When Exelixis Inc. was younger, it described itself as a model systems genetics and comparative genomics company. But a deal rich with up-front and potential funding disclosed after the markets closed Monday showed it has successfully made the move into drugs.
Exelixis entered a collaboration with GlaxoSmithKline plc to develop therapeutics in the vascular biology, inflammatory disease and oncology areas using Exelixis' drug candidates. The deal carries guaranteed funding of $134 million, a loan facility of $85 million and milestones and royalties that could push the deal to dizzying heights.
"This is the kind of deal that we have been building up to at Exelixis," said George Scangos, president and CEO of Exelixis. "The question is, how do you get from a start-up to a drug company? It's very hard to do. We made the bet, prior to our IPO, that [the answer] is to become an integrated drug discovery company. And you have to do that in phases."
And it has. From its initial public offering of $118 million in April 2000 through its acquisitions of Artemis Pharmaceuticals GmbH, of Cologne, Germany, and Agritope Inc., of Portland, Ore., the company has been growing and maturing to the point where it could attract the type of deal GSK offered, a deal that is suggestive of earlier, better times in the biotechnology sector. (See BioWorld Today, April 12, 2000; Sept. 11, 2000; and April 24, 2001.)
"This deal is comparable to Millennium-Aventis or Novartis-Vertex in size," Scangos told BioWorld Today. "You'd have to go back to the boom times to find a deal comparable in size."
Novartis Pharma AG, of Basel, Switzerland, signed a potential $800 million deal with Vertex Pharmaceuticals Inc., of Cambridge, Mass., centered on kinase inhibitors in May 2000. Millennium Pharmaceuticals Inc., of Cambridge, Mass., and Aventis Pharma, of Frankfurt, Germany, signed in June 2000 a potential $450 million deal focused on inflammatory drugs and enhancement of their drug discovery technologies. (See BioWorld Today, May 12, 2000, and June 26, 2000.)
Exelixis' stock (NASDAQ:EXEL) jumped $1.48 Tuesday, or 41.4 percent, to close at $5.06.
The deal between GSK, of London, and Exelixis, of South San Francisco, could lean more toward the $800 million side, given the right set of circumstances. GSK will pay a $30 million up-front fee and bought 2 million Exelixis shares at $7, a healthy jump from the stock's Monday closing of $3.58. Glaxo will provide a minimum of $90 million in development funding for six years and will provide up to $85 million through a loan facility. Milestones for the deal could range from $220 million to $350 million. But things get really interesting when considering that two years after the deal's initiation, the companies can elect to expand the collaboration, which could double Exelixis' milestone payments and increase both the development funding and the loan facility. In a perfect biotechnology world, that means the deal could have a total dollar sign of more than $919 million, not including the option for another equity stake by GSK or the increase in development funding and a larger loan facility.
That large sum doesn't include what Scangos called "very nice royalty rates."
Program Shifts Gears At Phase IIa
All the dangling money is some ways off, however. The deal calls for Exelixis to deliver an undisclosed number of small-molecule compounds that have met certain criteria in Phase IIa testing. Once developed to that stage, GSK gets the rights to further develop them and receives exclusive, worldwide commercialization and manufacturing rights. Exelixis gets co-promotion rights in North America.
"For us, this is a landmark deal because it calls for us to deliver Phase IIa compounds," Scangos said. "Our responsibility is to do the biology, find the targets, do the chemistry, pharmacology, structural biology [and] at Phase IIa, GSK will take them, or not. They have the option. And they would do late-stage clinical trials."
Although the Street liked the deal, some observers wondered if Exelixis is giving up too much of its pipeline. In a research note, SG Cowen analysts Eric Schmidt and Ravi Mehrotra addressed that concern.
"Admittedly, many of Exelixis' ongoing clinical programs could be covered under the terms of the deal, including lead internal [investigational new drug application] candidate EXEL-784," they said in the note, but added the deal was "very lucrative for Exelixis shareholders" because of double-digit royalties and substantial milestones. They also said the company will "keep rights to biotherapeutics discovered under the collaboration."
Scangos tossed aside the idea, too.
"You can't win either way," he said. "If you don't sign a deal, you get knocked for that. If you do, you get knocked for [giving away your pipeline]. I don't think we have done that at all. We have received a lot of money from GSK and you don't get that for nothing. You have to give something up for that."
Discovery Pipeline Attracting Attention
The agreement is not the first significant deal for Exelixis. It has agreements with Protein Design Labs Inc., of Fremont, Calif.; Bayer AG, of Leverkusen, Germany; Bristol-Myers Squibb Co., of New York; and Dow AgroSciences LLC, of Indianapolis. Guaranteed funding from those partnerships equals $350 million over the next eight years, according to SG Cowen's note.
Exelixis has "built a drug discovery capability that has now reached critical mass," Scangos said, and that critical mass means Exelixis can "now put out a stream of preclinical compounds - really crank out a pipeline of these."
In today's drug environment that has big pharma scooping up biotechnology compounds as pipeline filler, Scangos knew "pharma would want to be a part of a company that can do" what Exelixis has been doing.
"We have more interesting targets than we can possibly develop on our own," he said. "And we've always said the best time to find a partner is at Phase IIa, that we would seek partners for the first few compounds when they reached that stage.
"Well, we have a partner who stepped up now instead of waiting, and provided the funding."