EXELIXIS, INC. (EXEL)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are 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 company’s or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

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Overview

We are an oncology company innovating next-generation medicines and combination regimens at the forefront of cancer care. We have produced four marketed pharmaceutical products, two of which are formulations of our flagship molecule, cabozantinib, and we are steadily advancing and evolving our product pipeline portfolio, including our lead asset zanzalintinib, currently the focus of an extensive late-stage clinical development program. With a rational and disciplined approach to investment, we are leveraging our internal experience and expertise, and the strength of strategic partnerships, to identify and pursue opportunities across the landscape of scientific modalities, including small molecules, biotherapeutics and ADCs.

Sales related to cabozantinib account for the majority of our revenues. Cabozantinib is an inhibitor of multiple tyrosine kinases, including MET, AXL, VEGF receptors and RET and has been approved by the FDA and in 67 other countries: as CABOMETYX® (cabozantinib) tablets for advanced RCC (both alone and in combination with BMS’ nivolumab (OPDIVO®)), for previously treated HCC and for previously treated, RAI-refractory DTC; and as COMETRIQ® (cabozantinib) capsules for progressive, metastatic medullary thyroid cancer. For physicians treating these types of cancer, cabozantinib has become or is becoming an important medicine in their selection of effective therapies.

The other two products resulting from our discovery efforts are: COTELLIC® (cobimetinib), an inhibitor of MEK, approved as part of multiple combination regimens to treat specific forms of advanced melanoma and marketed under a collaboration with Genentech (a member of the Roche Group); and MINNEBRO® (esaxerenone), an oral, non-steroidal, selective blocker of the mineralocorticoid receptor, approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo Company, Limited.

We plan to continue leveraging our operating cash flows to advance a broad array of diverse biotherapeutics and small molecule programs for the treatment of cancer, as well as to support ongoing company-sponsored and externally sponsored trials evaluating cabozantinib. Furthest along in our pipeline is zanzalintinib, a novel, potent, third-generation oral TKI that targets VEGF receptors, MET and the TAM kinases (TYRO3, AXL and MER). Our zanzalintinib program includes a series of ongoing and planned pivotal trials to explore its therapeutic potential in CRC, RCC, SCCHN and NET, as well as earlier-stage trials. Our other pipeline programs in phase 1 development each have best-in-class potential and include: XL309, a small molecule inhibitor of USP1, which has emerged as a synthetic lethal target in the context of BRCA-mutated tumors; XB010, an ADC consisting of a MMAE payload conjugated to a human mAb targeting the tumor antigen 5T4; and XL495, a small molecule inhibitor of PKMYT1. We complement our internal drug discovery and development efforts by in-licensing investigational oncology assets or obtaining options to acquire other investigational oncology assets from third parties if those oncology assets demonstrate evidence of clinical success. Examples of this approach include XL309 and ADU-1805, a clinical-stage and potentially best-in-class human mAb that targets SIRPα.

Cabozantinib Franchise

The FDA first approved CABOMETYX in the U.S. as a monotherapy for previously treated patients with advanced RCC in April 2016, and then for previously untreated patients with advanced RCC in December 2017. In January 2021, the CABOMETYX label was expanded to include first-line advanced RCC in combination with nivolumab, which was the first CABOMETYX regimen approved for treatment in combination with an ICI. In addition to RCC, in January 2019, the FDA approved CABOMETYX for the treatment of patients with HCC previously treated with sorafenib, and then in September 2021, the FDA approved CABOMETYX for the treatment of adult and pediatric patients 12 years of age and older with locally advanced or metastatic DTC that has progressed following prior VEGF receptor-targeted therapy and who are RAI-refractory or ineligible.

The IRA introduced numerous substantial changes to drug pricing, reimbursement and access support in the U.S., including enabling the CMS to assert control over the prices of certain single-source drugs and biotherapeutics reimbursed under the Medicare Drug Price Negotiation Program. The IRA contains the limited small biotech exception. As of the date of this Annual Report on Form 10-K, CMS has informed us that we have qualified for the small biotech exception with respect to our cabozantinib franchise products through 2027 and we intend to apply to CMS to maintain the small biotech exception each year through 2030. Separately, in November 2023, CMS released final guidance on another program, the Part D Discount Program, which will require manufacturers to take on more of the beneficiary cost previously subsidized by the federal government through the application of increased drug discounts. We have since received notice from CMS that we qualify for the "specified small manufacturer” designation and are thereby eligible for a phase-in of the increased manufacturer discounts under the Part D Discount Program, from 2025 to 2031. We expect the increase in manufacturer

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discount will be 1% in 2025 and will further increase according to a schedule set by CMS until we are required to pay the full 20% discount paid by other manufacturers in 2031.

To develop and commercialize cabozantinib outside the U.S., we have entered into license agreements with Ipsen and Takeda. To Ipsen, we granted the rights to develop and commercialize cabozantinib outside of the U.S. and Japan, and to Takeda we granted such rights in Japan. Both Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of the cabozantinib franchise in other potential indications, and we work closely with them on these activities. Utilizing its regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of the U.S., including in the EU, the United Kingdom and Canada, as a treatment for advanced RCC (both as a monotherapy and in combination with nivolumab) and for previously treated HCC and DTC indications. With respect to the Japanese market, Takeda received Manufacturing and Marketing Approvals from the Japanese PMDA for monotherapy CABOMETYX as a treatment of patients with curatively unresectable or metastatic RCC and as a treatment of patients with unresectable HCC that has progressed after cancer chemotherapy, as well as for CABOMETYX in combination with nivolumab as a treatment for unresectable or metastatic RCC.

We are also pursuing other indications for cabozantinib that have the potential to increase the number of cancer patients who could potentially benefit from this medicine. In August 2023, we announced positive results from CABINET, a phase 3 pivotal study that evaluated cabozantinib versus placebo in patients with NET who experienced progression after prior systemic therapy in two independently powered cohorts: one for patients with advanced pNET and another for patients with advanced epNET. The trial was unblinded and stopped early due to the dramatic improvement in efficacy with respect to the primary endpoint of PFS observed at interim analysis. Data from CABINET demonstrated that cabozantinib substantially prolonged PFS as assessed by blinded independent central review in both pNET and epNET cohorts, and that the safety profile of cabozantinib observed in the trial was consistent with its known safety profile. In August 2024, we announced that the FDA had accepted our sNDA seeking approval for cabozantinib to treat adult patients with previously treated, locally advanced/unresectable or metastatic, well- or moderately differentiated pNET or epNET, granted standard review in the U.S., and assigned a PDUFA target action date of April 3, 2025. The FDA also granted orphan drug designation to cabozantinib for the treatment of pNET. Detailed final results from CABINET were presented during the NETs and Endocrine Tumours Proffered Paper Session at the ESMO 2024 and were concurrently published in NEJM. In November 2024, we announced that our sNDA would be discussed at an ODAC meeting in March 2025; however, in January 2025, we announced that the FDA had notified us that our sNDA would no longer be the subject of discussion at an ODAC. CABINET was conducted by the Alliance through our CRADA with the NCI-CTEP, which along with our investigator-sponsored trial program, provides an avenue for independent investigations of cabozantinib. The Alliance presented results from a subgroup analysis of patients in the epNET cohort with advanced gastrointestinal NET in CABINET at the ASCO GI 2025.

Building on preclinical and clinical observations that cabozantinib in combination with ICIs may promote a more immune-permissive tumor environment, we have initiated several pivotal studies to further explore these combination regimens, including collaborations with Roche and BMS. In August 2023, we announced positive top-line results from CONTACT-02, a phase 3 pivotal trial sponsored by us and co-funded by Roche, evaluating the combination of cabozantinib and Roche’s ICI, atezolizumab, versus a second NHT in patients with measurable, extra-pelvic mCRPC who have progressed after treatment with one prior NHT. The trial met one of two primary endpoints, demonstrating a statistically significant improvement in PFS in the predefined PFS intent-to-treat population (i.e., the first 400 randomized patients), and these data were presented at the American Society of Clinical Oncology Genitourinary Cancers Symposium in January 2024. For the second primary endpoint of OS, the final analysis for CONTACT-02, which was presented during the GU Tumours Proffered Paper Session at ESMO 2024, showed a trend that favored the combination of cabozantinib and atezolizumab but was not statistically significant. Of note, the trend in OS benefit was consistently observed in key subgroups, including in patients with liver metastases—a subgroup of mCRPC patients with the poorest prognosis in need of new treatment options, and one we anticipate will grow in the coming years. The safety profile observed in the trial was reflective of the known safety profiles for each single agent and was consistent with the known tolerability profile of approved ICI-TKI combinations in advanced solid tumors. We continue to evaluate the timing of a potential regulatory submission with the FDA. Both Ipsen and Takeda opted into and are co-funding the trial.

In August 2024, we announced the final analysis for the secondary endpoint of OS for COSMIC-313, a phase 3 pivotal trial evaluating the combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. At the final analysis, the experimental arm did not demonstrate an OS benefit over the control arm. Based on these results and the evolution of the

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first-line RCC treatment landscape since this study was initiated in May 2019, Exelixis will not pursue marketing authorization for COSMIC-313. Data from the final analysis of OS in COSMIC-313 will be presented at the ASCO GU 2025.

Pipeline Activities

Zanzalintinib

Zanzalintinib is a novel, potent, third-generation oral TKI that targets VEGF receptors, MET and the TAM kinases (TYRO3, AXL and MER) implicated in cancer’s growth and spread, and is our first in-house compound to enter the clinic following our re-initiation of drug discovery activities in 2017. We are evaluating zanzalintinib in a growing development program that builds on our prior experience with cabozantinib and targets indications with high unmet need. We have established collaborations and will continue to explore additional opportunities for novel combinations with zanzalintinib. To date, we have initiated two large phase 1b/2 clinical trials studying zanzalintinib as a monotherapy and in combination with ICIs (STELLAR-001 and STELLAR-002). Patient enrollment into STELLAR-001 was completed in 2023 and preliminary results from a randomized expansion cohort of patients with metastatic CRC were presented at the ASCO GI 2025. We anticipate initial clinical data readouts from STELLAR-002 in the first half of 2025. In addition, in December 2023, we initiated STELLAR-009 studying zanzalintinib in combination with AB521, an inhibitor of HIF-2α developed by Arcus; however, enrollment into STELLAR-009 was halted as of September 2024 following the joint decision between us and Arcus to wind down the study and end our clinical collaboration given the two companies’ differing strategies with respect to potential TKI-HIF combination regimens to treat RCC.

We have also initiated three pivotal trials evaluating zanzalintinib in combination with ICIs. Our first such trial, STELLAR-303, was initiated in June 2022 and is evaluating zanzalintinib in combination with atezolizumab versus regorafenib in patients with metastatic, refractory non-microsatellite instability-high or non-mismatch repair-deficient CRC; we announced completion of enrollment into STELLAR-303 in August 2024, and preliminary results are expected in the second half of 2025. The second pivotal trial, STELLAR-304, was initiated in December 2022 and is evaluating zanzalintinib in combination with nivolumab versus sunitinib in previously untreated patients with advanced nccRCC; we anticipate completing enrollment into STELLAR-304 by mid-2025. In December 2023, we initiated STELLAR-305, a phase 2/3 pivotal trial evaluating zanzalintinib in combination with pembrolizumab, an anti-PD-1 ICI developed by Merck & Co., versus monotherapy pembrolizumab in patients with previously untreated PD-L1-positive recurrent or metastatic SCCHN; enrollment into STELLAR-305 is ongoing. We intend to initiate additional pivotal trials evaluating zanzalintinib across a broad array of future potential indications, including in STELLAR-311, a planned phase 3 pivotal trial evaluating zanzalintinib versus everolimus as a first oral therapy in patients with advanced NET, regardless of site of origin, which we anticipate initiating in the first half of 2025.

To further expand our exploration of the clinical potential of zanzalintinib, we entered into a clinical development collaboration with Merck to evaluate zanzalintinib in combination with KEYTRUDA® (pembrolizumab) in SCCHN and in combination with WELIREG® (belzutifan), Merck's oral HIF-2α inhibitor, in RCC. Under the collaboration, Merck will supply KEYTRUDA for our ongoing phase 3 STELLAR-305 trial in SCCHN. In addition, Merck will sponsor a phase 1/2 trial and two phase 3 pivotal trials in RCC; Merck will fund one of these phase 3 studies, and we will co-fund the phase 1/2 study and the other phase 3 study, as well as supply zanzalintinib and cabozantinib. We maintain all global commercial and marketing rights to zanzalintinib.

Biotherapeutics

Much of our drug discovery activity focuses on discovering and advancing various biotherapeutics that have the potential to become anti-cancer therapies, such as bispecific antibodies, ADCs and other innovative treatments. ADCs in particular present a unique opportunity for new cancer treatments, given their capabilities to target the delivery of anti-cancer drug payloads to specific cells expressing the target; this increased precision should minimize collateral impact on healthy tissues that do not express the target. This approach has been validated by multiple regulatory approvals of ADCs in the past several years. To facilitate the growth of our various biotherapeutics programs, we have established multiple research collaborations and in-licensing arrangements and have entered into other strategic transactions aimed at conserving capital and managing risks, collectively providing us access to antibodies, binders, payloads and conjugation technologies to generate next-generation ADCs or multispecific antibodies.

As part of our strategy to access clinical- or near-clinical-stage assets, we executed an exclusive option and license agreement and clinical development collaboration with Sairopa to develop ADU-1805. ADU-1805 is currently being evaluated in a phase 1 clinical trial in patients with advanced or metastatic refractory solid tumors, and enrollment is ongoing. Plans for ADU-1805 include investigating the compound’s potential in combination with approved ICIs, including

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pembrolizumab. In addition to the option deal with Sairopa, some of our active research collaborations for biotherapeutics programs are with:

•Adagene, which is focused on using Adagene’s SAFEbodyTM technology to develop novel masked ADCs or other innovative biotherapeutics with potential for improved therapeutic index;

•Catalent, which is focused on the discovery and development of multiple ADCs using Catalent’s proprietary SMARTag site-specific bioconjugation technology; and

•Invenra, which is focused on the discovery and development of novel binders and multispecific antibodies for the treatment of cancer.

We have made significant progress under our research collaborations and in-licensing arrangements and believe we will continue to do so in 2025 and in future years. For example, in August 2024, we announced the initiation of a phase 1 clinical trial evaluating XB010, both as a monotherapy and in combination with pembrolizumab, in patients with advanced solid tumors, following the FDA’s acceptance of our IND application, and enrollment is ongoing. XB010 is our first ADC advanced internally and consists of an MMAE payload conjugated to a mAb targeting the tumor antigen 5T4. XB010 was constructed using Catalent’s SMARTag site-specific bioconjugation platform, and its 5T4-targeting mAb was discovered in collaboration with Invenra. Over the next two years, we also intend to advance four additional biotherapeutic candidates toward potential IND filings, and each of these candidates was discovered, in part, in connection with our research collaborations and in-licensing arrangements, including: XB628, a bispecific antibody that targets both PD-L1 and NKG2A; XB371, a next-generation TF-targeting ADC that consists of a topoisomerase inhibitor payload conjugated to a mAb targeting TF; XB064, a high-affinity mAb that targets ILT2; and XB033, an ADC targeting the tumor antigen IL13Rα2.

In August 2024, we announced that we will discontinue the development of XB002, our TF-targeting ADC, as part of our portfolio prioritization efforts. Based on available data, the compound is unlikely to improve upon tisotumab vedotin or other competitor TF-targeting ADCs currently in development. We plan to disclose data from the phase 1 JEWEL-101 study, evaluating XB002 in advance solid tumors, at a later date. We plan to reallocate resources to new pivotal trials with zanzalintinib, advancing XL309 and our growing pipeline.

Other Small Molecules

The knowledge and experience gained through our efforts to discover cabozantinib, cobimetinib and esaxerenone, each of which were approved by regulatory authorities and are commercially distributed, informs our current strategy for discovering and developing additional small molecules with the potential to treat cancer:

•XL309 is a potentially best-in-class small molecule inhibitor of USP1, a synthetic lethal target in the context of BRCA-mutated tumors. It is currently being evaluated in a phase 1 clinical trial as monotherapy and in combination with PARP1/2 inhibition in patients with advanced solid tumors; enrollment is ongoing. XL309 has potential in patients whose tumors are no longer responsive to PARPi, including ovarian, breast and prostate cancers. XL309 also has potential in combination with PARPi agents to deepen and prolong the response seen to PARPi, as well as to broaden the activity beyond that observed in patients with tumors that harbor a BRCA1/2 mutation.

•XL495 is an inhibitor of PKMYT1 with best-in-class potential to treat solid tumors due to its improved selectivity and pharmacokinetic profiles. In October 2024, we announced the initiation of a phase 1 clinical trial evaluating XL495, both as a monotherapy and in combination with select cytotoxic agents, in patients with advanced solid tumors, following the FDA’s acceptance of our IND application.

Beyond these assets, we continue to make progress on multiple lead optimization programs for inhibitors of a variety of targets that we believe play significant roles in tumor growth, and we anticipate that some of these other programs could reach development candidate status in 2025 and beyond.

Future Expansion of our Pipeline

Increasing the number of novel anti-cancer agents in our pipeline is essential to our overall strategy and business goals. We are working to expand our oncology product pipeline through drug discovery efforts, which encompass our diverse biotherapeutics and small molecule programs exploring multiple modalities and mechanisms of action. This approach provides a high degree of flexibility with respect to target selection and modality of treatment and allows us to prioritize those targets that we believe have the greatest chance of becoming impactful therapeutics. As part of our strategy, our drug discovery activities have and will continue to include internal research, as well as external research collaborations, in-licensing arrangements and other strategic transactions that collectively leverage a wide range of technology platforms and assets and increase our probability of success. As of the date of this Annual Report on Form 10-K,

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we expect to progress up to three new development candidates into preclinical development during 2025. We will continue to engage in pipeline expansion initiatives with the goal of discovering, acquiring and/or in-licensing promising investigational oncology assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

2024 Business Updates and Financial Highlights

Business Updates

•In January 2024, we appointed Mary C. Beckerle, Ph.D. and S. Gail Eckhardt, M.D. to our Board of Directors. Dr. Beckerle currently serves as Chief Executive Officer of the Huntsman Cancer Institute and Distinguished Professor of Biological and Oncological Sciences at the University of Utah. Dr. Eckhardt currently serves as Associate Dean of Experimental Therapeutics at Baylor College of Medicine and Associate Director of Translational Research at the College’s Dan L. Duncan Comprehensive Cancer Center.

•In January 2024, we announced that our Board of Directors had authorized a corporate restructuring plan (the 2024 Restructuring Plan) to reduce our workforce and rebalance our cost structure in alignment with our strategic priorities, including reducing real estate commitments and costs, and terminating certain licensing partnerships. The 2024 Restructuring Plan was initiated in the first quarter of 2024, and substantially completed in the second quarter of 2024.

•On March 27, 2024, we received a notice letter from Cipla asserting additional Paragraph IV Certifications arising from Cipla’s amendment of its ANDA with the FDA. In May 2024, we announced entry into a settlement agreement with Cipla, which resolved patent litigation we brought in response to Cipla’s ANDA. For a more detailed discussion of the Cipla matter, see “Note 12. Commitments and Contingencies – Legal Proceedings” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K.

•In July 2024, Ipsen announced the expansion of our collaboration for the commercialization of cabozantinib to include pNET and epNET indications. Accordingly, Ipsen has sought marketing authorizations for CABOMETYX in these indications in certain territories outside of the U.S. and Japan, and in addition, Ipsen has opted into and is now co-funding the development costs for CABINET.

•In August 2024, we announced that the FDA had accepted our sNDA for CABOMETYX as a treatment for adult patients with previously treated, locally advanced/unresectable or metastatic, well- or moderately differentiated pNET and epNET, granted standard review and assigned a PDUFA target action date of April 3, 2025. In November 2024, we announced that our sNDA would be discussed at an ODAC meeting in March 2025; however, in January 2025, we announced that the FDA had notified us that our sNDA would no longer be the subject of discussion at an ODAC.

•In August 2024, we announced the initiation of a phase 1 clinical trial evaluating XB010, our first ADC advanced internally, following the FDA’s earlier acceptance of our IND filing.

•In August 2024, we announced the achievement of a $150.0 million commercial milestone, recognized as license revenues from Ipsen during the second quarter of 2024, following Ipsen’s achievement of $600.0 million in cumulative net sales of cabozantinib in its related license territory over four consecutive quarters, which milestone payment we received during the third quarter of 2024.

•In August 2024, we announced that our Board of Directors authorized the repurchase of up to $500 million of our common stock through the end of 2025, the third stock repurchase program undertaken by Exelixis since March 2023. Under this program, as of the end of fiscal year 2024, we have repurchased $205.6 million of our common stock, at an average price of $33.62 per share.

•In September 2024, we received a notice letter regarding an ANDA submitted to the FDA by Sun Pharmaceutical Industries Ltd. (Sun), including a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776, 9,724,342, 10,034,873, 10,039,757, 11,091,439, 11,091,440, 11,098,015 and 11,298,349, the latest of which expires on February 10, 2032, requesting approval to market a generic version of CABOMETYX tablets prior to the expiration of the aforementioned patents. On October 30, 2024, we filed a complaint in the Delaware District Court for patent infringement against Sun asserting infringement of U.S. Patent Nos. 8,877,776, 11,091,440, and 11,098,015. On January 22, 2025, Sun filed its response to the complaint, alleging that the asserted claims of U.S. Patent No. 8,877,776, 11,091,439, 11,091,440 and 11098,015 are invalid and not infringed. Sun also filed counterclaims that, inter alia, seek a declaratory judgment that Sun’s ANDA would not infringe any valid and enforceable claim of U.S. Patent Nos. 8,877,776, 11,091,439, 11,091,440, 11,098,015, 9,724,342, 10,034,873, 10,039,757, and 11,298,349. We have not yet responded to Sun’s counterclaims.

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•In October 2024, we announced a clinical development collaboration with Merck to support the evaluation of the combination of zanzalintinib and KEYTRUDA in SCCHN through our ongoing STELLAR-305 phase 3 pivotal trial, as well as future evaluations of the combination of zanzalintinib and WELIREG in RCC, including a phase 1/2 trial and two phase 3 pivotal trials to be sponsored by Merck.

•In October 2024, the United States District Court for the District of Delaware (the Delaware District Court) issued a ruling in our two consolidated patent lawsuits against MSN Pharmaceuticals, Inc. (individually and collectively with certain of its affiliates, including MSN Laboratories Private Limited, referred to as MSN, and such lawsuits collectively referred to as MSN II), rejecting MSN’s invalidity challenge to each of U.S. Patents No. 11,091,439, 11,091,440 and 11,098,015, which expire January 15, 2030. The Delaware District Court had previously entered a stipulation that MSN’s proposed ANDA product infringes these patents. The Delaware District Court also ruled that our U.S. Patent No. 11,298,349 is not invalid and that MSN’s proposed ANDA product does not infringe this patent, which expires February 10, 2032. In accordance with these rulings, the Delaware District Court entered final judgment on October 23, 2024, that, should the FDA ultimately approve MSN’s ANDA, the effective date of any such approval shall not be a date earlier than January 15, 2030, the expiration date of each of U.S. Patents No. 11,091,439, 11,091,440 and 11,098,015, subject to our potential additional regulatory exclusivity. On November 22, 2024 MSN noticed an appeal to the Court of Appeals for the Federal Circuit and we noticed a cross-appeal on November 26, 2024. The Delaware District Court judgment is also subject to appeal by either party. In February 2025, we received notice that MSN submitted to the FDA a Paragraph IV certification regarding our Orange Book patent: U.S. Patent No. 12,128,039. For a more detailed discussion of the MSN II litigation matter, see “Note 12. Commitments and Contingencies – Legal Proceedings” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K.

•In October 2024, we announced the initiation of a phase 1 clinical trial evaluating XL495, our small molecule inhibitor of PKMYT1, following the FDA’s earlier acceptance of our IND filing.

•In January 2025, preliminary results from a randomized expansion cohort of patients with metastatic CRC from STELLAR-001, and results from a subgroup analysis of patients in the epNET cohort with advanced gastrointestinal NET in CABINET, were presented at the ASCO GI 2025.

Financial Highlights

•Net product revenues for 2024 were $1,809.4 million, as compared to $1,628.9 million for 2023.

•Total revenues for 2024 were $2,168.7 million, as compared to $1,830.2 million for 2023.

•Research and development expenses for 2024 were $910.4 million, as compared to $1,044.1 million for 2023.

•Selling, general and administrative expenses for 2024 were $492.1 million, as compared to $542.7 million for 2023.

•Provision for income taxes for 2024 was $160.4 million, as compared to $49.8 million for 2023.

•Net income for 2024 was $521.3 million, or $1.80 per share, basic and $1.76 per share, diluted, as compared to $207.8 million, or $0.65 per share, basic and diluted, for 2023.

See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.

Outlook, Challenges and Risks

We will continue to face numerous challenges and risks that may impact our ability to execute on our business objectives. In particular, for the foreseeable future, we expect our ability to generate sufficient cash flow to fund our business operations and growth will depend upon the continued commercial success of CABOMETYX, both alone and in combination with other therapies, as a treatment for the highly competitive indications for which it is approved, and possibly for other indications for which cabozantinib is currently being evaluated in potentially label-enabling clinical trials, if warranted by the data generated from these trials. However, we cannot be certain that the clinical trials we and our collaboration partners are conducting will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial markets where CABOMETYX is approved.

Even if the required regulatory approvals to market CABOMETYX for additional indications are achieved, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in these additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. As is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is becoming increasingly difficult, both within the U.S. and in foreign markets. In addition, healthcare policymakers in the U.S. continue to express concern over healthcare costs, and corresponding legislative and policy initiatives and activities have been launched aimed at increasing the

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healthcare cost burdens borne by pharmaceutical manufacturers, as well as expanding access to, and restricting the prices and growth in prices of, pharmaceuticals.

Achievement of our business objectives will also depend on our ability to maintain a competitive position in the shifting landscape of therapeutic strategies for the treatment of cancer, which we may not be able to do. On an ongoing basis, we assess the constantly evolving landscape of other approved and investigational cancer therapies that could be competitive, or complementary in combination, with our products, and then we adapt our development strategies for the cabozantinib franchise and our pipeline product candidates accordingly, such as by modifying our clinical trials to include evaluation of our therapies with ICIs and other targeted agents. Even if our current and future clinical trials produce positive results sufficient to obtain marketing approval by the FDA and other global regulatory authorities, it is uncertain whether physicians will choose to prescribe regimens containing our products instead of competing products and product combinations in approved indications.

In the longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic versions of CABOMETYX tablets that are the subject of ANDAs submitted to the FDA by MSN, Teva, Cipla and Sun. The approval of any of these ANDAs and subsequent launch of any generic version of CABOMETYX could significantly decrease our revenues derived from the U.S. sales of CABOMETYX and thereby materially harm our business, financial condition and results of operations.

Separately, our research and development objectives may be impeded by the challenges of scaling our organization to meet the demands of expanded drug development, unanticipated delays in clinical testing and the inherent risks and uncertainties associated with drug discovery operations, especially on the global level. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new potential cancer treatments or identifying appropriate candidates for in-licensing or acquisition.

Some of these challenges and risks are specific to our business, others are common to companies in the biopharmaceutical industry with development and commercial operations, and an additional category are macroeconomic, affecting all companies. For a more detailed discussion of challenges and risks we face, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Results of Operations

Impact of the Duration of Our Fiscal Year

We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2024, which was a 53-week fiscal year, ended on January 3, 2025; and fiscal year 2023, which was a 52-week fiscal year, ended on December 29, 2023. The 53-week fiscal year in 2024, as compared to the 52-week fiscal year in 2023, contributed to the year-over-year increases in certain revenues and expenses. For convenience, references in this report as of and for the fiscal years ended January 3, 2025 and December 29, 2023, are indicated as being as of and for the years ended December 31, 2024 and 2023, respectively. In fiscal year 2025, the annual period will end on January 2, 2026, and will be a 52-week fiscal year. The 52-week fiscal year in 2025 may result in a modest year-over-year impact on revenues and expenses, as compared to 2024.

This discussion and analysis generally addresses 2024 and 2023 items and year-over-year comparisons between 2024 and 2023. Discussions of 2022 items and year-over-year comparisons between 2023 and 2022 that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 6, 2024.

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Revenues

Revenues by category were as follows (dollars in thousands):

Net Product Revenues

Gross product revenues, discounts and allowances, and net product revenues were as follows (dollars in thousands):

Net product revenues by product were as follows (dollars in thousands):

The increase in net product revenues for the year ended December 31, 2024, as compared to 2023, was primarily related to an 8.2% increase in the number of CABOMETYX units sold as a result of the FDA’s approval of CABOMETYX in combination with nivolumab as a first-line treatment of patients with advanced RCC and, to a lesser extent, a 2.9% increase in the average net selling price of CABOMETYX. The increase in sales volume is largely driven by refills, reflecting the longer duration of therapy for this combination, and an increase in related market share reflecting the continued evolution of the metastatic RCC, HCC and DTC treatment landscapes.

We project our net product revenues may increase in fiscal year 2025, as compared to 2024, for similar reasons noted above.

We recognize product revenues net of discounts and allowances that are described in “Note 1. Organization and Summary of Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Discounts and allowances have generally increased over time as the number of patients participating in government programs has increased and as the discounts given and rebates paid to government payers have also increased. The increase in the amount of discounts and allowances for the year ended December 31, 2024, as compared to 2023, was primarily the result of an increase in the volume of units sold, and the increase in utilization and dollar amount of chargebacks under the Federal Supply Schedule program.

We project our discounts and allowances may increase during fiscal year 2025 for similar reasons noted above.

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License Revenues

License revenues include: (a) the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable, in the related period, that a milestone would be achieved and a significant reversal of revenues would not occur in future periods; (b) royalty revenues; and (c) the profit on the U.S. commercialization of COTELLIC from Genentech.

See “Note 4. Collaborations and Business Development Activities—Cabozantinib Commercial Collaborations—Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K for a discussion on the allocation of transaction price which impacts the proportion of milestone revenues allocated to license revenues and collaboration services revenues.

Milestone revenues, which are allocated between license revenues and collaboration services revenues, were $169.3 million for the year ended December 31, 2024, as compared to $15.0 million for 2023. Milestone revenues by fiscal year included the following:

•For the year ended December 31, 2024, milestone revenues included: (1) $150.0 million in license revenues recognized in connection with a commercial milestone from Ipsen upon its achievement of $600.0 million in cumulative net sales of cabozantinib over four consecutive quarters in its related Ipsen license territory; (2) $2.2 million in license revenues recognized in connection with a commercial milestone from Ipsen upon its achievement of CAD$30.0 million in cumulative net sales of cabozantinib over four consecutive quarters in Canada; and (3) $11.4 million in revenues related to a $12.5 million regulatory milestone from Ipsen upon submission of a variation application the EMA for evaluating cabozantinib versus placebo in patients with either advanced pNET or advanced epNET who experienced progression after prior systematic therapy.

•For the year ended December 31, 2023, $10.0 million in revenues was recognized in connection with a commercial milestone of $11.0 million from Takeda upon their achievement of $150.0 million of cumulative net sales of cabozantinib in Japan.

Due to uncertainties surrounding the timing and achievement of development, regulatory and commercial milestones, it is difficult to predict the timing of future milestones revenues; consequently, milestones may vary significantly from period to period.

Royalty revenues increased primarily as a result of an increase in Ipsen’s net sales of cabozantinib outside of the U.S. and Japan. Ipsen royalties were $154.0 million for the year ended December 31, 2024, as compared to $135.8 million for 2023. Ipsen’s net sales of cabozantinib have continued to grow since the first commercial sale of CABOMETYX in the Ipsen territories in 2016, primarily due to regulatory approvals in new territories, including regulatory approval in the EU for the combination therapy of CABOMETYX and nivolumab received in March 2021. Royalty revenues for the year ended December 31, 2024 also included $12.9 million, as compared to $12.7 million for 2023, related to Takeda’s net sales of cabozantinib. Takeda’s net sales of cabozantinib have continued to grow since Takeda’s first commercial sale of CABOMETYX in Japan in 2020; however, royalty revenues during the year ended December 31, 2024 were unfavorably impacted by foreign currency rate fluctuations, as compared to 2023. As of December 31, 2024, CABOMETYX is approved and commercially available in 67 countries outside of the U.S.

Our share of profits on the U.S. commercialization of COTELLIC under our collaboration agreement with Genentech was $10.6 million for the year ended December 31, 2024, as compared to $13.0 million for 2023. We also earned royalty revenues on ex-U.S. net sales of COTELLIC by Genentech of $3.0 million for the year ended December 31, 2024, as compared to $3.9 million for 2023.

We project our license revenues may decrease in fiscal year 2025, as compared to 2024, as a result of the anticipated achievement of fewer milestones in 2025, partially offset by an increase in royalty revenues related to an increase in product sales by Ipsen and Takeda.

Collaboration Services Revenues

Collaboration services revenues include the recognition of deferred revenues for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, development cost reimbursements earned under our collaboration agreements and product supply revenues, which are net of product supply costs and the royalties we pay to Royalty Pharma on sales by Ipsen and Takeda of products containing cabozantinib.

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Development cost reimbursements were $25.8 million for the year ended December 31, 2024, as compared to $35.6 million for 2023. The decrease in development cost reimbursements during the year ended December 31, 2024 were primarily attributable to decreases in spending on the CONTACT-02, CheckMate -9ER and COSMIC-021 studies, partially offset by Ipsen’s decision to opt-in and co-fund CABINET development costs in the second quarter of 2024, which includes a cumulative catch-up for Ipsen’s share of global development costs incurred since the beginning of the study and through the opt-in date.

Collaboration services revenues were reduced by $21.3 million and $19.2 million for the years ended December 31, 2024 and 2023, respectively, to account for the 3% royalty we are required to pay on the net sales by Ipsen and Takeda of any product containing cabozantinib. As royalty generating sales of cabozantinib by Ipsen and Takeda have increased as described above, our royalty payments have also increased.

We project our collaboration services revenues may decrease in fiscal year 2025, as compared to 2024, primarily as a result of a decrease in development cost reimbursement revenues, and uncertainties regarding the timing and achievement of development, regulatory, and commercial milestone revenues.

Cost of Goods Sold

The cost of goods sold and our gross margins were as follows (dollars in thousands):

Cost of goods sold is related to our product revenues and consists of a 3% royalty payable on U.S. net sales of any product containing cabozantinib, as well as the cost of inventory sold, indirect labor costs, write-downs related to expiring, excess and obsolete inventory, and other third-party logistics costs. The increase in cost of goods sold for the year ended December 31, 2024, as compared to 2023, was primarily due to the increase in royalties as a result of increased U.S. CABOMETYX sales, partially offset by a decrease in certain period costs. We project our gross margin in 2025 will remain consistent with fiscal year 2024.

Research and Development Expenses

We do not track fully burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: (1) development; (2) drug discovery; and (3) other research and development. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or may be studied in clinical trials. Development expenses include license and other collaboration costs, primarily composed of upfront license fees, development milestones and other payments associated with our clinical-stage in-licensing collaboration programs, clinical trial costs, personnel expenses, consulting and outside services and other development costs, including manufacturing costs of our drug development candidates. Our drug discovery group utilizes a variety of technologies, including in-licensed technologies, to enable the rapid discovery, optimization and extensive characterization of lead compounds and biotherapeutics such that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development. Drug discovery expenses include license and other collaboration costs primarily composed of upfront license fees, research funding commitments, option exercise fees, development milestones and other payments associated with our in-licensing collaboration programs in preclinical development stage. Other drug discovery costs include personnel expenses, consulting and outside services and laboratory supplies. Other research and development expenses include the allocation of general corporate costs to research and development services and development cost reimbursements in connection with certain of our collaboration arrangements.

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Research and development expenses by category were as follows (dollars in thousands):

In addition, we track our external clinical trial costs by product and product candidate and by scientific modalities, which are categorized as small molecule and biotherapeutics programs. Small molecule clinical development for the reported periods was primarily composed of cabozantinib and zanzalintinib. Biotherapeutics clinical development for the reported periods was primarily composed of XB002 and XB010.

Clinical trial costs by scientific modalities, by product and by product candidate were as follows (dollars in thousands):

The decrease in research and development expenses for the year ended December 31, 2024, as compared to 2023, was primarily related to decreases in license and other collaboration costs and other drug discovery costs, partially offset by an increase in other development costs, primarily related to manufacturing costs to support Exelixis’ development candidates and clinical trial costs.

Development-related license and other collaboration costs decreased for the year ended December 31, 2024, as compared to 2023, primarily due to an $80.0 million upfront payment made upon the execution of the exclusive license agreement with Insilico in 2023, partially offset by development milestone achievement in our clinical-stage in-licensing collaboration programs. Drug discovery-related license and other collaboration costs decreased for the year ended December 31, 2024, as compared to 2023, primarily due to lower development milestone achievement in our preclinical development stage in-licensing collaboration programs, lower upfront fees and lower research funding. Other drug discovery costs decreased for the year ended December 31, 2024, as compared to 2023, primarily due to decreases in personnel expenses, consulting and outside services, and laboratory supplies. Clinical trial costs, which include services performed by third-party contract research organizations and other vendors who support our clinical trials, increased for

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year ended December 31, 2024, as compared to 2023, primarily due to higher costs associated with studies evaluating zanzalintinib, XB010, XL309 and XL495, partially offset by lower costs associated with cabozantinib studies.

In addition to reviewing the three categories of research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. These factors include enrollment in clinical trials for our product candidates, preliminary data and final results from clinical trials, the potential market indications and overall clinical and commercial potential for our product candidates, and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy.

We project that clinical trial costs may continue to increase with higher costs associated with various studies evaluating zanzalintinib, XL309, XL495, and XB628, partially offset by decreases in costs associated with cabozantinib and XB002.

To continue growing our pipeline, we are prioritizing investment in new molecules that are clinically differentiated with the potential to improve the standard of care for our cancer patients, including current and planned clinical trial programs evaluating zanzalintinib, XL309, XL495, and XB010. We are working to expand our oncology product pipeline through drug discovery efforts, which encompass our diverse biotherapeutics and small molecule programs exploring multiple modalities and mechanisms of action. This approach provides a high degree of flexibility with respect to target selection and allows us to prioritize those targets that we believe have the greatest chance of yielding impactful therapeutics. As part of our strategy, our drug discovery activities have included and continue to include internal research, as well as external research collaborations, in-licensing arrangements and other strategic transactions that collectively incorporate a wide range of technology platforms and assets and increase our probability of success. As of the date of this Annual Report on Form 10-K, we expect to progress up to three new development candidates into preclinical development in 2025. We will continue to engage in pipeline expansion initiatives with the goal of acquiring and in-licensing promising investigational oncology assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

We project our research and development expenses may increase for fiscal year 2025, as compared to the prior year, primarily driven by increases in license and other collaboration costs and clinical trial costs, including the current and planned trials evaluating zanzalintinib, XL309, XL495, and XB010, partially offset by lower manufacturing costs.

A discussion of the risks and uncertainties with respect to our research and development activities, and the consequences to our business, financial position, and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were as follows (dollars in thousands):

____________________

(1)    Excludes stock-based compensation allocated to selling, general and administrative expenses.

Selling, general and administrative expenses consist primarily of personnel expenses, stock-based compensation, marketing costs and certain other administrative costs.

The decrease in selling, general and administrative expenses for the year ended December 31, 2024, as compared to 2023, was primarily due to decreases in corporate giving, legal and advisory fees related to the 2023 proxy contest and a reduction in activities related to litigation, technology costs and stock-based compensation expenses, partially offset by an increase in personnel expenses.

We project our selling, general and administrative expenses may increase in fiscal year 2025, as compared to 2024, as a result of an increase in the Branded Prescription Drug Fee due to higher revenues and an increase in marketing

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activities in support of the anticipated commercial launch of CABOMETYX for the treatment of patients with either advanced pNET or advanced epNET who experienced progression after prior systemic therapy.

Impairment of Long-Lived Assets

Impairment of long-lived assets for the year ended December 31, 2024, relates to certain leased facilities at our Alameda campus. During fiscal year 2024, we listed certain buildings for sublease. As a result, we assessed the impacted asset groups for impairment and concluded that the related right-of-use assets and leasehold improvements were not fully recoverable and recognized a $51.7 million non-cash impairment charge. See “Note 12. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Impairment of long-lived assets were as follows (dollars in thousands):

Restructuring Expenses

Restructuring expenses resulted from the execution of the 2024 Restructuring Plan to reduce our workforce and rebalance our cost structure in alignment with our strategic priorities. Restructuring expenses consist of severance and employee-related costs, asset impairment, and contract termination costs. We incurred the majority of the charges related to the 2024 Restructuring Plan during the first quarter of 2024. See “Note 13. Restructuring” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Restructuring expenses were as follows (dollars in thousands):

Non-Operating Income

Non-operating income was as follows (dollars in thousands):

The decrease in non-operating income for the year ended December 31, 2024, as compared to 2023, was primarily the result of a decrease in interest income due to lower average interest-bearing investment balances, partially offset by higher average interest rates.

Provision for Income Taxes

The provision for income taxes and the effective tax rates were as follows (dollars in thousands):

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The increase in provision for income taxes for the year ended December 31, 2024, as compared to 2023, was primarily due to an increase in pre-tax income. The effective tax rate for the year ended December 31, 2024 differed from the U.S. federal statutory rate of 21% primarily due to state taxes, partially offset by the generation of federal tax credits. The effective tax rate for the year ended December 31, 2023 differed from the U.S. federal statutory rate of 21% primarily due to the generation of federal tax credits, partially offset by non-deductible executive compensation. We project that our effective tax rate may be between 21% and 22% in fiscal year 2025.

Liquidity and Capital Resources

As of December 31, 2024, we had $1.7 billion in cash, cash equivalents and marketable securities, as compared to $1.7 billion as of December 31, 2023. We anticipate that the aggregate of our current cash and cash equivalents, marketable securities available for operations, net product revenues and collaboration revenues will enable us to maintain our operations for at least 12 months and thereafter for the foreseeable future.

Our primary cash requirements for operating activities, which we project will increase in fiscal 2025 as compared to fiscal year 2024, are for: employee related expenditures; payments related to our collaboration and development programs; income tax payments; royalty payments on our net product sales; cash payments for inventory; rent payments for our leased facilities and contract manufacturing payments.

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, modified the tax treatment of research and development expenditures beginning in fiscal year 2022. Research and development expenditures are no longer currently deductible but instead must be amortized ratably over five years for domestic expenditures or 15 years for foreign expenditures. As a result, we generated a higher federal income tax liability in fiscal year 2024, which required higher estimated federal tax payments by the end of 2024. We will realize a reduction of our federal income tax liability in future years as the capitalized research and development expenditures are amortized for tax purposes.

Our primary sources of operating cash are: cash collections from customers related to net product revenues, which we project may increase for fiscal year 2025, as compared to 2024; cash collections related to milestones achieved and royalties earned from our commercial collaboration arrangements with Ipsen, Takeda and others; and cash collections for cost reimbursements under certain of our development programs with Ipsen and Takeda which we project may decrease in 2025, as compared to 2024. The timing of cash generated from commercial collaborations and cash payments required for in-licensing collaborations relative to upfront license fee payments, research funding commitments, cost reimbursements, exercise of option payments and other contingent payments such as development milestone payments may vary from period to period.

We project that we may continue to spend significant amounts of cash to fund the development of product candidates in our pipeline, including zanzalintinib, XL309, XL495, XB010, and XB628, and the development and commercialization of cabozantinib. In addition, we may continue to expand our oncology product pipeline through additional research collaborations, in-licensing arrangements and other strategic transactions that align with our oncology drug development, regulatory and commercial expertise.

In January 2024, our Board of Directors authorized the repurchase of up to $450.0 million of our common stock before the end of 2024. As of June 30, 2024, we completed the repurchase of 20.3 million shares of common stock for an aggregate purchase price of $450.0 million pursuant to our stock repurchase program. In August 2024, our Board of Directors authorized a stock repurchase program to acquire up to $500.0 million of our outstanding common stock before the end of 2025. Under this program, during the third and fourth quarter of 2024, we repurchased 6.1 million shares of common stock for an aggregate purchase price of $205.6 million. As of December 31, 2024, approximately $294.4 million remained available for future stock repurchases before the end of 2025. Stock repurchases under this program may be made from time to time through a variety of methods, which may include open market purchases, in block trades, Rule 10b5-1 trading plans, accelerated share repurchase transactions, exchange transactions, or any combination of such methods.

The timing and amount of any stock repurchases under the stock repurchase program will be based on a variety of factors, including ongoing assessments of the capital needs of the business, alternative investment opportunities, the market price of Exelixis’ common stock and general market conditions.

Financing these activities could materially impact our liquidity and capital resources and may require us to incur debt or raise additional funds through the issuance of equity. Furthermore, even though we believe we have sufficient

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funds for our current and future operating plans, we may choose to incur debt or raise additional funds through the issuance of equity based on market conditions or strategic considerations.

Sources and Uses of Cash (dollars in thousands):

Working capital: The increase in working capital as of December 31, 2024, as compared to December 31, 2023, was primarily due to the favorable impact to our net current assets resulting from our increase in net product revenues and collaboration revenues, including a total of $164.7 million in milestone payments earned from Ipsen and reduction of the duration of our investments, partially offset by repurchases of our common stock. In the future, our working capital may be impacted by one of these factors or other factors, the amounts and timing of which are variable.

Cash, cash equivalents and marketable securities: Cash and cash equivalents primarily consist of deposits at major banks, money market funds, commercial paper and other securities with original maturities 90 days or less. Marketable securities primarily consist of debt securities available-for-sale and certificates of deposit. For additional information regarding our cash, cash equivalents and marketable securities, see “Note 5. Cash and Marketable Securities,” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. The increase in cash, cash equivalents and marketable securities at December 31, 2024, as compared to December 31, 2023, was primarily due to cash inflows generated by our operations from sales of our products and our commercial collaboration arrangements, including $164.7 million in cash received from Ipsen for regulatory and commercial milestone payments earned, partially offset by cash payments to repurchase our common stock, cash payments to support our development and discovery programs, including acquisition of in-process research and development technology, tax payments and operating cash payments for employee-related expenditures and restructuring.

Cash flow activities were as follows (dollars in thousands):

Operating Activities

Cash provided by operating activities is derived by adjusting our net income for non-cash operating items such as deferred taxes, stock-based compensation, depreciation and amortization, non-cash lease expense, impairment of long-lived assets, and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Consolidated Statements of Income.

Net cash provided by operating activities increased for the year ended December 31, 2024, as compared to 2023, primarily due to an increase in cash received on sales of our products, an increase in cash received upon achievement of milestones from Ipsen, and lower cash paid for operating expenses, partially offset by cash payments related to the 2024 Restructuring Plan.

Investing Activities

The changes in cash flows from investing activities primarily relates to the timing of marketable securities activity, acquisition of in-process research and development technology and capital expenditures. Our capital expenditures primarily consist of investments to expand our operations and acquire assets that further support our research and development activities.

Net cash used in investing activities increased for the year ended December 31, 2024, as compared to 2023. The increase in cash used in investing activities was primarily due to a decrease in cash proceeds from maturities and sales of

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marketable securities and an increase in purchases of marketable securities, partially offset by a decrease in purchases of in-process research and development technology related to certain in-licensing collaboration arrangements and a decrease in purchases of property and equipment.

Financing Activities

The changes in cash flows from financing activities primarily relate to payments for repurchases of common stock, proceeds from employee stock programs and taxes paid related to net share settlement of equity awards.

Net cash used in financing activities increased for the year ended December 31, 2024, as compared to 2023. The increase in cash used in financing activities was primarily due to an increase in payments for repurchases of common stock.

Contractual Obligations

As of December 31, 2024, we anticipate the aggregate of our cash, cash equivalents and marketable securities and cash generated from operations to be sufficient to fund our contractual obligations, as well as cash requirements to support our ongoing operations and capital expenditures. Our contractual obligations as of December 31, 2024 primarily consist of:

Operating leases: We have certain lease agreements related to our corporate campus facilities and laboratory facilities located in Alameda, California and Greater Philadelphia area, under which we are obligated to make lease payments. As of December 31, 2024, we had $26.5 million of lease payments due in one year and $259.2 million due over the remaining lease term.

Purchase obligations: Purchase obligations include firm purchase commitments related to manufacturing of inventory, software services and other facilities and equipment. As of December 31, 2024, we had $63.4 million total purchase obligations due within one year and $13.3 million due after one year.

Contingent payments: We have committed to make certain contingent payments for potential future milestones, research funding commitments and royalties to certain collaboration partners, including contingent exercise fee payments if we decide to exercise certain of our options to in-license or acquire in-process research and development technology as part of our agreements with those parties. We do not expect these contingent payments to have a significant impact on our liquidity in the near term.

See “Notes 4. Collaboration Agreements and Business Development Activities” and “Note 12. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our contractual obligations and contingencies.

As of December 31, 2024, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.

Critical Accounting Policies and Estimates

The preparation of our Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances as well as milestones included in collaboration arrangements; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions; and the amounts of deferred tax assets and liabilities including the related valuation allowance. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates.

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We believe our critical accounting policies relating to revenue recognition, clinical trial and collaboration accruals, stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.

For a complete description of our significant accounting policies, see “Note 1. Organization and Summary of Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

Net Product Revenues and Discounts and Allowances

We recognize revenues when our customers obtain control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) returns. We record estimates for these deductions at the time we recognize the related gross product revenue. However, the actual rebate or chargeback on the sale of our product to a distributor is not invoiced to us until a future period, generally within three months from the date of sale. Due to this time lag, we must estimate the amount of rebates and chargebacks to accrue. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates. We update our estimates every quarter to reflect actual claims and other current information. Actual rebates and chargebacks claimed for prior periods have varied from our estimates by less than 1% of the amount deducted from gross product revenues for the years ended December 31, 2024 and 2023. Our current estimates may differ significantly from actual results.

Collaboration Revenues

We enter into collaboration arrangements with third parties, under which we license certain rights to our intellectual property, and account for the arrangements as either license revenue or collaboration services revenue when the counterparty is a customer. The terms of these arrangements may include payments to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; product supply services; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products.

As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We use key assumptions to determine the standalone selling price, which may include forecast revenues and costs, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. At the end of each subsequent reporting period, we re-evaluate the probability of earning of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. For arrangements that may include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sale occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Development milestone adjustments are recorded on a cumulative catch-up basis, which would affect collaboration services revenues in the period of adjustment. In addition, in recording revenues for our research and development services performance obligations, we use projected development cost estimates to determine the amount of revenue to record as we satisfy this performance obligation.

Clinical Trial and Collaboration Accruals

We execute all of our clinical trials with support from contract research organizations and other vendors and we accrue costs for clinical trial activities performed by these third parties based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the activities performed for each patient, the number of active clinical sites and the duration for which the patients will be enrolled in the trial. Certain of our in-licensing collaboration arrangements include contingent payments in the form of development, regulatory and commercial milestones. We recognize expense for contingent payments when

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they are deemed probable of achievement which requires judgment as to the probability and timing of the achievement of the underlying milestones. To the extent actual results, or updated probability estimates, differ from current estimates, such amounts are recorded as an adjustment in the period estimates are revised. We monitor patient enrollment levels and assess the related research and development activities progress, including the probability of achieving milestones payments associated to the respective terms and conditions of our in-licensing and collaboration arrangements to the extent possible through internal reviews and estimates of the operational progress of our discovery and early-stage clinical development programs, correspondence with contract research organizations and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-based Compensation

Stock-based compensation expense requires us to estimate the fair value of performance-based restricted stock units (PSUs) and restricted stock units (RSUs) subject to market conditions, and estimate the number of shares subject to PSUs and RSUs with market conditions that will ultimately vest. To determine the fair value, we use models that require a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns and risk-free interest rates. Monte Carlo simulation models are used to determine grant date fair value of awards with market conditions. The assumptions used in calculating the fair value of market conditions awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

We recognize stock-based compensation for PSUs over the requisite service period only for awards which we estimate will ultimately vest, which requires judgment as to the probability and timing of the achievement of the underlying performance goals. Significant factors we consider in making those judgments include forecasts of our product revenues and those of our collaboration partners, estimates regarding the operational progress of late-stage clinical development programs and discovery pipeline expansion performance targets. To the extent actual results, or updated estimates, differ from current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised and as such, can materially affect our stock-based compensation expense in the current period and in the future. Compensation expense related to RSUs with market vesting conditions is recognized regardless of the outcome of the market conditions.

Income Taxes

We compute our income tax provision or benefit under the asset and liability method. Significant estimates are required in determining our income tax provision or benefit. We base some of these estimates on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that we deem a reversal of any portion of our valuation allowance against our deferred tax assets to be appropriate, we recognize a tax benefit against our income tax provision in the period of such reversal.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities based on the technical merits of the position. The tax benefit recognized in the Consolidated Financial Statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by tax authorities, new information obtained during a tax examination or resolution of an examination. We have elected to record interest and penalties in the accompanying Consolidated Statements of Income as a component of income taxes.

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Recent Accounting Pronouncements

For a description of the expected impact of recent accounting pronouncements, see “Note 1. Organization and Summary of Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are 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 company’s or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

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Overview

We are an oncology company innovating next-generation medicines and combination regimens at the forefront of cancer care. Through the commitment of our drug discovery, development and commercialization resources, we have produced four marketed pharmaceutical products, two of which are formulations of our flagship molecule, cabozantinib. We continue to evolve our product portfolio, leveraging our investments, expertise and strategic partnerships to target an expanding range of tumor types and indications with our clinically differentiated pipeline of small molecules and biotherapeutics, including ADCs.

Sales related to cabozantinib account for the majority of our revenues. Cabozantinib is an inhibitor of multiple tyrosine kinases, including MET, AXL, VEGF receptors and RET and has been approved by the FDA and in 69 other countries: as CABOMETYX tablets for advanced RCC (both alone and in combination with BMS’ nivolumab), for previously treated HCC and for previously treated, RAI-refractory DTC; and as COMETRIQ capsules for progressive, metastatic MTC. For physicians treating these types of cancer, cabozantinib has become or is becoming an important medicine in their selection of effective therapies.

The other two products resulting from our discovery efforts are: COTELLIC, an inhibitor of MEK, approved as part of multiple combination regimens to treat specific forms of advanced melanoma and marketed under a collaboration with Genentech; and MINNEBRO, an oral, non-steroidal, selective blocker of MR, approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo.

We plan to continue leveraging our operating cash flows to advance a broad array of diverse biotherapeutics and small molecule programs for the treatment of cancer, as well as to support ongoing company-sponsored and externally sponsored trials evaluating cabozantinib. The product candidates furthest along in our pipeline are: zanzalintinib, a novel, potent, next-generation oral TKI that targets VEGF receptors, MET and the TAM kinases (TYRO3, AXL and MER); and XB002, a next-generation TF-targeting ADC, administered via intravenous infusion and composed of a human mAb against TF that is conjugated to an MTI payload. Our internal drug discovery efforts are supplemented through in-licensing investigational oncology assets or obtaining options to acquire other investigational oncology assets from third parties if they demonstrate evidence of clinical success. Examples are: XL309, a clinical-stage and potentially best-in-class small molecule inhibitor of USP1, which has emerged as a synthetic lethal target in the context of BRCA-mutated tumors; and ADU-1805, a clinical-stage and potentially best-in-class mAb that targets SIRPα.

Cabozantinib Franchise

The FDA first approved CABOMETYX in the U.S. as a monotherapy for previously treated patients with advanced RCC in April 2016, and then for previously untreated patients with advanced RCC in December 2017. In January 2021, the CABOMETYX label was expanded to include first-line advanced RCC in combination with nivolumab, which was the first CABOMETYX regimen approved for treatment in combination with an ICI. In addition to RCC, in January 2019, the FDA approved CABOMETYX for the treatment of patients with HCC previously treated with sorafenib, and then in September 2021, the FDA approved CABOMETYX for the treatment of adult and pediatric patients 12 years of age and older with locally advanced or metastatic DTC that has progressed following prior VEGF receptor-targeted therapy and who are RAI-refractory or ineligible. To develop and commercialize cabozantinib outside the U.S., we have entered into license agreements with Ipsen and Takeda. To Ipsen, we granted the rights to develop and commercialize cabozantinib outside of the U.S. and Japan, and to Takeda we granted such rights in Japan. Both Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of the cabozantinib franchise in other potential indications, and we work closely with them on these activities. Utilizing its regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of the U.S., including in the EU, the U.K. and Canada, as a treatment for advanced RCC (both as a monotherapy and in combination with nivolumab) and for previously treated HCC and DTC indications. With respect to the Japanese market, Takeda received Manufacturing and Marketing Approvals from the Japanese MHLW for monotherapy CABOMETYX as a treatment of patients with curatively unresectable or metastatic RCC and as a treatment of patients with unresectable HCC that has progressed after cancer chemotherapy, as well as for CABOMETYX in combination with nivolumab as a treatment for unresectable or metastatic RCC.

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We are also pursuing other indications for cabozantinib that have the potential to increase the number of cancer patients who could potentially benefit from this medicine. Building on preclinical and clinical observations that cabozantinib in combination with ICIs may promote a more immune-permissive tumor environment, we initiated several pivotal studies to further explore these combination regimens. The first of these studies to deliver results was CheckMate -9ER, a phase 3 pivotal trial evaluating the combination of CABOMETYX and nivolumab compared to sunitinib in patients with previously untreated, advanced or metastatic RCC. Positive results from CheckMate -9ER served as the basis for the FDA’s, EC’s and MHLW’s approvals of CABOMETYX in combination with nivolumab as a first-line treatment of patients with advanced RCC in January 2021, March 2021 and August 2021, respectively. We are also collaborating with BMS on COSMIC-313, a phase 3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. We announced top-line results from COSMIC-313 in July 2022, and in September 2022 we presented the data at the Presidential Symposium III at the 2022 ESMO Congress. The trial met its primary endpoint, demonstrating significant improvement in BIRC-assessed PFS at the primary analysis for the triplet combination. At two prespecified interim analyses for the secondary endpoint of OS, conducted most recently during the third quarter of 2023, the data did not meet the threshold for statistical significance; therefore, the trial continues to the next planned analysis of OS, anticipated in 2024. The safety profile observed in the trial was reflective of the known safety profiles for each single agent, as well as the combination regimens used in this study. We plan to discuss a potential regulatory submission with the FDA when the results of the next OS analysis are available, provided such results are supportive.

To further expand our exploration of combinations with ICIs, we also initiated multiple trials evaluating cabozantinib in combination with Roche’s ICI, atezolizumab, beginning in 2017 with COSMIC-021, a broad phase 1b study evaluating the safety and tolerability of cabozantinib in combination with atezolizumab in patients with a wide variety of locally advanced or metastatic solid tumors. The encouraging efficacy and safety data that emerged from COSMIC-021 have been instrumental in guiding our clinical development strategy for cabozantinib in combination with ICIs. In August 2023, we announced positive top-line results from CONTACT-02, a phase 3 pivotal trial sponsored by us and co-funded by Roche, evaluating the cabozantinib and atezolizumab combination versus a second NHT in patients with mCRPC and measurable extra-pelvic soft-tissue disease who have progressed after treatment with one prior NHT, and detailed findings from CONTACT-02 were presented at the ASCO Genitourinary Cancers Symposium in January 2024. The trial met one of two primary endpoints, demonstrating a statistically significant improvement in PFS. At a prespecified interim analysis for the primary endpoint of OS, a trend toward improvement of OS was observed; however, the data were immature and did not meet the threshold for statistical significance. Therefore, the trial continues to the next planned OS analysis, anticipated in 2024. The safety profile observed in the trial was reflective of the known safety profiles for each single agent, as well as the combination regimen used in this study. We are discussing a potential regulatory submission with the FDA.

Independent investigators also conduct clinical trials evaluating cabozantinib through our CRADA with NCI-CTEP or our IST program. As reflected by the results from completed trials and ongoing clinical trials, we believe our CRADA with NCI-CTEP has facilitated and may continue to facilitate the expansion of the cabozantinib franchise in a cost-efficient manner. In August 2023, we announced positive results from the CABINET phase 3 pivotal study under our CRADA and conducted by the Alliance that evaluated cabozantinib versus placebo in patients who experienced progression after prior systemic therapy in two independently powered cohorts: one for patients with advanced pNET; and another for patients with epNET. Data from CABINET demonstrated that cabozantinib substantially prolonged the time to disease progression or death in both pNET and epNET cohorts, and that the safety profile of cabozantinib observed in the trial was consistent with its known safety profile. Detailed findings from CABINET were presented during a Proffered Paper Session at the ESMO Congress in October 2023. We are discussing these results with the FDA to support a potential regulatory submission in 2024. In addition to facilitating label expansion for the cabozantinib franchise, data sets from these externally sponsored clinical trials may also prove valuable by informing our development plans for zanzalintinib.

For additional information on our cabozantinib clinical trials, see “Business—Exelixis Development Programs—Cabozantinib Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

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Pipeline Activities

Zanzalintinib

Zanzalintinib is a novel, potent, next-generation oral TKI that targets VEGF receptors, MET and the TAM kinases (TYRO3, AXL and MER) implicated in cancer’s growth and spread, and is our first in-house compound to enter the clinic following our re-initiation of drug discovery activities in 2017. In designing zanzalintinib, we sought to build upon our experience with cabozantinib, retaining a similar target profile while improving key characteristics, including the pharmacokinetic half-life. Zanzalintinib has a pharmacokinetic half-life of approximately one day, supporting once-daily dosing, which could translate into a favorable safety profile compared with other VEGF-receptor TKIs. Taken together with the promising anti-tumor activity, we believe zanzalintinib is positioned to be a best-in-class VEGF-receptor TKI in a wide range of solid tumors when used as a monotherapy, as well as in combination regimens. Accordingly, we are evaluating zanzalintinib in a growing development program that builds on our prior experience with cabozantinib, which we believe reduces program risk. We have also established collaborations and will continue to explore additional opportunities for novel combinations with zanzalintinib with the goal of improving standards of care. To date, we have initiated two large phase 1b/2 clinical trials studying zanzalintinib as a monotherapy and in combination with ICIs (STELLAR-001 and STELLAR-002), one targeted phase 1b/2 trial studying zanzalintinib in combination with Arcus’ AB521 (STELLAR-009), and three phase 3 or phase 2/3 pivotal trials evaluating zanzalintinib in combination with ICIs (STELLAR-303, STELLAR-304 and STELLAR-305).

STELLAR-001 is a phase 1b/2 clinical trial evaluating zanzalintinib, both as a monotherapy and in combination with atezolizumab. We have established the recommended dose of 100 mg for both monotherapy zanzalintinib and zanzalintinib in combination with atezolizumab, and we have completed enrollment in expansion cohorts for patients with clear cell RCC, non-clear cell RCC, hormone-receptor positive breast cancer, mCRPC and CRC. We previously presented data from STELLAR-001 during poster sessions at the 2022 ESMO Congress in September 2022, which showed preliminary clinical activity similar to that observed with cabozantinib in phase 1 across a range of solid tumors and dose levels, with a manageable safety profile. More recently, we presented initial results evaluating monotherapy zanzalintinib in patients with previously treated clear cell RCC during the Oral Abstracts session at IKCS in November 2023. Follow-up continues in this cohort as well as the other completed cohorts, and we continue to be encouraged by zanzalintinib’s emerging safety and efficacy profile, both as a monotherapy and in combination with ICIs. STELLAR-002 is a phase 1b/2 clinical trial evaluating zanzalintinib in combination with either nivolumab, nivolumab and ipilimumab, or a fixed-dose combination of nivolumab and relatlimab. We have established recommended doses of zanzalintinib for these combination regimens and are exploring in a diverse array of solid tumor expansion cohorts, including clear cell RCC, non-clear cell RCC, HCC, mCRPC and CRC; patient enrollment into these expansion cohorts is ongoing. Monotherapy zanzalintinib may also be evaluated to support regulatory requirements for dosing and contribution of components. Most recently, in December 2023, we initiated STELLAR-009, an open-label phase 1b/2 trial evaluating zanzalintinib in combination with AB521 in patients with advanced solid tumors, including clear cell RCC. STELLAR-009 is divided into dose-escalation and expansion phases, and patient enrollment into dose-escalation cohorts is ongoing.

Our first zanzalintinib pivotal trial, STELLAR-303, was initiated in June 2022 and is evaluating zanzalintinib in combination with atezolizumab versus regorafenib in patients with metastatic non-microsatellite instability-high or non-mismatch repair-deficient CRC who have progressed after or are intolerant to the current standard of care. The trial aims to enroll approximately 874 patients at approximately 135 sites globally, regardless of RAS status, with approximately 350 of these patients showing no evidence of liver metastases. Under the amended trial protocol, the primary efficacy endpoint of STELLAR-303 is OS in those patients without liver metastases, and the key secondary efficacy endpoint is OS in the full intent-to-treat population. Additional secondary endpoints include investigator-assessed PFS, ORR and DOR per RECIST v. 1.1 in each population. The second pivotal trial, STELLAR-304, was initiated in December 2022 and is evaluating zanzalintinib in combination with nivolumab versus sunitinib in previously untreated patients with advanced non-clear cell RCC. The trial aims to enroll approximately 291 patients at approximately 173 sites globally. The primary efficacy endpoints of STELLAR-304 are BIRC-assessed PFS and ORR per RECIST v. 1.1. The secondary efficacy endpoint is OS. Most recently, in December 2023, we initiated STELLAR-305, a phase 2/3 pivotal trial evaluating zanzalintinib in combination with Merck & Co.’s pembrolizumab versus monotherapy pembrolizumab in patients with previously untreated PD-L1-positive recurrent or metastatic SCCHN. The primary efficacy endpoints of STELLAR-305 are BIRC-assessed PFS per RECIST v. 1.1 and OS. Secondary endpoints include investigator-assessed PFS per RECIST v. 1.1 and ORR and DOR per RECIST v. 1.1 as assessed by both BIRC and the investigator.

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Beyond STELLAR-303, STELLAR-304 and STELLAR-305, we intend to initiate additional early-stage and pivotal trials evaluating zanzalintinib in novel combination regimens across a broad array of future potential indications. For additional information on our zanzalintinib clinical trials, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—Zanzalintinib Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

Biotherapeutics

Much of our drug discovery activity focuses on discovering and advancing various biotherapeutics that have the potential to become anti-cancer therapies, such as bispecific antibodies, ADCs and other innovative treatments. ADCs in particular present a unique opportunity for new cancer treatments, given their capabilities to deliver anti-cancer drug payloads to targets with increased precision while minimizing impact on healthy tissues. This approach has been validated by multiple regulatory approvals for the commercial sale of ADCs in the past several years. To facilitate the growth of our various biotherapeutics programs, we have established multiple research collaborations and in-licensing arrangements and entered into other strategic transactions, aimed at conserving capital and managing risks, that provide us with access to antibodies, binders, payloads and conjugation technologies, which are the components employed to generate next-generation ADCs or multispecific antibodies.

Furthest along amongst our biotherapeutics programs is XB002, our lead TF-targeting ADC program, in-licensed from Iconic. XB002 is a next-generation ADC composed of a human mAb against TF that is conjugated to an MTI payload. TF is highly expressed on tumor cells and TF overexpression, while not oncogenic itself, facilitates angiogenesis, metastasis and other processes important to tumor development and progression. After binding to TF on tumor cells, XB002 is internalized, and the MTI payload is released, resulting in targeted tumor cell death. XB002 is a rationally designed next-generation ADC that leverages proprietary linker-payload technology. We are evaluating XB002, both as a single agent and in combination with nivolumab, in JEWEL-101, a phase 1 study in patients with advanced solid tumors. In October 2022, we announced promising initial dose-escalation results from JEWEL-101 during the Antibody-drug Conjugates Poster Session at the 2022 ENA Symposium. The data demonstrated that XB002 was well-tolerated at multiple dose levels, and a pharmacokinetic analysis confirmed that XB002 was stable with low levels of free payload. We have initiated the cohort-expansion phase of JEWEL-101 for monotherapy XB002, which is designed to further explore two doses of XB002 in individual tumor cohorts, including NSCLC, SCCHN, cervical cancer and ovarian cancer. Additional cohorts being evaluated with a single dose of XB002 include endometrial cancer, pancreatic cancer, esophageal cancer, mCRPC, triple negative breast cancer and hormone-receptor positive breast cancer, as well as a TF-expressing tumor-agnostic cohort. We are continuing to enroll patients in combination dose-escalation cohorts with nivolumab and will explore the combination potential with zanzalintinib. Additional expansion cohorts are planned for evaluating these various combinations as part of our goal to advance XB002 into full development. We intend to evaluate the potential of XB002 as monotherapy and in combination with other therapies across a wide range of tumor types, including indications other than those currently addressed by commercially available TF-targeting therapies. For additional information on JEWEL-101 and our development plans for XB002, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—XB002 Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

As part of our strategy to access clinical- or near-clinical-stage assets, we executed an exclusive option and license agreement and clinical development collaboration with Sairopa to develop ADU-1805. For more information on this arrangement, see “Business—Collaborations and Business Development Activities—Research Collaborations and In-licensing Arrangements” in Part I, Item 1 of this Annual Report on Form 10-K. ADU-1805 is currently being evaluated in a phase 1 clinical trial to explore its pharmacokinetics, safety, tolerability and preliminary anti-tumor activity in patients with advanced or metastatic refractory solid tumors and includes future plans to investigate the compound’s potential in combination with approved ICIs. For more information on the ADU-1805 development program, see “Business—Exelixis Development Programs—Pipeline Development Programs - Advancing Exelixis’ Future Cancer Therapy Candidates—ADU-1805 Development Program” in Part I, Item 1 of this Annual Report on Form 10-K. In addition to the option deal with Sairopa, some of our active research collaborations for biotherapeutics programs include collaborations with:

•Adagene, which is focused on using Adagene’s SAFEbody technology to develop novel masked ADCs or other innovative biotherapeutics with potential for improved therapeutic index;

•Catalent, which is focused on the discovery and development of multiple ADCs using Catalent’s proprietary SMARTag site-specific bioconjugation technology; and

•Invenra, which is focused on the discovery and development of novel binders and multispecific antibodies for the treatment of cancer.

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We have made significant progress under these and other research collaborations and in-licensing arrangements and believe we will continue to do so in 2024 and future years. For example, as a direct result of these arrangements, we are advancing five biotherapeutics development candidates toward potential IND filings in 2024, 2025 and 2026: XB010, XB628, XB371, XB064, and XB033. XB010, our first ADC advanced internally, targets the tumor antigen 5T4 and incorporates an antibody sourced from Invenra and was constructed using Catalent’s SMARTag site-specific bioconjugation platform. XB628 is a bispecific antibody that targets PD-L1 and NKG2A, identified as key regulators of natural killer cell activity, and was discovered, in part, in collaboration with Invenra. XB371 is a next-generation TF-targeting ADC that is differentiated from XB002 by its topoisomerase inhibitor payload, and was discovered, in part, in collaboration with Catalent. XB064 is a high-affinity mAb that targets ILT2, which is associated with resistance to PD-1 pathway inhibitors, with potential to combine broadly with our internal pipeline and approved immunotherapy agents, and was discovered, in part, in collaboration with Invenra. XB033 is an ADC targeting the tumor antigen IL13Ra2, and was discovered, in part, in collaboration with Invenra and Catalent.

For additional information on these specific research collaborations and in-licensing arrangements related to our biotherapeutics programs, see “Business—Collaborations and Business Development Activities—Research Collaborations and In-licensing Arrangements” in Part I, Item 1 of this Annual Report on Form 10-K.

Other Small Molecules

Since its formation in 2000, our drug discovery group has advanced 25 compounds to the IND stage, either independently or with collaboration partners, and today we deploy our drug discovery expertise to advance small molecule programs toward and through preclinical development. These efforts are led by our experienced scientists, including some of the same scientists who led the efforts to discover cabozantinib, cobimetinib and esaxerenone, each of which are now commercially distributed drug products. For example, as discussed above, zanzalintinib, which was discovered at Exelixis, is furthest along and is now being evaluated in phase 3 clinical trials. We are also advancing a small molecule development candidate, XL495, toward a potential IND filing in 2024. XL495 is an inhibitor of PKMYT1 with best-in-class potential to treat solid tumors due to its improved selectivity and pharmacokinetics. In addition, we augment our small molecule discovery activities through research collaborations and in-licensing arrangements with other companies engaged in small molecule discovery. Most recently, in September 2023, we entered into an exclusive global license agreement with Insilico, granting us global rights to develop and commercialize XL309, a potentially best-in-class small molecule inhibitor of USP1, which has emerged as a synthetic lethal target in the context of BRCA-mutated tumors. In April 2023, the FDA cleared the initial IND for XL309 for the treatment of patients with solid tumors. For additional information on our development plans for XL309, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—XL309 Development Program” in Part I, Item 1 of this Annual Report on Form 10-K, and for additional information on our research collaborations and in-licensing arrangements related to our small molecule programs, see “—Collaborations and Business Development Activities—Research Collaborations and In-licensing Arrangements.” We also continue to make progress on multiple lead optimization programs for inhibitors of a variety of targets that we believe play significant roles in tumor growth, and we anticipate that some of these other programs could reach development candidate status in 2024 and beyond.

Future Expansion of our Pipeline

Increasing the number of novel anti-cancer agents in our pipeline is essential to our overall strategy and business goals. We are working to expand our oncology product pipeline through drug discovery efforts, which encompass our diverse biotherapeutics and small molecule programs exploring multiple modalities and mechanisms of action. This approach provides a high degree of flexibility with respect to target selection and allows us to prioritize those targets that we believe have the greatest chance of yielding impactful therapeutics. As part of our strategy, our drug discovery activities have included and continue to include research collaborations, in-licensing arrangements and other strategic transactions that collectively incorporate a wide range of technology platforms and assets and increase our probability of success. As of the date of this Annual Report on Form 10-K, we expect to progress two new development candidates into preclinical development during 2024. We will continue to engage in pipeline expansion initiatives with the goal of acquiring and in-licensing promising investigational oncology assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

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2023 Business Updates and Financial Highlights

During 2023, we continued to execute on our business objectives, generating significant revenues from operations and enabling us to continue to seek to maximize the clinical and commercial potential of our products and expand our product pipeline. Significant business updates and financial highlights for 2023 and subsequent to year-end include:

Business Updates

•In January 2023, the Delaware District Court issued a ruling in the MSN I trial, rejecting MSN’s challenge to U.S. Patent No. 7,759,473, which expires August 14, 2026. The Delaware District Court also ruled that MSN’s proposed ANDA product does not infringe U.S. Patent No. 8,877,776, which expires October 8, 2030, and entered judgment that the effective date of any final FDA approval of MSN’s ANDA shall not be a date earlier than August 14, 2026, the expiration date of U.S. Patent No. 7,759,473. This ruling in MSN I does not address the parties’ claims in MSN II. For a more detailed discussion of the MSN litigation matters, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In February 2023, cabozantinib in patients with forms of RCC was the subject of multiple data presentations at the 2023 ASCO Genitourinary Cancers Symposium.

•In March 2023, Sairopa initiated a phase 1 clinical trial evaluating ADU-1805, a potentially best-in-class monoclonal antibody developed by Sairopa that targets SIRPα, following the FDA’s clearance of Sairopa’s IND filing in February 2023.

•In March 2023, we announced results from the phase 3 CONTACT-03 trial evaluating cabozantinib in combination with atezolizumab versus cabozantinib alone in patients with locally advanced or metastatic clear cell or non-clear cell, papillary or unclassified only, RCC who progressed during or after immune checkpoint inhibitor therapy, either combination or monotherapy, in which the combination did not meet its primary endpoint of PFS.

•In March 2023, we filed a patent lawsuit in the Delaware District Court against Cipla asserting infringement of U.S. Patents No. 8,877,776, 11,091,439, 11,091,440, 11,098,015 and 11,298,349 arising from Cipla’s February 2023 notice letter, which notified us that Cipla filed an ANDA with the FDA requesting approval to market a generic version of CABOMETYX tablets prior to the expiration of the aforementioned patents. For a more detailed discussion of the Cipla litigation matter, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In March 2023, we announced that our Board of Directors had authorized the repurchase of up to $550 million of our common stock, which was completed in 2023.

•In May 2023, Tomas J. Heyman, David E. Johnson and Robert L. Oliver were elected to our Board of Directors at our 2023 Annual Meeting of Stockholders. Mr. Heyman currently serves as the interim Chief Executive Officer of Interlaken Therapeutics, Inc., having previously served for over 35 years at Johnson & Johnson, most recently as President of the venture capital group, Johnson & Johnson Innovation. Mr. Johnson currently serves as the Managing Partner and Chief Investment Officer of Caligan Partners LP. Mr. Oliver currently serves as an Executive Advisor of Cellix Biosciences, Inc. and of Hyalo Technologies, LLC, having previously served in a variety of senior positions at Otsuka America Pharmaceutical, including as President and Chief Executive Officer, and at Wyeth Pharmaceuticals. These new directors filled vacancies on our Board of Directors following the departures of Carl B. Feldbaum, Esq., Vincent T. Marchesi, M.D., Ph.D. and Lance Willsey, M.D. in May 2023.

•In June 2023, cabozantinib was the subject of multiple presentations at the 2023 ASCO Annual Meeting, including three-year quality-of-life follow-up data from CheckMate -9ER and detailed results from CONTACT-03, as well as updated data from the phase 1 study of CBX-12.

•In July 2023, we announced entry into a settlement agreement with Teva. This settlement resolves patent litigation we brought in response to Teva’s ANDA seeking approval to market a generic version of CABOMETYX prior to the expiration of certain of our patents. For a more detailed discussion of this litigation matter involving Teva, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In August 2023, we announced positive results from the phase 3 CONTACT-02 trial evaluating cabozantinib in combination with atezolizumab versus a second NHT in patients with mCRPC and measurable extra-pelvic soft-tissue disease who have progressed after treatment with a prior NHT. The combination met one of the primary endpoints, demonstrating a statistically significant improvement in PFS at the primary analysis. At a prespecified interim analysis for the other primary endpoint of OS, a trend toward improvement of OS was observed; however, the data were immature and did not meet the threshold for statistical significance. Therefore, the trial continues to the next planned OS analysis, anticipated in 2024.

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•In August 2023, we appointed Amy Peterson, M.D., as our new Executive Vice President, Product Development & Medical Affairs, and Chief Medical Officer of the Company.

•In August 2023, we announced the early unblinding and halting of The Alliance’s phase 3 CABINET trial due to dramatic improvements in PFS observed at interim analyses and based on local investigator assessment. Detailed findings from CABINET were presented during a Proffered Paper Session at the 2023 ESMO Congress in October 2023. We are discussing these results with the FDA to support a potential regulatory submission in 2024.

•In September 2023, we entered into an exclusive license agreement with Insilico, which grants us global rights to develop and commercialize XL309. We completed the transfer of stewardship of the ongoing phase 1 clinical trial evaluating XL309 from Insilico to us during the fourth quarter of 2023.

•In November 2023, we presented data from the clear cell RCC expansion cohort of STELLAR-001 during the Oral Abstracts session at the 2023 International Kidney Cancer Symposium.

•In December 2023, we announced a clinical trial collaboration with Arcus and the initiation of STELLAR-009, a phase 1b/2 trial evaluating zanzalintinib in combination with AB521 in patients with advanced solid tumors, including clear cell RCC.

•In December 2023, we announced the initiation of STELLAR-305, a global phase 2/3 pivotal trial evaluating zanzalintinib in combination with pembrolizumab versus pembrolizumab as a monotherapy in patients with previously untreated PD-L1-positive recurrent or metastatic SCCHN.

•In December 2023, we hosted our R&D Day: Science & Strategy event in New York City to provide a strategic review of our biotherapeutics and small molecule pipeline.

•In January 2024, we appointed Mary C. Beckerle, Ph.D. and Gail Eckhardt, M.D. to our Board of Directors. Dr. Beckerle currently serves as Chief Executive Officer of the Huntsman Cancer Institute and Distinguished Professor of Biological and Oncological Sciences at the University of Utah. Dr. Eckhardt currently serves as Associate Dean of Experimental Therapeutics at Baylor College of Medicine and Associate Director of Translational Research at the College’s Dan L. Duncan Comprehensive Cancer Center.

•In January 2024, we announced that our Board of Directors had authorized the repurchase of up to $450 million of our common stock before the end of 2024.

•In January 2024, we presented detailed results from CONTACT-02 and four-year follow-up results from CheckMate -9ER at the 2024 ASCO Genitourinary Cancers Symposium.

Financial Highlights

•Net product revenues for 2023 were $1,628.9 million, as compared to $1,401.2 million for 2022.

•Total revenues for 2023 were $1,830.2 million, as compared to $1,611.1 million for 2022.

•Research and development expenses for 2023 were $1,044.1 million, as compared to $891.8 million for 2022.

•Selling, general and administrative expenses for 2023 were $542.7 million, as compared to $459.9 million for 2022.

•Provision for income taxes for 2023 was $49.8 million, as compared to $52.1 million for 2022.

•Net income for 2023 was $207.8 million, or $0.65 per share, basic and diluted, as compared to $182.3 million, or $0.57 per share, basic and $0.56 per share, diluted, for 2022.

See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.

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Outlook, Challenges and Risks

We will continue to face numerous challenges and risks that may impact our ability to execute on our business objectives. In particular, for the foreseeable future, we expect our ability to generate sufficient cash flow to fund our business operations and growth will depend upon the continued commercial success of CABOMETYX, both alone and in combination with other therapies, as a treatment for the highly competitive indications for which it is approved, and possibly for other indications for which cabozantinib is currently being evaluated in potentially label-enabling clinical trials, if warranted by the data generated from these trials. However, we cannot be certain that the clinical trials we and our collaboration partners are conducting will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial markets where CABOMETYX is approved. Even if the required regulatory approvals to market CABOMETYX for additional indications are achieved, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in these additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. As is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is becoming increasingly difficult, both within the U.S. and in foreign markets. In addition, healthcare policymakers in the U.S. are increasingly expressing concern over healthcare costs, and corresponding legislative and policy initiatives and activities have been launched aimed at increasing the healthcare cost burdens borne by pharmaceutical manufacturers, as well as expanding access to, and restricting the prices and growth in prices of, pharmaceuticals.

Achievement of our business objectives will also depend on our ability to maintain a competitive position in the shifting landscape of therapeutic strategies for the treatment of cancer, which we may not be able to do. On an ongoing basis, we assess the constantly evolving landscape of other approved and investigational cancer therapies that could be competitive, or complementary in combination, with our products, and then we adapt our development strategies for the cabozantinib franchise and our pipeline product candidates accordingly, such as by modifying our clinical trials to include evaluation of our therapies with ICIs and other targeted agents. Even if our current and future clinical trials produce positive results sufficient to obtain marketing approval by the FDA and other global regulatory authorities, it is uncertain whether physicians will choose to prescribe regimens containing our products instead of competing products and product combinations in approved indications.

In the longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic versions of CABOMETYX tablets that are the subject of ANDAs submitted to the FDA by MSN, Teva and Cipla. The approval of any of these ANDAs and subsequent launch of any generic version of CABOMETYX could significantly decrease our revenues derived from the U.S. sales of CABOMETYX and thereby materially harm our business, financial condition and results of operations.

Separately, our research and development objectives may be impeded by the challenges of scaling our organization to meet the demands of expanded drug development, unanticipated delays in clinical testing and the inherent risks and uncertainties associated with drug discovery operations, especially on the global level. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new potential cancer treatments or identifying appropriate candidates for in-licensing or acquisition.

Some of these challenges and risks are specific to our business, others are common to companies in the biopharmaceutical industry with development and commercial operations, and an additional category are macroeconomic, affecting all companies. For a more detailed discussion of challenges and risks we face, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Results of Operations

We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 2021 ended December 31, 2021; fiscal year 2022 ended December 30, 2022; fiscal year 2023 ended December 29, 2023; and fiscal year 2024 will end on January 3, 2025. For convenience, references in this report as of and for the fiscal years ended December 30, 2022, and December 29, 2023 are indicated as being as of and for the years ended December 31, 2022 and 2023, respectively. In fiscal year 2024, the annual period and quarterly period ending January 3, 2025 are a 53-week fiscal year and a 14-week fiscal quarter, respectively; all other annual periods presented are 52-week fiscal years.

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This discussion and analysis generally addresses 2023 and 2022 items and year-over-year comparisons between 2023 and 2022. Discussions of 2021 items and year-over-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 7, 2023.

Revenues

Revenues by category were as follows (dollars in thousands):

Net Product Revenues

Gross product revenues, discounts and allowances, and net product revenues were as follows (dollars in thousands):

Net product revenues by product were as follows (dollars in thousands):

The increase in net product revenues for the year ended December 31, 2023, as compared to 2022, was primarily related to a 9% increase in the number of CABOMETYX units sold as a result of the FDA’s approval of CABOMETYX in combination with nivolumab as a first-line treatment of patients with advanced RCC, and, to a lesser extent, a 7% increase in the average net selling price of CABOMETYX. The increase in sales volume is largely driven by refills due to the longer duration of therapy for this combination and an increase in related market share reflecting the continued evolution of the metastatic RCC, HCC and DTC treatment landscapes.

We project our net product revenues may increase in fiscal year 2024, as compared to 2023, for similar reasons noted above.

We recognize product revenues net of discounts and allowances that are described in “Note 1. Organization and Summary of Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Discounts and allowances as a percentage of gross revenues have generally increased over time as the number of patients participating in government programs has increased and as the discounts given and rebates paid to government payers have also increased. The increase in the amount of discounts and allowances for the year ended December 31, 2023, as compared to 2022, was primarily the result of an increase in the volume of units sold and higher utilization by covered entities in the 340B Drug Pricing Program.

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We project our discounts and allowances as a percentage of gross revenues may increase during fiscal year 2024 for similar reasons noted above.

License Revenues

License revenues include: (a) the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable, in the related period, that a milestone would be achieved and a significant reversal of revenues would not occur in future periods; (b) royalty revenues; and (c) the profit on the U.S. commercialization of COTELLIC from Genentech.

See “Note 3. Collaborations and Business Development Activities—Cabozantinib Commercial Collaborations—Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” in the “Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K for a discussion on the allocation of transaction price which impacts the proportion of milestone revenues allocated to license revenues and collaboration services revenues.

Milestone revenues, which are allocated between license revenues and collaboration services revenues, were $15.0 million for the year ended December 31, 2023, as compared to $28.9 million for 2022. Milestone revenues by fiscal year included the following:

•For the year ended December 31, 2023, $10.0 million in revenues was recognized in connection with a commercial milestone of $11.0 million from Takeda upon their achievement of $150.0 million of cumulative net sales of cabozantinib in Japan.

•For the year ended December 31, 2022, $25.8 million in revenues was recognized in connection with two regulatory milestones totaling $27.0 million upon the approval by the EC and Health Canada of cabozantinib as a monotherapy for the treatment of adult patients with locally advanced or metastatic DTC, refractory or not eligible to RAI who have progressed during or after prior systemic therapy.

Due to uncertainties surrounding the timing and achievement of development, regulatory and commercial milestones, it is difficult to predict the timing of future milestones revenues; consequently, milestones may vary significantly from period to period.

Royalty revenues increased primarily as a result of an increase in Ipsen’s net sales of cabozantinib outside of the U.S. and Japan. Ipsen royalties were $135.8 million for the year ended December 31, 2023, as compared to $110.1 million for 2022. Ipsen’s net sales of cabozantinib have continued to grow since the first commercial sale of CABOMETYX in the Ipsen territories in 2016, primarily due to regulatory approvals in new territories, including regulatory approval in the EU for the combination therapy of CABOMETYX and nivolumab received in March 2021. Royalty revenues for the year ended December 31, 2023 also included $12.7 million, as compared to $11.3 million for 2022, related to Takeda’s net sales of cabozantinib, which have continued to grow since their first commercial sale of CABOMETYX in Japan in 2020. As of December 31, 2023, CABOMETYX is approved and commercially available in 69 countries outside of the U.S.

Our share of profits on the U.S. commercialization of COTELLIC under our collaboration agreement with Genentech was $13.0 million for the year ended December 31, 2023, as compared to $7.7 million for 2022. We also earned royalty revenues on ex-U.S. net sales of COTELLIC by Genentech of $3.9 million for the year ended December 31, 2023, as compared to $4.8 million for 2022.

We project our license revenues may remain flat in fiscal year 2024, as compared to 2023, as a result of the anticipated achievement of fewer milestones in 2024, partially offset by an increase in royalty revenues related to an increase in product sales by Ipsen and Takeda.

Collaboration Services Revenues

Collaboration services revenues include the recognition of deferred revenues for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, and product supply revenues, which are net of product supply costs and the royalties we pay to Royalty Pharma on sales by Ipsen and Takeda of products containing cabozantinib.

Development cost reimbursements were $35.6 million for the year ended December 31, 2023, as compared to $60.3 million for 2022. The decrease in development cost reimbursements was primarily attributable to decreases in spending on the CONTACT-02, COSMIC-312, COSMIC-311 and COSMIC-021 studies.

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Collaboration services revenues were reduced by $19.2 million and $16.2 million for the years ended December 31, 2023 and 2022, respectively, as a result of the 3% royalty we are required to pay on the net sales by Ipsen and Takeda of any product containing cabozantinib. As royalty generating sales of cabozantinib by Ipsen and Takeda have increased as described above, our royalty payments have also increased.

We project our collaboration services revenues may decrease in fiscal year 2024, as compared to 2023, primarily as a result of a decrease in development cost reimbursement revenues and uncertainties regarding the timing and achievement of commercial milestone revenues.

Cost of Goods Sold

The cost of goods sold and our gross margins were as follows (dollars in thousands):

Cost of goods sold is related to our product revenues and consists of a 3% royalty payable on U.S. net sales of any product containing cabozantinib, as well as the cost of inventory sold, indirect labor costs, write-downs related to expiring, excess and obsolete inventory, and other third-party logistics costs. The increase in cost of goods sold for the year ended December 31, 2023, as compared to 2022, was primarily the result of increases in royalties from the increase in U.S. CABOMETYX sales and certain period costs. We project our gross margin in fiscal year 2024 will remain consistent with fiscal year 2023.

Research and Development Expenses

We do not track fully burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: (1) development; (2) drug discovery; and (3) other research and development. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or may be studied in clinical trials. Development expenses include license and other collaboration costs, primarily comprised of upfront license fees, development milestones and other payments associated with our clinical-stage in-licensing collaboration programs, clinical trial costs, personnel expenses, consulting and outside services and other development costs, including manufacturing costs of our drug development candidates. Our drug discovery group utilizes a variety of technologies, including in-licensed technologies, to enable the rapid discovery, optimization and extensive characterization of lead compounds and biotherapeutics such that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development. Drug discovery expenses include license and other collaboration costs primarily comprised of upfront license fees, research funding commitments, development milestones and other payments associated with our in-licensing collaboration programs in preclinical development stage. Other drug discovery costs include personnel expenses, consulting and outside services and laboratory supplies. Other research and development expenses include the allocation of general corporate costs to research and development services and development cost reimbursements in connection with certain of our collaboration arrangements.

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Research and development expenses by category were as follows (dollars in thousands):

The increase in research and development expenses for the year ended December 31, 2023, as compared to 2022, was primarily related to manufacturing costs to support Exelixis’ development candidates (presented as part of other development costs), personnel expenses, clinical trial costs and other research and development expenses, partially offset by decreases in license and other collaboration costs and stock-based compensation expense. Personnel expenses increased primarily due to an increase in headcount to support our discovery and development organization. Clinical trial costs, which include services performed by third-party contract research organizations and other vendors who support our clinical trials, increased primarily due to higher costs associated with studies evaluating zanzalintinib and XB002, partially offset by decreases in costs associated with cabozantinib studies. Other research and development costs increased primarily related to technology costs, including our investments in digital transformation initiatives to support productivity and efficiency in our organization, and an increase in facility expenses. License and other collaboration costs decreased primarily due to lower upfront payments from new in-licensing collaboration arrangements, partially offset by higher development milestone achievement. Stock-based compensation expense decreased primarily due to higher forfeitures.

In addition to reviewing the three categories of research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. These factors include enrollment in clinical trials for our product candidates, preliminary data and final results from clinical trials, the potential market indications and overall clinical and commercial potential for our product candidates, and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy.

We project that clinical trial costs may continue to increase with higher costs associated with various studies evaluating zanzalintinib, XB002 and XL309, partially offset by decreases in costs associated with cabozantinib studies. We continue our development efforts with cabozantinib to maximize the therapeutic and commercial potential of this compound. Notable ongoing company-sponsored cabozantinib studies include: CONTACT-02, for which Roche is sharing the development costs and providing atezolizumab free of charge; and COSMIC-313, for which BMS is providing nivolumab and ipilimumab free of charge.

To continue growing our pipeline, we are prioritizing investment in new molecules that are clinically differentiated with the potential to improve the standard of care for our cancer patients, including current and planned clinical trial programs evaluating zanzalintinib, XB002 and XL309. We are also working to expand our oncology product pipeline through drug discovery efforts, which encompass our diverse biotherapeutics and small molecule programs exploring multiple modalities and mechanisms of action. As part of our strategy, our drug development activities have included and continue to include research collaborations, in-licensing arrangements and other strategic transactions that collectively incorporate a wide range of technology platforms and assets and increase our probability of success. We will continue to engage in pipeline expansion initiatives with the goal of acquiring and in-licensing promising oncology assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

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We project our research and development expenses may decrease in fiscal year 2024, as compared to 2023, primarily driven by decreases in license and collaboration expenses and personnel expenses that result from the implementation of a corporate restructuring plan announced in January 2024 to prioritize the advancement of clinical and near-clinical programs, partially offset by higher manufacturing costs to support development candidates and clinical trial costs, including the current and planned trials evaluating zanzalintinib, XB002 and XL309.

A discussion of the risks and uncertainties with respect to our research and development activities, and the consequences to our business, financial position, and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were as follows (dollars in thousands):

____________________

(1)    Excludes stock-based compensation allocated to selling, general and administrative expenses.

Selling, general and administrative expenses consist primarily of personnel expenses, stock-based compensation, marketing costs and certain other administrative costs.

The increase in selling, general and administrative expenses for the year ended December 31, 2023, as compared to 2022, was primarily related to increases in personnel expenses, technology costs, facility expenses, legal and advisory fees related to litigation and the proxy contest, and stock-based compensation expense. Personnel expenses increased primarily due to increases in administrative headcount to support our commercial and research and development organizations. The increases in technology costs include our investments in business technology initiatives, including cybersecurity, to support productivity and efficiency in our organization. The increase in facility expenses was primarily due to the commencement of new leases in 2022 and 2023. Stock-based compensation expense increased primarily due to higher expense associated with the achievement of certain performance conditions for PSUs.

We project our selling, general and administrative expenses may decrease in fiscal year 2024, as compared to 2023, due to decreases in consulting and outside services and legal and advisory fees.

Non-Operating Income

Non-operating income was as follows (dollars in thousands):

The increase in non-operating income for the year ended December 31, 2023, as compared to 2022, was primarily the result of an increase in interest income due to higher interest rates.

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Provision for Income Taxes

The provision for income taxes and the effective tax rates were as follows (dollars in thousands):

The decrease in provision for income taxes for the year ended December 31, 2023, as compared to 2022, was primarily due to an increase in the generation of federal tax credits and the non-deductible warrant purchase in 2022. The effective tax rate for the year ended December 31, 2023 differed from the U.S. federal statutory rate of 21% primarily due to the generation of federal tax credits, partially offset by non-deductible executive compensation. The effective tax rate for the year ended December 31, 2022 differed from the U.S. federal statutory rate of 21% primarily due to the change in valuation allowance and a non-deductible warrant purchase, partially offset by the generation of federal tax credits. We project that our effective tax rate may be between 20% and 22% in fiscal year 2024.

Impact of Duration of Fiscal Years

We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. 2024 will be a 53-week fiscal year as compared to 52-week fiscal years for 2023, 2022 and 2021. Accordingly, the 53-week fiscal year in 2024 may result in a modest increase in revenues and expenses, as compared to 2023, 2022 and 2021.

Liquidity and Capital Resources

As of December 31, 2023, we had $1.7 billion in cash, cash equivalents and investments, as compared to $2.1 billion as of December 31, 2022. We anticipate that the aggregate of our current cash and cash equivalents, short-term investments available for operations, net product revenues and collaboration revenues will enable us to maintain our operations for at least 12 months and thereafter for the foreseeable future.

We project our cash requirements for operating activities may decrease in fiscal year 2024 as compared to 2023, in part due to the implementation of a corporate restructuring plan (the Plan) announced in January 2024 to reduce our workforce and rebalance the Company’s cost structure in alignment with strategic priorities. Our primary cash requirements for operating activities are employee related expenditures; payments related to our development programs; income tax payments; royalty payments on our net product sales; cash payments for inventory; rent payments for our leased facilities; contract manufacturing payments; and restructuring cash payments related to the Plan.

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, modified the tax treatment of research and development expenditures beginning in fiscal year 2022. Research and development expenditures are no longer currently deductible but instead must be amortized ratably over five years for domestic expenditures or 15 years for foreign expenditures. As a result, we generated a higher federal income tax liability in fiscal year 2023, which required higher estimated federal tax payments by the end of 2023. We will realize a reduction of our federal income tax liability in future years as the capitalized research and development expenditures are amortized for tax purposes.

Our primary sources of operating cash are: cash collections from customers related to net product sales, which we project may increase in fiscal year 2024, as compared to 2023; cash collections related to milestones achieved and royalties earned from our commercial collaboration arrangements with Ipsen, Takeda and others; and cash collections for cost reimbursements under certain of our development programs with Ipsen and Takeda, which we project may decrease in fiscal year 2024, as compared to 2023.

The timing of cash generated from commercial collaborations and cash payments required for in-licensing collaborations relative to upfront license fee payments, research funding commitments, cost reimbursements, exercise of option payments and other contingent payments such as development milestone payments may vary from period to period.

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We project that we may continue to spend significant amounts of cash to fund the development of product candidates in our pipeline, including zanzalintinib, XB002 and XL309, and the development and commercialization of cabozantinib. In addition, we may continue to expand our oncology product pipeline through additional research collaborations, in-licensing arrangements and other strategic transactions that align with our oncology drug development, regulatory and commercial expertise.

In January 2024, our Board of Directors authorized the repurchase of up to $450.0 million of our common stock before the end of 2024. The timing and amount of any stock repurchases under the stock repurchase program will be based on a variety of factors, including ongoing assessments of the capital needs of the business, alternative investment opportunities, the market price of Exelixis’ common stock and general market conditions.

Financing these activities could materially impact our liquidity and capital resources and may require us to incur debt or raise additional funds through the issuance of equity. Furthermore, even though we believe we have sufficient funds for our current and future operating plans, we may choose to incur debt or raise additional funds through the issuance of equity based on market conditions or strategic considerations.

Sources and Uses of Cash (dollars in thousands):

Working capital: The decrease in working capital as of December 31, 2023, as compared to December 31, 2022, was primarily due to payments for repurchases of common stock, partially offset by the favorable impact to our net current assets resulting from our net income. In the future, our working capital may be impacted by one of these factors or other factors, the amounts and timing of which are variable.

Cash, cash equivalents and investments: Cash and cash equivalents primarily consist of deposits at major banks, money market funds, commercial paper and other securities with original maturities 90 days or less. Investments primarily consist of debt securities available-for-sale. For additional information regarding our cash, cash equivalents and investments, see “Note 4. Cash and Investments,” in our “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. The decrease in cash, cash equivalents and investments at December 31, 2023, as compared to December 31, 2022, was primarily due to payments for repurchases of common stock, payments to support our development and discovery programs, including acquisition of acquired in-process research and development technology, tax payments and operating cash payments for employee-related expenditures, partially offset by cash inflows generated by our operations from sales of our products and our commercial collaboration arrangements.

Cash flow activities were as follows (in thousands):

Operating Activities

Cash provided by operating activities is derived by adjusting our net income for non-cash operating items such as deferred taxes, stock-based compensation, depreciation, non-cash lease expense, and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Consolidated Statements of Income.

Net cash provided by operating activities decreased for the year ended December 31, 2023, as compared to 2022, primarily due to an increase in cash paid for certain operating expenses, higher tax payments and the collection of a $100.0 million milestone payment from Ipsen in 2022, partially offset by an increase in cash received on sales of our products.

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Investing Activities

The changes in cash flows from investing activities primarily relates to the timing of marketable securities investment activity, acquisition of acquired in-process research and development technology and capital expenditures. Our capital expenditures primarily consist of investments to expand our operations and acquire assets that further support our research and development activities.

Net cash used in investing activities decreased for the year ended December 31, 2023, as compared to 2022, primarily due to a decrease in purchases of investments, partially offset by a decrease in cash proceeds from maturities and sales of investments, an increase in purchases of in-process research and development technology related to certain in-licensing collaboration arrangements and an increase in purchases of property and equipment.

Financing Activities

The changes in cash flows from financing activities primarily relate to payments for repurchases of common stock, proceeds from employee stock programs and taxes paid related to net share settlement of equity awards.

Net cash was used in financing activities for the year ended December 31, 2023, as compared to cash provided by financing activities in 2022. During the year ended December 31, 2023, cash used in financing activities was primarily related to payments for repurchases of common stock, which were $550.4 million. During the year ended December 31, 2022 cash provided by financing activities was related to proceeds from employee stock programs that were mostly offset by withholding taxes remitted to the government related to net share settlements of equity awards.

Contractual Obligations

As of December 31, 2023, we anticipate the aggregate of our cash, cash equivalents and short-term investments and cash generated from operations to be sufficient to fund our contractual obligations, as well as cash requirements to support our ongoing operations and capital expenditures. Our contractual obligations as of December 31, 2023 primarily consist of:

Operating leases: We have certain lease agreements related to our corporate campus facilities and laboratory facilities located in California and Pennsylvania, under which we are obligated to make lease payments. As of December 31, 2023, we had $26.3 million of lease payments due in one year and $289.3 million due over the remaining lease term.

Purchase obligations: Purchase obligations include firm purchase commitments related to manufacturing of inventory, software services and other facilities and equipment. As of December 31, 2023, we had $59.7 million total purchase obligations due within one year and $7.4 million due after one year.

Contingent payments: We have committed to make certain contingent payments for potential future milestones, research funding commitments and royalties to certain collaboration partners, including contingent exercise fee payments if we decide to exercise certain of our options to in-license or acquire in-process research and development technology as part of our agreements with those parties. We do not expect these contingent payments to have a significant impact on our liquidity in the near term.

Notes 3 and 11 of “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K include additional information regarding our contractual obligations and contingencies.

As of December 31, 2023, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.

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Critical Accounting Policies and Estimates

The preparation of our Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances as well as milestones included in collaboration arrangements; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions; and the amounts of deferred tax assets and liabilities including the related valuation allowance. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates.

We believe our critical accounting policies relating to revenue recognition, clinical trial and collaboration accruals, stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.

For a complete description of our significant accounting policies, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

Net Product Revenues and Discounts and Allowances

We recognize revenues when our customers obtain control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) returns. We record estimates for these deductions at the time we recognize the related gross product revenue. However, the actual rebate or chargeback on the sale of our product to a distributor is not invoiced to us until a future period, generally within three months from the date of sale. Due to this time lag, we must estimate the amount of rebates and chargebacks to accrue. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates. We update our estimates every quarter to reflect actual claims and other current information. Actual rebates and chargebacks claimed for prior periods have varied from our estimates by less than 1% of the amount deducted from gross product revenues for the years ended December 31, 2023 and 2022. Our current estimates may differ significantly from actual results.

Collaboration Revenues

We enter into collaboration arrangements with third parties, under which we license certain rights to our intellectual property, and account for the arrangements as either license revenue or collaboration services revenue when the counterparty is a customer. The terms of these arrangements may include payments to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; product supply services; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products.

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As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We use key assumptions to determine the standalone selling price, which may include forecast revenues and costs, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. At the end of each subsequent reporting period, we re-evaluate the probability of earning of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. For arrangements that may include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sale occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Development milestone adjustments are recorded on a cumulative catch-up basis, which would affect collaboration services revenues in the period of adjustment. In addition, in recording revenues for our research and development services performance obligations, we use projected development cost estimates to determine the amount of revenue to record as we satisfy this performance obligation.

Clinical Trial and Collaboration Accruals

We execute all of our clinical trials with support from contract research organizations and other vendors and we accrue costs for clinical trial activities performed by these third parties based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the activities performed for each patient, the number of active clinical sites and the duration for which the patients will be enrolled in the trial. Certain of our in-licensing collaboration arrangements include contingent payments in the form of development, regulatory and commercial milestones. We recognize expense for contingent payments when they are deemed probable of achievement which requires judgment as to the probability and timing of the achievement of the underlying milestones. To the extent actual results, or updated probability estimates, differ from current estimates, such amounts are recorded as an adjustment in the period estimates are revised. We monitor patient enrollment levels and assess the related research and development activities progress, including the probability of achieving milestones payments associated to the respective terms and conditions of our in-licensing and collaboration arrangements to the extent possible through internal reviews and estimates of the operational progress of our discovery and early-stage clinical development programs, correspondence with contract research organizations and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-based Compensation

Stock-based compensation expense requires us to estimate the fair value of performance-based restricted stock units (PSUs) and restricted stock units (RSUs) subject to market conditions, and estimate the number of shares subject to PSUs and RSUs with market conditions that will ultimately vest. To determine the fair value, we use models that require a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns and risk-free interest rates. Monte Carlo simulation models are used to determine grant date fair value of awards with market conditions. The assumptions used in calculating the fair value of market conditions awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

We recognize stock-based compensation for PSUs over the requisite service period only for awards which we estimate will ultimately vest, which requires judgment as to the probability and timing of the achievement of the underlying performance goals. Significant factors we consider in making those judgments include forecasts of our product revenues and those of our collaboration partners, estimates regarding the operational progress of late-stage clinical development programs and discovery pipeline expansion performance targets. To the extent actual results, or updated estimates, differ from current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised and as such, can materially affect our stock-based compensation expense in the current period and in the future. Compensation expense related to RSUs with market vesting conditions is recognized regardless of the outcome of the market conditions.

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Income Taxes

We compute our income tax provision or benefit under the asset and liability method. Significant estimates are required in determining our income tax provision or benefit. We base some of these estimates on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that we deem a reversal of any portion of our valuation allowance against our deferred tax assets to be appropriate, we recognize a tax benefit against our income tax provision in the period of such reversal.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities based on the technical merits of the position. The tax benefit recognized in the Consolidated Financial Statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by tax authorities, new information obtained during a tax examination or resolution of an examination. We have elected to record interest and penalties in the accompanying Consolidated Statements of Income as a component of income taxes.

Recent Accounting Pronouncements

For a description of the expected impact of recent accounting pronouncements, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are 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 company’s or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

Overview

We are an oncology company innovating next-generation medicines and combination regimens at the forefront of cancer care. Through the commitment of our drug discovery, development and commercialization resources, we have produced four marketed pharmaceutical products, including our flagship molecule, cabozantinib. We continue to evolve our product portfolio, leveraging our investments, expertise and strategic partnerships, to target an expanding range of tumor types and indications with our clinically differentiated pipeline of small molecules, ADCs and other biotherapeutics.

Sales related to cabozantinib account for the majority of our revenues. Cabozantinib is an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET and has been approved by the FDA and in 62 other countries as: CABOMETYX tablets, both alone and in combination with BMS’ OPDIVO for advanced RCC, for previously treated HCC and, currently by the FDA and EC, for previously treated, RAI-refractory DTC and COMETRIQ capsules approved for progressive, metastatic MTC. For physicians treating these types of cancer, cabozantinib has become or is becoming an important medicine in their selection of effective therapies.

The other two products resulting from our discovery efforts are: COTELLIC, an inhibitor of MEK, approved as part of multiple combination regimens to treat specific forms of advanced melanoma and marketed under a collaboration with Genentech; and MINNEBRO, an oral, non-steroidal, selective blocker of MR, approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo.

We plan to continue leveraging our operating cash flows to support the ongoing investigation of cabozantinib in phase 3 trials for new indications and the advancement of a broad array of diverse biotherapeutics and small molecule programs for the treatment of cancer exploring multiple modalities and mechanisms of action. Of the clinical-state assets that have emerged from our drug discovery and preclinical activities thus far, the furthest along are zanzalintinib, a next-generation oral TKI, and XB002, an ADC that targets TF. We are also focused on conserving cash and managing risks of clinical failure by securing options to acquire other investigational drug candidates from third parties if those assets demonstrate evidence of clinical success. One example of this approach is CBX-12, a clinical-stage PDC invented by Cybrexa that utilizes Cybrexa’s proprietary alphalex technology to enhance the delivery of exatecan, a highly potent, second-generation topoisomerase I inhibitor, to tumor cells.

Cabozantinib Franchise

The FDA first approved CABOMETYX as a monotherapy for previously treated patients with advanced RCC in April 2016, and then for previously untreated patients with advanced RCC in December 2017. In January 2021, the CABOMETYX label was expanded to include first-line advanced RCC in combination with OPDIVO, which was the first CABOMETYX regimen approved for treatment in combination with an ICI. In addition to RCC, in January 2019, the FDA approved CABOMETYX for the treatment of patients with HCC previously treated with sorafenib, and then in September 2021, the FDA approved CABOMETYX for the treatment of adult and pediatric patients 12 years of age and older with locally advanced or metastatic DTC that has progressed following prior VEGF receptor-targeted therapy and who are RAI-refractory or ineligible.

To develop and commercialize CABOMETYX and COMETRIQ outside the U.S., we have entered into license agreements with Ipsen and Takeda. We granted to Ipsen the rights to develop and commercialize cabozantinib outside of the U.S. and Japan, and to Takeda we granted the rights to develop and commercialize cabozantinib in Japan. Both Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of the cabozantinib franchise in other potential indications, and we work closely with them on these activities. Utilizing its

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regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of the U.S., including in the EU, the United Kingdom and Canada, as a treatment for advanced RCC and for HCC in adults who have previously been treated with sorafenib. In addition, in March 2021, Ipsen and BMS received regulatory approval from the EC for CABOMETYX in combination with OPDIVO as a first-line treatment for patients with advanced RCC, followed by additional regulatory approvals for the combination in other territories beyond the EU. Most recently, in May 2022, we announced that Ipsen received regulatory approval from the EC for CABOMETYX as a monotherapy for the treatment of adult patients with locally advanced or metastatic, RAI-refractory or ineligible DTC and who have progressed during or after prior systemic therapy, which followed an approval from Health Canada in April 2022 for a similar DTC indication. With respect to the Japanese market, Takeda received Manufacturing and Marketing Approvals in 2020 from the Japanese MHLW of CABOMETYX as a treatment of patients with curatively unresectable or metastatic RCC and as a treatment of patients with unresectable HCC who progressed after cancer chemotherapy. In August 2021, Takeda and Ono Pharmaceutical Co., Ltd., BMS’ development and commercialization partner in Japan, received Manufacturing and Marketing Approval from the MHLW of CABOMETYX in combination with OPDIVO as a treatment for unresectable or metastatic RCC.

In addition to our regulatory and commercialization efforts in the U.S. and the support provided to our collaboration partners for rest-of-world regulatory and commercialization activities, we are also pursuing other indications for cabozantinib that have the potential to increase the number of cancer patients who could potentially benefit from this medicine. We are continuing to evaluate cabozantinib in combination with ICIs in late-stage clinical trials that we sponsor, along with our collaboration partners, across RCC and mCRPC. Beyond clinical trials that we or our collaboration partners sponsor, independent investigators also conduct trials evaluating cabozantinib through our CRADA with NCI-CTEP or our IST program. Over time, the data we have obtained from these investigator-sponsored clinical trials have helped advance our development program for the cabozantinib franchise by informing subsequent label-enabling trials, including COSMIC-311, our phase 3 pivotal trial evaluating cabozantinib in previously treated patients with RAI-refractory DTC, from which positive results served as the basis for the FDA’s and EC’s approvals of CABOMETYX for DTC. Moreover, these data sets may also prove valuable by informing our development plans for zanzalintinib.

Building on preclinical and clinical observations that cabozantinib in combination with ICIs may promote a more immune-permissive tumor environment, we initiated numerous pivotal studies to further explore these combination regimens. The first of these studies to deliver results was CheckMate-9ER, a phase 3 pivotal trial evaluating the combination of CABOMETYX and OPDIVO compared to sunitinib in previously untreated, advanced or metastatic RCC, and positive results from CheckMate-9ER served as the basis for the FDA’s, EC’s and MHLW’s approvals of CABOMETYX in combination with OPDIVO as a first-line treatment of patients with advanced RCC in January 2021, March 2021 and August 2021, respectively. We are also collaborating with BMS on COSMIC-313, a phase 3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. We announced top-line results from COSMIC-313 in July 2022, and in September 2022 we presented the data at the Presidential Symposium III at the 2022 ESMO Congress. The trial met its primary endpoint, demonstrating significant improvement in BIRC-assessed PFS at the primary analysis for the triplet combination. At a prespecified interim analysis for the secondary endpoint of OS, the triplet combination did not demonstrate a significant benefit, and therefore, the trial will continue to the next analysis of OS, expected in 2023. The safety profile observed in the trial was reflective of the known safety profiles for each single agent, as well as the combination regimens used in this study. Based on feedback from the FDA, we do not intend to submit an sNDA for the combination regimen based on the currently available data, and we plan to discuss a potential regulatory submission with the FDA when the results of the next OS analysis are available.

To diversify our exploration of combinations with ICIs, we also initiated multiple trials evaluating cabozantinib in combination with Roche’s ICI, atezolizumab, beginning in 2017 with COSMIC-021, a broad phase 1b study evaluating the safety and tolerability of the cabozantinib and atezolizumab combination with atezolizumab in patients with a wide variety of locally advanced or metastatic solid tumors. The encouraging efficacy and safety data that emerged from COSMIC-021 have been instrumental in guiding our clinical development strategy for cabozantinib in combination with ICIs. We are currently evaluating the cabozantinib and atezolizumab combination in two late-stage trials: CONTACT-03, in which focuses on patients with inoperable, locally advanced or metastatic RCC who have progressed following treatment with an ICI as the immediate proceeding therapy; and CONTACT-02, which focuses on patients with mCRPC who have been previously treated with one NHT. A third trial, CONTACT-01, which focused on patients with metastatic NSCLC who have been previously treated with an ICI and platinum-containing chemotherapy, did not meet its primary endpoint of OS at final analysis. CONTACT-03 is sponsored by Roche and co-funded by us, and we anticipate announcing results of the primary PFS analysis

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from CONTACT-03 in the first half of 2023. CONTACT-02 is sponsored by us and co-funded by Roche, and we anticipate completing enrollment and announcing results of the primary PFS analysis in the second half of 2023.

For additional information on our cabozantinib clinical trials, see “Business—Exelixis Development Programs—Cabozantinib Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

Pipeline Activities

Zanzalintinib

The first compound to enter the clinic following our re-initiation of drug discovery activities in 2017 was zanzalintinib, a next-generation oral TKI that targets VEGF receptors, MET, AXL, MER and other kinases implicated in cancer’s growth and spread. In designing zanzalintinib, we sought to build upon our experience with cabozantinib, retaining a similar target profile while improving key characteristics, including the pharmacokinetic half-life. To date, we have initiated two large phase 1b clinical trials studying zanzalintinib: STELLAR-001 and STELLAR-002. STELLAR-001 is a phase 1b clinical trial evaluating zanzalintinib, both as a monotherapy and in combination with either atezolizumab or Merck KGaA’s and Pfizer’s avelumab. We have established a recommended dose of 100 mg for both single-agent zanzalintinib and zanzalintinib in combination with atezolizumab, and we have begun enrolling expansion cohorts for patients with clear cell RCC, non-clear cell RCC, hormone-receptor positive breast cancer, mCRPC and CRC. The dose-escalation stage for zanzalintinib in combination with avelumab is ongoing, with expansion cohorts planned initially in UC. We presented data from STELLAR-001 during poster sessions at the 2022 ESMO Congress in September 2022, which showed zanzalintinib has demonstrated preliminary, clinical activity similar to that observed with cabozantinib in phase 1 across a range of solid tumors and dose levels, with a manageable safety profile. STELLAR-002 is a phase 1b clinical trial evaluating zanzalintinib in combination with either nivolumab, nivolumab and ipilimumab, or a fixed dose of nivolumab and BMS’ relatlimab. We have established a recommended dose of 100 mg for zanzalintinib in combination with nivolumab, and we have begun enrolling patients in expansion cohorts for patients with clear cell RCC. The dose-escalation stage for zanzalintinib in the other combination regimens is ongoing and is continuing to enroll patients with advanced solid tumors in dose-escalation cohorts. Depending on the dose-escalation results, STELLAR-002 may enroll expansion cohorts for patients with clear cell and non-clear cell RCC, mCRPC, UC, HCC, NSCLC, CRC and SCCHN. To better understand the individual contribution of the therapies, treatment arms in the expansion cohorts may include zanzalintinib as a single agent in addition to the ICI combination regimens.

We also initiated two phase 3 pivotal trials evaluating zanzalintinib in combination with ICIs in 2022. The first trial, STELLAR-303, was initiated in June 2022 and is evaluating zanzalintinib in combination with atezolizumab versus regorafenib in patients with metastatic non-microsatellite instability-high or non-mismatch repair-deficient CRC who have progressed after, or are intolerant to, the current standard of care. The trial aims to enroll approximately 600 patients worldwide with documented RAS status at approximately 137 sites globally. The primary objective of STELLAR-303 is to evaluate the efficacy of the combination in patients with RAS wild-type disease, and outcomes in patients with RAS-mutated disease will also be evaluated. The primary efficacy endpoint of STELLAR-303 is OS, and additional efficacy endpoints include PFS, ORR and DOR per RECIST v. 1.1, in each case as assessed by the investigator. The second trial, STELLAR-304, was initiated in December 2022 and is evaluating zanzalintinib in combination with nivolumab versus sunitinib in previously untreated patients with advanced non-clear cell RCC. The trial aims to enroll approximately 291 patients at approximately 170 sites globally. The primary efficacy endpoints of STELLAR-304 are PFS and ORR per RECIST v 1.1, in each case as assessed by BIRC. The secondary efficacy endpoint is OS. Beyond STELLAR-303 and STELLAR-304, we intend to explore a series of early-stage and pivotal trials evaluating zanzalintinib in novel combination regimens across a broad array of future potential indications.

For additional information on our zanzalintinib clinical trials, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—Zanzalintinib Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

Biotherapeutics

Much of our drug discovery activities focuses on discovering and advancing various biotherapeutics that have the potential to become anti-cancer therapies, such as bispecific antibodies, ADCs and other innovative treatments. ADCs in particular present a unique opportunity for new cancer treatments, given their capabilities to deliver anti-cancer payload drugs to targets with increased precision while minimizing impact on healthy tissues. This biotherapeutic approach has been validated by multiple regulatory approvals for the commercial sale of ADCs in the past several years. Furthest along amongst our biotherapeutics programs is XB002, our lead TF-targeting ADC program, in-licensed from Iconic. We are evaluating XB002, both as a single agent and in combination with either nivolumab or Roche’s bevacizumab, in JEWEL-101,

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a phase 1 study in patients with advanced solid tumors for which therapies are unavailable, ineffective or intolerable. In October 2022, we announced promising initial dose-escalation results from JEWEL-101 during the Antibody-drug Conjugates Poster Session at the 2022 ENA Symposium. The data demonstrated that XB002 was well-tolerated at multiple dose levels, and a pharmacokinetic analysis confirmed that XB002 was stable with low levels of free payload. The planned cohort-expansion phase, which we expect to initiate during 2023, is designed to further explore the selected dose of XB002, both as a single agent and in combination with either nivolumab or bevacizumab, in individual tumor cohorts, which may include forms of NSCLC, cervical cancer, ovarian cancer, UC, SCCHN, pancreatic cancer, esophageal cancer, mCRPC, triple negative breast cancer and hormone-receptor positive breast cancer, and we also intend to initiate additional dose-escalation and expansion cohorts to evaluate the potential of XB002 in combination with additional ICIs and other targeted therapies across a wide range of tumor types, including indications other than those currently addressed by commercially available TF-targeted therapies. For additional information on JEWEL-101 and our development plans for XB002, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—XB002 Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

Most recently, in November 2022, we executed two option deals that highlight our strategic efforts to access clinical- or near-clinical-stage assets: an exclusive collaboration agreement with Cybrexa providing us with the right to acquire CBX-12; and an exclusive clinical development and option agreement with Sairopa to develop ADU-1805, a potentially best-in-class mAb that targets SIRPα. For more information on these arrangements, see “Business—Collaborations and Business Development Activities—Research Collaborations and In-licensing Arrangements” in Part I, Item 1 of this Annual Report on Form 10-K. CBX-12 is currently being evaluated in a phase 1 clinical trial to explore its pharmacokinetics, safety, tolerability and preliminary anti-tumor activity in patients with advanced or metastatic refractory solid tumors. For more information on the current development of CBX-12, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—Development of CBX-12” in Part I, Item 1 of this Annual Report on Form 10-K.

To facilitate the growth of our various biotherapeutics programs, we have established multiple research collaborations and in-licensing arrangements and entered into other strategic transactions that provide us with access to antibodies, binders, payloads and conjugation technologies, which are the components employed to generate next-generation ADCs or multispecific antibodies. In addition to the option deals with Cybrexa and Sairopa, some of our active research collaborations for biotherapeutics programs include collaborations with:

•Adagene, which is focused on using Adagene’s SAFEbody technology to develop novel masked ADCs or other innovative biotherapeutics with potential for improved therapeutic index;

•BioInvent, which is intended to expand our portfolio of antibody-based therapies and will utilize BioInvent’s proprietary n-CoDeR antibody library and patient-centric F.I.R.S.T screening platform, which together are designed to allow for parallel target and antibody discovery;

•Catalent, which is focused on the discovery and development of multiple ADCs using Catalent’s proprietary SMARTag site-specific bioconjugation technology;

•Invenra, which is focused on the discovery and development of novel binders and multispecific antibodies for the treatment of cancer; and

•NBE, which is focused on the discovery and development of multiple ADCs by leveraging NBE’s unique expertise and proprietary platforms in ADC discovery, including NBE’s SMAC-Technology and novel payloads.

We have already made significant progress under these and other research collaborations and in-licensing arrangements and believe we will continue to do so in 2023 and in future years. For example, as a direct result of these arrangements, we are advancing three biotherapeutics development candidates: XB010, XB014 and ZB628. XB010, our first ADC advanced internally, targets the tumor antigen 5T4 and incorporates antibodies sourced from Invenra and was constructed using Catalent’s SMARTag site-specific bioconjugation platform. XB014 and XB628 are bispecific antibodies: XB014 combines a PD-L1 targeting arm with a CD47 targeting arm to block a macrophage checkpoint; and XB628 targets PD-L1 and NKG2A, identified as an emerging immune checkpoint that may mediate resistance to classical checkpoint inhibition. Both XB014 and XB628 were developed through our collaboration with Invenra.

For additional information on these specific research collaborations and in-licensing arrangements related to our biotherapeutics programs, see “Business—Collaborations and Business Development Activities—Research Collaborations and In-licensing Arrangements” in Part I, Item 1 of this Annual Report on Form 10-K.

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Other Small Molecules

Since its formation in 2000, our drug discovery group has advanced 25 compounds to the IND stage, either independently or with collaboration partners, and today we deploy our drug discovery expertise to advance small molecule drug candidates toward and through preclinical development. These efforts are led by our experienced scientists, including some of the same scientists who led the efforts to discover cabozantinib, cobimetinib and esaxerenone, each of which are now commercially distributed drug products. For example, zanzalintinib, which was discovered at Exelixis, has now entered into phase 3 clinical trials. We augment our small molecule discovery activities through research collaborations and in-licensing arrangements with other companies engaged in small molecule discovery, including:

•STORM, which is focused on the discovery and development of inhibitors of novel RNA modifying enzymes, including ADAR1;

•Aurigene, which is focused on the discovery and development of novel small molecules as therapies for cancer; and

•StemSynergy, which is focused on the discovery and development of novel oncology compounds aimed to inhibit tumor growth by targeting CK1α and the Notch pathway.

For additional information on these research collaborations and in-licensing arrangements related to our small molecule programs, see “Business—Collaborations and Business Development Activities—Research Collaborations and In-licensing Arrangements” in Part I, Item 1 of this Annual Report on Form 10-K.

The most advanced compounds to emerge from these arrangements is XL102, our lead program targeting CDK7, in-licensed from Aurigene. We are evaluating XL102, both as a single agent and in combination with other anti-cancer therapies, in QUARTZ-101, a phase 1 study in patients with inoperable, locally advanced or metastatic solid tumors. In December 2022, we announced initial dose-escalation results from QUARTZ-101 during the Poster Session at the 2022 San Antonio Breast Cancer Symposium. The data demonstrated that XL102 was well-tolerated at multiple dose levels and a pharmacokinetic analysis supported adding investigation of twice-daily oral dosing. We are continuing to evaluate the efficacy of XL102 in additional patients during this initial dose-escalation phase. The subsequent cohort-expansion phase is designed to further explore the selected dose of XL102 as a single agent and in combination regimens in individual tumor cohorts, including ovarian cancer, triple-negative breast cancer, hormone-receptor positive breast cancer and mCRPC. For additional information on QUARTZ-101 and our development plans for XL102, see “Business—Exelixis Development Programs—Pipeline Development Programs – Advancing Exelixis’ Future Cancer Therapy Candidates—XL102 Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

As of the date of this Annual Report on Form 10-K, we are currently advancing more than 10 discovery programs and expect to progress up to five new development candidates into preclinical development during 2023. In addition, we will continue to engage in business development initiatives with the goal of acquiring and in-licensing promising oncology platforms and assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

2022 Business Updates and Financial Highlights

During 2022, we continued to execute on our business objectives, generating significant revenues from operations and enabling us to continue to seek to maximize the clinical and commercial potential of our products and expand our product pipeline. Significant business updates and financial highlights for 2022 and subsequent to year-end include:

Business Updates

•In January 2022, we appointed Vicki L. Goodman, M.D., as Executive Vice President, Product Development & Medical Affairs, and Chief Medical Officer.

•In January 2022, we announced the completion of enrollment for CONTACT-03. Based on current event rates, we anticipate announcing results of the primary PFS analysis in the first half of 2023.

•In January 2022, we announced an amendment to our exclusive option and license agreement with Iconic to acquire broad rights to use the anti-TF antibody incorporated into XB002 for any application, including conjugated to other payloads, as well as rights within oncology to a number of other anti-TF antibodies developed by Iconic, including for use in ADCs and multispecific biotherapeutics.

•In January 2022, cabozantinib in combination with ICIs in patients with forms of previously treated CRC was the subject of multiple data presentations at the 2022 American Society of Clinical Oncology (ASCO) Gastrointestinal Cancers Symposium.

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•In February 2022, cabozantinib in patients with forms of RCC and other genitourinary cancers was the subject of multiple data presentations at the 2022 ASCO Genitourinary Cancers Symposium.

•In February 2022, we filed a patent lawsuit in the Delaware District Court against MSN asserting infringement of U.S. Patents No. 11,091,439, 11,091,440 and 11,098,015 arising from MSN’s further amendment of its ANDA. This lawsuit, along with a subsequent lawsuit we filed against MSN in July 2022 asserting infringement of U.S. Patent No. 11,298,349, comprise MSN II, a new case against MSN involving Exelixis patents that are different from those asserted previously in the consolidated MSN I patent lawsuits that we filed in 2019 and 2020 and were adjudicated at a bench trial in May 2022. A bench trial for MSN II has been scheduled for October 2023. For a more detailed discussion of the MSN II litigation matter, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In March 2022, we announced results from the final OS analysis of COSMIC-312 trial, which showed neither improvement nor detriment in OS for cabozantinib in combination with atezolizumab versus sorafenib in patients with previously untreated advanced HCC. Based on this outcome for OS and the rapidly evolving treatment landscape for previously untreated HCC, we do not intend to submit an sNDA to the FDA for the combination regimen.

•In April 2022, we announced the initiation of a phase 1 clinical trial evaluating XL114 as a monotherapy in patients with NHL. Based on initial findings in this phase 1 trial and the evolving treatment landscape for NHL, we have discontinued development of XL114 as of January 2023.

•In May 2022, we announced that Ipsen received regulatory approvals from the EC and Health Canada for CABOMETYX as a monotherapy for patients with previously treated, RAI-refractory DTC.

•In June 2022, cabozantinib in patients with forms of NSCLC, UC, RCC, SCCHN and DTC was the subject of multiple data presentations at the 2022 ASCO Annual Meeting.

•In June 2022, we announced an exclusive option and license agreement with BioInvent to identify and develop novel antibodies for use in immuno-oncology therapeutics utilizing BioInvent’s n-CoDeR antibody library and patient-centric F.I.R.S.T screening platform.

•In June 2022, we announced the initiation of STELLAR-303, a global phase 3 pivotal trial evaluating zanzalintinib in combination with atezolizumab in patients with metastatic non-microsatellite instability-high or non-mismatch repair-deficient CRC who have progressed after or are intolerant to the current standard of care.

•In July 2022, we announced an exclusive license agreement with Ryvu to develop novel targeted therapies utilizing Ryvu’s STING technology.

•In July 2022, we announced results from the phase 3 COSMIC-313 trial, in which the triplet combination of cabozantinib, nivolumab and ipilimumab met its primary endpoint, demonstrating significant improvement in PFS versus the doublet combination of nivolumab and ipilimumab at the primary analysis. At a prespecified interim analysis for the secondary endpoint of OS, the triplet combination did not demonstrate a significant benefit, and therefore the trial will continue to the next analysis of OS, expected in 2023.

•In September 2022, we filed a patent lawsuit in the Delaware District Court against Teva, asserting infringement of U.S. Patent No. 11,298,349 arising from Teva’s amendment of its ANDA, originally filed with the FDA in May 2021. This lawsuit, our second case against Teva, has been consolidated with the prior patent lawsuit we filed in June 2021 and involves an Exelixis patent that is different from those asserted previously in June 2021. All proceedings were stayed pursuant to an order of the Delaware District Court in October 2022. For a more detailed discussion of the Teva litigation matter, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In September 2022, clinical data from COSMIC-313 were presented as part of Presidential Symposium III at the 2022 ESMO Congress. In addition, cabozantinib in patients with in RCC, DTC and advanced adrenocortical carcinoma was the subject of multiple data presentations, and we also presented phase 1b data from STELLAR-001, in which zanzalintinib demonstrated preliminary clinical activity similar to that observed with cabozantinib in phase 1 across a range of solid tumors with an acceptable safety profile.

•In October 2022, we announced an expansion of our clinical trial collaboration and supply agreement with BMS to include the use of the fixed-dose combination of nivolumab and relatlimab in STELLAR-002, our ongoing phase 1b clinical trial evaluating zanzalintinib in combination with multiple ICIs in advanced solid tumors.

•In October 2022, we announced promising initial dose-escalation results from JEWEL-101, the ongoing phase 1 trial evaluating XB002 in patients with advanced solid tumors, during the Antibody-drug Conjugates Poster

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Session at the 2022 ENA Symposium. The data demonstrated that XB002 was well-tolerated at multiple dose levels, and a pharmacokinetic analysis confirmed that XB002 was stable with low levels of free payload.

•In November 2022, we announced an agreement with Cybrexa that provides us the right to acquire CBX-12, a clinical-stage PDC that utilizes Cybrexa’s proprietary alphalex technology to enhance delivery of exatecan to tumor cells.

•In November 2022, we announced an exclusive option and license agreement and clinical development collaboration with Sairopa to develop ADU-1805, a mAb that targets SIRPα.

•In November 2022, we announced a new license agreement with Catalent for three target programs with lead antibody and/or ADC candidates.

•In December 2022, we announced initial dose-escalation results from QUARTZ-101, our phase 1 trial evaluating XL102 in patients with advanced solid tumors, during the Poster Session at the 2022 San Antonio Breast Cancer Symposium. The data demonstrated that XL102 was well tolerated at multiple dose levels.

•In December 2022, we announced results from the phase 3 CONTACT-01 trial evaluating cabozantinib in combination with atezolizumab in patients with previously treated NSCLC, in which the combination did not meet its primary endpoint of OS at final analysis.

•In December 2022, we announced the initiation of STELLAR-304, a global phase 3 pivotal trial evaluating zanzalintinib in combination with nivolumab in previously untreated patients with advanced non-clear cell RCC. The primary endpoints are PFS and ORR per RECIST v. 1.1, and the secondary endpoint is OS.

•In December 2022, we appointed Dana T. Aftab, Ph.D., as Executive Vice President, Discovery and Translational Research, and Chief Scientific Officer.

•In January 2023, the Delaware District Court issued a ruling in the MSN I trial, rejecting MSN’s challenge to U.S. Patent No. 7,759,473, which expires August 14, 2026. The Delaware District Court also ruled that MSN’s proposed ANDA product does not infringe U.S. Patent No. 8,877,776, which expires October 8, 2030, and entered judgment that the effective date of any final FDA approval of MSN’s ANDA shall not be a date earlier than August 14, 2026, the expiration date of U.S. Patent No. 7,759,473. This ruling in MSN I does not address the parties’ claims in the MSN II lawsuit. For a more detailed discussion of the MSN I litigation matter, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In February 2023, we received a notice letter regarding an ANDA submitted to the FDA by Cipla, including a Paragraph IV certification with respect to our U.S. Patents No. 8,877,776 (salt and polymorphic forms), 9,724,342 (formulations), 10,039,757 (methods of treatment), 11,098,015 (methods of treatment), 11,091,439 (crystalline salt forms), 11,091,440 (pharmaceutical composition) and 11,298,349 (pharmaceutical composition). Cipla’s ANDA requests approval to market a generic version of CABOMETYX tablets prior to the expiration of the aforementioned patents. We have not yet responded to this Paragraph IV certification notice letter but are evaluating it and will vigorously defend our cabozantinib intellectual property estate.

•In February 2023, cabozantinib in patients with forms of RCC will be the subject of multiple data presentations at the 2023 ASCO Genitourinary Cancers Symposium.

Financial Highlights

•Net product revenues for 2022 were $1,401.2 million, as compared to $1,077.3 million for 2021.

•Total revenues for 2022 were $1,611.1 million, as compared to $1,435.0 million for 2021.

•Research and development expenses for 2022 were $891.8 million, as compared to $693.7 million for 2021.

•Selling, general and administrative expenses for 2022 were $459.9 million, as compared to $401.7 million for 2021.

•Provision for income taxes for 2022 was $52.1 million, as compared to $63.1 million for 2021.

•Net income for 2022 was $182.3 million, or $0.57 per share, basic, and $0.56 per share, diluted, as compared to $231.1 million, or $0.73 per share, basic, and $0.72 per share, diluted, for 2021.

See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.

Outlook, Challenges and Risks

We will continue to face numerous challenges and risks that may impact our ability to execute on our business objectives. In particular, for the foreseeable future, we expect our ability to generate sufficient cash flow to fund our

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business operations and growth will depend upon the continued commercial success of CABOMETYX, both alone and in combination with other therapies, as a treatment for the highly competitive indications for which it is approved, and possibly for other indications for which cabozantinib is currently being evaluated in potentially label-enabling clinical trials, if warranted by the data generated from these trials. However, we cannot be certain that the clinical trials we and our collaboration partners are conducting will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial markets where CABOMETYX is approved. Even if the required regulatory approvals to market CABOMETYX for additional indications are achieved, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in these additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. As is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is becoming increasingly difficult, both within the U.S. and in foreign markets. In addition, healthcare policymakers in the U.S. are increasingly expressing concern over healthcare costs, and corresponding legislative and policy initiatives and activities have been launched aimed at increasing the healthcare cost burdens borne by pharmaceutical manufacturers, as well as expanding access to, and restricting the prices and growth in prices of, pharmaceuticals.

Achievement of our business objectives will also depend on our ability to maintain a competitive position in the shifting landscape of therapeutic strategies for the treatment of cancer, which we may not be able to do. On an ongoing basis, we assess the constantly evolving landscape of other approved and investigational cancer therapies that could be competitive, or complementary in combination, with our products, and then we adapt our development strategies for the cabozantinib franchise and our pipeline product candidates accordingly, such as by modifying our clinical trials to include evaluation of our therapies with ICIs and other targeted agents. Even if our current and future clinical trials, including those evaluating cabozantinib in combination with an ICI in mCRPC or evaluating zanzalintinib in combination with an ICI in CRC and RCC, produce positive results sufficient to obtain marketing approval by the FDA and other global regulatory authorities, it is uncertain whether physicians will choose to prescribe regimens containing our products instead of competing products and product combinations in approved indications.

In the longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic versions of CABOMETYX tablets that are the subject of ANDAs submitted to the FDA by MSN, Teva and Cipla. The approval of any of these ANDAs and subsequent launch of any generic version of CABOMETYX could significantly decrease our revenues derived from the U.S. sales of CABOMETYX and thereby materially harm our business, financial condition and results of operations.

Separately, our research and development objectives may be impeded by the challenges of scaling our organization to meet the demands of expanded drug development, unanticipated delays in clinical testing and the inherent risks and uncertainties associated with drug discovery operations, especially on the global level. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new drug candidates or identifying appropriate candidates for in-licensing or acquisition.

Some of these challenges and risks are specific to our business, others are common to companies in the biopharmaceutical industry with development and commercial operations, and an additional category are macroeconomic, affecting all companies. For a more detailed discussion of challenges and risks we face, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Results of Operations

We have adopted a 52- or 53-week fiscal year policy that ends on the Friday closest to December 31st. Fiscal year 2022, which was a 52-week fiscal year, ended December 30, 2022, fiscal year 2021, which was a 52-week fiscal year, ended December 31, 2021 and fiscal year 2020, which was a 52-week fiscal year, ended January 1, 2021. For convenience, references in this report as of and for the fiscal years ended December 30, 2022, and January 1, 2021 are indicated as being as of and for the years ended December 31, 2022 and 2020, respectively.

This discussion and analysis generally addresses 2022 and 2021 items and year-over-year comparisons between 2022 and 2021. Discussions of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 18, 2022.

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Revenues

Revenues by category were as follows (dollars in thousands):

Net Product Revenues

Gross product revenues, discounts and allowances, and net product revenues were as follows (dollars in thousands):

Net product revenues by product were as follows (dollars in thousands):

The increase in net product revenues for the year ended December 31, 2022, as compared to 2021, was primarily related to a 26% increase in the number of CABOMETYX units sold as a result of the FDA’s approval of CABOMETYX in combination with OPDIVO as a first-line treatment of patients with advanced RCC, in part due to the longer duration of therapy for this combination and an increase in related market share, and to a lesser extent a 4% increase in the average net selling price of CABOMETYX.

We project our net product revenues will increase in fiscal year 2023, as compared to fiscal year 2022, primarily due to an increase in market share that occurred in fiscal year 2022, reflecting the continued evolution of the metastatic RCC, HCC and DTC treatment landscapes, as well as an increase in selling price.

We recognize product revenues net of discounts and allowances that are described in “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K. Discounts and allowances as a percentage of gross revenues have increased over time as the number of patients participating in government programs has increased and as the discounts given and rebates paid to government payers have also increased. The increase in discounts and allowances for the year ended December 31, 2022, as compared to 2021, was generally attributed to an increase in units sold and an increase in the utilization and the dollar amount of chargebacks related to the government’s 340B Program, which mandates drug manufacturers offer discount drug pricing for certain eligible covered entities that meet 340B Program requirements.

We project our discounts and allowances as a percentage of gross revenues may increase during fiscal year 2023 for similar reasons noted above.

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License Revenues

License revenues include: (a) the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable, in the related period, that a milestone would be achieved and a significant reversal of revenues would not occur in future periods; (b) royalty revenues; and (c) the profit on the U.S. commercialization of COTELLIC from Genentech.

See “Note 3. Collaborations and Business Development Activities—Cabozantinib Commercial Collaborations—Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” in the “Notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K for a discussion on the allocation of transaction price which impacts the proportion of milestone revenues allocated to license revenues and collaboration services revenues.

Milestone revenues, which are allocated between license revenues and collaboration services revenues, were $28.9 million for the year ended December 31, 2022, as compared to $133.8 million for 2021. Milestone revenues by fiscal year included the following:

•For the year ended December 31, 2022, $25.8 million in revenues was recognized in connection with two regulatory milestones totaling $27.0 million upon the approval by the EC and Health Canada, of cabozantinib as a monotherapy for the treatment of adult patients with locally advanced or metastatic DTC, refractory or not eligible to RAI who have progressed during or after prior systemic therapy.

•For the year ended December 31, 2021, milestone revenues included: (1) $100.0 million related to a commercial sales milestone from Ipsen upon their achievement of $400.0 million of net sales of cabozantinib in the related Ipsen license territory over four consecutive quarters; (2) $11.9 million related to a $12.5 million regulatory milestone Ipsen achieved upon submission of a variation application to the EMA for CABOMETYX as a treatment for patients with previously treated, RAI-refractory DTC; and (3) $18.9 million in connection with a $20.0 million milestone achieved following Takeda’s first commercial sale in Japan of CABOMETYX in combination with OPDIVO for the treatment of patients with curatively unresectable or metastatic RCC.

Due to uncertainties surrounding the timing and achievement of development, regulatory and commercial milestones, it is difficult to predict the timing of future milestones revenues; consequently, milestones may vary significantly from period to period.

Royalty revenues increased primarily as a result of an increase in Ipsen’s net sales of cabozantinib outside of the U.S. and Japan. Ipsen royalty revenues were $110.1 million for the year ended December 31, 2022, as compared to $97.2 million for 2021. Ipsen’s net sales of cabozantinib have continued to grow since their first commercial sale of the product in the fourth quarter of 2016, as a result of continued increased global demand of CABOMETYX, as monotherapy for the treatment of adult patients with advanced RCC following prior VEGF-targeted therapy and CABOMETYX in combination with OPDIVO as a first-line treatment of patients with advanced RCC. Royalty revenues for the year ended December 31, 2022 also included $11.3 million, as compared to $7.9 million for 2021, related to Takeda’s net sales of CABOMETYX, which have continued to grow since their first commercial sale of product in Japan in 2020. Additionally, Takeda royalty revenues have increased for similar reasons noted above. As of December 31, 2022, CABOMETYX is approved and commercially available in 62 countries outside of the U.S.

Our share of profits on the U.S. commercialization of COTELLIC under our collaboration agreement with Genentech was $7.7 million for the year ended December 31, 2022, as compared to $8.1 million for 2021. We also earned royalty revenues on ex-U.S. net sales of COTELLIC by Genentech of $4.8 million for the year ended December 31, 2022, as compared to $4.1 million for 2021.

We project our license revenues may decrease in fiscal year 2023, as compared to fiscal year 2022, as a result of the anticipated achievement of fewer milestones in 2023, partially offset by an increase in royalty revenues related to an increase in product sales by Ipsen and Takeda.

Collaboration Services Revenues

Collaboration services revenues include the recognition of deferred revenues for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, and product supply revenues, which are net of product supply costs and the royalties we pay to Royalty Pharma on sales by Ipsen and Takeda of products containing cabozantinib.

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Development cost reimbursements were $60.3 million for the year ended December 31, 2022, as compared to $116.8 million for 2021. The decrease in development cost reimbursements was primarily due to Ipsen’s decision to opt in and co-fund COSMIC-311 development costs in the second quarter of 2021, which included a cumulative catch up for Ipsen’s share of global development costs incurred since the beginning of the study. To a lesser extent, the decrease was attributable to decreases in spending on the COSMIC-312, COSMIC-021 and COSMIC-311 studies, which was partially offset by an increase in spending on the CONTACT-02 study.

Collaboration services revenues were reduced by $16.2 million and $14.3 million for the years ended December 31, 2022 and 2021, respectively, with respect to the 3% royalty we are required to pay on the net sales by Ipsen and Takeda of any product incorporating cabozantinib. As royalty generating sales of cabozantinib by Ipsen and Takeda have increased as described above, our royalty payments have also increased.

We project our collaboration services revenues may decrease in fiscal year 2023, as compared to fiscal year 2022, primarily as a result of a decrease in development cost reimbursement revenues on certain studies with our collaborators Ipsen and Takeda.

Cost of Goods Sold

The cost of goods sold and our gross margins were as follows (dollars in thousands):

Cost of goods sold is related to our product revenues and consists of a 3% royalty payable on U.S. net sales of any product incorporating cabozantinib, as well as the cost of inventory sold, indirect labor costs, write-downs related to expiring, excess and obsolete inventory, and other third-party logistics costs. The increase in cost of goods sold for the year ended December 31, 2022, as compared to 2021, was primarily the result of increases in royalty payments as a result of increased U.S. CABOMETYX sales, which was partially offset by a decrease in certain period costs. We project our gross margin in fiscal year 2023 will remain consistent with fiscal year 2022.

Research and Development Expenses

We do not track fully burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: (1) development; (2) drug discovery; and (3) other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or may be studied in clinical trials. Our drug discovery group utilizes a variety of technologies, including in-licensed technologies, to enable the rapid discovery, optimization and extensive characterization of lead compounds and biotherapeutics such that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development.

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Research and development expenses by category were as follows (dollars in thousands):

____________________

(1)    License and other collaboration costs presented in total development includes upfront license fees and development milestone payments associated with programs currently in clinical development stage while license and other collaboration costs presented in total drug discovery primarily includes upfront license fees, development milestone payments, and research funding commitments and other payments associated with our in-licensing collaboration programs in preclinical development stage.

(2)    Primarily includes personnel expenses, consulting and outside services and laboratory supplies, if not separately presented.

(3)    Includes the allocation of general corporate costs to research and development services, and development cost reimbursements in connection with our collaboration arrangement with Roche executed in December 2019.

The increase in research and development expenses for the year ended December 31, 2022, as compared to 2021, was primarily related to increases in license and other collaboration costs, personnel expenses, consulting and outside services costs, clinical trial costs and other research and development costs. Drug discovery-related license and other collaboration costs increased primarily due to increases in upfront license fees, including, in connection with our recent agreements with Sairopa and Catalent in the fourth quarter of 2022, and other increases in program initiation fees, development milestones, and research funding commitments related to collaboration agreements. Development-related license and other collaboration costs increased primarily due to our recent agreement with Cybrexa in the fourth quarter of 2022 for the right to acquire CBX-12, partially offset by the reversal of a development milestone in 2022, which was recorded in 2021. The milestone was reversed as the compound has not progressed as expected and therefore we are no longer able to predict when the milestone will occur. Personnel expenses increased primarily due to an increase in headcount to support our expanding discovery and development organizations. Consulting and outside services expenses increased primarily as a result of the continued growth in our discovery and research and development activities. Clinical trial costs, which include services performed by third-party contract research organizations and other vendors who support our clinical trials, increased primarily due to higher costs associated with various studies evaluating zanzalintinib and XB002, as well as the CONTACT-02 cabozantinib study, which were partially offset by decreases in costs associated with the COSMIC-312, COSMIC-313, and COSMIC-021 cabozantinib studies. Other research and development costs increased primarily related to technology costs, including our investments in digital transformation initiatives to support productivity and efficiency in our organization, and an increase in rent expenses, which were partially offset by development cost reimbursements in connection with our collaboration arrangement with Roche.

In addition to reviewing the three categories of research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. These factors include enrollment in clinical trials for our drug candidates, preliminary data and final results from clinical trials, the potential market indications and overall clinical and commercial potential for our drug candidates, and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy.

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We continue to focus our development efforts on cabozantinib to maximize the therapeutic and commercial potential of this compound and, as a result, we project that a substantial portion of our research and development expenses will relate to the continuing late-stage clinical development program of cabozantinib. Notable ongoing company-sponsored studies resulting from this program include: COSMIC-313, for which BMS is providing nivolumab and ipilimumab free of charge; and CONTACT-02 for which Roche is sharing the development costs and providing atezolizumab free of charge.

We are expanding our oncology product pipeline through drug discovery efforts, which encompass both biotherapeutics and small molecule programs with multiple modalities and mechanisms of action, with the goal of identifying new product candidates to advance into clinical trials. We also continue to engage in business development initiatives aimed at acquiring and in-licensing promising oncology platforms and assets, with the goal of utilizing our established preclinical and clinical development infrastructure to further characterize and develop such platforms and assets.

We project our research and development expenses may increase in fiscal year 2023, as compared to fiscal year 2022, primarily driven by an increase in personnel expenses to support our expanding discovery and development organization and an increase in clinical trial costs, including our ongoing clinical evaluation of cabozantinib in late-stage trials, the initiation of new clinical trials and expansion of ongoing clinical trials evaluating other product candidates in our pipeline, including STELLAR-303 and STELLAR-304 and planned initiation of multiple additional phase 3 pivotal trials evaluating zanzalintinib, and also our current early-stage trials evaluating zanzalintinib, XB002 and XL102, as well as anticipated business development activities.

A discussion of the risks and uncertainties with respect to our research and development activities, and the consequences to our business, financial position, and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were as follows (dollars in thousands):

____________________

(1)    Excludes stock-based compensation allocated to selling, general and administrative expenses.

Selling, general and administrative expenses consist primarily of personnel expenses, stock-based compensation, marketing costs and certain other administrative costs.

The increase in selling, general and administrative expenses for the year ended December 31, 2022, as compared to 2021, was primarily related to increases in personnel expenses, technology costs, rent expenses and marketing costs. Personnel expenses increased primarily due to an increase in administrative headcount to support our commercial and research and development organizations. The increase in technology costs includes our investments in digital transformation initiatives to support productivity and efficiency in our organization. Rent expenses increased primarily related to the commencement of new leases in 2022. Marketing costs increased primarily due to increased spending to expand our brand recognition.

We project our selling, general and administrative expenses may increase in fiscal year 2023, as compared to fiscal year 2022, in support of our continued commercial investment in CABOMETYX and the growth in the broader organization.

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Non-Operating Income

Non-operating income was as follows (dollars in thousands):

The increase in non-operating income for the year ended December 31, 2022, as compared to 2021, was primarily the result of an increase in interest income due to higher interest rates and higher investment balances.

Provision for Income Taxes

The provision for income taxes and the effective tax rates were as follows (dollars in thousands):

The decrease in provision for income taxes for the year ended December 31, 2022, as compared to 2021, was primarily due to the decrease in pre-tax income. The effective tax rate for the year ended December 31, 2022 differed from the U.S. federal statutory rate of 21% primarily due to the change in valuation allowance and a non-deductible warrant purchase, offset by the generation of federal tax credits. The effective tax rate for the year ended December 31, 2021 differed from the U.S. federal statutory rate of 21% primarily due to non-deductible executive compensation, partially offset by excess tax benefits related to the exercise of certain stock options during the period and the generation of federal tax credits. We project that our effective tax rate will be between 20% and 22% in fiscal year 2023.

Liquidity and Capital Resources

As of December 31, 2022, we had $2.1 billion in cash, cash equivalents, restricted cash equivalents and investments, as compared to $1.9 billion as of December 31, 2021. We anticipate that the aggregate of our current cash and cash equivalents, short-term investments available for operations, net product revenues and collaboration revenues will enable us to maintain our operations for at least 12 months and thereafter for the foreseeable future.

Our primary cash requirements for operating activities, which we project will increase in fiscal year 2023 as compared to fiscal year 2022, are for: employee related expenditures; costs related to our development programs and discovery programs; income tax payments; cash payments for inventory; royalty payments on our net product sales; and our leased facilities.

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, modified the tax treatment of research and development expenditures beginning in fiscal year 2022. Research and development expenditures are no longer currently deductible but instead must be amortized ratably over five years for domestic expenditures or 15 years for foreign expenditures. As a result, we generated a larger federal income tax liability in fiscal year 2022, which required larger estimated federal tax payments. We will realize a reduction of our federal income tax liability in future years as the capitalized research and development expenditures are amortized for tax purposes.

Our primary sources of operating cash are: cash collections from customers related to net product sales, which we project will increase in fiscal year 2023, as compared to fiscal year 2022; cash collections related to royalties earned from our commercial collaboration arrangements with Ipsen, Takeda and others and cash collections upon achievement of certain development, regulatory and commercial milestones; and cash collections for cost reimbursements under certain of our development programs. The timing of cash generated from commercial collaborations and cash payments required for in-licensing collaborations relative to upfront license fee payments, research funding commitments, cost reimbursements, exercise of options payments and other contingent payments such as development milestone payments may vary from period to period.

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We also have cash requirements related to capital expenditures to support the planned growth of our business including investments in laboratory facilities and equipment. We project that we may continue to spend significant amounts of cash to fund the development and commercialization of cabozantinib and the development of other product candidates in our pipeline, including zanzalintinib. In addition, we intend to continue to expand our oncology product pipeline through our drug discovery efforts, including additional research collaborations, in-licensing arrangements and other strategic transactions that align with our oncology drug development, and regulatory and commercial expertise. Financing these activities could materially impact our liquidity and capital resources and may require us to incur debt or raise additional funds through the issuance of equity. Furthermore, even though we believe we have sufficient funds for our current and future operating plans, we may choose to incur debt or raise additional funds through the issuance of equity based on market conditions or strategic considerations.

Letters of Credit

We have obtained standby letters of credit related to our lease obligations and certain other obligations with combined credit limits of $1.5 million and $16.7 million as of December 31, 2022 and 2021, respectively.

The standby letter of credit entered in January 2021, as a guarantee of our obligation to fund our portion of the tenant improvements related to our Alameda build-to-suit lease was extinguished and the related collateral was returned in the third quarter of 2022, following the substantial completion of the building and the commencement of the lease.

Sources and Uses of Cash (dollars in thousands):

Working capital: The decrease in working capital as of December 31, 2022, as compared to December 31, 2021, was primarily due to the unfavorable impacts to our net current assets resulting from purchases of long-term investments and estimated tax payments made that are classified as long-term assets and liabilities in our Consolidated Balance Sheets. In the future, our working capital may be impacted by one of these factors or other factors, the amounts and timing of which are variable.

Cash, cash equivalents, restricted cash equivalent and investments: Cash and cash equivalents primarily consist of cash deposits held at major banks, commercial paper, money market funds and other securities with original maturities 90 days or less. Restricted cash equivalents relate to our letters of credit agreements and are invested in short-term certificates of deposit as of December 31, 2022 and marketable securities as of December 31, 2021. For additional information regarding our cash, cash equivalents, restricted cash equivalents and investments, see “Note 4. Cash and Investments,” in our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K. The increase in cash, cash equivalents, restricted cash equivalent and investments at December 31, 2022, as compared to December 31, 2021, was primarily due to cash inflows generated by our operations, including collections of amounts due from customers, and collection of a $100.0 million milestone payment from Ipsen, partially offset by operating cash payments for employee related expenditures, cash payments to support our development and discovery programs, cash payments for capital expenditures, lease payments and tax payments.

Cash flow activities were as follows (in thousands):

Operating Activities

Cash provided by operating activities is derived by adjusting our net income for non-cash operating items such as deferred taxes, stock-based compensation, depreciation, non-cash lease expense, and changes in operating assets and

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liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Consolidated Statements of Income.

Net cash provided by operating activities decreased for the year ended December 31, 2022, as compared to 2021, primarily due to an increase in cash paid for certain operating expenses primarily employee related expenses, collaboration related research and development payments and tax payments, partially offset by an increase in cash received on sales of our products and from our commercial collaboration arrangements, including the collection of a $100.0 million milestone payment from Ipsen.

Investing Activities

The changes in cash flows from investing activities primarily relates to the timing of marketable securities investment activity, acquisition of acquired in-process research and development technology and capital expenditures. Our capital expenditures primarily consist of investments to expand our operations and acquire assets that further support our research and development activities.

Net cash used in investing activities increased for the year ended December 31, 2022, as compared to 2021, primarily due to a decrease in cash proceeds from maturities and sales of investments, an increase in purchases of investments, and an increase in purchases of in-process research and development technology related to certain of our in-licensing collaboration arrangements, which were partially offset by a decrease in capital expenditures. Capital expenditures primarily consisted of investments in leasehold improvements and equipment related to an expansion of laboratory facilities at our corporate campus and technology infrastructure investments to support our digital transformation initiatives.

Financing Activities

The changes in cash flows from financing activities primarily relate to proceeds from employee stock programs and taxes paid related to net share settlement of equity awards.

Net cash was provided by financing activities for the year ended December 31, 2022, as compared to net cash used in financing activities in the prior year ended December 31, 2021. The increase in cash provided by financing activities was primarily due to lower withholding taxes remitted to the government related to net share settlements of equity awards partially offset by a decrease in proceeds received from the issuance of common stock under our equity incentive and stock purchase plans.

Contractual Obligations

As of December 31, 2022, we anticipate the aggregate of our cash, cash equivalents and short-term investments and cash generated from operations to be sufficient to fund our contractual obligations, as well as cash requirements to support our ongoing operations and capital expenditures. Our contractual obligations as of December 31, 2022 primarily consist of:

Operating leases: We have certain lease agreements related to our corporate campus facilities and other short term leases, under which we are obligated to make minimum lease payments. As of December 31, 2022, we had $19.6 million of minimum lease payments due in one year and $310.4 million due over the remaining lease term. The amounts presented herein include the estimated lease commitment payments at the estimated commencement of the lease.

Purchase obligations: Purchase obligations include firm purchase commitments related to manufacturing of inventory, software services and other facilities and equipment. As of December 31, 2022, we had $55.0 million total purchase obligations due within one year and $11.0 million due after one year.

Contingent payments: We have committed to make certain contingent payments for potential future milestones, research funding commitments and royalties to certain collaboration partners, including contingent exercise fee payments if we decide to exercise certain of our options to in-license or acquire in-process research and development technology as part of our agreements with those parties. We do not expect these contingent payments to have a significant impact on our liquidity in the near term.

Notes 3 and 11 of “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K include additional information regarding our contractual obligations and contingencies.

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As of December 31, 2022, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.

Critical Accounting Policies and Estimates

The preparation of our Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances as well as milestones included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement; recoverability of inventory; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions; and the amounts of deferred tax assets and liabilities including the related valuation allowance. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates.

We believe our critical accounting policies relating to revenue recognition, inventory, clinical trial accruals, stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.

For a complete description of our significant accounting policies, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

Net Product Revenues and Discounts and Allowances

We recognize revenues when our customers obtain control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) returns.

We initially record estimates for these deductions at the time we recognize the related gross product revenue. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data. We update our estimates every quarter to reflect actual claims and other current information. Actual rebates and chargebacks claimed for prior periods have varied from our estimates by less than 1% of the amount deducted from gross product revenues for the years ended December 31, 2022 and 2021. Our current estimates may differ significantly from actual results.

Collaboration Revenues

We enter into collaboration arrangements with third parties, under which we license certain rights to our intellectual property, and account for the arrangements as either license revenue or collaboration services revenue when the counterparty is a customer. The terms of these arrangements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; product supply services; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products.

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As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We use key assumptions to determine the standalone selling price, which may include forecast revenues and costs, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. At the end of each subsequent reporting period, we re-evaluate the probability of earning of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. For arrangements that may include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sale occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Development milestone adjustments are recorded on a cumulative catch-up basis, which would affect collaboration services revenues in the period of adjustment. In addition, in recording revenues for our research and development services performance obligations, we use projected development cost estimates to determine the amount of revenue to record as we satisfy this performance obligation.

Inventory

We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. On a quarterly basis, we analyze our estimated production levels for the following twelve-month period, which is our normal operating cycle, and reclassify inventory we expect to use or sell in periods beyond the next twelve months into other long-term assets in the Consolidated Balance Sheets.

Clinical Trial and Collaboration Accruals

We execute all of our clinical trials with support from contract research organizations and other vendors and we accrue costs for clinical trial activities performed by these third parties based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the activities performed for each patient, the number of active clinical sites and the duration for which the patients will be enrolled in the trial. Certain of our in-licensing collaboration arrangements include contingent payments in the form of development, regulatory and commercial milestones. We recognize expense for contingent payments when they are deemed probable of achievement which requires judgment as to the probability and timing of the achievement of the underlying milestones. To the extent actual results, or updated probability estimates, differ from current estimates, such amounts are recorded as an adjustment in the period estimates are revised. We monitor patient enrollment levels and assess the related research and development activities progress, including the probability of achieving milestones payments associated to the respective terms and conditions of our in-licensing and collaboration arrangements to the extent possible through internal reviews and estimates of the operational progress of our discovery and early-stage clinical development programs, correspondence with contract research organizations and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-based Compensation

Stock-based compensation expense requires us to estimate the fair value of stock options, performance-based restricted stock units (PSUs) and PSUs subject to market conditions, and the estimated the number of shares subject to PSUs that will ultimately vest. To determine the fair value, we use models that require a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns and risk-free interest rates. The value of a stock option is derived from its potential for appreciation. The more volatile the stock, the more valuable the option becomes because of the greater possibility of significant changes in stock price. Because there is a market for options on our common stock, we consider implied volatility as well as our historical volatility when developing an estimate of expected volatility. The expected option term also has a significant effect on the value of the option. The longer the term, the more time the option holder has to allow the stock price to increase without a cash investment and thus, the more valuable the option. Further, lengthier option terms provide more opportunity to take advantage of market highs. However, empirical data show that employees typically do not wait until the end of the contractual term of a nontransferable option to exercise.

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Accordingly, we are required to estimate the expected term of the option for input to an option-pricing model. Monte Carlo simulation models are used to determine grant date fair value of awards with market conditions. The assumptions used in calculating the fair value of stock options and PSUs represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

We recognize stock-based compensation for PSUs over the requisite service period only for awards which we estimate will ultimately vest, which requires judgment as to the probability and timing of the achievement of the underlying performance goals. Significant factors we consider in making those judgments include forecasts of our product revenues and those of our collaboration partners, estimates regarding the operational progress of late-stage clinical development programs and discovery pipeline expansion performance targets. To the extent actual results, or updated estimates, differ from current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised and as such, can materially affect our stock-based compensation expense in the current period and in the future.

Income Taxes

We compute our income tax provision or benefit under the asset and liability method. Significant estimates are required in determining our income tax provision or benefit. We base some of these estimates on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that we deem a reversal of any portion of our valuation allowance against our deferred tax assets to be appropriate, we recognize a tax benefit against our income tax provision in the period of such reversal.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities based on the technical merits of the position. The tax benefit recognized in the Consolidated Financial Statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by tax authorities, new information obtained during a tax examination or resolution of an examination. We have elected to record interest and penalties in the accompanying Consolidated Statements of Income as a component of income taxes.

Recent Accounting Pronouncements

For a description of the expected impact of recent accounting pronouncements, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are 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 company’s or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

Overview

We are an oncology-focused biotechnology company that strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Using our considerable drug discovery, development and commercialization resources and capabilities, we have invented and brought to market innovative therapies that appropriately balance patient benefits and risks; we will continue to build on this foundation as we strive to provide cancer patients with new treatment options that improve upon current standards of care.

Today, four products that originated in Exelixis laboratories are available to be prescribed to patients. Sales related to our flagship molecule, cabozantinib, account for the large majority of our revenues. Cabozantinib is an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET and has been approved by the FDA and in 61 other countries as: CABOMETYX tablets approved for advanced RCC, both alone and in combination with OPDIVO, for previously treated HCC and, currently by the FDA, for previously treated, RAI-refractory DTC; and COMETRIQ capsules approved for progressive MTC. For these types of cancer, cabozantinib has become or is becoming an important drug in their selection of effective therapies.

The other two products resulting from our discovery efforts are: COTELLIC, an inhibitor of MEK, approved as part of multiple combination regimens to treat specific forms of advanced melanoma and marketed under a collaboration with Genentech; and MINNEBRO, an oral, non-steroidal, selective blocker of the mineralocorticoid receptor, approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo. For additional information about these products, see “Business—Collaborations and Business Development Activities—Other Collaborations” in Part I, Item 1 of this Annual Report on Form 10-K.

Our plan is to utilize our operating cash flows and cash and investments to expand the cabozantinib franchise by potentially adding new indications in areas of unmet medical need. We will also leverage our operating cash flows to continue advancing our diverse small molecule and biotherapeutics programs, exploring multiple modalities and mechanisms of action to discover new oncology drugs. So far, these drug discovery and preclinical activities have resulted in four clinical-stage compounds: XL092, a next-generation oral TKI; XB002, a TF-targeting ADC; XL102, a potent, selective and orally bioavailable covalent inhibitor of CDK7; and XL114, a novel anti-cancer compound that inhibits the CBM complex.

Cabozantinib Franchise

On January 22, 2021, the FDA approved CABOMETYX in combination with OPDIVO as a first-line treatment of patients with advanced RCC. This regulatory milestone expands upon the FDA’s prior approvals of CABOMETYX as a monotherapy for previously treated patients with advanced RCC in April 2016 and for previously untreated patients with advanced RCC in December 2017. Additionally, in January 2019, the FDA approved CABOMETYX for the treatment of patients with HCC who have been previously treated with sorafenib, and most recently, on September 17, 2021, the FDA approved CABOMETYX for the treatment of adult and pediatric patients 12 years of age and older with locally advanced or metastatic DTC that has progressed following prior VEGF receptor-targeted therapy and who are RAI-refractory or ineligible.

To develop and commercialize CABOMETYX and COMETRIQ outside the U.S., we have entered into license agreements with Ipsen and Takeda. We granted to Ipsen the rights to develop and commercialize cabozantinib outside of the U.S. and Japan, and to Takeda the rights to develop and commercialize cabozantinib in Japan. Both Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of the cabozantinib franchise in other potential indications, and we continue to work closely with them on these activities. Utilizing its regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its

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commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of the U.S., including in the EU, the U.K. and Canada, as a treatment for advanced RCC and for HCC in adults who have previously been treated with sorafenib. In addition, in March 2021, Ipsen and BMS received regulatory approval from the EC for CABOMETYX in combination with OPDIVO as a first-line treatment for patients with advanced RCC, and both Ipsen and BMS plan to submit applications to approve the combination in other territories beyond the EU. Ipsen also submitted a variation application to the EMA to approve CABOMETYX as a treatment for patients with previously treated, RAI-refractory DTC, with the EMA validating the variation and beginning its centralized review process in August 2021. With respect to the Japanese market, Takeda received Manufacturing and Marketing Approvals in 2020 from the Japanese MHLW of CABOMETYX as a treatment of patients with curatively unresectable or metastatic RCC and as a treatment of patients with unresectable HCC who progressed after cancer chemotherapy. Most recently, in August 2021, Takeda and Ono Pharmaceutical Co., Ltd. (Ono), BMS’ development and commercialization partner in Japan, received Manufacturing and Marketing Approval from the Japanese MHLW of CABOMETYX in combination with OPDIVO as a treatment for unresectable or metastatic RCC.

In addition to our regulatory and commercialization efforts in the U.S. and the support provided to our collaboration partners for rest-of-world regulatory and commercialization activities, we are also pursuing other indications for cabozantinib that have the potential to increase the number of cancer patients who could potentially benefit from this medicine. We continue to evaluate cabozantinib, both as a single agent and in combination with ICIs, in a broad development program comprising over 100 ongoing or planned clinical trials across multiple tumor types. We, along with our collaboration partners, sponsor some of the trials, and independent investigators conduct the remaining trials through our CRADA with NCI-CTEP or our IST program. Informed by the available data from these clinical trials, we advanced the development program for the cabozantinib franchise with potentially label-enabling trials, including COSMIC-311, and positive results from COSMIC-311 served as the basis for the FDA’s September 2021 DTC approval for CABOMETYX.

Building on preclinical and clinical observations that cabozantinib in combination with ICIs may promote a more immune-permissive tumor environment, we initiated numerous pivotal studies to further explore these combination regimens. The first of these studies to deliver results was CheckMate -9ER, and positive results from CheckMate -9ER served as the basis for the FDA’s, EC’s and MHLW’s approvals of CABOMETYX in combination with OPDIVO as a first-line treatment of patients with advanced RCC in January 2021, March 2021 and August 2021, respectively. We are also collaborating with BMS on COSMIC-313, a phase 3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. Enrollment for COSMIC-313 was completed in March 2021, and we expect to report top-line results of the event-driven analyses from the trial in the first half of 2022.

To expand our exploration of combinations with ICIs, we also initiated multiple trials evaluating cabozantinib in combination with Roche’s ICI, atezolizumab. COSMIC-021 is a broad phase 1b study evaluating the safety and tolerability of cabozantinib in combination with atezolizumab in patients with a wide variety of locally advanced or metastatic solid tumors. Based on encouraging efficacy and safety data that has emerged from the trial, certain cohorts have been expanded, including Cohort 6 evaluating patients with mCRPC who have been previously treated with enzalutamide and/or abiraterone acetate and experienced radiographic disease progression in soft tissue and another cohort evaluating patients with NSCLC who have been previously treated with an ICI. We announced data from Cohort 6 in May 2021 and presented more detailed results from Cohort 6 at the ESMO 2021 Congress in September 2021.

Although, following our discussions with the FDA, we will not pursue a regulatory submission for the combination regimen in mCRPC based solely on the Cohort 6 results, data from COSMIC-021 have been instrumental in guiding our clinical development strategy for cabozantinib in combination with ICIs, including supporting the initiation of COSMIC-312, a phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab versus sorafenib in previously untreated advanced HCC, and three phase 3 pivotal trials in collaboration with Roche, CONTACT-01, CONTACT-02 and CONTACT-03, evaluating the combination of cabozantinib with atezolizumab in patients with metastatic NSCLC, mCRPC and advanced RCC, respectively. CONTACT-01 and CONTACT-03 are sponsored by Roche and co-funded by us; CONTACT-02 is sponsored by us and co-funded by Roche. In June 2021, we announced results from COSMIC-312. The trial met one of the primary endpoints, demonstrating significant improvement in BIRC assessed PFS at the planned primary analysis, reducing the risk of disease progression or death by 37% compared with sorafenib. The interim analysis for the second primary endpoint of OS, performed at the same time as the primary analysis for PFS, did not reach statistical significance. The trial is continuing as planned to the final analysis of OS, anticipated during the first quarter of 2022, and we intend to submit an sNDA to the FDA for the combination regimen if supported by the final OS analysis.

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For additional information on our cabozantinib clinical trials, see “Business—Exelixis Development Programs—Cabozantinib Development Program” in Part I, Item 1 of this Annual Report on Form 10-K.

Pipeline Activities

Our small molecule discovery programs are supported by a robust and expanding infrastructure, including a library of 4.6 million compounds. We have extensive experience in the identification and optimization of drug candidates against multiple target classes for oncology, inflammation and metabolic diseases. The first compound to enter the clinic following our re-initiation of drug discovery activities in 2017 was XL092, a next-generation oral TKI that targets VEGF receptors, MET, AXL, MER and other kinases implicated in cancer’s growth and spread. In designing XL092, we sought to build upon our experience with cabozantinib, retaining a similar target profile while improving key characteristics, including the pharmacokinetic half-life. To date, we have initiated two large phase 1b clinical trials studying XL092: STELLAR-001 and STELLAR-002. STELLAR-001 is a phase 1b clinical trial evaluating XL092, both as a monotherapy and in combination with either atezolizumab or Merck KGaA’s and Pfizer’s avelumab. We are continuing to enroll patients into the dose-escalation cohorts of the combination part of the trial, and we expect that once recommended doses are established for single-agent XL092, XL092 in combination with atezolizumab and XL092 in combination with avelumab, the trial will begin to enroll expansion cohorts for patients with clear cell and non-clear cell RCC, CRC, hormone-receptor positive breast cancer, mCRPC and UC. STELLAR-002 is a phase 1b clinical trial evaluating XL092 in combination with either nivolumab, nivolumab and ipilimumab, or nivolumab and Nektar’s bempegaldesleukin. We are enrolling patients with advanced solid tumors in dose-escalation cohorts, and depending on the dose-escalation results, STELLAR-002 may enroll expansion cohorts for patients with clear cell and non-clear cell RCC, mCRPC and UC. To better understand the individual contribution of the therapies, treatment arms in the expansion cohorts may include XL092 as a single-agent in addition to the ICI combination regimens. In addition to clinical updates for XL092 expected in 2022, we plan to initiate the first global phase 3 pivotal trial for the compound in the first half of the year, and other pivotal trials may follow throughout the year. This first planned trial, STELLAR-303, will evaluate XL092 in combination with atezolizumab versus regorafenib in patients with metastatic microsatellite stable CRC who have progressed after or are intolerant to the current standard of care.

We also augment our small molecule discovery activities through research collaborations and in-licensing arrangements with other companies. The most advanced compounds to emerge from these arrangements are XL102 , the lead program targeting CDK7 under our collaboration with Aurigene, and XL114, Aurigene’s novel anti-cancer compound that inhibits the CBM complex. Based on encouraging preclinical data, we have exercised our exclusive options to license each of XL102 and XL114 from Aurigene and initiated a phase 1 clinical trial evaluating XL102 in January 2021; we plan to initiate a phase 1 clinical trial for XL114 in the first half of 2022.

Beyond small molecules, we have also launched rigorous efforts to discover and advance various biotherapeutics that have the potential to become anti-cancer therapies, such as bispecific antibodies, ADCs and other innovative treatments. ADCs in particular present a unique opportunity for new cancer treatments, given their capabilities to deliver anti-cancer payload drugs to targets with increased precision while minimizing impact on healthy tissues, and have been validated by the multiple regulatory approvals for the commercial sale of ADCs in the past several years. To facilitate the growth of these programs, we have established multiple research collaborations and in-licensing arrangements and entered into other strategic transactions that provide us with access to antibodies or other binders, which are the starting point for use with additional technology platforms that we employ to generate next-generation ADCs or multispecific antibodies. We have already made significant progress under these arrangements and believe we will continue to do so in 2022 and future years. For example, based on promising preclinical data for XB002, Iconic’s lead TF-targeting ADC program, we exercised our exclusive option to license XB002 in December 2020 and initiated a phase 1 clinical trial in June 2021. We have expanded our access to antibodies through arrangements with WuXi Bio, focused on leveraging WuXi Bio’s panel of mAbs against an undisclosed target for the development of ADC, bispecific and certain other novel tumor-targeting biotherapeutics, and through the execution of an asset purchase agreement with GamaMabs, under which we will, upon the closing of the asset purchase and subject to certain conditions, acquire all rights, title and interest in GamaMabs’ antibody program directed at AMHR2. These antibodies, as well as those originating from our collaboration with Invenra, which was expanded in August 2021 to include an additional 20 oncology targets, provide starting points for the construction of ADCs through our collaborations with NBE and Catalent, utilizing their site-specific conjugation technologies and payloads. In addition, our collaboration with Adagene, focused on using Adagene’s SAFEbody technology to develop novel masked ADCs or other innovative biotherapeutics, provides potential for developing ADCs or other biotherapeutics with improved therapeutic index. As a direct result of these arrangements, we designated XB010, our first ADC advanced internally, as a development candidate in late 2021. XB010, which targets the tumor antigen 5T4, incorporates antibodies sourced from Invenra and was constructed using and Catalent’s SMARTag site-specific bioconjugation platform.

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For additional information on these early-stage trials of our small molecule and biotherapeutic product candidates, see “Business—Exelixis Development Programs—Other Development Programs - Advancing Exelixis’ Future Cancer Therapy Candidates” in Part I, Item 1 of this Annual Report on Form 10-K. For additional information on our specific research collaborations, in-licensing arrangements and other strategic transactions related to our small molecule and biotherapeutics programs, see “Business—Collaborations and Business Development Activities—Research Collaborations, In-licensing Arrangements and Other Business Development Activities” in Part I, Item 1 of this Annual Report on Form 10-K.

As of the date of this Annual Report, we are currently advancing more than 10 discovery programs and expect to progress up to five new development candidates into preclinical development during 2022. In addition, we will continue to engage in business development initiatives with the goal of acquiring and in-licensing promising oncology platforms and assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

COVID-19 Update

As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic continues to have a modest impact on our business operations, in particular with respect to our clinical trial and commercial activities. We have and continue to undertake considerable efforts to mitigate the various problems presented by this crisis, including as described below:

Clinical Trials. To varying degrees and at different rates across our global clinical trials, we experienced declines in screening and enrollment activity during the early days of the COVID-19 pandemic, as well as delays in new site activations and restrictions on the access to treatment sites that is necessary to monitor clinical study progress and administration. However, we and our collaboration partners, including principal investigators and personnel at clinical trial sites, have been successful overall in preventing material delays to our ongoing and planned clinical trials due to the COVID-19 pandemic. We have done this through ongoing assessment of the COVID-19 pandemic’s impact, which has included staffing and materials shortages and other operational disruptions at clinical trial sites, and wherever possible, we take proactive steps in compliance with guidance issued by the FDA, EMA and other regulatory agencies to support the safety of our patients and their access to treatment, as well as to maintain the high quality of our clinical trials. We recognize, however, that we may have to make further operational adjustments to our ongoing and planned clinical trials and that patient enrollment, and new clinical trial site initiations may again be slowed due to recurring COVID-19 outbreaks and potential reintroduction of certain restrictions intended to mitigate the spread of COVID-19.

Drug Discovery and Preclinical Development. We have fully resumed drug discovery in our laboratories following a temporary suspension of these activities while we observed the shelter in place orders issued by the State of California and Alameda County. While this temporary suspension combined with interruptions in the portion of drug discovery work outsourced to third-party contractors in regions first impacted by COVID-19 caused us to experience modest delays in the advancement of certain of our early-stage programs, we continued to substantially progress our product pipeline despite the COVID-19 pandemic, including the submission of INDs for XB002, XL102 and XL114.

Commercial Activities. Despite the challenges posed by the COVID-19 pandemic, including requiring us to temporarily shift to telephonic and virtual interactions with healthcare professionals, we believe our commercial business was only modestly impacted. Our field employees have now partially resumed their in-person promotional activities while supplementing these activities with telephonic and virtual interactions and we believe they are well-positioned to execute on our commercial objectives.

Supply Chain. We have not experienced significant production delays or seen any significant impairment to our supply chain as a result of the COVID-19 pandemic. In addition, we continue to maintain sufficient safety stock inventories for our commercial drug substance and drug products. We continue to work closely with our third-party contract manufacturers, distributors, suppliers, comparator drug sourcing vendors and collaboration partners to safeguard both the timely production and delivery of our products.

General Business Operations. We have taken numerous precautions, some temporary and others still in place, to help mitigate the risk of transmission of the virus in the workplace, including: initially reducing the number of our employees working on-site at our Alameda headquarters; implementing a vaccination mandate and maintaining enhanced safety and social distancing protocols for those employees who have returned to working on-site, as well as initiating an on-site COVID-19 testing program and limiting certain non-essential business travel for our employees. While most of our employees worked remotely during much of 2020 and early 2021, our Alameda-based workforce has largely returned to working on-site at our headquarters consistent with the policies in place

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prior to the COVID-19 pandemic. As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has only had a modest impact on our productivity and has not caused significant interruptions in our general business operations. For a discussion of workplace safety measures we have taken as a result of the COVID-19 pandemic, see “Business—Environmental, Health and Safety—Workplace Safety Measures in Response to COVID-19” in Part I, Item 1 of this Annual Report on Form 10-K.

The circumstances and public health requirements surrounding the COVID-19 pandemic continue to be subject to rapid change, and we will continue to monitor new developments that could pose additional risks for us, including the spread of the Delta and Omicron variants in the U.S. and other countries and the potential emergence of other SARS-CoV-2 variants that may prove especially contagious or virulent. Despite our mitigation efforts, we may experience delays or an inability to execute on our clinical and preclinical development plans, reduced revenues or other adverse impacts to our business, which are described in more detail in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. We recognize that this pandemic will continue to present unique challenges for us throughout 2022, and potentially into 2023.

For additional information regarding our business, see “Business” in Part I, Item 1 of this Annual Report on Form 10-K.

2021 Business Updates and Financial Highlights

During 2021, we continued to execute on our business objectives, generating significant revenues from operations and enabling us to continue to seek to maximize the clinical and commercial potential of our products and expand our product pipeline. Significant business updates and financial highlights for 2021 and subsequent to year-end include:

Business Updates

•In January 2021, the FDA approved the combination of CABOMETYX and OPDIVO as a first-line treatment of patients with advanced RCC, and we commenced the commercial launch of the combination upon such approval.

•In January 2021, we announced the initiation of a phase 1 clinical trial evaluating XL102, both as a single agent and in combination with other anti-cancer therapies in patients with inoperable, locally advanced or metastatic solid tumors.

•In February 2021, we announced a collaboration and license agreement with Adagene to utilize Adagene’s SAFEbody technology platform to generate masked versions of mAbs from our growing preclinical pipeline for the development of ADCs or other innovative biotherapeutics.

•In February 2021, cabozantinib was the subject of multiple data presentations in forms of RCC and other genitourinary cancers at the virtual 2021 ASCO Genitourinary Cancers Symposium.

•In March 2021, we announced an exclusive license agreement with WuXi Bio for a panel of mAbs, which were discovered based on WuXi Bio’s integrated technology platforms for the development of ADC, bispecific and certain other novel tumor-targeting biotherapeutic applications.

•In March 2021, we announced a clinical trial collaboration and supply agreement with Merck KGaA and Pfizer to evaluate XL092 in combination with avelumab in patients with locally advanced or metastatic UC as part of the ongoing STELLAR-001 phase 1b dose escalation study.

•In March 2021, we announced the completion of enrollment for COSMIC-313, a phase 3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. We expect to report top-line results of the event-driven analyses from the trial in the first half of 2022.

•In March 2021 and April 2021, Ipsen and BMS, respectively, received regulatory approval from the EC for CABOMETYX in combination with OPDIVO as a first-line treatment for patients with advanced RCC.

•In April 2021, we announced the FDA’s acceptance of the IND for XB002 and initiated a phase 1 trial evaluating the ADC in patients with advanced solid tumors in June 2021.

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•In May 2021, we announced an asset purchase agreement with GamaMabs to acquire GamaMabs’ antibody program directed at AMHR2.

•In June 2021, cabozantinib was the subject of multiple data presentations in forms of RCC and DTC at the 2021 ASCO Annual Meeting.

•In June 2021, we filed a patent lawsuit against Teva, following receipt of two Paragraph IV certification notice letters from Teva informing us that it had filed an ANDA with the FDA requesting approval to market a generic version of CABOMETYX tablets. For a more detailed discussion of this litigation matter, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.

•In June 2021, we announced results from the phase 3 COSMIC-312 trial, in which the combination of cabozantinib and atezolizumab met one of the primary endpoints, demonstrating significant improvement in PFS versus sorafenib in patients with previously untreated advanced HCC at the planned primary analysis. The interim OS analysis performed at the same time as the primary analysis for PFS did not demonstrate a statistically significant benefit for the combination. Detailed results from COSMIC-312 were later presented at the ESMO Asia Virtual Oncology Week in November 2021. The trial is continuing as planned to the final analysis of OS, anticipated during the first quarter of 2022, and we intend to submit an sNDA to the FDA for the combination regimen if supported by the final OS analysis.

•In August 2021, we announced the expansion of our discovery and licensing collaboration with Invenra to include an additional 20 oncology targets for multispecific antibody, ADC and other biotherapeutics candidate discovery and development.

•In August 2021, Takeda and Ono received regulatory approval from the Japanese MHLW to manufacture and market CABOMETYX in combination with OPDIVO as a treatment for unresectable or metastatic RCC.

•In September 2021, the FDA approved CABOMETYX for the treatment of adult and pediatric patients 12 and older with locally advanced or metastatic DTC that has progressed following prior VEGF receptor-targeted therapy and who are RAI-refractory or ineligible, and we commenced the commercial launch of CABOMETYX in this indication upon such approval.

•In September 2021, cabozantinib was the subject of multiple data presentations in previously untreated advanced RCC, previously treated RAI-refractory DTC and mCRPC at the ESMO 2021 Congress.

•In October 2021, we announced an exclusive collaboration and license agreement with STORM to discover and develop inhibitors of novel RNA modifying enzymes, including ADAR1.

•In October 2021, we and Aurigene announced that we exercised our exclusive option for XL114, Aurigene’s novel anti-cancer compound that inhibits the CBM complex, resulting in our assuming responsibility for all subsequent clinical development, manufacturing and commercialization of XL114. Following the FDA’s acceptance of the IND for XL114 in October 2021, we plan to initiate a phase 1 clinical trial evaluating XL114 as a monotherapy in patients with NHL in the first half of 2022

•In November 2021, we announced the completion of enrollment for CONTACT-01, a phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab versus docetaxel in patients with metastatic NSCLC who have been previously treated with an ICI and platinum-containing chemotherapy. Based on current event rates, we anticipate announcing results of the interim OS analysis in the second half of 2022.

•In December 2021, we announced the initiation of STELLAR-002, a phase 1b clinical trial evaluating XL092 in combination with either nivolumab, nivolumab and ipilimumab, or nivolumab and bempegaldesleukin in patients with advanced solid tumors. Previously in June 2021, we announced a clinical trial collaboration and supply agreement with BMS pursuant to which BMS is providing nivolumab, ipilimumab and bempegaldesleukin for use in the trial.

•In December 2021, we appointed Jacqueline Wright to our Board of Directors. Ms. Wright currently serves as Corporate Vice President & Chief Digital Officer, U.S. Business at Microsoft Corporation.

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•In January 2022, we appointed Vicki L. Goodman, M.D., as Executive Vice President, Product Development & Medical Affairs, and Chief Medical Officer. Dr. Goodman had previously served as Vice President, Clinical Research and Therapeutic Area Head, Late Stage Oncology at Merck & Co.

•In January 2022, we announced the completion of enrollment for CONTACT-03, a phase 3 pivotal trial evaluating the efficacy and safety of cabozantinib in combination with atezolizumab versus cabozantinib alone in patients with locally advanced or metastatic RCC who progressed during or following treatment with an ICI as the immediate preceding therapy. Based on current event rates, we anticipate announcing results of PFS and the first interim OS analysis in the second half of 2022.

•In January 2022, we announced an amendment to our exclusive option and license agreement with Iconic to acquire broad rights to use the anti-TF antibody incorporated into XB002 for any application, including conjugated to other payloads, as well as rights within oncology to a number of other anti-TF antibodies developed by Iconic, including for use in ADCs and multispecific biotherapeutics.

•In January 2022, we presented encouraging data from two early-stage studies evaluating cabozantinib in combination with ICIs in patients with previously treated CRC at the 2022 ASCO Gastrointestinal Cancers Symposium: cohort 16 from COSMIC-021, evaluating cabozantinib in combination with atezolizumab in patients with metastatic CRC who were previously treated with fluoropyrimidine-containing chemotherapy; and cohort 2 from CAMILLA, the phase 2 IST evaluating cabozantinib in combination with durvalumab in patients with advanced mismatch repair proficient/micro satellite stable CRC patients who were chemotherapy-refractory.

•In February 2022, cabozantinib will be the subject of multiple data presentations in forms of RCC and other genitourinary cancers at the 2022 ASCO Genitourinary Cancers Symposium.

2021 Financial Highlights

•Net product revenues for 2021 were $1,077.3 million, compared to $741.6 million for 2020.

•Total revenues for 2021 were $1,435.0 million, compared to $987.5 million for 2020.

•Research and development expenses for 2021 were $693.7 million, compared to $547.9 million for 2020.

•Selling, general and administrative expenses for 2021 were $401.7 million, compared to $293.4 million for 2020.

•Provision for income taxes for 2021 was $63.1 million, compared to $19.1 million for 2020.

•Net income for 2021 was $231.1 million, or $0.73 per share, basic and $0.72 per share, diluted, compared to $111.8 million, or $0.36 per share, basic and $0.35 per share diluted, for 2020.

•Cash and investments increased to $1.9 billion at December 31, 2021, compared to $1.5 billion at December 31, 2020.

See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.

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Outlook, Challenges and Risks

We will continue to face a number of challenges and risks that may impact our ability to execute on our 2022 business objectives, and some of these risks to our business have been or may be exacerbated by the COVID-19 pandemic. In particular, for the foreseeable future, we expect our ability to generate sufficient cash flow to fund our business operations and growth will depend upon the continued commercial success of CABOMETYX, both alone and in combination with other therapies, as a treatment for the highly competitive indications for which it is approved, and possibly for other indications for which cabozantinib has been or is currently being evaluated in potentially label-enabling clinical trials, if warranted by the data generated from these trials. However, we cannot be certain that the clinical trials we and our collaboration partners are conducting will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial markets where CABOMETYX is approved. Even if we and our collaboration partners receive the required regulatory approvals to market cabozantinib for additional indications, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in these additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. However, as is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is becoming increasingly difficult, both within the U.S. and in foreign markets, because of growing concerns over healthcare cost containment and corresponding policy initiatives and activities aimed at expanding access to, and restricting the prices of, pharmaceuticals.

Achievement of our 2022 business objectives will also depend on our ability to maintain a competitive position with respect to the shifting landscape of therapeutic strategy for the treatment of cancer, which we may not be able to do. While we have had success in adapting our development strategy for the cabozantinib franchise and other product candidates to address the competitive landscape, including through evaluation of therapies that combine ICIs with other targeted agents, it is uncertain whether current and future clinical trials will lead to regulatory approvals, or whether physicians will prescribe regimens containing our products instead of competing product combinations in approved indications. Moreover, the complexities of this development strategy have required and are likely to continue to require collaboration with some of our competitors. In the longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic versions of CABOMETYX tablets that are the subject of ANDAs submitted to the FDA by MSN and Teva, and the approval of either MSN’s or Teva’s ANDA could significantly decrease our revenues derived from the U.S. sales of CABOMETYX and thereby materially harm our business, financial condition and results of operations. Separately, our research and development objectives may be impeded by the challenges of scaling our organization to meet the demands of expanded drug development, unanticipated delays in clinical testing and the inherent risks and uncertainties associated with drug discovery operations, all of which may be increased as a result of the COVID-19 pandemic. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new drug candidates or identifying appropriate candidates for in-licensing or acquisition.

Some of these challenges and risks are specific to our business, and others are common to companies in the biopharmaceutical industry with development and commercial operations. As described under “—COVID-19 Update” above, these risks have been or may be exacerbated by the COVID-19 pandemic. For a more detailed discussion of challenges and risks we face, including those relating to the COVID-19 pandemic, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

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Results of Operations

We have adopted a 52- or 53-week fiscal year policy that ends on the Friday closest to December 31st. Fiscal 2021, which was a 52-week fiscal year, ended December 31, 2021 and fiscal year 2020, which was a 52-week fiscal year, ended January 1, 2021. For convenience, references in this report as of and for the fiscal year ended January 1, 2021 are indicated as being as of and for the year ended December 31, 2020.

This discussion and analysis generally addresses 2021 and 2020 items and year-over-year comparisons between 2021 and 2020. Discussions of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, submitted to the U.S. Securities and Exchange Commission (SEC) on February 10, 2021.

Revenues

Revenues by category were as follows (dollars in thousands):

Net Product Revenues

Gross product revenues, discounts and allowances, and net product revenues were as follows (dollars in thousands):

Net product revenues by product were as follows (dollars in thousands):

The increase in net product revenues for the year ended December 31, 2021, as compared to 2020, was related to a 42% increase in the number of CABOMETYX units sold that was primarily driven by the strong uptake for the combination therapy of CABOMETYX and OPDIVO following approval by the FDA in January 2021, and to a lesser extent a 3% increase in the average net selling price of CABOMETYX.

We project our fiscal 2022 net product revenues will increase over fiscal 2021, primarily as a result of the growth in the number of units sold following the FDA’s approval of CABOMETYX in combination with OPDIVO as a first line treatment of patients with advanced RCC, in part due to the longer duration of therapy for this combination, as well as an increase in selling price reflecting the continued evolution of the metastatic RCC, HCC and DTC treatment landscapes.

We recognize product revenues net of discounts and allowances that are described in “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” included in Part II, Item 8

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of this Annual Report on Form 10-K. Discounts and allowances as a percentage of gross revenue have increased over time as the number of patients participating in government programs has increased and as the discounts given and rebates paid to government payers have also increased. The increase in discounts and allowances for the year ended December 31, 2021, as compared to 2020, was primarily the result of an increase in Public Health Service hospital utilization and the dollar amount of the related chargebacks, and to a lesser extent, an increase in Medicaid utilization and the dollar amount of the related Medicaid rebates.

We project our discounts and allowances as a percentage of gross revenues may increase during fiscal 2022, for similar reasons noted above.

License Revenues

License revenues include: (a) the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable in the related period that the milestone would be achieved and a significant reversal of revenues would not occur in future periods; (b) royalty revenues and (c) the profit on the U.S. commercialization of COTELLIC from Genentech.

See “Note 3. Collaborations and Business Development Activities—Cabozantinib Commercial Collaborations—Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” in the “Notes to Consolidated Financial Statements—Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” contained in Part II, Item 8 of this Annual Report on Form 10-K for a discussion on the allocation of transaction price which impacts the proportion of milestone revenues allocated to license revenues and collaboration services revenues.

Milestone revenues, which are allocated between license revenues and collaboration services revenues, were $133.8 million for the year ended December 31, 2021, as compared to $86.5 million for 2020.

• Milestone revenues for the year ended December 31, 2021 included: (1) $100.0 million related to a commercial sales milestone from Ipsen upon their achievement of $400.0 million of net sales of cabozantinib in the related Ipsen license territory over four consecutive quarters, (2) $11.9 million related to a $12.5 million regulatory milestone Ipsen achieved upon submission of a variation application to the EMA for CABOMETYX as a treatment for patients with previously treated, RAI-refractory DTC and (3) $18.9 million in connection with a $20.0 million milestone achieved following Takeda’s first commercial sale in Japan of CABOMETYX in combination with OPDIVO for the treatment of patients with curatively unresectable or metastatic RCC;

•Milestone revenues for the year ended December 31, 2020 included: (1) $25.7 million in connection with a $31.0 million milestone achieved upon Takeda’s first commercial sale of CABOMETYX for the treatment of patients with curatively unresectable or metastatic RCC in Japan; (2) $19.0 million in connection with a $20.0 million development milestone from Ipsen for the initiation of a phase 3 pivotal trial; (3) $9.3 million in connection with a $10.0 million milestone for Takeda’s and Ono’s submission of a supplemental application to the Japanese MHLW for Manufacturing and Marketing Approval of CABOMETYX in combination with OPDIVO for the treatment of patients with unresectable, advanced or metastatic RCC; (4) $14.0 million in connection with a $15.0 million milestone achieved upon Takeda’s first commercial sale of CABOMETYX for the treatment of patients with advanced HCC; and (5) $14.0 million in connection with $15.0 million in milestones from Takeda for the initiation of two phase 3 pivotal clinical trials that were deemed probable of being achieved in 2021.

Due to uncertainties surrounding the timing and achievement of development, regulatory and commercial milestones, it is difficult to predict the timing of future milestones revenues; consequently, milestones may vary significantly from period to period.

Royalty revenues increased primarily as a result of an increase in Ipsen’s net sales of cabozantinib outside of the U.S. and Japan. Ipsen royalty revenues were $97.2 million for the year ended December 31, 2021, as compared to $76.2 million for 2020. Ipsen’s net sales of cabozantinib have continued to grow since their first commercial sale of the product in the fourth quarter of 2016, as a result of increased demand of CABOMETYX, due to regulatory approval in new territories, including the more recent regulatory approval in the EU for the combination therapy of CABOMETYX and OPDIVO received in March 2021. Royalty revenues for the year ended December 31, 2021 also included $7.9 million, as compared to $2.3 million for 2020, related to Takeda’s net sales of CABOMETYX, which have continued to grow since their first commercial sale of product in Japan in 2020. Additionally, Takeda royalty revenues have increased due to the August 2021 regulatory approval in Japan for the combination therapy of CABOMETYX and OPDIVO. As of December 31, 2021, CABOMETYX is approved and commercially available in 61 countries outside of the U.S.

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Our share of profits on the U.S. commercialization of COTELLIC under our collaboration agreement with Genentech was $8.1 million for the year ended December 31, 2021, as compared to $6.3 million for 2020. We also earned royalty revenues on ex-U.S. net sales of COTELLIC by Genentech of $4.1 million for the year ended December 31, 2021, as compared to $5.1 million for 2020.

We project our license revenues may decrease in fiscal 2022, as compared to fiscal 2021, as a result of the anticipated achievement of fewer milestones in 2022, partially offset by an increase in royalty revenues related to an increase in product sales by Ipsen and Takeda.

Collaboration Services Revenues

Collaboration services revenues include the recognition of deferred revenues for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, and product supply revenues, which are net of product supply costs and the royalties we pay to Royalty Pharma on sales by Ipsen and Takeda of products containing cabozantinib.

Development cost reimbursements were $116.8 million for the year ended December 31, 2021, as compared to $76.3 million for 2020. The increase in development cost reimbursement was primarily attributable to Ipsen’s decision to opt in and co-fund COSMIC-311 development costs in the second quarter of 2021. Ipsen is now responsible for 35% of the global development costs of COSMIC-311 and is obligated to reimburse us for these costs, as well as an additional payment calculated as a percentage of COSMIC-311 development costs, triggered by the timing of the exercise of its option.

Accordingly, collaboration services revenues for the year ended December 31, 2021, includes a cumulative catch-up of $43.2 million recognized in the second quarter of 2021 for Ipsen’s share of global development costs incurred since the beginning of the study. The increase in development cost reimbursements for the year ended December 31, 2021 was partially offset by a decrease in total spending for the COSMIC-312 and COSMIC-021 studies.

Collaboration services revenues were reduced by $14.3 million with respect to the 3% royalty we are required to pay on the net sales by Ipsen and Takeda of any product incorporating cabozantinib for the year ended December 31, 2021, as compared to $10.6 million for 2020. As royalty generating sales of cabozantinib by Ipsen and Takeda have increased as described above, our royalty payments have also increased.

We project our collaboration services revenues may decrease in fiscal 2022, as compared to fiscal 2021, primarily as a result of decreased development cost reimbursements related to Ipsen’s opt in and co-funding of COSMIC-311 and the related cumulative catch-up in development cost reimbursements recognized in fiscal 2021 for which no similar event is projected to occur in 2022.

Cost of Goods Sold

The cost of goods sold and our gross margins were as follows (dollars in thousands):

Cost of goods sold is related to our product revenues and consists of a 3% royalty payable on U.S. net sales of any product incorporating cabozantinib, as well as the cost of inventory sold, indirect labor costs, write-downs related to expiring, excess and obsolete inventory, and other third-party logistics costs. The increase in cost of goods sold for the year ended December 31, 2021, as compared to 2020, was the result of increases in royalty payments as a result of increased U.S. CABOMETYX sales and certain other period costs. We project our fiscal 2022 gross margin to remain consistent with fiscal 2021.

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Research and Development Expenses

We do not track fully burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: (1) development; (2) drug discovery; and (3) other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or may be studied in clinical trials. Our drug discovery group utilizes a variety of technologies, including in-licensed technologies, to enable the rapid discovery, optimization and extensive characterization of lead compounds and biotherapeutics such that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development.

Research and development expenses by category were as follows (dollars in thousands):

____________________

(1)    License and other collaboration costs presented in total development includes upfront license fees and development milestone payments associated with programs currently in clinical development stage while license and other collaboration costs presented in total drug discovery includes upfront license fees, development milestone payments, program initiation fees, and research funding commitments associated with programs in preclinical development stage.

(2)    Primarily includes personnel expenses, consulting and outside services and laboratory supplies, if not separately presented.

(3)    Includes the allocation of general corporate costs to research and development services, and development cost reimbursements in connection with our collaboration arrangement with Roche executed in December 2019.

The increase in research and development expenses for the year ended December 31, 2021, as compared to 2020, was primarily related to increases in license and other collaboration costs, personnel expenses, stock-based compensation and other research and development costs, partially offset by a decrease in clinical trial costs. Drug discovery related license and other collaboration costs increased primarily due to increases in upfront license fees, including, in connection with our recent amended agreement with Iconic in the fourth quarter of 2021 for rights to additional compounds, and other increases in program initiation fees, development milestones, and research funding commitments related to business development activities. Development related license and other collaboration costs increased primarily due to our recent amended agreement with Iconic to buyout future contingent milestone payments and a development milestone we deemed probable of achievement under certain of our in-licensing collaboration arrangements. Personnel expenses increased primarily due to an increase in headcount to support our expanding discovery and development organization. Stock-based compensation expense increased primarily due to an increase related to service-based RSUs associated with higher headcount. Other research and development costs increased primarily related to technology services and related investments in support of digital transformation initiatives and an increase in allocated corporate costs, which were

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partially offset by development cost reimbursements in connection with our collaboration arrangement with Roche. Clinical trial costs decreased primarily due to lower costs associated with the COSMIC-312 and COSMIC-021 studies.

In addition to reviewing the three categories of research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. These factors include enrollment in clinical trials for our drug candidates, preliminary data and final results from clinical trials, the potential indications for our drug candidates, the clinical and commercial potential for our drug candidates, and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy.

We are focusing a significant amount of our development efforts on cabozantinib to maximize the therapeutic and commercial potential of this compound and, as a result, we project that a substantial portion of our research and development expenses will relate to the continuing clinical development program of cabozantinib, which includes over 100 ongoing or planned clinical trials across multiple indications. Notable ongoing company-sponsored studies resulting from this program include: COSMIC-313, for which BMS is providing nivolumab and ipilimumab free of charge and CONTACT-02 for which Roche is sharing the development costs and providing atezolizumab free of charge.

We are working to expand our oncology product pipeline through drug discovery efforts, which encompass our diverse small molecule and biotherapeutics programs exploring multiple modalities and mechanisms of action. In this regard, we conduct drug discovery activities with the goal of identifying new product candidates to advance into clinical trials. In addition, we will continue to engage in business development initiatives with the goal of acquiring and in-licensing promising oncology platforms and assets and then further characterize and develop them utilizing our established preclinical and clinical development infrastructure.

We project our research and development expenses may increase in fiscal 2022 as compared to fiscal 2021, driven by our ongoing clinical evaluation of cabozantinib, the initiation of new clinical trials and expansion of ongoing clinical trials evaluating other product candidates in our pipeline, including ongoing and planned early-stage trials evaluating XL092, XB002, XL102 and XL114, and anticipated business development activities.

The length of time required for clinical development of a particular product candidate and our development costs for that product candidate may be impacted by the scope and timing of enrollment in clinical trials for the product candidate, our decisions to develop a product candidate for additional indications and whether we pursue development of the product candidate or a particular indication with a collaborator or independently. For example, cabozantinib is being developed in multiple indications, and we do not yet know for how many of those indications we will ultimately pursue regulatory approval. In this regard, our decisions to pursue regulatory approval of cabozantinib for additional indications depend on several variables outside of our control, including the strength of the data generated in our prior, ongoing and potential future clinical trials. Furthermore, the scope and number of clinical trials required to obtain regulatory approval for each pursued indication is subject to the input of the applicable regulatory authorities, and we have not yet sought such input for all potential indications that we may elect to pursue. Even after having given such input, applicable regulatory authorities may subsequently require additional clinical studies prior to granting regulatory approval based on new data generated by us or other companies, or for other reasons outside of our control. As a condition to any regulatory approval, we may also be subject to post-marketing development commitments, including additional clinical trial requirements. As a result of the uncertainties discussed above, we are unable to determine the duration of, or total costs associated with the development of cabozantinib or any of our other research and development projects.

Our potential therapeutic products are subject to a lengthy and uncertain regulatory process that may not result in our receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected, including cabozantinib in any additional indications. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval. A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses were as follows (dollars in thousands):

____________________

(1)    Excludes stock-based compensation allocated to selling, general and administrative expenses.

Selling, general and administrative expenses consist primarily of personnel expenses, stock-based compensation, marketing costs and certain other administrative costs.

The increase in selling, general and administrative expenses for the year ended December 31, 2021, as compared to 2020, was primarily related to increases in personnel expenses, marketing costs, legal costs, corporate giving and technology services. Personnel expenses increased primarily due to an increase in administrative headcount to support our commercial and research and development organizations. Marketing costs increased primarily to support the launch of the combination therapy of CABOMETYX and OPDIVO for the treatment of advanced RCC following approval by the FDA in January 2021. The increase in technology services relates to our digital transformation initiatives.

We project our selling, general and administrative expenses may increase in fiscal 2022, as compared to fiscal 2021 in support of our continued commercial investment in CABOMETYX and the growth in the broader organization.

Non-Operating Income

Non-operating income was as follows (dollars in thousands):

The decrease in non-operating income for the year ended December 31, 2021, as compared to 2020, was primarily the result of lower interest income due to lower interest rates.

Provision for Income Taxes

The provision for income taxes and the effective tax rates were as follows (dollars in thousands):

The increase in provision for income taxes for the year ended December 31, 2021, as compared to 2020, was primarily due to the increase in pre-tax income. The effective tax rate for the year ended December 31, 2021 differed from the U.S. federal statutory rate of 21% primarily due to non-deductible executive compensation, partially offset by excess tax benefits related to the exercise of certain stock options during the period and the generation of federal tax credits. The effective tax rate for the year ended December 31, 2020 differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits related to the exercise of certain stock options and federal tax credits, offset by non-deductible executive compensation during the period. We project that our effective tax rate will be between 20% and 22% in 2022.

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Liquidity and Capital Resources

As of December 31, 2021, we had $1.9 billion in cash and investments, compared to $1.5 billion as of December 31, 2020. We anticipate that the aggregate of our current cash and cash equivalents, short-term and long-term investments available for operations, net product revenues and collaboration revenues will enable us to maintain our short-term operations and execute our long-term plans.

Our primary cash requirements for operating activities, which we project will increase in 2022 as compared to 2021, are for employee related expenditures; costs related to our development programs including payments to third party contract research organizations that conduct and manage global clinical trials; drug discovery programs, including payments made to collaboration partners for in-licensing arrangements for upfront and option exercise fees, research and development funding, and development, regulatory and commercial milestones; royalties paid on our net product sales; and cost of inventory and our leased facilities. Our primary source of operating cash is cash collections from customers related to net product sales which we project will increase in 2022 compared to 2021 and cash collections from our commercial collaboration arrangements with Ipsen, Takeda and others related to royalties earned, the achievement of certain development, regulatory and commercial milestones as well as cash payments to us for cost reimbursements under certain of our development programs. The timing of cash generated from commercial collaborations and required for in-licensing collaborations related to upfront payments, initiation fees, milestone payments and cost reimbursements may vary from period to period.

We also have cash requirements related to capital expenditures to support the planned growth of our business including investments in laboratory facilities and equipment. We project that we may continue to spend significant amounts of cash to fund the continued development and commercialization of cabozantinib. In addition, we intend to continue to expand our oncology product pipeline through our drug discovery efforts, including additional research collaborations, in-licensing arrangements and other strategic transactions that align with our oncology drug development, and regulatory and commercial expertise. Financing these activities could materially impact our liquidity and capital resources and may require us to incur debt or raise additional funds through the issuance of equity. Furthermore, even though we believe we have sufficient funds for our current and future operating plans, we may choose to incur debt or raise additional funds through the issuance of equity based on market conditions or strategic considerations.

Letters of Credit

We have obtained standby letters of credit related to our lease obligations and certain other obligations with combined credit limits of $16.7 million and $1.6 million as of December 31, 2021 and 2020, respectively.

In January 2021, we entered into a standby letter of credit as guarantee of our obligation to fund our portion of the tenant improvements related to our build-to-suit lease at our corporate campus. The letter of credit is secured by our short-term investments, which are recorded as restricted cash equivalents and presented in other long-term assets in our Consolidated Balance Sheets and will be reduced as we fund our portion of the tenant improvements. As of December 31, 2021, restricted cash equivalents included $15.2 million of short-term investments as collateral under our standby letter of credit for our portion of the tenant improvements.

Sources and Uses of Cash (dollars in thousands):

Working capital: The increase in working capital as of December 31, 2021, as compared to December 31, 2020, was primarily due to an increase in net product revenues and collaboration revenues, including a $100.0 million milestone from Ipsen, and proceeds received from issuing common stock under our employee equity incentive plans. These increases were partially offset by the reclassification of certain investments from short-term to other long-term assets related to the standby letter of credit noted above, cash used for capital expenditures incurred in connection with expanding our laboratory facilities and acquiring related equipment, cash paid for tax withholding on equity awards, and a net increase in

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operating liabilities, including a $55.0 million collaboration liability related to the Iconic amended agreement. In the future, our working capital may be impacted by some or all of these factors, the amounts and timing of which are variable.

Cash, cash equivalents, restricted cash equivalent and investments: Cash and cash equivalents primarily consist of cash deposits held at major banks, commercial paper and other securities with original maturities 90 days or less. Restricted cash equivalents and investments relate to our letter of credit agreements and are invested in short-term marketable securities. For additional information regarding our cash, cash equivalents, restricted cash equivalents and investments, see “Note 4. Cash and Investments,” in our “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K. The increase in cash, cash equivalents, restricted cash equivalent and investments at December 31, 2021, as compared to December 31, 2020, was primarily due to cash inflows generated by our operations, including collections of amounts due from customers, partially offset by operating cash payments for employee related expenditures, our development and discovery programs, and capital expenditures.

Cash flow activities were as follows (in thousands):

Operating Activities

Our primary source of operating cash flows is cash collections from customers related to our net product sales and cash collections from our commercial collaboration arrangements. Our primary uses of cash from operating activities are for employee related costs, costs related to our development and discovery programs, cash payments for inventory, royalties paid on our net product sales, and our leased facilities.

Cash provided by operating activities is derived by adjusting our net income for non-cash operating items such as deferred taxes, stock-based compensation, depreciation, non-cash lease expense, and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Consolidated Statements of Income.

Net cash provided by operating activities increased for the year ended December 31, 2021, as compared to 2020, primarily due to an increase in cash received on sales of our products, an increase in cash received from our commercial collaboration arrangements and net favorable changes in operating assets and liabilities, partially offset by an increase in cash paid for operating expenses.

Investing Activities

The changes in cash flows from investing activities primarily relates to the timing of marketable securities investment activity and capital expenditures. Our capital expenditures primarily consist of investments to expand our operations and acquire assets that further our research and development.

Net cash used in investing activities decreased for the year ended December 31, 2021 as compared to 2020 primarily due to a net increase in cash proceeds from maturities and sales of investments, net of investment purchases partially offset by an increase in capital expenditures. In 2021, capital expenditures primarily consisted of investments in leasehold improvements and equipment related to an expansion of laboratory facilities at our corporate campus and technology infrastructure investments to support our digital transformation initiatives.

Financing Activities

The changes in cash flows from financing activities primarily relate to proceeds from employee stock programs and taxes paid related to net share settlement of equity awards.

Net cash used in financing activities decreased for the year ended December 31, 2021, as compared to 2020 primarily as a result of lower withholding taxes remitted to the government related to net share settlements of equity awards and to a lesser extent a decrease in proceeds received from the issuance of common stock under our equity incentive and stock purchase plans.

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Contractual Obligations

As of December 31, 2021, we anticipate the aggregate of our cash, cash equivalents and short-term investments and cash generated from operations to be sufficient to fund our contractual obligations, as well as cash requirements to support our ongoing operations and capital expenditures. Our contractual obligations as of December 31, 2021 primarily consist of:

Operating leases: We have certain lease agreements related to our corporate campus facilities, under which we are obligated to make minimum lease payments. As of December 31, 2021, we had $11.4 million of minimum lease payments due in one year and $289.1 million due over the remaining lease term. We entered into the build-to-suit lease agreement in October 2019, the term of the lease is for a period of 242 months, which is expected to begin in the first quarter of 2022. The amounts presented herein include the estimated lease commitment payments at the estimated commencement of the lease, subject to adjustment dependent upon the actual total development costs of the premises.

Purchase obligations: Purchase obligations include firm purchase commitments related to manufacturing of inventory, software services and other facilities and equipment. As of December 31, 2021, we had $40.0 million total purchase obligations due within one year and $10.6 million due after one year.

Contingent payments: We have committed to make certain contingent payments for potential future milestones, research funding commitments and royalties to certain collaboration partners as part of our agreements with those parties. We do not expect these contingent payments to have a significant impact on our liquidity in the near term.

Notes 3 and 11 of “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K include additional information regarding our contractual obligations and contingencies.

As of December 31, 2021, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.

Critical Accounting Policies and Estimates

The preparation of our Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances as well as milestones included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement; recoverability of inventory; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions; and the amounts of deferred tax assets and liabilities including the related valuation allowance. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates.

We believe our critical accounting policies relating to revenue recognition, inventory, clinical trial accruals, stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.

For a complete description of our significant accounting policies, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

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Revenue Recognition

Net Product Revenues and Discounts and Allowances

We recognize revenues when our customers obtain control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the U.S. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) returns.

We initially record estimates for these deductions at the time we recognize the related gross product revenue. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data. We update our estimates every quarter to reflect actual claims and other current information. Actual rebates and chargebacks claimed for prior periods have varied from our estimates by less than 1% of the amount deducted from gross product revenues for the years ended December 31, 2021 and 2020. Our current estimates may differ significantly from actual results.

Collaboration Revenues

We enter into collaboration arrangements with third parties, under which we license certain rights to our intellectual property, and account for the arrangements as either license revenue or collaboration services revenue when the counterparty is a customer. The terms of these arrangements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; product supply services; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products.

As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We use key assumptions to determine the standalone selling price, which may include forecast revenues and costs, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. At the end of each subsequent reporting period, we re-evaluate the probability of earning of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. For arrangements that may include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sale occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Development milestone adjustments are recorded on a cumulative catch-up basis, which would affect collaboration services revenues in the period of adjustment. In addition, in recording revenues for our research and development services performance obligations, we use projected development cost estimates to determine the amount of revenue to record as we satisfy this performance obligation.

Inventory

We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. On a quarterly basis, we analyze our estimated production levels for the following twelve-month period, which is our normal operating cycle, and reclassify inventory we expect to use or sell in periods beyond the next twelve months into other long-term assets in the Consolidated Balance Sheets.

Clinical Trial and Collaboration Accruals

We execute all of our clinical trials with support from contract research organizations and other vendors and we accrue costs for clinical trial activities performed by these third parties based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the activities to be performed for each patient, the number of active clinical sites and the duration for which the patients will be enrolled in the trial. Certain of our in-licensing collaboration arrangements includes contingent

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considerations in the form of development, regulatory and commercial milestones payments. We recognize the contingent considerations when they are deemed probable of achievement which requires judgment as to the probability and timing of the achievement of the underlying milestones. We monitor patient enrollment levels and assess the related research and development activities progress, including the probability of achieving milestones payments associated to the respective terms and conditions of our in-licensing and collaboration arrangements to the extent possible through internal reviews and estimates of the operational progress of our discovery and early-stage clinical development programs, correspondence with contract research organizations and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-based Compensation

Stock-based compensation expense requires us to estimate the fair value of stock options, performance-based restricted stock units (PSUs) and PSUs subject to market conditions, and the estimated the number of shares subject to PSUs that will ultimately vest. To determine the fair value, we use models that require a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns and risk-free interest rates. The value of a stock option is derived from its potential for appreciation. The more volatile the stock, the more valuable the option becomes because of the greater possibility of significant changes in stock price. Because there is a market for options on our common stock, we consider implied volatility as well as our historical volatility when developing an estimate of expected volatility. The expected option term also has a significant effect on the value of the option. The longer the term, the more time the option holder has to allow the stock price to increase without a cash investment and thus, the more valuable the option. Further, lengthier option terms provide more opportunity to take advantage of market highs. However, empirical data show that employees typically do not wait until the end of the contractual term of a nontransferable option to exercise. Accordingly, we are required to estimate the expected term of the option for input to an option-pricing model. Monte Carlo simulation models are used to determine grant date fair value of awards with market conditions. The assumptions used in calculating the fair value of stock options and PSUs represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

We recognize stock-based compensation for PSUs over the requisite service period only for awards which we estimate will ultimately vest, which requires judgment as to the probability and timing of the achievement of the underlying performance goals. Significant factors we consider in making those judgments include forecasts of our product revenues and those of our collaboration partners, estimates regarding the operational progress of late-stage clinical development programs and discovery pipeline expansion performance targets. To the extent actual results, or updated estimates, differ from current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised and as such, can materially affect our stock-based compensation expense in the current period and in the future.

Income Taxes

We compute our income tax provision or benefit under the asset and liability method. Significant estimates are required in determining our income tax provision or benefit. We base some of these estimates on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that we deem a reversal of any portion of our valuation allowance against our deferred tax assets to be appropriate, we recognize a tax benefit against our income tax provision in the period of such reversal.

Recent Accounting Pronouncements

For a description of the expected impact of recent accounting pronouncements, see “Note 1. Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8

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of this Annual Report on Form 10-K.