognized under our collaboration agreements.
Between March 2017 and June 2017, we repaid our $80.0 million term loan with Silicon Valley Bank and retired the Deerfield Notes in consideration for a payment of $123.8 million. For additional information on the repayment of our term loan with Silicon Valley Bank and the retirement of the Deerfield Notes, see “Note 6. Debt” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Cash and investments decreased to $457.2 million at December 31, 2017 as compared to $479.6 million at December 31, 2016 primarily due to the payoff of in debt, described above, offset by the increase in product and collaboration revenue.
2018 Outlook
In 2018, our key objective remains to maximize the clinical and commercial opportunities for cabozantinib and cobimetinib as oncology franchises. On the commercial front, we are executing on the U.S. launch of CABOMETYX for the expanded indication of previously untreated advanced RCC and working to ensure launch readiness should CABOMETYX be approved by the FDA for previously treated advanced HCC, while also supporting our collaboration partners on the execution of their commercial plans. From the research and development perspective, we intend to continue to invest in our cabozantinib development program, while driving toward the expansion of our product pipeline through drug discovery activities and the evaluation and execution of potential additional in-licensing and acquisition opportunities that align with our oncology drug development expertise.
We anticipate that we will continue to face a number of challenges and risks to our business that may impact our ability to execute on our 2018 business objectives. In particular, we anticipate that for the foreseeable future our ability to generate meaningful unrestricted cash to fund our commercial operations and our development and discovery programs is dependent upon the successful commercialization of CABOMETYX for the treatment of advanced RCC in territories where it has been or may soon be approved and in potential other indications for which we are in late-stage development or intend to seek regulatory review. The commercial opportunity for CABOMETYX as a treatment for advanced RCC remains subject to a variety of factors, most importantly, CABOMETYX’s perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or currently in development for the treatment of advanced RCC. Our ability to generate meaningful product revenues from CABOMETYX is also affected by a number of other factors, including, the highly competitive markets for which we intend to pursue regulatory approval of cabozantinib and the prospect for new competitive therapies and generic competition, and the extent to which coverage and reimbursement for CABOMETYX is available from government and other third-party payers. Obtaining and maintaining appropriate coverage and reimbursement for CABOMETYX is increasingly challenging due to, among other things, the attention being paid to healthcare cost containment and other potential austerity measures being discussed in the U.S. and worldwide, as well as increasing policy interest in the U.S. with respect to pharmaceutical drug pricing practices. Our ability to fulfill the commercial potential of cabozantinib also depends on our ability to expand the compound’s use by generating data in clinical development that will support regulatory approval of cabozantinib in additional indications. Achievement of our 2018 business objectives will also depend on our ability to adapt our development and commercialization strategy to navigate the increasing prevalence of immunotherapy competition, as well as the use of combination therapy to treat cancer. Furthermore, our research and development objectives may be curtailed as a result of operational challenges related to organizational growth as we expand drug discovery activities, and we may be unable to successfully identify appropriate candidates for in-licensing or acquisition.
Some of these challenges and risks are specific to our business, and others are common to companies in the pharmaceutical industry with development and commercial operations. For a complete discussion of challenges and risks we face, see in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
Results of Operations
Revenues
Revenues by category were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In thousands, except per share data) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Revenues | $ | 191,454 |
| | $ | 37,172 |
| | $ | 25,111 |
| | $ | 31,338 |
| | $ | 47,450 |
|
| Operating expenses: | | | | | | | | | |
| Cost of goods sold | 6,552 |
| | 3,895 |
| | 2,043 |
| | 1,118 |
| | — |
|
| Research and development | 95,967 |
| | 96,351 |
| | 189,101 |
| | 178,763 |
| | 128,878 |
|
| Selling, general and administrative | 116,145 |
| | 57,305 |
| | 50,829 |
| | 50,958 |
| | 31,837 |
|
| Restructuring charge | 914 |
| | 1,042 |
| | 7,596 |
| | 1,231 |
| | 9,171 |
|
| Total operating expenses | 219,578 |
| | 158,593 |
| | 249,569 |
| | 232,070 |
| | 169,886 |
|
| Loss from operations | (28,124 | ) | | (121,421 | ) | | (224,458 | ) | | (200,732 | ) | | (122,436 | ) |
Other expense, net (1) | (42,098 | ) | | (40,268 | ) | | (37,021 | ) | | (37,556 | ) | | (22,792 | ) |
| Loss before taxes | (70,222 | ) | | (161,689 | ) | | (261,479 | ) | | (238,288 | ) | | (145,228 | ) |
| Income tax provision (benefit) | — |
| | 55 |
| | (182 | ) | | (96 | ) | | 107 |
|
Net loss (1) | $ | (70,222 | ) | | $ | (161,744 | ) | | $ | (261,297 | ) | | $ | (238,192 | ) | | $ | (145,335 | ) |
Net loss per share, basic and diluted (1) | $ | (0.28 | ) | | $ | (0.77 | ) | | $ | (1.34 | ) | | $ | (1.29 | ) | | $ | (0.91 | ) |
| Shares used in computing basic and diluted loss per share amounts | 250,531 |
| | 209,227 |
| | 194,299 |
| | 184,062 |
| | 160,138 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In thousands) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and investments | $ | 479,554 |
| | $ | 253,310 |
| | $ | 242,760 |
| | $ | 415,862 |
| | $ | 633,961 |
|
| Working capital (deficit) | $ | 200,215 |
| | $ | 126,414 |
| | $ | (3,188 | ) | | $ | 178,756 |
| | $ | 350,837 |
|
| Total assets | $ | 597,541 |
| | $ | 332,342 |
| | $ | 323,269 |
| | $ | 497,951 |
| | $ | 714,142 |
|
Long-term obligations (1) | $ | 237,635 |
| | $ | 420,897 |
| | $ | 312,163 |
| | $ | 395,599 |
| | $ | 394,311 |
|
Accumulated deficit (1) | $ | (1,983,147 | ) | | $ | (1,912,925 | ) | | $ | (1,751,181 | ) | | $ | (1,489,884 | ) | | $ | (1,251,692 | ) |
Total stockholders’ equity (deficit) (1) | $ | 89,318 |
| | $ | (140,806 | ) | | $ | (159,324 | ) | | $ | 14,498 |
| | $ | 238,127 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Product revenues: | | | | | |
| Gross product revenues | $ | 402,569 |
| | $ | 151,499 |
| | $ | 36,650 |
|
| Discounts and allowances | (53,561 | ) | | (16,124 | ) | | (2,492 | ) |
| Net product revenues | 349,008 |
| | 135,375 |
| | 34,158 |
|
| Collaboration revenues: | | | | | |
Contract revenues (1) | 57,500 |
| | 40,000 |
| | 3,000 |
|
License revenues (2) | 28,908 |
| | 13,284 |
| | — |
|
| Development cost reimbursements | 8,737 |
| | — |
| | — |
|
| Royalty and product supply revenues, net | 8,324 |
| | 2,795 |
| | 14 |
|
| Total collaboration revenues | 103,469 |
| | 56,079 |
| | 3,014 |
|
| Total revenues | $ | 452,477 |
| | $ | 191,454 |
| | $ | 37,172 |
|
| Dollar change | $ | 261,023 |
| | $ | 154,282 |
| | |
| Percentage change | 136 | % | | 415 | % | | |
____________________
| |
| (1) | Prior periods have been revisedIncludes milestone payments. |
| |
| (2) | Includes amortization of upfront payments. |
Net product revenues by product were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| CABOMETYX | $ | 324,000 |
| | $ | 93,481 |
| | $ | — |
|
| COMETRIQ | 25,008 |
| | 41,894 |
| | 34,158 |
|
| Net product revenues | $ | 349,008 |
| | $ | 135,375 |
| | $ | 34,158 |
|
| Dollar change | $ | 213,633 |
| | $ | 101,217 |
| | |
| Percentage change | 158 | % | | 296 | % | | |
For the year ended December 31, 2017, net product revenues increased 158%, as compared to 2016. Net product revenues for CABOMETYX increased 247% during 2017, primarily due to a 228% increase in the number of units of CABOMETYX sold, and to a lesser extent, an increase in the average selling price of the product. The increase in CABOMETYX sales volume reflects the growth in product sales of CABOMETYX since the product’s launch in late April 2016 and an increase in market share. Net product revenues for COMETRIQ decreased 40% during 2017, primarily due to a 53% decrease in the number of units of COMETRIQ sold, partially offset by an increase in the average selling price of the product. The decrease in COMETRIQ sales volume was primarily driven by the adoption of CABOMETYX by our U.S. customers and the change in how our product was distributed outside the U.S., which resulted in a shift from earning product revenues during most of 2016 under our former distribution agreement with Swedish Orphan Biovitrum to earning royalty and other collaboration revenues during 2017 under our current collaboration agreement with Ipsen.
We have completed our analysis of the adoption of ASU 2014-09, which we will adopt using the modified retrospective method in the first quarter of fiscal year 2018, and we have determined the adoption will not have a material impact on our recognition of net product revenues. For information on our adoption of ASU 2014-09, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
For the year ended December 31, 2016, net product revenues increased 296%, as compared to 2015. The increase in CABOMETYX sales volume was primarily due to the impact of the commercial launch of the product in late April 2016. Net
product revenues for CABOMETYX during 2016 were also favorably impacted by the build of channel inventory by the specialty pharmacies and distributors to whom we sell CABOMETYX in connection with its initial launch. Net product revenues for COMETRIQ increased 23% during 2016, primarily due to a 15% increase in the number of COMETRIQ units sold as a result of an increase in demand for COMETRIQ, and to a lesser extent, an increase in the average selling price of the product.
We recognize product revenues net of discounts and allowances. Reserves for chargebacks and discounts for prompt payment are recorded as a reduction of trade receivables and the remaining reserve balances are classified as Rebates and fees due to customers on the accompanying Consolidated Balance Sheets. Total reserve balances were $9.5 million, $5.6 million and $1.3 million as of December 31, 2017, 2016 and 2015, respectively. See “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for a description and a summary of activities for each significant category of discount and allowance. The increase in the reserve balances from December 31, 2016 to December 31, 2017 was the result of an increase in product sales volume, and to a lesser extent, additional reserves for goods in the channel expected to have higher discounts during early 2018, as well as a higher volume in government programs. Those increases were partially offset by payments, the issuance of customer credits and the prior period adjustments for chargebacks and certain rebates. We expect our discounts and allowances as a percentage of gross product revenues to increase during 2018 as our business evolves and the number of patients participating in government programs increases, the discounts or rebates to government payers increase, and our engagement in commercial contracting which will result in additional discounts or rebates. The increase in the reserve balances from December 31, 2015 to December 31, 2016 resulted from the increase in discounts and allowances on increased product sales through an expanded distribution network, which included five specialty pharmacies and three specialty distributors during 2016, which we implemented following the launch of CABOMETYX and the continued distribution of COMETRIQ through one specialty pharmacy and one specialty distributor.
Contract revenues for the year ended December 31, 2017 reflect recognition of two milestones totaling $45.0 million resulting from Ipsen’s receipt of the validation from the EMA for the application for variation to the CABOMETYX marketing authorization for the addition of a new indication in previously untreated, advanced or metastatic RCC in adults. Payment of the first milestone of $20.0 million was received in the fourth quarter of 2017 and payment of the second milestone of $25.0 million was received in January 2018. Contract revenues also reflect recognition of two milestones totaling $12.5 million earned from BMS related to the ROR collaboration agreement with BMS.
Contract revenues for the year ended December 31, 2016 reflect recognition of two milestones totaling $20.0 million earned for the first commercial sales of CABOMETYX by Ipsen in Germany and the United Kingdom, a $15.0 million milestone earned from Daiichi Sankyo related to its worldwide license of our compounds that modulate MR, including CS-3150/esaxerenone (a specific rotational isomer of XL550) and a $5.0 million milestone earned from Merck related to its worldwide license of our PI3K-d program.
License revenues consist of the recognition of a portion of the upfront payments and the non-substantive milestone received in connection with our February 2016 collaboration agreement with Ipsen and the upfront payment received in connection with our January 2017 collaboration agreement with Takeda. The aggregate upfront payments and non-substantive milestone for the Ipsen collaboration agreement has been recognized ratably over the term of the collaboration agreement, through early 2030, which is the current estimated patent expiration of cabozantinib in the EU. The upfront payment for the Takeda collaboration agreement has been recognized ratably over the development period of approximately four years. For the year ended December 31, 2017, we recognized $18.5 million and $10.4 million of such revenue in connection with the Ipsen collaboration agreement and the Takeda collaboration agreement, respectively. For the year ended December 31, 2016, we recognized $13.3 million of such revenue in connection with the Ipsen collaboration agreement. No such revenue was recognized in connection with the Takeda collaboration agreement during 2016 or in connection with either agreement during 2015. The increase in such revenues is due to the timing of the execution of those agreements.
ASU 2014-09 will materially impact the timing of recognition of revenue for our collaboration arrangements with Ipsen and Takeda. For information on our adoption of ASU 2014-09, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Development cost reimbursements for the year ended December 31, 2017 consisted of reimbursements pursuant to our collaboration and license agreements, including $4.4 million under the Ipsen collaboration agreement and $4.3
million under the Takeda collaboration agreement. There were no such development cost reimbursements during 2016 or 2015.
Royalty and product supply revenues, net, primarily consisted of royalties on ex-U.S. net sales of COTELLIC under our collaboration agreement with Genentech and royalties on sales of cabozantinib under our collaboration agreement with Ipsen. Under the terms of our supply agreement with Ipsen, we supply product at our cost, as defined in the agreement, and therefore product supply revenues did not have a significant impact on collaboration revenues.
Total revenues by significant customer were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Diplomat Specialty Pharmacy | $ | 83,059 |
| | $ | 63,826 |
| | $ | 30,856 |
|
| Caremark L.L.C. | 73,921 |
| | 17,746 |
| | — |
|
| Ipsen | 69,792 |
| | 33,252 |
| | — |
|
| Accredo Health, Incorporated | 50,716 |
| | 16,631 |
| | — |
|
| Affiliates of McKesson Corporation | 48,662 |
| | 13,143 |
| | — |
|
| Others, individually less than 10% of total revenues for all periods presented | 126,327 |
| | 46,856 |
| | 6,316 |
|
| Total revenues | $ | 452,477 |
| | $ | 191,454 |
| | $ | 37,172 |
|
Cost of Goods Sold
Cost of goods sold and our gross margins were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cost of goods sold | $ | 15,066 |
| | $ | 6,552 |
| | $ | 3,895 |
|
| Gross margin | 96 | % | | 95 | % | | 89 | % |
Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty payable to GlaxoSmithKline, or GSK, on net sales of any product incorporating cabozantinib, indirect labor costs, the cost of manufacturing, write-downs related to expiring and excess inventory, and other third-party logistics and distribution costs for our product. A portion of the manufacturing costs for inventory was incurred prior to regulatory approval of CABOMETYX and COMETRIQ and therefore was expensed as research and development costs when those costs were incurred, rather than capitalized as inventory. The sale of products containing previously expensed materials resulted in a 3%, 7% and 6% reduction in the Cost of goods sold during the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, we had $0.4 million and $1.2 million, respectively, of materials that were previously expensed and will not be charged to Costs of goods sold in future periods. Write-downs related to excess and expiring inventory were $1.1 million, $0.5 million and $1.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The increase in Cost of goods sold primarily reflects the growth in product sales of CABOMETYX since the product’s launch in late April 2016 and an increase in market share.
The increase in gross margin during 2017 and 2016 was related to the change in product mix as CABOMETYX sales volumes have increased while COMETRIQ volumes have decreased. CABOMETYX tablets have a lower manufacturing cost than COMETRIQ capsules as the capsules have additional packaging requirements and are produced in smaller quantities due to lower market demand. In addition, during the year ended December 31, 2015, write-downs related to excess and expiring inventory had a more significant impact on gross margin than in subsequent periods. We do not expect our gross margin to change significantly during 2018.
Research and Development Expenses
Total research and development expenses were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Research and development expenses | $ | 112,171 |
| | $ | 95,967 |
| | $ | 96,351 |
|
| Dollar change | $ | 16,204 |
| | $ | (384 | ) | | |
| Percentage change | 17 | % | | less than 1% |
| | |
Research and development expenses consist primarily of clinical trial expenses, personnel expenses, consulting and outside services, stock-based compensation, the allocation of general corporate costs, and temporary personnel expenses.
The increase in research and development expenses for the year ended December 31, 2017, as compared to 2016, was primarily related to an increase in personnel expenses, clinical trial costs, and consulting and outside services. The increase in personnel expenses of $8.5 million for the year ended December 31, 2017, as compared to 2016, was primarily a result of increases in headcount associated with our development efforts, our internal discovery program, and our medical affairs organization. The increase in clinical trial costs was $4.4 million for the year ended December 31, 2017, as compared to 2016. Clinical trial costs includes services performed by third-party contract research organizations and other vendors who support our clinical trials. The increase in clinical trial costs was primarily due to start-up costs associated with CheckMate 9ER and start-up costs associated with our phase 1b trial of cabozantinib and atezolizumab in locally advanced or metastatic solid tumors, partially offset by decreases in costs related to METEOR, our completed phase 3 pivotal trial comparing CABOMETYX to everolimus in patients with previously treated advanced RCC. The increase in consulting and outside services was $2.5 million for the year ended December 31, 2017, as compared to 2016, and was primarily in support of our discovery and medical affairs organizations.
The nominal decrease in research and development expenses for the year ended December 31, 2016, as compared to 2015, was primarily related to clinical trial costs, which includes services performed by third-party contract research organizations and other vendors who support our clinical trials. The decrease in clinical trial costs was $8.9 million for the year ended December 31, 2016, as compared to 2015. The decrease in clinical trial costs was primarily due to decreases in costs related to METEOR, partially offset by increases in costs related to CELESTIAL, our phase 3 pivotal trial in previously treated advanced HCC. The decrease in research and development expenses for the year ended December 31, 2016, as compared to 2015, was also related to a decrease in the allocation of general corporate costs and stock-based compensation. The allocation of general corporate costs decreased $4.2 million for the year ended December 31, 2016 as compared to 2015, primarily due to headcount growth in the selling, general and administrative functions. Stock-based compensation decreased $2.3 million for the year ended December 31, 2016 as compared to 2015, primarily due to the 2015 recognition of stock-based compensation expenses for performance-based stock-options tied to the positive top-line data received from the METEOR trial and the anticipated acceptance of our NDA filing with the FDA, partially offset by a bonus to our employees in the form of fully-vested restricted stock units, or RSUs, during 2016. These decreases were almost entirely offset by increases in personnel expenses and consulting and outside services. Personnel and related expenses increased $12.8 million for the year ended December 31, 2016 as compared to 2015 primarily due to the hiring of medical science liaisons as a result of the launch of CABOMETYX and an increase in the accrual for corporate bonuses. Consulting and outside services increased $2.1 million for the year ended December 31, 2016 as compared to 2015 primarily due to increases in activities related to medical affairs and drug safety.
We do not track fully-burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: development, drug discovery and other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds may be studied in clinical trials. Our drug discovery group utilizes a variety of technologies to enable the rapid discovery, optimization and extensive characterization of lead compounds such that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development. Research and development expenses by category were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Research and development expenses: | | | | | |
| Development: | | | | | |
| Clinical trial costs | $ | 40,315 |
| | $ | 35,947 |
| | $ | 44,859 |
|
| Personnel expenses | 30,076 |
| | 22,936 |
| | 12,655 |
|
| Consulting and outside services | 8,492 |
| | 8,176 |
| | 6,203 |
|
| Other development costs | 12,967 |
| | 11,478 |
| | 9,352 |
|
| Total development | 91,850 |
| | 78,537 |
| | 73,069 |
|
Drug discovery (1) | 6,334 |
| | 1,220 |
| | 571 |
|
Other (2) | 13,987 |
| | 16,210 |
| | 22,711 |
|
| Total research and development expenses | $ | 112,171 |
| | $ | 95,967 |
| | $ | 96,351 |
|
____________________
| |
| (1) | Includes primarily personnel expenses, consulting and outside services, and laboratory supplies. |
| |
| (2) | Includes stock-based compensation and the allocation of general corporate costs to research and development. |
In addition to reviewing the three categories of research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. Such factors include enrollment in clinical trials for our drug candidates, the results of and data from clinical trials, the potential indications for our drug candidates, the clinical and commercial potential for our drug candidates, and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy, which includes the pursuit of commercial collaborations with major pharmaceutical and biotechnology companies for the development of our drug candidates.
We are focusing our development and commercialization efforts primarily on cabozantinib to maximize the therapeutic and commercial potential of this compound, and as a result, we expect our near-term research and development expenses to primarily relate to the clinical development of cabozantinib. We expect to continue to incur significant development costs for cabozantinib in future periods as we evaluate its potential in a broad development program comprising over 70 ongoing or planned clinical trials across multiple indications. Notable studies of this program include CheckMate 9ER and CheckMate 040, each in collaboration with BMS, as well as the phase 1b trial evaluating cabozantinib in combination with atezolizumab in locally advanced or metastatic solid tumors being conducted in collaboration with Roche.
In addition, post-marketing commitments in connection with the approval of COMETRIQ in progressive, metastatic MTC dictate that we conduct an additional study in that indication.
As a result, we expect our research and development expenses to increase in 2018 as we continue to expand the cabozantinib development program and our product pipeline.
The length of time required for clinical development of a particular product candidate and our development costs for that product candidate may be impacted by the scope and timing of enrollment in clinical trials for the product candidate, our decisions to develop a product candidate for additional indications, and whether we pursue development of the product candidate or a particular indication with a collaborator or independently. For example, cabozantinib is being developed in multiple indications, and we do not yet know how many of those indications we will ultimately pursue regulatory approval for. In this regard, our decisions to pursue regulatory approval of cabozantinib for additional indications depend on several variables outside of our control, including the strength of the data generated in our prior, ongoing and potential future clinical trials. Furthermore, the scope and number of clinical trials required to obtain regulatory approval for each pursued indication is subject to the input of the applicable regulatory authorities, and we have not yet sought such input for all potential indications that we may elect to pursue, and even after having given such input, applicable regulatory authorities may subsequently require additional clinical studies prior to granting regulatory approval based on new data generated by us or other companies, or for other reasons outside of our control. As a condition to any regulatory approval, we may also be subject to post-marketing development commitments, including additional clinical trial requirements. As a result of the uncertainties discussed above, we are unable to determine the duration of or complete costs associated with the development of cabozantinib or any of our other research and development projects.
In any event, our potential therapeutic products are subject to a lengthy and uncertain regulatory process that may not result in our receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected, including cabozantinib in any additional indications. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval. A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Selling, general and administrative expenses | $ | 159,362 |
| | $ | 116,145 |
| | $ | 57,305 |
|
| Dollar change | $ | 43,217 |
| | $ | 58,840 |
| | |
| Percentage change | 37 | % | | 103 | % | | |
Selling, general and administrative expenses consist primarily of personnel expenses, consulting and outside services, stock-based compensation, travel and entertainment, facility costs, legal and accounting costs, marketing costs and charitable contribution expenses.
The increase in selling, general and administrative expenses for the year ended December 31, 2017, as compared to 2016, was primarily related to increases in personnel expenses, consulting and outside services, marketing costs, charitable contribution expenses and legal and accounting costs. Personnel expenses increased $11.3 million for the year ended December 31, 2017, as compared to 2016, primarily due to an increase in general and administrative headcount to support our commercial and research and development organizations. Consulting and outside services increased $10.7 million for the year ended December 31, 2017, as compared to 2016, primarily due to increases in consulting for marketing activities. Marketing costs increased $6.6 million for the year ended December 31, 2017, as compared to 2016, primarily due to an increase in losses recognized under our collaboration agreement with Genentech. In December 2016, Genentech stated that it changed, both retroactively and prospectively, the manner in which it allocates promotional expenses of the COTELLIC plus Zelboraf combination therapy. As a result of Genentech’s decision to change its cost allocation approach, we were relieved of our obligation to pay certain disputed costs that had been accrued by us; we were also able to invoice Genentech for certain expenses, with interest, that we had previously paid. Accordingly, during the year ended December 31, 2016, we offset Selling, general and administrative expenses with a $13.3 million recovery of disputed losses that we had recognized and recorded prior to 2016. Marketing costs also included a loss of $2.1 million for activities during the year ended December 31, 2017 under our collaboration agreement with Genentech, as compared to a loss of $4.5 million for activities during 2016. Charitable contribution expenses increased $5.2 million for the year ended December 31, 2017, as compared to 2016. Legal and accounting expenses increased $3.8 million for the year ended December 31, 2017, as compared to 2016, primarily due to increases in costs related to our dispute with Genentech which was resolved during 2017.
The increase in selling, general and administrative expenses for the year ended December 31, 2016, as compared to 2015, was primarily related to increases in personnel expenses, consulting and outside services, travel and entertainment, the allocation of general corporate costs and stock-based compensation. Personnel expenses increased $44.1 million for the year ended December 31, 2016, as compared to 2015, primarily due to an increase in headcount connected with the build-out of our U.S. commercial organization as a result of the launch of CABOMETYX, as well as an increase in incentive compensation and the accrual for corporate bonuses. Consulting and outside services increased $16.0 million for the year ended December 31, 2016, as compared to 2015, primarily due to costs incurred supporting the commercialization and launch of CABOMETYX. Travel and entertainment increased $5.5 million for the year ended December 31, 2016, as compared to 2015, primarily due to travel incurred by our U.S. commercial organization. The allocation of general corporate costs to research and development and cost of goods sold decreased $3.9 million for the year ended December 31, 2016, as compared to 2015, primarily due to headcount growth in the selling, general and administrative functions. Stock-based compensation increased $3.3 million for the year ended December 31, 2016, as compared to 2015, primarily due to headcount growth and a bonus paid to our employees in the form of fully-vested RSUs, which was further offset by the 2015 recognition of expenses for performance-based stock-options described above. These
increases were partially offset by a decrease in marketing expenses primarily due a decrease in losses recognized under our collaboration agreement with Genentech.
We expect our Selling, general and administrative expenses in 2018 will increase as we continue to support our commercial and research and development organizations. Those expenses may increase further commensurate with potential expanded commercial opportunities.
Other Expenses, net
Other expenses, net, were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Interest income | $ | 4,883 |
| | $ | 2,578 |
| | $ | 793 |
|
| Interest expense | (8,679 | ) | | (33,060 | ) | | (40,680 | ) |
| Other, net | (3,537 | ) | | (11,616 | ) | | (381 | ) |
| Total other expenses, net | $ | (7,333 | ) | | $ | (42,098 | ) | | $ | (40,268 | ) |
| Dollar change | $ | 34,765 |
| | $ | (1,830 | ) | | |
| Percentage change | (83 | )% | | 5 | % | | |
The increase in interest income during the year ended December 31, 2017, as compared to both 2016 and 2015, was a result of both an increase in our investment balances and an increase in the yield earned on those investments.
The decrease in interest expense during the year ended December 31, 2017, as compared to both 2016 and 2015, was due to the repayment of the Deerfield Notes, in June 2017, the repayment of the Silicon Valley Bank term loan in March 2017, and the conversions and the redemption of the 4.25% convertible senior subordinated notes due 2019, or the 2019 Notes, during the third and fourth quarters of 2016. See “Note 6 - Debt” in our “Notes to Condensed Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for more information on the repayment and conversion of our debt.
The change in Other, net during the year ended December 31, 2017, as compared to both 2016 and 2015, was primarily due to losses on extinguishment of debt. During the years ended December 31, 2017 and 2016 we recognized a $6.2 million and $13.9 million loss on extinguishment of debt, respectively, due to the repayment of the Deerfield Notes in June 2017 and the conversions and the redemption of the 2019 Notes during the third and fourth quarters of 2016. Other, net also included gains of $3.0 million and $2.5 million during the years ended December 31, 2017 and 2016, respectively, related to the August 2016 sale of our 9% interest in Akarna Therapeutics, Ltd., or Akarna, to Allergan Holdco UK Limited, or Allergan. We acquired our interest in Akarna in 2015 in exchange for intellectual property rights related to the Exelixis discovered compound XL335. We are eligible to earn additional such gains in the future as Allergan continues its development of XL335.
Income Tax Expense
Income tax expense was as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Income tax expense | $ | 4,350 |
| | $ | — |
| | $ | 55 |
|
Income tax expense for the year ended December 31, 2017 primarily related to state taxes in jurisdictions outside of California, for which we do not have net operating loss carry-forwards due to a limited operating history. Our historical losses are sufficient to fully offset any federal taxable income.
Liquidity and Capital Resources
Although we reported net income of $154.2 million for the year ended December 31, 2017, we may not be able to maintain or increase profitability on a quarterly or annual basis, and we are unable to accurately predict the extent of long-range future profits or losses. The amount of our net profits or losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the U.S.; achievement of clinical, regulatory and commercial milestones and the amount of
royalties, if any, from sales of CABOMETYX and COMETRIQ outside of the U.S. under our collaboration agreements with Ipsen and Takeda; our share of the net profits and losses for the commercialization of COTELLIC in the U.S. under our collaboration with Genentech; the amount of royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and the level of our expenses, including development and commercialization activities for cabozantinib and any pipeline expansion efforts. We have limited commercialization experience and expect to continue to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we will continue to expand our product pipeline through our drug discovery efforts and the evaluation of in-licensing and acquisition opportunities that align with our oncology drug expertise, which efforts could involve substantial costs.
As of December 31, 2017, we had $457.2 million in cash and investments, which included $452.0 million available for operations. We anticipate that the aggregate of our current cash and cash equivalents, short-term investments available for operations, product revenues and collaboration revenues will enable us to maintain our operations for a period of at least 12 months following the filing date of this report. The sufficiency of our cash resources depends on numerous assumptions, including assumptions related to product sales and operating expenses, as well as the other factors set forth in “Risk Factors” under the headings “Risks Related to our Capital Requirements and Financial Results,” in Part I, Item 1A of this Annual Report on Form 10-K. Our assumptions may prove to be wrong or other factors may adversely affect our sources of cash, and as a result we may not have the cash resources to fund our operations as currently planned, which would have a material adverse effect on our business. In addition, we may choose to raise additional funds through the issuance of equity or debt due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current and future operating plans. For example, we may choose to raise additional capital to fund in-licensing or product acquisition opportunities.
Sources and Uses of Cash
The following table summarizes our cash flow activities (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 154,227 |
| | $ | (70,222 | ) | | $ | (161,744 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | 18,330 |
| | 53,359 |
| | 46,538 |
|
| Changes in operating assets and liabilities | (6,946 | ) | | 227,267 |
| | (25,845 | ) |
| Net cash provided by (used in) operating activities | 165,611 |
| | 210,404 |
| | (141,051 | ) |
| Net cash provided by (used in) investing activities | 35,795 |
| | (216,048 | ) | | 50,077 |
|
| Net cash (used in) provided by financing activities | (169,928 | ) | | 15,696 |
| | 152,213 |
|
| Net increase in cash and cash equivalents | 31,478 |
| | 10,052 |
| | 61,239 |
|
| Cash and cash equivalents at beginning of year | 151,686 |
| | 141,634 |
| | 80,395 |
|
| Cash and cash equivalents at end of year | $ | 183,164 |
| | $ | 151,686 |
| | $ | 141,634 |
|
Operating Activities
Our operating activities provided cash of $165.6 million for the year ended December 31, 2017, compared to $210.4 million of cash provided in 2016 and $141.1 million of cash used in 2015. Cash flows provided by operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Cash provided by operating activities is derived by adjusting our net income (loss) for: non-cash operating items such as depreciation and amortization, non-cash interest expense and share-based compensation charges; and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Consolidated Results of Operations.
Significant factors that contributed to the decrease in cash provided by operating activities for the year ended December 31, 2017, as compared to 2016, include the upfront nonrefundable payment of $200.0 million received from Ipsen in 2016 in consideration for the exclusive license and other rights contained in our collaboration agreement with Ipsen along with a $67.0 million increase in operating expenses. These were offset by a $213.6 million increase in net product revenues and the upfront nonrefundable payment of $50.0 million received from Takeda in the year ended December 31, 2017 in consideration for the exclusive license and other rights contained in our collaboration agreement with Takeda.
Significant factors that contributed to the increase in cash provided by operating activities for the year ended December 31, 2016, as compared to 2015, include the upfront nonrefundable payment of $200.0 million received from Ipsen in the year ended December 31, 2016 and a $101.2 million increase in net product revenues, which were partially offset by a $61.0 million increase in operating expenses in 2016.
Investing Activities
Our investing activities provided cash of $35.8 million for the year ended December 31, 2017, as compared to $216.0 million of cash used for 2016 and $50.1 million of cash provided for 2015.
Cash provided by investing activities for the year endedDecember 31, 2017 was primarily due to unrestricted and restricted investment purchases of $334.7 million, less cash from the sale and maturity of unrestricted and restricted investments of $388.5 million. During 2017 we also invested $21.1 million in property and equipment, primarily related to our new corporate headquarters and research facilities in Alameda, California.
Cash used by investing activities for the year ended December 31, 2016 was primarily due to unrestricted and restricted investment purchases of $377.8 million, less cash from the maturity of unrestricted and restricted investments of $158.6 million.
Cash provided by investing activities for the year ended December 31, 2015 was primarily due to the maturity of unrestricted and restricted investments of $198.7 million, less unrestricted and restricted investment purchases of $149.6 million.
Financing Activities
Our financing activities used cash of $169.9 million for the year ended December 31, 2017, as compared to $15.7 million of cash provided for 2016 and $152.2 million of cash provided for 2015.
Cash used in financing activities for the year ended December 31, 2017 was primarily a result of $185.8 million paid for all amounts outstanding under the Deerfield Notes and our term loan with Silicon Valley Bank. Those payments were partially offset by $15.9 million in proceeds from the issuance of common stock under our equity incentive plans, net of taxes paid related to net share settlements.
Cash provided by financing activities for the year ended December 31, 2016 was primarily the result of the issuance of common stock under our equity incentive plans, net of taxes paid related to net share settlements, totaling $23.4 million. Those proceeds were partially offset by cash payments from the conversion and redemption of the 2019 Notes totaling $7.7 million.
Cash provided by our financing activities for the year ended December 31, 2015 was primarily due to the issuance of 28,750,000 shares of common stock in July 2015 for net proceeds of $145.6 million and $10.9 million in proceeds from the issuance of common stock under our equity incentive plans, net of taxes paid related to net share settlements. Those proceeds were partially offset by principal payments on debt of $4.4 million.
Contractual Obligations
We have contractual obligations in the form of leases and purchase obligations. The following chart details our contractual obligations as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
Contractual Obligations (1) | | Total | | Less than 1 year | | 1-3 Years | | More than 3 years |
Operating leases (2) | | $ | 9,340 |
| | $ | 2,864 |
| | $ | 1,348 |
| | $ | 5,128 |
|
Other financing obligations (2) | | 21,493 |
| | 800 |
| | 4,034 |
| | 16,659 |
|
Purchase and other long-term obligations (3) | | 29,331 |
| | 28,033 |
| | 1,298 |
| | — |
|
| Total contractual cash obligations | | $ | 60,164 |
| | $ | 31,697 |
| | $ | 6,680 |
| | $ | 21,787 |
|
____________________
| |
| (1) | This table does not include potential future royalty obligations to GSK as the correctionamount of the accounting for non-cash interest expense associated with the 2019 Notes. Seesuch royalty obligations are not estimable. |
| |
| (2) | Other financing obligations are related to our build-to-suit lease of office and research facilities located in Alameda, California. For a description of our obligations under our leases, see “Note 1. Organization and Summary of Significant Accounting Policies - Correction of an Immaterial Error”12. Commitments” in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K. |
| |
| (3) | Purchase obligations due in 2018 include an obligation, which was capped at $20.9 million, for additional information onconstruction costs at our new office and research facilities in Alameda, California. We anticipate entering into additional contractual agreements related to the correction.construction and furnishing of those facilities in 2018. At December 31, 2017, we also had firm purchase commitments related to manufacturing and maintenance of inventory. |
Off-Balance Sheet Arrangements
We do not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.
52
Critical Accounting Estimates
TableThe preparation of Contentsour Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances), the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations; the amounts of revenues and expenses under our profit and loss sharing agreement; recoverability of inventory; the accrual for certain liabilities including accrued clinical trial liability; and valuations of awards used to determine stock-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates.We believe our critical accounting policies relating to revenue recognition, clinical trial accruals, share based compensation and inventory reflect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.
For a complete description of our significant accounting policies, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Revenue Recognition
Net Product Revenues and Discounts and Allowances
We recognize net product revenues when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies and distributors; and (d) returns. Discounts and allowances are complex and require significant judgment by management. Estimates are assessed each period and updated to reflect current information.
We initially record estimates for these deductions at the time we recognize the gross revenue. Our estimates for the expected utilization are based on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data. For a further description of our discounts and allowance, see “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Collaboration Revenues
Revenues from collaboration agreements primarily consist of upfront license fees, milestone, royalty and/or product supply payments. These arrangements have multiple elements, and our deliverables may include intellectual property rights, distribution rights, delivery of manufactured product, commercial and development activities and participation on joint steering, commercial and development committees. In order to account for these arrangements, we identify the deliverables and evaluate whether the delivered elements have value to our collaboration partner on a stand-alone basis and represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver future goods or services, a right or license to use an asset, or another performance obligation. If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement will be combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue then will be determined for those combined deliverables as a single unit of accounting. For a combined unit of accounting, non-refundable upfront fees are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period of our continued involvement. Amounts received in advance of performance are recorded as deferred revenue. The determination of deliverables and the allocation of consideration using selling prices and the period of our continued involvement may involve significant judgments and estimates that will impact revenue recognition. Often, the term of our continued involvement is not contractually defined, and an estimate of the term of our total obligation must be made. Therefore, any changes in the expected term of our continued involvement will impact revenue recognition for the given period.
We record royalty revenues and U.S. profits and losses under the collaboration agreement with Genentech based on estimates of the sales that occurred during the period. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical activity, adjusted for any changes in facts and circumstances, as appropriate. We base our estimates on the best information available at the time provided to us by our collaboration partners. However, additional information may subsequently become available to us, which may allow us to make a more accurate estimate in future periods. In this event, we are required to record adjustments in future periods when the actual level of activity becomes more certain. Such increases or decreases are generally considered to be changes in estimates and will be reflected in our Consolidated Statements of Operations in the period they become known.
Inventory
We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. On a quarterly basis, we analyze our estimated production levels for the following twelve month period, which is our normal operating cycle, and reclassify inventory we expect to use or sell in periods beyond the next twelve months into Other long-term assets in the Consolidated Balance Sheets.
Clinical Trial Accruals
All of our clinical trials have been executed with support from contract research organizations and other vendors. We accrue costs for clinical trial activities performed by contract research organizations based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the activities to be performed for each patient, the number of active clinical sites and the duration for which the patients will be enrolled in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence with contract research organizations and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.
Stock Option Valuation
Our estimate of compensation expense requires us to determine the appropriate fair value model and a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns and related tax effects. The most significant assumptions are our estimates of the expected volatility and the expected term of the stock option.
The value of a stock option is derived from its potential for appreciation. The more volatile the stock, the more valuable the option becomes because of the greater possibility of significant changes in stock price. Because there is a market for options on our common stock, we have considered implied volatilities as well as our historical volatilities when developing an estimate of expected volatility. The expected option term also has a significant effect on the value of the option. The longer the term, the more time the option holder has to allow the stock price to increase without a cash investment and thus, the more valuable the option. Further, lengthier option terms provide more opportunity to exploit market highs. However, empirical data show that employees typically do not wait until the end of the contractual term of a nontransferable option to exercise. Accordingly, we are required to estimate the expected term of the option for input to an option-pricing model. As required under generally accepted accounting principles, we review our valuation assumptions at each grant date and, as a result, from time to time we change the valuation assumptions we use to value stock options granted. The assumptions used in calculating the fair value of stock options represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation could be materially different in the future. For additional description of our stock-based compensation, see “Note 8. Stock-based Compensation” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K .
Recent Accounting Pronouncements
For a description of the expected impact of recent accounting pronouncements, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Some of the statements under in this “Management’s DiscussionItem 7A. Quantitative and Analysis of Financial Condition and Results of Operations” are 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 company’s 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,” “focus,” “goal,” “objective,” “will,” “may” “would,” “could,” “estimate,” “predict,” “target,” “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 those discussed in “Item 1A.Qualitative Disclosures About Market Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2014, a 53-week year, ended on January 2, 2015; fiscal year 2015, a 52-week year, ended on January 1, 2016; fiscal year 2016, a 52-week year, ended on December 30, 2016; and fiscal year 2017, a 52-week year, will end on December 29, 2017. For convenience, references in this report as of and for the fiscal years ended January 2, 2015, January 1, 2016, and December 30, 2016 are indicated as being as of and for the years ended December 31, 2014, 2015, and 2016, respectively. The quarterly period ended January 2, 2015 is a 14-week fiscal quarter; all other interim periods presented are 13-week fiscal quarters.
Overview
We are a biopharmaceutical company committed to the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Since its founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the commercial marketplace. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, and VEGF receptors: CABOMETYX™ tablets approved for previously treated advanced kidney cancer and COMETRIQ® capsules approved for progressive, metastatic medullary thyroid cancer. The third product, Cotellic®, is a formulation of cobimetinib, a selective inhibitor of MEK, marketed under a collaboration with Genentech (a member of the Roche Group), and is approved as part of a combination regimen to treat advanced melanoma. Both cabozantinib and cobimetinib have shown potential in a variety of forms of cancer and are the subjects of broad clinical development programs.
While our commercialization efforts for CABOMETYX and COMETRIQ are focused in the United States, the products are marketed for their approved indications outside of the United States and Japan under our collaboration agreement with Ipsen. We are also closely working with Ipsen and our other cabozantinib collaboration partner, Takeda, on the further global development and commercialization of cabozantinib.
Beyond the FDA-approved indications of cabozantinib for second-line advanced RCC and progressive, metastatic MTC, we are engaged in a broad development program composed of over 45 ongoing or planned clinical trials in additional tumor types, many of which are conducted through our CRADA with NCI-CTEP or our IST program. The most notable studies at this time are CELESTIAL, our company-sponsored phase 3 trial of cabozantinib in advanced HCC, for which we anticipate results in 2017, and CABOSUN, a randomized phase 2 trial comparing cabozantinib to sunitinib in the first-line treatment of intermediate- or poor-risk RCC patients, being conducted by The Alliance through our CRADA with NCI-CTEP. In May 2016, The Alliance informed us that CABOSUN met its primary endpoint demonstrating a statistically significant and clinically meaningful improvement of PFS compared with sunitinib. Based on these results, we are working towards the submission of a sNDA in 2017 for cabozantinib as a treatment for first-line advanced RCC. Cabozantinib has demonstrated clinical activity as a single agent in advanced RCC, and we are interested in further examining its potential in combination with immunotherapies to treat this serious disease. Building on the available preclinical and clinical observations that cabozantinib results in a more immune-permissive tumor environment potentially resulting in cooperative activity of cabozantinib in combination with immune check point inhibitors, in collaboration with BMS, we plan to evaluate the combination of cabozantinib with nivolumab or nivolumab and ipilimumab in various tumor types, including a phase 3 trial in first-line advanced RCC, as well as studies in bladder cancer and HCC.
In addition to these advances connected with cabozantinib, significant progress continues to be made with respect to the clinical development, regulatory status and commercial potential of cobimetinib under our collaboration agreement with
Genentech. For additional information on the cobimetinib development program, see “Part I. Item 1. Business - Cobimetinib Development Program.”
Additional information regarding our business is included in Part I, Item 1, “Business,” included in this Annual Report on Form 10-K.
During 2016, we significantly grew our commercial organization and positioned the business to be able to drive towards and support an expanded product pipeline. Below is a summary of our significant business developments:
In February 2016, we entered into a collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the collaboration agreement, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the United States, Canada and Japan. The collaboration agreement was subsequently amended in December 2016 to include commercialization rights in Canada.
In April 2016, based on results of our phase 3 pivotal trial METEOR, which met its primary endpoint of improving PFS, as well as its secondary endpoints of improving OS and ORR, the FDA approved CABOMETYX for the treatment of patients with advanced RCC who have received prior anti-angiogenic therapy.
In May 2016, we announced that CABOSUN met its primary endpoint, demonstrating a statistically significant and clinically meaningful improvement in PFS compared with sunitinib in patients with advanced intermediate- or poor-risk RCC. Based on these results, we are working towards the submission of a sNDA in the third quarter of 2017 for cabozantinib as a treatment for first-line advanced RCC.
In June 2016, we presented results from our phase 3 pivotal trial METEOR at the ASCO 2016 Annual Meeting, showing that CABOMETYX demonstrated a statistically significant and clinically meaningful increase in OS. Compared with everolimus, CABOMETYX was associated with a 34% reduction in the rate of death and median OS was 21.4 months for patients receiving CABOMETYX versus 16.5 months for those receiving everolimus (HR=0.66, 95% CI 0.53-0.83, P=0.0003).
In June 2016, our collaboration partner Genentech announced preliminary results from a phase 1b trial evaluating the safety and clinical activity of the combination of cobimetinib with ateolizumab in patients with metastatic CRC, which included 23 patients with advanced CRC (22 with mutant KRAS and one with wild-type KRAS). The ORR for the combination was 17%, including four confirmed PRs; additionally five patients achieved SD. Responses were seen in tumors with the microsatellite stable, or MSS, phenotype, which comprises 95% of CRC. MSS CRC has historically been refractory to immuno-oncology agents. The median duration of response was not yet reached, with a range of 5.4 months to more than 11.1 months. No dose-limiting toxicities were observed.
In September 2016, the EC approved CABOMETYX for the treatment of adult patients with advanced RCC following prior VEGF-targeted therapy and in December 2016, Ipsen recorded its first commercial sales in Europe.
In October 2016, we announced positive results from the NCI-CTEP-sponsored phase 1 trial of cabozantinib in combination with nivolumab in patients with previously treated genitourinary tumors.
In November 2016, we announced Genentech’s efforts to advance the development program for cobimetinib, through the initiation and announcement of multiple phase 3 pivotal trials exploring the combination of cobimetinib with other targeted and immuno-oncology agents for the treatment of melanoma and CRC.
In January 2017, we entered into a collaboration and license agreement with Takeda for the commercialization and further clinical development of cabozantinib in Japan.
2016 Financial Highlights
Our total net product revenue increased by $101.2 million, or 296%, in 2016 compared to 2015, primarily due to the commercial launch of CABOMETYX as a treatment for patients with advanced RCC in April 2016 and, to a lesser extent, an increase in COMETRIQ product sales.
Our collaboration revenue increased by $53.1 million in 2016 compared to 2015, primarily due to upfront payments and milestones received as a result of entering into our collaboration and license agreement with Ipsen.
Cash and investments increased to $479.6 million at December 31, 2016 as compared to $253.3 million at December 31, 2015.
Between August and November 2016, we retired all $287.5 million of the 2019 Notes through privately negotiated exchange transactions and redemption procedures provided for by the 2019 Notes. For additional information on the retirement of the 2019 Notes, see “Note 7. Debt,” to our “Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K.
2017 Outlook
In 2017, our key objective is to maximize the clinical and commercial opportunities for cabozantinib and cobimetinib as oncology franchises. On the commercial front, we plan to continue to execute on the U.S. launch of CABOMETYX as a treatment for patients with advanced RCC and increase sales of COMETRIQ and Cotellic, while supporting our collaboration partners on the execution of their commercial plans. From the research and development perspective, we intend to continue to invest in our cabozantinib development program, while driving toward the expansion of our product pipeline through the measured resumption of drug discovery activities and the evaluation of potential in-licensing and acquisition opportunities that align with our oncology drug development expertise.
We anticipate that we will continue to face a number of challenges and risks to our business that may impact our ability to execute on our 2017 business objectives. In particular, we anticipate that for the foreseeable future our ability to generate meaningful revenue to fund our commercial operations and our development and discovery programs is dependent upon the successful commercialization of CABOMETYX for the treatment of advanced RCC in territories where it has been or may soon be approved. The commercial potential of CABOMETYX for the treatment of advanced RCC remains subject to a variety of factors, most importantly, CABOMETYX’s perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or currently in development for the treatment of advanced RCC. Our ability to generate meaningful product revenue from CABOMETYX is also affected by a number of other factors, including the extent to which coverage and reimbursement for CABOMETYX is available from government and other third-party payers. Obtaining and maintaining appropriate coverage and reimbursement for CABOMETYX is increasingly challenging due to, among other things, the attention being paid to healthcare cost containment and other potential austerity measures being discussed in the U.S. and worldwide, as well as increasing policy interest in the U.S. with respect to pharmaceutical drug pricing practices. Our ability to fulfill the commercial potential of cabozantinib also depends on our ability to expand the compound’s use by generating data in clinical development that will support regulatory approval of cabozantinib in additional indications. Our immediate focus in this regard is a potential regulatory approval of our sNDA for cabozantinib for first-line advanced RCC based upon data from CABOSUN. This approval represents a greater challenge than others because CABOSUN was not originally designed as a registrational trial. However, given the positive nature of CABOSUN results, we are planning to submit a sNDA to the FDA. Achievement of our 2017 business objectives will also depend on our ability to adapt our development and commercialization strategy to navigate the increasing prevalence of immunotherapy competition, as well as the use of combination therapy to treat cancer. Furthermore, our research and development objectives may be curtailed as a result of operational challenges related to organizational growth as we resume drug discovery activities, and we may be unable to successfully identify appropriate candidates for in-licensing or acquisition.
Some of these challenges and risks are specific to our business, and others are common to companies in the pharmaceutical industry with development and commercial operations. For a complete discussion of challenges and risks we face, see in in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
Results of Operations – Comparison of Years Ended December 31, 2016, 2015 and 2014
Revenues
Revenues by category were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Gross product revenues | $ | 151,499 |
| | $ | 36,650 |
| | $ | 28,963 |
|
| Discounts and allowances | (16,124 | ) | | (2,492 | ) | | (3,852 | ) |
| Net product revenues | 135,375 |
| | 34,158 |
| | 25,111 |
|
| Royalty and product supply revenues, net | 2,795 |
| | 14 |
| | — |
|
License revenues (1) | 13,284 |
| | — |
| | — |
|
Contract revenues (2) | 40,000 |
| | 3,000 |
| | — |
|
| Collaboration revenues | 56,079 |
| | 3,014 |
| | — |
|
| Total revenues | $ | 191,454 |
| | $ | 37,172 |
| | $ | 25,111 |
|
| Dollar change | $ | 154,282 |
| | $ | 12,061 |
| | |
| Percentage change | 415 | % | | 48 | % | | |
____________________
| |
(1) | Includes amortization of upfront payments. |
| |
(2) | Includes milestone payments. |
Net product revenues by product were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| CABOMETYX | $ | 93,481 |
| | $ | — |
| | $ | — |
|
| COMETRIQ | 41,894 |
| | 34,158 |
| | 25,111 |
|
| Net product revenues | $ | 135,375 |
| | $ | 34,158 |
| | $ | 25,111 |
|
| Dollar change | $ | 101,217 |
| | $ | 9,047 |
| | |
| Percentage change | 296 | % | | 36 | % | | |
The increase in net product revenues for the year ended December 31, 2016, as compared to 2015, was primarily due to the impact of the commercial launch of CABOMETYX in late April 2016, and, to a lesser extent, an increase in demand for COMETRIQ. CABOMETYX was approved by the FDA on April 25, 2016 as a treatment for patients with advanced RCC who have received prior anti-angiogenic therapy. Net product revenues for CABOMETYX during 2016 were also favorably impacted by the build of channel inventory by the specialty pharmacies and distributors to whom we sell CABOMETYX in connection with its initial launch. The 23% increase in net product revenues for COMETRIQ for the year ended December 31, 2016, as compared to 2015, was primarily due to a 15% increase in the number of COMETRIQ units sold and to a lesser extent, an increase in the average selling price of the product. The 36% increase in net product revenues for the year ended December 31, 2015, as compared to 2014, was primarily due to a 26% increase in the number of COMETRIQ units sold and, to a lesser extent, the impact of a change to the “sell-in” method which resulted in the one-time recognition of $2.6 million of deferred revenue attributable to sales to the specialty pharmacy that sells COMETRIQ in the U.S. in the first quarter of 2015. The COMETRIQ sales volume increases in both periods were driven by increased product demand.
Royalty and product supply revenues, net for the years ended December 31, 2016 and 2015 primarily includes recognition of $2.8 million and $14 thousand, respectively, of royalties on ex-U.S. net sales of Cotellic following Genentech’s launch of the product in late 2015. There was no such royalty and product supply revenue during the comparable period in 2014.
License revenues for the year ended December 31, 2016 consisted of the recognition of $13.3 million of the upfront payments and non-substantive milestone received in 2016 in connection with our collaboration and license agreement with Ipsen. The upfront payment of $200.0 million, received in the first quarter of 2016, the $60.0 million milestone we achieved upon the approval of cabozantinib by the EMA in second-line RCC, and the $10.0 million upfront payment received in
December 2016 in consideration for the commercialization rights in Canada are being recognized ratably over the remaining term of the collaboration agreement. The collaboration agreement continues through early 2030, which is the current estimated patent expiration of cabozantinib in the European Union. There was no such license revenue during the comparable periods in 2015 and 2014.
Contract revenues for the year ended December 31, 2016 reflect recognition of two $10.0 million milestones for the first commercial sales of CABOMETYX by Ipsen in Germany and the United Kingdom, $15.0 million from a milestone payment earned from Daiichi Sankyo related to its worldwide license of our compounds that modulate mineralocorticoid receptor, including CS-3150/esaxerenone (a specific rotational isomer of XL550) in September 2016 and $5.0 million from a milestone payment earned from Merck related to its worldwide license of our PI3K-d program in July 2016. Contract revenues for the year ended December 31, 2015 reflect a $3.0 million contingent payment from Merck related to that same license. There was no such contract revenue during the comparable period in 2014.
Total revenues by significant customer were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Diplomat Specialty Pharmacy | $ | 63,826 |
| | $ | 30,856 |
| | $ | 24,832 |
|
| Ipsen | 33,252 |
| | — |
| | — |
|
| Others, individually less than 10% of total revenues for all periods presented | 94,376 |
| | 6,316 |
| | 279 |
|
| Total revenues | $ | 191,454 |
| | $ | 37,172 |
| | $ | 25,111 |
|
We recognize net product revenue net of discounts and allowances that are further described in “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K. The activities and ending reserve balances for each significant category of discount and allowance were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Customer credits and co-pay assistance | | Rebates | | Chargebacks | | Returns | | Total |
| Balance at December 31, 2014 | $ | 2,320 |
| | $ | 484 |
| | $ | (10 | ) | | $ | — |
| | $ | 2,794 |
|
| Provision related to sales made in: | | | | | | | | | — |
|
| Current period | 1,014 |
| | 1,539 |
| | 69 |
| | 38 |
| | 2,660 |
|
| Prior periods | — |
| | (197 | ) | | 10 |
| | — |
| | (187 | ) |
| Payments | (3,003 | ) | | (935 | ) | | (30 | ) | | — |
| | (3,968 | ) |
| Balance at December 31, 2015 | 331 |
| | 891 |
| | 39 |
| | 38 |
| | 1,299 |
|
| Provision related to sales made in: | | | | | | | | | — |
|
| Current period | 5,721 |
| | 5,105 |
| | 5,297 |
| | 359 |
| | 16,482 |
|
| Prior periods | 2 |
| | (313 | ) | | (39 | ) | | (8 | ) | | (358 | ) |
| Payments | (4,779 | ) | | (3,056 | ) | | (3,976 | ) | | (38 | ) | | (11,849 | ) |
| Balance at December 31, 2016 | $ | 1,275 |
| | $ | 2,627 |
| | $ | 1,321 |
| | $ | 351 |
| | $ | 5,574 |
|
The balance at December 31, 2014 consisted primarily of a project management fee payable to Sobi which was paid during the year ended December 31, 2015. Other activity during 2015 was related to discounts and allowances on product sales of COMETRIQ through a single specialty pharmacy. The growth in the ending reserve balances and the activity for the year ended December 31, 2016 resulted from the increase in discounts and allowances on increased product sales through an expanded distribution network, which includes five specialty pharmacies and three specialty distributors, which we implemented following the launch of CABOMETYX and the continued distribution of COMETRIQ through one specialty pharmacy and one specialty distributor.
Cost of Goods Sold
The cost of goods sold and our gross margins were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Cost of goods sold | $ | 6,552 |
| | $ | 3,895 |
| | $ | 2,043 |
|
| Gross margin | 95 | % | | 89 | % | | 92 | % |
Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty payable to GlaxoSmithKline on net sales of any product incorporating cabozantinib, indirect labor costs, the cost of manufacturing, write-downs related to expiring and excess inventory, and other third party logistics costs of our product. Portions of the manufacturing costs for inventory were incurred prior to the regulatory approval of CABOMETYX and COMETRIQ and, therefore, were expensed as research and development costs when those costs were incurred, rather than capitalized as inventory. The sale of products containing previously expensed materials resulted in a 7%, 6% and 9% reduction in the Cost of goods sold during the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, we have $1.2 million in previously expensed materials that will not be charged to Costs of goods sold in future periods. Cost of goods sold also includes write-downs related to excess and expiring inventory. Such write-downs were $0.5 million for the year ended December 31, 2016 as compared to $1.2 million for 2015 and $0.2 million for 2014. Gross margin percentage is net product revenues less cost of goods sold, divided by net product revenues.
The increase in Cost of goods sold was primarily related to the launch of CABOMETYX during the year ended December 31, 2016 and increases in the number of units of COMETRIQ sold during the years ended December 31, 2016 and 2015, as compared to the preceding periods. The increase in gross margins for the year ended December 31, 2016, as compared to 2015, was related to the change in product mix as CABOMETYX has a lower manufacturing cost than COMETRIQ. The decrease in gross margins for the year ended December 31, 2015, as compared to 2014, was related to the increase in write-downs related to excess and expiring inventory, described above.
Research and Development Expenses
Total research and development expenses were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Research and development expenses | $ | 95,967 |
| | $ | 96,351 |
| | $ | 189,101 |
|
| Dollar change | $ | (384 | ) | | $ | (92,750 | ) | | |
| Percentage change | less than 1% |
| | (49 | )% | | |
Research and development expenses consist primarily of clinical trial expenses, personnel expenses, stock-based compensation, consulting and outside services, the allocation of general corporate costs, and temporary personnel expenses.
The nominal decrease in research and development expenses for the year ended December 31, 2016, as compared to 2015, was primarily related to clinical trial costs, which includes services performed by third-party contract research organizations and other vendors who support our clinical trials. The decrease in clinical trial costs was $8.9 million for the year ended December 31, 2016, as compared to 2015. The decrease in clinical trial costs was predominantly due to decreases in costs related to METEOR, our phase 3 pivotal trial in advanced RCC and was partially offset by increases in costs related to CELESTIAL, our phase 3 pivotal trial in advanced HCC. Decreases in research and development expenses for the year ended December 31, 2016, as compared to 2015, also related to a decrease in the allocation of general corporate costs and stock-based compensation. The allocation of general corporate costs decreased by $4.2 million for the year ended December 31, 2016 as compared to the comparable period in 2015, primarily due to headcount growth in the selling, general and administrative functions. Stock-based compensation decreased by $2.3 million for the year ended December 31, 2016 as compared to the comparable period in 2015, primarily due to the 2015 recognition of stock-based compensation expenses for performance-based stock-options tied to the positive top-line data received from the METEOR trial and the anticipated acceptance of our NDA filing with the FDA which was partially offset by a bonus to our employees in the form of fully-vested RSU during 2016. These decreases were almost entirely offset by increases in personnel expenses and consulting and outside services. Personnel and related expenses increased by $12.8 million for the year ended December 31, 2016 as compared to the comparable period in 2015 primarily due to the hiring of medical science liaisons as a result of the launch of CABOMETYX and an increase in the accrual for corporate bonuses. Consulting and outside services increased by $2.1
million for the year ended December 31, 2016 as compared to the comparable period in 2015 primarily due to increases in activities related to medical affairs and drug safety.
The decrease in research and development expenses for the year ended December 31, 2015, as compared to 2014, was primarily related to a decrease in clinical trial costs, which includes services performed by third-party CROs and other vendors that support our clinical trials. The decrease in clinical trial costs was $70.3 million for the year ended December 31, 2015, as compared to 2014. The decrease in clinical trial costs was predominantly due to decreases in costs related to COMET-1 and COMET-2, our phase 3 pivotal trials in mCRPC which we terminated in September 2014, METEOR, our phase 3 pivotal trial in advanced RCC, and a reduction of general program level costs; the decrease in costs related to METEOR included the impact of a $9.8 million decrease in comparator drug purchases.
Decreases in research and development expenses for the year ended December 31, 2015, as compared to 2014, also related to personnel expenses, consulting and outside services and temporary personnel. Personnel expenses decreased by $16.6 million for the year ended December 31, 2015, as compared to 2014 primarily due to workforce reductions undertaken as a consequence of the failure of COMET-1. The allocation of general corporate costs decreased by $8.6 million for the year ended December 31, 2015 as compared to the comparable period in 2014, primarily due to headcount growth in the selling, general and administrative functions. Consulting and outside services decreased by $3.6 million primarily as a result of decreases in clinical development consulting activities and the use of outside medical safety liaisons. Temporary personnel decreased by $2.9 million due to a decrease in clinical trial activities performed by those personnel. Those decreases were partially offset by increases in stock-based compensation and regulatory filing fees. Stock-based compensation increased by $8.4 million primarily due to expense recognized for performance-based stock-options described above. Regulatory filing fees of $2.4 million were paid to the FDA in 2015 in connection with the filing of our NDA.
We are focusing our development and commercialization efforts primarily on cabozantinib to maximize the therapeutic and commercial potential of this compound, and as a result, we expect our near-term research and development expenses to relate to the clinical development of cabozantinib. We expect to continue to incur significant development costs for cabozantinib in future periods as we evaluate its potential in a broad development program comprising approximately 45 ongoing or planned clinical trials across multiple indications. The most notable study of this program is our company-sponsored phase 3 trial of cabozantinib in advanced HCC called CELESTIAL. In addition, postmarketing commitments in connection with the approval of COMETRIQ in progressive, metastatic MTC dictate that we conduct an additional study in that indication. As a result, we expect our research and development expenses to increase as we continue to develop cabozantinib and our pipeline.
We do not have reliable estimates regarding the timing of our clinical trials. We estimate that typical phase 1 clinical trials last approximately one year, phase 2 clinical trials last approximately one to two years and phase 3 clinical trials last approximately two to four years. However, the length of time may vary substantially according to factors relating to the particular clinical trial, such as the type and intended use of the drug candidate, the clinical trial design and the ability to enroll suitable patients.
We do not have reliable estimates of total costs for a particular drug candidate, or for cabozantinib for a particular indication, to reach the market. Our potential therapeutic products are subject to a lengthy and uncertain regulatory process that may involve unanticipated additional clinical trials and may not result in receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval. A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Selling, general and administrative expenses | $ | 116,145 |
| | $ | 57,305 |
| | $ | 50,829 |
|
| Dollar change | $ | 58,840 |
| | $ | 6,476 |
| | |
| Percentage change | 103 | % | | 13 | % | | |
Selling, general and administrative expenses consist primarily of personnel expenses, consulting and outside services, stock-based compensation, travel and entertainment, facility costs, legal and accounting costs, and marketing.
The increase in selling, general and administrative expenses for the year ended December 31, 2016, as compared to 2015, was primarily related to personnel expenses, consulting and outside services, travel and entertainment, the allocation of general corporate costs, and stock-based compensation. Personnel expenses increased by $44.1 million for the year ended December 31, 2016, as compared to 2015, primarily due to an increase in headcount connected with the build-out of our U.S. commercial organization as a result of the launch of CABOMETYX as well as an increase in incentive compensation and the accrual for corporate bonuses. Consulting and outside services increased by $16.0 million for the year ended December 31, 2016, as compared to 2015, primarily due to costs incurred supporting the commercialization and launch of CABOMETYX. Travel and entertainment increased by $5.5 million for the year ended December 31, 2016, as compared to 2015, primarily due to travel incurred by our U.S. commercial organization. The allocation of general corporate costs to research and development and cost of goods sold decreased by $3.9 million for the year ended December 31, 2016, as compared to 2015, primarily due to headcount growth in the selling, general and administrative functions. Stock-based compensation increased by $3.3 million for the year ended December 31, 2016, as compared to 2015, primarily due to headcount growth and a bonus paid to our employees in the form of fully-vested RSUs which was partially offset by the 2015 recognition of expenses for performance-based stock-options described above. These increases were partially offset by a decrease in marketing expenses.
Marketing expenses includes our share of losses under our collaboration agreement with Genentech. On June 3, 2016, following a 30 day dispute resolution period, we filed a demand for arbitration asserting claims against Genentech related to its clinical development, pricing and commercialization of Cotellic, and cost and revenue allocations in connection with Cotellic’s commercialization in the United States. Soon thereafter, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest related to the cost allocations under the collaboration agreement. On December 29, 2016, Genentech withdrew its counterclaim against us in the ongoing JAMS arbitration concerning alleged breaches of the parties’ collaboration agreement. When notifying the arbitral panel and us of this unilateral action, Genentech further stated that it changed, both retroactively and prospectively, the manner in which it allocates promotional expenses of the Cotellic plus Zelboraf combination therapy. As a result of Genentech’s decision to change its cost allocation approach, we are relieved of our obligation to pay $18.7 million of disputed costs that had been accrued by us as of September 30, 2016. We have invoiced Genentech for certain expenses, with interest, that we had previously paid. Accordingly, during the year ended December 31, 2016, we offset selling, general and administrative expenses with a $13.3 million recovery for disputed losses under the collaboration agreement that had been recognized prior to 2016. During the year ended December 31, 2016, we also recognized a loss of $4.5 million for 2016 activities under the collaboration agreement as computed under Genentech’s revised cost allocation approach. In total, we have recorded a net cost recovery of $8.8 million during the year ended December 31, 2016 for the collaboration agreement. In comparison, during 2015 marketing expenses included losses of $16.6 million under the collaboration agreement.
The increase in selling, general and administrative expenses for the year ended December 31, 2015, as compared to 2014, was primarily related to increases in marketing costs and stock-based compensation. Marketing expenses increased by $10.2 million, which includes our share of losses under our collaboration agreement with Genentech totaling $16.6 million. Stock-based compensation, increased by $3.5 million primarily due to expense recognized for performance-based stock-options tied to the positive top-line data received from the METEOR trial and the anticipated acceptance of our NDA filing with the FDA. Those increases were partially offset by decreases in personnel costs, consulting and outside services, facilities costs and patent and other legal and accounting fees. Personnel expenses decreased by $5.7 million primarily due to workforce reductions undertaken as a consequence of the failure of COMET-1. Consulting and outside services decreased by $3.3 million as a result of decreases in marketing research activities and reductions in outside services for buildings we are no longer occupying. Facilities costs decreased by $2.8 million primarily as a result of facilities we have vacated in connection with our 2014 Restructuring (see “Note 3. Restructurings” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for a description of these costs). Patent and other legal and accounting fees decreased by $2.0 million primarily due to decreases in activities related to patent filings and defense.
We expect our Selling, general and administrative expenses will increase as we continue to support our ongoing activities related to the commercialization of CABOMETYX. Those expenses may increase further commensurate with potential expanded sales opportunities.
Total Other Expense, net
Certain historical amounts in other expense, net have been revised to reflect the correction of the accounting for non-cash interest expense associated with the 2019 Notes. See “Note 1. Organization and Summary of Significant Accounting
Policies - Correction of an Immaterial Error” in the “Notes to the Consolidated Financial Statements” for additional information on the correction.
Total other expense, net, were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Interest income and other, net | $ | 4,863 |
| | $ | 412 |
| | $ | 4,341 |
|
| Interest expense | (33,060 | ) | | (40,680 | ) | | (41,362 | ) |
| Loss on extinguishment of debt | (13,901 | ) | | — |
| | — |
|
| Total other expense, net | $ | (42,098 | ) | | $ | (40,268 | ) | | $ | (37,021 | ) |
| Dollar change | $ | (1,830 | ) | | $ | (3,247 | ) | | |
| Percentage change | 5 | % | | 9 | % | | |
Total other expense, net consists primarily of the loss on extinguishment of debt, interest expense incurred on our debt, gains on the sale of equity investments, unrealized gains and losses from the fair value re-measurement of a warrant, foreign exchange fluctuations and interest income earned on our cash and investments.
The increase in Total other expense, net for the year ended December 31, 2016, as compared to 2015, was primarily related to the $13.9 million loss associated with the conversion and redemption of $286.9 million in aggregate principal amount of the 2019 Notes for 54,009,279 shares of our Common Stock. See “Note 7. Debt” in our “Notes to Consolidated Financial Statements” for more information on the conversions.
Interest expense is comprised of interest accrued on the 2019 Notes, the Deerfield Notes and the Silicon Valley Bank term loan. (see “Note 7. Debt” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for a description of these debt instruments, including the conversions and redemption of the 2019 Notes). Interest expenses decreased by $7.6 million for the year ended December 31, 2016, as compared to 2015, primarily due to the conversions and redemption of the 2019 Notes. We expect our interest expense will continue to decrease as a result of the full year impact of the interest savings from the conversions and redemption of the 2019 Notes, the maturity of the Silicon Valley Bank term loan and the anticipated prepayment of the Deerfield Notes on or about July 1, 2017.
Interest income and other, net for the year ended December 31, 2016 includes a $2.5 million gain on the sale of our 9% interest in Akarna Therapeutics, Ltd, which we acquired in 2015 in exchange for intellectual property rights related to a compound discovered by us. During 2014, Interest income and other, net includes an $0.8 million gain for a purchase price adjustment resulting from the resolution of contingencies related to the September 2011 sale of our remaining interest in another business. There were no such gains during 2015.
Interest income and other, net for the years ended December 31, 2015 and 2014 include $0.5 million in unrealized losses and $1.8 million in unrealized gains, respectively, on the revaluation of the 2014 Warrants; there were no such gains or losses during 2016. (see “Note 7. Debt” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for a description of the 2014 Warrants).
Liquidity and Capital Resources
We have incurred net losses since inception through December 31, 2016, with the exception of the 2011 fiscal year. For the year ended December 31, 2016, we incurred a net loss of $70.2 million and as of December 31, 2016, we had an accumulated deficit of $2.0 billion. These losses have had an adverse effect on our stockholders’ equity (deficit) and working capital. Because of the numerous risks and uncertainties associated with developing and commercializing drugs, we are unable to predict the extent of any future losses. Excluding fiscal 2011, our research and development expenditures and selling, general and administrative expenses have exceeded our revenues for each fiscal year, and we expect to spend significant additional amounts to fund the continued development and commercialization of cabozantinib during 2017. In addition, we intend to expand our product pipeline through the measured resumption of drug discovery and product acquisition and in-licensing. As a result, we expect to continue to incur substantial operating expenses and, consequently, we will need to generate substantial revenues to achieve and maintain profitability.
Since the launch of our first commercial product in January 2013, through December 31, 2016, we have generated an aggregate of $209.7 million in net product revenues, including $135.4 million for the year ended December 31, 2016. Other than sales of CABOMETYX and COMETRIQ, we have derived substantially all of our revenues since inception from
collaborative arrangements, including upfront and milestone payments and research funding and through the public sale of our common stock. The amount of our net profits or losses will depend, in large part, on: the level of sales of CABOMETYX and COMETRIQ in the U.S.; achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ under our collaboration agreements with Ipsen and Takeda; our share of the net profits and losses for the commercialization of Cotellic in the U.S. under our collaboration with Genentech; the amount of royalties from Cotellic sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and, the level of our expenses, including commercialization activities for cabozantinib and any pipeline expansion efforts.
As of December 31, 20162017, we had $479.6 million in cash and investments, which included $393.8 million available for operations, $81.6 million of compensating balance investments that we are required to maintain on deposit with Silicon Valley Bank, and $4.2 million of long-term restricted investments. We anticipate that our current cash and cash equivalents, and short-term investments available for operations, product revenues and collaboration revenues, will enable us to maintain our operations for a period of at least 12 months following the filing date of this report. The sufficiency of our cash resources depends on numerous assumptions, including assumptions related to product sales, operating expenses, the repayment of both the Deerfield Notes and our term loan from Silicon Valley Bank, as well as the other factors set forth in “Risk Factors” under the headings “Risks Related to our Capital Requirements and Financial Results,” in Part I, Item 1A of this Annual Report on Form 10-K. Our assumptions may prove to be wrong or other factors may adversely affect our business, and as a result we may not have the cash resources to fund our planned operations, which would have a material adverse effect on our business. In addition, we may choose to raise additional funds through the issuance of equity or debt due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current and future operating plans. For example, we may choose to raise additional capital to fund in-licensing or product acquisition opportunities.
Sources and Uses of Cash
The following table summarizes our cash flow activities (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Net loss | $ | (70,222 | ) | | $ | (161,744 | ) | | $ | (261,297 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | 49,251 |
| | 46,004 |
| | 36,169 |
|
| Changes in operating assets and liabilities | 227,267 |
| | (25,845 | ) | | (10,277 | ) |
| Net cash provided by (used in) operating activities | 206,296 |
| | (141,585 | ) | | (235,405 | ) |
| Net cash (used in) provided by investing activities | (216,048 | ) | | 50,077 |
| | 146,330 |
|
| Net cash provided by financing activities | 19,804 |
| | 152,747 |
| | 65,492 |
|
| Net increase (decrease) in cash and cash equivalents | 10,052 |
| | 61,239 |
| | (23,583 | ) |
| Cash and cash equivalents at beginning of year | 141,634 |
| | 80,395 |
| | 103,978 |
|
| Cash and cash equivalents at end of year | $ | 151,686 |
| | $ | 141,634 |
| | $ | 80,395 |
|
Operating Activities
Our operating activities provided cash of $206.3 million for the year ended December 31, 2016, compared to $141.6 million cash used in 2015 and $235.4 million cash used in 2014.
Cash provided by operating activities for the year endedDecember 31, 2016 was primarily a result of $280.0 million in upfront and milestone payments received from Ipsen under our collaboration and license agreement and cash receipts from our net product revenues of $135.4 million. Those proceeds were partially offset by operating expenses of $219.6 million for the period, less non-cash expenses for stock-based compensation totaling $22.9 million and the amortization of debt discount, debt issuance costs and accrual of interest paid in kind totaling $16.4 million. Our operating expenses were largely attributable to the development and commercialization of cabozantinib. In addition, cash provided by operating activities also increased as a result of a $16.7 million increase in accrued compensation and benefits and a $6.8 million increase in other liabilities which was partially offset by a $37.0 million increase in trade and other receivables, a $10.9 million decrease in the accrued partnership liability and a $3.9 million decrease in accrued clinical trial liabilities.
Cash used in operating activities for the year ended December 31, 2015 related primarily to our $158.6 million operating expenses for the period, less $37.2 million in revenues for the period and non-cash expenses for accretion of debt discount and interest paid in kind totaling $20.9 million on the Deerfield Notes and the 2019 Notes and stock-based compensation totaling $22.0 million. In addition to current period operating expenses, we made cash payments that resulted in a $23.5 million reduction in accrued clinical trial liabilities and an $8.8 million reduction in restructuring liabilities, which was partially offset by a $10.2 million increase in our accrued collaboration liability.
Cash used in operating activities for the year ended December 31, 2014 related primarily to our $249.6 million in operating expenses for the period, less non-cash expenses for accretion of debt discount totaling $22.3 million on the Deerfield Notes and the 2019 Notes, stock-based compensation totaling $10.0 million and depreciation and amortization totaling $2.4 million. Our operating expenses were largely attributable to the development of cabozantinib. In addition, we made cash payments that resulted in a $13.2 million reduction in accounts payable and other accrued expenses during the period and paid $10.2 million for restructuring activities, which was partially offset by a $6.6 million increase in accrued clinical trial liabilities.
Operating cash flows can differ from our consolidated net loss as a result of differences in the timing of cash receipts and earnings recognition and non-cash charges.
Investing Activities
Our investing activities resulted in a $216.0 million use of cash for the year ended December 31, 2016, as compared to providing cash of $50.1 million for 2015 and $146.3 million for 2014.
Cash used by investing activities for the year endedDecember 31, 2016 was primarily due to investment purchases of $377.8 million, less cash from the maturity of unrestricted and restricted investments of $158.6 million.
Cash provided by investing activities for the year ended December 31, 2015 was primarily due to the maturity of unrestricted and restricted investments of $198.7 million, less investment purchases of $149.6 million.
Cash provided by investing activities for the year ended December 31, 2014 was primarily due to the maturity of unrestricted and restricted investments of $273.2 million, less investment purchases of $127.7 million.
Financing Activities
Our financing activities provided cash of $19.8 million for the year ended December 31, 2016, compared to $152.7 million for 2015, and $65.5 million for 2014.
Cash provided by financing activities for the year ended December 31, 2016 was the result of the issuance of common stock under our equity incentive plans totaling $27.5 million which was partially offset by cash payments from the conversion and redemption of the 2019 Notes totaling $7.7 million.
Cash provided by our financing activities for the year ended December 31, 2015 was primarily due to the issuance of 28,750,000 shares of common stock in July 2015 for net proceeds of $145.6 million and $10.9 million in proceeds from the exercise of stock options, which was partially offset by principal payments on debt of $4.4 million.
Cash provided by our financing activities for the year ended December 31, 2014 was primarily due to the issuance of 10,000,000 shares of common stock in January 2014 for net proceeds of $75.6 million. The cash provided by the issuance of common stock was partially offset by principal payments on debt of $11.7 million.
Proceeds from these financing activities have historically been used for general working capital purposes, such as product commercialization and research and development activities and other general corporate purposes. However, during the next two years, we will be required to make significant payments to satisfy our outstanding debt obligations. On May 31, 2017, we will be required to pay the principal balance of $80.0 million plus accrued and unpaid interest on our term loan with Silicon Valley Bank and on July 1, 2018 we will be required to pay the principal balance of $125.0 million including interest paid in kind, plus accrued and unpaid coupon interest on the Deerfield Notes. We intend to repay the Deerfield Notes early, on or about July 1, 2017, at a prepayment price equal to 105% of the outstanding principal amount of the notes, plus accrued and unpaid interest to the date of repayment. We expect that cash and cash equivalents and short-term investments held at December 31, 2016 will be used to repay the debt. See “Note 7. Debt” to our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for additional details on these debt arrangements.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.
Contractual Obligations
We have contractual obligations in the form of convertible notes, loans payable, operating leases and purchase obligations. The following chart details our contractual obligations, including any potential accrued or accreted interest, as of December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 Years | | More than 3 years |
Deerfield notes (1) | | $ | 124,972 |
| | $ | — |
| | $ | 124,972 |
| | $ | — |
|
Loans payable (2) | | 80,000 |
| | 80,000 |
| | — |
| | — |
|
Operating leases (3) | | 11,481 |
| | 8,474 |
| | 3,007 |
| | — |
|
Purchase obligations (4) | | 1,112 |
| | 1,112 |
| | — |
| | — |
|
| Total contractual cash obligations | | $ | 217,565 |
| | $ | 89,586 |
| | $ | 127,979 |
| | $ | — |
|
____________________
| |
(1) | Due date is based on our contractual obligations under the Deerfield Notes. We intend to repay the Deerfield Notes on or about July 1, 2017 and as a result, we have classified the Deerfield Notes as a current liability as of December 31, 2016. See “Note 7. Debt” of the Notes to Consolidated Financial Statements regarding the terms of the Deerfield Notes. |
| |
(2) | Consists of our obligations under our loan from Silicon Valley Bank. See “Note 7. Debt” of the Notes to Consolidated Financial Statements regarding the terms of our loan from Silicon Valley Bank. |
| |
(3) | The operating lease payments do not include $1.2 million to be received in 2017 in connection with the subleases of our South San Francisco buildings. |
| |
(4) | At December 31, 2016, we had firm purchase commitments related to manufacturing and maintenance of inventory. These commitments include a portion of our 2017 contractual minimum purchase obligation. Our actual purchases are expected to significantly exceed these amounts. |
In connection with the sale of our plant trait business in 2007, we agreed to indemnify the purchaser and its affiliates up to a specified amount if they incur damages due to any infringement or alleged infringement of certain patents. We have 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 our misuse or negligence. We consider 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 applicable corporate insurance.
Critical Accounting Estimates
The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. On an ongoing basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, including deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances), the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations, the amounts of revenues and expenses under our profit and loss sharing agreement, recoverability of inventory, certain accrued liabilities including the accrued clinical trial liability, the valuation of the debt and equity components of our convertible debt and stock-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. For a complete description of our significant accounting policies, see “Note 1 - Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in this Annual Report on Form 10-K.
Revenue Recognition
Net Product Revenues and Discounts and Allowances
We recognize net product revenues when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues (a) trade allowances, such as discounts for prompt payment, (b) estimated government rebates and chargebacks, (c) certain other fees paid to specialty pharmacies and distributors and (d) returns. Discounts and allowances are complex and significant judgment by management. Estimates are assessed each period and updated to reflect current information.
We initially record estimates for these deductions at the time we recognize the gross revenue. Our estimates for these deductions are based on third party market research data for competitor products for the treatment of advanced RCC, customer and payer data received from the specialty pharmacies and distributors whom sell our product and historical utilization rates. Based in part on the availability of this third party market research data and historical data for COMETRIQ, we made the determination during 2016 that we had sufficient experience and data to reasonably estimate expected future returns and the discounts and allowances due to payers at the time of shipment to the specialty pharmacy or distributor, and therefore record revenue for CABOMETYX product sales using the “sell-in” revenue recognition model. We update our estimates on a recurring basis as new information becomes available. See “Note 1. Organization and Summary of Significant Accounting Policies” to our Consolidated Financial Statements for a further description of our discounts and allowances.
Collaboration Revenues
Revenues from collaboration agreements primarily consist of upfront license fees, milestone, royalty and/or product supply payments. These arrangements have multiple elements and our deliverables may include intellectual property rights, distribution rights, delivery of manufactured product, commercial and development activities and participation on joint steering, commercial and development committees. In order to account for these arrangements, we identify the deliverables and evaluate whether the delivered elements have value to our collaboration partner on a stand-alone basis and represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver future goods or services, a right or license to use an asset, or another performance obligation. If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting. For a combined unit of accounting, non-refundable upfront fees are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period of our continued involvement. Amounts received in advance of performance are recorded as deferred revenue. The determination of deliverables and the allocation of consideration using selling prices and the period of our continued involvement may involve significant judgments and estimates that will impact revenue recognition. Often, the term of our continued involvement is not contractually defined and an estimate of the term of our total obligation must be made. Therefore, any changes in the expected term of our continued involvement will impact revenue recognition for the given period.
Royalty revenues, and U.S. profits and losses under the collaboration agreement with Genentech, are based on amounts reported to us by our collaboration partners and are recorded when such information becomes available to us; for Ipsen, this occurs in the current quarter, and for Genentech, this occurs in the following quarter. We base our estimates on the best information available at the time provided to us by our collaboration partners. However, additional information may subsequently become available to us, which may allow us to make a more accurate estimate in future periods. In this event, we are required to record adjustments to collaboration revenue in future periods when the actual level of activity becomes more certain. Such increases or decreases in revenue are generally considered to be changes in estimates and will be reflected in collaboration revenues in the period they become known.
Inventory
We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates
incurred prior to regulatory approval are not capitalized as inventory, but rather are expensed as research and development costs. When regulatory approval is obtained, capitalization of inventory may begin.
We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. The related costs are recognized as cost of goods sold in the Consolidated Statements of Operations.
On a quarterly basis, we analyze our estimated production levels for the following twelve month period, which is our normal operating cycle and reclassify inventory we do not expect to use within the next twelve months into Other long-term assets in the Consolidated Balance Sheets.
Clinical Trial Accruals
All of our clinical trials have been executed with support from contract research organizations, or CROs, and other vendors. We accrue costs for clinical trial activities performed by CROs based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the activities to be performed for each patient, the number of active clinical sites, and the duration for which the patients will be enrolled in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence with CROs and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. There were no such significant reductions during the years ended December 31, 2016, 2015 or 2014.
Stock Option Valuation
Our estimate of compensation expense requires us to determine the appropriate fair value model and a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns, future forfeitures and related tax effects. The most significant assumptions are our estimates of the expected volatility and the expected term of the stock option. In addition, we are required to estimate the expected forfeiture rate, including assessing the likelihood of achieving our goals for performance-based stock options, and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The value of a stock option is derived from its potential for appreciation. The more volatile the stock, the more valuable the option becomes because of the greater possibility of significant changes in stock price. Because there is a market for options on our common stock, we have considered implied volatilities as well as our historical realized volatilities when developing an estimate of expected volatility. The expected option term also has a significant effect on the value of the option. The longer the term, the more time the option holder has to allow the stock price to increase without a cash investment and thus, the more valuable the option. Further, lengthier option terms provide more opportunity to exploit market highs. However, empirical data show that employees, for a variety of reasons, typically do not wait until the end of the contractual term of a nontransferable option to exercise. Accordingly, companies are required to estimate the expected term of the option for input to an option-pricing model. As required under generally accepted accounting principles, we review our valuation assumptions at each grant date and, as a result, from time to time we will likely change the valuation assumptions we use to value stock options granted in future periods. The assumptions used in calculating the fair value of stock options represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. As of December 31, 2016, $23.9 million of total unrecognized compensation expense related to stock options was expected to be recognized over a weighted-average period of 2.90 years and $13.9 million of total unrecognized compensation expense relating to RSUs was expected to be recognized over 3.28 years. See “Note 10. Employee Benefit Plans” of the Notes to Consolidated Financial Statements for a further discussion on stock-based compensation.
Recent Accounting Pronouncements
For a description of the expected impact of recent accounting pronouncements, see “Note 1 - Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in this Annual Report on Form 10-K.
| |
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 as of December 31, 2016, this also included our long-term debt. As of December 31, 20162017 and 20152016, we had cash and investments of $479.6457.2 million and $253.3$479.6 million,, respectively. Our investments are subject to interest rate risk, and our interest income may fluctuate due to changes in U.S. interest rates. We manage market risk through diversification requirements mandated by our investment policy, which limits the amount of our portfolio that can be invested in a single issuer. We limit our credit risk by limiting purchases to high-quality issuers. At December 31, 2016 and 2015, we had debt outstanding of $189.1 million and $417.9 million, respectively.. Our payment commitments associated with these debt instruments arewere primarily fixed and consist of interest payments,and principal payments, or a combination of both.payments. The fair value of our investments and our debt will fluctuate with movements of interest rates. We have estimated the effects on our interest rate sensitive assets and liabilities based on a one percentage point hypothetical adverse change in interest rates as of December 31, 20162017 and 2015.2016. For our investments, the estimated effects of hypothetical interest rate changes are obtained from the same third-party pricing sources we use to value our investments. For debt instruments, we determinedetermined the estimated effects of hypothetical interest rate changes using the same present value model we use to determine the fair of value of those instruments. As of December 31, 2016 and 2015, a decrease2017, an increase in the interest rates of one percentage point would have had a net adverse change in the fair value of interest rate sensitive assets and liabilities of $0.3($1.6) million and $8.7 million, respectively.
In addition, we have exposureas compared to fluctuations in certain foreign currencies in countries in which we conduct clinical trials. Most of our foreign expenses incurred were associated with establishing and conducting clinical trials for cabozantinib at sites outside of the U.S. Our agreements with the foreign sites that conduct such clinical trials generally provide that payments for the services provided will be calculateda net positive change in the currency of that country, and converted into U.S. dollars using various exchange rates based upon when services are rendered or the timing of invoices. When the U.S. dollar weakens against foreign currencies, the U.S. dollarfair value of the foreign-currency denominated expense increases,interest rate sensitive assets and when the U.S. dollar strengthens against these currencies, the U.S. dollar valueliabilities of the foreign-currency denominated expense decreases. As$0.3 million as of December 31, 2016.
Item 8. Financial Statements and 2015Supplementary Data
EXELIXIS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Exelixis, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Exelixis, Inc. (the “Company”) as of December 29, 2017 and December 30, 2016, the related consolidated statements of operations, comprehensive income (loss), approximately $2.2 millionstockholders’ equity (deficit) and $3.2 million, respectively,cash flows for each of our clinical accrual balance was owed in foreign currencies. An adverse change of one percentage pointthe three fiscal years in the foreign currency exchange rates would notperiod ended December 29, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2017 and December 30, 2016, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 29, 2017, in conformity with U.S. generally accepted accounting principles.
We also have resultedaudited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 29, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 26, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material impactmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for any periods presented. our opinion.
/s/ Ernst & Young LLP
We recorded a $0.2 million loss, a $0.1 million gainhave served as the Company’s auditor since 2002.
Redwood City, California
February 26, 2018
EXELIXIS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and a $0.5 million gain relating to foreign exchange fluctuations for the years ended per share data)December 31, 2016, 2015 and 2014, respectively. |
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 183,164 |
| | $ | 151,686 |
|
| Short-term investments | 204,607 |
| | 268,117 |
|
| Short-term restricted cash and investments | 504 |
| | — |
|
| Trade and other receivables, net | 81,192 |
| | 40,444 |
|
| Inventory, net | 6,657 |
| | 3,338 |
|
| Prepaid expenses and other current assets | 8,750 |
| | 5,416 |
|
| Total current assets | 484,874 |
| | 469,001 |
|
| Long-term investments | 64,255 |
| | 55,601 |
|
| Long-term restricted cash and investments | 4,646 |
| | 4,150 |
|
| Property and equipment, net | 25,743 |
| | 2,071 |
|
| Goodwill | 63,684 |
| | 63,684 |
|
| Other long-term assets | 12,092 |
| | 1,232 |
|
| Total assets | $ | 655,294 |
| | $ | 595,739 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 9,575 |
| | $ | 6,565 |
|
| Accrued compensation and benefits | 21,073 |
| | 20,334 |
|
| Accrued clinical trial liabilities | 19,849 |
| | 14,131 |
|
| Accrued collaboration liabilities | 8,974 |
| | 2,046 |
|
| Rebates and fees due to customers | 7,565 |
| | 3,420 |
|
| Current portion of deferred revenue | 31,984 |
| | 19,665 |
|
| Convertible notes | — |
| | 109,122 |
|
| Term loan payable | — |
| | 80,000 |
|
| Other current liabilities | 16,150 |
| | 13,503 |
|
| Total current liabilities | 115,170 |
| | 268,786 |
|
| Long-term portion of deferred revenue | 238,520 |
| | 237,094 |
|
| Other long-term liabilities | 16,643 |
| | 541 |
|
| Total liabilities | 370,333 |
| | 506,421 |
|
| Commitments (Note 12) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued | — |
| | — |
|
| Common stock, $0.001 par value; 400,000,000 shares authorized; issued and outstanding: 296,209,426 and 289,923,798 at December 31, 2017 and 2016, respectively | 296 |
| | 290 |
|
| Additional paid-in capital | 2,114,184 |
| | 2,072,591 |
|
| Accumulated other comprehensive loss | (347 | ) | | (416 | ) |
| Accumulated deficit | (1,829,172 | ) | | (1,983,147 | ) |
| Total stockholders’ equity | 284,961 |
| | 89,318 |
|
| Total liabilities and stockholders’ equity | $ | 655,294 |
| | $ | 595,739 |
|
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, |
| | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | |
| Net product revenues | $ | 349,008 |
| | $ | 135,375 |
| | $ | 34,158 |
|
| Collaboration revenues | 103,469 |
| | 56,079 |
| | 3,014 |
|
| Total revenues | 452,477 |
| | 191,454 |
| | 37,172 |
|
| Operating expenses: | | | | | |
| Cost of goods sold | 15,066 |
| | 6,552 |
| | 3,895 |
|
| Research and development | 112,171 |
| | 95,967 |
| | 96,351 |
|
| Selling, general and administrative | 159,362 |
| | 116,145 |
| | 57,305 |
|
| Restructuring (recovery) charge | (32 | ) | | 914 |
| | 1,042 |
|
| Total operating expenses | 286,567 |
| | 219,578 |
| | 158,593 |
|
| Income (loss) from operations | 165,910 |
| | (28,124 | ) | | (121,421 | ) |
| Other expenses, net: | | | | | |
| Interest income | 4,883 |
| | 2,578 |
| | 793 |
|
| Interest expense | (8,679 | ) | | (33,060 | ) | | (40,680 | ) |
| Other, net | (3,537 | ) | | (11,616 | ) | | (381 | ) |
| Total other expenses, net | (7,333 | ) | | (42,098 | ) | | (40,268 | ) |
| Income (loss) before income taxes | 158,577 |
| | (70,222 | ) | | (161,689 | ) |
| Provision for income taxes | 4,350 |
| | — |
| | 55 |
|
| Net income (loss) | $ | 154,227 |
| | $ | (70,222 | ) | | $ | (161,744 | ) |
| Net income (loss) per share, basic | $ | 0.52 |
| | $ | (0.28 | ) | | $ | (0.77 | ) |
| Net income (loss) per share, diluted | $ | 0.49 |
| | $ | (0.28 | ) | | $ | (0.77 | ) |
| Shares used in computing net income (loss) per share, basic | 293,588 |
| | 250,531 |
| | 209,227 |
|
| Shares used in computing net income (loss) per share, diluted | 312,003 |
| | 250,531 |
| | 209,227 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 154,227 |
| | $ | (70,222 | ) | | $ | (161,744 | ) |
Other comprehensive income (loss) (1) | 69 |
| | (184 | ) | | (111 | ) |
| Comprehensive income (loss) | $ | 154,296 |
| | $ | (70,406 | ) | | $ | (161,855 | ) |
____________________
| |
| (1) | Other comprehensive income (loss) consisted solely of unrealized gains or losses, net, on available-for-sale securities arising during the periods presented. There were nominal or no reclassification adjustments to net income (loss) resulting from realized gains or losses on the sale of securities and there was no income tax expense related to other comprehensive income (loss) during the periods presented. |
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)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Accumulated
Deficit | | Total
Stockholders’
Equity (Deficit) |
| | Shares | | Amount | | | | |
| Balance at December 31, 2014 | 195,895,769 |
| | $ | 196 |
| | $ | 1,591,782 |
| | $ | (121 | ) | | $ | (1,751,181 | ) | | $ | (159,324 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (161,744 | ) | | (161,744 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (111 | ) | | — |
| | (111 | ) |
| Sale of shares of common stock, net | 28,750,000 |
| | 29 |
| | 145,620 |
| | — |
| | — |
| | 145,649 |
|
| Issuance of common stock under equity incentive and stock purchase plans | 3,315,174 |
| | 3 |
| | 11,274 |
| | — |
| | — |
| | 11,277 |
|
| Stock-based compensation | — |
| | — |
| | 21,977 |
| | — |
| | — |
| | 21,977 |
|
| Warrants transferred from other long-term liabilities | — |
| | — |
| | 1,470 |
| | — |
| | — |
| | 1,470 |
|
| Balance at December 31, 2015 | 227,960,943 |
| | 228 |
| | 1,772,123 |
| | (232 | ) | | (1,912,925 | ) | | (140,806 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (70,222 | ) | | (70,222 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (184 | ) | | — |
| | (184 | ) |
| Issuance of common stock in settlement of convertible notes | 54,009,279 |
| | 54 |
| | 253,026 |
| | — |
| | — |
| | 253,080 |
|
| Issuance of common stock under equity incentive and stock purchase plans | 7,953,576 |
| | 8 |
| | 24,530 |
| | — |
| | — |
| | 24,538 |
|
| Stock-based compensation | — |
| | — |
| | 22,912 |
| | — |
| | — |
| | 22,912 |
|
| Balance at December 31, 2016 | 289,923,798 |
| | 290 |
| | 2,072,591 |
| | (416 | ) | | (1,983,147 | ) | | 89,318 |
|
| Adoption of Accounting Standards Update No. 2016-09 | — |
| | — |
| | 252 |
| | — |
| | (252 | ) | | — |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 154,227 |
| | 154,227 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 69 |
| | — |
| | 69 |
|
| Issuance of common stock under equity incentive and stock purchase plans | 5,408,177 |
| | 5 |
| | 17,404 |
| | — |
| | — |
| | 17,409 |
|
| Issuance of common stock on warrant exercise | 877,451 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 23,938 |
| | — |
| | — |
| | 23,938 |
|
| Balance at December 31, 2017 | 296,209,426 |
| | $ | 296 |
| | $ | 2,114,184 |
| | $ | (347 | ) | | $ | (1,829,172 | ) | | $ | 284,961 |
|
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, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 154,227 |
| | $ | (70,222 | ) | | $ | (161,744 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 1,187 |
| | 1,002 |
| | 1,406 |
|
| Stock-based compensation | 23,938 |
| | 22,912 |
| | 21,977 |
|
| Loss on extinguishment of debt | 6,239 |
| | 13,901 |
| | — |
|
| Amortization of debt discounts and debt issuance costs | 182 |
| | 8,432 |
| | 17,041 |
|
| Interest paid in kind | (11,825 | ) | | 8,008 |
| | 3,817 |
|
| Gain on other equity investments | (2,980 | ) | | (2,494 | ) | | (112 | ) |
| Changes in warrant fair value | — |
| | — |
| | 548 |
|
| Other | 1,589 |
| | 1,598 |
| | 1,861 |
|
| Changes in assets and liabilities: | | | | | |
| Trade and other receivables | (40,839 | ) | | (35,318 | ) | | (540 | ) |
| Inventory, net | (3,319 | ) | | (722 | ) | | (235 | ) |
| Prepaid expenses and other current assets | (3,268 | ) | | (1,610 | ) | | (325 | ) |
| Other long-term assets | 430 |
| | 1,077 |
| | 1,340 |
|
| Accounts payable | 3,010 |
| | 164 |
| | (12 | ) |
| Accrued compensation and benefits | 739 |
| | 16,705 |
| | 279 |
|
| Accrued clinical trial liabilities | 5,718 |
| | (3,940 | ) | | (23,474 | ) |
| Accrued collaboration liabilities | 6,928 |
| | (10,938 | ) | | 10,206 |
|
| Deferred revenue | 13,745 |
| | 256,759 |
| | (2,582 | ) |
| Other current and long-term liabilities | 9,910 |
| | 5,090 |
| | (10,502 | ) |
| Net cash provided by (used in) operating activities | 165,611 |
| | 210,404 |
| | (141,051 | ) |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (21,143 | ) | | (1,703 | ) | | (447 | ) |
| Proceeds from sale of property and equipment | 164 |
| | 97 |
| | 1,346 |
|
| Purchases of investments | (319,090 | ) | | (369,187 | ) | | (143,992 | ) |
| Proceeds from maturities of investments | 336,590 |
| | 151,485 |
| | 178,936 |
|
| Proceeds from sale of investments | 37,294 |
| | 2,266 |
| | — |
|
| Purchase of restricted cash and investments | (15,650 | ) | | (8,650 | ) | | (5,650 | ) |
| Proceeds from maturities of restricted cash and investments | 14,650 |
| | 7,150 |
| | 19,789 |
|
| Proceeds from other equity investments | 2,980 |
| | 2,494 |
| | 95 |
|
| Net cash provided by (used in) investing activities | 35,795 |
| | (216,048 | ) | | 50,077 |
|
| Cash flows from financing activities: | | | | | |
| Principal repayments of debt | (185,788 | ) | | (575 | ) | | (4,381 | ) |
| Payments on conversion of convertible notes | — |
| | (7,135 | ) | | — |
|
| Proceeds from issuance of common stock, net | — |
| | — |
| | 145,649 |
|
| Proceeds from exercise of stock options | 17,555 |
| | 25,327 |
| | 10,911 |
|
| Proceeds from employee stock purchase plan | 4,868 |
| | 2,187 |
| | 568 |
|
| Taxes paid related to net share settlement of equity awards | (6,563 | ) | | (4,108 | ) | | (534 | ) |
| Net cash (used in) provided by financing activities | (169,928 | ) | | 15,696 |
| | 152,213 |
|
| Net increase in cash and cash equivalents | 31,478 |
| | 10,052 |
| | 61,239 |
|
| Cash and cash equivalents at beginning of year | 151,686 |
| | 141,634 |
| | 80,395 |
|
| Cash and cash equivalents at end of year | $ | 183,164 |
| | $ | 151,686 |
| | $ | 141,634 |
|
(Continued on next page)
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Supplemental cash flow disclosure: | | | | | |
| Cash paid for interest | $ | 20,460 |
| | $ | 21,044 |
| | $ | 19,822 |
|
| Cash paid for taxes | $ | 538 |
| | $ | 190 |
| | $ | 192 |
|
| Non-cash investing and financing activity: | | | | | |
| Construction in progress deemed to have been acquired under build-to-suit lease | $ | 14,530 |
| | $ | — |
| | $ | — |
|
| Issuance of common stock in settlement of convertible notes | $ | — |
| | $ | 286,925 |
| | $ | — |
|
The accompanying notes are an integral part of these Consolidated Financial Statements
EXELIXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
EXELIXIS, INC.NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSOrganization
Exelixis, Inc. (“Exelixis,” “we,” “our” or “us”) is a biotechnology company committed to the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Since our founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the marketplace. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma (“RCC”) and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer. The third product, COTELLIC® (cobimetinib) tablets, is a formulation of cobimetinib and is an inhibitor of MEK, marketed under a collaboration with Genentech, Inc. (a member of the Roche Group), and is approved as part of a combination regimen to treat advanced melanoma.
Basis of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the U.S. dollar. All intercompany balances and transactions have been eliminated.
Basis of Presentation
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2015 ended on January 1, 2016; fiscal year 2016 ended on December 30, 2016; fiscal year 2017 ended on December 29, 2017; and fiscal year 2018 will end on December 28, 2018. For convenience, references in this report as of and for the fiscal years ended January 1, 2016, December 30, 2016 and December 29, 2017 are indicated as being as of and for the years ended December 31, 2015, 2016 and 2017, respectively. All annual periods presented are 52-week fiscal years and all interim periods presented are 13-week fiscal quarters.
Use of Estimates
The preparation of the accompanying Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances), the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations; the amounts of revenues and expenses under our profit and loss sharing agreement; recoverability of inventory; the accrual for certain liabilities including accrued clinical trial liability; and valuations of awards used to determine stock-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Reclassifications
Certain prior period amounts on the accompanying Consolidated Financial Statements have been reclassified to conform to current period presentation.
Cash and Investments
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include high-grade, short-term investments in money market funds and marketable debt securities which are subject to minimal credit and market risk.
We have designated all investments in marketable debt securities as available-for-sale and therefore, such investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive loss.
For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are included in Interest and other income, net on the accompanying Consolidated Statements of Operations.
We classify those investments that we do not require for use in current operations and that mature in more than 12 months as Long-term investments on the accompanying Consolidated Balance Sheets.
All of our investments are subject to a quarterly impairment review. We recognize an impairment charge when a decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investments fair value has been less than their cost basis, the financial condition and near-term prospects of the issuer, extent of the loss related to credit of the issuer, the expected cash flows from the security, our intent to sell the security and whether or not we will be required to sell the security before we are able to recover our carrying value.
Accounts Receivable
Trade accounts receivable are recorded net of allowances for chargebacks and cash discounts for prompt payment, as described further below. Estimates of our allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of our customers and individual customer circumstances, an analysis of days sales outstanding by geographic region and a review of the local economic environment and its potential impact on government funding and reimbursement practices. Historically, the amounts of uncollectible accounts receivable that have been written off were insignificant.
Fair Value Measurements
Fair value reflects the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We disclose the fair value of financial instruments for assets and liabilities for which the value is practicable to estimate. For those financial instruments measured and recorded at fair value on a recurring basis, we also provide fair value hierarchy information in these Notes to Consolidated Financial Statements. The fair value hierarchy has the following three levels:
Level 1 – Fair values are determined utilizing quoted prices (unadjusted) in active markets for identical assets and liabilities that the reporting entity can access at the measurement date.
Level 2 – Fair values are determined utilizing observable inputs that are observable either directly or indirectly, other than quoted prices in active markets for identical assets and liabilities. These inputs include using prices from independent pricing services based on quoted prices in active markets for similar instruments or on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.
Level 3 – Fair values are determined utilizing inputs that are both significant to the fair value measurement and unobservable.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain investments within the fair value hierarchy.
Inventory
We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. These inventory related costs are recognized as Cost of goods sold on the accompanying Consolidated Statements of Operations.
On a quarterly basis, we analyze our estimated production levels for the following twelve month period, which is our normal operating cycle, and reclassify inventory we expect to use or sell in periods beyond the next twelve months into Other long-term assets on the accompanying Consolidated Balance Sheets.
We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval are not capitalized as inventory but are expensed as research and
development costs. Only once regulatory approval is obtained, would we begin capitalization of these inventory related costs.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives once it is placed into service:
|
| | |
| Asset Category | | PageEstimated Useful Life |
| Buildings | | 40 years |
| Lab equipment | | 5 years |
| Furniture and fixtures | | 5 years |
| Computer equipment and software | | 3 years |
| Leasehold improvements | |
| |
| 15 years |
Leasehold improvements are depreciated over the lesser of their estimated useful lives or the remainder of the lease term. Capitalized software includes certain internal use computer software costs. Repairs and maintenance costs are charged to expense as incurred.
Goodwill amounts have been recorded as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair value. Goodwill is not subject to amortization. We assess the recoverability of our goodwill annually, or more frequently whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value. We continue to operate in one segment, which is also considered to be our sole reporting unit and therefore, goodwill was tested for impairment at the enterprise level as of December 31, 2017 and 2016. We did not recognize any impairment charges in any of the periods presented. Long-Lived Assets
TableThe carrying value of Contentsour long-lived assets, which includes property and equipment, is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.Revenue Recognition
We will adopt ASU 2014-09 using the modified retrospective method in the first quarter of fiscal year 2018. For information on our adoption of ASU 2014-09, see “- Recent Accounting Pronouncements,” below.
Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and title has transferred or services have been performed; the price is fixed or determinable; and collectability of the resulting receivable is reasonably assured.
Net Product Revenues
We recognize net product revenues upon delivery of the product and when there are no remaining customer acceptance requirements which is frequently referred to as the “sell-in” revenue recognition model.
Discounts and Allowances
We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues:
Report(a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies and distributors; and (d) returns.
We initially record estimates for these deductions at the time we recognize the gross revenue. We update our estimates on a recurring basis as new information becomes available.
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy or distributor. Contracted customers, which currently consist primarily of Independent Registered Public Accounting FirmHealth Service institutions, non-profit clinics, Federal government entities purchasing via the Federal Supply Schedule and Group Purchasing Organizations, and health maintenance organizations generally purchase the product at a discounted price. The specialty pharmacy or distributor, in turn, charges back to us the difference between the price initially paid by the specialty pharmacy or distributor and the discounted price paid to the specialty pharmacy or distributor by the customer. The allowance for chargebacks is based on an estimate of sales to contracted customers.
Discounts for Prompt Payment: The specialty pharmacies and distributors in the U.S. receive a discount of 2% for prompt payment. We expect the specialty pharmacies and distributors will earn 100% of its prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized.
Other Customer Credits: We pay fees to our customers for account management, data management and other administrative services.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using customer data provided by the specialty pharmacies and distributors.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and other government programs. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to our customers, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net revenue in the period of adjustment.
Allowances for rebates also includes the Medicare Part D Coverage Gap. In the U.S., theMedicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for expected Medicare Part D coverage gap are based in part on historical utilization rates, specialty pharmacy and distributor customer and payer data and third-party market research data. We also estimate when eligible patients who are prescribed our product enter and exit the insurance coverage gap. Funding of the coverage gap is invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarters’ shipments to patients, plus an accrual balance for prior sales. If actual future funding varies from estimates, we may need to adjust our accruals, which would affect net revenue in the period of adjustment.
The Boardactivities and ending reserve balances for each significant category of Directorsdiscount and Stockholdersallowance were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Chargebacks and discounts for prompt payment | | Other customer credits/fees and co-pay assistance | | Rebates | | Returns | | Total |
| Balance at December 31, 2015 | $ | 119 |
| | $ | 251 |
| | $ | 891 |
| | $ | 38 |
| | $ | 1,299 |
|
| Provision related to sales made in: | | | | | | | | | — |
|
| Current period | 8,271 |
| | 2,747 |
| | 5,105 |
| | 359 |
| | 16,482 |
|
| Prior periods | (39 | ) | | 2 |
| | (313 | ) | | (8 | ) | | (358 | ) |
| Payments and customer credits issued | (6,549 | ) | | (2,206 | ) | | (3,056 | ) | | (38 | ) | | (11,849 | ) |
| Balance at December 31, 2016 | 1,802 |
| | 794 |
| | 2,627 |
| | 351 |
| | 5,574 |
|
| Provision related to sales made in: | | | | | | | | | |
| Current period | 33,310 |
| | 7,301 |
| | 14,390 |
| | — |
| | 55,001 |
|
| Prior periods | (817 | ) | | — |
| | (624 | ) | | — |
| | (1,441 | ) |
| Payments and customer credits issued | (32,367 | ) | | (6,300 | ) | | (10,623 | ) | | (351 | ) | | (49,641 | ) |
| Balance at December 31, 2017 | $ | 1,928 |
| | $ | 1,795 |
| | $ | 5,770 |
| | $ | — |
| | $ | 9,493 |
|
Chargebacks and discounts for prompt payment are recorded as a reduction of Exelixis, Inc.trade receivables and the remaining reserve balances are classified as Rebates and fees due to customers on the accompanying Consolidated Balance Sheets. Balances as of December 31, 2016 have been reclassified to reflect that presentation.
Collaboration Revenues
We enter into collaboration agreements under which we may obtain upfront license fees, milestone, royalty, development cost reimbursements, and/or product supply payments. These arrangements have multiple elements, and our deliverables may include intellectual property rights, distribution rights, delivery of manufactured product, commercial and development activities and participation on joint steering, commercial and development committees. In order to account for these arrangements, we identify the deliverables and evaluate whether the delivered elements have value to our collaboration partner on a stand-alone basis and represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver future goods or services, a right or license to use an asset, or another performance obligation. If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement will be combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue then will be determined for those combined deliverables as a single unit of accounting. For a combined unit of accounting, non-refundable upfront fees are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period of our continued involvement. Amounts received in advance of performance are recorded as deferred revenue.
We record royalty revenues based on estimates of the sales that occurred during the period. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. Historically, adjustments have not been material when compared to actual amounts paid by licensees. However, additional information may subsequently become available to us, which may allow us to make a more accurate estimate in future periods. In this event, we are required to record adjustments in future periods when the actual level of activity becomes more certain. Such increases or decreases in revenue are generally considered to be changes in estimates and will be reflected in the period they become known. If we are unable to reasonably estimate royalty revenue, we record royalty revenues when they are received. We consider sales-based contingent payments to be royalty revenue which is generally recognized at the date the contingency is achieved.
Our product supply revenues are recognized upon delivery of the product. See “Note 2. Collaboration Agreements” for a description of our product supply agreements with our collaboration partners.
For certain milestone payments under collaboration agreements, we have made a policy election to recognize revenue using the milestone method. A milestone is an event: (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is: (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables. A substantive milestone is recognized as revenue in its entirety in the period in which the milestone is achieved. A non-substantive milestone is recognized as revenues over the estimated period of our continued involvement.
Under the terms of our collaboration agreement with Genentech for cobimetinib, we are also entitled to a share of U.S. profits and losses received in connection with commercialization of cobimetinib. We are entitled to low double-digit royalties on ex-U.S. net sales. See “Note 2. Collaboration Agreements” for additional information about our collaboration agreement with Genentech. We have auditeddetermined that we are an agent under the agreement and therefore revenues are recorded net of costs incurred. We record U.S. profits and losses under the collaboration agreement in the period earned based on our estimate of those amounts. As of December 31, 2017, we have not recognized a profit for any year to date period from the commercialization of cobimetinib in the U.S. Until we have recognized a profit under the agreement, losses are recognized as Selling, general and administrative expenses on the accompanying consolidated balance sheetsConsolidated Statements of Exelixis, Inc.Operations. In connection with our agreement to co-promote with Genentech, we were responsible for providing up to 25% of the sales force necessary to assist with the promotion of cobimetinib. Genentech reimburses us for these costs which we include as a reduction of our Selling, general and administrative costs when the obligations are incurred or we become entitled to the cost recovery.
Patient Assistance Programs
We provide CABOMETYX and COMETRIQ at no cost to eligible patients who have no insurance and meet certain financial and clinical criteria through our patient assistance programs. We record the cost of the product as a selling, general and administrative expense at the time the product is shipped to the specialty pharmacy for patient assistance use.
Cost of Goods Sold
Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty on sales of any product incorporating cabozantinib payable to GlaxoSmithKline (“GSK”), indirect labor costs, the cost of manufacturing, write-downs related to expiring and excess inventory, shipping and other third-party logistics and distribution costs for our product. A portion of the manufacturing costs for product sales were incurred prior to regulatory approval of COMETRIQ and CABOMETYX and therefore, were expensed as research and development costs when those costs were incurred, rather than capitalized as inventory. See “Note 2. Collaboration Agreements” for additional information on the royalty payable to GSK on sales of any product incorporating cabozantinib.
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 our behalf.
Substantial portions of our preclinical studies and all of our clinical trials have been executed with support from third-party contract research organizations and other vendors. We accrue expenses for preclinical studies performed by our vendors based on certain estimates over the term of the service period and adjust our estimates as required. We accrue expenses for clinical trial activities performed by contract research organizations based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the number of active clinical sites, and the duration for which the patients will be enrolled in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence with contract research organizations and review of contractual terms. We base our estimates on the best information
available at the time. However, additional information may become available to us which may allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain.
Foreign Currency Translation and Remeasurement
Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured using exchange rates in effect at the end of the period and related gains or losses are recorded in Other expenses, net. Gains and losses on the remeasurement of monetary assets and liabilities were not material for any of the years presented. We do not have any nonmonetary assets or liabilities denominated in currencies other than the U.S. dollar.
Stock-Based Compensation
The expense for stock-based compensation is based on the grant date fair value of the award; the grant date fair value of Restricted Stock Units (“RSUs”) is estimated as the value of the underlying shares of our common stock and the grant date fair value of stock-options is estimated using the Black-Scholes Merton option pricing model. Because there is a market for options on our common stock, we have considered implied volatilities as well as our historical realized volatilities when developing an estimate of expected volatility. We estimate the term using historical data. We recognize compensation expense on a straight-line basis over the requisite service period. Compensation expense relating to awards subject to performance conditions is recognized if it is probable that the performance goals will be achieved; the probability of achievement is assessed on a quarterly basis.
In January 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”). ASU 2016-09 is aimed at the simplification of several aspects of the accounting for employee share-based payment transactions, including accounting for forfeitures, income tax consequences and classification on the statement of cash flows.
Pursuant to the adoption of ASU 2016-09, we have made an election to record forfeitures when they occur. Previously, stock-based compensation was based on the number of awards expected to vest after considering estimated forfeitures. The change in accounting principle with regards to forfeitures was adopted using a modified retrospective approach, with a cumulative adjustment of $0.3 million to accumulated deficit and additional paid-in capital as of December 30, 2016 and January 1, 2017. No prior periods were restated as a result of this change in accounting principle.
ASU 2016-09 also requires that cash paid to taxing authorities when directly withholding shares for tax withholding purposes be classified as a financing activity on the accompanying Consolidated Statement of Cash Flows. Previously, we classified such payments as operating cash flows. The change in accounting principle with regards to such cash flows was adopted using a retrospective approach. Accordingly, we recorded a reclassification that resulted in an increase in operating cash flows of $4.1 million and $0.5 million along with a corresponding decrease in financing cash flows on the accompanying Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015, respectively.
Income Taxes
Our income tax provision is computed under the asset and liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities together with assessing carry-forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
We record an unrecognized tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities. An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, becomes effective for us in the first quarter of fiscal year 2018, which is when we will adopt the standard. ASU 2014-09 also permits two methods of adoption: retrospectively to each prior reporting period presented (full
retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We will adopt ASU 2014-09 using the modified retrospective method. The core principle of ASU 2014-09 is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, has created the possibility that more judgment and estimates may be required within the revenue recognition process than required under existing U.S. generally accepted accounting pronouncements. We have completed our analysis on the adoption of ASU 2014-09 and have determined the adoption will not have a material impact on the recognition of net product revenues. ASU 2014-09 will materially impact the timing of recognition of revenue for our collaboration agreements with Ipsen Pharma SAS (“Ipsen”) and Takeda Pharmaceutical Company Ltd. (“Takeda”). We will record a net adjustment of approximately $260 million to accumulated deficit (a concept known as “lost revenue”) for amounts associated with these collaboration agreements upon recording our transition adjustment in the first quarter of 2018, primarily due to the timing of recognition of revenue related consolidated statementsto intellectual property licenses that we have transferred for development and commercialization of operations, comprehensive loss, stockholders’ equity (deficit)our products. Additionally, for all of our collaboration agreements, the timing of recognition of certain of our development and regulatory milestones could change as a result of the variable consideration guidance included in ASU 2014-09. ASU 2014-09 will also require additional disclosures regarding our revenue transactions.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), (“ASU 2016-02”). Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Recognition, measurement, and presentation of expenses and cash flows for eacharising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. ASU 2016-02 will require both types of leases to be recognized on the three fiscal years inbalance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the period ended December 30, 2016.amount, timing, and uncertainty of cash flows arising from leases. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plandisclosures include qualitative and perform the audit to obtain reasonable assurancequantitative requirements, providing additional information about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosuresrecorded in the financial statements. An audit also includesASU 2016-02 is effective for us for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We are in the process of assessing the accounting principles usedimpact of ASU No. 2016-02 on our Consolidated Financial Statements and significant estimates made by management, as well as evaluatingare considering early adoption of this standard in the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.first half of 2018.
In our opinion,August 2016, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Exelixis, Inc. at December 30, 2016FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force),January 1, (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing and contingent consideration payments made after a business combination. ASU 2016-15 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU No. 2016-18,, and Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the consolidated resultsFASB Emerging Issues Task Force), (“ASU 2016-18”). ASU 2016-18 requires that a statement of its operations and its cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2016-18 to have a material impact on our Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“ASU 2017-04”). ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2017-04 to have a material impact on our Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, (“ASU 2017-09”). ASU 2017-09 streamlines the application of modification accounting by stating that when making a change to the terms or conditions of a share-based payment award, a company should apply modification accounting to the award, unless each of the three fiscal years in the period ended December 30, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standardsfollowing conditions is met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the Public Company Accounting Oversight Board (United States), Exelixis, Inc.’s internal control over financial reportingmodified award is the same as of December 30, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizationsfair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the Treadway Commission (2013 framework)original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, and 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our report dated Consolidated Financial Statements.February 27, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Redwood City, California
February 27, 2017
EXELIXIS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 151,686 |
| | $ | 141,634 |
|
| Short-term investments | 268,117 |
| | 25,426 |
|
| Trade and other receivables | 42,246 |
| | 5,183 |
|
| Inventory | 3,338 |
| | 2,616 |
|
| Prepaid expenses and other current assets | 5,416 |
| | 3,806 |
|
| Total current assets | 470,803 |
| | 178,665 |
|
| Long-term investments | 55,601 |
| | 83,600 |
|
| Long-term restricted cash and investments | 4,150 |
| | 2,650 |
|
| Property and equipment, net | 2,071 |
| | 1,434 |
|
| Goodwill | 63,684 |
| | 63,684 |
|
| Other long-term assets | 1,232 |
| | 2,309 |
|
| Total assets | $ | 597,541 |
| | $ | 332,342 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 6,565 |
| | $ | 6,401 |
|
| Accrued compensation and benefits | 20,334 |
| | 3,629 |
|
| Accrued clinical trial liabilities | 14,131 |
| | 18,071 |
|
| Accrued collaboration liability | — |
| | 10,938 |
|
| Current portion of convertible notes | 109,122 |
| | — |
|
| Current portion of term loan payable | 80,000 |
| | — |
|
| Current portion of deferred revenue | 19,665 |
| | — |
|
| Other current liabilities | 20,771 |
| | 13,212 |
|
| Total current liabilities | 270,588 |
| | 52,251 |
|
| Long-term portion of convertible notes | — |
| | 337,937 |
|
| Long-term portion of term loan payable | — |
| | 80,000 |
|
| Long-term portion of deferred revenue | 237,094 |
| | — |
|
| Other long-term liabilities | 541 |
| | 2,960 |
|
| Total liabilities | 508,223 |
| | 473,148 |
|
| Commitments (Note 13) |
| |
|
| Stockholders’ equity (deficit): | | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued | — |
| | — |
|
Common stock, $0.001 par value; 400,000,000 shares authorized; issued and outstanding: 289,923,798 and 227,960,943 shares at December 31, 2016 and 2015, respectively | 290 |
| | 228 |
|
| Additional paid-in capital | 2,072,591 |
| | 1,772,123 |
|
| Accumulated other comprehensive loss | (416 | ) | | (232 | ) |
| Accumulated deficit | (1,983,147 | ) | | (1,912,925 | ) |
| Total stockholders’ equity (deficit) | 89,318 |
| | (140,806 | ) |
| Total liabilities and stockholders’ equity (deficit) | $ | 597,541 |
| | $ | 332,342 |
|
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, |
| | 2016 | | 2015 | | 2014 |
| Revenues: | | | | | |
| Net product revenues | $ | 135,375 |
| | $ | 34,158 |
| | $ | 25,111 |
|
| Collaboration revenues | 56,079 |
| | 3,014 |
| | — |
|
| Total revenues | 191,454 |
| | 37,172 |
| | 25,111 |
|
| Operating expenses: | | | | | |
| Cost of goods sold | 6,552 |
| | 3,895 |
| | 2,043 |
|
| Research and development | 95,967 |
| | 96,351 |
| | 189,101 |
|
| Selling, general and administrative | 116,145 |
| | 57,305 |
| | 50,829 |
|
| Restructuring charges | 914 |
| | 1,042 |
| | 7,596 |
|
| Total operating expenses | 219,578 |
| | 158,593 |
| | 249,569 |
|
| Loss from operations | (28,124 | ) | | (121,421 | ) | | (224,458 | ) |
| Other expense, net: | | | | | |
| Interest income and other, net | 4,863 |
| | 412 |
| | 4,341 |
|
| Interest expense | (33,060 | ) | | (40,680 | ) | | (41,362 | ) |
| Loss on extinguishment of debt | (13,901 | ) | | — |
| | — |
|
| Total other expense, net | (42,098 | ) | | (40,268 | ) | | (37,021 | ) |
| Loss before income taxes | (70,222 | ) | | (161,689 | ) | | (261,479 | ) |
| Income tax provision (benefit) | — |
| | 55 |
| | (182 | ) |
| Net loss | $ | (70,222 | ) | | $ | (161,744 | ) | | $ | (261,297 | ) |
| Net loss per share, basic and diluted | $ | (0.28 | ) | | $ | (0.77 | ) | | $ | (1.34 | ) |
| Shares used in computing basic and diluted net loss per share | 250,531 |
| | 209,227 |
| | 194,299 |
|
The accompanying notes are an integral part of these consolidated financial statements.
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Net loss | $ | (70,222 | ) | | $ | (161,744 | ) | | $ | (261,297 | ) |
Other comprehensive loss (1) | (184 | ) | | (111 | ) | | (267 | ) |
| Comprehensive loss | $ | (70,406 | ) | | $ | (161,855 | ) | | $ | (261,564 | ) |
____________________
| |
(1) | Other comprehensive loss consisted solely of unrealized losses, net on available-for-sale securities arising during the periods presented. There were no reclassification adjustments to net loss resulting from realized gains or losses on the sale of securities and there was no income tax expense related to other comprehensive loss during those years. |
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)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Shares | | Common Stock Amount | | Additional Paid-in Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Balance at December 31, 2013 | 184,533,651 |
| | $ | 184 |
| | $ | 1,504,052 |
| | $ | 146 |
| | $ | (1,489,884 | ) | | $ | 14,498 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (261,297 | ) | | (261,297 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (267 | ) | | — |
| | (267 | ) |
| Sale of shares of common stock, net | 10,000,000 |
| | 10 |
| | 75,633 |
| | — |
| | — |
| | 75,643 |
|
| Issuance of common stock under stock plans | 1,362,118 |
| | 2 |
| | 2,091 |
| | — |
| | — |
| | 2,093 |
|
| Stock-based compensation expense | — |
| | — |
| | 10,006 |
| | — |
| | — |
| | 10,006 |
|
| Balance at December 31, 2014 | 195,895,769 |
| | 196 |
| | 1,591,782 |
| | (121 | ) | | (1,751,181 | ) | | (159,324 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (161,744 | ) | | (161,744 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (111 | ) | | — |
| | (111 | ) |
| Sale of shares of common stock, net | 28,750,000 |
| | 29 |
| | 145,620 |
| | — |
| | — |
| | 145,649 |
|
| Warrants transferred from other long-term liabilities | — |
| | — |
| | 1,470 |
| | — |
| | — |
| | 1,470 |
|
| Issuance of common stock under stock plans | 3,315,174 |
| | 3 |
| | 11,274 |
| | — |
| | — |
| | 11,277 |
|
| Stock-based compensation expense | — |
| | — |
| | 21,977 |
| | — |
| | — |
| | 21,977 |
|
| Balance at December 31, 2015 | 227,960,943 |
| | 228 |
| | 1,772,123 |
| | (232 | ) | | (1,912,925 | ) | | (140,806 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (70,222 | ) | | (70,222 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (184 | ) | | — |
| | (184 | ) |
| Issuance of common stock in settlement of convertible notes | 54,009,279 |
| | 54 |
| | 253,026 |
| | — |
| | — |
| | 253,080 |
|
| Issuance of common stock under stock plans | 7,953,576 |
| | 8 |
| | 24,530 |
| | — |
| | — |
| | 24,538 |
|
| Stock-based compensation expense | — |
| | — |
| | 22,912 |
| | — |
| | — |
| | 22,912 |
|
| Balance at December 31, 2016 | 289,923,798 |
| | $ | 290 |
| | $ | 2,072,591 |
| | $ | (416 | ) | | $ | (1,983,147 | ) | | $ | 89,318 |
|
The accompanying notes are an integral part of these consolidated financial statements.
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (70,222 | ) | | $ | (161,744 | ) | | $ | (261,297 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 1,002 |
| | 1,406 |
| | 2,391 |
|
| Stock-based compensation expense | 22,912 |
| | 21,977 |
| | 10,006 |
|
| Loss on extinguishment of debt | 13,901 |
| | — |
| | — |
|
| Amortization of debt discounts and debt issuance costs | 8,432 |
| | 17,041 |
| | 22,289 |
|
| Accrual of interest paid in kind | 8,008 |
| | 3,817 |
| | — |
|
| Gain on sale of business and other equity investment | (2,494 | ) | | (112 | ) | | (838 | ) |
| Changes in the fair value of warrants | — |
| | 548 |
| | (1,840 | ) |
| Other | (2,510 | ) | | 1,327 |
| | 4,161 |
|
| Changes in assets and liabilities: | | | | | |
| Trade and other receivables | (37,002 | ) | | (646 | ) | | (941 | ) |
| Inventory | (722 | ) | | (235 | ) | | 509 |
|
| Prepaid expenses and other current assets | (1,610 | ) | | (325 | ) | | 1,526 |
|
| Other long-term assets | 1,077 |
| | 1,340 |
| | (2,149 | ) |
| Accounts payable | 164 |
| | (12 | ) | | (2,932 | ) |
| Accrued compensation and benefits | 16,705 |
| | 279 |
| | (9,447 | ) |
| Accrued clinical trial liabilities | (3,940 | ) | | (23,474 | ) | | 6,587 |
|
| Accrued collaboration liability | (10,938 | ) |
| 10,206 |
| | 732 |
|
| Deferred revenue | 256,759 |
| | (2,582 | ) | | 1,133 |
|
| Other current and long-term liabilities | 6,774 |
| | (10,396 | ) | | (5,295 | ) |
| Net cash provided by (used in) operating activities | 206,296 |
| | (141,585 | ) | | (235,405 | ) |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (1,703 | ) | | (447 | ) | | (474 | ) |
| Proceeds from sale of property and equipment | 97 |
| | 1,346 |
| | 392 |
|
| Proceeds from sale of business and other equity investments | 2,494 |
| | 95 |
| | 838 |
|
| Proceeds from maturities of restricted cash and investments | 7,150 |
| | 19,789 |
| | 20,354 |
|
| Purchase of restricted cash and investments | (8,650 | ) | | (5,650 | ) | | (8,143 | ) |
| Proceeds from sale of investments | 2,266 |
| | — |
| | — |
|
| Proceeds from maturities of investments | 151,485 |
| | 178,936 |
| | 252,891 |
|
| Purchases of investments | (369,187 | ) | | (143,992 | ) | | (119,528 | ) |
| Net cash (used in) provided by investing activities | (216,048 | ) | | 50,077 |
| | 146,330 |
|
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of common stock, net | — |
| | 145,649 |
| | 75,643 |
|
| Proceeds from exercise of stock options | 25,327 |
| | 10,911 |
| | 120 |
|
| Proceeds from employee stock purchase plan | 2,187 |
| | 568 |
| | 1,438 |
|
| Principal payments on debt | — |
| | (4,381 | ) | | (11,709 | ) |
| Redemption of convertible notes | (575 | ) | | — |
| | — |
|
| Payments on conversion of convertible notes | (7,135 | ) | | — |
| | — |
|
| Net cash provided by financing activities | 19,804 |
| | 152,747 |
| | 65,492 |
|
| Net increase (decrease) in cash and cash equivalents | 10,052 |
| | 61,239 |
| | (23,583 | ) |
| Cash and cash equivalents at beginning of year | 141,634 |
| | 80,395 |
| | 103,978 |
|
| Cash and cash equivalents at end of year | $ | 151,686 |
| | $ | 141,634 |
| | $ | 80,395 |
|
(Continued on next page)
EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Supplemental cash flow disclosure: | | | | | |
| Cash paid for interest | $ | 21,044 |
| | $ | 19,822 |
| | $ | 19,109 |
|
| Cash paid for taxes | $ | 190 |
| | $ | 192 |
| | $ | 60 |
|
| Non-cash financing activity: | | | | | |
| Issuance of common stock in settlement of convertible notes | $ | 286,925 |
| | $ | — |
| | $ | — |
|
| Issuance of warrants in connection with amendment to convertible notes | $ | — |
| | $ | — |
| | $ | 2,762 |
|
The accompanying notes are an integral part of these consolidated financial statements
EXELIXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Exelixis, Inc. (“Exelixis,” “we,” “our” or “us”) is a biopharmaceutical company committed to the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer. Since its founding in 1994, three products discovered at Exelixis have progressed through clinical development, received regulatory approval, and entered the commercial marketplace. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, and VEGF receptors: CABOMETYX™ tablets approved for previously treated advanced kidney cancer and COMETRIQ® capsules approved for progressive, metastatic medullary thyroid cancer. The third product, Cotellic®, is a formulation of cobimetinib, a selective inhibitor of MEK, marketed under a collaboration with Genentech (a member of the Roche Group), and is approved as part of a combination regimen to treat advanced melanoma.
Basis of Consolidation
The consolidated financial statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the U.S. dollar. All intercompany balances and transactions have been eliminated.
Basis of Presentation
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2014, a 53-week year, ended on January 2, 2015; fiscal year 2015, a 52-week year, ended on January 1, 2016; fiscal year 2016, a 52-week year, ended on December 30, 2016; and fiscal year 2017, a 52-week year, will end on December 29, 2017. For convenience, references in this report as of and for the fiscal years ended January 2, 2015, January 1, 2016, and December 30, 2016 are indicated as being as of and for the years ended December 31, 2014, 2015, and 2016, respectively. The quarterly period ended January 2, 2015 is a 14-week fiscal quarter; all other interim periods presented are 13-week fiscal quarters.
Use of Estimates
The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the United States (“U.S.”) which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, including deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances), the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations, the amounts of revenues and expenses under our profit and loss sharing agreement, recoverability of inventory, certain accrued liabilities including the accrued clinical trial liability, the valuation of the debt and equity components of our convertible debt and stock-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Correction of an Immaterial Error
During the third quarter of 2016, we identified errors in the Consolidated Balance Sheets and Consolidated Statements of Operations, Comprehensive Loss and Cash Flows for 2015, 2014, 2013, and 2012, and in the unaudited interim Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations, Comprehensive Loss and Cash Flows for all prior interim fiscal periods from September 30, 2012 through June 30, 2016. Specifically, in 2012 we incorrectly calculated 1) the allocation between Additional paid-in capital and Convertible notes of the $287.5 million aggregate principal amount from our 4.25% Convertible Senior Subordinated Notes due 2019 (“2019 Notes”); and 2) the amortization of the debt discount associated with the 2019 Notes during 2012 and all subsequent periods.
Having evaluated the materiality of these errors from a quantitative and qualitative perspective, management concluded that although the accumulation of these errors was significant to the three and nine months ended September 30, 2016, the correction of these errors was not material to any individual prior period, and did not have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. Because management has concluded that these errors are not
material, we will correct them prospectively when the consolidated balance sheets, statements of operations, comprehensive loss and cash flows for such periods are included in future filings.
Following are the amounts (in thousands, except per share amounts) that should have been reported for the affected line items of the statements of operations, statements of comprehensive loss and statements of cash flows:
|
| | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 |
| Statements of Operations: |
| Interest expense, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (40,680 | ) | | $ | (41,362 | ) | | $ | (38,779 | ) | | $ | (24,778 | ) |
| Total other expense, net, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (40,268 | ) | | $ | (37,021 | ) | | $ | (37,556 | ) | | $ | (22,792 | ) |
| Net loss, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (161,744 | ) | | $ | (261,297 | ) | | $ | (238,192 | ) | | $ | (145,335 | ) |
| Net loss per share, basic and diluted, overstated by $0.04, $0.04, $0.04, $0.01 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (0.77 | ) | | $ | (1.34 | ) | | $ | (1.29 | ) | | $ | (0.91 | ) |
| Statements of Comprehensive Loss: |
| Comprehensive loss, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (161,855 | ) | | $ | (261,564 | ) | | $ | (237,954 | ) | | $ | (145,289 | ) |
Statements of Cash Flows(1): |
| Net loss, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (161,744 | ) | | $ | (261,297 | ) | | $ | (238,192 | ) | | $ | (145,335 | ) |
| Accretion of debt discount and debt issuance costs, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | 17,041 |
| | $ | 22,289 |
| | $ | 19,722 |
| | $ | 12,442 |
|
____________________
| |
(1) | The error did not impact our net cash provided by or used in operating activities, financing activities or investing activities for any of the periods presented. |
Following are the amounts (in thousands) that should have been reported for the affected line items of the balance sheets and statements of stockholders’ (deficit) equity:
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 |
| Balance Sheets: |
| Long-term portion of convertible notes, understated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively | $ | 337,937 |
| | $ | 223,629 |
| | $ | 301,550 |
| | $ | 291,828 |
|
| Liabilities, understated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively | $ | 473,148 |
| | $ | 482,592 |
| | $ | 483,452 |
| | $ | 476,015 |
|
| Additional paid-in capital, overstated by $60,618 as of all dates presented | $ | 1,772,123 |
| | $ | 1,591,782 |
| | $ | 1,504,052 |
| | $ | 1,489,727 |
|
| Accumulated deficit, overstated by $24,116, $16,124, $8,879, $2,310 as of December 31, 2015, 2014, 2013 and 2012, respectively | $ | (1,912,925 | ) | | $ | (1,751,181 | ) | | $ | (1,489,884 | ) | | $ | (1,251,692 | ) |
| Stockholders’ equity (deficit), misstated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively | $ | (140,806 | ) | | $ | (159,324 | ) | | $ | 14,498 |
| | $ | 238,127 |
|
| Statements of Stockholders’ Equity (Deficit): |
| Net loss, overstated by $7,993, $7,245, $6,568, $2,310 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively | $ | (161,744 | ) | | $ | (261,297 | ) | | $ | (238,192 | ) | | $ | (145,335 | ) |
| Additional paid-in capital, overstated by $60,618 as of all dates presented | $ | 1,772,123 |
| | $ | 1,591,782 |
| | $ | 1,504,052 |
| | $ | 1,489,727 |
|
| Accumulated deficit, overstated by $24,116, $16,124, $8,879, $2,310 as of December 31, 2015, 2014, 2013 and 2012, respectively | $ | (1,912,925 | ) | | $ | (1,751,181 | ) | | $ | (1,489,884 | ) | | $ | (1,251,692 | ) |
| Stockholders’ equity (deficit), misstated by $36,502, $44,494, $51,739, $58,307 as of December 31, 2015, 2014, 2013 and 2012, respectively | $ | (140,806 | ) | | $ | (159,324 | ) | | $ | 14,498 |
| | $ | 238,127 |
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These errors did not affect any other caption or total in our annual consolidated financial statements.
Reclassifications
Certain prior period amounts in the Consolidated Financial Statements have been reclassified to conform to current period presentation. We reclassified $3.2 million and $1.4 million of Current portion of restructuring and Long-term portion of restructuring as of December 31, 2015 to Other current liabilities and Other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets. We have also reclassified balances between line items within the Changes in assets and liabilities in the accompanying Statements of Cash Flows for the years ended December 31, 2015 and 2014 to conform the presentation of those line items to the corresponding presentation of assets and liabilities in our accompanying Balance Sheets.
Segment Information
We operate as a single reportable segment.
Cash and Investments
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include investments in high-grade, short-term money market funds, commercial paper and municipal securities, which are subject to minimal credit and market risk.
We have designated all investments as available-for-sale and therefore, such investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive loss. For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest and other income, net.
We classify those investments we do not require for use in current operations that mature in more than 12 months as Long-term investments on our Consolidated Balance Sheets. Additionally, those investments that collateralize loan balances with terms that extend 12 months or longer were classified as long-term investments even if the investment’s remaining term to maturity was one year or less; they are not restricted to withdrawal.
All of our investments are subject to a quarterly impairment review. We recognize an impairment charge when a decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investments fair value has been less than their cost basis, the financial condition and near-term prospects of the issuer, extent of the loss related to credit of the issuer, the expected cash flows from the security, our intent to sell the security and whether or not we will be required to sell the security before we are able to recovery our carrying value. During the years ended December 31, 2016, 2015 and 2014, we did not record any other-than-temporary impairment charges on our available-for-sale securities.
Fair Value Measurements
Fair value reflects the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We disclose the fair value of financial instruments for assets and liabilities for which the value is practicable to estimate. For those financial instruments measured and recorded at fair value on a recurring basis, we also provide fair value hierarchy information in these Notes to Consolidated Financial Statements. The fair value hierarchy has the following three levels:
Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities that the reporting entity can access at the measurement date.
Level 2 – observable inputs, other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly. These inputs include using prices from independent pricing services based on quoted prices in active markets for similar instruments or on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.
Level 3 – unobservable inputs.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain investments within the fair value hierarchy. During the years ended December 31, 2016, 2015 and 2014, there were no such reclassifications.
Inventory
We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. The related costs are recognized as cost of goods sold in the Consolidated Statements of Operations.
On a quarterly basis, we analyze our estimated production levels for the following twelve month period, which is our normal operating cycle and reclassify inventory we do not expect to use within the next twelve months into Other long-term assets in the Consolidated Balance Sheets.
We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval are not capitalized as inventory but are expensed as research and development costs. When regulatory approval is obtained, we begin capitalization of inventory related costs.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives:
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| |
Equipment and furniture | 5 years |
Computer equipment and software | 3 years |
Leasehold improvements | Shorter of lease life or 7 years |
Capitalized software includes certain internal use computer software costs.
Repairs and maintenance costs are charged to expense as incurred.
Goodwill
Goodwill amounts have been recorded as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair value. Goodwill is not subject to amortization. We assess the recoverability of our goodwill annually, or more frequently whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value. We continue to operate in one segment, which is also considered to be our sole reporting unit and therefore, goodwill was tested for impairment at the enterprise level as of December 31, 2016 and 2015. We did not recognize any impairment charges in any of the periods presented.
Long-Lived Assets
Long-lived assets include property and equipment. The carrying value of our long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.
Revenue Recognition
We recognize revenue from product sales and from license fees, milestones and royalties earned on research and collaboration arrangements.
Net Product Revenues
We recognize revenue when it is both realized or realizable and earned, meaning persuasive evidence of an arrangement exists, delivery has occurred, title has transferred, the price is fixed or determinable, there are no remaining customer acceptance requirements, and collectability of the resulting receivable is reasonably assured. For product sales to specialty pharmacies and distributors in the U.S., this generally occurs upon delivery of the product. For product sales to our former distribution partner, Swedish Orphan Biovitrum (“Sobi”), this generally occurred when Sobi accepted the product.
In the U.S., we sell our products, CABOMETYX and COMETRIQ, to specialty pharmacies and distributors that benefit from customer incentives and have a right of return under certain circumstances. Prior to 2015, COMETRIQ had limited sales history and we could not reliably estimate expected future returns, discounts and rebates of the product at the time the product was sold to a single specialty pharmacy, therefore we recognized revenue when the specialty pharmacy provided the product to a patient based on the fulfillment of a prescription. This is frequently referred to as the “sell-through” revenue recognition model. In January 2015, we established that we had sufficient historical experience and data to reasonably estimate expected future returns of COMETRIQ and the discounts and rebates due to payers at the time of shipment to the specialty pharmacy. Accordingly, beginning in January 2015 we began to recognize revenue upon delivery to the specialty pharmacy. This approach is frequently referred to as the “sell-in” revenue recognition model. In connection with the change in the timing of recognition of COMETRIQ sales in the U.S., we recorded a one-time adjustment to recognize revenue that had previously been deferred under the “sell-through” revenue recognition model, resulting in the additional recognition of gross product revenues of $2.6 million for the year ended December 31, 2015; there were no such additional amounts recorded during 2016 or 2014.
In determining discounts and allowances for the initial launch and sale of CABOMETYX, in addition to using payer data received from the specialty pharmacies and distributors that sell CABOMETYX and historical data for COMETRIQ, we also utilized claims data from third party sources for competitor products for the treatment of advanced renal cell carcinoma (“RCC”). Based in part on the availability of this third party data, we made the determination that we had sufficient experience and data to reasonably estimate expected future returns and the discounts and allowances due to payers at the time of shipment to the specialty pharmacy or distributor, and therefore record revenue for the product using the “sell-in” revenue recognition model. Net product revenues during the year ended December 31, 2016 were impacted by the build of channel inventory related to the initial launch period for CABOMETYX.
We also utilized the “sell-in” revenue recognition model for product sales to Sobi for all periods presented. As described further in “Note 2 - Collaboration Agreements”, under the terms of our collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib, we provided Sobi with a notice of termination of our commercialization agreement for COMETRIQ which became effective November 1, 2016.
Product Sales Discounts and Allowances
We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues (a) trade allowances, such as discounts for prompt payment, (b) estimated government rebates and chargebacks, (c) certain other fees paid to specialty pharmacies and distributors and (d) returns. Discounts and allowances for foreign sales for the years ended December 31, 2015 and 2014 included portions of a one-time $2.4 million project management fee payable to our European distribution partner upon its achievement of a cumulative revenue goal. During 2014, we determined that the achievement of the revenue goal was probable and therefore we recorded $2.3 million of the $2.4 million project management fee, of which $0.7 million would have been recorded in 2013 had the cumulative revenue goal been determined to be probable in that period. During 2015 we recorded an additional $0.1 million of the project management fee.
We initially record estimates for these deductions at the time we recognize the gross revenue. We update our estimates on a recurring basis as new information becomes available.
Customer Credits: The specialty pharmacies and distributors in the U.S. receive a discount of 2% for prompt payment. We expect the specialty pharmacies and distributors will earn 100% of its prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized.
Mandated Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and other government programs. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on third party market research data and customer and payer data received from the specialty pharmacies and distributors and historical utilization rates. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to our customers, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net revenue in the period of adjustment.
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy or distributor. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, Federal government entities purchasing via the Federal Supply Schedule and Group Purchasing Organizations, generally purchase the product at a discounted price. The specialty pharmacy or distributor, in turn, charges back to us the difference between the price initially paid by the specialty pharmacy and the discounted price paid to the specialty pharmacy by the customer. The allowance for chargebacks is based on an estimate of sales to contracted customers.
Medicare Part D Coverage Gap: In the U.S., theMedicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for expected Medicare Part D coverage gap are based in part on third party market research data and on customer and payer data received from specialty pharmacies and distributors. Funding of the coverage gap is invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarters’ shipments to patients, plus an accrual balance for prior sales. If actual future funding varies from estimates, we may need to adjust our accruals, which would affect net revenue in the period of adjustment.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using customer data provided by the specialty pharmacies and distributors.
Collaboration Revenues
We enter into collaboration agreements under which we may obtain upfront license fees, milestone, royalty and/or product supply payments. These arrangements have multiple elements and our deliverables may include intellectual property rights, distribution rights, delivery of manufactured product, commercial and development activities and participation on joint steering, commercial and development committees. In order to account for these arrangements, we identify the deliverables and evaluate whether the delivered elements have value to our collaboration partner on a stand-alone basis and represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may
be an obligation to deliver future goods or services, a right or license to use an asset, or another performance obligation. If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting. For a combined unit of accounting, non-refundable upfront fees are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period of our continued involvement. Amounts received in advance of performance are recorded as deferred revenue. Upfront fees are classified as Collaboration revenues in our Consolidated Statements of Operations.
Royalty revenues, and U.S. profits and losses under the collaboration agreement with Genentech, are based on amounts reported to us by our collaboration partners and are recorded when such information becomes available to us; for Ipsen, this occurs in the current quarter, and for Genentech, this occurs in the following quarter. We base our estimates on the best information available at the time provided to us by our collaboration partners. However, additional information may subsequently become available to us, which may allow us to make a more accurate estimate in future periods. In this event, we are required to record adjustments to collaboration revenue in future periods when the actual level of activity becomes more certain. Such increases or decreases in revenue are generally considered to be changes in estimates and will be reflected in collaboration revenues in the period they become known. We consider sales-based contingent payments to be royalty revenue which is generally recognized at the date the contingency is achieved. Royalty revenue is included in Collaboration revenues in our Consolidated Statements of Operations.
For product supplied to Ipsen, which began during the year ended December 31, 2016, we record revenue at the time the product is delivered. Once title has transferred to Ipsen, the product is generally no longer subject to return. See “Note 2. Collaboration Agreements - Ipsen Collaboration” for a description of our product supply agreement with Ipsen.
For certain milestone payments under collaboration agreements, we have made a policy election to recognize revenue using the milestone method. Under the milestone method a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event: (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is: (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
Non-substantive milestone payments are recognized as revenues over the estimated period of our continued involvement. We may also receive milestone payments after the end of our continued involvement. In such circumstances, we would recognize 100% of the milestone revenues when the contingency is achieved. Milestones payments, when recognized as revenue, are classified as Collaboration revenues in our Consolidated Statements of Operations.
Under the terms of our collaboration agreement with Genentech for cobimetinib, we are also entitled to a share of U.S. profits and losses received in connection with commercialization of cobimetinib. We are entitled to low double-digit royalties on ex-U.S. net sales. See “Note 2. Collaboration Agreements” for additional information about our collaboration agreement with Genentech. We have determined that we are an agent under the agreement and therefore revenues are recorded net of costs incurred. We record U.S. profits and losses under the collaboration agreement in the period earned based on our estimate of those amounts. As of December 31, 2016, we have not recognized a profit for any year to date period from the commercialization of cobimetinib in the U.S. Until we have recognized a profit under the agreement, losses are recognized as Selling, general and administrative expenses in our Consolidated Statements of Operations. In connection with our agreement to co-promote with Genentech, we are responsible for providing up to 25% of the sales force necessary to assist with the promotion of cobimetinib. Genentech reimburses us for these costs which we include as a reduction of our Selling, general and administrative costs when the obligations are incurred or we become entitled to the cost recovery.
Patient Assistance Programs
We provide CABOMETYX and COMETRIQ at no cost to eligible patients who have no insurance and meet certain financial and clinical criteria through our patient assistance programs. We record the cost of the product as a selling, general and administrative expense at the time the product is shipped to the specialty pharmacy for patient assistance use.
Cost of Goods Sold
Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty on net sales of any product incorporating cabozantinib payable to GlaxoSmithKline, indirect labor costs, the cost of manufacturing, write-downs related to expiring and excess inventory, and other third party logistics costs of our product. A portion of the manufacturing costs for product sales were incurred prior to regulatory approval of COMETRIQ and CABOMETYX and therefore, were expensed as research and development costs when those costs were incurred, rather than capitalized as inventory.
In accordance with our product development and commercialization agreement with GlaxoSmithKline, we are required to pay GlaxoSmithKline a 3% royalty on the Net Sales of any product incorporating cabozantinib, including COMETRIQ and CABOMETYX. Net Sales is defined in the product development and commercialization agreement as the gross invoiced sales price less customer credits, rebates, chargebacks, shipping costs, customs duties, and sales tax and other similar tax payments we are required to make.
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 our behalf.
Substantial portions of our preclinical studies and all of our clinical trials have been executed with support from third-party contract research organizations (“CROs”) and other vendors. We accrue expenses for preclinical studies performed by our vendors based on certain estimates over the term of the service period and adjust our estimates as required. We accrue expenses for clinical trial activities performed by CROs based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the number of active clinical sites, and the duration for which the patients will be enrolled in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence with CROs and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us which may allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. Such increases or decreases in costs will be reflected in research and development expenses in the period first known.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) allocated to common shares for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share gives effect to potential incremental common shares issuable upon the exercise of stock options and warrants, and shares issuable pursuant to restricted stock units (“RSUs”) (calculated based on the treasury stock method), and upon conversion of our convertible debt (calculated using an as-if-converted method) as long as such shares are not anti-dilutive.
Foreign Currency Translation and Remeasurement
Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured using exchange rates in effect at the end of the period and related gains or losses are recorded in interest income and other, net. Gains and losses on the remeasurement of monetary assets and liabilities were not material for any of the years presented. We do not have any nonmonetary assets or liabilities denominated in currencies other than the U.S. dollar.
Stock-Based Compensation
Stock-based compensation expense is based on the grant date fair value; the grant date fair value of RSUs is estimated as the value of the underlying shares of our common stock and the grant date fair value of stock-options is estimated using the Black-Scholes Merton option pricing model. Because there is a market for options on our common stock, we have considered implied volatilities as well as our historical realized volatilities when developing an estimate of expected volatility. We estimate the term using historical data. We recognize compensation expense on a straight-line basis over the requisite service period. Compensation expense relating to awards subject to performance conditions is recognized if it is probable that the performance goals will be achieved on a straight-line basis through the anticipated achievement date of the performance objectives. The
probability of achievement is assessed on a quarterly basis. The total number of awards expected to vest is adjusted for estimated forfeitures. We have elected to use the simplified method to calculate the beginning pool of excess tax benefits.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, becomes effective for us in the first quarter of fiscal year 2018, but allows us to adopt the standard one year earlier. We currently plan to adopt ASU 2014-09 in the first quarter of fiscal year 2018. ASU 2014-09 also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting ASU 2014-09 using the modified retrospective method.
The core principle of ASU 2014-09 is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. generally accepted accounting pronouncements. We do not expect that ASU 2014-09 will have a material impact on the recognition of revenue from product sales. We are still in the process of evaluating the effect that this guidance will have on revenue recognition from our collaboration agreements such as our arrangements with Ipsen and Genentech. We expect our evaluation to be completed by the end of the second quarter of 2017.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 was effective for all interim and annual reporting periods beginning after December 15, 2015 and therefore we adopted ASU 2015-05 in 2016 on a prospective basis. The adoption of ASU 2015-05 did not have a material impact on our Consolidated Financial Statements during the period of adoption and is not expected to have a material effect on our Consolidated Financial Statements in future periods.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory, (“ASU No. 2015-11”). ASU No. 2015-11 requires inventory measurement at the lower of cost and net realizable value. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted by all entities as of the beginning of an interim or annual reporting period. We are in the process of assessing the impact, if any, of ASU No. 2015-11 on our Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), (“ASU 2016-02”). Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. ASU 2016-02 will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. ASU 2016-02 is effective for us for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We are in the process of assessing the impact of ASU No. 2016-02 on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”). ASU 2016-09 is aimed at the simplification of several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for all interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material impact on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon
debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing and contingent consideration payments made after a business combination. ASU 2016-15 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2016-18 to have a material impact on our Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“ASU 2017-04”). ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2017-04 to have a material impact on our Consolidated Financial Statements.
NOTE 2. COLLABORATION AGREEMENTS
Cabozantinib Collaborations
Ipsen Collaboration
In February 2016, we entered into a collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the collaboration agreement, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the U.S., Canada and Japan. The collaboration agreement was subsequently amended in December 2016 to include commercialization rights in Canada (the “Amendment”).Canada. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications. The parties’ efforts are governed through a joint steering committee and appropriate subcommittees established to guide and oversee the collaboration’s operation and strategic direction; provided, however, that we retain final decision-making authority with respect to cabozantinib’s ongoing development.
In consideration for the exclusive license and other rights contained in the collaboration and license agreement, including commercialization rights in Canada, Ipsen paid us anaggregate upfront nonrefundable payment of $200.0 million in March 2016. Additionally, as a result of the Amendment, we received a $10.0 million upfront nonrefundable payment from Ipsen in December 2016. As a result of the approval of cabozantinib in second-line RCC by the European Commission in September 2016, we received a $60.0 million milestone in November 2016. We are also eligible to receive additional development and regulatory milestones, totaling up to $254.0 million, including, milestone payments of $10.0 million and $40.0 million upon the filing and the approval of cabozantinib in second-line hepatocellular carcinoma (“HCC”) with the European Medicines Agency (“EMA”), and additional milestones for other future indications and/or jurisdictions. In the fourth quarter of 2016 we achieved two $10.0 million milestones for the first commercial sales of CABOMETYX in Germany and the United Kingdom. The collaboration agreement also provides that we will be eligible to receive contingent payments of up to $544.7 million associated with the achievement of specified levels of Ipsen sales to end users. We will also receive royalties on net sales of cabozantinib outside of the U.S. and Japan. We will receive a 2% royalty on the initial $50.0 million of net sales, and a 12% royalty on the next $100.0 million of net sales. After the initial $150.0 million of sales, we will receive a tiered royalty of 22% to 26% on annual net sales; these tiers will reset each calendar year. We are primarily responsible for funding cabozantinib related development costs for existing trials; global development costs for potential future trials will be shared between the parties, with Ipsen to reimburse us for 35% of such costs. Pursuant to the terms of the collaboration agreement, we will remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. As part of the collaboration agreement, we entered into a supply agreement which provides that through the end of the second quarter of 2018, we will supply finished, labeled product to Ipsen for distribution in the territories outside of the U.S. and Japan at our cost, as defined in the agreement, which excludes, among other items, the 3% royalty we are required to pay GlaxoSmithKline on Ipsen’s Net Sales of any product incorporating cabozantinib. From the end of the second quarter of 2018 forward, we will continue to manufacture cabozantinib tablets and capsules while Ipsen will be responsible for packaging and labeling the products in territories where they have been approved outside of the U.S. and Japan, as applicable.
$210.0 million. The collaboration agreement contains multiple elements, and the deliverables under the collaboration agreement consistconsisting of intellectual property licenses, delivery of products and/or materials containing cabozantinib to Ipsen for all development and commercial activities, research and development services, and participation on the joint steering, development and developmentcommercialization committees (as defined in the collaboration agreement). These deliverables are non-contingent in nature. We determined that these deliverables do not have stand-alone value because each one of them has value only if we meet our obligation to provide Ipsen with cabozantinib, which is deemed to be the predominant deliverable under the collaboration agreement. We also determined that the level of effort required of us to meet our obligations under the collaboration agreement is not expected to vary significantly over the life of the collaboration agreement. Accordingly, weand accordingly, combined these deliverables into a single unit of accounting and allocated the entire arrangement consideration to that combined unit of accounting. As a result, the aggregate upfront payment of $200.0$210.0 million received in the first quarter of 2016 and the $10.0 million upfront payment received in December 2016 in consideration for the development and commercialization rights in Canada are beinghas been recognized ratably over the remaining term of the collaboration agreement. The collaboration agreement, continues through early 2030, which is the current estimated patent expiration of cabozantinib in the European Union.Union (“EU”). At the time we entered into the collaboration agreement, we also determined that the $60.0 million milestone we achieved in September 2016 upon the approval of cabozantinib by the ECEuropean Commission in second-linepreviously treated advanced RCC was not substantive due to the relatively low degree of uncertainty and relatively low amount of effort required on our part to achieve the milestone as of the date of the collaboration agreement; the $60.0 million was deferred as of the date of the EMA’s approval of cabozantinib in second-line RCC in September 2016 and is beinghas been recognized ratably over the remainingremainder of the term of the Ipsen collaboration agreement. The two $10.0 million milestones forWe will adopt ASU 2014-09 using the modified retrospective method in the first commercial salesquarter of CABOMETYXfiscal year 2018, which will materially impact the timing of recognition of revenue for our collaboration agreement with Ipsen. For information on our adoption of ASU 2014-09, see “Note 1. Organization and Summary of Significant Accounting Policies” in Germany and the United Kingdom were determined“Notes to be substantive atConsolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
At the time we entered into the collaboration agreement and were recognized as collaboration revenues in the fourth quarter of 2016. Wewe determined that the remaining development and regulatory milestones are substantive and will be recognized as revenue in the periods in which they are achieved. We have achieved additional milestones of $45.0 million and $20.0 million during the years ended December 31, 2017 and 2016, respectively. We are also eligible to receive future development and regulatory milestone payments, totaling up to an additional $209.0 million, including milestone payments of $10.0 million and $40.0 million upon European Medicines Agency (“EMA”) filing and the approval of cabozantinib as a treatment for patients with previously treated advanced hepatocellular carcinoma (“HCC”) and additional milestone payments for other future indications and/or jurisdictions. The collaboration agreement also provides that we will be eligible to receive contingent payments of up to $546.0 million associated with the achievement of specified levels of Ipsen sales to end users. We consider the contingent payments due to
us upon the achievement of specified sales volumes to be similar to royalty payments. We will also receive royalties on net sales of cabozantinib by Ipsen outside of the U.S. and Japan. Excluding Ipsen sales in Canada, we received a 2% royalty on the initial $50.0 million of net sales, which was achieved in the fourth quarter of 2017, and are entitled to receive a 12% royalty on the next $100.0 million of net sales, and following this initial $150.0 million of net sales, we are then entitled to receive a tiered royalty of 22% to 26% on annual net sales. These tiers will reset each calendar year. In Canada, we are entitled to receive a tiered royalty of 22% on the first CAD$30.0 million of annual net sales and a tiered royalty thereafter, up to 26% on annual net sales; these tiers will also reset each calendar year.
We are primarily responsible for funding cabozantinib-related development costs for those trials in existence at the time we entered into the collaboration agreement with Ipsen; global development costs for additional trials are shared between the parties, with Ipsen reimbursing us for 35% of such costs, provided Ipsen chooses to opt into such trials. In accordance with the collaboration agreement, Ipsen has opted into and is co-funding: CheckMate 9ER, the phase 3 pivotal trial evaluating the combination of cabozantinib with nivolumab versus sunitinib in patients with previously untreated, advanced or metastatic RCC being conducted in collaboration with Bristol-Myers Squibb Company (“BMS”); CheckMate 040, the phase 1/2 study evaluating the combination of cabozantinib with nivolumab in patients with both previously treated and previously untreated advanced HCC being conducted in collaboration with BMS (though Ipsen will not be co-funding the triplet arm of the study evaluating cabozantinib with nivolumab and ipilimumab); and the phase 1b trial evaluating cabozantinib in combination with atezolizumab in locally advanced or metastatic solid tumors being conducted in collaboration with Roche. We will record reimbursements for development costs as revenue as the development services represent a part of our ongoing major or central operations. As a result of a change in operational responsibilities for certain clinical programs, in March 2017, we reclassified $9.0 million of deferred revenue to Accrued collaboration liabilities and accordingly adjusted our amortization of the aggregate upfront payment of $210.0 million. As of December 31, 2017, we had paid $3.9 million toward the $9.0 million of reimbursements due to Ipsen for these clinical programs.
We remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. In connection with the collaboration agreement, we entered into a supply agreement with Ipsen in February 2016, which, pursuant to its amended terms, effective October 2017, we will supply finished, labeled drug product to Ipsen for distribution in the territories outside of the U.S. and Japan, indefinitely. The product will be supplied at our cost, as defined in the agreement, which excludes the 3% royalty we are required to pay GSK on Ipsen’s net sales of any product incorporating cabozantinib.
Unless terminated earlier, the collaboration agreement has a term that continues, on a product-by-product and country-by-country basis, until the latter of (i) the expiration of patent claims related to cabozantinib, (ii) the expiration of regulatory exclusivity covering cabozantinib or (iii) ten years after the first commercial sale of cabozantinib, other than COMETRIQ. The supply agreement will continue in effect until expiration or termination of the collaboration agreement. The collaboration agreement may be terminated for cause by either party based on uncured material breach of either the collaboration agreement or the supply agreement by the other party, bankruptcy of the other party or for safety reasons. We may terminate the collaboration agreement if Ipsen challenges or opposes any patent covered by the collaboration agreement. Ipsen may terminate the collaboration agreement if the U.S. Food and Drug Administration (“FDA”) or EMA orders or requires substantially all cabozantinib clinical trials to be terminated. Ipsen also has the right to terminate the collaboration agreement on a region-by-region basis after the first commercial sale of cabozantinib in advanced RCC in the given region. Upon termination by either party, all licenses granted by us to Ipsen will automatically terminate, and, except in the event of a termination by Ipsen for our material breach, the licenses granted by Ipsen to us shall survive such termination and shall automatically become worldwide, or, if Ipsen terminated only for a particular region, then for the terminated region. Following termination by us for Ipsen’s material breach, or termination by Ipsen without cause or because we undergo a change of control by a party engaged in a competing program, Ipsen is prohibited from competing with us for a period of time.
Collaboration revenues under the collaboration agreement with Ipsen were as follows (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| Milestones achieved | $ | 45,000 |
| | $ | 20,000 |
|
| Amortization of upfront payments and deferred milestone | 18,531 |
| | 13,284 |
|
| Royalty revenue | 3,831 |
| | 175 |
|
| Development cost reimbursements | 4,417 |
| | — |
|
| Product supply agreement revenue | 6,390 |
| | 1,612 |
|
| Cost of supplied product | (6,390 | ) | | (1,555 | ) |
| Royalty payable to GSK on net sales by Ipsen | (1,987 | ) | | (264 | ) |
| Collaboration revenues under the collaboration agreement with Ipsen | $ | 69,792 |
| | $ | 33,252 |
|
There were no such revenues for the year ended December 31, 2015. As of December 31, 2017, short-term and long-term deferred revenue relating to the collaboration agreement was $19.0 million and $210.2 million, respectively.
Takeda Collaboration
In January 2017, we entered into a collaboration and license agreement with Takeda for the commercialization and further clinical development of cabozantinib in Japan. Pursuant to the terms of the collaboration agreement, Takeda has exclusive commercialization rights for current and potential future cabozantinib indications in Japan. The parties have also agreed to collaborate on the future clinical development of cabozantinib in Japan. The operation and strategic direction of the parties’ collaboration is governed through a joint executive committee and appropriate subcommittees.
In consideration for the exclusive license and other rights contained in the collaboration agreement, we received a $50.0 million upfront nonrefundable payment from Takeda. The collaboration agreement contains multiple deliverables consisting of intellectual property licenses, delivery of products and/or materials containing cabozantinib to Takeda for all development and commercial activities, research and development services, and participation on the joint executive, development and commercialization committees (as defined in the collaboration agreement). We determined that these deliverables, other than the commercial supply and joint commercialization committee participation, are non-contingent in nature. The commercial supply deliverable was deemed contingent, primarily due to the fact that there is uncertainty around approval in Japan, which is dependent on successful clinical trial results from a study in Japanese patients. We also determined that the non-contingent deliverables do not have stand-alone value, because each one of them has value only if we meet our obligation as a whole to provide Takeda with research and development services, including clinical supply of cabozantinib under the collaboration agreement. Accordingly, we combined the non-contingent deliverables into a single unit of accounting and allocated the $50.0 million upfront fee to that combined unit of accounting. We also determined that the level of effort required of us to meet our obligations under the collaboration agreement is not expected to vary significantly over the development period of the collaboration agreement. As a result, the upfront payment of $50.0 million, received in the first quarter of 2017, has been recognized ratably over the development period of the collaboration agreement of approximately four years. We will adopt ASU 2014-09 using the modified retrospective method in the first quarter of fiscal year 2018, which will materially impact the timing of recognition of revenue for our collaboration agreement with Takeda. For information on our adoption of ASU 2014-09, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
We are eligible to receive development, regulatory and first-sale milestone payments of up to $95.0 million related to second-line RCC, first-line RCC and second-line HCC, as well as additional development, regulatory and first-sale milestones payments for potential future indications. We determined that the development and regulatory milestones are substantive and will be recognized as revenue in the periods in which they are achieved. The collaboration agreement also provides that we are eligible to receive pre-specified payments of up to $83.0 million associated with potential sales milestones. We consider the contingent payments due to us upon the achievement of specified sales volumes to be similar to royalty payments. SubsequentWe will also receive royalties on net sales of cabozantinib in Japan. We are entitled to February 29, 2016,receive a tiered royalty of 15% to 24% on the initial $300.0 million of net sales, and after the initial $300.0 million of net sales, we transferredare then entitled to receive a tiered royalty of 20% to 30% on annual net sales. These tiers will reset each calendar year.
Takeda is responsible for 20% of the intellectual property rights to Ipsen,costs associated with the global cabozantinib development plan’s current and participated in regulatory filingfuture trials, provided Takeda opts into such trials, and 100% of costs associated with the cabozantinib development activities and planningthat are exclusively for the production, delivery and distributionbenefit of manufactured product. As a result of these activities, we beganJapan. Pursuant to recognizethe terms of the upfront paymentcollaboration agreement, we are responsible for the manufacture and supply of cabozantinib for all development and commercialization activities under the collaboration, and consequently, we entered into a clinical supply agreement covering the manufacture and supply of cabozantinib to Takeda, as well as a quality agreement setting forth, in detail, the quality assurance arrangements and procedures for our manufacture of cabozantinib. We will record reimbursements for development costs as revenue as the development services represent a part of our ongoing major or central operations.
Unless earlier terminated, the collaboration agreement has a term that continues, on a product-by-product basis, until the earlier of (i) two years after first generic entry with respect to such product in Japan or (ii) the later of (A) the expiration of patent claims related to cabozantinib and (B) the expiration of regulatory exclusivity covering cabozantinib in Japan. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. For clarity, Takeda’s failure to achieve specified levels of commercial performance, based upon sales volume and/or promotional effort, during the first six years of the collaboration shall constitute a material breach of the collaboration agreement. We may terminate the agreement if Takeda challenges or opposes any patent covered by the collaboration agreement. At any time prior to August 1, 2023, the parties may mutually agree to terminate the collaboration agreement if Japan’s Pharmaceuticals and Medical Devices Agency is unlikely to grant any approval of the marketing authorization application in any cancer indication in Japan. After the commercial launch of cabozantinib in Japan, Takeda may terminate the collaboration agreement upon twelve months’ prior written notice following the third anniversary of the first commercial sale of cabozantinib in Japan. Upon termination by either party, all licenses granted by us to Takeda will automatically terminate, and the licenses granted by Takeda to us shall survive such termination and shall automatically become worldwide.
Collaboration revenues under the collaboration agreement at that time.
During the year ended December 31, 2016, collaboration revenues under the collaboration agreementwith Takeda were as follows (in thousands):
|
| | | |
| | Year Ended December 31, 2016 |
| Milestones achieved | $ | 20,000 |
|
| Amortization of upfront payments and deferred milestone | 13,284 |
|
| Royalty revenue | 175 |
|
| Product supply agreement revenue | 1,612 |
|
| Cost of supplied product | (1,555 | ) |
| Royalty payable to GlaxoSmithKline on net sales by Ipsen | (264 | ) |
| Collaboration revenues under the collaboration agreement | $ | 33,252 |
|
|
| | | |
| | Year Ended December 31, 2017 |
| Amortization of upfront payment | $ | 10,377 |
|
| Development cost reimbursements | 4,320 |
|
| Product supply agreement revenue | 82 |
|
| Collaboration revenues under the collaboration agreement with Takeda | $ | 14,779 |
|
There were no such revenues for the year ended December 31, 2016 or 2015. As of December 31, 2016,2017, short-term and long-term deferred revenue relating to the collaboration agreement was $19.6$11.3 million and $237.1$28.3 million, respectively.
In connection with the establishment of the collaboration agreement, we provided Sobi with a notice of termination of our distribution and commercialization agreement for COMETRIQ. Effective November 1, 2016, Ipsen became responsible for the distribution and commercialization of COMETRIQ for the approved medullary thyroid carcinoma indication in territories previously supported by Sobi. Pursuant to our commercialization agreement with Sobi, we were required to pay a $2.9 million termination fee during the year ended December 31, 2016, which was included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. Additionally, we were also required to issue a $0.4 million credit for unsold product to Sobi during the year ended December 31, 2016, which is included as a reduction of Net product revenues in the accompanying Consolidated Statements of Operations.
Cobimetinib Collaboration
Genentech Collaboration
In December 2006, we out-licensed the further development and commercialization of cobimetinib to Genentech pursuant to a worldwide collaboration agreement. The FDA approved cobimetinib in the U.S. under the brand name Cotellic on November 10, 2015. It is indicated in combination with Zelboraf as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. Cotellic in combination with Zelboraf has also been approved in Switzerland, the European Union, Canada, Australia and Brazil for use in the same indication. Under the terms of the collaboration agreement, we were responsible for developing cobimetinib through the determination of the maximum-tolerated dose in a phase 1 clinical trial, and Genentech had the option to co-develop cobimetinib, which Genentech could exercise after receipt of certain phase 1 data from us. In March 2008, Genentech exercised its option to co-develop cobimetinib. Incobimetinib, and in March 2009, we granted to Genentech an exclusive worldwide revenue-bearing license to cobimetinib, at which point Genentech became responsible for completing the phase 1 clinical trial and subsequent clinical development.
On November 10, 2015, the FDA approved cobimetinib, under the brand name COTELLIC, in combination with Zelboraf as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. COTELLIC in combination with Zelboraf has also been approved in Switzerland, the EU, Canada, Australia, Brazil and multiple additional countries for use in the same indication. Prior to the FDA’s approval of COTELLIC, in November 2013, we exercised an option under the collaboration agreement to co-promote COTELLIC in the U.S., which allowed us to provide up to 25% of the total sales force for approved cobimentinib indications in the U.S. Between November 2015 and December 2017, we fielded 25% of the sales force promoting COTELLIC in combination with Zelboraf as a treatment for patients with BRAF mutation-positive advanced melanoma in the U.S. However, following a recent commercial review, commencing in January 2018, we and Genentech scaled back the personal promotion of COTELLIC in this indication in the U.S. This decision is not indicative of
any change in our intention to promote COTELLIC for other therapeutic indications for which it may be approved in the future.
Under the terms of our collaboration agreement, with Genentech for cobimetinib,as amended in July 2017, we are entitled to a share of U.S.in the profits and losses received or incurred in connection with COTELLIC’s commercialization of cobimetinib. Thein the U.S. This profit and loss share has multiple tiers: we are entitled toreceive 50% of profits and losses from the first $200.0 million of U.S. actual sales, decreasing to 30% of profits and losses from U.S. actual sales in excess of $400.0 million. These tiers will reset each calendar year. The revenue for each sale of COTELLIC applied to the profit and loss statement for the collaboration agreement (the “Genentech Collaboration P&L”) is calculated using the average of the quarterly net selling prices of COTELLIC and any additional branded Genentech product(s) prescribed with COTELLIC in such sale. U.S. commercialization costs for COTELLIC are then applied to the Genentech Collaboration P&L, subject to reduction based on the number of Genentech products in any given combination including COTELLIC. In addition to our profit share in the U.S., under the terms of the collaboration agreement, we are entitled to low double-digit royalties on ex-U.S. net sales. In November 2013,sales of COTELLIC outside the U.S.
Unless earlier terminated, the collaboration agreement has a term that continues until the expiration of the last payment obligation with respect to the licensed products under the collaboration. Genentech has the right to terminate the collaboration agreement without cause at any time. If Genentech terminates the collaboration agreement without cause, all licenses that were granted to Genentech under the agreement terminate and revert to us. Additionally, if Genentech terminates the collaboration agreement without cause, or we exercised an optionterminate the collaboration agreement for cause, we would receive, subject to certain conditions, licenses from Genentech to research, develop and commercialize reverted product candidates. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party.
Collaboration revenues and U.S. (loss) net cost recovery under the collaboration agreement to co-promote in the U.S. Following the approval of Cotellic in the U.S. in November 2015, we began fielding 25% of the sales force promoting Cotellic in combination with Zelborafwere as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma.follows (in thousands):
On June 3, 2016, following a 30 day dispute resolution period, we filed a demand for arbitration asserting claims against Genentech related to its clinical development, pricing and commercialization of Cotellic, and cost and revenue allocations in connection with Cotellic’s commercialization in the United States. Soon thereafter, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest related to the cost allocations under the collaboration agreement. On |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Collaboration revenues: | | | | | |
| Royalty revenues on ex-U.S. sales of COTELLIC | $ | 6,398 |
| | $ | 2,827 |
| | $ | 14 |
|
| U.S. (loss) net cost recovery under the collaboration agreement included in Selling, general and administrative expenses | $ | (2,140 | ) | | $ | 8,771 |
| | $ | (16,600 | ) |
In December 29, 2016 Genentech withdrew its counterclaim against us in the ongoing JAMS arbitration concerning alleged breaches of the parties’ collaboration agreement. When notifying the arbitral panel and us of this unilateral action, Genentech further stated that it changed, both retroactively and prospectively, the manner in which it allocates promotional expenses of the CotellicCOTELLIC plus Zelboraf combination therapy. As a result of Genentech’s decision to change its cost allocation approach, we arewere relieved of our obligation to pay $18.7 million ofcertain disputed costs that had been accrued by us as of September 30, 2016. We have invoicedus; we were also able to invoice Genentech for certain expenses, with interest, that we had previously paid. Accordingly, during the year ended December 31, 2016, we offset Selling, general and administrative expenses with a $13.3 million recovery forof disputed losses that we had been recognized and recorded prior to 2016. During the year ended December 31, 2016 weand also recognized a loss under the collaboration agreement of $4.5 million for 2016 activities, under the collaboration agreement as computed under Genentech’s revised cost allocation approach. Taken together, we have recordedresulting in a net cost recovery of $8.8 million during the year ended December 31, 2016 under the collaboration agreement.
During the years ended December 31, 2016, 2015 and 2014, collaboration revenues and (loss) net cost recovery under the collaboration agreement were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Collaboration revenues: | | | | | |
| Royalty revenues on ex-U.S. sales of COTELLIC | $ | 2,827 |
| | $ | 14 |
| | $ | — |
|
| (Loss) net cost recovery under the collaboration agreement included in Selling, general and administrative expenses | $ | 8,771 |
| | $ | (16,600 | ) |
| $ | (2,916 | ) |
The (loss) net cost recovery under the collaboration agreement includes personnel and other costs we have incurred to co-promote Cotellic plus Zelboraf in the U.S. As of December 31, 2015, a portion of the liability for those costs, identified as Accrued collaboration liability on the accompanying Consolidated Balance Sheets, included commercialization expenses that Genentech had allocated to the collaboration but remained under discussion between us and Genentech.million.
Other Collaborations
We have established collaborations with other leading pharmaceutical and biotechnology companies, including BMS, Daiichi Sankyo Company Limited (“Daiichi Sankyo”), Roche, Merck (known as MSD outside of the U.S. and Canada), Bristol-Myers Squibb Company (“BMS”), and Sanofi, and GlaxoSmithKline, for various compounds and programs in our portfolio.
Pursuant to these collaborations, we have fully out-licensed compounds or programs to a partner for further development and commercialization. Under each of our collaborations, we are entitled to receive milestones and royalties.
With respect to our partnered compounds, other than cabozantinib and cobimetinib, we are eligible to receive potential contingent payments totaling approximately $2.2$1.9 billion in the aggregate on a non-risk adjusted basis, of which 9% are related to clinical development milestones, 42%49% are related to regulatory milestones and 49%42% are related to commercial milestones, all to be achieved by the various licensees, which may not be paid, if at all, until certain conditions are met.
Daiichi Sankyo
In March 2006, we entered into a collaboration agreement with Daiichi Sankyo for the discovery, development and commercialization of novel therapies targeted against the mineralocorticoid receptor (“MR”), a nuclear hormone receptor
implicated in a variety of cardiovascular and metabolic diseases. Under the terms of the agreement, we granted to Daiichi Sankyo an exclusive, worldwide license to certain intellectual property primarily relating to compounds that modulate MR, including CS-3150/esaxerenone (a specific rotational isomer of XL550). Daiichi Sankyo is responsible for all further preclinical and clinical development, regulatory, manufacturing and commercialization activities for the compounds and we do not have rights to reacquire such compounds, except as described below. In September 2017, Daiichi Sankyo reported positive top-line results from the phase 3 pivotal trial of CS-3150/esaxerenone and communicated its intention to submit a Japanese regulatory application for CS-3150/esaxerenone for an essential hypertension indication in the first quarter of 2018.
We are eligible to receive additional development, regulatory and commercialization milestone payments of up to $130.0 million. In addition, we are also entitled to receive royalties on any sales of certain products commercialized under the collaboration. Daiichi Sankyo may terminate the agreement upon ninety days’ written notice in which case Daiichi Sankyo’s payment obligations would cease, its license relating to compounds that modulate MR would terminate and revert to us and we would receive, subject to certain terms and conditions, licenses from Daiichi Sankyo to research, develop and commercialize compounds that were discovered under the collaboration.
We recognized contract revenues of $15.0 million fromfor milestone payments during the year ended December 31, 2016 under our collaboration agreement with Daiichi Sankyo. We did not recognize any such revenue during the years ended December 31, 20152017 or 2015.
The Roche Group Collaboration
In February 2017, we established a clinical trial collaboration with The Roche Group (“Roche”) for the purpose of evaluating the safety and 2014.tolerability of cabozantinib in combination with Roche’s atezolizumab in patients with locally advanced or metastatic solid tumors. Each party is responsible for supplying drug product for the applicable clinical trial in accordance with the terms of the clinical supply agreement entered into by the parties in February 2017. Based on the dose-escalation results, the trial has the potential to enroll up to four expansion cohorts, including a cohort of patients with previously untreated advanced clear cell RCC and three cohorts of urothelial carcinoma, namely platinum eligible first-line patients, first or second-line platinum ineligible patients and patients previously treated with platinum-containing chemotherapy. The trial was initiated in June 2017 and is open for enrollment. We are the sponsor of the trial, and Roche is responsible for supplying atezolizumab to us. Ipsen has opted to participate in the study and will have access to the results to support potential future development in its territories.
Merck
In December 2011, we entered into an agreement with Merck pursuant to which we granted Merck an exclusive worldwide license to our PI3K-deltaphosphoinositide-3 kinase-delta (“PI3K-d”) program, including XL499 and other related compounds. Pursuant to the terms of the agreement, Merck has sole responsibility to research, develop, and commercialize compounds from our PI3K-d program. The agreement became effective in December 2011.
We will beare eligible to receive additional payments associated with the successful achievement of potential development and regulatory milestones for multiple indications of up to $231.0 million. We will also be eligible to receive payments for combined sales performance milestones of up to $375.0 million and royalties on net-sales of products emerging from the agreement. Contingent payments associated with milestones achieved
Merck may at any time, upon specified prior notice to us, terminate the license. In addition, either party may terminate the agreement for the other party’s uncured material breach. In the event of termination by Merck at will or by us for Merck’s uncured material breach, the license granted to Merck would terminate. In the event of a termination by us for Merck’s uncured material breach, we would receive a royalty-free license from Merck to develop and commercialize certain joint products. In the event of termination by Merck for our uncured material breach, Merck would retain the licenses from us, and we would receive reduced royalties are payablefrom Merck on compounds emerging from our PI3K-d program or from certain compounds that arise from Merck’s internal discovery efforts targeting PI3K-d during a certain period.commercial sales of products.
We recognized contract revenues of $5.0 million and $3.0 million fromfor milestone payments during the years ended December 31, 2016 and 2015, respectively, under our collaboration agreement with Merck. We did not recognize any such revenue during the year ended December 31, 2014.2017.
Bristol-Myers Squibb
Previously Untreated Advanced RCC, Bladder Cancer and Previously Treated HCC Combination Studies
In February 2017, we entered into a clinical trial collaboration agreement with BMS for the purpose of evaluating the combination of cabozantinib and nivolumab with or without ipilimumab in various tumor types, including, in RCC, HCC and bladder cancer. To date, CheckMate 9ER, a phase 3 pivotal trial in previously untreated, advanced or metastatic RCC, and CheckMate 040, a phase 1/2 trial in both previously treated and previously untreated advanced HCC evaluating these combinations has been initiated. Pursuant to the terms of the collaboration agreement, each party will grant to the other a non-exclusive, worldwide (within the collaboration territory as defined in the collaboration agreement), non-transferable, royalty-free license to use the other party’s compounds in the conduct of each clinical trial. The parties’ efforts are governed through a joint development committee established to guide and oversee the collaboration’s operation. Each trial will be conducted under a combination Investigational New Drug Application, unless otherwise required by a regulatory authority. Each party will be responsible for supplying drug product for the applicable clinical trial in accordance with the terms of the supply agreement entered into between the parties in April 2017, and costs for each such trial will be shared equally between the parties, unless two BMS compounds will be utilized in such trial, in which case BMS will bear two-thirds of the costs and we will bear one-third of the costs for such study treatment arms. Unless earlier terminated, the BMS collaboration agreement will remain in effect until the completion of all clinical trials under the collaboration, all related trial data has been delivered to both parties and the completion of any then agreed upon analysis. Ipsen has opted in to participate in both trials (though Ipsen will not be co-funding the triplet arm of the study evaluating cabozantinib with nivolumab and ipilimumab) and will have access to the results to support potential future regulatory submissions. Ipsen may also participate in future studies at its choosing.
ROR Collaboration Agreement
In October 2010, we entered into a worldwide collaboration with BMS pursuant to which each party granted to the other certain intellectual property licenses to enable the parties to discover, optimize and characterize ROR antagonists that may subsequently be developed and commercialized by BMS. SinceUnder the terms of the collaboration agreement, we were responsible for activities related to the discovery, optimization and characterization of the ROR antagonists during the collaborative research period which began on October 8, 2010 and ended inon July 2013,8, 2013. Since the end of the collaborative research period, BMS has and will continue to have sole responsibility for any further research, development, manufacture and commercialization of products developed under the collaboration and will bear all costs and expenses associated with those activities.
For each product developed by BMS under the collaboration, we will beWe are eligible to receive payments upon the achievement by BMS offor additional development and regulatory milestonesmilestone payments of up to $252.5$240.0 million in the aggregate and
commercialization milestones of up to $150.0 million in the aggregate, as well as royalties on commercial net sales, depending on the advancement of the product candidate and eventual product.
The collaboration agreement was amended and restated in April 2011 in connection with an assignment of patents to a wholly-owned subsidiary. BMS may, at any time, terminate the collaboration agreement upon certain prior notice to us on a product-by-product and country-by-country basis. In addition, either party may terminate the agreement for the other party’s uncured material breach. In the event of termination by BMS at will or by us for BMS’s uncured material breach, the license granted to BMS would terminate, the right to such products.product would revert to us and we would receive a royalty-bearing license for late-stage reverted compounds and a royalty-free license for early-stage reverted compounds from BMS to develop and commercialize such product in the related country. In the event of termination by BMS for our uncured material breach, BMS would retain the right to such product, subject to continued payment of milestones and royalties.
We did not any recognize any revenuerecognized contract revenues of $12.5 million for milestone payments during the year ended December 31, 2017 under our ROR collaboration agreement with BMS during the three years ended December 31, 2016.
LXR CollaborationAgreement
In December 2005, we entered into a collaboration agreement with BMS for the discovery, development and commercialization of novel therapies targeted against LXR, a nuclear hormone receptor implicated in a variety of cardiovascular and metabolic disorders. This agreement became effective in January 2006, at which time we granted BMS an exclusive worldwide license with respect to certain intellectual property primarily relating to compounds that modulate LXR. The research term expired in January 2010 and we transferred the technology to BMS in 2011 to enable it to continue the LXR program. We have been advised that BMS is continuing additional preclinical research on the program.
Under the collaboration agreement, BMS is required to pay us contingent amounts associated with development and regulatory milestones of up to $53.0 million per product for up to two products from the collaboration. In addition, we are also entitled to receive payments associated with sales milestones of up to $310.0 million and royalties on sales of any products commercialized under the collaboration.
BMS. We did not recognize any such revenue under our LXR collaboration agreement with BMS during the three years ended December 31, 2016.2016 or 2015.
Sanofi
In May 2009, we entered into a global license agreement with Sanofi for SAR245408 (XL147) and SAR245409 (XL765), leading inhibitors of phosphoinositide-3 kinase (“PI3K”), and a broad collaboration for the discovery of inhibitors of PI3K for the treatment of cancer. The license agreement and collaboration agreement became effective on July 7, 2009.
Under the license agreement, Sanofi received a worldwide exclusive license to SAR245408 (XL147) and SAR245409 (XL765), which entered into a series of phase 1, phase 1b/2 or phase 2 clinical trials, and has sole responsibility, including
funding, for all subsequent clinical, regulatory, commercial and manufacturing activities. We will bewere notified by Sanofi that the initial clinical trials involving XL147 or XL765 have been terminated or are in the process of concluding, and that Sanofi is still considering whether to initiate any further trials. We are eligible to receive contingent payments associated with development, regulatory and commercial milestones under the license agreement of $745.0 million in the aggregate, as well as royalties on sales of any products commercialized under the license. Sanofi may, upon certain prior notice to us, terminate the license as to products containing SAR245408 (XL147) and SAR245409 (XL765). In the event of such termination election, Sanofi’s license relating to such product would terminate and revert to us, and we would receive, subject to certain terms, conditions and potential payment obligations, licenses from Sanofi to research, develop and commercialize such products.
We did not recognize any revenue under our collaboration agreement with Sanofi during the three years ended December 31, 2016.2017, 2016 and 2015.
GlaxoSmithKline
In October 2002, we established a collaboration with GlaxoSmithKlineGSK to discover and develop novel therapeutics in the areas of vascular biology, inflammatory disease and oncology. Under the terms of the product development and commercialization agreement, GlaxoSmithKlineGSK had the right to choose cabozantinib for further development and commercialization, but notified us in October 2008 that it had waived its right to select the compound for such activities. As a result, we retained the rights to develop, commercialize, and license cabozantinib, subject to payment to GlaxoSmithKlineGSK of a 3% royalty on net sales of any product incorporating cabozantinib. The product development and commercialization agreement was terminated during 2014, although GlaxoSmithKlineGSK will continue to be entitled to a 3% royalty on net sales by us or our collaboration partners of any product incorporating cabozantinib, including COMETRIQ and CABOMETYX.
InRoyalties accruing to GSK in connection with the sales of COMETRIQ and CABOMETYX during the years ended December 31, 2016, 2015 and 2014 we recorded $4.3 million, $1.0 million and $0.7 million, respectively, in royalties payablewere as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Royalties accruing to GSK | $ | 12,413 |
| | $ | 4,334 |
| | $ | 1,029 |
|
Royalties accruing to GlaxoSmithKline. Royalty expense isGSK are included in Cost of goods sold for net sales by us and as a reduction of Collaboration revenuerevenues for net sales by Ipsen inon the accompanying Consolidated Statements of Operations.
NOTE 3. RESTRUCTURINGS
Between March 2010 and May 2013, we implemented five restructurings (which we refer to collectively as the “2010 Restructurings”) to manage costs and as a consequence of our decision in 2010 to focus our proprietary resources and development efforts on the development and commercialization of cabozantinib. The aggregate reduction in headcount from the 2010 Restructurings was 429 employees. Charges and credits related to the 2010 Restructurings were recorded in periods other than those in which the 2010 Restructurings were implemented as a result of sublease activities for certain of our buildings in South San Francisco, California, changes in assumptions regarding anticipated sublease activities, the effect of the passage of time on our discounted cash flow computations, previously planned employee terminations, and sales of excess equipment and other assets.
In September 2014, as a consequence of the failure of COMET-1, one of our two phase 3 pivotal trials of cabozantinib in metastatic castration-resistant prostate cancer, we initiated a restructuring (which we refer to as the “2014 Restructuring”) to reduce our workforce. The aggregate reduction in headcount from the 2014 Restructuring was 143 employees. The principal objective of the 2014 Restructuring was to enable us to focus our financial resources on the phase 3 pivotal trials of cabozantinib in advanced RCC and advanced HCC.
The total outstanding current and long-term restructuring liability is included in Other current liabilities and Other long-term liabilities, respectively, on the accompanying Consolidated Balance Sheets. The changes of these liabilities and the cumulative restructuring charge from inception to date are summarized in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 Restructurings | | 2014 Restructuring | | |
| | Facility
Charges | | Other | | Employee Severance and Other Benefits | | Facility
Charges | | Other | | Total |
| Restructuring liability as of December 31, 2013 | $ | 13,460 |
| | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13,472 |
|
| Restructuring charge (recovery) | 1,626 |
| | (117 | ) | | 5,775 |
| | 65 |
| | 247 |
| | 7,596 |
|
| Proceeds from sale of assets | — |
| | 199 |
| | — |
| | — |
| | 100 |
| | 299 |
|
| Other cash payments, net | (5,644 | ) | | (8 | ) | | (4,507 | ) | | (65 | ) | | (12 | ) | | (10,236 | ) |
| Other items | 12 |
| | (86 | ) | | 22 |
| | — |
| | (288 | ) | | (340 | ) |
| Restructuring liability as of December 31, 2014 | 9,454 |
| | — |
| | 1,290 |
| | — |
| | 47 |
| | 10,791 |
|
| Restructuring charge (recovery) | 757 |
| | — |
| | (269 | ) | | 1,582 |
| | (1,028 | ) | | 1,042 |
|
| Proceeds from sale of assets | — |
| | — |
| | — |
| | — |
| | 1,325 |
| | 1,325 |
|
| Other cash payments, net | (6,449 | ) | | — |
| | (1,021 | ) | | (1,357 | ) | | — |
| | (8,827 | ) |
| Other items | 325 |
| | — |
| | — |
| | 278 |
| | (344 | ) | | 259 |
|
| Restructuring liability as of December 31, 2015 | 4,087 |
| | — |
| | — |
| | 503 |
| | — |
| | 4,590 |
|
| Restructuring charge | 902 |
| | — |
| | — |
| | 12 |
| | — |
| | 914 |
|
| Other cash payments, net | (4,039 | ) | | — |
| | — |
| | (500 | ) | | (34 | ) | | (4,573 | ) |
| Other items | 975 |
| | — |
| | — |
| | — |
| | 34 |
| | 1,009 |
|
| Restructuring liability as of December 31, 2016 | $ | 1,925 |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 1,940 |
|
| | | | | | | | | | | | |
| Restructuring charge (recovery) from implementation to date | $ | 32,517 |
| | $ | 23,933 |
| (1) | $ | 5,506 |
| | $ | 1,659 |
| | $ | (781 | ) | (1) | $ | 62,834 |
|
____________________
| |
(1) | Other restructuring charge from implementation to date for the 2010 Restructurings includes $21.7 million in charges related to employee severance and other benefits for periods ended prior to December 31, 2013. The remainder of Other activity for both restructurings relates primarily to the impairment and sale of property and equipment. |
The restructuring charge for the year ended December 31, 2016 included $0.8 million in charges related to a tenant’s default on an existing sublease which was partially offset by a $0.1 million recovery related to a new sublease executed in July 2016. The restructuring charge for the year ended December 31, 2015 included $1.6 million in additional charges due to the partial termination of one of our building leases and additional facility-related charges related to the decommissioning and exit of certain buildings, which was partially offset by $1.0 million in recoveries recorded in connection with the sale of excess equipment and other assets that had previously been fully depreciated and the reversal of severance charges recorded in 2014 for employees that were recalled in 2015. The restructuring charge for the year ended December 31, 2014 includes $5.8 million of employee severance and other benefits and we recorded charges of $0.3 million for property and equipment write-downs and other charges. The charges for all periods presented include the effect of the passage of time on our discounted cash flow computations (“accretion expense”) for the exit, in prior periods, of certain of our South San Francisco buildings and changes in estimates regarding future subleases.
We expect to pay accrued facility charges of $1.9 million, net of cash received from our subtenants, through the end of the lease terms of the buildings, all of which end in May 2017.
NOTE 4. CASH AND INVESTMENTS
Cash and Investments Available-for-Sale
The following tables summarize cash and cash equivalents, investments, and restricted cash and investments by balance sheet line item as of December 31, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Cash and cash equivalents | $ | 151,686 |
| | $ | — |
| | $ | — |
| | $ | 151,686 |
|
| Short-term investments | 268,234 |
| | 13 |
| | (130 | ) | | 268,117 |
|
| Long-term investments | 55,792 |
| | 1 |
| | (192 | ) | | 55,601 |
|
| Long-term restricted investments | 4,150 |
| | — |
| | — |
| | 4,150 |
|
| Total cash and investments | $ | 479,862 |
| | $ | 14 |
| | $ | (322 | ) | | $ | 479,554 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Cash and cash equivalents | $ | 141,634 |
| | $ | — |
| | $ | — |
| | $ | 141,634 |
|
| Short-term investments | 25,484 |
| | 5 |
| | (63 | ) | | 25,426 |
|
| Long-term investments | 83,665 |
| | 2 |
| | (67 | ) | | 83,600 |
|
| Long-term restricted investments | 2,650 |
| | — |
| | — |
| | 2,650 |
|
| Total cash and investments | $ | 253,433 |
| | $ | 7 |
| | $ | (130 | ) | | $ | 253,310 |
|
Under our loan and security agreement with Silicon Valley Bank, we are required to maintain compensating balances on deposit in one or more investment accounts with Silicon Valley Bank or one of its affiliates. The total collateral balances were $81.6 million as of both December 31, 2016 and 2015 and are reflected in our Consolidated Balance Sheets in short-term investments as of December 31, 2016 and long-term investments as of December 31, 2015; the change in classification from long-term to short-term was the result of a corresponding change in the classification for our term loan payable to Silicon Valley Bank which matures in May 2017. See “Note 7. Debt” for more information regarding the collateral balance requirements under our Silicon Valley Bank loan and security agreement.
The following table summarizes our cashCash equivalents and investments by security type were as of December 31, 2016 and 2015.follows. The amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):
| | | | December 31, 2016 | December 31, 2017 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Money market funds | $ | 71,457 |
| | $ | — |
| | $ | — |
| | $ | 71,457 |
| $ | 45,478 |
| | $ | — |
| | $ | — |
| | $ | 45,478 |
|
| Commercial paper | 165,375 |
| | — |
| | — |
| | 165,375 |
| 199,647 |
| | — |
| | — |
| | 199,647 |
|
| Corporate bonds | 152,712 |
| | 3 |
| | (308 | ) | | 152,407 |
| 179,336 |
| | 18 |
| | (332 | ) | | 179,022 |
|
| U.S. Treasury and government sponsored enterprises | 70,730 |
| | 11 |
| | (14 | ) | | 70,727 |
| 16,295 |
| | — |
| | (32 | ) | | 16,263 |
|
| Total investments | $ | 460,274 |
| | $ | 14 |
| | $ | (322 | ) | | $ | 459,966 |
| |
| Total | | $ | 440,756 |
| | $ | 18 |
| | $ | (364 | ) | | $ | 440,410 |
|
Cash is excluded from the table above.
In July 2015, we completed a registered underwritten public offering of 28,750,000 shares of our common stock, including 3,750,000 shares issued under the underwriters’ 30-day option to buy shares, at a price of $5.40 per share pursuant to a shelf registration statement previously filed with the SEC,Securities and Exchange Commission, which was filed and automatically became effective on July 1, 2015. We received $145.6 million in net proceeds from the offering after deducting the underwriting discount and other estimated expenses.
The carrying amounts of cash, trade and other receivables, accounts payable, accrued collaboration liability, accrued compensation and benefits, accrued clinical trial liabilities, accrued compensation and benefits,rebates fees due customers, and other liabilities approximate their fair values and are excluded from the tables above. We had no additional financial instruments carried at amortized cost as of December 31, 2017.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value:instrument:
When available, we value investments based on quoted prices for those financial instruments, which is a Level 1 input. Our remaining investments are valued using third-party pricing sources, which use observable market prices, interest rates and yield curves observable at commonly quoted intervals offor similar assets as observable inputs for pricing, which is a Level 2 input.
The settlement consideration comprises, in part, shares of our Common Stock. The fair value of our Common Stock was determined based on the closing market price of our Common Stock on the various settlement dates of the conversions, which are level 1 inputs;
The carrying value of the remaining settlement consideration, which includes cash and the forgiveness of the repayment of certain prior interest payments, approximates fair value;
Not applicable.
The independent registered public accounting firm Ernst & Young LLP has issued an audit report on our internal control over financial reporting, which is included on the following page.
We have audited Exelixis, Inc.’s internal control over financial reporting as of December 30, 2016,29, 2017, based on criteria established in Internal Control – IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Exelixis, Inc.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2017, based on the COSO criteria.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The information required by this item relating to our directors and nominees, including information with respect to our audit committee, audit committee financial experts and procedures by which stockholders may recommend nominees to our board of directors, is incorporated by reference to the section entitled “Proposal 1 –Election– Election of Class IIII Directors” appearing in our Proxy Statement for our 20172018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, or SEC, within 120 days after December 30, 2016,29, 2017, which we refer to as our 20172018 Proxy Statement. The information required by this item regarding our executive officers is incorporated by reference to the section entitled “Executive Officers” appearing in our 20172018 Proxy Statement. The information required by this item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” appearing in our 20172018 Proxy Statement.
We have adopted a Corporate Code of Conduct that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Corporate Code of Conduct is posted on our website at www.exelixis.com under the caption “Investors & Media -- Corporate Governance.Governance - Corporate Governance Documents.”
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Corporate Code of Conduct by posting such information on our website, at the address and location specified above and, to the extent required by the listing standards of the NASDAQNasdaq Stock Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.
The information required by this item is incorporated by reference to the sections entitled “Compensation of Executive Officers,” “Compensation of Directors,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” appearing in our 20172018 Proxy Statement.
The information required by this item relating to security ownership of certain beneficial owners and management is incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” appearing in our 20172018 Proxy Statement.
The information required by this item is incorporated by reference to the sections entitled “Certain Relationships and Related Party Transactions” and “Proposal 1 – Election of Class IIII Directors” appearing in our 20172018 Proxy Statement.
The information required by this item is incorporated by reference to the section entitled “Proposal 2 – Ratification of Selection of Independent Registered Public Accounting Firm” appearing in our 20172018 Proxy Statement.
