Exelixis Secures Its Future

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In one of the more complicated financing deals ever made by a development-stage drugmaker, Exelixis (Nasdaq: EXEL) helped bring in enough cash to keep guiding its lead drugs closer to market.

In a deal with one of its largest shareholders, Deerfield Management, Exelixis secured the right to as much as $150 million in loans over the next 18 months. Intriguingly, Exelixis is under no obligation to actually take this cash; if it does, it can accept the money in increments as small as $15 million. It can borrow the money and pay back its debt, in its choice of cash or in shares, by 2013. That's a fairly unusual option for a development stage drugmaker.

Simpler variations on this sort of financing, allowing a drugmaker to access cash at its own pace, have become more popular in recent months. Development-stage drugmakers like Discovery Labs (Nasdaq: DSCO) and Cyclacel Pharmaceuticals (Nasdaq: CYCC) have similar deals recently. Most of these transactions have been far simpler, but all share the basic premise of selling shares piecemeal at opportune times, rather than all at once in a potentially hostile market environment.

Exelixis ended its first quarter with $252 million in cash and investments on its balance sheet. Considering that its guidance for 2008 called for revenue of $115 million (at the midpoint) and cash expenses of nearly $300 million, Exelixis could definitely use the added cash.

If Exelixis chooses to access all of this $150 million over the coming months, it will have more than enough funds to see compounds like its lead drug, lung cancer treatment XL647, and multiple other compounds through continued clinical testing. That extra time could help the company potentially extract a better deal in any partnership negotiations.

This financing deal doesn't eliminate the company's development and commercialization risks, but it does remove some of the near-term financial risk. Money woes can sink even drugmakers with valuable assets, as we saw with Encysive Pharmaceuticals earlier in the year.

Even as companies ranging from financial giants like Lehman Brothers to small consumer health-care companies like American Oriental Bioengineering (NYSE: AOB) struggle to raise cash, Exelixis just secured sufficient funding for several years to come. Better yet, it did so at relatively reasonable rates for a company of its kind.