As Exelixis Reigns In Spending, It Looks To Offload Early-Stage Assets

Management elaborates on plans to scale down early discovery and drug development to focus resources on its three lead partnered drugs.

One day after Exelixis announced plans to lay off 40 percent of its workforce, management outlined further details of its restructuring that will result in a pared down early discovery research program.

During a March 9 conference call with analysts to discuss fourth-quarter earnings, the South San Francisco-based biotech company said cuts are being made across the G&A expense line - general and administrative costs - and that in R&D, more job eliminations will occur in discovery than in development. The previous day, Exelixis said it will trim its headcount by about 270 employees to 700 and reduce cash expenditures by about $90 million through 2011 (Also see "Exelixis Reorganizes R&D And Cuts Its Workforce By 40 Percent" - Pink Sheet, 8 Mar, 2010.).

Under its new strategy, Exelixis will focus resources on its three mid- to late-stage assets -- XL184, X147 and XL765, all of which are partnered -- while scaling back drug discovery, preclinical development and early development to one new investigational new drug per year from about three a year, CEO George Scangos said in an interview.

"We can take the resources we would have otherwise put into discovery and we can put it towards the development of our later-stage assets, which are entering large clinical programs now," he said. Despite the cuts, Scangos told analysts Exelixis can maintain a fully functional and balanced R&D organization from discovery through late-stage development.

The R&D shakeup also leaves Exelixis with more drugs to develop with a partner. The company is looking to offload several early-stage assets, though Scangos maintained that many of those compounds are ones the company would have sought to develop with a partner, with or without a restructuring.

These include two cancer drugs -- XL288, an insulin growth factor-1 receptor, and SRC kinase inhibitor -- in Phase I, as well as XL388, a clinical ready compound that targets mTOR1 and mTOR2 (mammalian target of rapamycin).

Exelixis is also looking to partner two preclinical compounds, XL541, an antagonist of sphingosine-1-phosphate type 1 receptor (S1P1) for cancer, and XL475, a TGR5 target with potential in diabetes. Exelixis is already in discussions with partners, the firm said.

"We've been having these discussions in any case," Scangos said. "We can't develop everything in our pipeline. That was true before the restructuring and that's more true now."

R&D Costs Grow As Lead Drug XL184 Advances Into Phase III

Exelixis has a rich pipeline of oncology drug candidates, but most are in the early stages of development, which means they are a long way off from generating revenue. The company relies on money it receives through its many licensing arrangements to pad its top line.

Meanwhile, the biotech is facing increased R&D costs as some drugs advance through the pipeline, especially its lead drug, XL184, which is in Phase III development for metastatic medullary thyroid cancer under a partnership with Bristol-Myers Squibb. Under that partnership, BMS is responsible for paying 65 percent of development costs, leaving Exelixis responsible for the other 35 percent.

Following the restructuring, a significantly greater portion of the company's operating expense is covered by partners, Chief Financial Officer Frank Karbe said in an interview. In 2010, 50 percent of the company's operating expense will be covered by partnerships, versus 30 percent in 2009 and 10 percent in 2008, he said.

Exelixis reported R&D expenses for the fourth quarter of $64.1 million, compared to $56.9 million for the 2008 quarter, due to development activities related to XL184. For the year, R&D spending was lower, at $234.7 million, compared to $257.4 million in 2008, though this was due to cost reductions undertaken in 2008, the firm said. Revenues were higher for the year, $151.8 million, compared to $117.9 million in 2008, due to increased revenue from new partnerships in 2009, one with Sanofi-Aventis for two compounds, XL147 and XL765, and the other with Boehringer Ingelheim for its S1P1 agonist program.

The cost cutting is expected to provide Exelixis with a cash runway long enough to see it through 2011, when XL184 could be ready for regulatory submission.

"Longer term, of course, we plan to be profitable at some point in the future," Karbe said during the conference call. He did not provide any guidance on when that might be, but noted, "We're not in the business of accumulating losses forever." Exelixis' net loss was $135.2 million in 2009, compared to a loss of $162.9 million in 2008; the company ended the year with $221 million in cash and cash equivalents, marketable securities and other investments.

"Restructuring and workforce reductions should lead to near-term expense savings, but long-term discovery may be negatively impacted," Lazard Capital Markets analyst Joel Sedek cautioned in a March 9 research note.

In addition to XL184, the other two lead drugs are phosphoinositide-3-kinase inhibitors partnered with Sanofi. They are XL-147 in Phase Ib/II for non-small cell lung cancer, and XL-765 in Phase Ib/II for glioblastoma and NSCLC. Sanofi is responsible for paying 100 percent of the development costs for the two drugs. Exelixis inked the lucrative deal with Sanofi in May 2009, receiving $140 million upfront for the two programs with potential milestones running up to $1 billion (Also see "Ahead of ASCO, Exelixis Inks Lucrative Deal With Sanofi For Its PI3 Kinase Inhibitors" - Pink Sheet, 28 May, 2009.).

The other deal signed last year with Boehringer Ingelheim focused on the discovery of S1P1 agonists for autoimmune disorders and added $15 million in upfront cash to the biotech's coffers.

Exelixis Will Continue To Invest In Two Early Un-Partnered Assets

Exelixis' early-stage pared down pipeline will include XL139 and XL413, both partnered with Bristol and in Phase I development for solid tumors and hematological cancers, respectively. Exelixis will also continue to invest in two un-partnered assets, a heat shock protein-90 inhibitor XL888 in Phase I for cancer, as well as XL499, a selective PI3K delta inhibitor for oncology and inflammation indications.

Of the HSP-90 inhibitor, R&D President Michael Morrissey noted, "We think that's a compound we can get to the next milestone or decision point with a modest investment of resources. I think the goal is to push to that go, no go decision sometime later in the year."

"We'd like to bring them to the market on our own, but being a small biotech company, we have to be opportunistic so we will move them forward and continue partnerships at the appropriate time," Scangos said of the un-partnered assets.

In addition, compounds that are fully out-licensed and in development with partner drug companies are not affected by the restructuring announcement, the firm said. Those drugs include the early clinical candidates XL880 with GlaxoSmithKline, XL518 with Roche/Genentech, and XL281 and XL652 with Bristol, as well as the preclinical candidates XL550 with Daiichi Sankyo, and FXR with Pfizer.

-Jessica Merrill ([email protected])