Exelixis, Inc. (EXEL) Earnings Call Transcript & Summary

[indiscernible] And Jeremy Levin. When I sent out the invite for this webinar, I got feedback from some of you, and I quote, "Oh my gosh, what a trifecta, unbelievable lineup. How did you do it? I think we got lucky, extremely lucky. Thank you very much, gentlemen, for accepting the invite. And instead of spending 60 minutes reading through your bios I thought that I would just mention a couple of interesting factors since most in the audience will know you. You've been around some and experience some of the ups and downs of this industry. Stelios started his Wall Street career as an analyst. 40 years and 1 month ago. Is that correct, Stelios. He founded and chaired the Board of Exelixis since 1998. Dennis entered a little bit earlier in 1982 and subsequently established Aisling Capital in 1999, a funded that deployed over $15 billion in about 200 biotech investments. Following a decade practicing medicine Jeremy joined the biopharma industry in 1987 leading Teva and having had executive positions at Bristol, Novartis and being a co-founder and current Chairman and CEO of Ovid Therapeutics. So as many of you know, Stelios is often mentioned as the Godfather of biotech, which I think it speaks for itself. Dennis is a proud second-generation Irish American. He named his firm Aisling as per Irish for vision or dream. Jeremy was born and based on a farm in South Africa called the Hoek, did I pronounce it correctly, Jeremy. And today, he has a farm in Connecticut called the Hoek where he raises Black Angus. So he's in pharma, and he is also a farmer. He's also the author and executor of the String of Pearls Strategy at Bristol, and we'll probably mention this and we talk about it a little bit later. So turning our attention to the image that I share with you. The title is darkest before Dawn. I lifted this picture from an article in Nature Biotechnology some 10 months ago. And the question is how far from dawn are we? Figuratively speaking, is it minutes or maybe hours. So on the next slide, I compiled a few stock charts in the middle on the top is the XVI index. This is performance over the last 10 years. Inflation adjusted, it's probably a negative return. The BTK, just below it, which is more focused on larger cap biotech fared a little bit better, but nowhere close to where the NASDAQ was over the last 10 years. Now if we take the top 10 companies gotten highest holdings in the XBI, the better performers are depicted on the left-hand side and maybe not a coincidence, but the top performer, guess what, is Exelixis with an annualized return of 23%. If you look at on the right-hand side, the picture is less appetizing there with Gilead being the most significant underperformer in the top 10. I mean, the index has 120 other names besides this plan. And most of the companies below the $100 million market cap range probably trade below cash at this stage. So let's look at some statistics from the last 10 years. We are looking at the VC fundraising over this decade which peaked in -- back in 2018 and has declined ever since. And the trend that is mirrored by the IPO market, which peaked during the pandemic, but it's practically a shot at this stage. And perhaps the only ray of sunshine here -- sorry, I think I missed yes, before we get to the ray of sunshine. In this slide, we compiled the last 6 quarters worth of secondary offerings, which obviously it appears that they are declining. So -- the only thing that is currently appears to be positive is the M&A activity over the last 10 years, which appears to be steady or stable. And we have seen at least 7 relatively sizable acquisitions by pharma, totaling about $28 billion, perhaps with the hope that some of those proceeds will be reinvested in biotech. So going back to this slide and maybe we can start on the Stelios maybe a provocative question is biotech investable.

No more, no less than any other time. Of course, it is. You just have to be careful, select the right stories, defining your investment horizon. But more than anything else, if you got to understand the world around because we have a tendency to think of biotech markets coming and going strictly because of our own doing within biotech. Do we have good news is FDA been good to us? Are we getting approvals, sales and earnings going up. All these things do matter. There's no doubt. What matters just as much, if not more, in the alternative investment opportunities. Can I put my money to work in the technology sector, do I do cyclicals? How are -- how is the fixed income market? All these things do matter and we don't seem to be looking at them a whole lot. So I'd say, all in all, frankly, if I could share a slide I will show you now the last 10 years of IPOs, the last 50 years of IPOs. And all of a sudden, in 2024, which looks like a bad year is -- it is a bad year in the last 10 years. Over the last 50 years, it's a very good year. So it's a question of what time period you choose.

Yes. Do you want -- would you like to share your slide.

Yes, let me just see if -- yes. Can you all see it?

Yes. That's a different perspective. Yes.

So some of you may know this, I painstakingly been collecting the prospectus of all biotech IPOs of all time. I actually read them. I annotate them. I introduced data into spreadsheets. And if you look here for the last 10 years, 2024 doesn't look great, but it's only second after the year 2000, which was another exaggeration. Now the industry has been growing. I understand you can normalize things. But bottom line is, it's not so bad.

Okay. So historically, when you had these peaks and troughs how did the funding scarcity impacted the industry? How did we manage to survive these dry periods, so to speak, which is more relative obviously.

Is that addressed to me or...

Perhaps we can start...

Look, I think what we do is the most important point for investors to understand is whether consciously or subconsciously the investment horizon expands and shrinks based on your expectation of returns. If you're feeling good, optimistic, you'll invest in a preclinical asset. If not, you're going to look at late stage assets only which is where we are right now. It's very hard to get good funding for a preclinical idea no matter how powerful it is. And I think that's what affects the investment horizon. Basically, I know you'll be asking that question later, just to run ahead for a moment. The market most analogous to what's going on now was the exuberance of 2000 and what follow after that. And what followed after that was what they call the nuclear winter and all sorts of things, and we thought we were all going to be dead. And here we are still 25 years later, alive and well and with many new products in the market. So it's always the investment process reacts to the recent market events and one's perception was likely to happen.

And have you seen any adjustments to business models during these periods when one had to reexamine what we are doing or what we are investing in, apart from this sentiment from going earlier stage feeling more lucky or focused on late-stage or commercial product companies.

I think there are a lot of fancy terms of business models. In my mind, there's really only 2 ways to think about it. One is to invest early in technological capabilities that lead to products and the other to invest late-stage products that are in the clinic and with a clear sign of potential market introduction. When the investment horizon shrinks, you go to the latter. When you feel exuberant just look at the IPOs of 2020, 2021, every crazy idea that made you the product 15 years from now was being funded.

Interesting. Dennis, if we could go and continue with you, -- what do you think would be the signs that perhaps the IPO market or this activity will change? What should happen for that based on historical parallels to previous bear markets that tend to end between 2 to 3 years.

My hunch is that we're going to need some type of reset. I go back a little bit to Stelios and go back 40 years. I see this as kind of the third phase of our evolution. The first phase, I put it kind of the '80s and '90s and ended up with the dot-com crash. But then we got the human gene, then we entered the second phase, which is powered by the human genome project, up to COVID and like -- and now we're in this third phase, which is lasting longer than the other 2 phases. The other ones were up, even though there were hiccups in the middle. And I think that Stelios talked about being an investable industry, of course, if you look at our supply chain, big pharma had top 10 pharmas do about 80% of sales, 3 PBMs, 3 big insurers, and we have 5,000 companies. So I'm trying to think about how you can have a good sustainable -- a good investable industry with that many companies. So like do we need 4,000 gene therapy trials going on now? Maybe, maybe out of chaos is where the answer comes. But even a big proponent of gene and cell therapy, somebody like Scott Gottlieb, he says maybe 25 a year, and then you get to 100 over 4 years with 4,000 of them being going on. So again, maybe out of chaos comes the best ideas and the like. But right now, I don't see a whole lot of green -- although from a personal level, we did -- I would go back to 2 things Stelios said, we had a very early stage asset in a company called IGI, Ichnos Glenmark Innovation that I sit on the Board of. And last week, we had some have good data in multiple myeloma. It's kind of a trispecific. And had bidders over the place for that thing. And finally, we went with AbbVie, and they paid us $700 million upfront, and there will be a $2 billion deal. And then we sold Verona last week too to Merck, and that was about $10 billion. That was a healthy transaction also. So kind of -- they're looking around -- what worries me is the level of interest we had on both of those assets and the fact that M&A is not up, Liu, I could draw the conclusion and 1 could draw the conclusion that big pharmas picked over everything and not seeing what they like. But at least in my experience over the 2 that we announced last week, there was plenty of people around the table that wanted to invest. And then the timeline question well, I'll stop there.

Yes, yes, yes. So moving on to some perceived headwinds or real headwinds and Jeremy, would you look at this list and from your perspective, which 1 of those do you think is holding people back and/or the real concerns, let it be potential regulatory disruptions tariffs are the most favorite nation pricing initiative the fact that the IPO window is short and the new store is almost predicted would the investor sentiment, which is thought to be not nearly as despondent as it has been according to a recent survey.

A couple of things, if I can and taking that list and then coming back to it in a minute. What Stelios and Dennis described is an environment which over the last 10, 20 years, has experienced black swan events. They come and they go. And you had a reasonable opportunity to understand that it would come back. You would take action. Right now, we're in a very different situation. We're not in a black swan event. We're in a complete reset of the economy, of the social structure and of the governance of the country. So underlying everything that we say today, there's a very different thinking that goes on. What that occasions, I think, is a couple of important considerations. There's plenty of opportunity. We are -- there is a reset necessary. There was this ebullient moment where lots and lots of huge amounts of my money were poured into companies, which really didn't have much opportunity to be successful because the products were very speculative. However, that being said, many of those companies are sitting out there, I think something like 200, which you've got no product and a lot of cash. Something will happen with them. That's an opportunity for them to rethink their governance, do they want to give that cash back or do they want to sit down and really engage in collectively thoughtfully putting themselves together with other companies. That will be a very good sign if we start to see that.

More important.ly Just that particular point. The last 3 now, I think it's 4 years. There's been more M&A than IPOs. So we might be beginning to see the start of a reset.

Exactly Dennis. Now you asked about what's holding people back. I think the uncertainty that has swept through the FDA has had a very negative impact. That uncertainty will clarify itself over time. But the regulatory disruptions are of great concern. However, on the other side to that is understanding that this is well perceived in Europe and America and China. And the Chinese and the Europeans are saying, come to us. So you're seeing investment pouring into China. You're seeing investment revving up in Europe. And I would say to you the regulatory disruptions by themselves have occasioned already a change. So what signs should we see in that particular area? Well, I think some very clear statements about from the regulatory environment, from the leaders of the FDA that they are going to give some degree of certitude about how processes are going to be run. With regard to the tariffs, look, some people look at them as a little bit like political bullfighting. Look at this, which is the red flag, that statement of the tariff, but you really ought to be asking the question, what's going on in the Fed, what's going on in the bond market, what's going on elsewhere. I think that the tariffs sometimes have significant impacts if they are going to be imposed and will have a rigorous and dramatic impact on the supply chain because it's impossible to rebuild the biotech and pharmaceutical industry within the United States, and we are utterly dependent for the foreseeable future on China as a source. The important point to remember here is that China has spent 25 years with a specific strategy to build this? They're basically cheering right now. They know they're going to be in control. And unless we in this country do something on a policy basis, a clear signal of a bio build strategy coming out of Washington, D.C. In other words, saying biotech is a national strategy. We believe that it is nationally important. We're going to look to address capital formation, regulatory issues. And indeed, we want to invest in the states that want to build new plant. That will be a signal and we'll just open the flood gate. So I think tariffs are a much bigger picture.

Just 1 question here, though, from the bottom line perspective, since we are dealing with APIs that are made in China and we are dealing with 90-plus percent profit margins on small molecules. Does it really have a huge impact if the API itself would have 30%, 40% tariff on it as opposed to the finished product itself.

Very good question. The answer is probably not in and of itself. Much more serious issue is if you do not have political alignment between China and the United States, imagine the moment when you don't have the API to build an antibiotic. Okay? We need to consider this. We, as a -- what's really interesting under all of this is that the biotech industry has grown up into itself to the point of Stelios and Dennis, we now represent a core pillar of the United States health strategy. And as a consequence of that, this high margins, low margins and API also needs to be considered in the political context of having a dialogue between 2 countries, which is 1 which has to be constructive because if it's not, what you lead to is what I described to you suddenly not having the API to get an antibiotic. And that's troublesome.

Yes. Coming back to you Stelios, we lived through this MFN or favorite nation pricing initiative before. Do you have -- do you think that it will ever be implemented something like that?

So that's the core of this discussion today, I think, having to do with all these margins and everything else. And I'll go -- MFN, we'll talk about this in a moment, I'll go point Jeremy made before, which is the essential central issue to deal with. We're in the middle of a major reset, not of the biotech market of our society, our political system and our economy. And what is going on is because there have been so many ever-changing on a case of contradictory or realistic pronouncements from the top. We get to the point almost now of the [indiscernible] too much. When you hear that okay, we'll put big tariffs, 200% on finished products on pharma companies unless they start producing in the U.S. in a year. Well, that's just not going to happen. Nobody can build a plant from nothing and be up and running in a year. It's a totally other question. So somebody should know that in government and someone should control these pronouncements. So what I'm saying is because these things appear to be somewhat contradictory or realistic, people are not paying attention. The issue is no matter which way, no matter how, no matter by what mechanism drug prices are going down. slowly and steadily year in and year out, the profitability of the pharma sector 10 years from now would be meaningfully less than what it is now. And we're not going to be so clever to game the system to call a discount or rebate itself. It's not a discount, it's a rebate. It's a different thing. So I think that's what people are missing out on, which is the secular trend towards decreasing prices and therefore, decreasing margins. And once your margins shrink, you start reorganizing your companies. There'll be more outsourcing. Companies will fall out of the way. It will be acquired. There will be some arrangement. As far as the biotechs are concerned, whether they're 1,000 or 5,000. All they got to do is pick the 2 or 3. They're going to be good enough or lucky enough to develop something pharma would want to buy because pharma even more so going forward, than ever would want to buy biotech products or technologies. So that's how we have to look at it.

The question is as a stock picker. Most people don't have the access to asset or to people and assets that we might have in order to do due diligence. So -- the question I have is, how does anybody kind of -- we have PhDs, MDs, KOLs, blah, blah, blah, talk to hundreds of payers you talk to before you make an investment. And the question that I wrestle with is that as we move away from the venture capital specialized model of biotech and move more toward a broader range of people investing in the sector. How do they get educated about what to buy. I mean we're having -- we're in the middle -- going to be in the middle of this great wealth transfer. Everything is going to from baby boomers on down to the millennials, and they want impact investing. Biotech is right up their alley. But how do they educate themselves in order to be a stock picker. I mean I think one thing you can -- if you look at it, you talked about being a stock picker. I was thinking about '20 and '21 really the home run here was people that could time to think pretty well. So if you could time the market that was really the best way to play biotech. It's a fabulous way to play biotech without worrying about failed trials and stuff like that. So -- the question what, yes, so...

I mean but that is, look, I don't expect the average individual in a house smart to become well versed in biotech technology products, markets investing to go do it directly. If they have a lot of money, you know they're all going to do. They're going to give it to you or somebody else in the hedge fund community or go buy a mutual fund. I mean they're not going to invest directly. They should not be investing directly. It's way too complicated. Look, 40 years ago, I knew every company and every product. Now I got to keep on asking people for their opinion because I can't keep up it so much.

And you're starting to see Stelios on the analyst side, they don't even put price targets anymore because there are so many companies out there that they can't -- they themselves have trouble keeping track of what's out there.

I tell you what, I love the best analysts who have stock price is $30. Their price target is $50, and they got to hold on them. So it's like...

Dennis, going back to your point. There's something, which has also shifted dramatically over these last 30 years. It's not the amount of money that's invested. It's how the venture world has chosen to grow itself as an industry, how much funds have flowed into it and then their ability to deploy capital in high risk versus lower risk in their minds entity. So what you've seen which is truly interesting and I think has some significant impact. You're seeing in China, for example, investments of $1 million, $2 million, $3 million, $5 million by Chinese investors. Actually, you see this very similarly in Silicon Valley, where they invest in similar high-tech entities, small amounts of capital. That has changed fundamentally in the United States. In the United States, it used to be that there were some very highly qualified venture funds who would have a pretty clear model, $10 million, $20 million with a $50 million and then take it out. Now we're in a completely different environment. You have $200 million, $300 million, $400 million A rounds. This is unbelievably different from before and has direct consequences on our ability to generate innovation because with the power of America's innovation was the smarts that Dennis that Stelios and others had early on in picking really interesting high-risk, incredibly interesting innovative companies, knowing that the chances of most of them wouldn't win, but they were going to have a few winners. That's not the case today. So I -- for me, I think there's another thing which would signal a really good return to what I hope would be a vibrant biotech industry, would be getting some of the venture funds to say, okay, we're going to return to what we were which is we're going to start picking on some really smart, small entities. And that may not be possible because as Dennis points out, his fund has grown immensely. His expertise is deep and that's the very expertise that is required for these early companies. I'm not sure that Dennis can afford to do what I've described, getting -- growing up a whole new generation of venture funds may help that.

Yes. And I think the underlying, Jeremy, thing that happens is the limited partner base is changing a lot also. And Stelios has not talked about this a lot in the past, where the timeframe we have is not the same timeframe as the company's need -- and there's more and more pressure now to even be shorter in the timelines because all the states are going broke and all the university endowments are dipping into their endowments more and more to fund operating expenses. So that unfortunately, the timeline for the limited partners is shortening up because of their cash needs for their retirees on the one hand or their universities on the other. And so unlike 20 years ago, Stelios said you knew everybody in the room and you knew who all the VCs are, I think we're going to go through a reset there. Also, I think we're going to go through a reset in the venture capital community. I have like a wacky idea about the whole -- the reset of the industry, which I was thinking about this the other day. What if we could get to -- I don't know what get together means, but if people agreed that we wouldn't start any new companies until we got -- until we had an exit of one of our companies and just start to see exit starting -- right now, we start about 300 or 400 companies a year and exits, we have about 50. So we're just continuing to add and add and add to the number of companies. So we're a reset in the venture community. Where it shakes out, I don't know. And the LPs are -- a lot of them are starting their own funds like -- welcome Trust or Ontario Teachers or people like that have their own venture fund. We used to be the intermediary for those guys. And now they're doing it themselves. And I'm sorry, I'll stop. And number, they also are trying to shrink the number of venture funds that they want to invest in. So they want to shrink them, but make them bigger. So you also see in the last year or so, some really big funds be raised, and that's because players like CalPERS, what they'll tell you is we want to -- we have to invest at least $100 million, and we don't want to be more than 10% of your fund. So right off the bat, unless you're a $1 billion fund plus, they're out of the game. So I think we're seeing a -- just like society and just like our industry, I think you're seeing a reset in the venture world also.

I think, if I can jump in, the points both Jeremy and Dennis have made point to 2 very important considerations that most people may not have fully realized. One is the issue of scale. Dennis has described it. Scale redefines how we do business. And this is no longer the idea, as Jeremy was describing that some decades ago, an inventive entrepreneurial scientist will come up with an idea, join up with a friend, start a little company, raise some family and friends money, then go to the venture community, do a $5 million Series A and then do a $20 million Series B and IPO or whatever. All that is gone because largely, the leaders in the venture community are no longer the investment business, they're in the manufacturing business. They manufacture companies. They often will have an idea so like under wraps for a year or 2 or 3 doing work quietly. And once they're convinced they've got something good, they'll throw in $50 million of their own and maybe 1 or 2 others will join in. And before you know it, off they go, and they've done this multi-hundred million dollar financings. So they're not so much looking to invest in an entrepreneurial idea, but their own ideas. So you can't -- as an intelligent, if we believe that all the great ideas of the world can be contained within a cadre of connected academic scientists in Boston and 10 venture funds and the rest of the world is stupid, then we're fine.

Interesting. Dennis, coming back to you, and let's spend maybe the next 20 minutes looking into the future. I noticed that you started to explore maybe the next frontier, mental health. What do you see there? What sort of treatment modality might be standing out there where there really hasn't been an innovation like 60 years.