Company Quick10K Filing
Quick10K
Exelixis
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$19.64 302 $5,930
10-Q 2019-03-29 Quarter: 2019-03-29
10-K 2018-12-28 Annual: 2018-12-28
10-Q 2018-09-28 Quarter: 2018-09-28
10-Q 2018-06-29 Quarter: 2018-06-29
10-Q 2018-03-30 Quarter: 2018-03-30
10-K 2017-12-29 Annual: 2017-12-29
10-Q 2017-09-29 Quarter: 2017-09-29
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-30 Annual: 2016-12-30
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-07-01 Quarter: 2016-07-01
10-Q 2016-04-01 Quarter: 2016-04-01
10-K 2016-01-01 Annual: 2016-01-01
10-Q 2015-10-02 Quarter: 2015-10-02
10-Q 2015-07-03 Quarter: 2015-07-03
10-Q 2015-04-03 Quarter: 2015-04-03
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-26 Quarter: 2014-09-26
10-Q 2014-06-27 Quarter: 2014-06-27
10-Q 2014-03-28 Quarter: 2014-03-28
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-19 Regulation FD
8-K 2019-05-22 Shareholder Rights, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-04-25 Regulation FD
8-K 2019-04-01 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-14 Shareholder Rights, Amend Bylaw, Exhibits
8-K 2019-02-12 Earnings, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-05 Officers
8-K 2018-02-12 Officers, Exhibits
ESS Essex Property Trust 18,410
AY Atlantica Yield 2,050
TDW Tidewater 866
OXFD Oxford Immunotec Global 437
TLRA Telaria 369
PIH 1347 Property Insurance Holdings 30
ZEST Ecoark Holdings 0
NXMD Nexeon Medsystems 0
BYIN Baying Ecological Holding Group 0
HUNT Hunter Maritime Acquisition 0
EXEL 2019-03-29
Part I - Financial Information
Item 1. Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
Note 2. Revenues
Note 3. Collaboration Agreements
Note 4. Cash and Investments
Note 5. Inventory
Note 6. Property and Equipment
Note 7. Stock-Based Compensation
Note 8. Income Taxes
Note 9. Net Income per Share
Note 10. Fair Value Measurements
Note 11. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exel20190331exhibit101.htm
EX-10.2 exel20190331exhibit102.htm
EX-10.3 exel20190331exhibit103.htm
EX-10.4 exel20190331exhibit104.htm
EX-10.5 exel20190331exhibit105.htm
EX-10.6 exel20190331exhibit106.htm
EX-31.1 exel20190331exhibit311.htm
EX-31.2 exel20190331exhibit312.htm
EX-32.1 exel20190331exhibit321.htm

Exelixis Earnings 2019-03-29

EXEL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 exel2019033110-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-30235
exellogo2017aa07.jpg
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)
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
ý
 
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 April 22, 2019, there were 301,767,356 shares of the registrant’s common stock outstanding.



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

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXELIXIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 
March 31,
2019
 
December 31, 2018*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
373,937

 
$
314,775

Short-term investments
425,713

 
378,559

Trade receivables, net
107,670

 
162,771

Other receivables
7,445

 
16,056

Inventory, net
10,143

 
9,838

Unbilled collaboration revenue
7,244

 

Prepaid expenses and other current assets
14,146

 
15,017

Total current assets
946,298

 
897,016

Long-term investments
218,619

 
157,187

Long-term restricted cash and investments
1,100

 
1,100

Property and equipment, net
50,553

 
50,897

Operating lease right-of-use assets
13,921

 
5,867

Deferred tax assets, net
243,717

 
244,111

Goodwill
63,684

 
63,684

Other long-term assets
3,902

 
2,424

Total assets
$
1,541,794

 
$
1,422,286

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,748

 
$
10,901

Accrued clinical trial liabilities
23,055

 
18,231

Accrued compensation and benefits
22,550

 
32,142

Rebates and fees due to customers
19,708

 
14,954

Accrued collaboration liabilities
7,556

 
7,419

Current portion of deferred revenue
2,376

 

Other current liabilities
40,139

 
21,825

Total current liabilities
125,132

 
105,472

Long-term portion of lease liabilities
19,958

 
12,178

Long-term portion of deferred revenue
8,323

 
15,897

Other long-term liabilities
3,361

 
1,286

Total liabilities
156,774

 
134,833

Commitments

 

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: 301,519,885 and 299,876,080 at March 31, 2019 and December 31, 2018, respectively
302

 
300

Additional paid-in capital
2,188,578

 
2,168,217

Accumulated other comprehensive income (loss)
728

 
(701
)
Accumulated deficit
(804,588
)
 
(880,363
)
Total stockholders’ equity
1,385,020

 
1,287,453

Total liabilities and stockholders’ equity
$
1,541,794

 
$
1,422,286

*
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.

3


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Net product revenues
$
179,581

 
$
134,272

Collaboration revenue
35,906

 
79,447

Total revenues
215,487

 
213,719

Operating expenses:
 
 
 
Cost of goods sold
7,501

 
5,639

Research and development
63,289

 
37,757

Selling, general and administrative
60,138

 
54,016

Total operating expenses
130,928

 
97,412

Income from operations
84,559

 
116,307

Other income (expense), net:
 
 
 
Interest income
6,087

 
1,895

Other, net
25

 
169

Total other income (expense), net:
6,112

 
2,064

Income before income taxes
90,671

 
118,371

Provision for income taxes
(14,896
)
 
(2,514
)
Net income
$
75,775

 
$
115,857

Net income per share, basic
$
0.25

 
$
0.39

Net income per share, diluted
$
0.24

 
$
0.37

Shares used in computing net income per share, basic
300,542

 
296,421

Shares used in computing net income per share, diluted
314,644

 
313,691

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 March 31,
 
2019
 
2018
Net income
$
75,775

 
$
115,857

Other comprehensive income (loss):
 
 
 
Net unrealized gains or losses on available-for-sale securities, net of tax impact of $394 and $0, respectively (1)
1,429

 
(540
)
Total other comprehensive income (loss)
1,429

 
(540
)
Comprehensive income
$
77,204

 
$
115,317

____________________
(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 those periods.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
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

Net income

 

 

 

 
115,857

 
115,857

Other comprehensive loss

 

 

 
(540
)
 

 
(540
)
Issuance of common stock under equity incentive and stock purchase plans
484,904

 
1

 
1,677

 

 

 
1,678

Stock-based compensation

 

 
9,305

 

 

 
9,305

Balance at March 31, 2018
296,694,330

 
$
297

 
$
2,125,166

 
$
(887
)
 
$
(1,454,810
)
 
$
669,766

 
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

 

 

 

 
75,775

 
75,775

Other comprehensive income

 

 

 
1,429

 

 
1,429

Issuance of common stock under equity incentive and stock purchase plans
1,643,805

 
2

 
7,832

 

 

 
7,834

Stock-based compensation

 

 
12,529

 

 

 
12,529

Balance at March 31, 2019
301,519,885

 
$
302

 
$
2,188,578

 
$
728

 
$
(804,588
)
 
$
1,385,020




5


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
75,775

 
$
115,857

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,962

 
371

Stock-based compensation
12,529

 
9,305

401(k) matching contributions made in common stock
2,469

 
1,880

Amortization and other right-of-use assets
(7,730
)
 

Gain on other equity investments

 
(209
)
Accretion of investments, net and other
(1,415
)
 
(158
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
55,101

 
(10,819
)
Other receivables
8,741

 
64

Inventory, net
(305
)
 
(906
)
Unbilled collaboration revenue
(7,753
)
 
(38,014
)
Prepaid expenses and other current assets
871

 
1,900

Other long-term assets
(4,854
)
 
(346
)
Accounts payable
(1,294
)
 
(183
)
Accrued compensation and benefits
(9,592
)
 
(317
)
Accrued clinical trial liabilities
4,824

 
(4,498
)
Rebates and fees due customers
4,754

 
4,424

Accrued collaboration liability
137

 
(1,000
)
Current and long-term deferred revenue
(1,313
)
 
(2,652
)
Long-term portion of lease liabilities
7,517

 
(35
)
Other current and long-term liabilities
21,169

 
(2,856
)
Net cash provided by operating activities
161,593

 
71,808

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(2,307
)
 
(2,947
)
Purchases of investments
(239,869
)
 
(116,537
)
Proceeds from maturities of investments
129,820

 
87,504

Proceeds from sale of investments
4,699

 
6,238

Proceeds from other equity investments

 
209

Net cash used in investing activities
(107,657
)
 
(25,533
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
6,817

 
1,875

Taxes paid related to net share settlement of equity awards
(1,580
)
 
(2,129
)
Principal payments on financing lease obligation
(11
)
 

Net cash provided by (used in) financing activities
5,226

 
(254
)
Net increase in cash, cash equivalents and restricted cash
59,162

 
46,021

Cash, cash equivalents and restricted cash at beginning of period
315,875

 
188,314

Cash, cash equivalents and restricted cash at end of period
$
375,037

 
$
234,335

Continued on next page

6


EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Supplemental cash flow disclosure
 
 
 
Right-of-use assets obtained in exchange for lease obligations (1)
$
8,170

 
$
17,180

Unpaid liabilities incurred to acquire Property and equipment
$
141

 
$
6,608

____________________
(1)
Amounts for the three months ended March 31, 2019 include receipt of a tenant inventive payment. Amounts for the three months ended March 31, 2018 include the transition adjustment for the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.

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

7


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. Since we were founded in 1994, four products resulting from our discovery efforts have progressed through clinical development and received regulatory approval; three have a growing commercial presence in markets worldwide, and we expect that the fourth will soon enter the marketplace in Japan. Two are derived from cabozantinib, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET. These are: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma and previously treated hepatocellular carcinoma and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer. The other two products resulting from our discovery efforts are: COTELLIC® (cobimetinib), an inhibitor of MEK, approved as part of a combination regimen to treat a specific form 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, recently approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo).
Basis of Consolidation
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 31st. Fiscal year 2019 will end on January 3, 2020 and fiscal year 2018 ended on December 28, 2018. For convenience, references in this report as of and for the fiscal periods ended March 29, 2019 and March 30, 2018, and as of and for the fiscal years ending January 3, 2020 and ended December 28, 2018, are indicated as being as of and for the periods ended March 31, 2019 and March 31, 2018, and the years ending December 31, 2019 and ended December 31, 2018, 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.
Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 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, included in our Annual Report on Form 10-K filed with the SEC on February 22, 2019.
Segment Information
We operate in one 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.

8


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.
Reclassifications
Certain prior period amounts in the accompanying Condensed Consolidated Financial Statements have been reclassified to conform to current period presentation.
Total revenues and Selling, general and administrative expenses for the three months ended March 31, 2018 have been adjusted to reflect the reclassification of the $1.4 million profit related to the profit-sharing arrangement with Genentech for the commercialization of COTELLIC. In our Condensed Consolidated Financial Statements included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, the net profit had been classified as Selling, general and administrative expenses as we expected an overall loss under the agreement for the year ended December 31, 2018. Subsequent to March 31, 2018, we determined that the U.S. commercialization of COTELLIC would result in a profit for the year ended December 31, 2018 and therefore, we had reclassified the profit for the three months ended March 31, 2018 from Selling, general and administrative expenses to Collaboration revenues in our financial statements issued after March 31, 2018. Accordingly, we have also reclassified the profit for the three months ended March 31, 2018 in the accompanying Condensed Consolidated Financial Statements to be consistent with our presentation for the year ended December 31, 2018. For more information on our collaboration agreement with Genentech, 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.
Recently Adopted Accounting Pronouncements
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 (the FASB) issued 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 under 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 Topic 808 to the unit of account guidance in ASC 606 and requires that it be applied only to assess whether transactions in a collaborative arrangement are in the

9


scope of Topic 606. ASU 2018-18 will preclude 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 is effective for us for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are in the process of assessing the impact of ASU 2018-18 on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued 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 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, ASU 2018-15 requires a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 also requires us to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. ASU 2018-15 is effective for us for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are in the process of assessing the impact of ASU 2018-15 on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2017-04 to have a material impact on our Condensed Consolidated Financial Statements.
In June 2016, the FASB issued 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 will recognize as an allowance its estimate of expected credit losses. 2016-13 is effective for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2016-13 to have a material impact on our Condensed Consolidated Financial Statements.
NOTE 2. REVENUES
Revenues by disaggregated category were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Product revenues:
 
 
 
Gross product revenues
$
223,750

 
$
159,436

Discounts and allowances
(44,169
)
 
(25,164
)
Net product revenues
179,581

 
134,272

Collaboration revenues:
 
 
 
License revenues (1)
24,509

 
69,030

Research and development service revenues (2)
11,928

 
10,099

Other collaboration revenues (3)
(531
)
 
318

Total collaboration revenues
35,906

 
79,447

Total revenues
$
215,487

 
$
213,719

____________________
(1)
License revenues included the immediate 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) and Genentech.

10


(2)
Research and development service revenues included the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development service 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 partially 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, License revenues and Research and development services revenues were recorded in accordance with Topic 606 for all periods presented. Net product revenues and License revenues related to goods and intellectual property licenses transferred at a point in time and Research and development services revenues related to services performed over time. Other collaboration revenues, which included the profit on the U.S. commercialization of COTELLIC and net losses on product supply services, were recorded in accordance with ASC Topic 808, Collaborative Arrangements for all periods presented.
Net product revenues disaggregated by product were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
CABOMETYX
$
175,890

 
$
128,934

COMETRIQ
3,691

 
5,338

Net product revenues
$
179,581

 
$
134,272

Total revenues disaggregated by significant customer were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
 
Dollars
 
Percent of total
 
Dollars
 
Percent of total
Caremark L.L.C.
$
32,698

 
15
%
 
$
26,388

 
12
%
Affiliates of McKesson Corporation
25,311

 
12
%
 
21,331

 
10
%
Accredo Health, Incorporated
22,495

 
10
%
 
18,286

 
9
%
Affiliates of AmerisourceBergen Corporation
21,902

 
10
%
 
15,736

 
7
%
Ipsen
21,868

 
10
%
 
53,809

 
25
%
Others, individually less than 10% of Total revenues for all periods presented
91,213

 
43
%
 
78,169

 
37
%
Total revenues
$
215,487

 
100
%
 
$
213,719

 
100
%
Total revenues disaggregated by geographic region were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
U.S.
$
182,126

 
$
136,993

Europe
21,868

 
53,809

Rest of the world
11,493

 
22,917

Total revenues
$
215,487

 
$
213,719

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

11


Product Sales Discounts and Allowances
The activities and ending reserve balances for each significant category of discounts and allowances (which constitute variable consideration) were as follows (in thousands):
 
Chargebacks and Discounts for Prompt Payment
 
Other Customer Credits/Fees and Co-pay Assistance
 
Rebates
 
Returns
 
Total
Balance at December 31, 2018
$
2,322

 
$
3,038

 
$
11,916

 
$

 
$
17,276

Provision related to sales made in:
 
 
 
 
 
 
 
 
 
Current period
27,153

 
3,875

 
12,905

 

 
43,933

Prior periods

 
9

 
227

 

 
236

Payments and customer credits issued
(27,367
)
 
(4,189
)
 
(8,073
)
 

 
(39,629
)
Balance at March 31, 2019
$
2,108

 
$
2,733

 
$
16,975

 
$

 
$
21,816

Chargebacks and discounts for prompt payment are recorded as a reduction of trade receivables and the remaining reserve balances are classified as Other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
Contract Assets and Liabilities
We receive payments from our licensees based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Upfront and milestone payments may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements and are recorded as deferred revenue upon receipt or when due. We may also recognize revenue in advance of the contractual billing schedule and such amounts are recorded as unbilled collaboration revenue when recognized. Changes in our contract assets and liabilities under Topic 606 were as follows (in thousands):
 
Contract Assets: Unbilled Collaboration Revenue
 
Contract Liabilities: Deferred Revenue
 
Current Portion
 
Long-term Portion
 
Current Portion
 
Long-term Portion
Balance at December 31, 2018
$

 
$

 
$

 
$
15,897

Increases as a result of a change in transaction price and recognition of revenues as services are performed
10,222

 
1,450

 

 

Transfer to receivables from contract assets recognized at the beginning of the period
(543
)
 

 

 

Increases as a result of the deferral of milestones achieved in period, excluding amounts recognized as revenue

 

 

 

Revenue recognized that was included in the contract liability balance at the beginning of the period

 

 
(1,313
)
 

Other adjustments (1)
(2,435
)
 
(1,450
)
 
3,689

 
(7,574
)
Balance at March 31, 2019
$
7,244

 
$

 
$
2,376

 
$
8,323

____________________
(1)
Includes reclassification of deferred revenue from long-term to current and adjustments made due to netting of contract assets and liabilities by collaboration agreement.
During the three months ended March 31, 2019 and 2018, we recognized $25.3 million and $71.3 million, respectively, in revenues under Topic 606 for performance obligations satisfied in previous periods. Such revenues primarily related to milestone and royalty payments allocated to our license performance obligations of our collaborations with Ipsen, Takeda and Bristol-Myers Squibb Company (BMS).
NOTE 3. COLLABORATION AGREEMENTS
We have established multiple collaborations with leading pharmaceutical companies for the commercialization and further development of cabozantinib, as well as with smaller, discovery-focused biotechnology companies to expand our product pipeline. Additionally, in line with our business strategy prior to the commercialization of our first product,

12


COMETRIQ, we entered into other collaborations with leading pharmaceutical companies including Genentech, Daiichi Sankyo and BMS for other compounds and programs in our portfolio. 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 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 months ended March 31, 2019 and 2018.
Cabozantinib Commercial Collaborations
Ipsen Collaboration
In February 2016, we entered into a collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the collaboration agreement, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the U.S., Canada and Japan. The collaboration agreement was subsequently amended in December 2016 to include commercialization rights in Canada. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications. Collaboration revenues under the collaboration agreement with Ipsen were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Ipsen collaboration revenues
$
21,868

 
$
53,809

As of March 31, 2019, $46.8 million of the transaction price allocated to our research and development services performance obligation had not been satisfied. As of March 31, 2019, the net contract liability for the collaboration agreement with Ipsen was $10.7 million, of which 2.4 million was included in the Current portion of deferred revenue and $8.3 million 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. See “Note 11. Subsequent Events - Amendment to Collaboration Agreement with Takeda” for information regarding an amendment to our collaboration agreement with Takeda. Pursuant to this collaboration agreement, 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. Collaboration revenues under the collaboration agreement with Takeda were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Takeda collaboration revenues
$
11,493

 
$
2,917

As of March 31, 2019, $25.2 million of the transaction price allocated to our research and development services performance obligation had not been satisfied. As of March 31, 2019, the net contract asset for the collaboration agreement with Takeda was $7.2 million, which was included in Unbilled collaboration revenue in the accompanying Condensed Consolidated Balance Sheets.
GlaxoSmithKline (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, GSK continues to be entitled to a 3% royalty we are required to pay on all 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):

13


 
Three Months Ended March 31,
 
2019
 
2018
Royalties accruing to GSK
$
7,282

 
$
5,125

Genentech Collaboration
In December 2006, we out-licensed the development and commercialization of cobimetinib to Genentech pursuant to 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 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 and Royalty revenues on ex-U.S. sales were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Profits on U.S. commercialization
$
1,055

 
$
1,373

Royalty revenues on ex-U.S. sales
$
1,490

 
$
1,349

NOTE 4. CASH AND INVESTMENTS
Cash, Cash Equivalents and Restricted Cash
A reconciliation of Cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the amount reported within the accompanying Condensed Consolidated Statements of Cash Flows was as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents
$
373,937

 
$
314,775

 
$
232,331

 
$
183,164

Restricted cash included in short-term restricted cash and investments

 

 
504

 
504

Restricted cash included in long-term restricted cash and investments
1,100

 
1,100

 
1,500

 
4,646

Cash, cash equivalents, and restricted cash as reported within the accompanying Condensed Consolidated Statements of Cash Flows
$
375,037

 
$
315,875

 
$
234,335

 
$
188,314

Restricted cash includes certificates of deposit used to collateralize letters of credit and, in prior periods, a purchasing card program.

14


Cash and Investments
Cash and investments by security type were as follows (in thousands):
 
March 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Investments available-for-sale:
 
 
 
 
 
 
 
Money market funds
$
75,171

 
$

 
$

 
$
75,171

Commercial paper
414,317

 

 

 
414,317

Corporate bonds
417,303

 
1,257

 
(175
)
 
418,385

U.S. Treasury and government sponsored enterprises
84,448

 
41

 
(2
)
 
84,487

Total investments available-for-sale
991,239

 
1,298

 
(177
)
 
992,360

Cash and restricted cash
1,019

 

 

 
1,019

Certificates of deposit
25,990

 

 

 
25,990

Total cash and investments
$
1,018,248

 
$
1,298

 
$
(177
)
 
$
1,019,369

 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Investments available-for-sale:
 
 
 
 
 
 
 
Money market funds
$
47,744

 
$

 
$

 
$
47,744

Commercial paper
381,134

 

 
(1
)
 
381,133

Corporate bonds
344,741

 
180

 
(857
)
 
344,064

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

Certificates of deposit
16,596

 

 

 
16,596

Total cash and investments
$
852,322

 
$
182

 
$
(883
)
 
$
851,621

Gains and losses on the sales of investments available-for-sale were nominal during the three months ended March 31, 2019 and 2018.
The fair value and gross unrealized losses on investments available-for-sale in an unrealized loss position were as follows (in thousands):
 
March 31, 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
$
49,233

 
$
(39
)
 
$
45,010

 
$
(136
)
 
$
94,243

 
$
(175
)
U.S. Treasury and government sponsored enterprises

 

 
7,990

 
(2
)
 
7,990

 
(2
)
Total
$
49,233

 
$
(39
)
 
$
53,000

 
$
(138
)
 
$
102,233

 
$
(177
)

15


 
December 31, 2018
 
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
$
236,162

 
$
(606
)
 
$
39,627

 
$
(251
)
 
$
275,789

 
$
(857
)
U.S. Treasury and government sponsored enterprises
28,105

 
(16
)
 
9,182

 
(9
)
 
37,287

 
(25
)
Commercial paper
7,091

 
(1
)
 

 

 
7,091

 
(1
)
Total
$
271,358

 
$
(623
)
 
$
48,809

 
$
(260
)
 
$
320,167

 
$
(883
)
There were 69 and 199 investments in an unrealized loss position as of March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019 and 2018 we did not record any other-than-temporary impairment charges on our available-for-sale 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. Based on the scheduled maturities of our investments and our determination 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.
The fair value of investments available-for-sale by contractual maturity were as follows (in thousands):
 
March 31,
2019
 
December 31, 2018
Maturing in one year or less
$
784,432

 
$
674,455

Maturing after one year through five years
207,928

 
153,687

Total investments available-for-sale
$
992,360

 
$
828,142

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 March 31, 2019 and December 31, 2018, respectively, the fair value of cash and investments managed by BlackRock was $356.0 million and $298.5 million, which included $0.8 million and $3.0 million invested in the BlackRock Liquidity Money Market Fund. We incurred $0.1 million in fees for BlackRock advisory services performed during the three months ended March 31, 2019.
NOTE 5. INVENTORY
Inventory consisted of the following (in thousands):
 
March 31,
2019
 
December 31, 2018
Raw materials
$
2,245

 
$
1,922

Work in process
6,514

 
6,170

Finished goods
4,862

 
3,836

Total
$
13,621

 
$
11,928

 
 
 
 
Balance Sheet classification:
 
 
 
Current portion included in Inventory
$
10,143

 
$
9,838

Long-term portion included in Other long-term assets
3,478

 
2,090

Total
$
13,621

 
$
11,928


16


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 $0.2 million for the three months ended March 31, 2019. There were no such write-downs for the three months ended and March 31, 2018.
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 March 31, 2019 and December 31, 2018, the long-term portion of inventory consisted of portions of our raw materials and finished goods, and as March 31, 2019, also a portion of our work in process.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands): 
 
March 31,
2019
 
December 31,
2018
Leasehold improvements
$
33,811

 
$
33,941

Computer equipment and software
15,110

 
15,022

Furniture and fixtures
12,908

 
12,709

Laboratory equipment
6,764

 
5,668

Construction in progress
1,231

 
866

 
69,824

 
68,206

Less: accumulated depreciation and amortization
(19,271
)
 
(17,309
)
Property and equipment, net
$
50,553

 
$
50,897

Depreciation expense was $2.0 million and $0.4 million for the three months ended March 31, 2019 and 2018, 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 March 31,
 
2019
 
2018
Research and development
$
4,306

 
$
3,033

Selling, general and administrative
8,223

 
6,272

Total stock-based compensation
$
12,529

 
$
9,305

We have several equity incentive plans under which we have granted stock options and restricted stock units (RSUs) to employees and directors. At March 31, 2019, 14,586,459 shares were available for grant under our equity incentive plans.
We used 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 March 31,
 
2019
 
2018
Stock options
$
9.21

 
$
11.52

ESPP
$
4.67

 
$
7.39


17


The grant-date fair value of stock option grants and ESPP purchases was estimated using the following assumptions:
 
Three Months Ended March 31,
 
2019
 
2018
Stock options:
 
 
 
Risk-free interest rate
2.22
%
 
2.40
%
Dividend yield
%
 
%
Volatility
49
%
 
54
%
Expected life
4.0 years

 
4.0 years

ESPP:
 
 
 
Risk-free interest rate
2.48
%
 
1.53
%
Dividend yield
%
 
%
Volatility
57
%
 
53
%
Expected life
6 months

 
6 months

We considered our implied volatility 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 of the underlying common stock on the date of grant.
Activity for stock options during the three months ended March 31, 2019 was as follows (dollars in thousands, except 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
246,820

 
$
22.94

 
 
 
 
Exercised
(1,413,766
)
 
$
4.91

 
 
 
 
Forfeited
(44,200
)
 
$
14.32

 
 
 
 
Expired
(22,925
)
 
$
22.12

 
 
 
 
Options outstanding at March 31, 2019
21,439,991

 
$
9.10

 
3.6 years
 
$
317,143

Exercisable at March 31, 2019
15,714,721

 
$
6.01

 
2.9 years
 
$
280,307

As of March 31, 2019, there was $44.1 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 2.5 years.

18


Activity for RSUs during the three months ended March 31, 2019 was as follows (dollars in thousands, except 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
123,410

 
$
22.94

 
 
 
 
Vested and released
(194,296
)
 
$
7.83

 
 
 
 
Forfeited
(100,630
)
 
$
18.13

 
 
 
 
RSUs outstanding at March 31, 2019
4,685,818

 
$
18.98

 
2.0 years
 
$
111,522

During 2018, in connection with our long-term incentive compensation program, we awarded 693,131 RSUs that will vest upon the achievement of certain product revenue, late-stage clinical development and pipeline expansion performance targets (PSUs). The PSUs were designed to drive the performance of our management team toward the achievement of key corporate objectives and will be forfeited if the performance targets are not met by December 31, 2021. Expense recognition for PSUs commences when it is determined that attainment of the performance goal is probable. As of March 31, 2019, we have not recognized any compensation expense related to these PSUs and the total unrecognized compensation expense was $12.7 million.
As of March 31, 2019, there was $77.0 million of unrecognized compensation expense related to our unvested RSUs, including the PSUs described above. The compensation expense for the unvested RSUs will be recognized over a weighted-average period of 2.9 years.
NOTE 8. INCOME TAXES
Our effective income tax rate was 16.4% during the three months ended March 31, 2019 as compared to 2.1% for the three months ended March 31, 2018. The Provision for income taxes relating to our pre-tax income for the three months ended March 31, 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.
The effective tax rate for the three months ended March 31, 2019 differed from the U.S. federal statutory rate of 21% primarily was due to excess tax benefits related to the exercise of certain stock options during the quarter.
NOTE 9. NET INCOME PER SHARE
The computation of basic and diluted net income per share was as follows (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income
$
75,775

 
$
115,857

Denominator:
 
 
 
Weighted-average shares of common stock outstanding used in computing basic net income per share
300,542

 
296,421

Dilutive securities
14,102

 
17,270

Weighted-average shares of common stock outstanding and dilutive securities used in computing diluted net income per share
314,644

 
313,691

 
 
 
 
Net income per share, basic
$
0.25

 
$
0.39

Net income per share, diluted
$
0.24

 
$
0.37


19


Dilutive securities include outstanding stock options, unvested RSUs and ESPP contributions. Potential shares of common stock not included in the computation of diluted net income per share because to do so would be anti-dilutive was as follows (in thousands): 
 
Three Months Ended March 31,
 
2019
 
2018
Potentially dilutive securities
5,089

 
1,907

NOTE 10. FAIR VALUE MEASUREMENTS
The classification within the fair value hierarchy of our financial assets that were measured and recorded at fair value on a recurring basis was as follows (in thousands):
 
March 31, 2019
 
Level 1
 
Level 2
 
Total
Money market funds
$
75,171

 
$

 
$
75,171

Commercial paper

 
414,317

 
414,317

Corporate bonds

 
418,385

 
418,385

U.S. Treasury and government sponsored enterprises

 
84,487

 
84,487

Total investments available-for-sale
75,171

 
917,189

 
992,360

Certificates of deposit

 
25,990

 
25,990

Total financial assets carried at fair value
$
75,171

 
$
943,179

 
$
1,018,350

 
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 March 31, 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 March 31, 2019 or December 31, 2018. There were no transfers of financial assets or liabilities between Levels 1, 2 and 3 during the three months ended March 31, 2019 or 2018.
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.
See “Note 11. Commitments” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for a description of the determination of the amount of our 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, Rebates and fees due to customers and other current and long-term liabilities. Those financial assets and liabilities are carried at cost which approximates their fair values.

20


NOTE 11. SUBSEQUENT EVENTS
Lease Amendment
On April 1, 2019, we entered into an amendment to the existing Lease Agreement (the Lease) relating to our corporate headquarters located at 1851, 1801, and 1751 Harbor Bay Parkway, Alameda, California (the Premises). The Lease Amendment provides, among other things, for the (i) expansion of the 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). We surrendered the 1751 Space on April 15, 2019 and the term for the 1601 Expansion Space will begin ninety days after the landlord’s delivery of the entire 1601 Expansion Space (the 1601 Expansion Space Commencement Date). The term for the 1601 Expansion Space is expected to commence on December 1, 2019, and will run coterminous with the term of the Lease for the existing space, which ends on January 31, 2028. We have been provided an allowance of $1.7 million for tenant improvements to the 1601 Expansion Space.
Following April 15, 2019, the monthly base rent for the Premises, other than the 1601 Expansion Space, is $224,505 through January 31, 2020, increasing throughout the remainder of the term to $283,933 at the end of the term. Following the 1601 Expansion Space Commencement Date, the monthly base rent for the 1601 Expansion Space will be $71,334 through November 30, 2020, increasing throughout the remainder of the term to $90,481 at the end of the term. The aggregate contractual base rent for the entire 169,606 square feet of the Premises from April 15, 2019, through the remainder of the Lease term will be approximately $34.6 million. In addition, we are required to pay the landlord for certain operating expenses and taxes they incur related to the Premises.
Amendment to Collaboration Agreement with Takeda
On April 29, 2019, we executed an amendment to our January 2017 collaboration agreement with Takeda (the Amendment), which will become effective on May 7, 2019. The Amendment, among other things, reduces 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 increases the total potential development, regulatory and first-sale milestone payments to be paid to us by Takeda for second-line renal cell carcinoma (RCC), first-line RCC and second-line hepatocellular carcinoma by an aggregate of $12.0 million to $102.0 million, including an increase from $10.0 million to $16.0 million for the milestone we expect to receive 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. We continue to be eligible to receive additional development, regulatory and first-sale milestone payments for other potential future indications. The Amendment also increases the amount of Takeda’s potential sales-based milestones by an aggregate of $3.0 million to $86.0 million. We continue to be eligible to receive royalties on net sales of cabozantinib in Japan.
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 filed with the Securities and Exchange Commission (SEC) on February 22, 2019.
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 and received regulatory approval; three have a growing commercial presence in markets worldwide, and we expect that the fourth will soon enter the marketplace in Japan. Two are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET. These 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). The other two products resulting from our discovery efforts are: COTELLIC® (cobimetinib), an inhibitor of MEK, approved as part of a combination regimen to treat a specific form 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, recently approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo).
CABOMETYX was first approved by the U.S. Food and Drug Administration (FDA) 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 most recent 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 (OS) versus placebo. We remain highly focused on optimizing the execution of the commercial launch in HCC in the U.S. through our commercial and medical affairs organizations and established distribution network.
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. (Takeda). Ipsen has been granted rights to cabozantinib outside of the U.S. and Japan, and Takeda has been granted rights to cabozantinib in Japan. Both partners 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, recently receiving regulatory approval from the European Commission (EC) for CABOMETYX as a treatment for HCC in adults who have previously been treated with sorafenib. Takeda has also made significant progress on bridging studies in both RCC and HCC and achieved an important regulatory milestone in April 2019 with its application to the Japanese Ministry of Health, Labour and Welfare (MHLW) for approval to manufacture and sell CABOMETYX as a treatment for unresectable and metastatic RCC in Japan.
In addition to our regulatory and commercialization efforts in the U.S. and the support provided to our partners for rest of world regulatory and commercialization activities, we are also focused on the cabozantinib clinical development program, pursuing other indications that have the potential to expand 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 75 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 trial program. Informed by the available data from these clinical trials, we continue to advance cabozantinib’s late-stage development program. One pivotal trial that has resulted from this effort is COSMIC-311, our ongoing phase 3 pivotal trial evaluating cabozantinib in patients with radioactive iodine (RAI)-refractory differentiated thyroid cancer (DTC) who have progressed after up to two VEGF receptor-targeted therapies.
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 in multiple clinical trials. The most advanced of these combination studies include CheckMate 9ER, a phase 3 pivotal trial evaluating cabozantinib in combination with nivolumab in previously untreated advanced or metastatic RCC, for which enrollment was completed in April 2019, and CheckMate 040, a 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. Both trials are in collaboration with Bristol-Myers Squibb Company (BMS). Additionally, as part of our clinical collaboration with BMS, we are initiating 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, and plan to further evaluate the combination of cabozantinib and nivolumab, with or without ipilimumab, in various other tumor types, including urothelial carcinoma (UC). Diversifying our exploration of combinations with ICIs, we also initiated 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, and COSMIC-021, a phase 1b study evaluating the safety and tolerability of cabozantinib in combination with atezolizumab in patients with locally advanced or metastatic solid tumors. The study 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 demonstrate that the combination was well-tolerated and showed encouraging anti-tumor activity in patients with advanced RCC. The expansion phase of COSMIC-021 comprises eighteen tumor expansion cohorts evaluating the combination of cabozantinib and atezolizumab, including multiple therapeutic settings of RCC, UC, and non-small cell lung cancer (NSCLC) and single therapeutic settings of HCC, castration-resistant prostate cancer, triple-negative breast cancer, epithelial ovarian cancer, endometrial cancer, gastric or gastroesophageal junction adenocarcinoma, colorectal adenocarcinoma, DTC and head and neck cancer of squamous cell histology, and is currently enrolling. Depending on the results from COSMIC-021, we may also evaluate this combination in various other tumor types, including NSCLC. COSMIC-021 also includes two additional exploratory cohorts that will evaluate cabozantinib as a single-agent therapy in NSCLC and UC indications.
As we continue to work to maximize the clinical and commercial potential of cabozantinib, we also remain committed to building our product pipeline by discovering and developing new cancer therapies for patients. In this regard, we have reinitiated internal drug discovery efforts with the goal of identifying new product candidates to advance into clinical trials. Notably, these efforts are led by some of the same experienced scientists responsible for the discovery of cabozantinib and cobimetinib, which have been approved for commercialization by regulatory authorities, as well as other promising compounds resulting from our discovery efforts in various stages of clinical, regulatory and commercial development pursuant to our collaborations with Daiichi Sankyo and BMS. Using our expertise in medicinal chemistry, tumor biology and pharmacology, we are advancing drug candidates toward and through preclinical development. Furthest along in these internal drug discovery efforts is XL092, a next-generation oral tyrosine kinase inhibitor (TKI) that is currently in a phase 1 clinical trial in patients with advanced solid malignancies.
These internal drug discovery activities are augmented by efforts to identify and in-license promising, early-stage oncology assets and then further develop them utilizing our established clinical development infrastructure. In furtherance of this strategy, we entered into an exclusive global collaboration and license agreement with StemSynergy, Inc. (StemSynergy) for the discovery and development of novel oncology compounds aimed to inhibit tumor growth by targeting Casein Kinase 1α, a component of the Wnt signaling pathway implicated in key oncogenic processes. We also entered into a collaboration and license agreement with Invenra, Inc. (Invenra), which is focused on developing next-generation biologics, for the discovery and development of multispecific antibodies for the treatment of cancer. To further enhance our early-stage pipeline, in the near future we expect to enter into additional, external collaborative relationships around assets and technologies that complement our in-house drug discovery and development efforts.
First Quarter 2019 Business Updates and Financial Highlights
During the first quarter of 2019, we continued to execute on our business objectives, generating significant revenue from operations and enabling us 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 January 2019, we announced that our partner Daiichi Sankyo received approval from the Japanese MHLW for MINNEBRO as a treatment for patients with hypertension in Japan. MINNEBRO is a compound identified during our research collaboration with Daiichi Sankyo, which the companies entered into in March 2006, and has been subsequently developed by Daiichi Sankyo.
In January 2019, the FDA approved CABOMETYX as a treatment for patients with HCC who have been previously treated with sorafenib. The FDA’s approval of CABOMETYX 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 OS versus placebo.
In January 2019, the FDA accepted our Investigational New Drug application for XL092, a next-generation oral TKI and the first compound to advance from our new discovery organization.
In February 2019, we initiated a phase 1 dose escalation trial, evaluating the pharmacokinetics, safety and tolerability of XL092 in patients with advanced solid tumors, with the primary objective of determining a dose for daily oral administration suitable for further evaluation.
In April 2019, CheckMate 9ER, the phase 3 pivotal trial evaluating the combination of cabozantinib and nivolumab versus sunitinib in patients with previously untreated advanced or metastatic RCC completed enrollment, including in Japan where the last few patients are in the process of being randomized.
In April 2019, Takeda applied to the Japanese MHLW for approval to manufacture and sell CABOMETYX as a treatment for unresectable and metastatic RCC in Japan.
In May 2019, we announced the initiation of 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, which will be conducted in collaboration with BMS.
Financial Highlights
Net income for the first quarter of 2019 was $75.8 million, or $0.25 per share, basic and $0.24 per share, diluted, compared to $115.9 million, or $0.39 per share, basic and $0.37 per share diluted, for the first quarter of 2018.
Net product revenues for the first quarter of 2019 increased to $179.6 million, compared to $134.3 million for the first quarter of 2018.
Total revenues for the first quarter of 2019 increased to $215.5 million, compared to $213.7 million for the first quarter of 2018.
Research and development expenses for the first quarter of 2019 increased to $63.3 million, compared to $37.8 million for the first quarter of 2018.
Selling, general and administrative expenses for the first quarter of 2019 increased to $60.1 million, compared to $54.0 million for the first quarter of 2018.
Provision for income taxes for the first quarter of 2019 increased to $14.9 million, compared to $2.5 million for the first quarter of 2018.
Cash and investments increased to $1,019.4 million at March 31, 2019, compared to $851.6 million at December 31, 2018.
See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.
Challenges and Risks
We will continue to face challenges and risks that may impact our ability to execute on our 2019 business objectives. In particular, for the foreseeable future, we expect 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 for other indications for which cabozantinib is in late-stage clinical trials, if warranted by the data generated from such trials. The commercial success of CABOMETYX 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. CABOMETYX will only continue to be successful commercially 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 2019 business objectives will also depend on the success of the development and commercialization strategies we have formulated to navigate increased competition, including that from, but not limited to, ICIs, as well as the use of combination therapy to treat cancer. Our research and development objectives may be impeded by the challenges associated with scaling our organization to meet the demands of expanded drug development and discovery activities. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new drug candidates or we may not be able to successfully identify appropriate candidates for in-licensing or acquisition.
Some of these challenges and risks are specific to our business, and others are common to companies in the pharmaceutical industry with development and commercial operations. For a complete discussion of challenges and risks we face, see “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 31st. Fiscal year 2019 will end on January 3, 2020 and fiscal year 2018 ended on December 28, 2018. For convenience, references in this report as of and for the fiscal periods ended March 29, 2019 and March 30, 2018, and as of and for the fiscal years ending January 3, 2020 and ended December 28, 2018, are indicated as being as of and for the periods ended March 31, 2019 and March 31, 2018, and the years ending December 31, 2019 and ended December 31, 2018, respectively.
Results of Operations
Revenues
Revenues by category were as follows (dollars in thousands): 
 
Three Months Ended March 31,
 
 Percentage Change
 
2019
 
2018
 
Net product revenues
$
179,581

 
$
134,272

 
34
 %
Collaboration revenues
35,906

 
79,447

 
(55
)%
Total revenues
$
215,487

 
$
213,719

 
1
 %
Net Product Revenues
Net product revenues were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 Percentage Change
 
2019
 
2018
 
Gross product revenues
$
223,750

 
$
159,436

 
40
 %
Discounts and allowances
(44,169
)
 
(25,164
)
 
76
 %
Net product revenues
$
179,581

 
$
134,272

 
34
 %
 
 
 
 
 
 
Product revenues by product:
 
 
 
 
 
CABOMETYX
$
175,890

 
$
128,934

 
36
 %
COMETRIQ
3,691

 
5,338

 
(31
)%
Net product revenues
$
179,581

 
$
134,272

 
34
 %
The increase in product revenues for CABOMETYX for the three months ended March 31, 2019, as compared to the comparable period in 2018, was primarily due to a 26% increase in the number of units of CABOMETYX sold and, to a lesser extent, an increase in the average selling price of the product. The increase in CABOMETYX sales volumes reflects the continued growth of CABOMETYX 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. The decrease in product revenues for COMETRIQ for the three months ended March 31, 2019, as compared to the comparable period in 2018, was primarily due to a 35% decline in the number of units of COMETRIQ sold. COMETRIQ sales volume has continued to decrease since the launch of CABOMETYX in April 2016.
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. The increase in discounts and allowances for the three months ended March 31, 2019, as compared to the comparable period in 2018, was primarily the result of the overall increase in product sales volume described above, increases in the volume and dollar amount of chargebacks associated with public health service hospitals, and an increase to the discount provided to Medicare Part D beneficiaries as required by our

21


participation in the Medicare Part D Coverage Gap Discount Program. We expect our discounts and allowances as a percentage of gross product revenues to increase during 2019 as compared to 2018 as our business evolves and the number of patients participating in government programs increases, the discounts and rebates paid to government payers increase and as a result of the engagement in commercial contracting that may result in additional discounts or rebates.
Collaboration Revenues
Collaboration revenues were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 Percentage Change
 
2019
 
2018
 
Collaboration revenues:
 
 
 
 
 
License revenues (1)
$
24,509

 
$
69,030

 
(64
)%
Research and development service revenues (2)
11,928

 
10,099

 
18
 %
Other collaboration revenues (3)
(531
)
 
318

 
n/m

Total collaboration revenues
$
35,906

 
$
79,447

 
(55
)%
____________________
(1)
License revenues included the immediate 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 and Genentech.
(2)
Research and development service revenues included the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development service 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 partially offset by the 3% royalty we are required to pay GlaxoSmithKline (GSK) on the net sales by Ipsen of any product incorporating cabozantinib.
The decrease in collaboration revenues was primarily the result of a decrease in milestones revenues, which was partially offset by an increase in royalty revenues under our collaboration agreement with Ipsen and development cost reimbursements by Ipsen and Takeda.
Milestone revenues were $10.0 million for the three months ended March 31, 2019, as compared to $66.5 million for the comparable period in 2018. Milestone revenues for the three months ended March 31, 2019 primarily related to $9.4 million in revenues recognized in connection with an expected $10.0 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. See “Note 11. Subsequent Events - Amendment to Collaboration Agreement with Takeda” in the “Notes to Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding an amendment to our January 2017 collaboration agreement with Takeda. Milestone revenues for the three months ended March 31, 2018 primarily related to $45.8 million in revenues recognized in connection with a $50.0 million milestone from Ipsen we expected to, and did, earn in the second quarter of 2018 for the approval of CABOMETYX for the first-line treatment of adults with intermediate- or poor-risk RCC by the EC and 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 essential 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 on net sales of cabozantinib by Ipsen outside of the U.S. and Japan were $14.0 million for the three months ended March 31, 2019, as compared to $4.4 million for the comparable period in 2018. 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 is currently approved and commercially available in 40 and 27 countries outside of the U.S., respectively. We were entitled to receive a tiered royalty of 2% to 12% on the initial $150.0 million 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. For 2019, we expect the royalty revenues to increase as compared to 2018 as a result of achieving the 22% minimum royalty tier.

22


Development cost reimbursements in connection with our collaboration arrangements with Ipsen and Takeda were $10.3 million for the three months ended March 31, 2019, as compared to $5.7 million for the comparable period in 2018. The increase was primarily the result of reimbursements from Ipsen and Takeda for their share of the increase in spending on the CheckMate 9ER study.
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 $2.5 million for the three months ended March 31, 2019, as compared to $2.7 million for the comparable period 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 months ended March 31, 2019 and 2018, collaboration revenues were reduced by $1.9 million and $1.1 million, respectively, for the 3% royalty we are required to pay GSK on the net sales by Ipsen of any product incorporating cabozantinib. As royalty generating sales of cabozantinib by Ipsen have increased as described above, our royalty payments to GSK have also increased.
Cost of Goods Sold
The Cost of goods sold and our gross margin were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 Percentage Change
 
2019
 
2018
 
Cost of goods sold
$
7,501

 
$
5,639

 
33
%
Gross margin
96
%
 
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 increase in Cost of goods sold for the three months ended March 31, 2019, as compared to the comparable period in 2018, was primarily the result of the increase in product sales volume described above. We do not expect our gross margin to change significantly during the remainder of 2019.
Research and Development Expenses
Research and development expenses were as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 Percentage Change
 
2019
 
2018
 
Research and development expenses
$
63,289

 
$
37,757

 
68
%
Research and development expenses consist primarily of clinical trial costs, personnel expenses, stock-based compensation, consulting and outside services, the allocation of general corporate costs and license costs.
The increase in Research and development expenses for the three months ended March 31, 2019, as compared to the comparable period in 2018, was primarily related to increases in clinical trial costs, personnel expenses, the allocation of general corporate costs and stock-based compensation. Clinical trial costs, which includes services performed by third-party contract research organizations and other vendors who support our clinical trials, and comparator drug purchases, increased $17.0 million for the three months ended March 31, 2019, as compared to the comparable period in 2018. The increase in clinical trial costs was primarily due to costs associated with the expanding clinical trial program for cabozantinib that now includes four phase 3 pivotal studies (CheckMate 9ER, COSMIC-311, COSMIC-312 and COSMIC-313), as well as the multi-cohort phase 1b study, COSMIC-021. Personnel expenses, the allocation of general corporate costs and stock-based compensation increased $3.8 million, $1.8 million and $1.3 million, respectively, for the three months ended March 31, 2019, as compared to the comparable period in 2018, primarily due to increases in headcount to support our expanded discovery and development efforts.

23


We do not track fully-burdened Research and development expenses on a project-by-project basis. We group our Research and development expenses into three categories: Development, Drug discovery and Other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds 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 March 31,
 
2019
 
2018
Research and development expenses:
 
 
 
Development:
 
 
 
Clinical trial costs
$
28,187

 
$
11,196

Personnel expenses
13,587

 
10,658

Consulting and outside services
2,712

 
1,945

Other development costs
4,134

 
3,388

Total development
48,620

 
27,187

Drug discovery (1)
7,040

 
5,990

Other (2)
7,629

 
4,580

Total research and development expenses
$
63,289

 
$
37,757

____________________
(1)
Primarily includes personnel expenses, consulting and outside services, laboratory supplies and license costs for our collaboration and license agreements with Invenra and StemSynergy.
(2)
Includes stock-based compensation and the allocation of general corporate costs to research and development.
In addition to reviewing the three categories of Research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. Such factors include enrollment in clinical trials for our drug candidates, preliminary data from and final results of 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 our near-term research and development expenses to primarily relate to the clinical development of cabozantinib. We expect to continue to incur significant development costs for cabozantinib in future periods as we evaluate its potential in a broad development program comprising over 75 ongoing or planned clinical trials across multiple indications. Notable studies of 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; 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 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 internal drug discovery activities with the goal of identifying new product candidates to advance into clinical trials. These internal drug discovery activities are augmented by efforts to identify and in-license promising, early-stage oncology assets and then further develop them utilizing our established clinical development infrastructure. As a result, for 2019 we expect our Research and development expenses to increase as we continue to expand the cabozantinib development program and our product pipeline.
The length of time required for clinical development of a particular product candidate and our development costs for that product candidate may be impacted by the scope and timing of enrollment in clinical trials for the product candidate, our decisions to develop a product candidate for additional indications and whether we pursue development of the product candidate or a particular indication with a collaborator or independently. For example, cabozantinib is being developed in multiple indications, and we do not yet know 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

24


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 costs associated with the development of cabozantinib or any of our other research and development projects.
In any event, our potential therapeutic products are subject to a lengthy and uncertain regulatory process that may not result in our receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected, including cabozantinib in any additional indications. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval. A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part 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 March 31,
 
 Percentage Change
 
2019
 
2018
 
Selling, general and administrative expenses
$
60,138

 
$
54,016

 
11
%
Selling, general and administrative expenses consist primarily of personnel expenses, consulting and outside services, stock-based compensation, marketing costs and corporate giving.
The increase in Selling, general and administrative expenses for the three months ended March 31, 2019, as compared to the comparable period in 2018, was primarily related to increases in consulting and outside services, personnel expenses, stock-based compensation, marketing costs and depreciation expense; those increases were partially offset a decrease in corporate giving. Consulting and outside services and marketing costs increased $3.3 million and $1.5 million, respectively, for the three months ended March 31, 2019 as compared to the comparable period 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. Personnel expenses and stock-based compensation each increased $2.0 million for the three months ended March 31, 2019, as compared to the comparable period in 2018, primarily due to increases in general and administrative headcount to support our commercial and research and development organizations. Depreciation expense increased $1.4 million for the three months ended March 31, 2019, as compared to the comparable period in 2018, primarily as a result of our office and research facilities in Alameda, California being placed into service in June 2018. Our expense for the Branded Prescription Drug Fee, which is also included in Selling, general and administrative expenses, increased $1.4 million for the three months ended March 31, 2019, as compared to the comparable period in 2018. Corporate giving, consisting predominantly of donations to independent patient support foundations, decreased $2.8 million for the three months ended March 31, 2019, as compared to the comparable period in 2018.
For 2019, we expect modest increases in Selling, general and administrative expenses to support our overall organizational growth.
Other Income (Expense), Net
Other income (expense), net, was as follows (dollars in thousands): 
 
Three Months Ended March 31,
 
Percentage Change
 
2019
 
2018
 
Interest income
$
6,087

 
$
1,895

 
221
 %
Other, net
25

 
169

 
(85
)%
Total other income (expense), net
$
6,112

 
$
2,064

 
196
 %

25


The increase in Interest income for the three months ended March 31, 2019, as compared to the comparable period in 2018, was the result of both an increase in our investment balances and an increase in the yield earned on those investments.
Provision for Income Taxes
The Provision for income taxes was as follows (in thousands): 
 
Three Months Ended March 31,