

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 27, 2019~~July 3, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-30235

EXELIXIS, INC.

(Exact name of registrant as specified in its charter)



Delaware	04-3257395
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1851 Harbor Bay Parkway

Alameda, CA 94502

(650) 837-7000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock $.001 Par Value per Share	EXEL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days). Yes ý No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

As of ~~October 21, 2019,~~July 27, 2020, there were ~~303,846,306~~308,995,819 shares of the registrant’s common stock outstanding.

EXELIXIS, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX



		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	98
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2621
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3834
Item 4.	Controls and Procedures	3834
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	3935
Item 1A.	Risk Factors	3935
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6257
Item 3.	Defaults Upon Senior Securities	6257
Item 4.	Mine Safety Disclosures	6257
Item 5.	Other Information	6257
Item 6.	Exhibits	6357
SIGNATURES

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EXELIXIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except ~~share and~~ per share amounts)

(unaudited)


	September 30, 2019			December 31, 2018*			June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	242,317		$	314,775		$	527,143		$	266,501
Short-term investments	518,350			378,559			685,895			585,742
Trade receivables, net	169,788			162,771			121,080			119,073
Other receivables	13,801			16,056
Inventory, net	13,366			9,838
Inventory							16,608			12,886
Prepaid expenses and other current assets	14,490			15,017			43,937			26,988
Total current assets	972,112			897,016			1,394,663			1,011,190
Long-term investments	486,763			157,187			327,141			536,385
Long-term restricted cash and investments	1,000			1,100
Property and equipment, net	49,467			50,897			52,323			48,892
Operating lease right-of-use assets	17,735			5,867
Deferred tax assets, net	186,836			244,111			148,235			172,374
Goodwill	63,684			63,684			63,684			63,684
Other long-term assets	7,268			2,424			60,502			53,145
Total assets	$	1,784,865		$	1,422,286		$	2,046,548		$	1,885,670
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,352		$	10,901		$	9,103		$	11,581
Accrued compensation and benefits	31,713			32,142			33,156			37,364
Accrued clinical trial liabilities	30,330			18,231			39,940			38,777
Rebates and fees due to customers	16,782			14,954			16,957			18,719
Accrued collaboration liabilities	7,973			7,419			10,695			11,856
Other current liabilities	45,919			21,825			32,830			24,449
Total current liabilities	141,069			105,472			142,681			142,746
Long-term portion of lease liabilities	23,705			12,178
Long-term portion of deferred revenue	15,399			15,897
Long-term portion of deferred revenues							15,003			6,596
Long-term portion of operating lease liabilities							48,334			48,011
Other long-term liabilities	975			1,286			7,206			2,347
Total liabilities	181,148			134,833			213,224			199,700
Commitments
Commitments and contingencies
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: 303,776,032 and 299,876,080 at September 30, 2019 and December 31, 2018, respectively	304			300
Preferred stock, $0.001 par value, 10,000 shares authorized and no shares issued							—			—
Common stock, $0.001 par value; 400,000 shares authorized; issued and outstanding: 308,886 and 304,831 at June 30, 2020 and December 31, 2019, respectively							309			305
Additional paid-in capital	2,228,839			2,168,217			2,269,093			2,241,947
Accumulated other comprehensive income (loss)	2,668			(701		)
Accumulated other comprehensive income							7,840			3,069
Accumulated deficit	(628,094		)	(880,363		)	(443,918		)	(559,351		)
Total stockholders’ equity	1,603,717			1,287,453			1,833,324			1,685,970
Total liabilities and stockholders’ equity	$	1,784,865		$	1,422,286		$	2,046,548		$	1,885,670


*	~~The Condensed Consolidated Balance Sheet as of December 31, 2018 has been derived from the audited financial statements as of that date.~~

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

EXELIXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2019			2018			2019			2018			2020		2019		2020		2019
Revenues:
Net product revenues	$	191,768		$	162,946		$	565,024		$	443,054		$	178,730	$	193,675	$	372,610	$	373,256
Collaboration revenue	79,935			62,451			162,441			182,170
License revenues													59,234		37,742		80,113		63,306
Collaboration services revenues													21,515		8,858		33,671		19,200
Total revenues	271,703			225,397			727,465			625,224			259,479		240,275		486,394		455,762
Operating expenses:
Cost of goods sold	7,537			7,360			22,577			18,996			9,221		7,539		18,510		15,040
Research and development	97,295			44,741			242,516			124,986			114,933		81,932		216,810		145,221
Selling, general and administrative	51,265			48,120			170,218			153,989			59,791		58,815		122,731		118,953
Total operating expenses	156,097			100,221			435,311			297,971			183,945		148,286		358,051		279,214
Income from operations	115,606			125,176			292,154			327,253			75,534		91,989		128,343		176,548
Other income (expense), net:
Interest income	7,191			3,507			20,253			8,099			5,162		6,975		12,382		13,062
Other, net	(140		)	271			688			368
Total other income (expense), net:	7,051			3,778			20,941			8,467
Other income, net													—		803		6		828
Income before income taxes	122,657			128,954			313,095			335,720			80,696		99,767		140,731		190,438
Provision for income taxes	(25,205		)	(2,324		)	(60,826		)	(5,739		)	13,875		20,725		25,298		35,621
Net income	$	97,452		$	126,630		$	252,269		$	329,981		$	66,821	$	79,042	$	115,433	$	154,817
Net income per share, basic	$	0.32		$	0.42		$	0.84		$	1.11
Net income per share, diluted	$	0.31		$	0.41		$	0.80		$	1.05
Shares used in computing net income per share, basic	303,268			298,416			301,999			297,700
Shares used in computing net income per share, diluted	315,453			312,346			315,046			313,200
Net income per share:
Basic													$	0.22	$	0.26	$	0.38	$	0.51
Diluted													$	0.21	$	0.25	$	0.36	$	0.49
Weighted-average common shares outstanding:
Basic													307,807		302,188		306,598		301,365
Diluted													318,144		314,911		316,992		314,786

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

EXELIXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	66,821	$	79,042	$	115,433	$	154,817
Other comprehensive income:
Net unrealized gains on available-for-sale debt securities, net of tax impact of $2,287, $413, $1,346 and $807, respectively	8,062		1,479		4,771		2,908
Comprehensive income	$	74,883	$	80,521	$	120,204	$	157,725

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net income $ 97,452
$ 126,630
$ 252,269
$ 329,981
Other comprehensive income (loss):
Net unrealized gains or losses on available-for-sale securities, net of tax impact of $129, $0, $936 and $0, respectively⁽¹⁾
461
218
3,369
(166 )
Total other comprehensive income (loss) 461
218
3,369
(166 )
Comprehensive income $ 97,913
$ 126,848
$ 255,638
$ 329,815

~~____________________~~


~~(1)~~	~~Reclassification adjustments to net income resulting from realized gains or losses on the sale of securities and the related tax impact were nominal or zero during the periods presented.~~

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

EXELIXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in ~~thousands, except share data)~~thousands)

(unaudited)


	Three Months Ended September 30, 2019															Three Months Ended June 30, 2020
	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity			Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount				Shares			Accumulated Deficit			Amount								Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at June 30, 2019	302,784,854	$	303	Additional Paid-in Capital		$	Accumulated Other Comprehensive Income	2,211,668	$	2,207			Total Stockholders’ Equity		$	(725,546	)	$	1,488,632
Balance at March 31, 2020																305,780		$	306	$	2,258,307		$	(222	)	$	(510,739	)	$	1,747,652
Net income	—	—		—			—		97,452				97,452			—		—		—			—			66,821			66,821
Other comprehensive income	—	—		—			461		—				461			—		—		—			8,062			—			8,062
Issuance of common stock under equity incentive and stock purchase plans	991,178	1		4,032			—		—				4,033			3,106		3		13,780			—			—			13,783
Stock transactions associated with taxes withheld on equity awards																—		—		(19,148		)	—			—			(19,148		)
Stock-based compensation	—	—		13,139			—		—				13,139			—		—		16,154			—			—			16,154
Balance at September 30, 2019	303,776,032	$	304	$	2,228,839		$	2,668	$	(628,094	)		$	1,603,717
Balance at June 30, 2020																308,886		$	309	$	2,269,093		$	7,840		$	(443,918	)	$	1,833,324


	Three Months Ended September 30, 2018																Three Months Ended June 30, 2019
	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit				Total Stockholders’ Equity			Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount				Shares				Accumulated Deficit			Amount								Additional Paid-in Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balance at June 30, 2018	297,892,180	$	298	Additional Paid-in Capital		$	Accumulated Other Comprehensive Loss	2,142,717		$	(731	)		Total Stockholders’ Equity		$	(1,367,082	)	$	775,202
Balance at March 31, 2019																	301,520		$	302	$	2,188,578		$	728	$	(804,588	)	$	1,385,020
Net income	—	—		—			—			126,630				126,630			—		—		—			—		79,042			79,042
Other comprehensive income	—	—		—			218			—				218			—		—		—			1,479		—			1,479
Issuance of common stock under equity incentive and stock purchase plans	989,704	1		4,173			—			—				4,174			1,265		1		8,865			—		—			8,866
Stock transactions associated with taxes withheld on equity awards																	—		—		(854		)	—		—			(854		)
Stock-based compensation	—	—		9,742			—			—				9,742			—		—		15,079			—		—			15,079
Balance at September 30, 2018	298,881,884	$	299	$	2,156,632		$	(513	)	$	(1,240,452	)		$	915,966
Balance at June 30, 2019																	302,785		$	303	$	2,211,668		$	2,207	$	(725,546	)	$	1,488,632

Continued on next page

EXELIXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - continued

(in thousands)

(unaudited)



	Six Months Ended June 30, 2020
	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2019	304,831	$	305	$	2,241,947		$	3,069	$	(559,351	)	$	1,685,970
Net income	—	—		—			—		115,433			115,433
Other comprehensive income	—	—		—			4,771		—			4,771
Issuance of common stock under equity incentive and stock purchase plans	4,055	4		17,951			—		—			17,955
Stock transactions associated with taxes withheld on equity awards	—	—		(20,941		)	—		—			(20,941		)
Stock-based compensation	—	—		30,136			—		—			30,136
Balance at June 30, 2020	308,886	$	309	$	2,269,093		$	7,840	$	(443,918	)	$	1,833,324



	Six Months Ended June 30, 2019
	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2018	299,876	$	300	$	2,168,217		$	(701	)	$	(880,363	)	$	1,287,453
Net income	—	—		—			—			154,817			154,817
Other comprehensive income	—	—		—			2,908			—			2,908
Issuance of common stock under equity incentive and stock purchase plans	2,909	3		18,277			—			—			18,280
Stock transactions associated with taxes withheld on equity awards	—	—		(2,434		)	—			—			(2,434		)
Stock-based compensation	—	—		27,608			—			—			27,608
Balance at June 30, 2019	302,785	$	303	$	2,211,668		$	2,207		$	(725,546	)	$	1,488,632

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

EXELIXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY - continued~~

~~(in thousands, except share data)~~

~~(unaudited)~~

Nine Months Ended September 30, 2019
Common Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at December 31, 2018 299,876,080
$ 300
$ 2,168,217
$ (701 ) $ (880,363 ) $ 1,287,453
Net income —
—
—
—
252,269
252,269
Other comprehensive income —
—
—
3,369
—
3,369
Issuance of common stock under equity incentive and stock purchase plans 3,899,952
4
19,875
—
—
19,879
Stock-based compensation —
—
40,747
—
—
40,747
Balance at September 30, 2019 303,776,032
$ 304
$ 2,228,839
$ 2,668
$ (628,094 ) $ 1,603,717

Nine Months Ended September 30, 2018
Common Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at December 31, 2017 296,209,426
$ 296
$ 2,114,184
$ (347 ) $ (1,829,172 ) $ 284,961
Adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606)
—
—
—
—
258,505
258,505
Adoption of ASU No. 2016-02, Leases (Topic 842)
—
—
—
—
234
234
Net income —
—
—
—
329,981
329,981
Other comprehensive loss —
—
—
(166 ) —
(166 )
Issuance of common stock under equity incentive and stock purchase plans 2,672,458
3
14,118
—
—
14,121
Stock-based compensation —
—
28,330
—
—
28,330
Balance at September 30, 2018 298,881,884
$ 299
$ 2,156,632
$ (513 ) $ (1,240,452 ) $ 915,966

~~EXELIXIS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF~~ CASH FLOWS

(in thousands)

(unaudited)

Nine Months Ended September 30,
2019 2018
Net income $ 252,269
$ 329,981
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,088
2,876
Stock-based compensation 40,747
28,330
401(k) matching contributions made in common stock 4,079
3,232
Amortization and other changes in right-of-use assets (6,367 ) 2,732
Deferred income taxes 56,339
—
Gain on other equity investments (730 ) (209 )
Accretion of investments, net and other (3,970 ) (1,423 )
Changes in operating assets and liabilities:
Trade receivables, net (7,017 ) (12,707 )
Other receivables 2,469
(2,938 )
Inventory, net (3,528 ) (3,776 )
Current portion of unbilled collaboration revenue (2,640 ) (32,673 )
Prepaid expenses and other current assets 527
(3,529 )
Other long-term assets (6,294 ) (542 )
Accounts payable (2,708 ) (1,248 )
Accrued compensation and benefits (429 ) 6,210
Accrued clinical trial liabilities 12,099
(891 )
Rebates and fees due customers 1,828
4,124
Accrued collaboration liability 554
(577 )
Current and long-term deferred revenue 3,592
(1,548 )
Long-term portion of lease liabilities 6,087
(974 )
Other current and long-term liabilities 15,940
(3,321 )
Net cash provided by operating activities 368,935
311,129
Cash flows from investing activities:
Purchases of property and equipment (5,575 ) (30,403 )
Proceeds from sale of property and equipment —
308
Purchases of investments (887,698 ) (368,304 )
Proceeds from maturities of investments 422,419
231,204
Proceeds from sale of investments 13,078
11,935
Proceeds from other equity investments 730
209
Net cash used in investing activities (457,046 ) (155,051 )
Cash flows from financing activities:
Proceeds from exercise of stock options 14,811
10,390
Proceeds from employee stock purchase plan 4,145
3,650
Taxes paid related to net share settlement of equity awards (3,369 ) (3,205 )
Principal payments on financing lease obligation (34 ) —
Net cash provided by financing activities 15,553
10,835
Net (decrease) increase in cash, cash equivalents and restricted cash (72,558 ) 166,913
Cash, cash equivalents and restricted cash at beginning of period 315,875
188,314
Cash, cash equivalents and restricted cash at end of period $ 243,317
$ 355,227

~~Continued on next page~~

~~EXELIXIS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued~~

~~(in thousands)~~

~~(unaudited)~~

Nine Months Ended September 30,
2019 2018
Supplemental cash flow disclosure:
Right-of-use assets obtained in exchange for lease obligations⁽¹⁾
$ 12,944
$ 17,180
Unpaid liabilities incurred to acquire Property and equipment $ 159
$ 1,281
Unpaid liabilities incurred to acquire investments $ 8,961
$ —



	Six Months Ended June 30,
	2020			2019
Net income	$	115,433		$	154,817
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	4,376			3,998
Stock-based compensation	30,136			27,608
Non-cash lease expense	2,383			1,099
Deferred taxes	22,793			33,067
Other, net	726			(98		)
Changes in operating assets and liabilities:
Trade receivables, net	(2,014		)	65,230
Inventory	(7,049		)	(2,514		)
Prepaid expenses and other assets	(18,954		)	(9,278		)
Deferred revenue	9,659			4,656
Accounts payable and other liabilities	262			14,736
Net cash provided by operating activities	157,751			293,321
Cash flows from investing activities:
Purchases of property, equipment and other	(9,925		)	(3,516		)
Purchases of investments	(433,154		)	(518,268		)
Proceeds from maturities and sales of investments	548,973			271,198
Net cash provided by (used in) investing activities	105,894			(250,586		)
Cash flows from financing activities:
Proceeds from issuance of common stock under equity incentive and stock purchase plans	17,938			14,735
Taxes paid related to net share settlement of equity awards	(20,941		)	(2,434		)
Other, net	—			(22		)
Net cash (used in) provided by financing activities	(3,003		)	12,279
Net increase in cash, cash equivalents and restricted cash	260,642			55,014
Cash, cash equivalents and restricted cash at beginning of period	268,137			315,875
Cash, cash equivalents and restricted cash at end of period	$	528,779		$	370,889
Supplemental cash flow disclosures:
Right-of-use assets obtained in exchange for lease obligations	$	1,824		$	11,338
Unpaid liabilities incurred for purchases of property and equipment	$	804		$	1,350

~~____________________~~


~~(1)~~	Amounts for the nine months ended September 30, 2019 include receipt of a tenant incentive payment and an amendment to our existing lease for office and research space. Amounts for the nine months ended September 30, 2018 include the transition adjustment for the adoption of Topic 842.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

EXELIXIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Exelixis, Inc. (Exelixis, we, our or us) is an oncology-focused biotechnology company that strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Our drug discovery and development capabilities and commercialization platform are the foundations upon which we intend to bring to market novel, effective and tolerable therapies to provide cancer patients with additional treatment options.

Since we were founded in 1994, 4 products resulting from our discovery efforts have progressed through clinical development, received regulatory approval and ~~have launched commercially.~~established a commercial presence in various geographies around the world. NaN are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET. ~~These~~Our cabozantinib products are: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma ~~(RCC)~~ and previously treated hepatocellular ~~carcinoma (HCC);~~carcinoma; and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer. For these types of cancer, cabozantinib has become or is becoming a standard of care. Beyond these approved indications, cabozantinib is currently the focus of a broad clinical development program and is being investigated both alone and in combination with other therapies in a wide variety of cancers.

The other 2 products resulting from our discovery efforts are: COTELLIC® (cobimetinib), an inhibitor of MEK, approved as part of amultiple combination ~~regimen~~regimens to treat a specific ~~form~~forms of advanced melanoma and marketed under a collaboration with Genentech, Inc. (a member of the Roche Group) (Genentech); and MINNEBRO® (esaxerenone), an oral, non-steroidal, selective blocker of the mineralocorticoid receptor, ~~(MR),~~ approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo).

Basis of ~~Consolidation~~Presentation

The accompanying Condensed Consolidated Financial Statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the U.S. dollar. All intercompany balances and transactions have been eliminated.

~~Basis of Presentation~~

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial statements for the periods presented have been included.

~~We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31~~^st. Fiscal year 2019, which is a 53-week fiscal year, will end on January 3, 2020 and fiscal year 2018, which was a 52-week fiscal year, ended on December 28, 2018. For convenience, references in this report as of and for the fiscal periods ended September 27, 2019, June 28, 2019, September 28, 2018 and June 29, 2018, and as of and for the fiscal years ending January 3, 2020, and ended December 28, 2018 and December 29, 2017, are indicated as being as of and for the periods ended September 30, 2019, June 30, 2019, September 30, 2018 and June 30, 2018 and the years ending December 31, 2019, and ended December 31, 2018 and December 31, 2017, respectively. Similarly, references in this report to the first day of the fiscal year ended January 3, 2020 are indicated as being as of January 1, 2019 and the first day of the fiscal quarter ended September 27, 2019 are indicated as being as of July 1, 2019.

Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019~~2020 or for any future period. The accompanying Condensed Consolidated Financial Statements and Notes thereto should be read in conjunction with our Consolidated Financial Statements and Notes thereto for the year ended December 31, ~~2018,~~2019, included in our Annual Report on Form 10-K filed with the SEC on February ~~22, 2019.~~25, 2020.

We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31^st. Fiscal year 2020, which is a 52-week fiscal year, will end on January 1, 2021 and fiscal year 2019, which was a 53-week fiscal year, ended on January 3, 2020. For convenience, references in this report as of and for the fiscal periods ended July 3, 2020 and June 28, 2019, and as of and for the fiscal years ending January 1, 2021, and ended January 3, 2020, are indicated as being as of and for the fiscal periods ended June 30, 2020 and June 30, 2019 and the years ending December 31, 2020 and ended December 31, 2019, respectively. Similarly, references in this report to the first day of the fiscal year ending January 1, 2021 are indicated as being as of January 1, 2020.

Reclassifications

Certain prior period amounts in the accompanying Condensed Consolidated Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported total revenues, income from operations, net income, total assets, total liabilities or total stockholders’ equity.

Segment Information

We operate in 1 business segment that focuses on the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Our Chief Executive Officer, as the chief operating decision-maker, manages and allocates resources to our operations on a total consolidated basis. Consistent with this decision-making process, our Chief Executive Officer uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.

All of our long-lived assets are located in the U.S. See “Note 2. Revenues” for enterprise-wide disclosures about product sales, revenues from major customers and revenues by geographic region.

Use of Estimates

The preparation of the accompanying Condensed 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 determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns, sales allowances, and milestone payments included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement; the recoverability of inventory; the amounts of operating lease right-of-use assets and lease liabilities; the amounts of deferred tax assets and liabilities including the related valuation allowance; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions. 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.

In March 2020, we received the 2020 preliminary fee notice from the Internal Revenue Service for the Branded Prescription Drug Fee for the 2018 sales year, which resulted in an increase in our estimate of such fees for the 2018 and 2019 sales years. Accordingly, we recorded an adjustment to increase selling, general and administrative expenses and our accrual for these fees by $5.4 million during the three months ended March 31, 2020. This adjustment resulted in a $0.02 decrease in basic and diluted earnings per share for the six months ended June 30, 2020. Our total accrual for the Branded Prescription Drug Fee was $15.1 million and $6.0 million as of June 30, 2020 and December 31, 2019, respectively, of which $8.6 million and $4.4 million was recorded in other current liabilities, and $6.5 million and $1.6 million was recorded in other long-term liabilities.

Recently Adopted Accounting Pronouncements

On ~~July~~January 1, ~~2019,~~2020, we adopted ~~ASU No. 2018-15,~~ ~~Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ ~~(ASU 2018-15). ASU 2018-15 requires a customer in a hosting arrangement that is a service contract to follow the guidance in~~ Accounting Standards Codification (ASC) Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense and requires us to expense the capitalized implementation costs over the term of the hosting arrangement, which includes reasonably certain renewals. ASU 2018-15 was adopted using the prospective transition method in the accompanying Condensed Consolidated Financial Statements. The adoption of ASU 2018-15 did not have a material impact on our Condensed Consolidated Financial Statements.

~~On January 1, 2019, we adopted ASU 2018-02,~~ ~~Income Statement—Reporting Comprehensive Income (Topic 220)~~ (ASU 2018-02). There was no financial impact from the adoption of ASU 2018-02 and we did not make an election to reclassify the income tax effects of the Tax Cuts and Jobs Act of 2017 from Accumulated other comprehensive income (loss) to Accumulated deficit. In connection with the adoption of ASU 2018-02, we have adopted the individual unit of account approach for releasing income tax effects from Accumulated other comprehensive income (loss).

~~On January 1, 2019, we also adopted ASU 2017-08,~~ ~~Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)~~ (ASU 2017-08). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The financial impact from the adoption of ASU 2017-08 was nominal.

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~In November 2018, the Financial Accounting Standards Board (FASB) issued ASU~~Update (ASU) No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as ~~revenue~~part of revenues under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) when the counterparty is a customer for a distinct good or service (i.e. a unit of account). For units of account that are in the scope of Topic 606, all of the guidance in Topic 606 should be applied, including the guidance on recognition, measurement, presentation and disclosure. ASU 2018-18 ~~also adds a reference in ASC Topic 808,~~ ~~Collaborative Arrangements~~ (Topic 808) to the unit of account guidance in Topic 606 and requires that it be applied only to assess whether transactions in a collaborative arrangement are in the scope of Topic 606. ASU 2018-18 will precludeprecludes entities from presenting amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer as revenue from contracts with customers. ~~ASU 2018-18~~If a portion of a distinct bundle of goods or services within an arrangement is ~~effective for us for all interim~~not with a customer, then the unit of account is not within the scope of Topic 606, and ~~annual reporting periods beginning after December 15, 2019. Early~~the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election. Upon adoption ~~is permitted. We are in the process of assessing the impact~~ of ASU 2018-18, onwe have presented revenues from performance obligations associated with our collaboration arrangements that are within the scope of Topic 606 (license revenues) separately from revenues from performance obligations that are not subject to Topic 606 (collaboration services revenues). The adoption of ASU 2018-18 was applied retrospectively, and prior periods have been restated to conform to the presentation prescribed by ASU 2018-18. The adoption of ASU 2018-18 did not impact total revenues for the prior period presented in the accompanying Condensed Consolidated ~~Financial Statements.~~Statements of Income.

InOn January ~~2017, the FASB issued~~1, 2020, we adopted 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~~simplifies goodwill impairment testing by eliminating the second step of the 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 recognizeThe amended guidance requires an impairment charge to be recognized 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~~a reporting unit ~~when measuring the goodwill~~exceeds its fair value under a one-step 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~~test. The adoption of ASU 2017-04 ~~to have a material~~did not impact ~~on our~~the accompanying Condensed Consolidated Financial Statements.

~~In June 2016, the FASB issued~~On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (ASU 2016-13). ASU 2016-13 implements an impairment model, known as the current expected credit loss model, that is based on expected losses rather than incurred losses. Under the new guidance, ~~an entity~~we will recognize our estimate of current expected credit losses

as an allowance ~~its estimate of~~on financial assets measured at amortized cost, including accounts receivable, unbilled collaboration revenues, and investments classified as available for sale. Current expected credit ~~losses. 2016-13 is effective for all interim~~losses were immaterial as of the date of adoption, and ~~annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We do not expect~~ the adoption of ASU 2016-13 todid not have a ~~material~~significant impact on ~~our~~the accompanying Condensed Consolidated Financial Statements.

Investment Impairment

Quarterly, we assess each of our investments in debt securities available-for-sale whose fair value is below its cost basis to determine if the investment’s impairment is due to credit-related factors or noncredit-related factors. Factors considered in determining whether an impairment is credit-related include the extent to which the investment’s fair value is less than its cost basis, declines in published credit ratings, issuer default on interest or principal payments, and declines in the financial condition and near-term prospects of the issuer. If we determine a credit-related impairment exists, we will measure the credit loss based on a discounted cash flows model. Credit-related impairments on debt securities available-for-sale are recognized as an allowance for credit losses with a corresponding adjustment to other income, net in the accompanying Condensed Consolidated Statements of Income. The portion of the impairment that is not credit-related is recorded, net of applicable taxes, as a reduction of other comprehensive income.

We have elected to exclude accrued interest from both the fair value and the amortized cost basis of debt securities available-for-sale for the purposes of identifying and measuring an impairment. We write-off accrued interest as a reduction of interest income when an issuer has defaulted on interest payments due on a security.

Accounts Receivable

Trade receivables, net contain amounts billed to our customers for product sales, and amounts billed to our collaboration partners for development, regulatory and sales-based milestone payments, royalties on the sale of licensed products, profit-sharing arrangements, development cost reimbursements, and payments for product supply services. Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S., and collaboration partners that are located in Europe and Japan. We record trade receivables net of allowances for credit losses and chargebacks, and cash discounts for prompt payment. We apply an aging method to estimate credit losses and consider our historical loss information, adjusted to account for current conditions, and reasonable and supportable forecasts of future economic conditions affecting our customers.

Goodwill

We recorded goodwill amounts as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair value. We review the carrying amount of goodwill for impairment annually and whenever events or changes in circumstance indicate that the carrying value may not be recoverable. We perform our annual assessment of the recoverability of our goodwill as of the first day of our fourth quarter. 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 our reporting unit is less than its carrying amount. We perform a quantitative assessment if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment determines whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value, limited to the goodwill balance. We operate in 1 business segment, which is also considered to be our sole reporting unit and therefore, goodwill is tested for impairment at the enterprise level. We did 0t recognize any impairment charges in any of the periods presented.

Collaboration Agreements

We assess whether our collaboration agreements are subject to ASC Topic 808, Collaborative Arrangements (Topic 808) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808, we apply the unit of account guidance under Topic 606 to identify distinct performance obligations, and then determine whether a customer relationship exists for each distinct performance obligation. If we determine a performance obligation within the arrangement is with a customer, we apply the guidance in Topic 606. If a portion of a distinct bundle of goods or services within an arrangement is not with a customer, then the unit of account is not within the scope of Topic 606, and the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.

We enter into collaboration arrangements, under which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payments to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and sales-based milestone payments; product supply services; development cost reimbursements; profit-sharing arrangements; and royalties on net sales of licensed products. As part of the accounting for these arrangements, we develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. These key assumptions may include forecasted revenues, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Up-front License Fees: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license, which happens at or near the inception of the contract. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenues from non-refundable, up-front fees. We evaluate the measure of progress at the end of each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Regulatory and Development Milestone Payments: At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development and regulatory milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis.

Product Supply Services: Arrangements that include a promise for the future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.

Development Cost Reimbursements: Our collaboration arrangements may include promises of future clinical development and drug safety services, as well as participation on certain joint committees. When such services are provided to a customer, and they are distinct from the licenses provided to our collaboration partners, these promises are accounted for as a separate performance obligation which we estimate using internal development costs incurred and projections through the term of the arrangements. We record revenues for these services as the performance obligations are satisfied over time. However, if we conclude that our collaboration partner is not a customer for those collaborative research and development activities, we present such payments as a reduction of research and development expenses.

Profit-sharing Arrangements: Under the terms of our collaboration agreement with Genentech for cobimetinib, we are entitled to a share of U.S. profits and losses received in connection with the commercialization of cobimetinib. We account for this arrangement in accordance with Topic 606. We have determined that we are an agent under the agreement and therefore revenues are recorded net of costs incurred. We record revenues for the variable consideration associated with the profits and losses under the collaboration agreement when it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur.

Royalty and Sales-based Milestone Payments: For arrangements that include royalties and sales-based milestone payments, including milestone payments earned for the first commercial sale of a product, the license is deemed to be the predominant item to which such payments relate and we recognize revenues at the later of when the related sales occur or when the performance obligation to which the royalty has been allocated has been satisfied.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes and clarifying and amending existing

guidance. ASU 2019-12 will be effective for us in the first quarter of 2021 with early adoption permitted. We are currently assessing the impact of ASU 2019-12 on our financial statements.

NOTE 2. REVENUES

Revenues ~~by disaggregated category were as follows~~consisted of the following (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Product revenues:
Gross product revenues	$	229,898		$	240,418		$	482,464		$	464,168
Discounts and allowances	(51,168		)	(46,743		)	(109,854		)	(90,912		)
Net product revenues	178,730			193,675			372,610			373,256
Collaboration revenues:
License revenues	59,234			37,742			80,113			63,306
Collaboration services revenues	21,515			8,858			33,671			19,200
Total collaboration revenues	80,749			46,600			113,784			82,506
Total revenues	$	259,479		$	240,275		$	486,394		$	455,762

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Product revenues:
Gross product revenues $ 239,916
$ 193,356
$ 704,084
$ 525,438
Discounts and allowances (48,148 ) (30,410 ) (139,060 ) (82,384 )
Net product revenues 191,768
162,946
565,024
443,054
Collaboration revenues:
License revenues⁽¹⁾
68,035
51,323
128,937
152,261
Research and development services revenues⁽²⁾
12,988
10,560
35,814
27,464
Other collaboration revenues⁽³⁾
(1,088 ) 568
(2,310 ) 2,445
Total collaboration revenues 79,935
62,451
162,441
182,170
Total revenues $ 271,703
$ 225,397
$ 727,465
$ 625,224

~~____________________~~


~~(1)~~	License revenues included the recognition of the portion of milestones allocated to the transfer of intellectual property licenses for which it had become probable in the current period that the milestone would be achieved and a significant revenue reversal would not occur, as well as royalty revenues from Ipsen Pharma SAS (Ipsen), Genentech and Daiichi Sankyo.


~~(2)~~	Research and development services revenues included the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, as well as development cost reimbursements earned on our collaboration agreements.


~~(3)~~	Other collaboration revenues included the profit on the U.S. commercialization of COTELLIC from Genentech and revenues on product supply services provided to Ipsen and Takeda Pharmaceutical Company Ltd. (Takeda), which were offset by the 3% royalty we are required to pay GlaxoSmithKline (GSK) on the net sales by Ipsen of any product incorporating cabozantinib.

Net product revenues and license revenues are recorded in accordance with Topic 606. License revenues include the recognition of the portion of milestones payments allocated to the transfer of intellectual property licenses for which it had become probable in the current period that the milestone would be achieved and ~~Research~~a significant reversal of revenues would not occur, as well as royalty revenues and ~~development~~our share of profits under our collaboration agreement with Genentech. Collaboration services revenues were recorded in accordance with Topic ~~606~~808 and by analogy to Topic 606. Collaboration services revenues include the recognition of deferred revenues for ~~all periods presented. Net product revenues~~the portion of upfront and ~~License revenues related~~milestone payments allocated to ~~goods and intellectual property licenses transferred at a point in time and Research~~our research and development services ~~revenues related to services performed over time. Other~~performance obligations, development cost reimbursements earned under our collaboration ~~revenues, which included the profit on the U.S. commercialization of COTELLIC and net losses on~~agreements, product supply ~~services, were recorded in accordance with Topic 808 for all periods presented.~~

revenues, net of product supply costs, and the royalties we paid to GlaxoSmithKline (GSK) on sales of products containing cabozantinib by our collaboration partners.

Net product revenues ~~disaggregated~~ by product were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
CABOMETYX	$	187,410	$	158,262	$	552,315	$	428,317	$	173,610	$	189,015	$	362,826	$	364,905
COMETRIQ	4,358		4,684		12,709		14,737		5,120		4,660		9,784		8,351
Net product revenues	$	191,768	$	162,946	$	565,024	$	443,054	$	178,730	$	193,675	$	372,610	$	373,256

~~Total~~The percentage of total revenues ~~disaggregated~~ by ~~significant~~ customer who individually accounted for 10% or more of our total revenues were as ~~follows (dollars in thousands):~~follows:

Three Months Ended September 30,
2019 2018
Dollars Percent of Total Dollars Percent of Total
Ipsen $ 76,016
28 % $ 57,186
25 %
Caremark L.L.C. 35,703
13 % 30,707
14 %
Affiliates of McKesson Corporation 31,901
12 % 26,597
12 %
Affiliates of AmerisourceBergen Corporation 25,235
9 % 17,232
8 %
Others, individually less than 10% of Total revenues for all periods presented 102,848
38 % 93,675

41 %
Total revenues $ 271,703
100 % $ 225,397
100 %

Nine Months Ended September 30,
2019 2018
Dollars Percent of Total Dollars Percent of Total
Ipsen $ 120,133
17 % $ 145,038
23 %
Caremark L.L.C. 105,638
15 % 83,516
13 %
Affiliates of McKesson Corporation 88,496
12 % 71,249
11 %
Affiliates of AmerisourceBergen Corporation 70,503
10 % 49,995
8 %
Others, individually less than 10% of Total revenues for all periods presented 342,695

46 %
275,426

45 %
Total revenues $ 727,465
100 % $ 625,224
100 %



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Ipsen Pharma SAS (Ipsen)	20	%	9	%	17	%	10	%
Affiliates of CVS Health Corporation	13	%	15	%	15	%	15	%
Affiliates of McKesson Corporation	11	%	13	%	13	%	12	%
Affiliates of AmerisourceBergen Corporation	11	%	10	%	11	%	10	%
Affiliates of Optum Specialty Pharmacy	10	%	8	%	11	%	8	%
Takeda Pharmaceutical Company Limited (Takeda)	10	%	1	%	5	%	3	%
Accredo Health, Incorporated	10	%	8	%	9	%	9	%

~~Total revenues disaggregated~~

Revenues by geographic region were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
U.S.	$	194,484	$	166,270	$	572,957	$	453,342	$	181,231	$	196,347	$	377,827	$	378,473
Europe	76,017		57,186		120,134		145,038		52,917		22,249		81,953		44,117
Japan	1,202		1,941		34,374		26,844		25,331		21,679		26,614		33,172
Total revenues	$	271,703	$	225,397	$	727,465	$	625,224	$	259,479	$	240,275	$	486,394	$	455,762

Net product revenues are attributed to geographic region based on the ship-to location. ~~Collaboration~~License and collaboration services revenues are attributed to geographic region based on the location of our collaboration partners’ headquarters.

Product Sales Discounts and Allowances

The activities and ending reserve balances for each significant category of discounts and allowances, ~~(which~~which constitute variable ~~consideration)~~consideration, were as follows (in thousands):


	Chargebacks and Discounts for Prompt Payment			Other Customer Credits/Fees and Co-pay Assistance			Rebates			Total			Chargebacks and Discounts for Prompt Payment			Other Customer Credits/Fees and Co-pay Assistance			Rebates			Total
Balance at December 31, 2018	$	2,322		$	3,038		$	11,916		$	17,276
Balance at December 31, 2019													$	7,514		$	3,497		$	15,222		$	26,233
Provision related to sales made in:
Current period	92,769			11,190			35,422			139,381			72,874			8,339			28,226			109,439
Prior periods	(130		)	(106		)	(85		)	(321		)	39			(364		)	740			415
Payments and customer credits issued	(92,317		)	(11,466		)	(33,127		)	(136,910		)	(72,169		)	(9,111		)	(29,592		)	(110,872		)
Balance at September 30, 2019	$	2,644		$	2,656		$	14,126		$	19,426
Balance at June 30, 2020													$	8,258		$	2,361		$	14,596		$	25,215

~~Chargebacks~~The allowance for chargebacks and discounts for prompt payment ~~are~~is recorded as a reduction of trade receivables, net and the remaining ~~reserve balances~~reserves are ~~classified~~recorded as ~~Other current liabilities~~rebates and fees due to customers in the accompanying Condensed Consolidated Balance Sheets.

Contract Assets and Liabilities

We receive payments from our ~~licensees~~collaboration partners based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We may also recognize ~~revenue~~revenues in advance of the contractual billing schedule and such amounts are recorded, net of any allowance for credit losses, as ~~unbilled collaboration revenue~~a contract asset when recognized. ~~Unbilled collaboration revenue was 0~~Contract assets, which are presented in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets, were $13.8 million and $1.1 million as of ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018. Upfront~~2019, respectively. We may be required to defer recognition of revenues for upfront and milestone payments ~~may require deferral of revenue recognition to a future period~~ until we perform our obligations under these arrangements, and such amounts are recorded as deferred ~~revenue~~revenues upon receipt or when due. ~~Deferred revenue was $15.4~~Contract liabilities were $16.3 million and ~~$15.9~~$6.6 million as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The ~~amount~~current portion of the contract liabilities totaling $1.3 million and $0 as of June 30, 2020 and December 31, 2019, respectively, are presented in other current liabilities and the remainder of the contract liabilities are presented in long-term portion of deferred revenues ~~recognized~~as of those dates in the accompanying Condensed Consolidated Balance Sheets. For those contracts that have multiple performance obligations, contract assets and liabilities are reported on a net basis at the contract level.

Significant changes in contract assets during the ~~nine~~six months ended ~~September~~June 30, 2020 include the impact of a $20.0 million development milestone from Ipsen we determined was probable of achievement, which was offset by the impact of a $10.0 million milestone from Takeda which was recognized as revenues during the year ended December 31, 2019 and ~~2018~~was achieved, invoiced and collected during the current period.

During the six months ended June 30, 2020 and 2019, we recognized $3.4 million and $1.8 million, respectively, in revenues that were included in the beginning deferred ~~revenue~~revenues balance ~~as of December 31, 2018 and December 31, 2017 was $2.7 million and $6.1 million, respectively~~for those periods.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recognized ~~$67.7~~$62.0 million and ~~$129.0~~$82.2 million, respectively, in revenues ~~under Topic 606~~ for performance obligations satisfied in previous periods as compared to ~~$48.2~~$36.1 million and ~~$151.8~~$61.4 million during the ~~same~~comparable periods in ~~2018.~~2019. Such revenues primarily related to milestone and royalty payments allocated to ~~our~~the license performance obligations offor our collaborations with Ipsen, Takeda, Daiichi Sankyo and ~~Daiichi Sankyo.~~Genentech.

As of June 30, 2020, $71.4 million of the transaction price was allocated to performance obligations that had not yet been satisfied. See “Note 3. Collaboration Agreements - Cabozantinib Commercial Collaborations - Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for information about the expected timing to satisfy these performance obligations.

NOTE 3. COLLABORATION AGREEMENTS

We have established multiple collaborations with leading pharmaceutical companies for the commercialization and further development of cabozantinib. Additionally, consistent with our business strategy prior to the commercialization of cabozantinib, ~~as well as~~we entered into other collaborations with leading pharmaceutical companies for other compounds and programs in our portfolio. Under these collaborations, we are generally entitled to receive milestone and royalty payments, and for certain collaborations receive payments for product supply services, development cost reimbursements, and/or profit-sharing payments. See “Note 2. Revenues” for additional information on revenues recognized under our collaboration agreements.

We have also established multiple collaborations with smaller, discovery-focused biotechnology companies to expand our product pipeline. ~~Additionally, in line with our business strategy prior~~Under these collaborations, we may be required to ~~the commercialization of our first product, COMETRIQ, we entered into other~~make milestone and royalty payments, and for certain collaborations ~~with leading pharmaceutical companies including Genentech, Daiichi Sankyo and Bristol-Myers Squibb Company~~make payments for ~~other compounds and programs in our portfolio.~~ development cost reimbursements and/or option exercise fees.

See “Note 3. Collaboration Agreements” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 for a description of each of our collaboration agreements.

Under these collaborations, we are generally entitled to receive milestone and royalty payments, and for certain collaborations, payments for product supply services, development cost reimbursements, and/or profit-sharing payments. See “Note 2. Revenues” for information on collaboration revenues recognized during the three and nine months ended September 30, 2019 and 2018.

~~Commercial~~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~~Under the terms of the collaboration agreement, as amended, 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 on three occasions, including 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. ~~Collaboration revenues~~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. During the second quarter of 2020, Ipsen opted into and is now co-funding the development costs for CONTACT-01 and CONTACT-02, two phase 3 pivotal trials of cabozantinib in combination with atezolizumab in patients with previously treated, metastatic non-small cell lung cancer and metastatic castration-resistant prostate cancer, respectively, and the four remaining cohorts of COSMIC-021 it had not previously opted into.

Revenues under the collaboration agreement with Ipsen were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Ipsen collaboration revenues $ 76,016
$ 57,186
$ 120,133
$ 145,038



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
License revenues	$	33,597	$	14,946	$	51,546	$	28,909
Collaboration services revenues	19,320		7,303		30,407		15,208
Total	$	52,917	$	22,249	$	81,953	$	44,117

Revenues for both the three and six months ended June 30, 2020 included $18.8 million in revenues recognized in connection with a $20.0 million development milestone from Ipsen we determined was probable of achievement.

As of ~~September~~June 30, ~~2019, $47.1~~2020, $46.2 million of the transaction price was allocated to our research and development services performance obligation ~~had~~that has not yet been satisfied. As of September 30, 2019, the net contract liability for the collaboration agreement with Ipsen was $7.2 million which was included in the Long-term portion of deferred revenue in the accompanying Condensed Consolidated Balance Sheets.

Takeda Collaboration

In January 2017, we entered into a collaboration ~~and license~~ agreement with Takeda. ~~Pursuant to~~Under this collaboration agreement, as amended, Takeda has exclusive commercialization rights for current and potential future cabozantinib indications in Japan, and the parties have agreed to collaborate on the clinical development of cabozantinib in Japan. The operation and strategic direction of the parties’ collaboration ~~agreement was subsequently amended in March 2018~~is governed through a joint executive committee and ~~April 2019.~~appropriate subcommittees.

The second amendment to the collaboration agreement with Takeda, which was executed on April 29, 2019 and became effective on May 7, 2019 (the Amendment), among other things, reduced the amount of reimbursements we will receive from Takeda for costs associated with our required global pharmacovigilance activities and limits those reimbursements to $1.0 million per year. It also increased the total potential development, regulatory and first-sale milestone payments to be paid to us by Takeda for second-line RCC, first-line RCC and second-line HCC by $12.0 million to $102.0 million, including an increase from $10.0 million to $16.0 million for the milestone we received for the April 2019 submission of a regulatory application for cabozantinib as a treatment for patients with advanced RCC to the Japanese Ministry of Health, Labour and Welfare (MHLW). We continue to be eligible to receive additional development, regulatory and first-sale milestone payments for other potential future indications. The Amendment also increased the amount of Takeda’s total potential commercial milestones by $6.0 million to $89.0 million. We continue to be eligible to receive royalties on net sales of cabozantinib in Japan.

~~Collaboration revenues~~Revenues under the collaboration agreement with Takeda were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Takeda collaboration revenues $ 1,187
$ 1,940
$ 14,245
$ 6,843



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
License revenues	$	22,946	$	—	$	22,946	$	9,056
Collaboration services revenues	2,195		1,565		3,264		4,002
Total	$	25,141	$	1,565	$	26,210	$	13,058

Revenues for both the three and six months ended June 30, 2020 included $23.7 million in revenues recognized in connection with $31.0 million in milestones we achieved upon Takeda’s first commercial sale of CABOMETYX as a treatment for patients with curatively unresectable or metastatic renal cell carcinoma in Japan, as well as royalties earned related to sales of cabozantinib in Japan.

As of ~~September~~June 30, ~~2019, $18.7~~2020, $25.1 million of the transaction price was allocated to our research and development services performance obligation ~~had~~that has not yet been satisfied. ~~As of September 30, 2019, the net contract liability for the~~

GSK

In October 2002, we established a product development and commercialization collaboration agreement with ~~Takeda was $8.2 million which was~~GSK. We are required to pay a 3% royalty to GSK on the net sales of any product incorporating cabozantinib by us and our collaboration partners. Royalties earned by GSK in connection with the sales of cabozantinib are included in cost of goods sold for sales by us and as a reduction of collaboration services revenues for sales by our collaboration partners. Such royalties were $7.6 million and $15.7 million during the ~~Long-term portion of deferred revenue~~three and six months ended June 30, 2020, respectively, as compared to $7.8 million and $15.1 million during the comparable periods in ~~the accompanying Condensed Consolidated Balance Sheets.~~2019.

Genentech Collaboration

In December 2006, we out-licensed the development and commercialization of cobimetinib to Genentech ~~pursuant to~~under a worldwide collaboration agreement. Under the terms of the collaboration agreement, we developed cobimetinib through the determination of the maximum tolerated dose in a phase 1 clinical trial, and Genentech had the option to co-develop cobimetinib, an option that Genentech exercised, 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 the subsequent clinical development.

In November 2015, the U.S. Food and Drug Administration (FDA) approved cobimetinib, under the brand name COTELLIC, in combination with Genentech’s Zelboraf (vemurafenib) as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. COTELLIC in combination with Zelboraf has also been approved in the European Union and multiple additional countries for use in the same indication. ~~Profits on U.S. commercialization~~In July 2020, the FDA also approved COTELLIC for use in combination with Zelboraf and ~~Royalty~~Tecentriq (atezolizumab) as a treatment for BRAF V600-mutation positive advanced melanoma in previously untreated patients. License revenues ~~on ex-U.S. sales~~under the collaboration agreement with Genentech were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Profits on U.S. commercialization	$	1,102	$	1,935	$	3,507	$	6,004	$	1,376	$	1,349	$	2,783	$	2,404
Royalty revenues on ex-U.S. sales	$	1,614	$	1,390	$	4,426	$	4,285	$	1,125	$	1,323	$	2,434	$	2,813

~~Daiichi Sankyo~~

In March 2006, we entered into a collaboration agreement with Daiichi Sankyo pursuant to which we granted to Daiichi Sankyo an exclusive, worldwide license to certain intellectual property primarily relating to compounds that modulate MR, including esaxerenone, an oral, non-steroidal, selective MR antagonist. Daiichi Sankyo was responsible for all further preclinical and clinical development, regulatory, manufacturing and commercialization activities for the compounds.

In January 2019, the Japanese MHLW approved esaxerenone, under the brand name MINNEBRO, as a treatment for patients with hypertension and in May 2019, Daiichi Sankyo had its first commercial sale of MINNEBRO. As a result of the launch, we received a $20.0 million milestone payment from Daiichi Sankyo in June 2019. We are eligible for low double-digit royalties on sales of MINNEBRO. In addition, pursuant to a license agreement we entered into with Ligand Pharmaceuticals, Inc. (Ligand), we are required to pay a royalty of 0.5% to Ligand on net sales of MINNEBRO.

~~Collaboration revenues under the collaboration agreement with Daiichi Sankyo were as follows (in thousands):~~

Nine Months Ended September 30,
2019 2018
Daiichi Sankyo collaboration revenues $ 20,130
$ 20,000

~~Such collaboration revenues were nominal or zero for the three months ended September 30, 2019 and 2018.~~

~~Iconic Therapeutics, Inc. (Iconic) Collaboration~~

In May 2019, we entered into an exclusive option and license agreement with Iconic. Under the terms of the agreement, we gained an exclusive option to license ICON-2, Iconic’s lead oncology antibody-drug conjugate program, in exchange for an upfront payment to Iconic of $7.5 million and a commitment for preclinical development funding. As of September 30, 2019, we accrued $6.6 million for the preclinical development funding commitment. Both the upfront payment and the accrual for the preclinical development funding commitment were included in Research and development expenses in the accompanying Condensed Consolidated Statements of Income.

If we exercise the option, we would be required to make an option exercise fee payment of $20.0 million to Iconic, we would assume responsibilities for all subsequent clinical development and commercialization activities, and Iconic would become eligible for up to $190.6 million in potential development, regulatory and first-sale milestone payments, $262.5 million in potential commercial milestone payments, as well as royalties on potential sales.

~~Aurigene Discovery Technologies Limited (Aurigene) Collaboration~~

In July 2019, we entered into an exclusive collaboration, option and license agreement with Aurigene, and India-based biotechnology company focused on oncology and inflammatory disorders, to in-license as many as 6 programs. Under the terms of the agreement, we made an upfront payment of $10.0 million for exclusive options to license 3 preexisting programs. In addition, we and Aurigene selected 3 additional Aurigene-led drug discovery programs on mutually agreed upon targets, in exchange for additional option payments totaling $7.5 million. We are also responsible for up to $32.6 million in research funding for the discovery and preclinical development work on these programs. As of September 30, 2019, we accrued $1.3 million for the discovery and preclinical development funding commitment.

For each option we decide to exercise, we would be required to pay an exercise fee of either $10.0 million or $12.0 million, depending on the program, and would assume responsibilities for all subsequent clinical development,

commercialization and global manufacturing of that program. Aurigene would then become eligible for up to $148.8 million per program in potential development and regulatory milestone payments, $280.0 million per program in potential commercial milestone payments, as well as royalties on potential sales. Under the terms of the agreement, Aurigene retains limited development and commercial rights for India and Russia.

~~GSK~~

In October 2002, we established a product development and commercialization collaboration agreement with GSK. Under the terms of the collaboration agreement, GSK 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. Although the collaboration agreement was terminated in December 2014, we continue to be required to pay a 3% royalty to GSK on the net sales of any product incorporating cabozantinib by us and our collaboration partners. Royalties accruing to GSK in connection with the sales of cabozantinib are included in Cost of goods sold for sales by us and as a reduction of Collaboration revenues for sales by Ipsen. Such royalties accruing to GSK were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Royalties accruing to GSK $ 7,964
$ 6,268
$ 23,079
$ 17,021

NOTE 4. CASH AND INVESTMENTS

Cash, Cash Equivalents and Restricted Cash Equivalents

A reconciliation of ~~Cash,~~cash, cash equivalents, and restricted cash equivalents reported ~~within our~~in the accompanying Condensed Consolidated Balance Sheets to the amount reported within the accompanying Condensed Consolidated Statements of Cash Flows was as follows (in thousands):

September 30, 2019 December 31, 2018 September 30, 2018 December 31, 2017
Cash and cash equivalents $ 242,317
$ 314,775
$ 353,623
$ 183,164
Restricted cash included in short-term restricted cash and investments —
—
504
504
Restricted cash included in long-term restricted cash and investments 1,000
1,100
1,100
4,646
Cash, cash equivalents, and restricted cash as reported within the accompanying Condensed Consolidated Statements of Cash Flows $ 243,317
$ 315,875
$ 355,227
$ 188,314



	June 30, 2020		December 31, 2019
Cash and cash equivalents	$	527,143	$	266,501
Restricted cash equivalents included in long-term investments	1,636		1,636
Cash, cash equivalents, and restricted cash equivalents as reported in the accompanying Condensed Consolidated Statements of Cash Flows	$	528,779	$	268,137

Restricted cash ~~includes~~equivalents consisted of certificates of deposit with original maturities of 90 days or less used to collateralize letters of ~~credit and, in prior periods, a purchasing card program.~~

credit. The long-term classification of restricted cash equivalents is based upon the remaining term of the underlying restriction.

Cash and Investments

Cash and investments ~~by security type were as follows~~consisted of the following (in thousands):



	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities available-for-sale:
Commercial paper	$	239,685	$	245	$	—		$	239,930
Corporate bonds	663,491		9,527		(150		)	672,868
U.S. Treasury and government-sponsored enterprises	89,890		462		—			90,352
Municipal bonds	28,229		152		(1		)	28,380
Total debt securities available-for-sale	1,021,295		10,386		(151		)	1,031,530
Cash	52,053		—		—			52,053
Money market funds	404,313		—		—			404,313
Certificates of deposit	52,283		—		—			52,283
Total cash and investments	$	1,529,944	$	10,386	$	(151	)	$	1,540,179

September 30, 2019

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
Investments available-for-sale:
Money market funds $ 26,641
$ —
$ —
$ 26,641
Commercial paper 332,239
—
—
332,239
Corporate bonds 703,325
3,549
(67 ) 706,807
U.S. Treasury and government sponsored enterprises 152,531
143
(24 ) 152,650
Total investments available-for-sale 1,214,736
3,692
(91 ) 1,218,337
Cash and restricted cash 901
—
—
901
Certificates of deposit 29,189
3
—
29,192
Total cash and investments $ 1,244,826
$ 3,695
$ (91 ) $ 1,248,430


	December 31, 2018									December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Investments available-for-sale:
Money market funds	$	47,744	$	—	$	—		$	47,744
Debt securities available-for-sale:
Commercial paper	381,134		—		(1		)	381,133		$	389,573	$	—	$	—		$	389,573
Corporate bonds	344,741		180		(857		)	344,064		752,295		3,934		(3		)	756,226
U.S. Treasury and government sponsored enterprises	55,224		2		(25		)	55,201
Total investments available-for-sale	828,843		182		(883		)	828,142
Cash and restricted cash	6,883		—		—			6,883
U.S. Treasury and government-sponsored enterprises										166,483		187		(5		)	166,665
Total debt securities available-for-sale										1,308,351		4,121		(8		)	1,312,464
Cash										40,964		—		—			40,964
Money market funds										2,467		—		—			2,467
Certificates of deposit	16,596		—		—			16,596		32,728		5		—			32,733
Total cash and investments	$	852,322	$	182	$	(883	)	$	851,621	$	1,384,510	$	4,126	$	(8	)	$	1,388,628

Interest receivable was $5.3 million and $6.2 million as of June 30, 2020 and December 31, 2019, respectively, and is included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets.

~~Gains~~Realized gains and losses on the sales of investments ~~available-for-sale~~ were ~~nominal~~insignificant during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019.

We manage credit risk associated with our investment portfolio through our investment policy, which limits purchases to high-quality issuers and limits the amount of our portfolio that can be invested in a single issuer. The fair value and gross unrealized losses on ~~investments~~debt securities available-for-sale in an unrealized loss position were as follows (in thousands):

September 30, 2019
In an Unrealized Loss Position Less than 12 Months In an Unrealized Loss Position 12 Months or Greater Total
Fair Value Gross
Unrealized
Losses Fair Value Gross
Unrealized
Losses Fair Value Gross
Unrealized
Losses
Corporate bonds $ 73,064
$ (66 ) $ 4,398
$ (1 ) $ 77,462
$ (67 )
U.S. Treasury and government sponsored enterprises 46,744
(24 ) —
—
46,744
(24 )
Total $ 119,808
$ (90 ) $ 4,398
$ (1 ) $ 124,206
$ (91 )



	June 30, 2020
	Fair Value		Gross Unrealized Losses
Corporate bonds	$	27,850	$	(150	)
U.S. Treasury and government-sponsored enterprises	4,997		—
Municipal bonds	2,471		(1		)
Total	$	35,318	$	(151	)


	December 31, 2018
	In an Unrealized Loss Position Less than 12 Months					In an Unrealized Loss Position 12 Months or Greater					Total					December 31, 2019
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate bonds	$	236,162	$	(606	)	$	39,627	$	(251	)	$	275,789	$	(857	)	$	14,529	$	(3	)
U.S. Treasury and government sponsored enterprises	28,105		(16		)	9,182		(9		)	37,287		(25		)
Commercial paper	7,091		(1		)	—		—			7,091		(1		)
U.S. Treasury and government-sponsored enterprises																2,848		(5		)
Total	$	271,358	$	(623	)	$	48,809	$	(260	)	$	320,167	$	(883	)	$	17,377	$	(8	)

All securities presented have been in an unrealized loss position less than 12 months. There were 4317 and ~~199~~9 investments in an unrealized loss position as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019, we did 0t record ~~any other-than-temporary~~an allowance for credit losses or other impairment charges on our ~~available-for-sale~~investment securities. Based upon our quarterly impairment review, we determined that the unrealized losses were not attributed to credit risk but were primarily associated with changes in interest ~~rates.~~rates and market liquidity. Based on the scheduled maturities of our investments, ~~and our determination~~we determined that it was more likely than not that we will hold these investments for a period of time sufficient for a recovery of our cost ~~basis, we concluded that the unrealized losses in our investment securities were not other-than-temporary.~~basis.

The fair value of ~~investments~~debt securities available-for-sale by contractual maturity ~~were~~was as follows (in thousands):


	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Maturing in one year or less	$	743,768	$	674,455	$	720,089	$	789,913
Maturing after one year through five years	474,569		153,687		311,441		522,551
Total investments available-for-sale	$	1,218,337	$	828,142
Total debt securities available-for-sale					$	1,031,530	$	1,312,464

~~Related Party Transactions~~

BlackRock, Inc. (BlackRock), a global provider of investment, advisory and risk management solutions, reported that as of December 31, 2018, the most recent date for which they reported ownership data, their beneficial ownership was more than 10% of our outstanding common stock. BlackRock manages a portion of our cash and investments portfolio. As of September 30, 2019 and December 31, 2018, respectively, the fair value of cash and investments managed by BlackRock was $470.8 million and $298.5 million, which included $1.9 million and $3.0 million invested in the BlackRock Liquidity Money Market Fund. As of September 30, 2019, we also had a $9.0 million payable to BlackRock for unsettled trades that was included in Other current liabilities in the accompanying Condensed Consolidated Balance Sheets. We incurred $0.2 million in fees for BlackRock advisory services performed during the nine months ended ~~September 30, 2019~~.

~~NOTE 5. INVENTORY~~

~~Inventory consisted of the following (in thousands):~~

September 30,
2019 December 31, 2018
Raw materials $ 1,906
$ 1,922
Work in process 11,035
6,170
Finished goods 7,311
3,836
Total $ 20,252
$ 11,928

Balance Sheet classification:
Current portion included in Inventory $ 13,366
$ 9,838
Long-term portion included in Other long-term assets 6,886
2,090
Total $ 20,252
$ 11,928

Write-downs related to excess and expiring inventory are charged to Cost of goods sold or the cost of supplied product included in Collaboration revenues. Such write-downs were $0.4 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively.

~~Inventory not expected to be used in production or sold in the next 12 months is classified as Other long-term assets in the accompanying Condensed Consolidated Balance Sheets. As of both~~ ~~September 30, 2019~~ ~~and December 31, 2018, the long-term portion of inventory consisted of portions of our raw materials and finished goods, and as of~~ ~~September 30, 2019, also a portion of our work in process.~~

~~NOTE 6. PROPERTY AND EQUIPMENT~~

~~Property and equipment consisted of the following (in thousands):~~

September 30,
2019 December 31,
2018
Leasehold improvements $ 33,769
$ 33,941
Computer equipment and software 17,017
15,022
Furniture and fixtures 13,053
12,709
Laboratory equipment 8,408
5,668
Construction in progress 617
866
72,864
68,206
Less: accumulated depreciation and amortization (23,397 ) (17,309 )
Property and equipment, net $ 49,467
$ 50,897

~~Depreciation expense was $2.1 million and $6.1 million for the three and nine months ended~~ ~~September 30, 2019, respectively, as compared to $1.7 million and $2.9 million and for the comparable periods in~~ ~~2018~~.

NOTE 5. 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. The fair value hierarchy has the following three levels:

Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities;

Level 2 - inputs other than level 1 that are observable either directly or indirectly, such as 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 that are supported by little or no market activity that are significant to the fair value measurement

The classifications within the fair value hierarchy of our financial assets that were measured and recorded at fair value on a recurring basis were as follows (in thousands):



	June 30, 2020
	Level 1		Level 2		Total
Commercial paper	$	—	$	239,930	$	239,930
Corporate bonds	—		672,868		672,868
U.S. Treasury and government-sponsored enterprises	—		90,352		90,352
Municipal bonds	—		28,380		28,380
Total debt securities available-for-sale	—		1,031,530		1,031,530
Money market funds	404,313		—		404,313
Certificates of deposit	—		52,283		52,283
Total financial assets carried at fair value	$	404,313	$	1,083,813	$	1,488,126



	December 31, 2019
	Level 1		Level 2		Total
Commercial paper	$	—	$	389,573	$	389,573
Corporate bonds	—		756,226		756,226
U.S. Treasury and government-sponsored enterprises	—		166,665		166,665
Total debt securities available-for-sale	—		1,312,464		1,312,464
Money market funds	2,467		—		2,467
Certificates of deposit	—		32,733		32,733
Total financial assets carried at fair value	$	2,467	$	1,345,197	$	1,347,664

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 for similar assets as observable inputs for pricing, which is a Level 2 input.

The carrying amount of our remaining financial assets and liabilities, which include cash, receivables and payables, approximate their fair values due to their short-term nature.

NOTE 6. INVENTORY

Inventory consisted of the following (in thousands):



	June 30, 2020		December 31, 2019
Raw materials	$	1,876	$	2,709
Work in process	15,275		9,447
Finished goods	5,086		4,367
Total	$	22,237	$	16,523
Balance Sheet classification:
Current portion included in inventory	$	16,608	$	12,886
Long-term portion included in other long-term assets	5,629		3,637
Total	$	22,237	$	16,523

Write-downs related to excess and expiring inventory were $1.3 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively.

NOTE 7. STOCK-BASED COMPENSATION

We allocated the stock-based compensation expense for our equity incentive plans and our 2000 Employee Stock Purchase Plan (ESPP) as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Research and development	$	4,301	$	3,169	$	13,745	$	9,102	$	6,112	$	5,138	$	11,198	$	9,444
Selling, general and administrative	8,838		6,573		27,002		19,228		10,042		9,941		18,938		18,164
Total stock-based compensation	$	13,139	$	9,742	$	40,747	$	28,330	$	16,154	$	15,079	$	30,136	$	27,608

~~We have several equity incentive plans under which we have granted stock options and restricted stock units (RSUs) to employees and directors. At~~As of ~~September~~June 30, ~~2019~~2020, ~~6,024,995~~25,749,356 shares were available for grant under ~~our equity incentive plans.~~

~~We used~~the Exelixis, Inc. 2017 Equity Incentive Plan (as amended and restated, the 2017 Plan). The share reserve is reduced by 1 share for each share issued pursuant to a Monte Carlo simulation pricing model to value stock options that include market vesting conditions and a Black-Scholes Merton option pricing model to value other stock options and ESPP purchases. The weighted average grant-date fair value per share of stock options and ESPP purchases were as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Stock options $ 7.71
$ 8.67
$ 8.57
$ 9.13
ESPP $ 5.39
$ 6.19
$ 4.93
$ 6.96

~~The grant-date fair value of~~ stock option ~~grants~~or stock appreciation award and ~~ESPP purchases was estimated using~~1.5 shares for full value awards granted in the ~~following assumptions:~~

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Stock options:
Risk-free interest rate 1.57 % 2.91 % 1.82 % 2.83 %
Dividend yield — % — % — % — %
Volatility 48 % 55 % 48 % 55 %
Expected life 4.0 years
4.4 years
4.4 years
4.4 years
ESPP:
Risk-free interest rate 2.09 % 2.11 % 2.34 % 1.74 %
Dividend yield — % — % — % — %
Volatility 43 % 51 % 52 % 52 %
Expected life 6 months
6 months
6 months
6 months

~~We considered~~form of restricted stock units (RSUs). On May 20, 2020, at our ~~implied volatility~~2020 Annual Meeting of Stockholders, our stockholders approved the amendment and our historical volatility in developing our estimates of expected volatility. The assumptions for the expected life of stock options were based on historical exercise patterns and post-vesting termination behavior. The risk-free interest rate is based on U.S. Treasury rates with the same or similar term as the underlying award. Our dividend rate is based on historical experience and our investors’ current expectations.

~~The fair value of RSUs was based on the closing price~~restatement of the ~~underlying common stock~~2017 Plan. The amendment and restatement increased the share reserve under the 2017 Plan by 21,000,000 shares (the Additional Shares), subject to adjustment for certain changes in our capitalization, which became effective immediately upon stockholder approval. The Additional Shares will be registered on ~~the date of~~a Form S-8 prior to grant.

~~Activity for stock options during~~During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~ ~~was as follows (dollars in thousands~~2020, ~~except~~we granted 839,318 stock options with a weighted average exercise price of $21.40 per share ~~amounts):~~

Shares
Weighted
Average
Exercise Price Per Share

Weighted
Average
Remaining Contractual
Term

Aggregate
Intrinsic
Value
Options outstanding at December 31, 2018 22,674,062
$ 8.71

Granted 1,042,286
$ 20.81

Exercised (3,042,201 ) $ 4.94

Forfeited (160,241 ) $ 16.76

Expired (35,045 ) $ 23.41

Options outstanding at September 30, 2019 20,478,861
$ 9.80
3.4 years $ 186,407
Exercisable at September 30, 2019 15,860,131
$ 7.02
2.8 years $ 181,542

and a weighted average grant date fair value of $9.74 per share. As of June 30, 2020, there were 16,655,274 stock options outstanding and $30.3 million unrecognized compensation expense.

~~As of~~ ~~September 30, 2019, there was~~ ~~$38.0 million~~ ~~of unrecognized compensation expense related to our unvested stock options. The compensation expense for the unvested stock options will be recognized over a weighted-average period of~~ ~~2.3 years~~.

~~Activity for RSUs during~~During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~ ~~was as follows (dollars in thousands~~2020, ~~except~~we granted 889,023 RSUs with a weighted average grant date fair value of $21.43 per ~~share amounts):~~

Shares
Weighted
Average
Grant Date
Fair Value Per Share

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value
RSUs outstanding at December 31, 2018 4,857,334
$ 18.42

Awarded 5,635,362
$ 19.54

Vested and released (484,731 ) $ 12.33

Forfeited (258,142 ) $ 18.47

RSUs outstanding at September 30, 2019 9,749,823
$ 19.37
2.2 years $ 175,448

share. As of ~~September~~June 30, ~~2019~~2020, there ~~was $166.0~~were 4,774,852 RSUs outstanding and $75.1 million of unrecognized compensation ~~expense related to our unvested RSUs, including those~~expense.

Stock options and RSUs granted to employees during the six months endedJune 30, 2020 have vesting conditions and contractual lives of a similar nature to those described in ~~September 2018 and September 2019 that will vest upon~~“Note 8. Employee Benefit Plans” of the ~~achievement of specific performance targets (PSUs) described below. The compensation expense~~Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the ~~unvested RSUs will be recognized over a weighted-average period of 2.8 years.~~fiscal year ended December 31, 2019.

During ~~2019,~~the year ended December 31, 2018, in connection with our long-term incentive compensation program, we ~~awarded 1,926,605 RSUs (the target amount)~~granted 308,365 performance-based stock options (PSOs) to our President and Chief Executive Officer. In addition to the standard service-based vesting conditions included in our other stock options, these PSOs contain a market vesting condition such that ~~will vest upon~~they may not be exercised until, at any time after the grant date, the closing market price of our Common Stock is equal to or greater than 125% of the per share exercise price of the PSOs over a period of at least 30 consecutive calendar days. This market vesting condition was achieved during the three months ended June 30, 2020. The stock-based compensation expense for the PSOs is being recognized on an accelerated basis over the service period of the award, which commenced on the date of grant. The achievement of ~~a performance target~~the market vesting condition did not impact the compensation expense recognized during the period.

As of June 30, 2020, there were 4,343,852 performance-based restricted stock units (PSUs) outstanding with $79.7 million in related to a product approval by the FDA (the 2019 PSUs); employees may earn 150% of the target amount, or an additional 963,136 shares relative to the target amount, if the performance target is achieved before December 31, 2020 and may earn the full 200% of the target amount, or up to an additional 1,926,605 shares relative to the target amount, if we receive a second product approval. During 2018 we awarded 693,131 RSUs that will vest upon the achievement of certain product revenue, late-stage clinical development and pipeline expansion performance targets (the 2018 PSUs). The 2018 PSUs and 2019 PSUs were designed to drive the performance of our management team and employees toward the achievement of key corporate objectives and will be forfeited if the performance targets are not met by December 31, 2021.

unrecognized compensation expense. Expense recognition for PSUs commences when it is determined that ~~attainment~~achievement of the performance target is probable. ~~During~~Of the ~~quarter ended June 30, 2019,~~outstanding PSUs, 237,945 relate to awards for which we achieved ~~one of~~ the ~~two product revenue related~~ performance ~~targets for 114,843 of the 2018 PSUs and~~target during 2019 or had determined during 2019 that it was probable that we would achieve the ~~second product revenue related~~performance target during 2020. During the three months ended June 30, 2020, we determined that it had become probable that we would achieve an additional performance target for ~~172,272~~98,653 additional PSUs granted during 2018 PSUs. During the quarter ended September 30, 2019, the second product revenue related performance target of the 2018 PSUs was achieved. Those 2018 PSUs will vest over various dates through February 2021. We recognizedresulting in $0.9 ~~million and $3.5~~ million in compensation expense ~~related to those 2018 PSUs~~ during the ~~three and nine months ended September 30, 2019, respectively; the remaining unrecognized compensation expense for those 2018~~period. For more information about our PSUs, ~~was $1.7 million as of September 30, 2019. The total unrecognized compensation expense for both the 2019 PSUs and the remaining 2018 PSUs for which we have not yet determined that attainment~~see “Note 8. Employee Benefit Plans” of the ~~performance target is probable was $82.4 million as of~~ ~~September 30, 2019~~.Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

NOTE 8. INCOME TAXES

Our effective income tax rate was ~~20.5%~~17.2% and ~~19.4%~~18.0% during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to ~~1.8%~~20.8% and ~~1.7% during the three and nine months ended September 30, 2018, respectively. The Provision for income taxes relating to our pre-tax income~~18.7% for the three and nine months ended September 30, 2018 was largely offset by a valuation allowance against our net operating loss carryforwards and other deferred tax assets. At December 31, 2018, we released substantially all of our valuation allowance against our deferred tax assets, after we determined that it was more likely than not that these deferred tax assets would be realized.

comparable periods in 2019. The effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits related to the exercise of certain stock options during ~~those~~the periods.

NOTE 9. NET INCOME PER SHARE

~~The~~Net income per share - basic and diluted, ~~net income per share~~ were computed as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Numerator:
Net income	$	97,452	$	126,630	$	252,269	$	329,981	$	66,821	$	79,042	$	115,433	$	154,817
Denominator:
Weighted-average shares of common stock outstanding used in computing basic net income per share	303,268		298,416		301,999		297,700
Weighted-average common shares outstanding - basic									307,807		302,188		306,598		301,365
Dilutive securities	12,185		13,930		13,047		15,500		10,337		12,723		10,394		13,421
Weighted-average shares of common stock outstanding and dilutive securities used in computing diluted net income per share	315,453		312,346		315,046		313,200
Weighted-average common shares outstanding - diluted									318,144		314,911		316,992		314,786
Net income per share - basic									$	0.22	$	0.26	$	0.38	$	0.51
Net income per share - diluted									$	0.21	$	0.25	$	0.36	$	0.49

Net income per share, basic	$	0.32	$	0.42	$	0.84	$	1.11
Net income per share, diluted	$	0.31	$	0.41	$	0.80	$	1.05

Dilutive securities ~~include outstanding~~included stock options, ~~unvested~~ RSUs, PSUs and ESPP contributions. ~~Potential~~

Certain potential common shares were excluded from our calculation of weighted-average common ~~stock not included in the computation of~~shares outstanding - diluted because either they would have had an anti-dilutive effect on net income per share ~~because~~or they were related to ~~do so would be anti-dilutive,~~shares from PSOs and PSUs for which the contingent vesting condition had not been achieved. These excluded potential common shares were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Potentially dilutive securities 6,153
5,687
5,740
2,938



	Three Months Ended June 30,		Six Months Ended June 30,
	2020	2019	2020	2019
Anti-dilutive securities and contingently issuable shares excluded	8,812	5,935	10,413	5,625

NOTE 10. COMMITMENTS AND CONTINGENCIES

In September 2019, we received a notice letter regarding an Abbreviated New Drug Application (ANDA) submitted to the FDA by MSN Pharmaceuticals, Inc. (MSN), requesting approval to market a generic version of CABOMETYX tablets. MSN’s initial notice letter included a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776, 9,724,342, 10,034,873 and 10,039,757, which are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, also referred to as the Orange Book. MSN’s initial notice letter did not provide a Paragraph IV certification against U.S. Patent No. 7,579,473, the composition of matter patent, or U.S. Patent No. 8,497,284, a method of use patent. On October 29, 2019, we filed a complaint in the United States District Court for the District of Delaware for patent infringement against MSN asserting U.S. Patent No. 8,877,776 arising from MSN’s ANDA filing with the FDA. On November 20, 2019, MSN filed its response to the complaint, alleging that U.S. Patent No. 8,877,776 is invalid and not infringed. On May 5, 2020, we received notice from MSN that it had amended its ANDA to assert additional Paragraph IV certifications. The ANDA now requests approval to market a generic version of CABOMETYX tablets prior to expiration of the two previously-unasserted CABOMETYX patents: U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284. On May 11, 2020, we filed a complaint in the United States District Court for the District of Delaware for patent infringement against MSN asserting U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 arising from MSN’s amended ANDA filing with the FDA. On May 22, 2020, MSN filed its response to the complaint, alleging that each of U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 is invalid and not infringed. Neither of our complaints alleges infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757. In our complaints, we are seeking, among other relief, an order that the effective date of any FDA approval of the ANDA would be a date no earlier than the expiration of all of U.S. Patent No. 7,579,473, U.S. Patent No. 8,497,284 and U.S. Patent No. 8,877,776, the latest of which expires on October 8, 2030, and equitable relief enjoining MSN from infringing these patents. These two lawsuits against MSN have been consolidated, and a bench trial has been scheduled for May 2022. The sale of a generic version of CABOMETYX earlier than its patent expiration could significantly decrease our revenues and thereby materially harm our business, financial condition and results of operations. It is not possible at this time to determine the likelihood of an unfavorable outcome or estimate of the amount or range of any potential loss.

We may also from time to time become a party or subject to various other 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.

~~NOTE 10. FAIR VALUE MEASUREMENTS~~

~~The classifications within the fair value hierarchy of our financial assets that were measured and recorded at fair value on a recurring basis were as follows (in thousands):~~

September 30, 2019
Level 1 Level 2 Total
Money market funds $ 26,641
$ —
$ 26,641
Commercial paper —
332,239
332,239
Corporate bonds —
706,807
706,807
U.S. Treasury and government sponsored enterprises —
152,650
152,650
Total investments available-for-sale 26,641
1,191,696
1,218,337
Certificates of deposit —
29,192
29,192
Total financial assets carried at fair value $ 26,641
$ 1,220,888
$ 1,247,529

December 31, 2018
Level 1 Level 2 Total
Money market funds $ 47,744
$ —
$ 47,744
Commercial paper —
381,133
381,133
Corporate bonds —
344,064
344,064
U.S. Treasury and government sponsored enterprises —
55,201
55,201
Total investments available-for-sale 47,744
780,398
828,142
Certificates of deposit —
16,596
16,596
Total financial assets carried at fair value $ 47,744
$ 796,994
$ 844,738

~~We did not have any financial liabilities measured and recorded at fair value on a recurring basis as of~~ ~~September 30, 2019~~ or ~~December 31, 2018. We did not have any financial assets or liabilities classified as Level 3 in the fair value hierarchy as of~~ ~~September 30, 2019~~ or ~~December 31, 2018. There were no transfers of financial assets or liabilities between Levels 1, 2 and 3 during the three and nine months ended September 30, 2019 or~~ ~~2018~~.

See “Note 11. Leases” for a description of the determination of the amount of operating lease liabilities. Our remaining financial assets and liabilities include cash and restricted cash, Trade receivables, net, Other receivables, Accounts payable, Accrued compensation and benefits, Accrued clinical trial liabilities, Accrued collaboration liabilities and Rebates and fees due to customers. Those financial assets and liabilities are carried at cost, which approximates their fair values.

~~NOTE 11. LEASES~~

In May 2017, we entered into a Lease Agreement (the Lease) for our corporate headquarters located at 1851, 1801 and 1751 Harbor Bay Parkway, Alameda, California (the Initial Premises). The Lease was subsequently amended in October 2017, June 2018 and April 2019, resulting in the addition of the building located at 1601 Harbor Bay Parkway and increasing the leased space to an aggregate of 169,606 square feet (the Current Premises) as of ~~September 30, 2019~~. We have made certain tenant improvements to the space leased on the Initial Premises, for which we received $8.2 million in reimbursements in January 2019. The Lease’s initial term is through January 31, 2028. Rent payments began February 1, 2018, following the conclusion of a partial twelve-month rent abatement period. We have 2 five-year options to extend the Lease and a one-time option to terminate the Lease without cause on the last day of the 8^th year of the initial term (the Early Termination Right); none of these optional periods have been considered in the determination of the right-of-use asset or the lease liability for the Lease as we did not consider it reasonably certain that we would exercise any such options. The Lease further provides that we are obligated to pay the landlord certain variable costs, including taxes and operating expenses.

The April 2019 amendment to the Lease (the Third Lease Amendment) provides, among other things, for the (i) expansion of the Initial Premises by 37,544 square feet of office facilities located at 1601 Harbor Bay Parkway, Alameda, California (the 1601 Expansion Space) and (ii) surrender of 2,703 square feet of office facilities located at 1751 Harbor Bay Parkway, Alameda, California (the 1751 Space). The term for the 1601 Expansion Space will run coterminous with the term of the Lease for the existing space. We have been provided an allowance of $1.7 million for tenant improvements to the 1601 Expansion Space. As of ~~September 30, 2019~~, we have surrendered the 1751 Space and we have taken possession of the 1601 Expansion Space, and accordingly we have adjusted our right-of-use asset and lease liability, and have begun to recognize lease costs for the Third Lease Amendment.

~~The balance sheet classification of our lease liabilities were as follows (in thousands):~~

September 30,
2019 December 31, 2018
Operating lease liabilities:
Current portion included in Other current liabilities $ 2,695
$ 2,738
Long-term portion of lease liabilities 23,661
12,099
Total operating lease liabilities 26,356
14,837
Financing lease liabilities:
Current portion included in Other current liabilities 50
49
Long-term portion of lease liabilities 44
79
Total financing lease liabilities 94
128
Total lease liabilities $ 26,450
$ 14,965

The components of lease costs for operating leases, which were included in Selling, general and administrative expenses in our Condensed Consolidated Statements of Income, were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Operating lease cost $ 692
$ 1,614
$ 1,768
$ 3,587
Variable lease cost 274
363
654
1,366
Total lease costs $ 966
$ 1,977
$ 2,422
$ 4,953

Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2019 was $2.1 million and was included in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

~~As of~~ ~~September 30, 2019, the maturities of our operating lease liabilities were as follows (in thousands):~~

Remainder of 2019 $ 745
Years ending December 31,
2020 3,625
2021 3,731
2022 3,852
2023 3,959
Thereafter 17,444
Total lease payments 33,356
Less:
Present value adjustment (5,258 )
Tenant improvement reimbursements⁽¹⁾
(1,742 )
Operating lease liabilities $ 26,356

~~____________________~~


~~(1)~~	~~Represents anticipated tenant improvement reimbursements applicable to the portion of the 1601 Expansion Space.~~

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, we use our incremental borrowing rate. The weighted average discount rate used to determine the operating lease liability was 4.20%. As of ~~September 30, 2019, the weighted average remaining lease term is 8.3 years.~~

~~NOTE 12. SUBSEQUENT EVENTS~~

~~Build to Suit Lease~~

On ~~October 25, 2019~~, we entered into a build-to-suit Lease Agreement (the Build-to-Suit Lease) with Ernst Development Partners, Inc. (Ernst), for approximately 220,000 square feet of office space located in Alameda, California (the New Premises), adjacent to the Current Premises. The term of the Build-to-Suit Lease is for a period of 242 months (the Term), which will begin on the completion of the building and tenant improvements by Ernst. The Term is currently anticipated to begin on October 25, 2021. The monthly base rent under the Build-to-Suit Lease will equal to a percentage of the total development costs incurred in connection with the development of the New Premises (excluding the cost of the tenant improvements in excess of the allowance provided by Ernst and any development costs we pay) and is currently estimated to be about $726,000, subject to an annual increase of 3% during the Term. The monthly base rent will begin sixty days following commencement of the Term. We will also be responsible for paying operating expenses related to the New Premises.

The Build-to-Suit Lease includes 2 five-year options to extend the term of the Build-to-Suit Lease, exercisable under certain conditions and at a market rate determined in accordance with the Build-to-Suit Lease. We have a one-time option to terminate the Build-to-Suit Lease without cause after the 180^th ~~month of the Term, exercisable under certain conditions as described in the Build-to-Suit Lease and subject to a termination payment calculated in accordance with the Build-to-Suit Lease.~~

~~See Part II, Item 5 of this Quarterly Report on Form 10-Q for more information about the Build to Suit Lease.~~

~~Fourth Amendment to the Lease~~

In the fourth quarter of 2019, Hillwood Enterprises, L.P. (Hillwood) is expected to purchase the project known as 1750 North Loop Road and 1601, 1701, 1751, 1801 and 1851 Harbor Bay Parkway, Alameda, California from Ascentris 105, LLC (the Purchase), which project includes the Current Premises. Effective upon the Purchase, Hillwood will become the landlord pursuant to the Lease.

On August 30, 2019, we entered into an amendment to the Lease with Hillwood (the Fourth Lease Amendment), pursuant to which each of our rights and obligations are contingent upon the Purchase. Effective upon the Purchase, the Fourth Lease Amendment will provide for, among other things, the (i) expansion of the Current Premises by 59,335 square feet of laboratory facilities located at 1701 Harbor Bay Parkway, Alameda, California, (ii) extension of the Lease term through October 31, 2031 and (iii) elimination of the Early Termination Right.

As of September 30, 2019, we have not yet recorded a right-of-use asset or lease liability for the Fourth Lease Amendment, and the remainder of the disclosures in this note do not reflect the impact of this amendment.

~~See Part II, Item 5 of this Quarterly Report on Form 10-Q for more information about the Fourth Lease Amendment.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements are based on Exelixis, Inc.’s (Exelixis, we, our or us) current expectations, assumptions, estimates and projections about our business and our industry and involve known and unknown risks, uncertainties and other factors that may cause our 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. 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 “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those discussed elsewhere in this report. 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.

This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and the consolidated financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 filed with the Securities and Exchange Commission (SEC) on February ~~22, 2019.~~25, 2020.

Overview

We are an oncology-focused biotechnology company that strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Since we were founded in 1994, four products resulting from our discovery efforts have progressed through clinical development, received regulatory approval and ~~have launched commercially.~~established a commercial presence in various geographies around the world. Two are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET. ~~These~~Our cabozantinib products are: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma (RCC) and previously treated hepatocellular carcinoma (HCC); and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer (MTC). For these types of cancer, cabozantinib has become or is becoming a standard of care. The other two products resulting from our discovery efforts are: COTELLIC® (cobimetinib), an inhibitor of MEK, approved as part of amultiple combination ~~regimen~~regimens to treat a specific ~~form~~forms of advanced melanoma and marketed under a collaboration with Genentech, Inc. (a member of the Roche Group) (Genentech); and MINNEBRO® (esaxerenone), an oral, non-steroidal, selective blocker of the mineralocorticoid receptor, approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo).

~~CABOMETYX was first approved by the~~The U.S. Food and Drug Administration (FDA) first approved CABOMETYX for previously treated patients with advanced RCC in April 2016, and ~~then~~ in December 2017 the FDA expanded CABOMETYX’s approval to include previously untreated patients with advanced RCC. Additionally, in January 2019, the FDA approved CABOMETYX as a treatment for patients with HCC who have been previously treated with sorafenib. This approval was based on results from CELESTIAL, our phase 3 pivotal trial evaluating cabozantinib in patients with previously treated HCC, which demonstrated a statistically significant and clinically meaningful improvement in overall survival versus placebo.

To develop and commercialize CABOMETYX and COMETRIQ outside the U.S., we have entered into license agreements with Ipsen Pharma SAS (Ipsen) and Takeda Pharmaceutical Company ~~Ltd.~~Limited (Takeda). We granted to Ipsen ~~has been granted~~the rights to develop and commercialize cabozantinib outside of the U.S. and Japan, and to Takeda ~~has been granted~~the rights to develop and commercialize cabozantinib in Japan. Both ~~partners~~Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of cabozantinib in other potential indications, and we continue to work closely with them on these activities. Utilizing its regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of the ~~United States,~~U.S., including in the European Union (EU), and Canada, as a treatment for advanced RCC and for HCC in adults who have previously been treated with ~~sorafenib, and in Canada where CABOMETYX has recently been approved for previously untreated advanced RCC in addition~~sorafenib. With respect to the ~~earlier approval for advanced RCC who have received prior VEGF-targeting therapy.~~Japanese market, Takeda has ~~also made significant progress on bridging studies~~achieved important milestones in ~~both RCC~~2020, including receipt of Manufacturing and ~~HCC and achieved an important regulatory milestone in April 2019 with its application to~~Marketing Approval from the Japanese Ministry of Health, Labour and Welfare (MHLW) ~~for approval to manufacture~~ and ~~sell~~first commercial sales of CABOMETYX as a treatment for patients with curatively unresectable ~~and~~or metastatic RCC, ~~in Japan.~~and the submission of its application to the Japanese MHLW for Manufacturing and Marketing Approval of CABOMETYX as a treatment for patients with unresectable HCC who progressed after prior systemic therapy.

In addition to our regulatory and commercialization efforts in the U.S. and the support provided to our collaboration partners for ~~rest of world~~rest-of-world regulatory and commercialization activities, we are also pursuing other indications for cabozantinib that have the potential to increase the number of cancer patients who could benefit from this medicine. We are evaluating cabozantinib, both as a single agent and in combination with other therapies, in a broad development program comprising over 80100 ongoing or planned clinical trials across multiple indications. We, along with our ~~clinical and commercial~~

collaboration partners, sponsor some of the trials, and independent investigators conduct the remaining trials through our Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute’s Cancer Therapy Evaluation Program (NCI-CTEP) or our ~~investigator sponsored~~investigator-sponsored trial program. Informed by the available data from these clinical trials, we continue to advance cabozantinib’s ~~late-stage~~ development ~~program.~~program with potentially label-enabling trials. One pivotal trial that has resulted from this effort is COSMIC-311, our ongoing phase 3 pivotal trial evaluating cabozantinib versus placebo in patients with ~~radioactive iodine-refractory~~radioiodine (RAI)-refractory differentiated thyroid cancer (DTC) who have progressed after up to two VEGF receptor-targeted therapies. We plan to conduct an analysis in these first 100 patients enrolled in COSMIC-311 for the co-primary endpoint of objective response rate (ORR), and an interim analysis of progression-free survival (PFS) in the second half of 2020.

We are particularly interested in examining cabozantinib’s potential in combination with immune checkpoint inhibitors (ICIs) to determine if such combinations further improve outcomes for patients. Building on preclinical and clinical observations that cabozantinib may promote a more immune-permissive tumor environment potentially resulting in cooperative activity of cabozantinib in combination with these products, we are evaluating cabozantinib in combination with a variety of ICIs. Furthest advanced is our evaluation of cabozantinib in combination with Bristol-Myers Squibb Company’s (BMS) nivolumab as a treatment for patients with previously untreated advanced or metastatic RCC, for which we plan to submit a supplemental New Drug Application (sNDA) for use of the combination in this indication to the FDA during the third quarter of 2020. The ~~most advanced~~data in support of ~~these combination studies include~~this filing will be derived from CheckMate ~~9ER,~~-9ER, a phase 3 pivotal trial evaluating the combination of cabozantinib ~~in combination with~~and nivolumab compared to sunitinib in previously untreated advanced or metastatic RCC, for which we and our collaboration partner ~~Bristol-Myers Squibb Company (BMS) has~~BMS announced ~~top line~~positive top-line results ~~are expected~~ in ~~early~~April 2020. CheckMate -9ER met its primary endpoint of PFS at final analysis, as well as the secondary endpoints of overall survival (OS) at a pre-specified interim analysis and ORR. The results, which will be presented as part of the Presidential Symposium II at the European Society for Medical Oncology (ESMO) Virtual Congress 2020 in September 2020, showed that the combination of cabozantinib with nivolumab significantly reduced the risk of disease progression or death compared with sunitinib (hazard ratio [HR]=0.51, p<0.0001) and also significantly improved OS compared to sunitinib (HR=0.60, p<0.001). We have also collaborated with BMS on CheckMate 040, a multi-cohort phase 1/2 trial evaluating cabozantinib in combination with nivolumab and in combination with both nivolumab and ipilimumab in patients with previously treated or previously untreated advanced HCC, ~~also~~for which initial clinically meaningful results were presented at American Society of Clinical Oncology’s (ASCO’s) Gastrointestinal Cancers Symposium in ~~collaboration with BMS. Additionally in May 2019, as part of our clinical collaboration with BMS, we initiated~~January 2020, and COSMIC-313, a phase 3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk ~~RCC,~~RCC. We expect to complete enrollment for COSMIC-313 in early 2021 and ~~plan~~ to ~~further evaluate~~report top-line results of the ~~combination of cabozantinib and nivolumab, with or without ipilimumab,~~event-driven analyses from the trial in ~~various other tumor types.~~ the 2022 time frame.

In an effort to diversify our exploration of combinations with ICIs, we have also initiated multiple trials evaluating cabozantinib in combination with F. Hoffmann-La Roche Ltd.’s (Roche’s) ICI, atezolizumab, including COSMIC-312, a phase 3 pivotal trial evaluating cabozantinib in combination with ~~the Roche Group’s (Roche’s) ICI,~~ atezolizumab versus sorafenib in previously untreated advanced HCC, for which we announced in August 2020 that enrollment was completed, and COSMIC-021, a broad phase 1b study evaluating the safety and tolerability of cabozantinib in combination with atezolizumab in patients with locally advanced or metastatic solid tumors. COSMIC-021 is divided into two parts: a dose-escalation phase, which was completed in 2018; and an expansion phase, which is ongoing. Findings from the dose-escalation stage of COSMIC-021 demonstrated that the combination was well-tolerated and showed encouraging anti-tumor activity in patients with advanced RCC. The expansion phase of COSMIC-021 comprises 24 total cohorts, with 20 cohorts evaluating the combination of cabozantinib and atezolizumab and four cohorts evaluating cabozantinib or atezolizumab as single-agent therapies. Based on ~~initial~~continuing encouraging ~~results from~~efficacy and safety data certain cohorts have been or may be further expanded, including the ~~ongoing expansion~~ cohorts inof patients with ~~castration-resistant prostate cancer (CRPC) and in ICI-pretreated~~ non-small cell lung cancer (NSCLC), who have been previously treated with an ICI and metastatic castration-resistant prostate cancer (mCRPC) who have been previously treated with enzalutamide and/or abiraterone acetate and experienced radiographic disease progression in ~~July 2019, we expanded~~soft tissue. We anticipate enrolling up to 1,732 patients in the ~~original 30-patient~~trial in late 2020, which timing is subject to the initiation of additional cohorts or expansion of selected existing cohorts, as well as potential delays resulting from the COVID-19 pandemic. Since its initiation, data from COSMIC-021 have been instrumental in guiding our clinical development strategy for ~~each~~cabozantinib in combination with ICIs, including supporting the recent initiation of these disease states to allow enrollment of an additional 50 patients for a total of 80 patients each. Additionally, four new cohorts, consisting of two expansion and two exploratory cohorts, were added to COSMIC-021three phase 3 pivotal trials in ~~July 2019: two new expansion cohorts~~collaboration with Roche evaluating the combination of cabozantinib ~~and atezolizumab in~~with

atezolizumab. The first, CONTACT-01, focuses on patients with metastatic ~~CRPC~~NSCLC who have ~~received prior enzalutamide or abiraterone therapy,~~been previously treated with ~~or without prior docetaxel~~an ICI and platinum-containing chemotherapy; the second, CONTACT-02, focuses on patients with mCRPC who have been previously treated with one novel hormonal therapy; and ~~two new exploratory cohorts evaluating single-agent cabozantinib and single-agent atezolizumab in~~the third, CONTACT-03, focuses on patients with inoperable, locally advanced or metastatic ~~CRPC,~~RCC who have progressed during or following treatment with an ICI as the immediate preceding therapy. Encouraging results from interim analyses of the mCRPC and NSCLC cohorts of COSMIC-021 were presented at ASCO’s Genitourinary Cancer Symposium in February 2020 and the 2020 ASCO Virtual Scientific Program in May 2020, respectively. Based on regulatory feedback from the FDA, and if supported by the clinical data, we intend to file with the ~~purpose of determining the individual contribution of each therapy. Depending on the results from COSMIC-021, we may evaluate the combination of cabozantinib and atezolizumab~~FDA for accelerated approval in ~~various late-stage clinical trials, including in NSCLC and CRPC.~~an mCRPC indication as early as 2021.

~~As we continue to work to maximize the clinical and commercial potential of cabozantinib, we~~We also remain committed to building our product pipeline by discovering and developing new cancer therapies for patients. ~~In this regard, we reinitiated internal drug discovery efforts in 2017 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~~that led the ~~discovery of~~efforts to discover cabozantinib, cobimetinib and esaxerenone, which have been approved for ~~commercialization by regulatory authorities.~~commercialization. Using our expertise in medicinal chemistry, tumor biology and pharmacology and supported by our partners, we are advancing drug candidates across approximately 20 ongoing discovery programs toward and through preclinical ~~development. Furthest along in these~~development, with plans for up to three new compounds to reach Investigational New Drug (IND) filing status before the end of 2020.

The first compounds to advance from our recent internal drug discovery efforts isinclude XL092, a next-generation oral tyrosine kinase inhibitor that is currently in a phase 1 clinical trial in patients with advanced solid ~~malignancies.~~

malignancies for which we anticipate that dose expansion cohorts and potential combination cohorts with ICIs will begin enrolling in 2020, and XL265, a TAM kinase-focused kinase inhibitor for which we anticipate filing an IND in 2020. We augment ~~these~~our internal drug discovery activities with business development initiatives aimed at identifying and in-licensing promising, early-stage oncology assets and then further develop them utilizing our established clinical development infrastructure. In furtherance of this strategy, in 2019, we ~~have~~ entered into ~~multiple~~ collaboration and license agreements ~~including with:~~with Aurigene Discovery Technologies Limited (Aurigene), which is focused on the discovery and development of novel small molecules as therapies for cancer, and Iconic Therapeutics, Inc. (Iconic), which is focused on the advancement of a next-generation antibody-drug conjugate (ADC) program targeting tissue factor in solid tumors. Both the lead Aurigene program targeting CDK7 and the tissue factor ADC program with Iconic are in preclinical development and could result in IND filings in 2020. We have also made progress under our 2018 collaborations with Invenra, Inc., which is focused on the discovery and development of multispecific antibodies for the treatment of cancer, and StemSynergy Therapeutics, Inc., which is focused on the discovery and development of novel oncology compounds aimed to inhibit tumor growth by targeting Casein Kinase 1α; Invenra, Inc. (Invenra), which is focused on the discovery and development of multispecific antibodies for the treatment of cancer; Iconic Therapeutics, Inc. (Iconic), which is focused on the advancement of a next-generation antibody-drug conjugate program targeting tissue factor in solid tumors; and Aurigene Discovery Technologies Limited (Aurigene), which is focused on the discovery and development of novel small molecules as therapies for cancer.1 alpha. To further enhance our early-stage pipeline, we expect to enter into

additional, external collaborative relationships around assets and technologies that complement our internal drug discovery and development efforts.

~~Third~~COVID-19 Update

As of the date of this Quarterly Report, the COVID-19 pandemic continues to have a modest impact on our business operations, in particular on our clinical trial, drug discovery and commercial activities. We have and continue to undertake considerable efforts to mitigate the various problems presented by this crisis, including as described below:

Clinical Trials. To varying degrees and at different rates across our clinical trials being conducted in regions impacted by COVID-19, we have experienced declines in screening and enrollment activity, delays in new site activations, and restrictions on the access to treatment sites that is necessary to monitor clinical study progress and administration. However, we recently began to see an increase in screening and enrollment activity, and overall, we and our collaboration partners, including principal investigators and personnel at clinical trial sites, have been successful in preventing material delays to our ongoing and planned clinical trials. We have done this through ongoing assessment of the pandemic’s impact and, wherever possible, taking proactive steps in compliance with guidance issued by the FDA, European Medicines Agency (EMA) and other regulatory agencies to support the safety of our patients and their access to treatment, as well as to maintain the high quality of our clinical trials. We recognize, however, that we may have to make further operational adjustments to our ongoing and planned clinical trials and that patient enrollment, and new clinical trial site initiations may be further slowed due to the COVID-19 pandemic, especially if it continues to grow in severity.

Drug Discovery and Preclinical Development. We have partially resumed internal drug discovery in our laboratories following a temporary suspension of these activities while we observed the shelter in place orders issued by the State of California and Alameda County. While this temporary suspension did not result in any significant changes to the timelines for our late-stage discovery work, we did experience modest delays in the advancement of certain of our early-stage programs. We also experienced some modest delays with respect to the portion of drug discovery work outsourced to third-party contractors in regions first impacted by COVID-19. However, those service providers have resumed discovery work and are meeting their contractual obligations in accordance with planned

timelines. Prior to the COVID-19 pandemic, we largely outsourced preclinical development work to third-party contractors, and that work has continued without substantial delay or interference resulting from the COVID-19 pandemic. While we continue to utilize our resources effectively to move new product candidates toward the clinic, we may ultimately be unable to achieve our drug discovery and preclinical development objectives within the previously disclosed timelines due to the COVID-19 pandemic, especially if it continues to grow in severity.

Commercial Activities. Although our field employees have limited their in person promotional activities, they remain engaged with healthcare professionals and are available to them as an informational resource. Nevertheless, with healthcare professionals acutely focused on the COVID-19 pandemic and patient access to healthcare professionals limited due to shelter in place orders, we experienced a decrease in demand for CABOMETYX during the quarter ended June 30, 2020. We also observed fluctuations in CABOMETYX ordering, and we believe that this effect could continue depending on developments related to the COVID-19 pandemic. Overall, despite the challenges posed by the pandemic, our commercial business has only experienced a small impact. We believe this is the case largely because of the gravity of the cancer conditions that our products are indicated to treat and the fact that CABOMETYX has been available as an orally administrable cancer treatment in the U.S. since 2016, thereby establishing a safety and efficacy profile that is well known to healthcare professionals. It remains possible, however, that over a longer period, changes to our standard sales and marketing practices resulting from the COVID-19 pandemic, including the shift from in-person to primarily telephonic and virtual interactions with healthcare professionals, along with obstacles to patient access to healthcare professionals, could diminish sales of our marketed products.

Supply Chain. We have not experienced production delays or seen any significant impact to our clinical or commercial supply chain as a result of the COVID-19 pandemic. In addition, we have substantial safety stock inventories for both our commercial drug substance and drug products, which should be sufficient to maintain robust long-term supply. We continue to work closely with our third-party contract manufacturers, suppliers, comparator drug sourcing vendors and collaboration partners to safeguard both the timely production and delivery of our products. If the COVID-19 pandemic becomes more severe, however, we are prepared to modify our manufacturing and supply chain operations as appropriate in response.

General Business Operations. Most of our Alameda-based employees began working remotely on March 16, 2020, while a small number of employees have continued to work on-site in order to maintain critical operational activities. Beginning in June 2020, we started permitting some of our employees to return to our Alameda headquarters under enhanced safety and social distancing protocols. Although having most of our employees continue to work remotely has required that we devise new ways of working and collaborating, to date we have not experienced any material reduction in productivity or interruptions in our general business operations. If the COVID-19 pandemic becomes more severe, however, we may find it more challenging to maintain that level of productivity, to grow the company as we have anticipated, and to execute on our long-term business plans.

The circumstances surrounding the COVID-19 pandemic are volatile and subject to rapid change. Despite our mitigation efforts, we may experience delays or an inability to execute on our clinical and preclinical development plans, reduced revenues or other adverse impacts to our business, which are described in more detail in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. We recognize that this pandemic will continue to present unique challenges for us throughout 2020, and potentially in future years should the adverse effects of the COVID-19 pandemic continue indefinitely.

Second Quarter ~~2019~~2020 Business Updates and Financial Highlights

During the ~~third~~second quarter of ~~2019,~~2020, we continued to execute on our business objectives, generating significant ~~revenue~~revenues from operations and enabling us to continue to seek to maximize the clinical and commercial potential of our products and expand our product pipeline. Significant business updates and financial highlights for the quarter and subsequent to quarter-end include:

Business Updates

In ~~July 2019,~~March 2020, Takeda, our partner responsible for the clinical development and commercialization of CABOMETYX in Japan, received approval from the Japanese MHLW to manufacture and market CABOMETYX as a treatment for patients with curatively unresectable or metastatic RCC. During the second quarter of 2020, Takeda launched CABOMETYX in Japan, triggering $31.0 million in milestone payments from Takeda upon the first commercial sale of CABOMETYX, of which $23.7 million was recognized as revenue in this quarter.

In April 2020, we announced ~~an amendment to the protocol for COSMIC-021, the~~that CheckMate -9ER, BMS’ phase 1b3 pivotal trial of cabozantinib in combination with atezolizumab in patients with locally advanced or metastatic solid tumors, to expand patient enrollment in certain existing CRPC and NSCLC cohorts and to add new expansion and exploratory cohorts in CRPC (an aggregate of 24 total cohorts, with 20 expansion cohorts evaluating the combination of cabozantinib and ~~atezolizumab~~nivolumab in previously untreated advanced or metastatic RCC, met its primary endpoint of significantly improving PFS, as well as the secondary endpoints of OS and ~~four exploratory cohorts evaluating cabozantinib or atezolizumab~~ORR, versus sunitinib. More detailed results of CheckMate -9ER will be presented as ~~single-agent therapies).~~part of the Presidential Symposium II at the upcoming ESMO Virtual Congress 2020.

In ~~July 2019, we announced an exclusive collaboration, option~~May 2020, cabozantinib was the subject of 12 presentations at the 2020 ASCO Annual Meeting. Data presentations included results from NSCLC, mCRPC and ~~license agreement with Aurigene, and India-based biotechnology company focused on oncology and inflammatory disorders, to in-license~~urothelial carcinoma cohorts of COSMIC-021, as ~~many~~well as ~~six programs.~~

~~In October 2019, Ipsen received regulatory approval~~updates from ~~Health Canada for CABOMETYX for the first-line treatment of adults with advanced RCC.~~

In October 2019, we expanded our collaboration with Invenra focused on the discovery and development of multispecific antibodies for the treatment of cancer to include the development of novel binders against six additional targets which we can use to generate multispecific antibodies based on Invenra’s B-Body™ technology platform, or with other ~~platforms and formats at our option.~~externally sponsored studies.

In October 2019, we filed a patent infringement lawsuit against MSN Pharmaceuticals, Inc. (MSN), following receipt of a Paragraph IV certification notice letter from MSN that it had filed an Abbreviated New Drug Application (ANDA) with the FDA requesting approval to market a generic version of CABOMETYX tablets, following expiration of the CABOMETYX composition of matter patent, U.S. Patent No. 7,579,473, which expires on August 14, 2026. We are seeking, among other relief, an order that the effective date of any FDA approval of the ANDA would be a date no earlier than the expiration of U.S. Patent No. 8,877,776 on October 8, 2030 and equitable relief enjoining MSN from infringing this

•

In May 2020, we filed a second complaint in our patent infringement lawsuit against MSN Pharmaceuticals, Inc. (MSN), following receipt of notice from MSN that it had amended its Abbreviated New Drug Application (ANDA), originally filed with the FDA in September 2019, to assert additional Paragraph IV certifications. The ANDA now requests approval to market a generic version of CABOMETYX tablets prior to expiration of two previously-unasserted CABOMETYX patents listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, also referred to as the Orange Book: U.S. Patent No. 7,579,473, the composition of matter patent, and U.S. Patent No. 8,497,284, a method of use patent. We are seeking, among other relief, an order that the effective date of any FDA approval of the ANDA would be a date no earlier than the expiration of all of U.S. Patent No. 7,579,473, U.S. Patent No. 8,497,284, and U.S. Patent No. 8,877,776, the latest of which expires on October 8, 2030, and equitable relief enjoining MSN from infringing these patents. For a more detailed discussion of this litigation matter, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q.

In June 2020, we announced the initiation of CONTACT-01, a global phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab in patients with metastatic NSCLC who have been previously treated with an ICI and platinum-containing chemotherapy. The primary endpoint of the trial is OS, and the secondary endpoints include PFS, ORR and duration of response (DOR).

In June 2020, we announced the initiation of CONTACT-02, a global phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab in patients with mCRPC who have been previously treated with one novel hormonal therapy. The co-primary endpoints of the trial are PFS and OS, and the secondary endpoints include ORR, prostate-specific antigen response rate and DOR.

In July 2020, we announced the initiation of CONTACT-03, a global phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab in patients with inoperable, locally advanced or metastatic RCC who progressed during or following treatment with an ICI as the immediate preceding therapy. The co-primary endpoints of the trial are PFS per Response Evaluation Criteria in Solid Tumors (RECIST) v. 1.1 as assessed by independent review and OS, and the secondary endpoints include PFS, ORR and DOR as assessed by the investigators.

In July 2020, we completed patient enrollment in EXAMINER, the phase 4 trial evaluating the safety and efficacy of the 60 mg tablet formulation of cabozantinib compared with the 140 mg capsule formulation, which is marketed as COMETRIQ, for the treatment of patients with progressive, metastatic MTC. EXAMINER is a post-marketing requirement from the FDA and the European Commission. The trial was designed to enroll up to 250 patients, and top-line results from the trial are anticipated later in 2020.

In July 2020, the FDA approved the supplemental Biologics License Application submitted by Genentech for atezolizumab plus cobimetinib and vemurafenib for the treatment of BRAF V600-mutation positive advanced melanoma in previously untreated patients. The approval is based on positive results from IMspire150, a phase 3 pivotal trial that demonstrated that adding atezolizumab to cobimetinib and vemurafenib helped to reduce the risk of disease worsening or death, compared to placebo plus cobimetinib and vemurafenib. This is the second FDA approval for a regimen including cobimetinib, which we discovered and is now being developed by Genentech as part of a worldwide collaboration agreement between the two companies.

In August 2020, we announced the completion of patient enrollment in COSMIC-312, a global phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab versus sorafenib in previously untreated advanced HCC, providing the patient population for the event-driven analyses of the study’s endpoints. Separately, patient enrollment remains open in China with a focus on enrolling the necessary patient number to enable local registration, if supported by the clinical data. The co-primary endpoints of the trial are PFS and OS. Based on current event rates, we anticipate announcing top-line results in the first half of 2021.

Financial Highlights


•	Net product revenues for the ~~third~~second quarter of ~~2019 increased to~~2020 were $~~191.8~~178.7 million, compared to $~~162.9~~193.7 million for the ~~third~~second quarter of ~~2018.~~2019.


•	Total revenues for the ~~third~~second quarter of ~~2019 increased to~~2020 were $~~271.7~~259.5 million, compared to $~~225.4~~240.3 million for the ~~third~~second quarter of ~~2018.~~2019.


•	Research and development expenses for the ~~third~~second quarter of ~~2019 increased to~~2020 were $~~97.3~~114.9 million, compared to $~~44.7~~81.9 million for the ~~third~~second quarter of ~~2018.~~2019.


•	Selling, general and administrative expenses for the ~~third~~second quarter of ~~2019 increased to~~2020 were $~~51.3~~59.8 million, compared to $~~48.1~~58.8 million for the ~~third~~second quarter of ~~2018.~~2019.


•	Provision for income taxes for the ~~third~~second quarter of ~~2019 increased to~~2020 was $~~25.2~~13.9 million, compared to $~~2.3~~20.7 million for the ~~third~~second quarter of ~~2018.~~2019.


•	Net income for the ~~third~~second quarter of ~~2019~~2020 was $~~97.5~~66.8 million, or $~~0.32~~0.22 per share, basic and $~~0.31~~0.21 per share, diluted, compared to $~~126.6~~79.0 million, or $~~0.42~~0.26 per share, basic and $~~0.41~~0.25 per share diluted, for the ~~third~~second quarter of ~~2018.~~2019.


•	Cash and investments ~~increased to~~were $~~1.2~~1.5 billion atas of ~~September~~June 30, ~~2019~~2020, compared to $~~851.6 million~~1.4 billion atas of December 31, ~~2018~~2019.

See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.

Challenges and Risks

WeIn addition to the challenges and risks imposed by the COVID-19 pandemic and described under “—COVID-19 Update” above, we will also continue to face challenges and risks that may impact our ability to execute on our ~~remaining 2019~~2020 business ~~objectives.~~objectives, and some of these risks to our business have been or may be exacerbated by the COVID-19 pandemic. In particular, for the foreseeable future, we expect our ability to ~~maintain or increase unrestricted~~generate sufficient cash flow to fund our business operations and growth will depend upon the continued commercial success of CABOMETYX as a treatment for advanced RCC and previously treated HCC, and ~~potentially~~possibly for other indications for which cabozantinib is being evaluated in ~~late-stage~~potentially label-enabling clinical trials, if warranted by the data generated from such trials. ~~The~~However, we cannot be certain that the clinical trials we and our collaboration partners are currently conducting, or may conduct in the future, will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial ~~success of~~markets where CABOMETYX is approved. Even if we and our collaboration partners receive the required regulatory approvals to market cabozantinib for additional indications, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in its approved indications is subject to a variety of factors, most importantly, the drug’s perceived benefit/risk profile as compared to the benefit/risk profiles of other competitive treatments available or in development for these ~~conditions.~~additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. However, as is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is becoming increasingly difficult, both within the U.S. and in foreign markets, because of growing concerns over healthcare cost containment and corresponding policy initiatives and activities aimed at limiting access to, and restricting the prices of, pharmaceuticals.

Achievement of our ~~remaining 2019~~2020 business objectives and the continued success of CABOMETYX will also depend on the success of our development and commercialization strategies to navigate increased competition, including that from, but not limited to, ~~ICIs, as well as~~ the use of ~~combination therapy~~therapies that combine an ICI with another targeted agent to treat cancer. In the longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic version of CABOMETYX tablets that is the subject of ~~the~~an ANDA submitted to the FDA by MSN, which if approved, ~~following the expiration of our composition of matter patent in 2026,~~ could result in significant decreases in the revenue derived from the U.S. sales of CABOMETYX and thereby materially harm our business and financial condition. Separately, our research and development objectives may be impeded by the challenges of scaling our organization to meet the demands of expanded drug development, unanticipated delays in clinical testing and the inherent risks and uncertainties associated with internal drug discovery ~~operations.~~operations, all of which may be increased as a result of the COVID-19 pandemic. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new drug candidates or identifying 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 biotechnology, biopharmaceutical and pharmaceutical ~~industry~~industries with development and commercial operations. Moreover, as described under “—COVID-19 Update” above, these risks have been or may be exacerbated by the COVID-19 pandemic. For a more detailed discussion of challenges and risks we face, including those relating to the COVID-19 pandemic, see “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Fiscal Year Convention

We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31^st. Fiscal year ~~2019,~~2020, which is a ~~53-week~~52-week fiscal year, will end on January ~~3, 2020~~1, 2021 and fiscal year ~~2018,~~2019, which was a ~~52-week~~53-week fiscal year, ended on ~~December 28, 2018.~~January 3, 2020. For convenience, references in this report as of and for the ~~fiscal periods~~three months ended ~~September 27,~~July 3, 2020 and June 28, 2019, ~~and September 28, 2018,~~ and as of and for the fiscal years ending January ~~3, 2020,~~1, 2021, and ended ~~December 28, 2018,~~January 3, 2020, are indicated as being as of and for the ~~periods~~three months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019 and the years ending December 31, ~~2019,~~2020 and ended December 31, ~~2018,~~2019, respectively.

Results of Operations

Revenues

Revenues by category were as follows (dollars in thousands):


	Three Months Ended September 30,				Percentage Change - Q3 2019 v. Q3 2018			Nine Months Ended September 30,								Percentage Change - Year to Date 2019 v. 2018		Three Months Ended June 30,								Percent Change		Six Months Ended June 30,					Percent Change
	2019		2018				2019				2018				2020				2019					2020				2019					Percent Change
Net product revenues	$	191,768	$	162,946	Percentage Change - Q3 2019 v. Q3 2018	18	%		$	565,024			$	443,054		Percentage Change - Year to Date 2019 v. 2018			28	%	$	178,730			$	Percent Change	193,675		(8	)%	$	372,610	$	373,256	0	%
Collaboration revenues	79,935		62,451		28	%		162,441				182,170				(11	)%
License revenues																		59,234				37,742				57	%	80,113			63,306		27	%
Collaboration services revenues																		21,515				8,858				143	%	33,671			19,200		75	%
Total revenues	$	271,703	$	225,397	21	%		$	727,465			$	625,224			16	%	$	259,479			$	240,275			8	%	$	486,394		$	455,762	7	%

Net Product Revenues

Gross product revenues, ~~Discounts~~discounts and allowances, and ~~Net~~net product revenues were as follows (dollars in thousands):


	Three Months Ended September 30,						Percentage Change - Q3 2019 v. Q3 2018			Nine Months Ended September 30,								Percentage Change - Year to Date 2019 v. 2018		Three Months Ended June 30,								Percent Change		Six Months Ended June 30,						Percent Change
	2019			2018					2019				2018				2020				2019					2020				2019						Percent Change
Gross product revenues	$	239,916		$	193,356		Percentage Change - Q3 2019 v. Q3 2018	24	%		$	704,084			$	525,438		Percentage Change - Year to Date 2019 v. 2018			34	%	$	229,898			$	Percent Change	240,418		(4	)%	$	482,464		$	464,168	4	%
Discounts and allowances	(48,148		)	(30,410		)	58	%		(139,060		)		(82,384		)		69	%	(51,168		)		(46,743		)		9	%	(109,854		)	(90,912		)	21	%
Net product revenues	$	191,768		$	162,946		18	%		$	565,024			$	443,054			28	%	$	178,730			$	193,675			(8	)%	$	372,610		$	373,256		0	%

Net product revenues by product were as follows (dollars in thousands):


	Three Months Ended September 30,				Percentage Change - Q3 2019 v. Q3 2018			Nine Months Ended September 30,								Percentage Change - Year to Date 2019 v. 2018		Three Months Ended June 30,								Percent Change		Six Months Ended June 30,					Percent Change
	2019		2018				2019				2018				2020				2019					2020				2019					Percent Change
CABOMETYX	$	187,410	$	158,262	Percentage Change - Q3 2019 v. Q3 2018	18	%		$	552,315			$	428,317		Percentage Change - Year to Date 2019 v. 2018			29	%	$	173,610			$	Percent Change	189,015		(8	)%	$	362,826	$	364,905	(1	)%
COMETRIQ	4,358		4,684		(7	)%		12,709				14,737				(14	)%	5,120				4,660				10	%	9,784			8,351		17	%
Net product revenues	$	191,768	$	162,946	18	%		$	565,024			$	443,054			28	%	$	178,730			$	193,675			(8	)%	$	372,610		$	373,256	0	%

The ~~increases~~decreases in product revenues for CABOMETYX for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable periods in ~~2018,~~2019, were ~~primarily~~ due to ~~a 12% and 21% increase, respectively,~~decreases in the number of units of CABOMETYX sold, ~~and~~which were partially offset by increases in the average net selling price of the product. ~~The increases~~We partially attribute these decreases in ~~CABOMETYX sales volumes reflects~~ the ~~continued growth~~number of units of CABOMETYX sold to factors related to the COVID-19 pandemic, including obstacles to patient access to healthcare professionals and fluctuations in advanced RCC following FDA approvals in April 2016 of CABOMETYX for the treatment of patients with advanced RCC who have received prior anti-angiogenic therapy and in December 2017 for previously untreated patients with advanced RCC, as well as the U.S. launch of CABOMETYX for the treatment of patients with HCC who have been previously treated with sorafenib, following FDA approval in January 2019.product ordering patterns. The ~~decreases~~increases in product revenues for COMETRIQ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable periods in ~~2018,~~2019, were ~~primarily~~ due to ~~a 8% and 18% decline, respectively,~~increases in the number of units of COMETRIQ ~~sold. COMETRIQ sales volumes have continued~~sold and increases in the average net selling price of the product.

We expect our net product revenues for the remainder of 2020 to ~~decrease since the launch of CABOMETYX in April 2016.~~remain in-line with 2019.

We recognize product revenues net of discounts and allowances that are described in “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. The ~~increases~~9% and 21% increase in discounts and allowances for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the comparable periods in ~~2018, were~~2019, was primarily the

result of ~~the overall increases in product sales volume and~~ increases in Public Health Service hospital utilization and the dollar amount of the related chargebacks, and, to a lesser extent, increases to the dollar amount of chargebacks associated with Veterans Affairs hospitals, as well as increases to other government and commercial rebates.utilization. We do not expect our discounts and allowances as a percentage of gross ~~product~~ revenues to ~~increase~~change significantly during the remainder of ~~2019~~2020.

License Revenues

License revenues include the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable in the related period that the milestone would be achieved and a significant reversal of revenues would not occur, as ~~compared to 2018~~well as royalty revenues and the ~~number~~profit on the U.S. commercialization of ~~patients participating in government programs increases,~~COTELLIC from Genentech.

Milestone revenues, which are allocated between license revenues and ~~as the discounts and rebates paid to government payers increase.~~

~~Collaboration Revenues~~

~~Collaboration~~collaboration services revenues, were ~~as follows (dollars in thousands):~~

Three Months Ended September 30, Percentage Change -
Q3 2019 v. Q3 2018 Nine Months Ended September 30, Percentage Change - Year to Date 2019 v. 2018
2019 2018 2019 2018
Collaboration revenues:

License revenues⁽¹⁾
$ 68,035
$ 51,323
33 % $ 128,937
$ 152,261
(15 )%
Research and development services revenues⁽²⁾
12,988
10,560
23 % 35,814
27,464
30 %
Other collaboration revenues⁽³⁾
(1,088 ) 568
n/m
(2,310 ) 2,445
n/m
Total collaboration revenues $ 79,935
$ 62,451
28 % $ 162,441
$ 182,170
(11 )%

~~____________________~~


~~(1)~~	License revenues included the recognition of the portion of milestones allocated to the transfer of intellectual property licenses for which it had become probable in the current period that the milestone would be achieved and a significant revenue reversal would not occur, as well as royalty revenues from Ipsen, Genentech and Daiichi Sankyo.


~~(2)~~	Research and development services revenues included the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, as well as development cost reimbursements earned on our collaboration agreements.


~~(3)~~	Other collaboration revenues included the profit on the U.S. commercialization of COTELLIC from Genentech and revenues on product supply services provided to Ipsen and Takeda, which were offset by the 3% royalty we are required to pay GlaxoSmithKline (GSK) on the net sales by Ipsen of any product incorporating cabozantinib.

~~Milestone revenues were $50.6~~$43.5 million and ~~$81.1~~$43.6 million ~~respectively,~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to ~~$42.6~~$20.4 million and ~~$134.8~~$30.5 million for the comparable periods in ~~2018.~~2019. Milestone revenues by period included the following:

•

Milestone revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 included ~~recognition~~$23.7 million in revenues recognized in connection with $31.0 million in milestones we achieved upon Takeda’s first commercial sale of CABOMETYX as a ~~$50.0~~treatment for patients with curatively unresectable or metastatic RCC in Japan and $18.8 million ~~commercial~~ in revenues recognized in connection with a $20.0 million development milestone from Ipsen ~~that~~ we ~~earned in the third quarter~~determined was probable of ~~2019 upon Ipsen’s achievement of $250.0 million in net sales of cabozantinib in its territories over four consecutive quarters.~~achievement.


•	Milestone revenues for the ~~nine~~three and six months ended ~~September~~June 30, 2019 ~~also~~ included recognition of a $20.0 million milestone from Daiichi Sankyo for the launch of MINNEBRO tablets as a treatment for patients with hypertension in ~~Japan and $9.7~~Japan.


•	Milestone revenues for the six months endedJune 30, 2019 also included $9.5 million in revenues recognized in connection with a $16.0 million milestone from Takeda for the submission in April 2019 of a regulatory application for cabozantinib as a treatment for patients with advanced RCC to the Japanese MHLW.

•

~~Milestone revenues for the~~ ~~three and nine months endedSeptember 30, 2018~~ included $36.9 million in revenue related to a $40.0 million milestone from Ipsen for the approval by the European Commission (EC) of cabozantinib for previously-treated HCC and $5.0 million in revenue for a milestone from Ipsen on the approval by Health Canada of cabozantinib for the treatment of adults with advanced RCC.

•

~~Milestone revenues for the~~ ~~nine months endedSeptember 30, 2018~~ also included: i) recognition of $46.2 million in revenue of a $50.0 million milestone from Ipsen for the approval of cabozantinib for the first-line treatment of adults with intermediate- or poor-risk advanced RCC by the EC, of which $0.2 million was recognized in the third quarter of 2018; ii) recognition of a $25.0 million commercial milestone from Ipsen that we earned in the second quarter of 2018 upon Ipsen’s achievement of $100.0 million in net sales of cabozantinib in its territories over four consecutive quarters; and iii) recognition of a $20.0 million milestone upon Daiichi Sankyo’s submission to the Japanese MHLW of a regulatory application for esaxerenone as a treatment for patients with hypertension.

Due to uncertainties surrounding the timing and achievement of regulatory and development milestones, it is difficult to predict future milestone revenues and such milestones can vary significantly from period to period.

Royalties increased primarily as a result of increases in royalties earned on Ipsen’s net sales of cabozantinib ~~by Ipsen~~ outside of the U.S. and ~~Japan~~Japan. Ipsen royalties were ~~$16.4~~$16.3 million and ~~$45.3~~$34.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to ~~$10.3~~$14.9 million and ~~$20.0~~$28.9 million for the comparable periods in ~~2018.~~2019. Ipsen’s net sales of cabozantinib have continued to grow since their first commercial sale of the product in the fourth quarter of 2016, primarily due to increased demand of CABOMETYX, which, as of ~~September~~June 30,

~~2019,~~ 2020, is approved ~~and commercially available~~ in ~~48 and 33~~54 countries outside of the U.S.~~, respectively. We were entitled~~ Royalties also increased due to ~~receive~~the commercial launch of CABOMETYX as a ~~tiered royalty~~treatment for patients with curatively unresectable or metastatic RCC in Japan by Takeda during the three months ended June 30, 2020.

Our share of ~~2% to 12%~~profits on the ~~initial $150.0 million~~U.S. commercialization of net sales; this amount was reached in the second quarter of 2018. As of June 30, 2018 and going forward, we are entitled to receive a tiered royalty of 22% to 26% on annual net sales (with separate tiers for Canada); these 22% to 26% royalty tiers 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 of 22% to 26% on annual net sales; these 22% to 26% royalty tiers for Canada will also reset each calendar year. In May 2019, we also began to earn low double-digit royalties on the sale of MINNEBRO by Daiichi Sankyo in Japan.

~~Development cost reimbursements in connection with~~COTELLIC under our collaboration ~~arrangements~~agreement with ~~Ipsen and Takeda were $12.0~~Genentech was $1.4 million and ~~$32.5~~$2.8 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to ~~$6.9~~$1.3 million and ~~$17.7~~$2.4 million for the comparable periods in ~~2018.~~2019. We also earned royalties on ex-U.S. net sales of COTELLIC by Genentech of $1.1 million and $2.4 million for the three and six months ended June 30, 2020, compared to $1.3 million and $2.8 million for the comparable periods in 2019.

We expect our license revenues to decrease during the remainder of 2020, as compared to the same period in 2019, as a result of a decrease in milestones expected to be achieved during the year.

Collaboration Services Revenues

Collaboration services revenues include the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, product supply revenues, net of product supply costs, and the royalties we paid to GlaxoSmithKline (GSK) on sales by Ipsen of products containing cabozantinib.

Development cost reimbursements were $19.6 million and $34.0 million for the three and six months ended June 30, 2020, respectively, as compared to $10.2 million and $20.5 million for the comparable periods in 2019. The increases in development cost reimbursements were primarily ~~the~~a result of reimbursements from Ipsen ~~and Takeda~~ for their share of the increase in spending on the ~~CheckMate 9ER study.~~COSMIC-312, COSMIC-021 and CONTACT-02 studies.

Profits on the U.S. commercialization of COTELLIC and royalties on ex-U.S. net sales of COTELLIC under our collaboration agreement with Genentech were $2.7 million and $7.9 million for the three and nine months ended September 30, 2019, respectively, as compared to $3.3 million and $10.3 million for the comparable periods in 2018. Sales of COTELLIC in the U.S. have declined following Genentech’s decision to scale back the personal promotion of COTELLIC commencing in January 2018.

~~For three and nine months ended September 30, 2019, collaboration~~Collaboration services revenues were reduced by ~~$8.0~~$2.3 million and ~~$23.1~~$4.7 million ~~respectively,~~ for the 3% royalty we are required to pay GSK on the net sales by Ipsen and Takeda of any product incorporating cabozantinib asfor the three and six months

ended June 30, 2020, respectively, compared to ~~$6.3~~$2.0 million and ~~$17.0~~$3.9 million for the comparable periods in ~~2018.~~2019. As royalty generating sales of cabozantinib by Ipsen have increased as described above, our royalty payments to GSK have also increased. ~~In addition, pursuant~~

We expect collaboration services revenues to increase during the remainder of 2020, as compared to the same period in 2019, as a ~~license agreement we entered into with Ligand Pharmaceuticals, Inc. (Ligand), we are required to pay a royalty~~result of ~~0.5% to Ligand on net sales~~higher development cost reimbursements earned under our collaboration agreements including in particular the impact of ~~MINNEBRO.~~CONTACT-01 and CONTACT-02.

Cost of Goods Sold

The ~~Cost~~cost of goods sold and our gross margin were as follows (dollars in thousands):


	Three Months Ended September 30,						Percentage Change - Q3 2019 v. Q3 2018			Nine Months Ended September 30,								Percentage Change - Year to Date 2019 v. 2018	Three Months Ended June 30,							Percent Change		Six Months Ended June 30,						Percent Change
	2019			2018					2019				2018				2020			2019				2020				2019						Percent Change
Cost of goods sold	$	7,537		$	7,360		Percentage Change - Q3 2019 v. Q3 2018	2	%		$	22,577			$	18,996		Percentage Change - Year to Date 2019 v. 2018		19	%	$	9,221		$	Percent Change	7,539		22	%	$	18,510		$	15,040	23	%
Gross margin	96		%	95		%				96		%		96		%			95		%		96	%				95		%	96		%

Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty payable to GSK on U.S. net sales of any product incorporating cabozantinib, as well as the cost of inventory sold, indirect labor costs, write-downs related to expiring and excess inventory, and other third-party logistics costs. The increases in ~~Cost~~cost of goods sold for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable periods in ~~2018,~~2019, were primarily the result of ~~the~~ increases in ~~product sales volume described above.~~write-downs of inventory and certain period costs. We do not expect our gross margin to change significantly during the remainder of ~~2019.~~2020.

Research and Development Expenses

Research and development expenses were as follows (dollars in thousands):

Three Months Ended September 30, Percentage Change -
Q3 2019 v. Q3 2018 Nine Months Ended September 30, Percentage Change - Year to Date 2019 v. 2018
2019 2018 2019 2018
Research and development expenses $ 97,295
$ 44,741
117 % $ 242,516
$ 124,986
94 %



	Three Months Ended June 30,				Percent Change		Six Months Ended June 30,				Percent Change
	2020		2019		Percent Change		2020		2019		Percent Change
Research and development expenses	$	114,933	$	81,932	40	%	$	216,810	$	145,221	49	%

Research and development expenses consist primarily of clinical trial costs, personnel expenses, license and other collaboration costs, stock-based compensation, and consulting and outside ~~services, stock-based compensation and the allocation of general corporate costs.~~

services.

The increases in ~~Research~~research and development expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable periods in ~~2018,~~2019, were primarily related to increases in clinical trial costs, ~~license and other collaboration costs,~~ personnel expenses, and the allocation of general corporate costs, which were partially offset by decreases in license and ~~stock-based compensation.~~other collaboration costs and the impact of development cost reimbursements. Clinical trial costs, which ~~includes~~include services performed by third-party contract research organizations and other vendors who support our clinical trials, and comparator drug purchases, increased ~~$20.8~~$34.2 million and ~~$54.1~~$59.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the comparable periods in ~~2018.~~2019. The increases in clinical trial costs were primarily due to costs associated with the expanding clinical trial program for cabozantinib, ~~that now~~which includes ~~four phase 3 pivotal studies (CheckMate 9ER, COSMIC-311,~~ COSMIC-312, COSMIC-313, CONTACT-02 and ~~COSMIC-313), as well as the multi-cohort phase 1b study (COSMIC-021). License and other collaboration costs~~COSMIC-021. Personnel expenses increased ~~$20.5~~$6.4 million and ~~$30.4~~$14.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the comparable periods in ~~2018, primarily as a result of the collaboration agreements we entered into with Aurigene in July~~ 2019, and Iconic in May 2019. Personnel expenses increased $3.8 million and $13.0 million and the allocation of general corporate costs increased $1.3 million and $4.5 million for the three and nine months ended September 30, 2019, respectively, as compared to the comparable periods in 2018, primarily due to increases in headcount to support our ~~expanded~~expanding discovery and development efforts. ~~Stock-based compensation increased $1.1~~License and other collaboration costs decreased $7.7 million and ~~$4.6~~$5.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the comparable periods in ~~2018,~~2019, primarily ~~due to~~as a result of upfront license fee payments we made in 2019, offset in part by an increase in payments for our research funding commitments. Research and development expenses for the ~~increases~~three and six months ended June 30, 2020 were reduced by $2.9 million and $5.0 million, respectively, as a result of development cost reimbursements in ~~headcount, as well as~~connection with our December 2019 collaboration arrangement with Roche; there were no such reimbursements during the ~~expense recognition for restricted stock units that were granted~~comparable periods in ~~September 2018 that either have vested or will vest upon the achievement of specific performance targets (the 2018 PSUs).~~2019.

We do not track fully-burdened ~~Research~~research and development expenses on a project-by-project basis. We group our ~~Research~~research and development expenses into three categories: ~~Development, Drug discovery~~1) development; 2) drug discovery; and ~~Other.~~3) other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or 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):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Research and development expenses:
Development:
Clinical trial costs	$	38,055	$	17,242	$	94,612	$	40,482	$	62,606	$	28,369	$	115,950	$	56,556
Personnel expenses	14,964		12,316		44,077		34,182		20,610		15,526		40,898		29,113
Consulting and outside services	4,084		1,943		10,884		6,969		3,811		4,089		7,055		6,801
Other development costs	3,754		2,925		11,824		10,257		5,194		3,935		9,935		8,069
Total development	60,857		34,426		161,397		91,890		92,221		51,919		173,838		100,539
Drug discovery:
License and other collaboration costs	20,910		367		38,390		7,708		7,239		14,975		12,252		17,481
Other drug discovery⁽¹⁾	6,896		3,706		17,870		9,646		6,407		6,440		13,141		10,974
Total drug discovery	27,806		4,073		56,260		17,354		13,646		21,415		25,393		28,455
Other ⁽²⁾	8,632		6,242		24,859		15,742		9,066		8,598		17,579		16,227
Total research and development expenses	$	97,295	$	44,741	$	242,516	$	124,986	$	114,933	$	81,932	$	216,810	$	145,221

____________________


(1)	Primarily includes 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.~~development, and development cost reimbursements in connection with our December 2019 collaboration arrangement with Roche.

In addition to reviewing the three categories of ~~Research~~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, preliminary data ~~from~~ and final results offrom 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.

We are focusing our development efforts primarily on cabozantinib to maximize the therapeutic and commercial potential of this compound and, as a result, we expect that a significant portion of our ~~near-term~~ research and development expenses ~~to primarily~~

will relate to the continuing clinical development program 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~~which includes over 80100 ongoing or planned clinical trials across multiple indications. Notable company-sponsored studies ofresulting from this program include: ~~CheckMate 9ER and CheckMate 040, each in collaboration with BMS; company-sponsored~~ COSMIC-021 and COSMIC-312, for which Roche is providing atezolizumab free of charge; ~~company-sponsored~~ COSMIC-313, for which BMS is providing nivolumab and ipilimumab free of charge; CONTACT-02 for which Roche is sharing in the development costs including the provision of atezolizumab free of charge; and ~~company-sponsored~~ COSMIC-311. In addition, post-marketing commitments in connection with the approval of COMETRIQ in progressive, metastatic MTC ~~dictate that we conduct an additional~~led to the ongoing EXAMINER study in that indication.

We are also committed to building our product pipeline by discovering and developing new cancer therapies for patients. In this regard, we ~~are conducting~~conduct internal drug discovery activities with the goal of identifying new product candidates to advance into clinical trials. We augment these internal drug discovery activities with business development initiatives aimed at identifying and in-licensing promising, early-stage oncology assets and then further develop them utilizing our established clinical development infrastructure.

WeSubject to the impact of the COVID-19 pandemic on our research and development efforts described under “—COVID-19 Update” above, we expect our ~~Research~~research and development expenses to continue to increase over the remainder of 2020 as a result of the expected initiation and completion of numerous late-stage and other potentially label-enabling cabozantinib trials. In addition, our research and development expenses may further increase as we ~~expand the cabozantinib~~enter into business development ~~program and~~transactions to augment our ~~product pipeline.~~internal drug discovery efforts.

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 for how many of those indications we will ultimately pursue regulatory approval. 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. 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~~total costs associated with the development of cabozantinib or any of our other research and development projects.

~~In any event, our~~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 II, Item 1A of this Quarterly Report on Form 10-Q.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were as follows (dollars in thousands):

Three Months Ended September 30, Percentage Change -
Q3 2019 v. Q3 2018 Nine Months Ended September 30, Percentage Change - Year to Date 2019 v. 2018
2019 2018 2019 2018
Selling, general and administrative expenses $ 51,265
$ 48,120
7 % $ 170,218
$ 153,989
11 %



	Three Months Ended June 30,				Percent Change		Six Months Ended June 30,				Percent Change
	2020		2019		Percent Change		2020		2019		Percent Change
Selling, general and administrative expenses	$	59,791	$	58,815	2	%	$	122,731	$	118,953	3	%

Selling, general and administrative expenses consist primarily of personnel expenses, ~~consulting and outside services,~~ stock-based compensation, marketing costs, and ~~marketing~~certain other administrative costs.

The increases in ~~Selling,~~selling, general and administrative expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable periods in ~~2018,~~2019, were primarily related to the increases in ~~stock-based compensation,~~

personnel expenses and ~~consulting and outside services, and~~the Branded Prescription Drug Fee, which were ~~partially~~ offset by ~~a decrease~~decreases in ~~corporate giving. Stock-based compensation~~marketing costs. Personnel expenses increased ~~$2.3~~$2.7 million and ~~$7.8~~$7.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the comparable periods in ~~2018,~~2019, primarily due to increases in administrative headcount to support ~~the company’s~~our commercial and research and development ~~organizations as well as the expense recognition for the 2018 PSUs. Personnel expenses~~organizations. The Branded Prescription Drug Fee increased ~~$2.6~~$0.5 million and ~~$7.2~~$5.8 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the comparable periods in ~~2018,~~2019, primarily due to ~~increases~~a change in ~~headcount. Consulting~~estimate for such fees related to 2018 and ~~outside services increased $0.3~~2019 sales following our receipt of the 2020 preliminary fee notice from the Internal Revenue Service for the 2018 sales year. Marketing costs decreased $2.9 million and ~~$5.1~~$6.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively,~~2020, as compared to the comparable periods in 2018, primarily due to increases in marketing activities in support of the CABOMETYX launch in HCC and continued support of the product in an increasingly competitive RCC market. Corporate giving, consisting predominantly of donations to independent patient support foundations, decreased $2.1 million and $6.9 million for the three and nine months ended September 30, 2019, respectively, as compared to the comparable periods in 2018.2019.

We expect our ~~Selling,~~selling, general and administrative expenses to continue to increase ~~modestly to~~during the remainder of 2020 in support of our ~~overall organizational growth.~~continued commercial investment in CABOMETYX and the growth of the broader organization.

~~Other~~

Non-operating Income ~~(Expense), Net~~

~~Other~~Items of non-operating income ~~(expense), net, was~~were as follows (dollars in thousands):

Three Months Ended September 30, Percentage Change -
Q3 2019 v. Q3 2018 Nine Months Ended September 30, Percentage Change - Year to Date 2019 v. 2018
2019 2018 2019 2018
Interest income $ 7,191
$ 3,507
105 % $ 20,253
$ 8,099
150 %
Other, net (140 ) 271
n/m
688
368
87 %
Total other income (expense), net $ 7,051
$ 3,778
87 % $ 20,941
$ 8,467
147 %



	Three Months Ended June 30,				Percent Change		Six Months Ended June 30,				Percent Change
	2020		2019		Percent Change		2020		2019		Percent Change
Interest income	$	5,162	$	6,975	(26	)%	$	12,382	$	13,062	(5	)%
Other income, net	$	—	$	803	(100	)%	$	6	$	828	(99	)%

The ~~increases~~decreases in ~~Interest~~interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable periods in ~~2018,~~2019, were the result of ~~both an increase in our investment balances and an increase in the yield earned on those investments.~~lower interest rates.

Provision for Income Taxes

The ~~Provision~~provision for income taxes ~~was~~and effective income tax rates were as follows (dollars in thousands):

Three Months Ended September 30, Percentage Change -
Q3 2019 v. Q3 2018 Nine Months Ended September 30, Percentage Change - Year to Date 2019 v. 2018
2019 2018 2019 2018
Provision for income taxes $ 25,205
$ 2,324
985 % $ 60,826
$ 5,739
960 %



	Three Months Ended June 30,						Percent Change		Six Months Ended June 30,						Percent Change
	2020			2019			Percent Change		2020			2019			Percent Change
Provision for income taxes	$	13,875		$	20,725		(33	)%	$	25,298		$	35,621		(29	)%
Effective income tax rate	17.2		%	20.8		%			18.0		%	18.7		%

~~Our effective~~The decreases in the provision for income ~~tax rates were 20.5% and 19.4% during~~taxes for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively,~~2020, as compared to ~~1.8% and 1.7% for~~ the comparable periods in ~~2018.~~2019, were primarily due to decreases in pre-tax income. The ~~Provision for income taxes relating to our pre-tax income~~effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~ ~~was largely offset by a valuation allowance against our net operating loss carryforwards~~2020 and ~~other deferred~~2019 differed from the U.S. federal statutory rate of 21% primarily due to excess tax ~~assets. At December 31, 2018, we released substantially all~~benefits related to the exercise of certain stock options during the ~~remaining valuation allowance against our deferred tax assets, after we determined that it was more likely than not that these deferred tax assets would be realized.~~periods.

Liquidity and Capital Resources

As of ~~September~~June 30, ~~2019~~2020, we had ~~$1.2~~$1.5 billion in cash and ~~investments.~~investments, compared to $1.4 billion as of December 31, 2019. 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, Accounting and Financial Results,” in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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.

We expect to continue to spend significant amounts to fund the continued development and commercialization of cabozantinib. In addition, we intend to continue to expand our product pipeline through our internal drug discovery efforts and the execution of strategic transactions that align with our oncology drug expertise. Financing these activities could materially impact our liquidity and capital resources and may require us to incur debt or raise additional funds through the issuance of equity. Furthermore, even ifthough we believe we have sufficient funds for our current and future operating plans, we may choose to incur debt or raise additional funds through the issuance of equity due to market conditions or strategic considerations. The COVID-19 pandemic has caused volatility in the U.S. and global financial markets and a downturn in the U.S. and global economy, which may adversely impact our rates of return for our invested cash resources, the availability and cost of credit, as well as our ability to raise additional funds in the capital markets. Among other things, our inability to access additional funds could in the future inhibit our ability to engage in larger-scale strategic transactions or investments.

Sources and Uses of Cash

~~The following table summarizes our cash~~Cash flow activities were as follows (in thousands):

Nine Months Ended September 30,
2019 2018
Net cash provided by operating activities $ 368,935
$ 311,129
Net cash used in investing activities $ (457,046 ) $ (155,051 )
Net cash provided by financing activities $ 15,553
$ 10,835



	Six Months Ended June 30,
	2020			2019
Net cash provided by operating activities	$	157,751		$	293,321
Net cash provided by (used in) investing activities	$	105,894		$	(250,586	)
Net cash (used in) provided by financing activities	$	(3,003	)	$	12,279

Operating Activities

~~Our operating activities provided cash of $368.9 million for nine months ended September 30, 2019, compared to $311.1 million of for the comparable period in 2018.~~

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 for: non-cash operating items such as deferred ~~income~~ taxes, ~~share-based~~stock-based compensation, ~~charges,~~ depreciation, ~~and amortization, and 401(k) matching contributions made in common stock;~~non-cash lease expense 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 Condensed Consolidated Statements of ~~Income.~~Income, the most significant of which may include the timing of milestones payments from our collaboration partners.

The most significant factors that contributed to the ~~increase~~decrease in cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the comparable period in ~~2018, was $96.0 million in milestone payments received from Ipsen, Takeda and Daiichi Sankyo, including $60.0 million in payments for milestones that had previously been recognized and~~2019, were ~~included in Trade receivables, net as of December 31, 2018, and an increase in cash received on sales of our products. Those increases were partially offset by~~ an increase in cash paid for operating expenses ~~for the nine months ended September 30, 2019,~~ as ~~compared to the comparable period~~a result of a $78.8 million increase in ~~2018.~~operating expenses, a $33.0 million decrease in milestone payments received, and other net changes in operating assets and liabilities described above.

Investing Activities

~~Our~~Cash provided by investing activities ~~used cash of $457.0 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2019, as compared to $155.1~~2020 included cash provided by the maturities and sales of investments of $549.0 million, ~~during the comparable period in 2018.~~less investment purchases of $433.2 million and purchases of property, equipment and other of $9.9 million.

Cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, 2019 ~~was primarily due to~~included investment purchases of ~~$887.7~~$518.3 million and ~~Property~~property and equipment purchases of ~~$5.6~~$3.5 million, less cash provided by the ~~maturity~~maturities and ~~sale~~sales of investments of ~~$422.4 million and $13.1 million, respectively.~~

Cash used in investing activities for the nine months ended September 30, 2018 was primarily due to investment purchases of $368.3 million and Property and equipment purchases of $30.4 million, less cash provided by the maturity and sale of investments of $231.2 million and $11.9 million, respectively.$271.2 million.

Financing Activities

Cash ~~provided by financing activities was $15.6 million for the nine months ended September 30, 2019, as compared to $10.8 million during the comparable period~~used in ~~2018.~~

~~Cash provided by~~ financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2019 was primarily a result~~2020 included $20.9 million of ~~$19.0~~taxes paid related to net share settlements of equity awards, partially offset by $17.9 million in proceeds from the issuance of common stock under our equity incentive ~~plans, partially offset by $3.4 million of taxes paid related to net share settlements.~~and stock purchase plans.

Cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2018 was primarily a result of $14.0~~2019 included $14.7 million in proceeds from the issuance of common stock under our equity incentive and stock purchase plans, partially offset by ~~$3.2~~$2.4 million of taxes paid related to net share ~~settlements.~~settlements of equity awards.

Contractual Obligations

~~Except as follows, there~~There were no material changes outside of the ordinary course of business in our contractual obligations as of ~~September~~June 30, ~~2019~~2020 from those ~~as of December 31, 2018.~~

In April 2019, we entered into an amendment to the existing Lease Agreement dated May 2, 2017, as amended (the Lease) relating to our corporate headquarters located in Alameda, California, and in August 2019 we entered into an agreement that will further amend the Lease upon consummation of a third-party transaction. See “Note 11. Leases”disclosed in our ~~“Notes to Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this Quarterly~~Annual Report on Form ~~10-Q~~10-K for ~~more information about these amendments to~~ the ~~Lease.~~year ended December 31, 2019.

Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2019~~2020, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.

Critical Accounting Policies and Estimates

The preparation of our Condensed 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 Condensed Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances ~~and milestone payments~~as well as milestones included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement; ~~the~~ recoverability of inventory; ~~the amounts of operating lease right-of-use assets and lease liabilities;~~ the amounts of deferred tax assets and liabilities including the related valuation allowance; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions. 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, inventory, clinical trial accruals, ~~stock option valuation~~stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Condensed Consolidated Financial Statements.

There have been no significant changes in our critical accounting policies and estimates during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on February ~~22, 2019.~~25, 2020.

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 Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks atas of ~~September~~June 30, ~~2019~~2020 have not changed significantly from those described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Limitations on the effectiveness of controls. A control system, no matter how ~~well conceived~~well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In ~~October~~September 2019, we received a notice letter regarding an ANDA submitted to the FDA by MSN, requesting approval to market a generic version of CABOMETYX tablets. ~~The~~MSN’s initial notice letter included a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776, 9,724,342, 10,034,873 and 10,039,757, which are listed in the ~~FDA publication~~ ~~Approved Drug Products with Therapeutic Equivalence Evaluations~~,~~also referred to as the~~ Orange Book. MSN’s initial notice letter ~~does~~did not provide a Paragraph IV certification against U.S. Patent No. 7,579,473, the ~~CABOMETYX~~ composition of matter patent, or U.S. Patent No. ~~7,579,473, which expires on August 14, 2026, and therefore this patent is not presently at issue.~~8,497,284, a method of use patent. On October 29, 2019,, we filed a complaint ~~for patent infringement against MSN asserting U.S. Patent No. 8,877,776~~ in the United States District Court for the District of Delaware ~~(the Delaware District Federal Court)~~for patent infringement against MSN asserting U.S. Patent No. 8,877,776 arising from MSN’s ANDA filing with the FDA. ~~Based on~~On November 20, 2019, MSN filed its response to the ~~information~~complaint, alleging that U.S. Patent No. 8,877,776 is invalid and not infringed. On May 5, 2020, we ~~have~~ received notice from MSN that it had amended its ANDA to ~~date,~~assert additional Paragraph IV certifications. The ANDA now requests approval to market a generic version of CABOMETYX tablets prior to expiration of the two previously-unasserted CABOMETYX patents: U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284. On May 11, 2020, we filed a complaint in the United States District Court for the District of Delaware for patent infringement against MSN asserting U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 arising from MSN’s amended ANDA filing with the FDA. On May 22, 2020, MSN filed its response to the complaint, alleging that each of U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 is invalid and not infringed. Neither of our ~~complaint does not allege~~complaints alleges infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757. WeIn our complaints, we are seeking, among other relief, an order that the effective date of any FDA approval of the ANDA would be a date no earlier than the expiration of all of U.S. Patent No. 7,579,473, U.S. Patent No. 8,497,284 and U.S. Patent No. 8,877,776, the latest of which expires on October 8, 2030, and equitable relief enjoining MSN from infringing ~~this patent.~~these patents. These two lawsuits against MSN have been consolidated, and a bench trial has been scheduled for May 2022.

Item 1A. Risk Factors

In addition to the ~~factors~~risks discussed elsewhere in this report, ~~and our other reports filed with the SEC,~~ 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 ability to grow our company is critically dependent upon the commercial success of CABOMETYX in 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 to position us for future growth through our discovery efforts and expansion of our development pipeline.~~ We anticipate that for the foreseeable future, our ability to maintain or meaningfully increase ~~unrestricted~~ cash flow to fund our business operations and growth will depend upon the continued commercial success of CABOMETYX as a treatment for advanced RCC and previously treated HCC, and ~~potentially~~possibly for other indications for which cabozantinib is being evaluated in ~~late-stage~~potentially label-enabling clinical trials, if warranted by the data generated from such trials. ~~The~~In this regard, part of our strategy is to pursue additional indications for cabozantinib to increase the number of cancer patients who could benefit from this medicine. However, we cannot be certain that the clinical trials we and our collaboration partners are currently conducting, or may conduct in the future, will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial ~~success of~~markets where CABOMETYX is approved. Even if we and our collaboration partners receive the required regulatory approvals to market cabozantinib for additional indications, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in its approved indications is subject to a variety of factors, most importantly, the drug’s perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or in development for these ~~conditions.~~additional indications. If revenue from CABOMETYX decreases or remains flat, or if we are unable to expand the labeled indications in major commercial markets where CABOMETYX is approved, or if we fail to achieve anticipated product royalties and collaboration milestones, whether as a result of the COVID-19 pandemic or otherwise, we may need to reduce our operating expenses, access other sources of cash or otherwise modify our business plans, which could have a material adverse impact on our business, financial condition and results of operations. ~~Furthermore,~~

If the COVID-19 pandemic becomes more severe, our business operations and corresponding financial results could suffer, which could have a material adverse impact on our financial condition and prospects for growth.

Our business could be materially and adversely impacted by the ongoing COVID-19 pandemic, a disease caused by a novel coronavirus, SARS-CoV-2, which has spread globally. The COVID-19 pandemic continues to have a modest impact on our business operations, in particular on our clinical trial, drug discovery and commercial activities. For example, to varying degrees and at different rates across our clinical trials being conducted in regions impacted by COVID-19, we experienced declines in screening and enrollment activity, delays in new site activations, and restrictions on access to treatment sites that is necessary to monitor clinical study progress and initiation. As the COVID-19 pandemic continues to surge in various parts of the world, the impact on our clinical development operations could grow more severe. We anticipate that a prolonged, or more severe, global public health crisis could limit our ability to identify and work with clinical investigators at clinical trial sites globally to enroll, initiate and maintain treatment per protocol of patients for our ongoing COSMIC-311, COSMIC-312, COSMIC-313, COSMIC-021, CONTACT-01, CONTACT-02 and CONTACT-03 clinical trials. Disruptions to medical and administrative operations at clinical trial sites and the implementation of crisis management initiatives have and may continue to reduce personnel and other resources necessary to conduct our clinical trials, which could delay our clinical trial plans or require certain trials to be temporarily suspended. Moreover, quarantines and travel restrictions have impeded and may continue to impede patient movement or interrupt healthcare services, which we anticipate over time, could also interfere with and potentially negatively impact clinical trial results. In addition, new and increased costs connected with our efforts to mitigate the adverse impacts resulting from the COVID-19 pandemic on our clinical trials could cause the expenses we incur in administering those clinical trials to increase considerably. Specifically, with respect to our clinical trials evaluating cabozantinib in combination with therapies that must be administered via professional intravenous infusion, such as COSMIC-312, COSMIC-313, COSMIC-021, CONTACT-01, CONTACT-02 and CONTACT-03, limited patient movement or interrupted healthcare services at medical institutions have delayed in some instances and may continue to delay or prevent on-site infusion of the therapies being evaluated in combination with cabozantinib. If a sizable portion of patients in our combination studies are unable or unwilling to receive all components of the combination therapy being tested in accordance with the applicable clinical trial protocol, those studies could be delayed, suspended or prevented from producing statistically significant results.Depending upon the severity of the COVID-19 pandemic, we could also experience delays in the commencement of new clinical trials of cabozantinib, or our earlier-stage investigative product candidates. The COVID-19 pandemic could also impede internal clinical operations and delay our planning and preparation timelines for new clinical trials, as well as adversely affect our ability to obtain regulatory approval for clinical protocols and increase the operating expenses connected with these new clinical trials.

In addition, the COVID-19 pandemic caused us to suspend internal drug discovery work in our laboratories temporarily while we observed the shelter in place orders issued by the State of California and Alameda County. We also experienced some modest delays with respect to the portion of drug discovery work outsourced to third-party contractors in regions first impacted by COVID-19. While both internal drug discovery work in our laboratories and outsourced drug discovery activities have since partially resumed, we may be unable to maximize the potential of these programs due to reduced staffing and the imposition of increased safety protocols, and should the COVID-19 pandemic continue to grow in severity, we may have to further scale back activities in the future. For example, as a ~~consequence~~result of spikes or surges in infection, positivity or hospitalization rates, we may choose or be required to suspend work in our laboratories, which will once again impede our internal drug discovery efforts. Prior to the COVID-19 pandemic, we had largely outsourced preclinical development work, as well as certain drug discovery activities, to third-party contractors, and although to date that work has continued without substantial delay or interference, the COVID-19 pandemic could impede these third parties from providing timely deliverables to us in the future. As a result of the COVID-19 pandemic, especially if it continues to grow in severity, we may ultimately be unable to achieve our drug discovery and preclinical development objectives within the previously disclosed timelines, which could have a material adverse impact on our prospects for growth.

Moreover, while we believe that our commercial business has only experienced a small impact related to the COVID-19 pandemic, it remains possible that over a longer period, changes to our standard sales and marketing practices, including the shift from in-person to primarily telephonic and virtual interactions with healthcare professionals, could negatively impact the flow of important information regarding our medicines, which along with obstacles to patient access to healthcare professionals, could diminish sales of our ~~collaboration agreements~~marketed products.

Although as of the date of this Quarterly Report, we have substantial safety stock inventories for both our commercial drug substance and drug products and, to our knowledge, we have not yet experienced production delays or seen significant impairment to our supply chain as a result of the COVID-19 pandemic, our third-party contract manufacturers and suppliers may experience delays, facility closures and other hardships due to COVID-19, which could potentially impact our supply chain and cause delays or disruption in our commercial or clinical supply of our products or

product candidates. These potential delays or disruptions to our supply chain could be exacerbated if the COVID-19 pandemic begins to impact essential mail distribution systems, which could substantially increase delivery times and costs, or otherwise adversely affect our ability to provide our products to customers and clinical trial sites and generate product revenues.

As of the date of this Quarterly Report, we have taken temporary precautions to help mitigate the risk of transmission of the virus, including: initially requiring Alameda-based employees to work remotely beginning on March 16, 2020, with rare exceptions to maintain critical operational activities, and then beginning in June 2020, permitting some of our employees to return to our Alameda headquarters under enhanced safety and social distancing protocols; suspending all non-essential business travel for our employees; and limiting the circumstances under which our field employees may engage in in-person promotional activities with healthcare professionals. Over a longer period, all of these measures could negatively affect our business operations and prospects in both foreseeable and unforeseeable ways. For instance, requiring employees to work remotely while we adhered to shelter in place orders limited our internal drug discovery activities, and although we have begun to allow our employees to return to our Alameda headquarters under enhanced safety and social distancing protocols, if we are forced to, or determine that we should, resume shelter in place restrictions for an extended period of time, this would eventually cause substantial delays and otherwise negatively impact the effectiveness of these programs and delay our ability to execute on our long-term business plans. Further, extended periods of remote work could impede the focused attention of management or reduce the productivity of teams that would otherwise be working closely together. The COVID-19 pandemic has also caused volatility in the U.S. and global financial markets and a downturn in the U.S. and global economy, which may adversely impact our rates of return for our invested cash resources, the availability and cost of credit, as well as our ability to raise additional funds in the capital markets. Among other things, our inability to access additional funds could in the future inhibit our ability to engage in larger scale strategic transactions or investments.

While we expect the COVID-19 pandemic to continue to have varying degrees of adverse impact on our business operations and, potentially in the future, our financial results, the extent of such adverse impact arising from the COVID-19 pandemic to our business and our financial results, as well as to the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the U.S. and in other countries, and the effectiveness of actions taken globally to contain and treat the disease. These effects could materially and adversely affect our business, financial condition, results of operations and growth prospects, as further explained in the risks and uncertainties described elsewhere in this ‘‘Risk Factors’’ section. In addition, to the extent the ongoing COVID-19 pandemic adversely impacts our business and financial results, it may also have the effect of exacerbating many of these other risks and uncertainties inherent to our business.

We rely on Ipsen and Takeda wefor the commercial success of CABOMETYX in its approved indications outside of the U.S., and are unable to control the amount or timing of resources expended by these collaboration partners in the commercialization of CABOMETYX in its approved indications outside of the U.S.

We rely ~~heavily~~ upon ~~their~~the regulatory, commercial, medical affairs, market access and other expertise and resources of our collaboration partners, Ipsen and Takeda, for commercialization of CABOMETYX in their respective territories outside of the U.S. We cannot control the amount and timing of resources that our ~~collaborators~~collaboration partners dedicate to the commercialization of CABOMETYX, or to its marketing and distribution, and our ability to generate revenues from the commercialization of CABOMETYX by our ~~collaborators~~collaboration partners depends on their ability to obtain and maintain regulatory approvals for, achieve market acceptance of, and to otherwise effectively market, CABOMETYX in its approved indications in their respective territories. Further, the operations of our collaboration partners, and ultimately their foreign sales of CABOMETYX, ~~by our collaborators~~ could be adversely affected by the degree and effectiveness of their respective corporate responses to the COVID-19 pandemic, as well as by the imposition of governmental price or other controls, political and economic instability, trade restrictions or barriers and changes in tariffs, ~~including as a result of the pending withdrawal of the United Kingdom (UK) from the EU (commonly referred to as “Brexit”) and the uncertainty surrounding the date and the terms of the withdrawal,~~ escalating global trade and political tensions, or otherwise. If our ~~collaborators~~collaboration partners are unable ~~to,~~ or ~~do not~~unwilling to invest the resources necessary to ~~successfully~~ commercialize CABOMETYX successfully in the EU,

Japan and other international territories where it has been approved, this could reduce the amount of revenue we are due to receive under these collaboration agreements, thus resulting in harm to our business and operations.

CABOMETYX has been approved for the treatment of advanced RCC and previously treated HCC in the U.S., the EU and other territories. With these approvals, our ability to grow our company remains contingent upon, among other things, further success in the clinical development, regulatory approval and market acceptance of cabozantinib, the active pharmaceutical ingredient in CABOMETYX, in potential additional indications. We cannot be certain that the clinical trials we and our collaboration partners are currently conducting, or may conduct in the future, will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval. Even if we and our partners receive the required regulatory approvals to market cabozantinib for any additional indications or in additional territories, we and our partners may not be able to effectively commercialize CABOMETYX in these additional indications or territories.

Our ability to grow revenues from sales of CABOMETYX will depend upon the degree of market acceptance among physicians, patients, ~~health care~~healthcare payers, and the medical community.

Our ability to increase or maintain revenues from sales of CABOMETYX for its approved indications is, and if approved for additional indications will be, highly dependent upon the extent of market acceptance of CABOMETYX among physicians, patients, government ~~health care~~healthcare payers such as Medicare and Medicaid, commercial ~~health care~~healthcare plans and the

medical community. Market acceptance for CABOMETYX could depend on numerous factors, including the effectiveness and safety profile, or the perceived effectiveness and safety profile, of CABOMETYX compared to competing products, the strength of CABOMETYX sales and marketing efforts, the impact to healthcare systems and our ability to successfully communicate product information to healthcare professionals resulting from the COVID-19 pandemic, and changes in pricing and reimbursement for CABOMETYX. If CABOMETYX does not continue to be prescribed broadly for the treatment of its approved RCC and HCC indications, ~~we may not be able to grow~~our product ~~revenues. The degree of market acceptance of CABOMETYX will depend upon a number of factors, including:~~

~~the effectiveness,~~revenues could flatten or ~~perceived effectiveness, of CABOMETYX in comparison to competing products;~~

~~the safety of CABOMETYX, including the existence of serious side effects of CABOMETYX and their severity in comparison to those of competing products;~~

~~CABOMETYX’s relative convenience and ease of administration;~~

~~potential unexpected results connected with analysis of data from future or ongoing clinical trials of cabozantinib;~~

~~the timing of CABOMETYX label expansions for additional indications, if any, relative to competitive treatments;~~

~~the price of CABOMETYX relative to competitive therapies;~~

~~price increases taken by us and the impact on the net sales price of CABOMETYX as a result of any new laws, regulations or other government initiatives affecting pharmaceutical pricing;~~

~~the strength of CABOMETYX sales efforts, marketing, market access and product distribution support;~~

~~our ability to obtain and maintain coverage and reimbursement for CABOMETYX from commercial and government payers; and~~

~~our ability to enforce our intellectual property rights with respect to CABOMETYX, including against potential generic competition.~~

~~Further, in the event that any of these or other factors cause market acceptance of CABOMETYX to~~ decrease, ~~this could negatively impact our revenues,~~ which could have a material adverse impact on our business, financial condition and results of operations.

Our competitors may develop products and technologies that impair the relative value of our marketed products and any future product candidates.

The ~~pharmaceutical,~~biotechnology, biopharmaceutical and ~~biotechnology~~pharmaceutical industries are competitive ~~highly diversified~~ and are characterized by ~~rapid~~constant technological change and diverse offerings of products, particularly in the area of novel oncology therapies. Many of ~~the organizations competing with us~~our competitors have greater capital resources, larger research and development staff and facilities, ~~more experience in obtaining~~deeper regulatory ~~approvals~~expertise and more extensive product manufacturing and commercial capabilities than we do, which may ~~allow~~afford them ~~to have~~ a competitive advantage. Further, our competitors may be more effective at ~~using their technologies to develop~~in-licensing and developing new commercial ~~products. As a result, our competitors may be able to more easily develop~~ products that ~~would~~could render our products, and those of our ~~collaborators,~~collaboration partners, 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 scientific and clinical research activities similar to ours. ~~Delays in the development of cabozantinib for the treatment of additional tumor types, for example, could allow our competitors to bring products to market before us.~~

Furthermore, the specific indications for which CABOMETYX is currently or may be approved, based on the results from clinical trials currently evaluating cabozantinib, are highly competitive. Several novel therapies and combinations of therapies have been approved, are in advanced stages of clinical development or are under expedited regulatory review in these indications, and these other therapies are currently competing or 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 ICIs. While we have adapted our cabozantinib development strategy to address the ~~fact~~use of therapies that ~~the approach to treating cancer with~~combine ICIs ~~in combination~~ with other ~~therapeutic~~targeted agents ~~has become highly prevalent~~ in indications for which ~~our products are~~CABOMETYX is approved, we cannot ensure that our ongoing or planned clinical trials will show efficacy in comparison to competing ~~products or~~ product combinations. Moreover, the complexities of such a development strategy have required and ~~may~~are likely to continue to require collaboration with some of our competitors.

We also may face competition from manufacturers of generic versions of our marketed products, and both Congress and the FDA are seeking to promote generic competition, including through proposals focused on drug patenting, importation and provision of drug to generic applicants for testing. Such generic competition often results in very significant decreases in the overall sales or prices at which branded products can be sold. Please also see the risk factor entitled, “~~If competitors use litigation and regulatory means to obtain approval for generic versions of our marketed products, our business will suffer.~~”

If we are unable to maintain or ~~scale adequate~~increase our internal sales, marketing, market access and product distribution capabilities for our products, ~~or enter into or maintain agreements with third parties to do so,~~ we may be unable to maximize product revenues, which could have a material adverse impact on our business, financial condition and results of operations.

Maintaining our sales, marketing, market access and product distribution capabilities requires significant resources, and there are numerous risks involved with ~~managing~~maintaining and continuously improving such a commercial organization, including our potential inability to successfully recruit, train, retain and incentivize adequate numbers of qualified and effective sales and marketing personnel. We are competing for talent with numerous commercial- and pre-commercial-stage oncology-focused biotechnology companies seeking to build out and maintain their commercial organizations, as well as other large pharmaceutical and biotechnology organizations that have extensive, well-funded and more experienced sales and marketing operations, and we may be unable to maintain or adequately scale our commercial organization as a result of such competition. If we cannot maintain effective sales, marketing, market access and product distribution capabilities, we may be unable to maximize the commercial potential of CABOMETYX and COMETRIQ in their approved indications. Also, to the extent that the commercial opportunities for CABOMETYX grow over time, we may not properly ~~judge~~scale the ~~requisite~~ size and experience of our ~~current~~ commercialization teams ~~or the level of distribution necessary~~ to market and sell CABOMETYX successfully in ~~multiple~~an expanded number of indications. If we are unable to maintain or scale our ~~organization~~commercial function appropriately, or should we have to maintain primarily telephonic and virtual interactions in lieu of in-person meetings with healthcare professionals for an extended period of time as a result of the COVID-19 pandemic, we may not be able to maximize product revenues, which could have a material adverse impact on our business, financial condition and results of operations.

If we are unable to enter into or maintain agreements with third parties to store, distribute and commercialize our products, we may be unable to maximize product revenues, which could have a material adverse impact on our business, financial condition and results of operations.

Our ability to ~~successfully~~ commercialize our products successfully will depend, in part, on the ~~extent to which we are able to adequately distribute the~~adequacy of our distribution of those products to eligible patients. We currently rely on third-party providers for storage and distribution ~~of our commercial supplies of both CABOMETYX~~ and ~~COMETRIQ in the U.S. Furthermore, we rely~~ on ~~our~~ collaboration partners for ongoing ~~and further~~ commercialization and distribution of CABOMETYX and COMETRIQ in their respective

territories outside of the U.S., as well as for access and distribution activities for the approved products under named patient use programs (or similar programs) ~~with the effect of introducing earlier patient access to CABOMETYX and COMETRIQ.~~.

Our current and anticipated future dependence upon the activities, support, and legal and regulatory compliance of third parties may adversely affect our ability to supply CABOMETYX and COMETRIQ ~~to the marketplace~~ on a timely and competitive basis. ~~These~~The services provided by these third parties may not ~~provide services in~~be effective or timely, which risks may be increased as a result of the ~~time required~~COVID-19 pandemic. In such cases, we may be unable to ~~meet our commercial timelines and objectives or to meet regulatory requirements. We may not be able to~~ maintain, improve or renew our arrangements with these third parties or enter into new, alternative arrangements with other service providers, on acceptable terms or at all. ~~Third parties could terminate or decline to renew our arrangements based on their own business priorities.~~ If we are unable to contract successfully for ~~these~~effective third-party services ~~related to the distribution of CABOMETYX and COMETRIQ~~ on acceptable terms, our commercialization efforts and those of our collaboration partners may be delayed or otherwise adversely affected, which could have a material adverse impact on our business, financial condition and results of operations.

If we are unable to obtain or maintain coverage and reimbursement for our products from third-party payers, our business will suffer.

Our ability to commercialize our products successfully is highly dependent on the extent to which health insurance coverage and reimbursement is, and will be, available from third-party payers, including governmental payers, such as Medicare and Medicaid, and private health insurers. Third-party payers continue to scrutinize and manage access to pharmaceutical products and services and may limit reimbursement for newly approved products and indications. Patients are generally not capable of paying for CABOMETYX or COMETRIQ themselves and rely on third-party payers to pay for, or subsidize, the costs of their medications, among other medical costs. Accordingly, market acceptance of CABOMETYX and COMETRIQ is dependent on the extent to which coverage and reimbursement is available from third-party payers. If third-party payers do not provide coverage or reimbursement for CABOMETYX or COMETRIQ, our revenues and results of operations 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, may not be sufficient for patients to afford CABOMETYX or COMETRIQ. Third-party payers continue to scrutinize and manage access to pharmaceutical products and services and press manufacturers for discounts and rebates. Payers may also limit reimbursement for newly approved products and indications.

We are subject to ~~certain~~ healthcare laws, regulations and enforcement; our failure to comply with those laws could have a material adverse impact on our business, financial condition and results of operations.

We are subject to ~~certain~~federal and state healthcare laws and regulations, which laws and ~~enforcement~~regulations are enforced by the federal government and the states in which we conduct our business. Should our compliance controls prove ineffective at preventing or mitigating the risk and impact of improper business conduct or inaccurate reporting, we could be subject to enforcement of the ~~laws that may affect our ability to operate include,~~following, including, without limitation:

the federal Anti-Kickback Statute, ~~(AKS),~~ which governs our business activities, including our marketing practices, medical educational programs, pricing policies, and relationships with healthcare providers or other entities. The AKS 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, value-added services to customers, and providing anything at less than its fair market value;entities;

the ~~Federal~~federal Food, Drug, and Cosmetic Act (FDCA) and its implementing regulations, which prohibit, among other things, the introduction or delivery for introduction into interstate commerce of any drug that is adulterated or misbranded;

federal civil and criminal false claims laws, including the civil False Claims Act, 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 Portability and Accountability Act of 1996 (HIPAA) and its implementing regulations, which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information on covered entities and business associates that access such information on behalf of a covered entity;

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;laws;

the Open Payments program of the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act (PPACA), which was created under the Physician Payments Sunshine Act and its implementing regulations and requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program, with

specific exceptions, to report annually to the government information related to certain payments and other

transfers of value to physicians (as defined by such law) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

state and local laws and regulations that require drug manufacturers to file reports relating to marketing activities, payments and other remuneration and items of value provided to healthcare professionals and entities, as well as state and local laws requiring the registration of pharmaceutical sales representatives; and

state pharmaceutical price and price reporting laws and regulations that require us to provide notice of price increases or the introduction of new high-cost products, and/or file complex ancillary reports concerning prices and pricing and discount practices.

In addition, we may be subject to 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)~~professionals employed by national healthcare programs) and its foreign ~~equivalents;~~

equivalents, as well as federal and state consumer protection and unfair competition ~~laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and~~

state pharmaceutical price and price reporting laws and regulations that require us to provide notice of price increases and/or file complex ancillary reports concerning prices and pricing and discount practices. Laws and regulations in this area, and associated compliance obligations, may increase general and administrative costs, cause volatility in our revenues due to speculative buying practices by purchasers, or diminish our revenues as a result of the imposition of caps on pricing and price increases.laws.

These federal and state healthcare ~~fraud and abuse~~ laws ~~FDA rules~~ and regulations ~~as well as false claims laws, including the civil False Claims Act,~~ govern ~~certain~~drug marketing practices, including off-label promotion. If our operations are found, or even alleged, 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 significant penalties, including administrative civil and criminal penalties, damages, fines, regulatory penalties, the curtailment or restructuring of our operations, exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs, imprisonment, reputational harm, additional reporting requirements and oversight, ~~if we become subject to a corporate integrity agreement or similar agreement,~~ any of which would adversely affect our ability to sell our products and 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. ~~These~~Under the False Claims Act, these 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, or settles a lawsuit brought pursuant to the False Claims Act to avoid further prosecution, 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~~action is brought against us, our business may be ~~impaired.~~impaired, even if we are ultimately successful in our defense.

Current healthcare laws and regulations in the U.S. and future legislative or regulatory reforms to the U.S. healthcare system may affect our ability to commercialize our marketed products profitably.

~~The~~Federal and state governments in the U.S. ~~and some foreign jurisdictions~~ are considering ~~or have enacted a number of~~ legislative and regulatory proposals to change the U.S. healthcare system in ways that could affect our ability to continue to commercialize CABOMETYX and COMETRIQ profitably. ~~Among~~Similarly, among policy makers and payers, ~~in the U.S. and elsewhere,~~ there is significant interest in promoting such changes ~~in healthcare systems~~ with the stated goals of containing healthcare costs, improving quality ~~and/or~~and expanding patient access. InThe life sciences industry and specifically the ~~U.S.,~~market for the ~~pharmaceutical industry~~sale, insurance coverage and distribution of pharmaceuticals has been a particular focus of these efforts and ~~has been~~would likely be significantly affected by any major legislative or regulatory initiatives.

~~Specifically, we may~~We face related uncertainties as a result of ~~executive, legislative and administrative~~ efforts to repeal, substantially modify or invalidate some or all of the provisions of the PPACA. OnNotably, in December ~~14,~~ 2018, a Texas U.S. District Court Judge ruled that the PPACA is unconstitutional in its entirety because the penalty enforcing the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. ~~The decision has been appealed to~~Then, in December 2019, the U.S. Court of Appeals for the ~~Fifth~~5th Circuit upheld this District Court ruling that the individual mandate was unconstitutional and remanded the ~~Trump administration filed its brief in support~~case back to the District Court to determine whether the remaining provisions of the ~~decision~~PPACA are invalid as well. While the U.S. Supreme Court has agreed to review an appeal of the Texas District Court judge on May 1, 2019. While the Texas District Court Judge, as well as the Trump Administration and the Centers for Medicare and Medicaid Services, have stated that the ruling will have no immediate effect pending the appeal,5th Circuit’s decision in 2020, it is unclear how this decision, future decisions, subsequent appeals and other efforts ~~to repeal and replace the PPACA~~ will impact the PPACA. Additionally, the 2020 federal spending package permanently repealed, effective January 1, 2020, the PPACA-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical device taxes, and, effective January 1, 2021, also eliminates the health insurer tax. There is no assurance that the ~~PPACA, as currently enacted~~repeal or ~~as amended~~modification of some or all of the provisions of the PPACA in the future, will not have a material adverse impact on our business, financial condition and results of operations, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business. The Trump Administration has also indicated an intention to regulate prescription drug pricing, and recent Congressional hearings and proposed legislation have brought increased public attention to the costs of prescription drugs. These actions and the uncertainty about the future of the

~~PPACA, healthcare laws or future legislation on drug pricing at the federal level may put downward pressure on pharmaceutical pricing and increase our regulatory burdens and operating costs.~~

~~There~~In addition, there are pending federal and ~~state Congressional~~state-level legislative proposals that would significantly expand government-provided health insurance coverage, ranging from establishing a single-payer, national health insurance system to more limited ~~buy-in~~“buy-in” options ~~that would be available~~ to individuals above a certain age. Federal legislation has also been proposed that would authorize states to permit individuals to “buy in” to their state Medicaid programs. Several states are also considering or have already enacted legislation that would allow individuals to “buy in” to the state’s Medicaid program or that would otherwise establish a “publicexisting public health ~~option,”~~insurance programs, each of which could have a significant impact

on the healthcare industry. ~~At this stage,~~It is also possible that additional governmental actions will be taken to address the ongoing COVID-19 pandemic, and that such actions would have a significant impact on these public health insurance programs. While we cannot predict how future legislation (or enacted legislation that has yet to be implemented) will affect our ~~business. However,~~business, such proposals could have the potential to impact access to and sales of our products.

In August 2017, President Trump signed the FDA Reauthorization Act of 2017, which reauthorized the FDA user fee programs for prescription drugs, generic drugs, medical devices, and biosimilars, under which applicants for such products partially pay for the FDA’s pre-market review of their product candidates and pay other specified fees, including yearly program fees in the case of most New Drug Application (NDA)-approved prescription drugs. 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, and the FDA has taken steps to implement this plan. Moreover, both Congress and the FDA are considering various legislative and regulatory proposals focused on drug competition, including legislation focused on drug patenting, importation, and provision of drug to generic applicants for testing. While we cannot currently predict the specific outcome or impact on our business of such regulatory actions or legislation, they do have the potential to facilitate the development and future approval of generic versions of our products, or otherwise limit or reduce the term for our market exclusivity, which could result in significant decreases in the revenue derived from sales of our marketed products and thereby materially harm our business and financial condition.

As a result of ~~the overall trend towards managed healthcare in the U.S.,~~these developments and trends, third-party payers are increasingly attempting to contain healthcare costs by limiting ~~both~~ coverage and the level of reimbursement of new drugs. Insurers are also ~~continue to pursue~~pursuing means of contracting for pharmaceutical “value” or “outcomes.” These entities could refuse, limit or ~~limit~~condition coverage for ~~CABOMETYX and COMETRIQ,~~our products, such as by using tiered reimbursement or pressing for new forms of value-based contracting, which ~~would~~could adversely affect ~~demand~~product sales. Furthermore, the expansion of the 340B Drug Discount Program has increased the number of purchasers eligible for ~~CABOMETYX and COMETRIQ. They may also refuse to provide coverage for uses of CABOMETYX and COMETRIQ for medical indications other than those for which the FDA has granted market approval. As a result,~~ significant ~~uncertainty exists as to whether and how much third-party payers will cover newly approved~~discounts on branded drugs, ~~which in turn will put pressure on the pricing of drugs.~~including our marketed products. Due to the volatility in the current ~~economic~~regulatory 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~~including potential cost containment and healthcare reform measures. ~~These policy actions~~If enacted, any such measures could have a material adverse impact on our business, financial condition and results of operations.

Pricing for ~~and patient access to,~~ pharmaceutical products in the U.S. has come under increasing attention and scrutiny by federal and state 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.

There have been several recent U.S. Congressional inquiries, hearings and proposed and enacted federal legislation and rules, as well as Executive Orders, designed to, among other things: reduce or limit the prices of drugs and make them more ~~accessible and~~ affordable for patients; reform the structure and financing of ~~public health insurance~~Medicare Part D pharmaceutical benefits, ~~most importantly, Medicare and Medicaid,~~ including through increasing manufacturer contributions to offset Medicare beneficiary costs; ~~facilitate value-based arrangements between manufacturers and payers;~~ bring more transparency to drug pricing rationale and methodologies; ~~and expedite the development and approval of generic~~revise rebate payments for prescription drugs and biosimilars. It is entirely unclear what, if any, legislative, regulatory and/or administrative measures that impact the biopharmaceutical industry will eventually be implemented; however, both Congress,under Medicaid and the ~~Trump Administration have indicated that they will continue~~methodologies to ~~seek reforms in this area.~~calculate average manufacturer price and best price; and facilitate the importation of certain lower-cost drugs from other countries. While we cannot know the final form of any such ~~reforms,~~legislative, regulatory and/or administrative measures, some of the pending legislative proposals, such as those incorporating International Pricing Index models, if enacted, would likely have a significant and far-reaching impact on the biopharmaceutical industry and therefore also likely have a material adverse impact on our business, financial condition and results of operations.

In connection with its evaluation of proposals concerning the pricing of, and access to, pharmaceutical products, many companies in our industry have received governmental requests for documents and information relating to drug pricing and patient support programs. ~~Requests take various forms, including through a Congressional inquiry (e.g., from the U.S. Senate Finance Committee) or a subpoena from the U.S. Department of Justice.~~ We could receive a similar request, which would require us to incur significant expense and ~~result in distraction for our management team.~~divert the attention of management. Additionally, to the extent there are findings, or even allegations, of improper conduct on the part of the company, these findings could further harm our business, reputation and/or prospects. It is possible that these inquiries could result in: negative publicity or other negative actions that could harm our reputation; changes in our product pricing and distribution strategies; reduced demand for our approved products; and/or reduced reimbursement of our approved products, including by federal health care programs such as Medicare and Medicaid as well as state health care programs.

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~~pricing or reimbursement at the state government level, limitations on discounts to patients, marketing cost disclosure and transparency measures, and, in some cases, policies to encourage importation from other countries (subject to federal approval) and bulk purchasing, including the National Medicaid Pooling Initiative. ~~With respect to drug pricing transparency, for~~

For example, ~~in October 2017, Jerry Brown, the Governor of~~ California ~~at the time, signed~~adopted SB-17, which requires, among other provisions, pharmaceutical manufacturers to provide advance notice of price increases above a defined threshold to certain purchasers and related reports to the government. ~~SB-17 is currently subject~~Such obligations to challenge, but in the meantime, manufacturers must comply with its requirements. It is possible that laws such as SB-17 will encourage federal and state healthcare programs to reduce the amount of reimbursements they provide for prescription drugs, and any reduction in reimbursement from these government healthcare programs may result in a similar reduction in payments from private payers. We also believe that pricing transparency requirements, such as the requirement for us, in certain circumstances, to provide lengthy notices of price increases to purchasers may influence customer ordering patterns for CABOMETYX and COMETRIQ, ~~and that this,~~which in turn may increase the volatility of our revenues as a reflection of changes in inventory volumes. Furthermore, adoption of drug pricing transparency regulations, and our associated compliance obligations, may increase general and administrative costs and/or diminish our revenues as a result of the imposition of caps on pricing and price increases. Therefore, the implementation of these cost-containment measures or other healthcare reforms may result in fluctuations in our results of operations and limit our ability to generate product revenue or commercialize our ~~current~~products.

Lengthy regulatory pricing and reimbursement procedures and cost control initiatives imposed by governments outside the U.S. could delay the marketing of and/or result in downward pressure on the price of our approved products ~~and/or those for which we may receive regulatory approval~~resulting in a decrease in revenue.

Outside the ~~future.~~

~~Further, in some foreign countries,~~U.S., particularly in the EU, the pricing and reimbursement of prescription pharmaceuticals is generally subject to governmental ~~control under the respective national health system.~~control. In ~~these~~ EU countries, pricing and reimbursement negotiations with governmental authorities or payers can take six to 12 months or longer after the initial marketing authorization is granted for a product, or after the

marketing authorization for a new indication is granted. This can substantially delay broad availability of the product. To obtain reimbursement and/or pricing approval in some countries, our collaboration partner Ipsen may also be required to conduct a study that seeks to establish the cost effectiveness of CABOMETYX compared with other available established therapies. The conduct of such a study could also result in delays in the commercialization of CABOMETYX. Additionally, cost-control initiatives, increasingly based on affordability, could decrease the price we and ~~our collaboration partner,~~ Ipsen might establish for CABOMETYX, which would result in lower license revenues to us.

A significant and prolonged economic downturn, whether globally or just within the U.S., could have a substantial impact on our revenues and financial condition.

Our revenues are substantially dependent on the net pricing that we ultimately realize in payment for our marketed products, and commercial third-party payers do not receive the same degree of discounts and allowances that we provide to government payers. In the event of a significant and prolonged economic downturn, the number of patients enrolled in commercial health insurance programs is likely to decrease, particularly in the U.S. where workforce reductions could cause widespread loss of the private health insurance coverage typically provided by employers, and a commensurate shift of eligible individuals to government insurance programs or to the circumstance of lacking health insurance coverage altogether. The effects of the COVID-19 pandemic, among other catalysts, have already caused a downturn in the U.S. and global economy and significant levels of unemployment, and the duration and severity of this economic downturn are not yet known. Depending on the severity of the COVID-19 pandemic, as well as other factors, we could experience a substantial decrease in revenues as a result of the increase in gross-to-net discounting applied to the price of our products due to a substantial shift from private health insurance coverage to government insurance coverage, and also a significant increase in demand for our patient assistance and/or free drug program, all or any of which would adversely affect our product revenues.

Enhanced governmental and private scrutiny over, or investigations or litigation involving, pharmaceutical manufacturer donations to patient assistance programs offered by charitable foundations ~~may require us to modify our programs and~~ could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.

To help patients afford our products, we have a patient assistance program and also occasionally make donations to independent charitable foundations that help financially needy patients. These types of programs designed to assist patients with affording pharmaceuticals have become the subject of scrutiny. In recent years, some pharmaceutical manufacturers were named in class action lawsuits challenging the legality of their patient assistance programs and support of independent charitable patient support foundations under a variety of federal and state laws. Notably, certain of these manufacturers have entered into significant monetary or other settlements with the federal government, including entering into Corporate Integrity Agreements, to resolve allegations that they paid kickbacks through independent charitable foundations. Our patient assistance program and support of independent charitable foundations could become the target of similar litigation. Though not affecting CABOMETYX, at least one insurer also has directed its network pharmacies to no longer accept manufacturer co-payment coupons for certain specialty drugs the insurer identified. In addition, certain state and federal enforcement authorities and members of Congress have initiated inquiries about co-pay assistance programs. Some state legislatures have also been considering proposals that would restrict or ban co-pay coupons.

~~In addition, there has been regulatory review,~~ Congressional interest and enhanced government ~~scrutiny of donations by pharmaceutical companies to patient assistance programs operated by charitable foundations.~~scrutiny. The U.S. Department of Health and Human Services Office of Inspector General ~~has~~ established specific guidelines permitting pharmaceutical manufacturers to make donations to charitable organizations ~~who~~that provide co-pay assistance to Medicare patients, provided that manufacturers meet certain specified compliance requirements. In the event we make such organizations are bona fide charities, are entirely independent of and not controlled by the manufacturer, provide aid to applicants on a first-come basis according to consistent financial criteria, and do not link aid to use of a donor’s product. If wedonations but are deemed not to have complied with these guidelines and other laws or regulations inrespecting the operation of these programs, we could be subject to significant damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. ~~Further, numerous organizations,~~We also rely on a third-party hub provider and exercise oversight to monitor patient assistance program activities. Hub providers are generally hired by manufacturers to assist patients with insurance coverage, financial assistance and treatment support after the patients receive a prescription from their healthcare professional. For manufacturers of specialty pharmaceuticals (including our marketed products), the ability to have a single point of contact for their therapies helps ensure efficient medication distribution to patients. Accordingly, our hub activities are also subject to scrutiny and may create risk for us if not conducted appropriately. A variety of entities, including independent charitable foundations and pharmaceutical manufacturers, but not including our company, have received subpoenas from the U.S. Department of Justice and other enforcement authorities seeking information related to their patient assistance programs and support, and, as noted above, certain of these organizations have entered into, or have otherwise agreed to, significant civil settlements with applicable enforcement authorities. Additionally, in March 2019, the Senate Finance Committee launched an inquiry into alleged ties between pharmaceutical manufacturers and patient assistance charitable foundations. It is possible that future legislation may propose establishing requirements that affect pharmaceutical manufacturers and such charitable organizations. We cannot ensure that our compliance controls, policies and procedures will be sufficient to protect against acts of our employees, business partners or vendors that may violate the laws or regulations of the jurisdictions in which we operate.support. Regardless of whether we have complied with the ~~law, a~~regulations governing patient assistance programs, this type of government investigation could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.

We are subject to laws and ~~government~~ regulations relating to privacy, ~~and~~ data protection ~~that have required us to modify certain of our policies~~ and ~~procedures with respect to~~ the collection and processing of ~~personal data, and future laws and regulations may cause us to incur additional expenses or otherwise limit our ability to collect and process~~ personal data. Failure to maintain compliance with these regulations could ~~jeopardize certain business transactions and~~ create additional liabilities for us.

The legislative and regulatory landscape for privacy and data protection continues to evolve globally and in the U.S. continues to evolve, and there has been an increasing focus on privacy and data protection, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws governing the collection, use and disclosure of personal information. For example, ~~in June 2018, Jerry Brown, the Governor of California at the time, signed into law~~ the California Consumer Privacy Act of 2018 (CCPA)~~, which was subsequently amended, and which goes~~ went into operation on January 1, 2020 and ~~will give~~affords California residents expanded privacy rights and protections, ~~and will provide for~~including civil penalties for violations and statutory damages under a private right of action for data security breaches. ~~There are similar~~Similar legislative proposals being advanced in other states and Congress is also considering federal privacy legislation. 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 encourage, assist or otherwise facilitate a HIPAA-covered entity (or its business associate) to use or disclose

individually identifiable health information in a manner not authorized or permitted by HIPAA. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. For example, the EU General Data Protection Regulation 2016/679 (GDPR)~~, which became enforceable on May 25, 2018,~~ regulates the processing of personal data of individuals within the EU, even if, under certain circumstances, that processing occurs outside the EU, and also restricts transfers of such data to countries outside of the EU, including the United States. Switzerland is updating the Swiss Data Protection Act, and updates to data protection laws in other countries may occur in due course. In connection with these new laws, in particular the CCPA and GDPR,U.S. Should we have modified or are reviewing certain of our policies and procedures with respect to the collection and processing of personal data. We will continue to review all future privacy and other regulations implemented pursuant to the CCPA, GDPR and other applicable laws to assess whether additional procedural safeguards are warranted, which may cause us to incur additional expenses or otherwise limit our ability to collect and process personal data. Failurefail to provide adequate privacy or data security protections or maintain compliance with these laws and regulations, ~~could jeopardize certain domestic and cross-border business transactions and create additional liabilities for us,~~ including the ~~imposition of~~CCPA and GDPR, we could be subject to sanctions or other penalties, litigation or an increase in our cost of doing business.

~~If competitors use litigation~~Legislation and regulatory ~~means~~action designed to ~~obtain~~facilitate the development, approval ~~for~~and adoption of generic ~~versions~~drugs in the U.S., and the entrance of generic competitors, could limit the commercial potential of our ~~marketed~~ products, which could have a material adverse impact on our business, ~~will suffer.~~financial condition and results of operations.

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. The FDA can also approve ~~an NDA~~a New Drug Application (NDA) under section 505(b)(2) of the FDCA that relies in whole or in part on the agency’s findings of safety and/or

effectiveness for a previously approved drug. Both the ANDA and 505(b)(2) processes are discussed in more detail under “Item 1. ~~Business-Government Regulation-The Hatch-Waxman Act”~~Business—Government Regulation—FDA Review and Approval” in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on February ~~22, 2019.~~25, 2020. In either case, if an ANDA or 505(b)(2) applicant submits an application referencing one of our marketed products prior to the expiry of one or more our Orange Book-listed patents for the applicable product, we may ~~engage in litigation~~litigate with the potential generic competitor to protect our patent rights, which ~~will require us to incur significant expense and~~would result in ~~distraction for our~~substantial costs and divert the attention of management, ~~team,~~ and could ~~also~~ have an adverse impact on our stock price. ~~If one~~For example, we received Paragraph IV certification notice letters from MSN concerning the ANDA that it had filed with the FDA seeking approval to market a generic version of CABOMETYX tablets. It is possible that MSN or ~~more~~other companies, ~~receive~~following FDA approval of an ANDA or 505(b)(2) NDA, ~~it is possible that such company or companies~~ could introduce generic versions of our marketed products before our patents expire if they do not infringe our patents or if it is determined that our patents are invalid or ~~unenforceable. In particular,~~unenforceable, and we expect that generic cabozantinib products would be offered at a significantly lower price compared to our marketed cabozantinib products. ~~Regardless~~Therefore, regardless of the regulatory approach, ~~whether through the ANDA or 505(b)(2) pathways or otherwise,~~ the introduction of a generic version of ~~any of~~cabozantinib could significantly decrease our ~~marketed products could result in significant decreases in the revenue derived from sales of our marketed products~~revenues and thereby materially harm our business, financial condition and ~~financial condition.~~results of operations.

The U.S. federal government has also taken numerous legislative and regulatory actions to expedite the development and approval of generic drugs and biosimilars. In ~~October 2019, we received a notice letter regarding an ANDA submitted to~~August 2017, President Trump signed the FDA ~~by MSN, requesting~~Reauthorization Act of 2017, which reauthorized the FDA user fee programs for prescription drugs, generic drugs, medical devices, and biosimilars, under which applicants for such products partially pay for the FDA’s pre-market review of their product candidates and pay other specified fees. The legislation also includes, inter alia, measures to expedite the development and approval ~~to market a~~of generic ~~version of CABOMETYX tablets. The notice letter included a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776, 9,724,342, 10,034,873 and 10,039,757, which are listed~~products, where generic competition is lacking even in the ~~Orange Book.~~ ~~MSN’s notice letter does not provide~~absence of exclusivities or listed patents. In addition, the FDA has also released a ~~Paragraph IV certification against~~Drug Competition Action Plan, which proposes actions to broaden access to generic drugs and lower consumers’ healthcare costs by, among other things, improving the ~~CABOMETYX composition~~efficiency of ~~matter patent, U.S. Patent No. 7,579,473, which expires~~the generic drug approval process and supporting the development of complex generic drugs, and the FDA has taken steps to implement this plan. Moreover, both Congress and the FDA are considering various legislative and regulatory proposals focused on ~~August 16, 2026. On October 29,~~drug competition, including legislation focused on drug patenting and provision of drug to generic applicants for testing. For example, the Creating and Restoring Equal Access To Equivalent Samples (CREATES) Act of 2019, ~~we filed a complaint for patent infringement against MSN asserting U.S. Patent No. 8,877,776~~signed into law as part of the 2019 year-end federal spending package, purports to promote competition in the ~~Delaware District Federal Court arising from MSN’s ANDA filing with~~market for drugs and biological products by facilitating the ~~FDA. Based on the information we have received~~timely entry of lower-cost generic and biosimilar versions of those drugs and biological products, including by allowing generic manufacturers access to date, our complaint does not allege infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757. We are seeking, among other relief, an order that the effective date of any FDA approval of the ANDA would be a date no earlier than the expiration of U.S. Patent No. 8,877,776 on October 8, 2030 and equitable relief enjoining MSN from infringing this patent. We cannot assure you that the lawsuit will prevent the introduction of a generic version of CABOMETYX for any particular length of time, or at all. If MSN’s ANDA is approved, and a generic version of CABOMETYX is introduced following the expiration of our composition of matter patent in 2026, our sales of CABOMETYX would be adversely affected. In addition,branded drug samples. While we cannot predict ~~what additional ANDAs could be filed by MSN~~the specific outcome or ~~other~~impact on our business of such regulatory actions or legislation, they do have the potential to facilitate the development and future approval of generic ~~competitors requesting approval to market generic forms~~versions of ~~cabozantinib, including against~~our products, or otherwise limit or reduce the ~~cabozantinib composition of matter patent that MSN has not challenged, which would require us to incur significant additional expense and result in distraction~~term for our ~~management team, and if approved, result in significant decreases in the revenue derived from sales of our marketed products and thereby materially harm~~market exclusivity, which could have a material adverse impact on our business, financial condition and ~~financial condition.~~results of operations.

Clinical testing of cabozantinib for new indications, or of new potential 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 cabozantinib, despite its approval for certain indications, or a new ~~potential~~ product candidate, is ineffective or has an unacceptable safety profile with respect to an intended use. Such results may significantly decrease the likelihood of regulatory approval inof that product for a particular indication. Moreover, the results of preliminary studies do not necessarily predict clinical or commercial success, and ~~later stage~~late-stage or other potentially label-enabling clinical trials may fail to confirm the results observed in ~~earlier stage~~early-stage trials or preliminary studies. Although we have established timelines for manufacturing and clinical development of cabozantinib and our other product candidates

based on existing knowledge of our compounds in development and industry metrics, we may not be able to meet those timelines.

We may experience numerous unforeseen events, during or as a result of clinical ~~testing,~~investigations, that could delay or prevent commercialization of cabozantinib (or of other product candidates) in new indications, ~~or of~~and in some cases, as described in the risk factor titled, “If the COVID-19 pandemic becomes more severe, our ~~other product candidates, including:~~business operations and corresponding financial results could suffer, which could have a material adverse impact on our financial condition and prospects for growth,” the COVID-19 pandemic has already increased and may further increase the potential for such developments to occur. These may include:

lack of acceptable efficacy or a tolerable safety profile;

negative or inconclusive clinical trial results that require us to conduct further testing or to abandon ~~projects that we had expected to be promising;~~projects;

discovery or commercialization by our competitors of other compounds or therapies that show significantly improved safety or efficacy compared to cabozantinib or our other 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;~~sites;

lower-than-anticipated patient registration or enrollment in our clinical ~~testing, resulting in the delay or cancellation of clinical~~ testing;

failure by our ~~collaborators~~collaboration partners to provide us with an adequate and timely supply of product that complies with the applicable quality and regulatory requirements for a combination trial;

failure of our third-party contract research organizations or investigators to satisfy their contractual obligations, including deviating from any trial protocols; and

withholding of authorization from regulators or institutional review boards to commence or conduct clinical trials ~~of cabozantinib or another product candidate,~~ or delays, suspensions or terminations of clinical research for various reasons, including noncompliance with regulatory requirements or a determination by these regulators and institutional review boards that participating patients are being exposed to unacceptable health risks.

If ~~we were to have significant~~there are further delays in or termination of the clinical testing of cabozantinib or our other product candidates ~~as a result of~~due to any of the events described above or otherwise, including as a result of the COVID-19 pandemic, 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~~our clinical development ~~of cabozantinib and our product candidates.~~programs. 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~~financing the further development of cabozantinib or our other product candidates and, as a result, we may be unable to execute our current business plans, which could have a material adverse impact on our business, financial condition and results of operations.

We may not be able to ~~rapidly or effectively continue~~pursue the further development of cabozantinib or our other product candidates or meet current or future requirements of the FDA or regulatory authorities in other jurisdictions ~~including those identified based on~~in accordance with our ~~discussions with the FDA~~stated timelines or ~~such other regulatory authorities.~~at all. 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.

The duration and the cost of clinical trials vary significantly as a result of factors relating to the clinical trial, including, among others:

characteristics of the product candidate under investigation;

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;~~

follow-up; the number of clinical sites included in the trials; and

the length of time required to enroll ~~suitable patient subjects.~~eligible patients.

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 regulatory approvals for cabozantinib or our other product candidates, which could have a material adverse impact on our business, financial condition and results of operations.

The activities associated with the research, development and commercialization of cabozantinib and our other product candidates are subject to extensive regulation by the FDA and other regulatory agencies in the U.S. ~~and~~, as well as by comparable authorities in other countries. The ~~process~~processes of obtaining regulatory approvals in the U.S. and other foreign jurisdictions is expensive and often takes many years, if approval is obtained at all, and they can vary substantially based

upon the type, complexity and novelty of the product candidates involved. For example, before an NDA or ~~supplemental New Drug Application (sNDA)~~sNDA can be submitted to the FDA, or a marketing authorization application to the ~~European Medicines Agency~~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 sNDA ~~and~~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, we may encounter 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~~could cause delays in the approval or rejection of an application for cabozantinib or for our other product candidates.

Even if the FDA or a comparable authority in another jurisdiction approves cabozantinib for one or more new indications, ~~beyond advanced RCC, previously treated HCC and MTC, or approves one of our other product candidates,~~ such 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~~clinical trials, all of which may result in significant expense and ~~clinical trials.~~limit our and our collaboration partners’ ability to commercialize cabozantinib in one or more new indications. For example, ~~in connection~~based on the regulatory feedback from the FDA, and if supported by the clinical data from COSMIC-021, we intend to file with the ~~FDA’s~~FDA for accelerated approval of ~~COMETRIQ for~~cabozantinib in an mCRPC indication as early as 2021. We expect that as a condition of any potential approval under the ~~treatment of progressive, metastatic MTC in November 2012, we are subject~~FDA's accelerated approval pathway, the FDA will require us to aperform confirmatory post-marketing ~~requirement~~clinical trials to ~~conduct a~~confirm the clinical ~~study comparing a lower dose~~benefit, if any, of cabozantinib ~~to the approved dose of 140 mg daily cabozantinib~~ in ~~progressive,~~combination with Roche’s atezolizumab in patients with locally advanced or metastatic ~~MTC.~~solid tumors, such as mCRPC. 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~~ultimately restrict the commercialization of ~~cabozantinib.~~cabozantinib in any additional indications. Further, these regulatory agencies ~~may~~could also impose various administrative, civil or criminal sanctions for failure to comply successfully with regulatory requirements, including withdrawal of product approval.

In addition, on March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. Amongst other provisions, the CARES Act made a number of changes to the FDCA aimed at preventing drug shortages. While we are still evaluating these and other CARES Act changes, these changes could impact our business. For example, in light of the COVID-19 pandemic, the FDA has issued a number of guidance documents describing the agency’s expectations for how drug manufacturers should comply with various FDA requirements during the pandemic, including with respect to conducting clinical trials, distributing drug samples, and reporting post-marketing adverse events. In addition, as a result of the COVID-19 pandemic, there has been increasing political and regulatory scrutiny of foreign-sourced drugs and foreign drug supply chains, resulting in proposed legislative and executive actions to incentivize or compel drug manufacturing operations to relocate to the United States. These political and regulatory developments and any further guidance documents issued by FDA that impact the requirements to which we are subject, as well as any equivalent federal or state legislative or regulatory initiatives, or similar measures outside of the United States, could have a material adverse impact on our business, financial condition and results of operations.

We may be unable to expand our development pipeline, which could limit our growth and revenue potential.

Our business is focused on the discovery, development and commercialization of new medicines for difficult-to-treat cancers. In this regard, we ~~are pursuing~~have invested in substantial technical, financial and human resources toward internal drug discovery ~~efforts~~activities with the goal of identifying new product candidates to advance into clinical trials. ~~Internal~~Notwithstanding such investment, we temporarily suspended internal drug discovery ~~efforts~~in our laboratories due to ~~identify new product candidates require substantial technical,~~the COVID-19 pandemic, among other limitations to our programs described in the risk factor titled, “If the COVID-19 pandemic becomes more severe, our business operations and corresponding financial results could suffer, which could have a material adverse impact on our financial condition and ~~human resources. These internal~~prospects for growth.” While we have since partially resumed our drug discovery ~~efforts~~operations, even assuming we successfully return these operations to full capacity in the future, many programs that may have initially ~~show~~shown promise ~~in identifying potential product candidates, yet~~will ultimately fail to yield product candidates for ~~clinical development for a number of~~multiple reasons. For example, ~~potential~~ product candidates may, on further study, be shown to have inadequate efficacy, harmful side effects, suboptimal pharmaceutical profiles or other characteristics suggesting that they are unlikely to be commercially viable products.

Apart from our internal drug 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 highly competitive area, and many other companies are pursuing the same or similar

product candidates to those that we may consider attractive. In particular, larger companies with more ~~well-established and diverse revenue streams may have a competitive advantage over us due to their size, financial~~capital resources and more extensive clinical development and commercialization ~~capabilities.~~capabilities may have a competitive advantage over us. 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 additional ~~relevant~~ product candidates 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~~our internal drug discovery or business development efforts ~~or if we are unable to successfully obtain rights to~~do not result in suitable product candidates, our business 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, 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.~~financial condition and results of operations.

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. For example, we use Facebook and Twitter to communicate with the medical community and the investing public, although we do not intend to disclose material, nonpublic information through these means. Despite our efforts to monitor ~~evolving~~

social media ~~communication guidelines and comply with applicable laws and regulations,~~communications, there is risk that the unauthorized use of social media by us or our employees to communicate about our products or business, or any inadvertent disclosure of material, nonpublic information through these means, may ~~cause us to be found~~result in ~~violation~~violations 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 a material adverse impact on our business, financial condition and results of operations. Furthermore, negative posts or comments about us or our products on social media could seriously damage our reputation, brand image and goodwill.

Risks Related to Our Capital Requirements, Accounting and Financial Results

~~We may~~Our profitability could be ~~unable~~negatively impacted by our extensive clinical development, business development and commercialization activities for cabozantinib and pipeline expansion efforts relative to ~~maintain or increase profitability.~~the revenues we generate.

Although we reported net income of ~~$252.3 million and $690.1~~$115.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and $321.0 million for the year ended December 31, ~~2018,~~2019, respectively, we may not be able to maintain or increase profitability on a quarterly or annual basis, and we are unable to 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, if any, under our collaboration agreements with Ipsen and Takeda; the amount of royalties from sales of CABOMETYX and COMETRIQ outside of the U.S. under our collaboration agreements with Ipsen and Takeda; other collaboration revenues; and the level of our expenses, including for development and commercialization activities for cabozantinib and for any pipeline expansion efforts. We expect to continue to spend ~~significant additional~~substantial amounts to fund the continued development of cabozantinib for additional indications and the commercialization of our approved products. In addition, we intend to continue to expand our product pipeline through our internal drug discovery efforts and the execution of additional partnerships through business development activities or strategic transactions that align with our oncology drug development, regulatory and commercial expertise, which efforts could involve substantial costs. To offset these costs in the future, we will need to generate substantial revenues. If these costs exceed our current expectations, or we fail to achieve anticipated revenue targets, the market value of our common stock may decline.

Our financial outlook may not be realized.

From time to time, in press releases and otherwise, we may publish estimates, forecasts or other forward-looking statements regarding our future financial or operating results, including estimated revenues, expenses and earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant risks and uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any

forecast depends on numerous assumptions and other factors (including those described in this discussion), many of which are beyond our control. Moreover, the impact of the COVID-19 pandemic on our profitability, especially if it continues to grow in severity, is difficult to predict. As a result, we cannot be certain that our performance will be consistent with any management estimates or forecasts or that the variation from such estimates or forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated estimates or forecasts, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information regarding us, our products, the competitive landscape for our products, our commercialization, development and regulatory efforts, as well as those of our collaboration partners, and the biotechnology and pharmaceutical industry generally when evaluating our prospective financial or operating results.

If additional capital is not available to us when we need it, we may be unable to expand our product offerings and maintain business growth.

~~As of September 30, 2019, we had $1,248.4 million in cash~~Cash and investments were $1.5 billion as of June 30, 2020, compared to ~~$851.6 million~~$1.4 billion as of December 31, ~~2018.~~2019. Our business operations grew substantially during ~~2018~~2019 and the first ~~nine~~six months of ~~2019.~~2020. In order to maintain business growth during the remainder of 2020, we plan to continue to execute on our U.S. commercialization plans for CABOMETYX, while reinvesting in our product pipeline through the continued development of cabozantinib and our other product candidates, internal discovery activities, and the execution of strategic transactions. Our ability to achieve 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, market access, medical affairs and product distribution capabilities for CABOMETYX and COMETRIQ;

the achievement of stated regulatory and commercial milestones and royalties paid under our collaboration agreements with Ipsen and Takeda;

the commercial success of and revenues generated by products marketed under our collaboration and license agreements;

future clinical trial results;

the impact of the COVID-19 pandemic on our ability to conduct critical business operations, including internal drug discovery activities, clinical trials and commercial operations;

the level of our investments in the expansion of our pipeline through internal drug discovery and business development activities;

~~our ability to control costs;~~

the number and size of clinical trials we conduct and the cost of drug supply for such clinical trials evaluating our products with other therapeutic agents;

trends and developments in the pricing of oncologic therapeutics in the U.S. and abroad, especially in the 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.

Our commitment of cash resources to CABOMETYX and the reinvestment in our product pipeline through the continued development of cabozantinib and increasing internal drug discovery activities, as well as through the execution of strategic transactions, could require us to obtain additional capital. We may seek such additional capital through some or all of the following methods: corporate collaborations; licensing arrangements; and public or private debt or equity financings. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other factors beyond our control. Disruptions in the U.S. and global financial markets, including ~~any~~ disruptions ~~resulting~~that have resulted and may continue to result from the COVID-19 pandemic and the related downturn in the U.S. and global economy, as well as future potential U.S. federal government shutdowns, ~~the uncertainty surrounding the date and the terms of the pending Brexit,~~ rising interest rate environments, increased or changed tariffs and trade restrictions or otherwise, may adversely impact the availability and cost of credit, as well as our ability to raise ~~money~~additional funds in the capital markets. Economic and capital markets 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~~In particular, our inability to access additional funds, whether due to the COVID-19 pandemic or otherwise, could in the future inhibit our ability to engage in larger scale strategic transactions or investments. We do not know whether

additional capital will be available when needed, or that, if available, we will obtain additional capital on terms favorable to us or our stockholders. If we are unable to raise additional funds when we need them, we may be unable to expand our product offerings and maintain business growth, which could have a material adverse impact on our business, financial condition and results of operations.

Our financial results are impacted by management’s selection of accounting methods, certain assumptions and 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. We believe our critical accounting policies relating to revenue recognition, clinical trial accruals, inventory, ~~and~~ stock-based compensation and income taxes reflect the more significant estimates and judgments used in the preparation of our ~~Condensed~~ Consolidated Financial Statements. 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 from the Financial Accounting Standards Board ~~(FASB)~~ 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, our other results of operations or our current financial position.

~~The 2017 comprehensive tax reform bill could have a material adverse impact on our business, financial condition and results of operations.~~

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, 2018 and September 30, 2019, 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, possibly with retroactive effect.

Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.

We are subject to income tax in the U.S. as well as numerous U.S. states and territories, municipalities, and other local jurisdictions. As a result, our effective tax rate is derived from various factors including the mix of forecast and actual earnings and applicable tax rates in the various places that we operate, the accounting for stock options and ~~share based~~stock-based awards, and research and development spending. In preparing our financial statements, we estimate the amount of tax that will become

payable in each jurisdiction. Our effective tax rate, however, may be different than experienced in the past due to numerous factors, including changes in tax laws, ~~such as the passage of the Tax Cuts and Jobs Act,~~ changes in the mix of our earnings from state to state, the results of examinations and audits of our tax filings, or our inability to secure or sustain acceptable agreements with tax authorities. Any of these factors could cause our effective tax rate to fluctuate.

Our ability to use net operating losses and tax credits to offset future taxable income may be subject to limitations.

As of December 31, ~~2018,~~2019, we had federal and, subject to the recent California franchise tax law change affecting California state net operating losses mentioned below, state net operating loss carryforwards of approximately ~~$1.1 billion. The~~$675 million. Portions of the federal and state net operating loss carryforwards will begin to expire, if not utilized, beginning in ~~2031~~2035 for federal income tax purposes and ~~2028~~2020 for ~~California~~ state income tax purposes. ~~These~~Portions of these net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the Internal Revenue Code (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 carryforwards that can be utilized in future years to offset future taxable income. The annual limitation may result in the expiration of a portion of our net operating losses and credit carryforwards before utilization. Based on our review and analysis, we concluded, as of December 31, ~~2018,~~2019, 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. Furthermore, our ability to utilize our net operating losses is conditioned upon our maintaining profitability and generating U.S. federal taxable income.

~~The transition away from~~ In addition, at the ~~London Interbank Offered Rate (LIBOR) could affect the value of certain short-term investments, as well as our ability to seek additional debt financing.~~

~~Actions by governmental entities~~state level, there may ~~impact certain financial instruments in~~be periods during which we have invested or may invest in the future. For example, some of these financial instruments may rely in some fashion upon LIBOR, which is an average interest rate, determined by the ICE Benchmark Administration, that banks charge one another for the use of ~~short-term money. The UK's Financial Conduct Authority, which regulates LIBOR, has announced plans~~net operating losses is suspended or otherwise limited. For example,

California recently imposed limits on the usability of California state net operating losses to ~~phase out the use of LIBOR by the end of 2021. While only a small percentage of our short-term investments include financial instruments subject to LIBOR,~~offset taxable income in tax years beginning after 2019 and while we do not currently have any outstanding debt that is subject to LIBOR, there remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate, and any potential effects of the transition away from LIBOR on certain instruments in to which we may enter in the future are not known. The transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on LIBOR. The transition may also result in reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, result in expenses, difficulties, complications or delays in connection with future financing efforts, which could have a material adverse impact on our business, financial condition and results of operations.before 2023.

The ~~UK’s pending~~United Kingdom’s (UK’s) withdrawal from the EU may have a negative effect on global economic conditions, financial markets and our business.

~~Brexit has created significant uncertainty concerning~~Following the ~~terms~~ratification of the Withdrawal Agreement by the European Parliament and UK ~~withdrawal from~~Parliament, the UK left the EU ~~and the future relationship between the UK and the EU. On April 11, 2019, the European Council agreed at its Special Meeting to extend the UK’s departure date to October 31, 2019, and then~~ on ~~October 28, 2019, the European Council informally agreed to further extend the departure date to~~ January 31, 2020 ~~though this latest extension allows the UK~~(commonly referred to ~~withdraw from the EU prior to January~~as “Brexit”). The Withdrawal Agreement provides for a transition period until December 31, 2020, if a transition agreement is ratified by both the UK Parliament and the European Parliament. However, despite numerous proposals to provide for a more fair and reasonable exit, both the EU and the UK are preparing for a “no deal” scenario induring which the UK will leave the EU as a “third country” without the benefit of any transition arrangements. In addition, the resignation of Theresa May and election of Boris Johnson as UK Prime Minister has further increased this uncertainty, since the UK’s future position on Brexit will depend significantly upon the policies and political decisions of the new administration under the premiership of Prime Minister Johnson.

~~The “no deal” scenario has been recognized by the policy makers~~remains in the ~~UK and the EU as likely to cause significant~~single market and economic disruption. The effects of Brexit will depend on whether the UK retains access to EU markets either during a transitional period or more permanently. Brexit could disrupt the single internal market principle, which ensurescustoms union and the free movement of goods, services, people and ~~people~~capital will continue, in order to ensure frictionless trade and business continuity until a long-term relationship is agreed. At the end of transition, the UK’s relationship with the EU will be determined by the new agreements it has entered into on trade and other areas of cooperation. The new agreements must be reached before the transition period ends. If not, the UK would have to rely on previous international conventions for security cooperation and would trade with the EU on World Trade Organization terms. The exception is Northern Ireland, whose trade in goods with the EU would be covered by the provisions in the Northern Ireland Protocol. As a result of the COVID-19 pandemic, planned negotiating rounds for the UK’s future relationship with the EU have not been progressing at a pace that would facilitate a final agreement on trade and cooperation between the UK and the EU ~~undermine bilateral cooperation in key policy areas and significantly disturb trade relationships between~~prior to December 31, 2020. Under these circumstances, it is uncertain whether the UK and EU would agree to extend the ~~EU. In addition, Brexit could lead to legal~~

~~uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace, amend or adopt.~~

transition period beyond December 31, 2020. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications ~~the withdrawal of the UK from the EU would~~Brexit will have and how ~~such withdrawal would~~it might affect us. For example, we rely on third-party contract manufacturing organization facilities located in the UK, responsible for packaging, labeling, storing and subsequently distributing supplies of our product to the EU. Any tariffs, differing regulatory requirements and other restrictions on the free movement of goods between the UK and the EU that ultimately result from Brexit may have an adverse impact on this part of our supply chain. Trade restrictions, changes to the regulatory approval or drug cost reimbursement systems, and additional administrative costs may impede the ability of our ~~collaborator~~collaboration partner Ipsen to market our products in Europe. Furthermore, the initial announcement of Brexit caused significant volatility in global stock markets and currency exchange rate ~~fluctuations, and~~fluctuations; therefore, the ~~pending withdrawal of the UK from the EU~~Brexit transition may ~~also~~continue to adversely affect European and global economic and market conditions, which may cause third-party payers, including governmental organizations, to closely monitor their costs and reduce their spending budgets, and which could contribute to instability in the global financial and foreign exchange markets. Any of these effects of Brexit could have a material adverse impact on our business, financial condition and results of operations.

Risks Related to Our Relationships with Third Parties

We are dependent upon our collaborations with major companies, which subject us to a number of risks.

We have established collaborations with leading ~~pharmaceutical~~biotechnology, biopharmaceutical and ~~biotechnology~~pharmaceutical companies, including, Ipsen, Takeda, Roche and Genentech, BMS and Daiichi Sankyo, ~~and BMS~~ for the development and ultimate commercialization of ~~certain compounds generated from~~ our ~~research and development efforts.~~products. Our dependence on our relationships with ~~collaborators~~collaboration partners for the development and commercialization of compounds subjects us to, a number of risks, including:

our inability to control the amount and timing of resources that our ~~collaborators~~collaboration partners or potential future ~~collaborators~~collaboration partners will devote to the development or commercialization of drug candidates or to their marketing and distribution;

the possibility that ~~collaborators~~collaboration partners may delay clinical trials, fail to supply us on a timely basis with the product required for a combination trial (including as a result of the COVID-19 pandemic), deliver product that fails to meet appropriate quality and regulatory standards and results in a market recall or withdrawal, 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 that may arise between us and our ~~collaborators~~collaboration partners 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;~~

our inability to control the U.S. commercial resourcing decisions made and resulting costs incurred by Genentech for COTELLIC, which costs we are obligated to share, in part, under our collaboration agreement with Genentech;arbitration;

the possibility that our ~~collaborators~~collaboration partners may experience financial ~~difficulties;~~difficulties, including, without limitation, difficulties arising from the impact of the COVID-19 pandemic;

our ~~collaborators’~~collaboration partners’ lack of success in their efforts to obtain regulatory approvals in a timely manner, or at all;

our ~~collaborators’~~collaboration partners’ failure to properly maintain or defend our intellectual property rights or their use of our intellectual property rights or proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential litigation;

our ~~collaborators’~~collaboration partners’ failure to comply with the terms of our collaboration agreements and related ancillary agreements;

our ~~collaborators’~~collaboration partners’ failure to comply with applicable healthcare laws, as well as established guidelines, laws and regulations related to Good Manufacturing Practice, Good Clinical Practice, Good Distribution Practice and Good Pharmacovigilance Practice;

~~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;~~

the possibility that our ~~collaborators~~collaboration partners could independently move forward with competing drug candidates, developed either independently or in collaboration with others, including our competitors;

our inability to enter into additional collaboration arrangements with third parties in an area or field of exclusivity;

the possibility that future ~~collaborators~~collaboration partners may require us to relinquish some important rights, such as marketing and distribution rights; and

the possibility that 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 revenues or otherwise realize anticipated benefits from such collaborations and our product development efforts could be delayed, all of which could have a material adverse impact on our business, financial condition and results of operations.

If third parties upon which we rely to perform clinical trials for cabozantinib in new indications or for new potential product candidates do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize cabozantinib or other product candidates beyond currently approved indications.

We do not have the ability to conduct clinical trials for cabozantinib or for new potential product candidates independently, ~~including our post-marketing commitments in connection with the approval of 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 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, whether as a result of the COVID-19 pandemic or otherwise, 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 or other product candidates beyond currently approved indications. In addition, due to the complexity of our research initiatives, we may be unable to engage with third-party contract research organizations that have the necessary experience and sophistication to further our internal drug discovery efforts, which would impede our ability to identify, develop and commercialize our potential product candidates.

We lack internal manufacturing capabilities necessary for us to produce materials required for certain preclinical activities and produce our products 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 facilities, distribution facilities or resources for chemistry, manufacturing and control development activities, preclinical, clinical or commercial production and distribution offor our ~~products.~~current products and new product candidates. Instead, we have multiple contractual agreements in place with third-party contract manufacturing organizations that, on our behalf, manufacture preclinical, clinical and commercial supplies of ~~CABOMETYX and COMETRIQ.~~our products. As our operations continue to ~~expand through our clinical development and commercial progress,~~grow in these areas, we ~~are~~continue to appropriately ~~expanding~~expand our supply chain ~~by entering into new agreements with additional~~through secondary third-party contract manufacturers and suppliers. ~~This will continue for the foreseeable future for all of our product candidates, as well as our current and future commercial products.~~

To establish and manage our supply chain requires a significant financial commitment, the creation of numerous third-party contractual relationships and continued oversight of these third parties to ~~ensure~~fulfill compliance with applicable regulatory requirements. Although we maintain significant resources to directly and effectively oversee the activities and relationships with the companies in our supply chain, we do not have direct control over their operations.

Our third-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 preclinical, clinical development and commercial needs and applicable regulatory ~~requirements.~~requirements, including as a result of the COVID-19 pandemic. Although as of the date of this Quarterly Report, we have substantial safety stock inventories for both our commercial drug substance and drug products and, to our knowledge, have not yet experienced production delays or seen significant impairment to our supply chain as a result of the COVID-19 pandemic, our third-party contract manufacturers and suppliers may experience delays, facility closures and other hardships due to COVID-19, which could potentially impact our supply chain and cause delays or disruption in our commercial or clinical supply of our products or product candidates. If our third-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 if they otherwise fail or refuse to comply with their obligations to us under our ~~supply~~manufacturing and ~~manufacturing~~supply arrangements, we may not have adequate remedies for any breach. Furthermore, their failure to supply us could impair or preclude our ability to meet our commercial product supply requirements, or our product supply needs for clinical trials, including those being conducted in collaboration with our partners, which could delay our product development efforts and have a material adverse impact on our business, financial condition and results of operations. ~~Through~~In addition, through our third-party contract manufacturers and data service providers, we ~~have implemented product serialization designed~~continue to provide serialized commercial products as required to comply with the Drug Supply Chain Security Act (DSCSA)~~, pursuant to which, subject to limited exemptions, all prescription pharmaceutical products manufactured and distributed in the U.S. were required to be serialized as of November 27, 2018.~~. If our third-party

contract manufacturers or data service providers fail to support our efforts to continue to comply with DSCSA and any future federal or state electronic pedigree requirements, we may face legal penalties or be restricted from selling our products.

As part of our collaboration agreements with Ipsen and Takeda, we are responsible for the supply of CABOMETYX and COMETRIQ for global development and commercial purposes. Failure to meet our supply obligations under these collaboration agreements could impair our ~~collaborators’~~partners’ ability to successfully develop and commercialize CABOMETYX and COMETRIQ and generate revenues to which we are entitled under the collaborations.

~~Our collaborations with outside~~If third-party scientific advisors and ~~collaborators~~contractors we rely on to assist with our drug discovery efforts do not perform as expected, the expansion of our product pipeline may be ~~subject to restriction and change.~~delayed.

We work with scientific ~~and clinical~~ advisors ~~and collaborators~~ at academic and other institutions, as well as third-party contractors in various locations throughout the world, that assist us in our research and development efforts, including in internal drug discovery and preclinical development strategy. These ~~advisors and collaborators~~third parties are not our employees and may have other commitments or ~~pursue other opportunities~~contractual obligations that limit their availability to us. Although these third-party scientific advisors and ~~collaborators~~contractors 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. There has also been increased scrutiny surrounding the disclosures of payments made to medical researchers from companies in the pharmaceutical industry, and it is possible that the academic and other institutions that employ these medical researchers may prevent us from engaging them as scientific advisors and ~~collaborators~~contractors or otherwise limit our access to these experts, or that the scientific advisors themselves may now be more reluctant to work with industry partners. ~~In any~~Even if these scientific advisors and contractors with whom we have engaged intend to meet their contractual obligations, their ability to perform services may be impacted by external factors, as we experienced in the early stages of ~~these circumstances,~~the COVID-19 pandemic. If we have or may continue to experience delays in the receipt of services, lose work performed by these scientific advisors and ~~collaborators~~contractors or beare unable to engage them in the first place, ~~and~~ our discovery and development efforts with respect to the matters on which they were working or would work in the future 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 Information Technology, Data Privacy and Intellectual Property

Data breaches, ~~cyber-attacks~~cyber attacks and other failures in our information technology infrastructure could compromise our intellectual property or other sensitive information, damage our operations and cause significant harm 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~~collaboration partners. We have also outsourced significant elements of our information technology infrastructure to third parties and, as a result, such third parties may or could have access to our confidential information. The secure maintenance of this information is critical to our business and reputation, and while we have enhanced and are continuing to enhance our ~~cyber-security~~cybersecurity 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.~~cyber attack. Such vulnerabilities may be further exacerbated by the fact that

our workforce is operating remotely as we comply with shelter in place orders and the recent rise in COVID-19 phishing attacks targeting remote workers. In addition, we are heavily dependent on the functioning of our information technology infrastructure to carry out our business processes, such as external and internal communications or access to clinical data and other key business information. Accordingly, both inadvertent disruptions to this infrastructure and ~~cyber-attacks~~cyber attacks could cause us to incur significant remediation or litigation costs, result in product development delays, disrupt ~~key~~critical business operations, ~~and divert attention of management and~~expend key information technology ~~resources.~~resources and divert the attention of management.

Numerous companies have been subject to a wide variety of security incidents, ~~cyber-attacks~~cyber attacks (including through use of ransomware) and other attempts to gain unauthorized access or otherwise compromise information technology systems. In fact, although the aggregate impact of ~~cyber-attacks~~cyber attacks on our operations and financial condition has not been material to date, we and our third-party vendors have frequently 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 such threats can also vary in motive (including corporate espionage). Cyber ~~threats may be generic, or they may be custom-crafted against our information systems. Cyber-attacks~~attacks continue to become more prevalent and much harder to detect and defend ~~against. Our network~~against, and storage applications and those of our contract manufacturing organizations, contract research organizations or vendors may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. Itit 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 our sensitive business information (or sensitive business information of our collaboration partners, which may lead to significant liability for us). A data security breach could also lead to public exposure of personal information of our clinical trial patients, employees or 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 (including the GDPR), subject us to investigations and mandatory corrective action, or 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 financial exposure. Furthermore, the costs of maintaining or upgrading our ~~cyber-security~~cybersecurity systems (including the recruitment and retention of experienced information technology professionals, who are in high demand) at the level necessary to keep up with our expanding operations and prevent against potential attacks are increasing, and despite our best efforts, our network security and data recovery measures and those of our vendors may still not be adequate to protect against such security breaches and disruptions, which could cause material harm to our business, financial condition and results of operations.

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, 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 U.S. and elsewhere. The costs of defending our patents or enforcing our proprietary rights in post-issuance administrative proceedings and litigation can 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. For example, ~~in October 2019,~~ we received aParagraph IV certification notice ~~letter~~letters from MSN concerning the ANDA that it ~~has~~had filed ~~an ANDA~~ with the FDA ~~for~~seeking approval to market a generic version of CABOMETYX ~~tablets, and we subsequently filed a patent infringement lawsuit against MSN on~~ ~~October 29, 2019~~.tablets. Should MSN or any other third parties receive FDA approval of an ANDA ~~for a generic version of cabozantinib~~ or a 505(b)(2) NDA with respect to cabozantinib, ~~and if our patents covering cabozantinib were held to be invalid (or if~~it is possible that such ~~competing generic versions of cabozantinib were found to not infringe our patents), then they~~company or companies could introduce generic versions of ~~cabozantinib or other such 505(b)(2)~~our marketed products before our patents expire if they do not infringe our patents or if it is determined that our patents are invalid or unenforceable, and the resulting generic competition ~~would negatively affect~~could have a material adverse impact on our business, financial condition and results of operations. ~~Please also see the risk factor entitled, “If competitors use litigation and regulatory means to obtain approval for generic versions of our marketed products, our business will suffer.~~”

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 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. Initiatives seeking compulsory licensing of life-saving drugs are also becoming increasingly prevalent in developing countries either through direct legislation or international initiatives. Governments in those developing countries could require that we grant compulsory licenses to allow competitors to manufacture and sell their own versions of our products or product candidates, thereby reducing our 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~~partners and consultants, we cannot ~~assure you~~provide assurance 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 accomplish or could require substantial time and expense.

In addition, third parties may obtain patents that relate to our technologies and claim that use of such technologies infringes on their patents or otherwise employs their proprietary technology without authorization. Regardless of their merit, such claims could require us to incur substantial costs ~~including~~and divert the ~~diversion~~attention of management and key 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, subjecting us to substantial royalty payment obligations. We may not be able to obtain these licenses on commercially reasonable 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 we or these employees or independent contractors 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.~~the attention of management. If we fail in defending such claims, in addition to paying damages, 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

develop or commercialize certain product candidates, which could ~~severely harm~~have a material adverse impact on our ~~business.~~business, financial condition and results of operations.

Risks Related to Employees and Location

If we are unable to manage our growth, there could be a material adverse impact on our business, financial condition and results of operations, and our 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 ~~facilities, systems, procedures~~ and ~~controls~~operating practices may not be adequate to support our growth. To effectively manage our growth, we must continue to improve existing, and implement new, facilities, operational and financial systems, and procedures and controls, as well as 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. If we are unable to manage our growth effectively, including as result of the COVID-19 pandemic or otherwise, or we are unsuccessful in recruiting qualified management personnel, there could be a material adverse impact on our business, financial condition and results of ~~operations, and our prospects may be adversely affected.~~

operations.

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 plans. Retaining and, where necessary, recruiting qualified clinical, commercial, scientific and ~~scientific~~pharmaceutical operations personnel will be critical to support activities related to advancing the development program for cabozantinib and our other ~~compounds,~~product candidates, successfully executing upon our commercialization plan for cabozantinib and our internal proprietary research and development efforts. Competition is intense for experienced clinical, commercial, scientific and pharmaceutical operations 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. Similarly, the COVID-19 pandemic could negatively impact the health of key personnel or make it difficult to recruit qualified personnel for critical positions. Further, all of our employees are employed “at will” and, therefore, may leave our employment at any time.

Additionally, in the second quarter of 2018, we moved our corporate headquarters from South San Francisco, California to Alameda, California. This relocation 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.

Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.

Our headquarters in Alameda, California is located in the San Francisco Bay Area, and therefore our facilities are vulnerable to damage from earthquakes. ~~We have limited~~Our earthquake insurance ~~which~~ may not 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 fires and floods, which have become a significant danger in California during recent years, as well as power loss, communications failures, aircraft disasters (due to the proximity of our headquarters to a major international airport), terrorism and similar events, and any insurance we may maintain may be inadequate 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, a disaster could cause~~impaired, causing significant delays in our programs and ~~make~~making it difficult for us to recover due to the unique nature of our research activities. Accordingly, an earthquake or other disaster could ~~materially~~have a material adverse impact on our business, financial condition and ~~adversely harm our ability to conduct business.~~results of operations.

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, or that results in physical or psychological harm to any of our employees, could subject us to liability or otherwise have a material adverse impact on our business, financial condition and results of operations.

Risks Related to Environmental and Product Liability

We use hazardous chemicals 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 biological ~~materials. Our~~materials, and our operations can produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge, or any resultant injury from these ~~materials. Federal, state~~materials, and ~~local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We~~we may face liability under applicable laws for any injury or contamination that results from our use or the use by our collaboration partners or other third parties of these materials, and such liability may exceed our insurance coverage and our total assets. ~~Compliance~~In addition, we may be required to indemnify our collaboration partners against all damages and other liabilities arising out of our development activities or products produced in connection with our collaborations with them. Moreover, our continued 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, any 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~~collaboration partners 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 in the future. These claims might be made directly by consumers, ~~health care~~healthcare 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,~~biotechnology, biopharmaceutical and ~~biotechnology~~pharmaceutical 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 as a result of multiple factors, including pricing information required to be disclosed by us pursuant to drug pricing transparency laws;

~~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 achievement of stated regulatory and commercial milestones and royalties paid under our collaboration agreements;~~

~~the commercial success of and revenues generated by products marketed under our collaboration and license agreements, including COTELLIC and MINNEBRO;~~

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 sales, marketing, market access, medical affairs and product distribution capabilities for CABOMETYX and COMETRIQ;~~

~~the progress and scope of other development and commercialization activities for cabozantinib and our other compounds;~~

~~future clinical trial results;~~

~~our future investments in the expansion of our pipeline through internal drug discovery and business 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-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, including with respect our current and potential future patent litigations against MSN and potential future generic applicants;

~~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;~~

~~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.~~

In addition, in the fourth quarter of 2018, we determined, based on our facts and circumstances, that it was more likely than not that a substantial portion of our deferred tax assets would be realized and, as a result, substantially all of our valuation allowance against deferred tax assets was released. Therefore, beginning in 2019, we record income tax expense at an estimated tax rate that will likely approximate statutory tax rates, adjusted for discrete tax items, which has resulted in a significant reduction in our net income and net income per share.

Due to the possibility of such fluctuations in our revenues and expenses, we believe that quarter-over-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 highly 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 or inconclusive results or announcements related to our or our collaborators’ clinical trials or delays in those clinical trials;~~

the announcement of FDA approval or non-approval, or delays in the FDA review process with respect to cabozantinib, our ~~collaborators’~~collaboration partners’ product candidates being developed in combination with cabozantinib, or our competitors’ product candidates;

the commercial ~~success~~performance of both CABOMETYX and COMETRIQ and the revenues we generate from those approved ~~products;~~products, including royalties paid under our collaboration and license agreements;

adverse or inconclusive results or announcements related to our or our collaboration partners’ clinical trials or delays in those clinical trials;

the timing of achievement of our clinical, regulatory, partnering, commercial 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;~~product candidates;

our ability to make future investments in the expansion of our pipeline through internal drug discovery and business development activities;

our ability to obtain the materials and services, including an adequate product supply for any approved drug product, from our third-party vendors or do so at acceptable prices;

the timing and amount of expenses incurred for clinical development and manufacturing of cabozantinib;

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, including approvals at earlier stages of clinical development or with lesser developed data sets and expedited reviews;

the announcement of new products or clinical trial data by our competitors;

the announcement of regulatory applications, such as MSN’s ANDA, seeking approval of generic versions of our marketed products;

quarterly variations in our or our competitors’ results of operations;

~~developments~~changes in our relationships with our ~~collaborators,~~collaboration partners, including the termination or modification of our ~~agreements;~~agreements, or other events or conflicts that may affect our collaboration partners’ timing and willingness to develop, or if approved, commercialize our products and product candidates out-licensed to them;

the announcement of an in-licensed product candidate or strategic acquisition;

~~conflicts or litigation with our collaborators;~~

litigation, including intellectual property infringement and product liability lawsuits, involving us;

the impairment of acquired goodwill and other assets;

changes in earnings estimates or recommendations by securities analysts, or financial guidance from our management team, and any failure to achieve the operating results projected by securities ~~analysts;~~analysts or by our management team;

the 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;

additions and departures of key personnel or board members;

the extent to which coverage and reimbursement 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;

significant fluctuations in interest rates or foreign currency exchange rates; and

general market, economic and political conditions and other factors, including factors unrelated to our operating performance or the operating performance of our ~~competitors.~~competitors, such as the impact of the COVID-19 pandemic on financial markets.

These and other factors ~~as well as general economic, political and market conditions, may materially adversely affect~~could have material adverse impact on 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 uncertainty of the date and the terms of the pending Brexit and/or~~ significant changes in U.S. ~~social,~~or global political ~~regulatory~~ and economic conditions, ~~or in laws and~~including the effects of the COVID-19 pandemic, policies governing foreign trade and ~~health care~~healthcare spending and delivery, including possible repeal and/or replacement of or adverse judicial rulings against all or portions of PPACA or increases or changes in tariffs and other trade restrictions stemming from Trump administration and foreign government policies, or future potential U.S. federal government shutdowns, the financial markets could continue to experience significant volatility that could also continue to 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~~the attention ~~and resources,~~of management, which could have a material adverse impact on our business, financial condition and results of operations.

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 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; 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Build to Suit Lease~~

The term of the Build-to-Suit Lease is for a period of 242 months (the Term), which will begin on the completion of the building and tenant improvements by Ernst. The Term is currently anticipated to begin on October 25, 2021. The monthly base rent under the Build-to-Suit Lease will equal to a percentage of the total development costs incurred in connection with the development of the New Premises (excluding the cost of the tenant improvements in excess of the allowance provided by Ernst and any development costs we pay) and is currently estimated to be about $726,000, subject to an annual increase of 3% during the Term. The monthly base rent will begin sixty days following commencement of the Term. We will also be responsible for paying operating expenses related to the New Premises. We have been provided an allowance of $75 per square foot of the New Premises (approximately $16.5 million) for tenant improvements to the New Premises. To the extent that the total development costs of the New Premises exceeds $525 per square foot, we will also pay 50% of such excess costs prior to the commencement of the Term, and may be required to secure such amount and the cost of the tenant improvements in excess of the allowance by providing a letter of credit or depositing such amounts in an account with Ernst’s lender prior to the start of construction.

The Build-to-Suit Lease includes two five-year options to extend the term of the Build-to-Suit Lease, exercisable under certain conditions and at a market rate determined in accordance with the Build-to-Suit Lease. We have a one-time option to terminate the Build-to-Suit Lease without cause after the 180^th month of the Term, exercisable under certain conditions as described in the Build-to-Suit Lease and subject to a termination payment calculated in accordance with the Build-to-Suit Lease. In addition, we have a right of first offer to purchase the New Premises, subject to certain procedures and exclusions set forth in the Build-to-Suit Lease.

In connection with the Build-to-Suit Lease, we will deliver to Ernst an irrevocable standby letter of credit for $726,000, which amount will be adjusted to reflect the initial monthly base rent once it is determined, as security for our performance of our obligations under the Build-to-Suit Lease.

Ernst does not yet own the land upon which the New Premises will be built, and the Build-to-Suit Lease is subject to termination if Ernst does not acquire such land. The Build-to-Suit Lease contains customary events of default, representations, warranties and covenants.

The foregoing summary of the Build-to-Suit Lease does not purport to be complete and is qualified in its entirety by the full text of the Build-to-Suit Lease, which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference.

~~Fourth Amendment to the Lease~~

On August 30, 2019, we entered into an amendment to the Lease with Hillwood (the Fourth Lease Amendment), pursuant to which each of our rights and obligations are contingent upon the Purchase. Effective upon the Purchase, the Fourth Lease Amendment will provide for, among other things, the (i) expansion of the Current Premises by 59,335 square feet of laboratory facilities located at 1701 Harbor Bay Parkway, Alameda, California (the 1701 Expansion Space), (ii) extension of the Lease term through October 31, 2031 (the New Term) and (iii) elimination of our early termination right.

Assuming the Purchase occurs, we expect to take possession of the 1701 Expansion Space on or prior to April 30, 2020 and will begin to pay rent on or within fifteen days following delivery of each respective portion of the 1701 Expansion Space. Following receipt of the entire 1701 Expansion Space, and assuming such receipt occurs on April 30, 2020 (the 1701 Expansion Space Commencement Date), the total monthly base rent under the Lease for the entire premises, consisting of the Current Premises and the 1701 Expansion Space (the Entire Premises) will be $391,580 per month, increasing throughout the remainder of the New Term to $574,975 at the end of the New Term. The aggregate contractual base rent for the entire 228,941 square feet of the Entire Premises from the 1701 Expansion Space Commencement Date through the remainder of the New Term of Lease will be approximately $67.0 million. If any portion of the 1701 Expansion Space is delivered prior to the 1701 Expansion Space Commencement Date, our base rent obligations will increase in accordance with the terms of the Lease. In addition, we will pay the New Landlord specified percentages of certain operating expenses and taxes related to the leased facilities incurred by the New Landlord.

The foregoing summary of the Fourth Lease Amendment does not purport to be complete and is qualified in its entirety by reference to the Fourth Lease Amendment, which is filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q and incorporated herein by reference.Not applicable.

Item 6. Exhibits

Exhibit
Number
Exhibit Description Incorporation by Reference
Filed
Herewith
Form File Number
Exhibit/
Appendix
Reference
Filing Date
3.1
Amended and Restated Certificate of Incorporation of Exelixis, Inc.
10-K 000-30235 3.1 3/10/2010
3.2
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.
10-K 000-30235 3.2 3/10/2010
3.3
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.
8-K 000-30235 3.1 5/25/2012
3.4
Certificate of Change of Registered Agent and/or Registered Office of Exelixis, Inc.
8-K 000-30235 3.1 10/15/2014
3.5
Certificate of Ownership and Merger Merging X-Ceptor Therapeutics, Inc. with and into Exelixis, Inc.
8-K 000-30235 3.2 10/15/2014
3.6
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.
8-K 000-30235 3.1 5/23/2019
3.7
Amended and Restated Bylaws of Exelixis, Inc.
8-K 000-30235 3.2 5/23/2019
4.1
Specimen Common Stock Certificate

S-1,
as amended
333-96335 4.1 4/7/2000
10.1*
Amendment No. 2 dated August 15, 2019 to the Clinical Trial Collaboration Agreement dated February 24, 2017, by and between Exelixis, Inc. and Bristol-Myers Squibb Company
X

Exhibit

Number

Exhibit Description

Incorporation by Reference

Filed

Herewith

Form

File Number

Exhibit/

Appendix

Reference

Filing Date

3.1

Amended and Restated Certificate of Incorporation of Exelixis, Inc.

10-K

000-30235

3.1

3/10/2010

3.2

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.

10-K

000-30235

3.2

3/10/2010

3.3

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.

8-K

000-30235

3.1

5/25/2012

3.4

Certificate of Change of Registered Agent and/or Registered Office of Exelixis, Inc.

8-K

000-30235

3.1

10/15/2014

3.5

Certificate of Ownership and Merger Merging X-Ceptor Therapeutics, Inc. with and into Exelixis, Inc.

8-K

000-30235

3.2

10/15/2014

3.6

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.

8-K

000-30235

3.1

5/23/2019

3.7

Amended and Restated Bylaws of Exelixis, Inc.

8-K

000-30235

3.1

2/20/2020

4.1

Specimen Common Stock Certificate

S-1,

as amended

333-96335

4.1

4/7/2000

10.1

Exelixis, Inc. 2014 Equity Incentive Plan

10.2

Exelixis, Inc. 2016 Inducement Award Plan

10.3

Exelixis, Inc. 2017 Equity Incentive Plan

Exhibit

Number

Exhibit Description

Incorporation by Reference

Filed

Herewith

Form

File Number

Exhibit/

Appendix

Reference

Filing Date

~~10.2~~10.4

~~Lease~~Form of Stock Option Agreement ~~dated October 25, 2019, between Ernst Development Partners,~~under the Exelixis, Inc. ~~and Exelixis, Inc.~~2017 Equity Incentive Plan

~~10.3~~10.5

~~Fourth~~Form of Restricted Stock Unit Agreement under the Exelixis, Inc. 2017 Equity Incentive Plan

10.6

Form of Restricted Stock Unit Agreement (Non-Employee Director) under the Exelixis, Inc. 2017 Equity Incentive Plan

10.7*

Second Amendment dated ~~August 30, 2019,~~May 7, 2020, to ~~Lease~~the Supplement to the Clinical Trial Collaboration Agreement dated ~~May 2,~~February 24, 2017, ~~between Hillwood Enterprises, L.P. (as successor in interest to Ascentris 105, LLC)~~by and among Exelixis, Inc., Bristol-Myers Squibb Company and Ipsen Pharma SAS.

31.1

Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and Rule 15d-14(a)

31.2

Certification of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and Rule 15d-14(a)

32.1‡

Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350

101.INS

XBRL Instance Document

The XBRL instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File

Formatted as Inline XBRL and contained in Exhibit 101.



*	Portions of this exhibit have been omitted as being immaterial and would be competitively harmful if publicly disclosed.
‡	This certification accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Exelixis, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	EXELIXIS, INC.

~~October 30, 2019~~August 6, 2020	By:	/s/ CHRISTOPHER J. SENNER
Date		Christopher J. Senner
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)

6559



	Nine Months Ended September 30, 2019
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2018	299,876,080	$	300	$	2,168,217	$	(701	)	$	(880,363	)	$	1,287,453
Net income	—	—		—		—			252,269			252,269
Other comprehensive income	—	—		—		3,369			—			3,369
Issuance of common stock under equity incentive and stock purchase plans	3,899,952	4		19,875		—			—			19,879
Stock-based compensation	—	—		40,747		—			—			40,747
Balance at September 30, 2019	303,776,032	$	304	$	2,228,839	$	2,668		$	(628,094	)	$	1,603,717



	Nine Months Ended September 30, 2018
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2017	296,209,426	$	296	$	2,114,184	$	(347	)	$	(1,829,172	)	$	284,961
Adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606)	—	—		—		—			258,505			258,505
Adoption of ASU No. 2016-02, Leases (Topic 842)	—	—		—		—			234			234
Net income	—	—		—		—			329,981			329,981
Other comprehensive loss	—	—		—		(166		)	—			(166		)
Issuance of common stock under equity incentive and stock purchase plans	2,672,458	3		14,118		—			—			14,121
Stock-based compensation	—	—		28,330		—			—			28,330
Balance at September 30, 2018	298,881,884	$	299	$	2,156,632	$	(513	)	$	(1,240,452	)	$	915,966



	September 30, 2019		December 31, 2018		September 30, 2018		December 31, 2017
Cash and cash equivalents	$	242,317	$	314,775	$	353,623	$	183,164
Restricted cash included in short-term restricted cash and investments	—		—		504		504
Restricted cash included in long-term restricted cash and investments	1,000		1,100		1,100		4,646
Cash, cash equivalents, and restricted cash as reported within the accompanying Condensed Consolidated Statements of Cash Flows	$	243,317	$	315,875	$	355,227	$	188,314



	September 30, 2019			December 31, 2018
Leasehold improvements	$	33,769		$	33,941
Computer equipment and software	17,017			15,022
Furniture and fixtures	13,053			12,709
Laboratory equipment	8,408			5,668
Construction in progress	617			866
	72,864			68,206
Less: accumulated depreciation and amortization	(23,397		)	(17,309		)
Property and equipment, net	$	49,467		$	50,897



	Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at December 31, 2018	22,674,062		$	8.71
Granted	1,042,286		$	20.81
Exercised	(3,042,201	)	$	4.94
Forfeited	(160,241	)	$	16.76
Expired	(35,045	)	$	23.41
Options outstanding at September 30, 2019	20,478,861		$	9.80	3.4 years	$	186,407
Exercisable at September 30, 2019	15,860,131		$	7.02	2.8 years	$	181,542



	Shares		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
RSUs outstanding at December 31, 2018	4,857,334		$	18.42
Awarded	5,635,362		$	19.54
Vested and released	(484,731	)	$	12.33
Forfeited	(258,142	)	$	18.47
RSUs outstanding at September 30, 2019	9,749,823		$	19.37	2.2 years	$	175,448



	September 30, 2019		December 31, 2018
Operating lease liabilities:
Current portion included in Other current liabilities	$	2,695	$	2,738
Long-term portion of lease liabilities	23,661		12,099
Total operating lease liabilities	26,356		14,837
Financing lease liabilities:
Current portion included in Other current liabilities	50		49
Long-term portion of lease liabilities	44		79
Total financing lease liabilities	94		128
Total lease liabilities	$	26,450	$	14,965



Remainder of 2019	$	745
Years ending December 31,
2020	3,625
2021	3,731
2022	3,852
2023	3,959
Thereafter	17,444
Total lease payments	33,356
Less:
Present value adjustment	(5,258		)
Tenant improvement reimbursements⁽¹⁾	(1,742		)
Operating lease liabilities	$	26,356