UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File Number: 0-30235 EXELIXIS, INC. (Exact name of registrant as specified in its charter) Delaware 04-3257395 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 170 Harbor Way P.O. Box 511 South San Francisco, CA 94083 (Address of principal executive offices, including zip code) (650) 837-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] As of October 31, 2001, there were 49,511,273 shares of the registrant's common stock outstanding.
EXELIXIS, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets September 30, 2001 and December 31, 2000 3 Consolidated Condensed Statements of Operations Three and Nine Months ended September 30, 2001 and 2000 4 Consolidated Condensed Statements of Cash Flows Nine Months ended September 30, 2001 and 2000 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 18 Item 5. Other Information - Risk Factors 19 Item 6. Exhibits and Reports on Form 8-K 30 SIGNATURE
PART I. FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements <TABLE> <CAPTION> EXELIXIS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 2001 2000 (1) ---------- -------------- (unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 42,813 $ 19,552 Short-term investments 89,470 93,000 Other receivables 2,368 1,493 Inventories - 3,612 Other current assets 2,671 1,987 ---------- -------------- Total current assets 137,322 119,644 Property and equipment, net 35,870 23,480 Related party receivables 1,021 494 Goodwill and other intangibles, net 67,454 58,674 Other assets 5,050 2,622 ---------- -------------- Total assets $ 246,717 $ 204,914 ========== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 11,581 $ 10,050 Line of credit - 1,484 Current portion of capital lease obligations 6,239 3,826 Current portion of notes payable 3,589 1,664 Advances from minority shareholders - 868 Deferred revenue 12,908 6,233 ---------- -------------- Total current liabilities 34,317 24,125 Capital lease obligations 9,881 6,341 Notes payable 828 1,635 Convertible promissory note 30,000 - Minority interest in consolidated subsidiary - 1,044 Other long-term liabilities 200 - Deferred revenue 22,080 9,036 ---------- -------------- Total liabilities 97,306 42,180 ---------- -------------- Commitments Stockholders' equity: Common stock 50 47 Additional paid-in-capital 338,326 304,339 Notes receivable from stockholders (1,624) (1,805) Deferred stock compensation, net (5,355) (10,174) Accumulated other comprehensive income 969 365 Accumulated deficit (182,955) (130,038) ---------- -------------- Total stockholders' equity 149,411 162,734 ---------- -------------- Total liabilities and stockholders' equity $ 246,717 $ 204,914 ========== ============== <FN> (1) The consolidated condensed balance sheet at December 31, 2000 has been derived from the audited financial statement at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements.
<TABLE> <CAPTION> EXELIXIS, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (unaudited) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues: Contract and government grants $ 9,212 $ 5,211 $ 23,649 $ 14,914 License 2,716 907 4,564 2,771 --------- --------- --------- --------- Total revenues 11,928 6,118 28,213 17,685 --------- --------- --------- --------- Operating expenses: Research and development (1) 22,466 13,428 59,836 37,248 General and administrative (2) 5,361 3,845 14,597 11,539 Amortization of goodwill and intangibles 1,397 - 3,673 - Acquired in-process research and development - - 6,673 - --------- --------- --------- --------- Total operating expenses 29,224 17,273 84,779 48,787 --------- --------- --------- --------- Loss from operations (17,296) (11,155) (56,566) (31,102) Other income (expense): Interest and other income 1,617 2,318 5,109 4,331 Interest expense (811) (162) (1,460) (488) --------- --------- --------- --------- Total other income 806 2,156 3,649 3,843 Net loss $(16,490) $ (8,999) $(52,917) $(27,259) ========= ========= ========= ========= Net loss per share, basic and diluted $ (0.35) $ (0.22) $ (1.15) $ (1.00) ========= ========= ========= ========= Shares used in computing net loss per share, basic and diluted 47,750 41,179 45,848 27,235 ========= ========= ========= ========= <FN> (1) Includes stock compensation expense of $1,136 and $2,291 in the quarters ended September 30, 2001 and 2000, respectively, and $3,936 and $8,293 in the nine-month periods ended September 30, 2001 and 2000, respectively. (2) Includes stock compensation expense of $551 and $1,210 in the quarters ended September 30, 2001 and 2000, respectively, and $1,921 and $3,766 in the nine-month periods ended September 30,2001 and 2000, respectively. </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements.
<TABLE> <CAPTION> EXELIXIS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited) SIX MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 --------- --------- <S> <C> <C> Cash flows from operating activities: Net loss $(52,917) $(27,259) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,135 3,207 Amortization of deferred stock compensation 5,857 12,059 Amortization of goodwill and other intangibles 3,673 - Acquired in-process research and development 6,673 - Changes in assets and liabilities: Other receivables (234) (1,363) Other current assets (717) (1,337) Related party receivables (474) 226 Other assets (2,731) (532) Accounts payable and accrued expenses (18) 885 Deferred revenue 20,441 9,587 --------- --------- Net cash provided by (used in) operating activities (13,312) (4,707) --------- --------- Cash flows from investing activities: Purchases of property and equipment (8,326) (12,970) Proceeds from sale-leaseback of equipment - 5,954 Cash acquired in acquisition 3,463 - Proceeds from maturity of short-term investments 115,779 - Purchases of short-term investments (111,562) (77,874) --------- --------- Net cash provided by (used in) investing activities (646) (84,890) --------- --------- Cash flows from financing activities: Proceeds from initial public offering, net - 124,709 Proceeds from convertible note 30,000 - Proceeds from issuance of common stock 10,000 - Proceeds from exercise of stock options and warrants 384 503 Proceeds from employee stock purchase plan 1,198 - Repayments of notes from stockholders 181 - Principal payments on capital lease obligations (3,162) (570) Principal payments on notes payable (1,429) (1,128) --------- --------- Net cash provided by financing activities 37,172 123,514 --------- --------- Effect of foreign exchange rate changes on cash 47 - --------- --------- Net increase in cash and cash equivalents 23,261 33,917 Cash and cash equivalents, at beginning of period 19,552 5,400 --------- --------- Cash and cash equivalents, at end of period $ 42,813 $ 39,317 ========= ========= </TABLE> The accompanying notes are in integral part of these consolidated condensed financial statements.
EXELIXIS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - ------------ Exelixis, Inc. ("Exelixis" or the "Company") is a genomics-based biotechnology company focused on pharmaceutical product development through its expertise in comparative genomics and model system genetics. Company scientists have developed multiple fungal, nematode, insect, plant and vertebrate genetic systems. Exelixis' proprietary model systems and comparative genomics technologies address gene function by using biologically relevant functional genomics information very early on in the process to rapidly, efficiently and cost-effectively translate sequence data to knowledge about the function of genes and the proteins that they encode. The Company also has a significant internal cancer discovery and drug development program. Exelixis believes that its technology is broadly applicable to all life science industries including pharmaceutical, diagnostic, agricultural biotechnology and animal health. The Company has active partnerships with Aventis CropScience, Bayer, Bristol-Myers Squibb, Dow AgroSciences, Elan Pharmaceuticals, Pharmacia, Protein Design Labs and Scios. Basis of Presentation - ----------------------- The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions 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 generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001, or for any future period. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K. Net Loss per Share - --------------------- Basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential common stock if their effect is antidilutive. Potential common stock consists of common stock subject to repurchase, incremental common shares issuable upon the exercise of stock options and warrants and shares issuable upon conversion of the preferred stock and a convertible promissory note. Comprehensive Income (Loss) - ----------------------------- There are two components of other comprehensive income: unrealized gains on available-for-sale securities and foreign currency translation adjustments. For the three- and nine-month periods ended September 30, 2001, total comprehensive loss amounted to approximately $16.0 million and $52.3 million, respectively. For the three- and nine-month periods ended September 30, 2000, total comprehensive loss amounted to $8.8 million and $27.0 million, respectively. Foreign Currency Translation - ------------------------------ The Company's German subsidiary, Artemis Pharmaceuticals GmbH ("Artemis"), uses its local currency as its functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and income and expense amounts are translated at the average exchange rates during the period. Resulting translation adjustments are recorded directly to a separate component of stockholders' equity. Reclassification - ---------------- Certain prior period amounts have been reclassified to conform to the current period presentation. Recent Accounting Pronouncements - ---------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS No. 141"), which establishes financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires that all business combinations be accounted for using one method, the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 had no material impact on financial reporting and related disclosures of the Company. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. Exelixis will adopt SFAS No. 142 during the first quarter of fiscal 2002, and is in the process of evaluating the impact of implementation on its financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal periods. SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and parts of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions relating to extraordinary items", however, SFAS No. 144 retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment or in a distribution to owners) or is classified as held for sale. SFAS 144 addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. Management does not expect the adoption of SFAS 144 to have a material impact on the Company's financial position and results of operations. NOTE 2. SALE OF VINIFERA OWNERSHIP INTEREST On March 31, 2001, the Company reduced its ownership interest in Vinifera, Inc. ("Vinifera") to 19% by selling 3.0 million shares of Vinifera common stock back to Vinifera in consideration for $2.1 million in interest bearing promissory notes. The promissory notes bear an interest rate of prime plus 1% and are payable in two installments of $400,000, due no later than September 30, 2001 and February 28, 2002, respectively, and one installment of $1.3 million, due on February 28, 2006. The first installment payment due date has been extended to December 31, 2001. Due to risks associated with collection, the Company has reserved for $1.7 million of these promissory notes. As a result of this transaction, the Company recorded the following amounts as an adjustment to goodwill recorded in connection with the acquisition of Agritope, Inc. (parent company of Vinifera), based on the operating results of Vinifera through March 31, 2001: a write-down of the value of acquired developed technology attributable to Vinifera, a gain on sale of Vinifera shares and the promissory note reserve. The net adjustment was an increase to goodwill in the amount of $675,000. Beginning April 1, 2001, the Company accounts for its remaining investment in Vinifera using the cost method. NOTE 3. ACQUISITION OF ARTEMIS PHARMACEUTICALS GMBH In May 2001, Exelixis acquired a majority of the outstanding capital stock of Artemis Pharmaceuticals GmbH ("Artemis"), a privately held genetics and functional genomics company organized under the laws of Germany. The transaction, which was accounted for under the purchase method of accounting, was effected through the exchange of shares of Exelixis common stock for DEM 1.00 of nominal value of Artemis capital stock, using an exchange ratio of 4.064 to one. Approximately 1.6 million shares of Exelixis common stock were issued in exchange for 78% of the outstanding capital stock of Artemis held by Artemis stockholders. In addition, Exelixis received a call option (the "Call Option") from, and issued a put option (the "Put Option") to, certain stockholders of Artemis (the "Option Holders") for the issuance of approximately 480,000 shares of Exelixis common stock in exchange for the remaining 22% of the outstanding capital stock of Artemis held by the Artemis Option Holders. Exelixis may exercise the Call Option at any time from May 14, 2001 through January 31, 2002, and the Option Holders may exercise their rights under the Put Option at any time from April 1, 2002 through May 15, 2002. The value of any shares issued pursuant to exercising the Call Option or Put Option will be added to goodwill. In connection with the acquisition of Artemis, Exelixis also issued fully vested rights to purchase approximately 187,000 additional shares of Exelixis common stock to Artemis employees in exchange for such employees' vested options formerly representing the right to purchase shares of Artemis capital stock pursuant to an Employee Phantom Stock Option Program. The total consideration for the acquisition was approximately $22.3 million, which consisted of Exelixis common stock and options valued at $21.4 million and estimated Exelixis transaction costs of $900,000. Exelixis' transaction costs include financial advisory, legal, accounting and other fees. Based upon an independent valuation of the tangible and intangible assets acquired, Exelixis management has completed an allocation of the total cost of the acquisition to the assets acquired and liabilities assumed as follows (in thousands): Tangible assets acquired $6,848 In-process research and development 6,673 Developed technology 1,240 Assembled workforce 1,332 Goodwill 9,655 Patents/core technology 571 Liabilities assumed (4,016) -------- $22,303 ======== The Company will amortize the acquired intangible assets using the following estimated useful lives: Developed technology 5 years Patents/core technology 15 years Assembled workforce 3 years Goodwill 15 years The valuation of the purchased in-process research and development of $6.7 million was based upon the results of an independent valuation using the income approach for each of the three significant in-process projects. The in-process projects relate primarily to the development of technologies that use vertebrate genetic model organisms, zebrafish and mice, to identify and functionally validate novel genes in vivo. These genes can be used as novel screening targets or as the basis for secreted proteins in clinically and commercially relevant diseases. The in-process projects are expected to be completed over the next 18 months. The income approach estimates the value of each acquired in-process project based on its expected future cash flows. The valuation analysis considered the contribution of the core technology as well as the percent complete of each in-process research and development project. The expected present value of the cash flows associated with the in-process research and development projects was computed using a risk adjusted rate of return of 30%, which is considered commensurate with the overall risk and percent complete of the in-process projects. The purchased in-process research and development was not considered to have reached technological feasibility, and it has no alternative future use, accordingly, it has been recorded as a component of operating expense. The revenues, expenses, cash flows and other assumptions underlying the estimated fair value of the acquired in-process research and development involve significant risks and uncertainties. The risks and uncertainties associated with completing the acquired in-process projects include the ability to reach future research milestones since the technologies being developed are unproven, the ability to retain key personal, the ability to obtain licenses to key technology and the ability to avoid infringing on patents and propriety rights of third parties. PRO FORMA RESULTS The Company's historical consolidated condensed statements of operations include the results of Artemis and Agritope, Inc. (now Exelixis Plant Sciences, Inc.) subsequent to the acquisition dates of May 14, 2001 and December 8, 2000, respectively. The following unaudited pro forma financial information presents the consolidated results of the Company as if the acquisitions of Artemis and Agritope had occurred at the beginning of each period presented. Nonrecurring charges, such as acquired in-process research and development, are not reflected in the following unaudited pro forma financial information. This unaudited pro forma financial information is not intended to be indicative of future operating results (in thousands, except per share data). <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2001 2000 ----------- --------- <S> <C> <C> Total revenues $ 28,469 $ 25,193 Net loss $(49,847) $(39,431) Net loss per share, basic and diluted $ (1.07) $ (1.29) </TABLE> NOTE 4. SUPPLEMENTAL STOCK OPTION PLAN During April 2001, the Company granted approximately 545,000 supplemental stock options ("Supplemental Options") under the 2000 Equity Incentive Plan to employees (excluding officers and directors) who had stock options with exercise prices greater than $16.00 per share under the 2000 Equity Incentive Plan. The number of Supplemental Options granted were equal to 50% of the corresponding original grant held by each employee, have an exercise price of $16.00, vest monthly over a two-year period beginning April 1, 2001, and have a 27-month term. The vesting on the corresponding original grants was halted and will resume in April 2003 following the completion of vesting of the Supplemental Options. This new grant constitutes a synthetic repricing as defined in FASB Interpretation Number 44 "Accounting for Certain Transactions Involving Stock Compensation" and will result in certain options being reported using the variable plan method of accounting for stock compensation expense until they are exercised, forfeited or expire. As of September 30, 2001, the Company has recorded no compensation expense for the Supplemental Options for the current fiscal year. NOTE 5. COMMITMENTS During April 2001, the Company entered into a master lease agreement with a third-party lessor for an equipment lease line of credit of up to $12.0 million, which expires on December 31, 2001. The master lease agreement provides for a periodic delivery structure. Each delivery has a payment term of 36 or 48 months depending on the type of the equipment purchased under the lease. At September 30, 2001, $5.6 million was remaining under the equipment lease line of credit. Under the master lease agreement, the Company is subject to certain financial covenants. As of September 30, 2001, the Company was in compliance with all such covenants. NOTE 6. COLLABORATION AGREEMENTS On May 22, 2001, the Company and Protein Design Labs, Inc. ("PDL") entered into a collaboration to discover and develop humanized antibodies for the diagnosis, prevention and treatment of cancer. The collaboration will utilize Exelixis' model organism genetics technology for the identification of new cancer drug targets and PDL's antibody and clinical development expertise to create and develop new antibody drug candidates. PDL will provide Exelixis with $4.0 million in annual research funding for two or more years and has purchased a $30.0 million convertible note. The note bears interest at 5.75%, and the interest thereon is payable annually. The note is convertible at PDL's option any time after the first anniversary of the note. The note is convertible into Exelixis common stock at a conversion price per share equal to the lower of (i) $28.175 and (ii) 110% of the Fair Market Value (as defined in the note) of a share of Exelixis common stock at the time of conversion. On July 17, 2001, the Company and Bristol-Myers Squibb Company ("BMS") entered into a collaboration involving three agreements: (a) a Stock Purchase Agreement; (b) a Cancer Collaboration Agreement; and (c) a License Agreement. Under the terms of the collaboration, BMS (i) purchased 600,600 shares of Exelixis common stock in a private placement at a purchase price of $33.30 per share, for cash proceeds to Exelixis of approximately $20.0 million; (ii) agreed to pay Exelixis a $5.0 million upfront license fee and provide Exelixis with $3.0 million per year in research funding for a minimum of three years; and (iii) granted to Exelixis a worldwide, fully-paid, exclusive license to an analogue to Rebeccamycin developed by BMS, which is currently in Phase I and Phase II clinical studies for cancer. Due to risk and uncertainties with Rebeccamycin, and because the analogue had not reached technological feasibility and has no alternative use, the analogue was therefore assigned no value for financial reporting purposes. Exelixis has agreed to provide BMS with exclusive rights to certain potential small molecule compound drug targets in cancer identified during the term of the research collaboration. The premium in excess of fair market value of $10.0 million paid for the stock purchased by BMS is being accounted for similar to an upfront license fee and is being recognized ratably over the life of the contract. On July 26, 2001, the Company announced the reacquisition, effective February 2002, of future rights to research programs in metabolism and alzheimer's disease previously licensed exclusively to Pharmacia Corporation ("Pharmacia"). Pharmacia will retain rights to targets under the existing agreement selected prior to the reacquisition date, subject to the payment of milestones for certain of those targets selected and royalties for future development of products against or using those targets, but will have no other obligations to make payments to the Company, including approximately $9.0 million in annual funding that would otherwise be payable for an additional two years if the Company had not elected to reacquire rights to the research at this time. As a result of this transaction, revenue recognition of upfront license fees and milestone payments has accelerated over the remaining term of the agreement. The result is an increase of approximately $1.0 million in incremental revenue for the quarter ended September 30, 2001. In August and October 2001, the Company entered into collaboration agreements with Elan Pharmaceuticals, Inc. ("Elan") and Scios Inc. ("Scios"), respectively, to jointly design custom high-throughput screening compound libraries that Exelixis will synthesize and qualify. Both Elan and Scios will pay Exelixis a per-compound fee and both have paid a $500,000 upfront technology access fee that is creditable towards the future purchase of compounds. The upfront fees have been deferred. Revenue under these collaboration agreements will be recorded upon shipment of compounds. Each party retains rights to use the compounds in its own unique drug discovery programs and in its collaborative efforts with third parties. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the 2000 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2000. Operating results are not necessarily indicative of results that may occur in future periods. The following discussion and analysis contains forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's results, levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied in or contemplated by the forward-looking statements. Words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," "should," "estimate," "predict," "potential," "continue" or the negative of such terms or other similar expressions, identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described under the caption "Risk Factors" as well as those discussed elsewhere in this document and those discussed in our Annual Report on Form 10-K. OVERVIEW We believe that we are a leader in the discovery and validation of high-quality novel targets for several major human diseases, and a leader in the discovery of potential new drug therapies, specifically for cancer and other proliferative diseases. Our mission is to develop proprietary cancer products by leveraging our integrated discovery platform to increase the speed, efficiency and quality of pharmaceutical and agricultural product discovery and development. Through our expertise in comparative genomics and model system genetics, we are able to find new drug targets that we believe would be difficult or impossible to uncover using other experimental approaches. Our pharmaceutical research identifies novel genes and proteins expressed by those genes that, when changed, either decrease or increase the activity in a specific disease pathway in a therapeutically relevant manner. These genes and proteins then represent either potential product targets or drugs that may treat disease, or prevent disease initiation or progression. We have established commercial collaborations with Aventis CropScience, Bayer, Bristol-Myers Squibb, Dow AgroSciences, Elan Pharmaceuticals, Pharmacia, Protein Design Labs and Scios, which provide us with substantial funding, including licensing fees, research funding and milestone payments when specific objectives are met and royalties if our partners successfully develop and commercialize products. In addition, many of these collaborations provide us with access to strategic technologies and product development opportunities. Revenues from these collaborations and a few small government grants were $28.2 million for the nine months ended September 30, 2001, $24.8 million in fiscal year 2000, $10.5 million in fiscal year 1999 and $2.3 million in fiscal year 1998. Our sources of potential revenues for the next several years are likely to include upfront license and other fees, funded research payments under existing and possible future collaborative arrangements, compound deliveries and milestone payments and royalties from our collaborators based on revenues received from any products commercialized under those agreements. We have a history of operating losses resulting principally from costs associated with research and development activities, investment in core technologies and general and administrative functions. As a result of planned expenditures for future research and development activities, including manufacturing and clinical development expenses for compounds in clinical studies, Exelixis expects to incur additional operating losses for the foreseeable future. License, research commitment and other non-refundable payments received in connection with research collaboration agreements are generally deferred and recognized on a straight-line basis over the relevant periods specified in the agreements, generally the research term. Exelixis recognizes contract research revenues as services are performed in accordance with the terms of the agreements. Any amounts received in advance of performance are recorded as deferred revenue. ACQUISITION OF ARTEMIS PHARMACEUTICALS In May 2001, we acquired a majority of the outstanding capital stock of Artemis Pharmaceuticals GmbH, a privately held genetics and functional genomics company organized under the laws of Germany ("Artemis"). The transaction, which was accounted for under the purchase method of accounting, was effected through the exchange of shares of our common stock for DEM 1.00 of nominal value of Artemis capital stock, using an exchange ratio of 4.064 to one. Approximately 1.6 million shares of our common stock was issued in exchange for 78% of the outstanding capital stock of Artemis held by Artemis stockholders. In addition, we received a call option (the "Call Option") from, and issued a put option (the "Put Option") to, certain stockholders of Artemis (the "Option Holders") for the issuance of approximately 480,000 shares of our common stock in exchange for the remaining 22% of the outstanding capital stock of Artemis held by the Option Holders. We may exercise the Call Option at any time from May 14, 2001 through January 31, 2002, and the Option Holders may exercise their rights under the Put Option at any time from April 1, 2002 through May 15, 2002. The value of any shares issued pursuant to exercising the Call Option or Put Option will be added to goodwill. In connection with the acquisition of Artemis, we also issued fully vested rights to purchase approximately 187,000 additional shares of our common stock to Artemis employees in exchange for such employees' vested options formerly representing the right to purchase shares of Artemis capital stock pursuant to an Employee Phantom Stock Option Program. The purchase price, which for financial accounting purposes was valued at $22.3 million, was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition, as determined by management based upon an independent valuation. As a result of this transaction, we recorded expense associated with the purchase of in-process research and development of $6.7 million, net tangible assets of $2.8 million and intangible assets (including goodwill) of $12.8 million, the majority of which will be amortized over 15 years. RESULTS OF OPERATIONS REVENUES Total revenues were $11.9 million and $28.2 million for the three- and nine-month periods ended September 30, 2001, respectively, compared to $6.1 million and $17.7 million, respectively, for the comparable periods in 2000. The increase in revenues over the 2000 levels was primarily due to new collaborations formed with Bristol-Myers Squibb and Protein Design Labs, additional contract revenues earned from our existing collaborations with Bayer, Bristol-Myers Squibb, Pharmacia and Dow AgroSciences, revenues from Aventis CropScience resulting from our December 2000 acquisition of Agritope, Inc., now Exelixis Plant Sciences, Inc., and revenues from government grants resulting from our May 2001 acquisition of Artemis. We expect revenues to continue to increase during the remainder of 2001 as additional contract revenues are earned from our existing collaborations. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses consist primarily of salaries and other personnel-related expenses, facilities costs, supplies and depreciation of facilities and laboratory equipment. Research and development expenses were approximately $22.5 million and $59.8 million for the three- and nine-month periods ended September 30, 2001, respectively, compared to $13.4 million and $37.2 million, respectively, for the comparable periods in 2000. The increase over the 2000 levels was due to the expansion of our research and development organization to include Exelixis Plant Sciences and Artemis Pharmaceuticals as well as to support growth in South San Francisco for new collaborations and the continued expansion of our drug discovery organization. This increase was partially offset by a decrease in non-cash stock compensation expense (as described below). We expect to continue to devote substantial resources to research and development. In addition, we expect that research and development expenses will continue to increase in absolute dollar amounts in the future as we assume the responsibility for manufacturing and clinical development of compounds and as we continue to expand our proprietary drug development efforts. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses consist primarily of personnel costs to support our worldwide activities, facilities costs and professional expenses, such as legal fees. General and administrative expenses were $5.4 million and $14.6 million for the three- and nine-month periods ended September 30, 2001, respectively, compared to $3.8 million and $11.5 million, respectively, for the comparable periods in 2000. General and administrative expenses increased year-over-year due primarily to increased staffing and other personnel-related costs required to support our expanding research and development operations, partially offset by a decrease in non-cash stock compensation expense (as described below). We expect that our general and administrative expenses will increase in absolute dollar amounts in the future as we support a larger, worldwide organization through expanding our administrative staff and adding infrastructure to support our growing research and development efforts. STOCK COMPENSATION EXPENSE Deferred stock compensation for options granted to our employees is the difference between the fair value for financial reporting purposes of our common stock on the date such options were granted and their exercise price. Deferred stock compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and is periodically remeasured as the underlying options vest in accordance with Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services." As of September 30, 2001, we have approximately $5.4 million of remaining deferred stock compensation, net of amortization, related to stock options granted to consultants and employees. Stock compensation expense is being recognized in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN 28"), over the vesting periods of the related options, generally four years. We recognized stock compensation expense of $1.7 million and $5.9 million for the three- and nine-month periods ended September 30, 2001, respectively, compared to $3.5 million and $12.1 million, respectively, for the comparable periods in 2000. The decrease in stock compensation expense year-over-year primarily results from the accelerated amortization method prescribed by FIN 28. During April 2001, we granted approximately 545,000 supplemental stock options ("Supplemental Options") under the 2000 Equity Incentive Plan to certain employees (excluding officers and directors) who had stock options with exercise prices greater than $16.00 per share under the 2000 Equity Incentive Plan. The number of Supplemental Options granted was equal to 50% of the corresponding original grant held by each employee. The Supplemental Options have an exercise price of $16.00, vest monthly over a two-year period beginning April 1, 2001, and have a 27-month term. The vesting on the corresponding original stock options was halted and will resume in April 2003 following the completion of vesting of the Supplemental Options. This new grant constitutes a synthetic repricing as defined in FASB Interpretation Number 44, "Accounting for Certain Transactions Involving Stock Compensation" and will result in certain options being reported using the variable plan method of accounting for stock compensation expense until they are exercised, forfeited or expire. For the nine months ended September 30, 2001, the cumulative compensation expense recorded for the Supplemental Options was zero. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT The valuation of the purchased in-process research and development related to the Artemis acquisition of $6.7 million was determined by management based upon the results of an independent valuation using the income approach for each of the three significant in-process projects. The in-process projects relate primarily to the development of technologies that use vertebrate genetic model organisms, zebrafish and mice, to identify and functionally validate novel genes in vivo. These genes can be used as novel screening targets or as the basis for secreted proteins in clinically and commercially relevant diseases. The in-process projects are expected to be completed over the next 18 months. The income approach estimates the value of each acquired project in-process based on its expected future cash flows. The valuation analysis considered the contribution of the core technology as well as the percent complete of each in-process research and development project. The expected present value of the cash flows associated with the in-process research and development projects was computed using a risk adjusted rate of return of 30%, which is considered commensurate with the overall risk and percent complete of the in-process projects. The purchased in-process technology was not considered to have reached technological feasibility, and it has no alternative future use, accordingly, it has been recorded as a component of operating expenses. AMORTIZATION OF GOODWILL AND INTANGIBLES Goodwill and intangibles result from our acquisitions of Artemis and Agritope, now renamed Exelixis Plant Sciences, Inc. Amortization of goodwill and intangibles was $1.4 million and $3.7 million for the three- and nine-month periods ended September 30, 2001, respectively, compared to none for the comparable periods in 2000. OTHER INCOME (EXPENSE), NET Other income (expense), net primarily consists of interest income earned on cash, cash equivalents and short-term investments, partially offset by interest expense incurred on notes payable and capital lease obligations. Net interest income was $0.8 million and $3.6 million for the three- and nine-month periods ended September 30, 2001, respectively, compared to $2.2 and $3.8 million for the comparable periods in 2000. The decrease in the current quarter is primarily the result of increased interest expense as a result of increasing capital lease arrangements and a full quarter of interest expense associated with the convertible note with PDL. In addition, there was a decrease in interest income due to lower average cash and investment balances, as well as lower interest rates on those balances. The decrease for the nine-month period ended September 30, 2001 as compared to the prior year relates to an increase in interest expense as a result of increasing capital lease arrangements and the convertible note with PDL, almost fully offset by higher interest income due to an increase in average cash and investment balances in 2001. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private placements of preferred stock, loans, convertible debt, equipment lease financing and other loan facilities and payments from collaborators. In addition, during the second quarter of 2000, we completed our initial public offering raising $124.5 million in net cash proceeds. We intend to continue to use the proceeds for research and development activities, capital expenditures, working capital and other general corporate purposes. As of September 30, 2001, we had approximately $132.3 million in cash, cash equivalents and short-term investments. Our operating activities used cash of $13.3 million for the nine months ended September 30, 2001, compared to cash used of $4.7 million for the nine months ended September 30, 2000. Cash used in operating activities related primarily to funding net operating losses, partially offset by an increase in non-cash charges related to depreciation and amortization of deferred stock compensation, goodwill, in-process research and development, and other intangible assets. Our investing activities used cash of $0.6 million for the nine months ended September 30, 2001, compared to cash used of $84.9 million for the corresponding period in 2000. During 2001, investing activities consisted primarily of purchases of short-term investments and property and equipment, which were partially offset by maturities of short-term investments. During 2000, our investing activities consisted of purchases of property and equipment and short-term investments. We expect to continue to make significant investments in research and development and our administrative infrastructure, including the purchase of property and equipment to support our expanding operations. Our financing activities provided cash of $37.2 million and $123.5 million for the nine months ended September 30, 2001 and 2000, respectively. The 2001 amounts consisted primarily of proceeds from a $30.0 million convertible note entered into as part of our collaboration agreement with Protein Design Labs in May 2001 and $10.0 million in proceeds from the issuance of common stock to Bristol-Myers Squibb in July 2001. The 2000 amounts consisted primarily of proceeds from our initial public offering in April 2000. We believe that our current cash and cash equivalents, short-term investments and committed funding to be received from collaborators will be sufficient to satisfy our anticipated cash needs for at least the next two years. However, it is possible that we will seek additional financing within this timeframe. We may raise additional funds through public or private financings, collaborative relationships, debt or other arrangements. In July 2001, we filed a registration statement on Form S-3 to offer and sell up to $150.0 million of common stock. We have no current commitments to offer or sell securities with respect to shares that may be offered or sold pursuant to that filing. We cannot assure you that additional funding, if sought, will be available or, even if available, will be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141 "Business Combinations" ("SFAS No. 141"), which establishes financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires that all business combinations be accounted for using one method, the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 had no material impact on our financial reporting and related disclosures. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition, and after they have been initially recognized in the financial statements. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. Exelixis will adopt SFAS No. 142 during the first quarter of fiscal 2002, and is in the process of evaluating the impact of implementation on its financial position and results of operation. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal periods. SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and parts of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions relating to extraordinary items", however, SFAS No. 144 retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment or in a distribution to owners) or is classified as held for sale. SFAS 144 addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. Management does not expect the adoption of SFAS 144 to have a material impact on the Company's financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our investments are subject to interest rate risk, and our interest income may fluctuate due to changes in U.S. interest rates. By policy, we limit our investments to money market instruments, debt securities of U.S. government agencies and debt obligations of U.S. corporations. We manage market risk by our diversification requirements, which limit the amount of our portfolio that can be invested in a single issuer. We manage credit risk by limiting our purchases to high quality issuers. Through our money manager, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would cause an approximately $0.6 million decline in the fair value of our financial instruments at September 30, 2001. All highly liquid investments with an original maturity of three months or less from the date of purchase are considered cash equivalents. Exelixis views its available-for-sale portfolio as available for use in current operations. Accordingly, we have classified all investments with an original maturity date greater than three months as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date. Due to our German operations, we have market risk exposure to adverse changes in foreign currency exchange rates. The revenues and expenses of our subsidiary, Artemis, are denominated in Deutche Marks. At the end of each period, the revenues and expenses of this subsidiary are translated into U.S. dollars using the average currency rate in effect for the period, and assets and liabilities are translated into U.S. dollars using the exchange rate in effect at the end of the period. Fluctuations in exchange rates, therefore, impact our financial condition and results of operations as reported in U.S. dollars. To date, we have not experienced any significant negative impact as a result of fluctuations in foreign currency markets. As a policy, we do not engage in speculative or leveraged transactions, nor do we hold financial instruments for trading purposes. We will periodically analyze our exposure to foreign currency fluctuations and may adjust our policies to allow for financial hedging techniques to minimize exchange rate risk. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) On July 17, 2001, Exelixis entered into a stock purchase agreement with Bristol-Myers Squibb Company, a Delaware corporation ("BMS"). In connection with a corporate collaboration and pursuant to the terms of the stock purchase agreement, Exelixis issued 600,600 shares of its common stock (the "Shares") at a purchase price of $33.30 per share to BMS in exchange for approximately $20,000,000 in cash. Pursuant to the terms of the stock purchase agreement, BMS has agreed not to offer or sell any of the Shares prior to July 17, 2002, without the prior written consent of Exelixis. The Shares were issued to BMS in a private placement pursuant to an exemption from registration in reliance upon Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933. BMS is an "accredited investor," as such term is defined in Rule 501 of Regulation D. On August 27, 2001, Exelixis filed a registration statement on Form S-3 (No. 333-68436) with the Securities and Exchange Commission to register the Shares for resale. The registration statement was declared effective by the Securities and Exchange Commission on October 26, 2001. (d) In May 2000, we completed our initial public offering for aggregate proceeds of approximately $136.0 million. In connection with the offering, We paid a total of approximately $9.5 million in underwriting discounts and commissions and $2.0 million in other offering costs and expenses. After deducting the underwriting discounts and commissions and the offering costs and expenses, the net proceeds from the offering were approximately $124.5 million. From the time of receipt through September 30, 2001, the proceeds from our initial public offering were used for research and development activities, capital expenditures, working capital and other general corporate purposes. In the future, Exelixis intends to use the net proceeds in a similar manner. As of September 30, 2001, approximately $88.6 million of the proceeds remained available and were primarily invested in short-term marketable securities. ITEM 5. OTHER INFORMATION - RISK FACTORS WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY. We have incurred net losses each year since our inception, including a net loss of approximately $52.9 million for the nine months ended September 30, 2001. As of that date, we had an accumulated deficit of approximately $183.0 million. We expect these losses to continue and anticipate negative cash flow for the foreseeable future. The size of these net losses will depend, in part, on the rate of growth, if any, in our license and contract revenues and on the level of our expenses. Our research and development expenditures and general and administrative costs have exceeded our revenues to date, and we expect to spend significant additional amounts to fund research and development in order to enhance our core technologies and undertake product development. As a result, we expect that our operating expenses will increase significantly in the near term and, consequently, we will need to generate significant additional revenues to achieve profitability. Even if we do increase our revenues and achieve profitability, we may not be able to sustain or increase profitability. WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US. Our future capital requirements will be substantial, and will depend on many factors including: - payments received under collaborative agreements; - the progress and scope of our collaborative and independent research and development projects; - our ability to successfully continue development of a recently acquired cancer compound; - our need to expand our other proprietary product development efforts as well as develop manufacturing and marketing capabilities to commercialize products; and - the filing, prosecution and enforcement of patent claims. We anticipate that our current cash and cash equivalents, short-term investments and funding to be received from collaborators will enable us to maintain our currently planned operations for at least the next two years. Changes to our current operating plan may require us to consume available capital resources significantly sooner than we expect. For example, our newly acquired cancer product from our recent relationship with Bristol-Myers Squibb will require significant resources for development that were not in our operational plans prior to acquiring the cancer product. We may be unable to raise sufficient additional capital when we need it, on favorable terms, or at all. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that would restrict our ability to incur further indebtedness. If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unattractive terms. DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH MAY DIVERT RESOURCES AND LIMIT OUR ABILITY TO SUCCESSFULLY EXPAND OUR OPERATIONS. We have experienced a period of rapid and substantial growth that has placed, and our anticipated growth in the future will continue to place, a strain on our administrative and operational infrastructure. As our operations expand, we expect that we will need to manage multiple locations, including additional locations outside of the United States, and additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and growth effectively requires us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. In addition, acquisitions involve the integration of different financial and management reporting systems. We may not be able to successfully integrate the administrative and operational infrastructure without significant additional improvements and investments in management systems and procedures. WE ARE DEPENDENT ON OUR COLLABORATIONS WITH MAJOR COMPANIES. IF WE ARE UNABLE TO ACHIEVE MILESTONES, DEVELOP PRODUCTS OR RENEW OR ENTER INTO NEW COLLABORATIONS, OUR REVENUES MAY DECREASE AND OUR ACTIVITIES MAY FAIL TO LEAD TO COMMERCIALIZED PRODUCTS. Substantially all of our revenues to date have been derived from collaborative research and development agreements. Revenues from research and development collaborations depend upon continuation of the collaborations, the achievement of milestones and royalties derived from future products developed from our research. If we are unable to successfully achieve milestones or our collaborators fail to develop successful products, we will not earn the revenues contemplated under such collaborative agreements. In addition, some of our collaborations are exclusive and preclude us from entering into additional collaborative arrangements with other parties in the area or field of exclusivity. We currently have continuing collaborative research agreements with Bayer, Bristol-Myers Squibb (two agreements), Dow AgroSciences, Aventis CropSciences, Protein Design Labs, Elan Pharmaceuticals and Scios. Our current collaborative agreement with Bayer is scheduled to expire in 2008, after which it will automatically be extended for one-year terms unless terminated by either party upon 12-month written notice. Our agreement permits Bayer to terminate our collaborative activities prior to 2008 upon the occurrence of specified conditions, such as the failure to agree on key strategic issues after a period of years or the acquisition of Exelixis by certain specified third parties. In addition, our agreements with Bayer are subject to termination at an earlier date if two or more of our Chief Executive Officer, Chief Scientific Officer, Agricultural Biotechnology Program Leader and Chief Informatics Officer cease to have a relationship with us within six months of each other and we are unable to find replacements acceptable to Bayer. The first of our collaborative agreements with Bristol-Myers Squibb expires in September 2002. The funded research term of the second collaborative arrangement, entered into in July 2001, expires in July 2005. Our collaborative agreement with Dow AgroSciences is scheduled to expire in July 2003, after which Dow AgroSciences has the option to renew on an annual basis. Our collaborative research arrangement with Aventis is scheduled to expire in June 2004. Aventis has the right to terminate the research arrangement prior to the expiration date, provided that it pays the annual research funding amount due for the year following termination. Thereafter, the arrangement renews annually unless Aventis terminates automatic renewal prior to the scheduled date of renewal. The Aventis arrangement is conducted through a limited liability company, Agrinomics, which is owned equally by Aventis and Exelixis. Aventis may surrender its interest in Agrinomics and terminate the related research collaboration prior to the scheduled expiration upon the payment of the subsequent year's funding commitment. Bayer and Aventis recently announced an agreement for Bayer to acquire Aventis. The acquisition is expected to close during the first quarter of 2002. At this time we are not able to predict the impact of the acquisition of Aventis on our collaboration agreement. Our agreement with Protein Design Labs is scheduled to expire in May 2003. Protein Design Labs has a unilateral right to renew for additional twelve- and six-month periods thereafter. The five-year term of the convertible promissory note entered into as part of this arrangement is unaffected by whether or not Protein Design Labs renews. If these existing agreements are not renewed or if we are unable to enter into new collaborative agreements on commercially acceptable terms, our revenues and product development efforts may be adversely affected. In August and October of 2002, we signed agreements to deliver high-throughput-screening compounds with Elan Pharmaceuticals and Scios, respectively, which have terms of three and four years, respectively. These agreements are subject to early termination if we fail to achieve certain quality and quantity commitments. We recently announced the reacquisition, effective February 2002, of future rights to research programs in metabolism and Alzheimer's disease previously licensed exclusively to Pharmacia Corporation. The existing agreement with Pharmacia will terminate as of that date. Pharmacia will retain rights to targets under the existing agreement selected prior to the reacquisition date, subject to the payment of milestones for certain of those targets selected and royalties for future development of products against or using those targets but will have no other obligations to make payments to us, including approximately $9.0 million in annual funding that would otherwise be payable for two years if we had not elected to reacquire rights to the research at this time. Although we anticipate entering into future collaborations involving either or both of these programs, there can be no assurance that we will be able to enter into new collaborative agreements or that such collaborations will provide revenues equal to or exceeding those otherwise obtainable under the Pharmacia collaboration. CONFLICTS WITH OUR COLLABORATORS COULD JEOPARDIZE THE OUTCOME OF OUR COLLABORATIVE AGREEMENTS AND OUR ABILITY TO COMMERCIALIZE PRODUCTS. We intend to conduct proprietary research programs in specific disease and agricultural product areas that are not covered by our collaborative agreements. Our pursuit of opportunities in agricultural and pharmaceutical markets could, however, result in conflicts with our collaborators in the event that any of our collaborators takes the position that our internal activities overlap with those areas that are exclusive to our collaborative agreements, and we should be precluded from such internal activities. Moreover, disagreements with our collaborators could develop over rights to our intellectual property. In addition, our collaborative agreements may have provisions that give rise to disputes regarding the rights and obligations of the parties. Any conflict with our collaborators could lead to the termination of our collaborative agreements, delay collaborative activities, reduce our ability to renew agreements or obtain future collaboration agreements or result in litigation or arbitration and would negatively impact our relationship with existing collaborators. We have limited or no control over the resources that our collaborators may choose to devote to our joint efforts. Our collaborators may breach or terminate their agreements with us or fail to perform their obligations thereunder. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or may fail to devote sufficient resources to the development, manufacture, market or sale of such products. Certain of our collaborators could also become our competitors in the future. If our collaborators develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain necessary regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of our products, our product development efforts could be delayed and may fail to lead to commercialized products. WE ARE DEPLOYING UNPROVEN TECHNOLOGIES, AND WE MAY NOT BE ABLE TO DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS. You must evaluate us in light of the uncertainties and complexities affecting a biotechnology company. Our technologies are still in the early stages of development. Our research and operations thus far have allowed us to identify a number of product targets for use by our collaborators and our own internal development programs. We are not certain, however, of the commercial value of any of our current or future targets, and we may not be successful in expanding the scope of our research into new fields of pharmaceutical or pesticide research, or other agricultural applications such as enhancing plant traits to produce superior crop yields, disease resistance or increased nutritional content. Significant research and development, financial resources and personnel will be required to capitalize on our technology, develop commercially viable products and obtain regulatory approval for such products. WE HAVE NO EXPERIENCE IN DEVELOPING, MANUFACTURING AND MARKETING PRODUCTS AND MAY BE UNABLE TO COMMERCIALIZE PROPRIETARY PRODUCTS. We recently acquired a development compound, an analog to rebeccamycin (Rebeccamycin), directed against cancer under our recent collaborative arrangement with Bristol-Myers Squibb. Clinical development of Rebeccamycin to date has been conducted by the National Cancer Institute, or the NCI, and manufacturing of this product has been the responsibility of Bristol-Myers Squibb. Rebeccamycin has recently completed Phase I clinical studies and is in Phase I and early Phase II clinical trials being conducted by the NCI. We have an agreement with the NCI to use the results of the clinical studies they have conducted and are conducting in order to determine what additional studies, if any, will be conducted by the NCI or us. There can be no assurance that we will successfully agree upon further development plans, the respective rights and obligations of the parties to conduct additional clinical studies or the timing of such studies. In addition, there can be no assurance that the clinical studies conducted to date will support further clinical development or be accepted by the Food and Drug Administration, or FDA, in conjunction with any application for product approval submitted to the FDA for Rebeccamycin. Moreover, although Bristol-Myers Squibb has provided the NCI with sufficient quantities of Rebeccamycin to complete the existing Phase I and II clinical studies, development necessary for further clinical studies and product approval will require us to either develop internal manufacturing capabilities or retain a third party to manufacture the product. In addition, we have recently hired a new Senior Vice President responsible for clinical development of this product, as well as any new potential products that we may develop. As a result, we have limited experience in clinical development and no experience in manufacturing potential drug products. Accordingly, the development of Rebeccamycin is subject to significant risk and uncertainty, particularly with respect to our ability to successfully develop, manufacture and market Rebeccamycin as a product. With respect to products developed against our proprietary drug targets, we will rely on our collaborators to develop and commercialize products based on our research and development efforts. We have limited or no experience in using the targets that we identify to develop our own proprietary products. Our recent success in applying our drug development capabilities to our proprietary targets in cancer are subject to significant risk and uncertainty, particularly with respect to our ability to meet currently estimated timelines and goals for completing preclinical development efforts and filing an Investigational New Drug Application, or IND, for compounds developed. In order for us to commercialize products, we would need to significantly enhance our capabilities with respect to product development, and establish manufacturing and marketing capabilities, either directly or through outsourcing or licensing arrangements. We may not be able to enter into such outsourcing or licensing agreements on commercially reasonable terms, or at all. SINCE OUR TECHNOLOGIES HAVE MANY POTENTIAL APPLICATIONS AND WE HAVE LIMITED RESOURCES, OUR FOCUS ON A PARTICULAR AREA MAY RESULT IN OUR FAILURE TO CAPITALIZE ON MORE PROFITABLE AREAS. We have limited financial and managerial resources. This requires us to focus on product candidates in specific industries and forego opportunities with regard to other products and industries. For example, depending on our ability to allocate resources, a decision to concentrate on a particular agricultural program may mean that we will not have resources available to apply the same technology to a pharmaceutical project. While our technologies may permit us to work in both areas, resource commitments may require trade-offs resulting in delays in the development of certain programs or research areas, which may place us at a competitive disadvantage. Our decisions impacting resource allocation may not lead to the development of viable commercial products and may divert resources from more profitable market opportunities. Moreover, our recent acquisition of Rebeccamycin will require that resources and management time be directed to clinical development and manufacturing of this potential product. There can be no assurance that allocating resources and time to these efforts will allow us to remain competitive in existing programs and potential areas of future research. The resources dedicated to the development of Rebeccamycin may limit or hinder our ability to meet currently estimated timelines and goals for completing preclinical development efforts and filing an IND for our proprietary compounds. OUR COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE. The biotechnology industry is highly fragmented and is characterized by rapid technological change. In particular, the area of gene research is a rapidly evolving field. We face, and will continue to face, intense competition from large biotechnology and pharmaceutical companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing research activities similar to ours. Some of our competitors have entered into collaborations with leading companies within our target markets, including some of our existing collaborators. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Any products that are developed through our technologies will compete in highly competitive markets. Further, our competitors may be more effective at using their technologies to develop commercial products. Many of the organizations competing with us have greater capital resources, larger research and development staffs and facilities, more experience in obtaining regulatory approvals and more extensive product manufacturing and marketing capabilities. As a result, our competitors may be able to more easily develop technologies and products that would render our technologies and products, and those of our collaborators, obsolete and noncompetitive. IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE IN THE MARKET. Our success will depend in part on our ability to obtain patents and maintain adequate protection of the intellectual property related to our technologies and products. The patent positions of biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our intellectual property rights from unauthorized use by third parties only to the extent that our technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. We will continue to apply for patents covering our technologies and products as and when we deem appropriate. However, these applications may be challenged or may fail to result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patents. In addition, our patents may be challenged, invalidated or fail to provide us with any competitive advantages. We rely on trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information and trade secrets, but these measures may not provide adequate protection. While we seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants, we cannot assure you that our proprietary information will not be disclosed, or that we can meaningfully protect our trade secrets. In addition, our competitors may independently develop substantially equivalent proprietary information or may otherwise gain access to our trade secrets. LITIGATION OR THIRD PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS. Our commercial success depends in part on our ability to avoid infringing patents and proprietary rights of third parties, and not breaching any licenses that we have entered into with regard to our technologies. Other parties have filed, and in the future are likely to file, patent applications covering genes and gene fragments, techniques and methodologies relating to model systems, and products and technologies that we have developed or intend to develop. If patents covering technologies required by our operations are issued to others, we may have to rely on licenses from third parties, which may not be available on commercially reasonable terms, or at all. Third parties may accuse us of employing their proprietary technology without authorization. In addition, third parties may obtain patents that relate to our technologies and claim that use of such technologies infringes these patents. Regardless of their merit, such claims could require us to incur substantial costs, including the diversion of management and technical personnel, in defending ourselves against any such claims or enforcing our patents. In the event that a successful claim of infringement is brought against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, or at all. Defense of any lawsuit or failure to obtain any of these licenses could adversely affect our ability to develop and commercialize products. THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL COULD IMPAIR OUR ABILITY TO EXPAND OUR OPERATIONS. We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might adversely impact the achievement of our objectives and the continuation of existing collaborations. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. We do not currently have sufficient executive management and technical personnel to fully execute our business plan. There is currently a shortage of skilled executives and employees with technical expertise, and this shortage is likely to continue. As a result, competition for skilled personnel is intense and turnover rates are high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists from numerous companies, academic and other research institutions may limit our ability to do so. Our business operations will require additional expertise in specific industries and areas applicable to products identified and developed through our technologies. These activities will require the addition of new personnel, including management and technical personnel and the development of additional expertise by existing employees. The inability to attract such personnel or to develop this expertise could prevent us from expanding our operations in a timely manner, or at all. OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND CHANGE. We work with scientific advisors and collaborators at academic and other institutions that assist us in our research and development efforts. These scientists are not our employees and may have other commitments that would limit their availability to us. Although our scientific advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. In addition, although our scientific advisors and collaborators sign agreements not to disclose our confidential information, it is possible that valuable proprietary knowledge may become publicly known through them. OUR POTENTIAL THERAPEUTIC PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN REGULATORY PROCESS THAT MAY NOT RESULT IN THE NECESSARY REGULATORY APPROVALS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO COMMERCIALIZE PRODUCTS. The FDA must approve any drug or biologic product before it can be marketed in the U.S. Any products resulting from our research and development efforts must also be approved by the regulatory agencies of foreign governments before the product can be sold outside the U.S. Before a new drug application or biologics license application can be filed with the FDA, the product candidate must undergo extensive clinical trials, which can take many years and may require substantial expenditures. The regulatory process also requires preclinical testing. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, delays or rejections may be encountered based upon changes in regulatory policy for product approval during the period of product development and regulatory agency review. The clinical development and regulatory approval process is expensive and time consuming. Any failure to obtain regulatory approval could delay or prevent us from commercializing products. Our efforts to date have been primarily limited to identifying targets. Significant research and development efforts will be necessary before any products resulting from such targets can be commercialized. If regulatory approval is granted to any of our products, this approval may impose limitations on the uses for which a product may be marketed. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions and sanctions with respect to the product, manufacturer and relevant manufacturing facility, including withdrawal of the product from the market. SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED PRODUCTS, WHICH COULD REDUCE DEMAND FOR OUR PRODUCTS. Although our technology is not dependent on genetic engineering, genetic engineering plays a prominent role in our approach to product development. For example, research efforts focusing on plant traits may involve either selective breeding or modification of existing genes in the plant under study. Public attitudes may be influenced by claims that genetically engineered products are unsafe for consumption or pose a danger to the environment. Such claims may prevent our genetically engineered products from gaining public acceptance. The commercial success of our future products will depend, in part, on public acceptance of the use of genetically engineered products including drugs and plant and animal products. The subject of genetically modified organisms has received negative publicity, which has aroused public debate. For example, certain countries in Europe are considering regulations that may ban products or require express labeling of products that contain genetic modifications or are "genetically modified." Adverse publicity has resulted in greater regulation internationally and trade restrictions on imports of genetically altered products. If similar action is taken in the U.S., genetic research and genetically engineered products could be subject to greater domestic regulation, including stricter labeling requirements. To date, our business has not been hampered by these activities. However, such publicity in the future may prevent any products resulting from our research from gaining market acceptance and reduce demand for our products. LAWS AND REGULATIONS MAY REDUCE OUR ABILITY TO SELL GENETICALLY ENGINEERED PRODUCTS THAT OUR COLLABORATORS OR WE DEVELOP IN THE FUTURE. Our collaborators or we may develop genetically engineered agricultural and animal products. The field-testing, production and marketing of genetically engineered products are subject to regulation by federal, state, local and foreign governments. Regulatory agencies administering existing or future regulations or legislation may prevent us from producing and marketing genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to our product development programs and the commercialization of products. The FDA has released a policy statement stating that it will apply the same regulatory standards to foods developed through genetic engineering as it applies to foods developed through traditional plant breeding. Genetically engineered food products will be subject to premarket review, however, if these products raise safety questions or are deemed to be food additives. Our products may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise questions regarding safety or our products are deemed to be food additives. The FDA has also announced that it will not require genetically engineered agricultural products to be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its policies, and local or state authorities may enact labeling requirements, either of which could have a material adverse effect on our ability or the ability of our collaborators to develop and market products resulting from our efforts. WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY. Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts. In addition, our collaborators may use hazardous materials in connection with our collaborative efforts. To our knowledge, their work is performed in accordance with applicable biosafety regulations. In the event of a lawsuit or investigation, however, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials use by these parties. Further, we may be required to indemnify our collaborators against all damages and other liabilities arising out of our development activities or products produced in connection with these collaborations. WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES. Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. A number of factors, many of which we cannot control, could subject our operating results and stock price to volatility, including: - recognition of license, milestone or other fees; - payments of licensing fees to third parties; - acceptance of our technologies and platforms; - the success rate of our discovery efforts leading to milestones and royalties; - the introduction of new technologies or products by our competitors; - the timing and willingness of collaborators to commercialize our products; - our ability to enter into new collaborative relationships; - the termination or non-renewal of existing collaborations; - general and industry-specific economic conditions that may affect our collaborators' research and development expenditures; and - exposure to fluctuations in foreign currency. A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed in the short term. In addition, we expect operating expenses to increase significantly during the next year. Accordingly, if our revenues decline or do not grow as anticipated due to the expiration of existing contracts or our failure to obtain new contracts, our inability to meet milestones or other factors, we may not be able to correspondingly reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. As a result, in some future quarters, our operating results may not meet the expectations of stock market analysts and investors, which could result in a decline in the price of our stock. OUR STOCK PRICE MAY BE EXTREMELY VOLATILE. We believe the trading price of our common stock will remain highly volatile and may fluctuate substantially due to factors such as the following: - the announcement of new products or services by us or our competitors; - quarterly variations in our or our competitors' results of operations; - failure to achieve operating results projected by securities analysts; - changes in earnings estimates or recommendations by securities analysts; - developments in the biotechnology industry; - acquisitions of other companies or technologies; and - general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. These factors and fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert management's attention and resources, which could have a material and adverse effect on our business. WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS. We have made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including, but not limited to: - difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies; - diversion of management's attention from other operational matters; - the potential loss of key employees of acquired companies; - the potential loss of key collaborators of the acquired companies; - lack of synergy, or the inability to realize expected synergies, resulting from the acquisition; - exposure to fluctuations in foreign currency; - differences in foreign laws, business practices, statutes, regulations and tax provisions; and - acquired intangible assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired company. Mergers and acquisitions are inherently risky, and the inability to effectively manage these risks could materially and adversely affect our business, financial condition and results of operations. IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE SUBSTANTIAL LIABILITIES THAT EXCEED OUR RESOURCES. We may be held liable if any product our collaborators or we develop causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Although we intend to obtain general liability and product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or to otherwise protect ourselves against potential product liability claims could prevent or inhibit the commercialization of products developed by our collaborators or us. OUR HEADQUARTERS' FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS. Given the location of our headquarters in South San Francisco, California, those facilities are vulnerable to damage from earthquakes. In addition, all of our facilities are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the unique nature of our research activities could cause significant delays in our programs and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. If our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of outstanding options and warrants) in the public market, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deemed appropriate. In October 2000, a significant number of shares of our common stock held by existing stockholders became freely tradable, subject in some instances to the volume and other limitations of Rule 144. In addition, in connection with our recent acquisitions and corporate collaborations, we issued and registered for sale a significant number of shares of common stock. Sales of these shares and other shares of common stock held by existing stockholders could cause the market price of our common stock to decline. SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS. Due to their combined stock holdings, our officers, directors and principal stockholders (stockholders holding more than 5% of our common stock) acting together, may be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of our stockholders. In addition, the interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q. (b) Reports on Form 8-K On July 18, 2001, the Company filed an Item 5 Current Report on Form 8-K announcing the signing of a collaboration agreement with Bristol-Myers Squibb. On July 26, 2001, the Company filed an Item 5 Current Report on Form 8-K announcing the reacquisition, effective February 2002, of future rights to research programs in metabolism and alzheimer's disease previously licensed exclusively to Pharmacia Corporation. On August 9, 2001, the Company filed a Reg FD, Item 9 Current Report on Form 8-K, in connection with the announcement of the Company's second quarter financial results.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2001 EXELIXIS, INC. /s/ Glen Y. Sato ------------------- Glen Y. Sato Chief Financial Officer, Vice President of Legal Affairs and Secretary (Principal Financial and Accounting Officer)
INDEX TO EXHIBITS Exhibit Number Description of Document - ------ ------------------------- 3.1 Amended and Restated Certificate of Incorporation (1) 3.2 Amended and Restated Bylaws (1) 4.1 Specimen Common Stock Certificate (1) 10.29 Form of Stock Purchase Agreement, dated as of July 17, 2001, by and between Exelixis, Inc. and Bristol-Myers Squibb Company (2) 10.30* Cancer Collaboration Agreement, dated July 17, 2001, by and between Exelixis, Inc. and Bristol-Myers Squibb Company 10.31* License Agreement, dated July 17, 2001, by and between Exelixis, Inc. and Bristol-Myers Squibb Company _____________________ (1) Filed with Exelixis' Registration Statement on Form S-1, as amended (No. 333-96335), declared effective by the Securities and Exchange Commission on April 10, 2000, and incorporated herein by reference. (2) Filed with Exelixis' Registration Statement on Form S-3, as filed on August 27, 2001(No. 333-68436) and incorporated by reference. * Confidential treatment requested for certain portions of this exhibit.