Exelixis is making some cutbacks now but waiting on further cuts as it tries to sort out new licensing or co-development partnerships - all part of the biotech's plan to leverage its pipeline through further deals to get past the end of its partnership with GlaxoSmithKline.

Co-development deals could require retaining scientists, thus the potential delayed cuts, CEO George Scangos explained during the firm's third-quarter earnings call on Oct. 27.

Scangos and other company execs outlined a plan for refocusing the company after the conclusion of the long-term partnership with GSK, which rolled to an official stop that day. The first part of Exelixis' three-part plan includes partnering as many compounds as possible as soon as possible to bring in upfront cash and cut clinical costs, Scangos said.

Confident that Exelixis will be able to sign some attractive partnerships and bring in substantial cash, he said the firm "hope[s] to complete one or more of these transactions by year end and others in early 2009."

Only days before the call, Exelixis announced GSK had declined its option to license a second compound from the sunsetting partnership, leaving Scangos and investors speculating that the U.K. firm must have left the Phase III candidate, XL184, on the table because it was too similar to one it already had picked up, XL880 (¹ Also see "GSK/Exelixis: The End of an Era" - Pink Sheet, 24 October, 2008.).

Exelixis' lead candidate XL184, a cancer drug that targets MET and VEGF-2, is the centerpiece of current partnering discussions, Scangos said. Other oncologics on the block are P13K inhibitors XL147 and XL765, in late Phase I testing; RAF inhibitor XL281, also in late Phase I; and the heat shock protein 90 inhibitor, XL888, in late preclinical testing.

For XL184, Exelixis is looking for a co-development and commercialization agreement. For other compounds in the company's lengthy pipeline, the firm is considering more straightforward relationships that include cash, development, regulatory and commercialization milestones, and royalties, Scangos said.

The second prong of the plan focuses on internal development. For itself, the company is reserving a portfolio of candidates with possible niche indications, the more low-risk, low-cost route to market. Possibilities include XL228, which targets BCR-ABL, and XL019, a JAK2 inhibitor, both in Phase I. Scangos promised more detail on those programs during the firm's R&D day Dec. 12.

Finally, the firm will make cuts to lower operating costs. While some positions can be eliminated right away, other retrenching depends on partnering arrangements. Where a partner takes over development, costs go to zero, and "we can take appropriate steps to reduce head count," Scangos said. "Our internal capacity and spend [would be] aligned with a smaller number of internal development opportunities."

On the other hand, a partner could opt to pay Exelixis to continue development, and jobs would be saved. The firm does not want "to eliminate a lot of heads and be unable to carry the development of those compounds further," which is the company's preference, rather than "just offloading [them] to a pharma company."

Street reflects Scangos' confidence in his company's pipeline

For the most part, analysts took an encouraging view of the prospects for Exelixis' post-GSK partnering strategy, although there was some sentiment that the management team was a bit too confident.

"While we acknowledge management may seem overly optimistic in its ability to partner its compounds in the near term, we believe [Exelixis] holds one of the deepest and broadest pipelines in the industry," Susquehanna analyst Derek Jellinek said in an Oct. 28 note. "With a growing dearth of clinical compounds in Big Pharma pipelines, we believe large pharmaceutical companies will begin to sign a great number of collaborations, with [Exelixis] likely on the short list of potential partners."

Cowen & Co. analyst Eric Schmidt agreed that Exelixis' "broad, but early stage cancer pipeline contains several differential candidates that could produce significant shareholder value."

J.P. Morgan analysts were more cautious, however. "We suspect most investors will take a wait-and-see approach and judge the success of the company's business development activities as they materialize, despite the somewhat bold expectations put forth by management."

It all comes back to the cash situation

If the plan works, Exelixis, in South San Francisco, Calif., can maintain its guidance of $200 million in free cash at the end of 2008, while avoiding further involvement with the capital markets for the next year or two, all the while bringing along its internal compounds.

But making it work depends on bringing in "substantial cash" (about $80 million) through new business development and milestones in existing discovery platform collaborations, CFO Frank Karbe acknowledged. However, he said, the timing and extent of cost-cutting and the potential for milestones ($20 million could come in from Bristol-Myers Squibb) will make a difference.

Exelixis ended the third quarter with $285 million in cash and committed funding: $135 million in cash and another $150 million available in a flexible credit facility with Deerfield Management. The 18-month deal inked in June allows Exelixis to draw down in $15 million increments (² Also see "Exelixis, GSK Deal Comes To A ‘Natural, Positive End’" - Pink Sheet, 27 June, 2008.). The funds remain untapped.

Had GSK optioned XL184, payment would have come in the form of an offset against about $101 million Exelixis owed the U.K. firm at the end of the quarter ($85 million at 4 percent interest). One-third of the balance is due in October 2009, but it's possible the entire balance eventually could be wiped out by milestones on XL880, the compound GSK optioned in December 2007 (³ Also see "GSK Selects Exelixis’ Phase II MET Inhibitor XL880" - Pink Sheet, 14 December, 2007.).

-Shirley Haley (s.haley@elsevier.com)

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