'Tis the season to be giving, so it's appropriate that Exelixis (NASDAQ:EXEL) and GlaxoSmithKline (NYSE:GSK) chose last week to exchange gifts. On Friday, Glaxo announced that it will take over development of a lead Exelixis drug.

In 2002, Glaxo and Exelixis inked a collaboration agreement, giving Glaxo the right to continue development of as many as two Exelixis compounds. They later expanded the deal to include a possible option on a third drug.

There were plenty of signals from Exelixis and Glaxo that the latter would take over the drug candidate selected, XL880. In August, Glaxo decided to expedite its review of XL880 before the drug completed proof-of-concept phase 2 testing. And in its annual research-and-development presentation two weeks ago, Exelixis failed to mention that it would bring XL880 into pivotal studies itself. If the company expected XL880 to remain in-house, 2008 would have been the most logical time to start these studies.

XL880 has been tested as a treatment for various solid tumors, including kidney cancer. It blocks a proven target that helps cancers spread, one also attacked by drugs like Genentech's (NYSE:DNA) Avastin, but it also pursues a novel target for which there are no approved therapies. (That's probably why Glaxo likes the drug.)

The next Glaxo opt-in decision will be early next year, with kidney disease drug XL784. Because of unimpressive study results earlier in the year, Glaxo probably won't pick up that compound -- not with other, more exciting options available in the future.

There were 12 Exelixis drugs involved in the original Glaxo deal. For those keeping score at home, if Glaxo fails to pick up XL784 next year, it will have denied two drugs (XL647 and XL784) and accepted one (XL880). Exelixis halted development on two others, (XL999 and XL418), leaving seven possible picks remaining for Glaxo.

Glaxo's opt-in decision on XL880 won't bring any new cash to Exelixis' balance sheet, despite a $35 million milestone payment; this cash will be used to pay off a previous Glaxo cash advance.

Now that Glaxo has taken control of XL880m it will be responsible for all clinical trial expenditures. Exelixis will receive a royalty on future sales if the compound makes it to market, along with possible co-promotion rights in the U.S. Getting XL880 over to Glaxo was important, because it allows Exelixis to focus its limited cash resources on other drug candidates in its expansive 12-drug active clinical-stage pipeline.

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