EXELIXIS, INC. (EXEL) FY 2021 MD&A

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):

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(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.