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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):

Year Ended December 31, Percent Change

Net Product Revenues

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

Year Ended December 31, Percent Change

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

Year Ended December 31, Percent Change

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):

Year Ended December 31, Percent Change

Gross margin % 96 % 95 %

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):

Year Ended December 31, Percent Change

Research and development expenses:

Development:

Drug discovery:

____________________

(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):

Year Ended December 31, Percent Change

Total selling, general and administrative expenses $ 459,856 $ 401,715 14 %

____________________

(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):

Year Ended December 31, Percent Change

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):

Year Ended December 31, Percent Change

Effective tax rate 22.2 % 21.4 % 4 %

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):

Year Ended December 31, Percent Change

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):

Year Ended December 31,

Net cash provided by operating activities $ 362,614 $ 400,804

Net cash used in investing activities $ (524,414) $ (42,884)

Net cash provided by (used in) financing activities $ 586 $ (14,801)

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 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to credit risk, changes in interest rates and foreign exchange rates. Our investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. None of these market risk-sensitive instruments are held for trading purposes. We do not have derivative financial instruments in our investment portfolio.

Credit Risk

We manage credit risk associated with our investment portfolio through our investment policy, which limits purchases to high-quality issuers and limits the amount of our portfolio that can be invested in a single issuer.

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Interest Rate Risk

We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment-grade corporate bonds and commercial paper, and money market funds. These investments are denominated in U.S. Dollars. All of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term-to-maturity of our investment instruments. Due to the conservative and short-term nature of these instruments, we do not believe that we have a material exposure to interest rate risk. If market interest rates were to increase or decrease by one percentage point, the fair value of our investment portfolio would increase or decrease by an immaterial amount.

Foreign Exchange Rate Risk

Fluctuations in the exchange rates of the U.S. dollar and foreign currencies may have the effect of increasing or decreasing our revenues and expenses. Royalty revenues and sales-based milestones we receive from our collaboration agreements with Ipsen, Takeda and Genentech are a percentage of the net sales made by those collaboration partners from sales made in countries outside the U.S. and are denominated in currencies in which the product is sold, which is predominantly the Euro or Japanese Yen. Research and development expenses include clinical trial services performed by third-party contract research organizations and other vendors located outside the U.S. that may bill us in currencies where their services are provided, which is predominantly the Euro. If the U.S. dollar strengthens against a foreign currency, then our royalty revenues will decrease for the same number of units sold in that foreign currency and the date we achieve certain sales-based milestones may also be delayed. Similarly, if the U.S. dollar weakens against a foreign currency, then our research and development expenses would increase. However, we believe that we are not subject to material risks arising from changes in foreign exchange rates and that a hypothetical 10% increase or decrease in foreign exchange rates would not have a material adverse impact on our financial condition, results of operations or cash flows.

Item 8. Financial Statements and Supplementary Data

EXELIXIS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 79

Consolidated Balance Sheets 81

Consolidated Statements of Income 82

Consolidated Statements of Comprehensive Income 82

Consolidated Statements of Stockholders’ Equity 83

Consolidated Statements of Cash Flows 84

Notes to Consolidated Financial Statements 85

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Exelixis, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Exelixis, Inc. (the Company) as of December 30, 2022 and December 31, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 30, 2022 and December 31, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 7, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue recognition - product sales and accounts receivable

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/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2002.

San Mateo, California

February 7, 2023

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EXELIXIS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

December 31,

ASSETS

Current assets:

Prepaid expenses and other current assets 62,211 57,530

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Long-term portion of deferred revenue 6,582 8,739

Long-term portion of operating lease liabilities 190,170 51,272

Commitments and contingencies (Note 11)

Stockholders’ equity:

Accumulated other comprehensive loss (14,521) (758)

The accompanying notes are an integral part of these Consolidated Financial Statements.

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EXELIXIS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

Year Ended December 31,

Revenues:

Operating expenses:

Net income per share:

Weighted-average common shares outstanding:

The accompanying notes are an integral part of these Consolidated Financial Statements.

EXELIXIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended December 31,

Other comprehensive income (loss):

The accompanying notes are an integral part of these Consolidated Financial Statements.

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EXELIXIS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Shares Amount

Other comprehensive income — — — 1,407 — 1,407

Other comprehensive loss — — — (5,234) — (5,234)

The accompanying notes are an integral part of these Consolidated Financial Statements.

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EXELIXIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Acquired in-process research and development technology 107,250 14,000 —

Changes in operating assets and liabilities:

Cash flows from investing activities:

Acquired in-process research and development technology (110,750) (10,000) —

Cash flows from financing activities:

Net cash provided by (used in) financing activities 586 (14,801) (25,132)

Supplemental cash flow disclosures:

Non-cash operating activities:

Non-cash investing activities:

Accounts receivable for unsettled investment sales $ — $ — $ 6,180

The accompanying notes are an integral part of these Consolidated Financial Statements.

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EXELIXIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Exelixis, Inc. (Exelixis, we, our or us) is 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, antibody-drug conjugates (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 U.S. Food and Drug Administration (FDA) and in 62 other countries as: CABOMETYX® (cabozantinib) tablets approved both alone and in combination with Bristol-Myers Squibb Company’s (BMS) OPDIVO® (nivolumab) for advanced renal cell carcinoma (RCC), for previously treated hepatocellular carcinoma (HCC) and, currently by the FDA and European Commission (EC), for previously treated, radioactive iodine (RAI)-refractory differentiated thyroid cancer (DTC); and COMETRIQ® (cabozantinib) capsules approved 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, Inc. (a member of the Roche Group) (Genentech); 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 (Daiichi Sankyo). See “—Collaborations and Business Development Activities—Other Collaborations.”

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.

Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the U.S. dollar. All intercompany balances and transactions have been eliminated.

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 on 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.

We have made reclassifications to our prior years’ Consolidated Financial Statements to conform to the current year’s presentation. These reclassifications did not impact previously reported total revenues, income from operations, net income, total assets, total liabilities, total operating, investing or financing cash flows or total stockholders’ equity.

Segment Information

We operate in one business segment that focuses on the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Our Chief Executive Officer, as the chief operating decision-maker, manages and allocates resources to our operations on a total consolidated basis. Consistent with this decision-making process, our Chief Executive Officer uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.

All of our long-lived assets are located in the U.S. See “Note 2. Revenues” for enterprise-wide disclosures about product sales, revenues from major customers and revenues by geographic region.

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Use of Estimates

The preparation of the accompanying 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. On an ongoing basis, we evaluate our significant estimates. 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. Actual results could differ materially from those estimates.

Recently Adopted Accounting Pronouncements

There were no new accounting pronouncements adopted by us since our filing of the Annual Report on Form 10-K for the year ended December 31, 2021, which could have a significant effect on our Consolidated Financial Statements.

Cash, Cash Equivalents, Restricted Cash Equivalents and Investments

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include high-grade, short-term investments in money market funds, certificates of deposit and marketable debt securities which are subject to minimal credit and market risk.

We designate all investments in marketable debt securities as available-for-sale and therefore, report such investments at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. We include realized gains and losses on the sale of investments in other income, net in the accompanying Consolidated Statements of Income.

We classify those investments that we do not require for use in current operations and that mature in more than 12 months as long-term investments in the accompanying Consolidated Balance Sheets. The classification of restricted cash equivalents as short-term or long-term is dependent upon the longer of the remaining term to maturity of the investment or the remaining term of the related restriction.

Investment Impairment

Quarterly, we assess each of our investments in available-for-sale debt securities whose fair value is below its cost basis to determine if the investment’s impairment is due to credit-related factors or noncredit-related factors. Factors considered in determining whether an impairment is credit-related include the extent to which the investment’s fair value is less than its cost basis, declines in published credit ratings, issuer default on interest or principal payments, and declines in the financial condition and near-term prospects of the issuer. If we determine a credit-related impairment exists, we will measure the credit loss based on a discounted cash flows model. Credit-related impairments on available-for-sale debt securities are recognized as an allowance for credit losses with a corresponding adjustment to other income, net in the accompanying Consolidated Statements of Income. The portion of the impairment that is not credit-related is recorded as a reduction of other comprehensive income (loss), net of applicable taxes.

We have elected to exclude accrued interest from both the fair value and the amortized cost basis of the available-for-sale debt securities for the purposes of identifying and measuring an impairment. We write-off accrued interest as a reduction of interest income when an issuer has defaulted on interest payments due on a security.

Fair Value Measurements

We define fair value as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks.

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Foreign Currency Remeasurement

Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured using exchange rates in effect at the end of the period and related gains or losses are recorded in other income, net in the accompanying Consolidated Statements of Income. Net foreign currency gains or losses were immaterial for the years ended December 31, 2022, 2021 and 2020, respectively.

Accounts Receivable

Trade receivables, net, contain amounts billed to our customers for product sales, and amounts billed to our collaboration partners for development, regulatory and sales-based milestone payments, royalties on the sale of licensed products, profit-sharing arrangements, development cost reimbursements, and payments for product supply services. Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S., and collaboration partners that are located in Europe and Japan. We record trade receivables net of allowances for credit losses and chargebacks, and cash discounts for prompt payment. We apply an aging method to estimate credit losses and consider our historical loss information, adjusted to account for current economic conditions, and reasonable and supportable forecasts of future economic conditions affecting our customers. We write off trade receivables and related allowances for credit losses when it becomes probable we will not collect the amount receivable. Write-offs for the years ended December 31, 2022 and December 31, 2021 were immaterial.

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. These write downs are charged to either cost of goods sold or the cost of supplied product included in collaboration services revenues in the accompanying Consolidated Statements of Income. 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 accompanying Consolidated Balance Sheets.

Property and Equipment

We record property and equipment at cost, net of depreciation. We compute depreciation using the straight-line method based on estimated useful lives of the assets, which ranges up to 15 years and depreciate leasehold improvements over the lesser of their estimated useful lives or the remainder of the lease term. We charge repairs and maintenance costs to expense as incurred. We periodically review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We did not recognize any material impairment charges in any of the periods presented.

Goodwill

We recorded goodwill amounts as the excess of purchase price over identifiable net assets acquired based on their estimated fair value. We review the carrying amount of goodwill for impairment annually and whenever events or changes in circumstance indicate that the carrying value may not be recoverable. We perform our annual assessment of the recoverability of our goodwill as of the first day of our fourth quarter. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. We perform a quantitative assessment if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded for the amount by which the carrying amount of a reporting unit exceeds its fair value, limited to the goodwill balance. We operate in one business segment, which is also considered to be our sole reporting unit and therefore, goodwill is tested for impairment at the enterprise level. We did not recognize any impairment charges in any of the periods presented.

Long-Lived Assets

The carrying value of our long-lived assets, which includes property and equipment, right-of-use assets and leasehold improvements, is reviewed for impairment whenever events or changes in circumstances indicate that the

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carrying value of the asset may not be recoverable. Should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. If the asset or asset group is determined to be impaired, any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.

Revenue

We account for revenues under the guidance of ASU Topic 606, Revenues from Contracts with Customers (Topic 606). Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration to which the entity is entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of Topic 606, we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

Net Product Revenues

We sell our products principally to specialty distributors and specialty pharmacy providers, or collectively, our Customers. These Customers subsequently resell our products to health care providers and patients. In addition to distribution agreements with Customers, we enter into arrangements with health care providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products. Revenues from product sales are recognized when the Customer obtains control of our product, which occurs at a point in time, typically upon delivery to the Customer.

Product Sales Discounts and Allowances

We record revenues from product sales at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established primarily from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between us and our Customers, health care providers, payors and other indirect customers relating to the sales of our products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted Customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of our contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenues and earnings in the period such variances become known.

Chargebacks: Chargebacks are discounts that occur when contracted Customers purchase directly from a specialty distributor. Contracted Customers, which currently consist primarily of Public Health Service institutions, Federal government entities purchasing via the Federal Supply Schedule, Group Purchasing Organizations, and health maintenance organizations, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to us the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the Customer. The allowance for chargebacks is based on actual chargebacks received and an estimate of sales to contracted Customers.

Discounts for Prompt Payment: Our Customers in the U.S. receive a discount of 2% for prompt payment. We expect our Customers will earn 100% of their prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program, other government programs and commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers,

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such as Medicaid. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on Customer and payer data received from the specialty pharmacies and distributors and historical utilization rates. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to our Customers, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net product revenues in the period of adjustment.

Allowances for rebates also include amounts related to the Medicare Part D Coverage Gap Discount Program. In the U.S. during 2020, theMedicare Part D prescription drug benefit mandated participating manufacturers to fund 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for expected Medicare Part D coverage gap amounts are based on Customer and payer data received from specialty pharmacies and distributors and historical utilization rates. Funding of the coverage gap is invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to Customer, plus an accrual balance for known prior quarters’ unpaid claims. If actual future funding varies from estimates, we may need to adjust our accruals, which would affect net product revenues in the period of adjustment.

Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using Customer data provided by the specialty distributor that administers the copay program.

Other Customer Credits: We pay fees to our Customers for account management, data management and other administrative services. To the extent the services received are distinct from the sale of products to the Customer, we classify these payments in selling, general and administrative expenses in our Consolidated Statements of Income.

Collaboration Revenues

We assess whether our collaboration agreements are subject to ASC Topic 808, Collaborative Arrangements (Topic 808) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808, we apply by analogy the unit of account guidance under Topic 606 to identify distinct performance obligations, and then determine whether a customer relationship exists for each distinct performance obligation. If we determine a performance obligation within the arrangement is with a customer, we apply the guidance in Topic 606. If a portion of a distinct bundle of goods or services within an arrangement is not with a customer, then the unit of account is not within the scope of Topic 606, and the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.

We enter into collaboration arrangements, under which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payments to us for one or more of the following: nonrefundable up-front license fees; development, regulatory and sales-based 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 develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. These key assumptions may include forecasted revenues, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Up-front License Fees: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license, which generally occurs at or near the inception of the contract. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenues from nonrefundable up-front fees. We evaluate the measure of progress at the end of each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

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Regulatory and Development Milestone Payments: 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. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development and regulatory milestones and any related variable consideration constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis.

Product Supply Services: Arrangements that include a promise for the future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.

Development Cost Reimbursements: Our collaboration arrangements may include promises of future clinical development and drug safety services, as well as participation on certain joint committees. When such services are provided to a customer, and they are distinct from the licenses provided to our collaboration partners, these promises are accounted for as a separate performance obligation, which we estimate using internal development costs incurred and projections through the term of the arrangements. We record revenues for these services as the performance obligations are satisfied over time based on measure of progress. However, if we conclude that our collaboration partner is not a customer for those collaborative research and development activities, we present such payments as a reduction of research and development expenses.

Profit-sharing Arrangements: Under the terms of our collaboration agreement with Genentech for cobimetinib, we are entitled to a share of U.S. profits and losses received in connection with the commercialization of cobimetinib. We account for this arrangement in accordance with Topic 606. We have determined that we are an agent under the agreement and therefore revenues are recorded net of costs incurred. We record revenues for the variable consideration associated with the profits and losses under the collaboration agreement when it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur.

Royalty and Sales-based Milestone Payments: For arrangements that include royalties and sales-based milestone payments, including milestone payments earned for the first commercial sale of a product, the license is deemed to be the predominant item to which such payments relate and we recognize revenues at the later of when the related sales occur or when the performance obligation to which the royalty has been allocated has been satisfied.

Cost of Goods Sold

Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty we are required to pay on all net sales of any product incorporating cabozantinib, the cost of manufacturing, indirect labor costs, write-downs related to expiring and excess inventory, shipping and other third-party logistics and distribution costs for our product.

We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval are not capitalized as inventory but are expensed as research and development costs.

Research and Development Expenses

Research and development expenses consist of (1) direct and indirect internal costs for drug discovery; (2) upfront license and project initiation fees, license option fees and option exercise fees, funded research and milestone payments incurred or probable to be incurred for our in-licensing arrangements with our collaboration partners for research programs in development and prior to regulatory approval; and (3) development costs associated with our clinical trial projects, which include fees paid to Contract Research Organizations (CRO) performing work on our behalf.

Our clinical trial projects have been executed with support from third-party CROs, who specialize in conducting and managing global clinical trials. We accrue expenses for clinical trial activities performed by the CROs based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating

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accruals include direct CRO costs, the number of patients enrolled, the number of active clinical sites involved, the duration for which the patients will be enrolled in the trial and patient out of pocket costs. We monitor patient enrollment levels and related activities to the extent possible through CRO meetings and correspondence, internal reviews 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. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. As described further above, certain payments made to us from our collaboration partners may be presented as a reduction of research and development expense.

Leases

We determine if an arrangement includes a lease at the inception of the agreement. For each of our lease arrangements, we record a right-of-use asset representing our right to use an underlying asset for the lease term and a lease liability representing our obligation to make lease payments. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the net present value of lease payments over the lease term. In determining the discount rate used to calculate the net present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense for our operating leases is recognized on a straight-line basis over the lease term. We have elected not to apply the recognition requirements of ASU 2016-02, Leases (Topic 842) for short-term leases.

Advertising

Advertising expenses were $41.6 million, $31.8 million and $25.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses are recorded in selling, general and administrative expenses.

Stock-Based Compensation

We account for stock-based payments to employees, including grants of service-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), service-based stock options and purchases under our 2000 Employee Stock Purchase Plan (ESPP) in accordance with ASC 718, Compensation-Stock Compensation, which requires that stock-based payments (to the extent they are compensatory) be recognized in our Consolidated Statements of Income based on their fair values. We account for forfeitures of stock-based awards as they occur. The expense for stock-based compensation is based on the grant date fair value of the award. The grant date fair value of RSUs and PSUs are estimated as the value of the underlying shares of our common stock. The grant date fair values are estimated using a Monte Carlo simulation pricing model for certain PSUs and RSUs with market vesting conditions and a Black-Scholes Merton option pricing model for stock options. Both pricing models require the input of subjective assumptions. These variables include, but are not limited to, the expected volatility of our stock price and the expected term of the awards. We consider both implied and historical volatility when developing an estimate of expected volatility. We estimate the term using historical data. We recognize compensation expense over the requisite service period on an accelerated basis for awards with a market or performance condition and on a straight-line basis for service-based stock options and awards. Compensation expense related to PSUs is recognized when we determine that it is probable that the performance goals will be achieved, which we assess on a quarterly basis. Compensation expense related to RSUs with market vesting conditions is recognized regardless of the outcome of the market conditions.

Variable Interest Entities

We continually assess our ownership, contractual and other interests in entities that are not wholly-owned whether we are the primary beneficiary of a variable interest entity (VIE) and therefore we must consolidate the entity. We apply a qualitative approach that determines whether we have both (1) the power to direct the activities that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. We perform this assessment, as changes to existing relationships or future transactions may result in consolidation or deconsolidation of a VIE.

Provision for Income Taxes

Our provision for income taxes is computed under the asset and liability method. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or

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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 a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our provision for income taxes in the period of such reversal. Based on our evaluation of various factors, including our achievement of a cumulative three-year income position as of December 31, 2022 and forecasts of future operating results, we do not have a valuation allowance against our deferred tax assets as described in “Note 9. Provision For Income Taxes”, below. We continue to maintain a valuation allowance against our California state deferred tax assets.

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities based on the technical merits of the position. An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.

Recent Accounting Pronouncements Not Yet Adopted

There were no new accounting pronouncements issued since our filing of the Annual Report on Form 10-K for the year ended December 31, 2021, which could have a significant effect on our Consolidated Financial Statements.

NOTE 2. REVENUES

Revenues consisted of the following (in thousands):

Year Ended December 31,

Product revenues:

Collaboration revenues:

Net product revenues and license revenues are recorded in accordance with Topic 606. License revenues include the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable in the current period that the milestone would be achieved and a significant reversal of revenues would not occur, as well as royalty revenues and our share of profits under our collaboration agreement with Genentech. Collaboration services revenues were recorded in accordance with Topic 808. Collaboration services revenues include the recognition of deferred revenues for the portion of upfront and milestone payments allocated to our research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, product supply revenues, net of product supply costs, and the royalties we paid on sales of products containing cabozantinib by our collaboration partners.

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

Year Ended December 31,

The percentage of total revenues by customer who individually accounted for 10% or more of our total revenues were as follows:

Year Ended December 31,

Affiliates of AmerisourceBergen Corporation 18 % 14 % 11 %

Affiliates of McKesson Corporation 17 % 14 % 12 %

Affiliates of CVS Health Corporation 17 % 14 % 14 %

Ipsen Pharma SAS 10 % 21 % 15 %

Accredo Health, Incorporated 10 % 9 % 9 %

Affiliates of Optum Specialty Pharmacy 10 % 8 % 11 %

As of December 31, 2022 and 2021, the percentage of trade receivables by customer who individually accounted for 10% or more of our trade receivables were as follows:

December 31,

Affiliates of McKesson Corporation 22 % 10 %

Ipsen Pharma SAS 20 % 50 %

Affiliates of AmerisourceBergen Corporation 18 % 11 %

Affiliates of CVS Health Corporation 18 % 9 %

Cardinal Health, Inc. 11 % 6 %

Total revenues by geographic region were as follows (in thousands):

Year Ended December 31,

Total revenues include net product revenues attributed to geographic regions based on ship-to location and license and collaboration services revenues attributed to geographic regions based on the location of our collaboration partners’ headquarters.

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Product Sales Discounts and Allowances

The activities and ending reserve balances for each significant category of discounts and allowances (which constitute variable consideration) were as follows (in thousands):

Provision related to sales made in:

Provision related to sales made in:

The allowance for chargebacks, discounts for prompt payment and other are recorded as a reduction of trade receivables, net, and the remaining reserves are recorded as rebates and fees due to customers in the accompanying Consolidated Balance Sheets.

Contract Assets and Liabilities

We receive payments from our collaboration partners based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We may also recognize revenue in advance of the contractual billing schedule and such amounts are recorded as a contract asset when recognized. We may be required to defer recognition of revenue for upfront and milestone payments until we perform our obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt or when due. For those contracts that have multiple performance obligations, contract assets and liabilities are reported on a net basis at the contract level. As of December 31, 2022 and 2021, respectively, contract assets are primarily related to contract assets from Ipsen Pharma SAS (Ipsen) and contract liabilities are primarily related to deferred revenues from Takeda Pharmaceutical Company Limited (Takeda).

Contract assets and liabilities were as follows (in thousands):

December 31,

Contract liabilities:

____________________

(1) Presented in other long-term assets in the accompanying Consolidated Balance Sheets.

(2) Presented in other current liabilities in the accompanying Consolidated Balance Sheets.

(3) Presented in the long-term portion of deferred revenues in the accompanying Consolidated Balance Sheets.

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During the years ended December 31, 2022, 2021 and 2020, we recognized $8.1 million, $8.5 million and $9.2 million, respectively, in revenues that were included in the beginning deferred revenues balance for those years.

During the years ended December 31, 2022, 2021 and 2020, we recognized $161.6 million, $148.7 million and $169.7 million, respectively, in revenues for performance obligations satisfied in previous periods. Such revenues were primarily related to milestone and royalty payments allocated to our license performance obligations for our collaborations with Ipsen, Takeda, Daiichi Sankyo and Genentech.

As of December 31, 2022, $73.0 million of the combined transaction prices for our Ipsen and Takeda collaborations were allocated to performance obligations that had not yet been satisfied. See “Note 3. Collaboration Agreements— Cabozantinib Collaborations —Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations” for additional information about the expected timing to satisfy these performance obligations.

NOTE 3. COLLABORATION AGREEMENTS AND BUSINESS DEVELOPMENT ACTIVITIES

We have established multiple collaborations with leading biopharmaceutical companies for the commercialization and further development of our cabozantinib franchise. Additionally, we have made considerable progress under our existing research collaboration and in-licensing arrangements to further enhance our early-stage pipeline and expand our ability to discover, develop and commercialize novel therapies with the goal of providing new treatment options for cancer patients and their physicians. Historically, we also entered into other collaborations with leading biopharmaceutical companies pursuant to which we out-licensed other compounds and programs in our portfolio.

Under these collaborations, we are generally entitled to receive milestone and royalty payments, and for certain collaborations, to receive payments for product supply services, development cost reimbursements, and/or profit-sharing payments. See “Note 2. Revenues” for additional information on revenues recognized under our collaboration agreements during the years ended December 31, 2022, 2021 and 2020.

Cabozantinib Commercial Collaborations

Ipsen Collaboration

Description of the Collaboration

In February 2016, we entered into a collaboration and license agreement with Ipsen, which was subsequently amended, for the commercialization and further development of cabozantinib. Under the collaboration agreement, as amended, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the U.S. and Japan. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications. The parties’ efforts are governed through a joint steering committee and appropriate subcommittees established to guide and oversee the collaboration’s operation and strategic direction; provided, however, that we retain final decision-making authority with respect to cabozantinib’s ongoing development.

During the second quarter of 2021, Ipsen opted into and is now co-funding the development costs for COSMIC-311, our phase 3 pivotal trial evaluating cabozantinib versus placebo in patients with RAI-refractory DTC who have progressed after up to two VEGF receptor-targeted therapies. Under the collaboration agreement, Ipsen is obligated to reimburse us for their share of COSMIC-311 global development costs, as well as an additional payment calculated as a percentage of such costs, triggered by the timing of the exercise of its option. We determined that the decision to opt in and co-fund the development costs for COSMIC-311 represented a contract modification for additional distinct services at their standalone selling price and therefore was treated as a separate contract under Topic 606. Accordingly, collaboration services revenues for the year ended December 31, 2021, includes a cumulative catch-up of $43.2 million for Ipsen’s share of global development costs incurred since the beginning of the study and through the opt-in date.

Unless earlier terminated, the collaboration agreement has a term that continues, on a product-by-product and country-by-country basis, until the latter of (1) the expiration of patent claims related to cabozantinib, (2) the expiration of regulatory exclusivity covering cabozantinib or (3) ten years after the first commercial sale of cabozantinib, other than COMETRIQ. A related supply agreement will continue in effect until expiration or termination of the collaboration agreement. The collaboration agreement may be terminated for cause by either party based on uncured material breach of

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either the collaboration agreement or the supply agreement by the other party, bankruptcy of the other party or for safety reasons. We may terminate the collaboration agreement if Ipsen challenges or opposes any patent covered by the collaboration agreement. Ipsen may terminate the collaboration agreement if the FDA or European Medicines Agency orders or requires substantially all cabozantinib clinical trials to be terminated. Ipsen also has the right to terminate the collaboration agreement on a region-by-region basis after the first commercial sale of cabozantinib in advanced RCC in the given region. Upon termination by either party, all licenses granted by us to Ipsen will automatically terminate, and, except in the event of a termination by Ipsen for our material breach, the licenses granted by Ipsen to us shall survive such termination and shall automatically become worldwide, or, if Ipsen were to terminate only for a particular region, then for the terminated region. Following termination by us for Ipsen’s material breach, or termination by Ipsen without cause or because we undergo a change of control by a party engaged in a competing program, Ipsen is prohibited from competing with us for a period of time.

Consideration under the Collaboration

In consideration for the exclusive license and other rights contained in the collaboration agreement, including commercialization rights in Canada, we received aggregate upfront payments of $210.0 million from Ipsen in 2016. As of December 31, 2022, we have achieved aggregate milestones of $489.5 million related to regulatory, development and sales-based threshold by Ipsen since the inception of the collaboration agreement, including $27.0 million, $112.5 million, and $20.0 million in milestones achieved during the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, we are eligible to receive additional regulatory and development milestone payments from Ipsen totaling an aggregate of $19.5 million, as well as sales-based milestones, including milestone payments earned for the first commercial sale of a product, of up to $350.0 million and CAD$26.5 million. We excluded these milestones from the transaction price as of December 31, 2022 because we determined such payments to be fully constrained under Topic 606 due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. We will adjust the constraint applied to the variable consideration at each reporting period as uncertain events are resolved or other changes in circumstances occur. See “—Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations”, below, for additional information related to the revenue recognition for this collaboration.

We also receive royalty revenues on the net sales of cabozantinib by Ipsen outside of the U.S. and Japan. During the year ended December 31, 2022 and going forward, we are entitled to receive a tiered royalty of 22% to 26% on annual net sales, with separate tiers for Canada; these royalty tiers reset each calendar year.

Any variable consideration related to royalties and sales-based milestones will be recognized when the related sales occur as these amounts have been determined to relate to the relevant transferred license and therefore are recognized as the related sales occur.

We are required to pay a 3% royalty on all net sales of any product incorporating cabozantinib, including net sales by Ipsen.

We are responsible for funding cabozantinib-related development costs for those trials in existence at the time we entered into the collaboration agreement with Ipsen; global development costs for additional trials are shared between the parties, with Ipsen reimbursing us for 35% of such costs, provided Ipsen chooses to opt into such trials. Ipsen has opted into and is co-funding certain clinical trials, including: CheckMate-9ER, COSMIC-021, COSMIC-311, COSMIC-312, CONTACT-01 and CONTACT-02.

We remain responsible for manufacturing and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. Relatedly, we entered into a supply agreement with Ipsen to supply finished, labeled drug product to Ipsen for distribution in the territories outside of the U.S. and Japan for the term of the collaboration agreement as well as a quality agreement that provides respective quality responsibilities for the aforementioned supply. The product is supplied at our cost, as defined in the agreement. This agreement also requires us to maintain the global safety database for cabozantinib. To meet our obligations to regulatory authorities for the reporting of safety data from territories outside of U.S. and Japan from sources other than our sponsored global clinical development trials, we rely on data collected and reported to us by Japan.

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Revenues from the Collaboration

Revenues under the collaboration agreement with Ipsen were as follows (in thousands):

Year Ended December 31,

During the year ended December 31, 2022, we recognized $25.8 million in revenues in connection with two regulatory milestones totaling $27.0 million upon approval by the EC and Health Canada, of cabozantinib 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.

As of December 31, 2022, $35.4 million of the transaction price was allocated to our research and development services performance obligation that has not yet been satisfied.

Takeda Collaboration

Description of the Collaboration

In January 2017, we entered into a collaboration and license agreement with Takeda, which was subsequently amended effective March 2018, May 2019 and September 2020, to, among other things, modify the amount of reimbursements we receive, for costs associated with our required pharmacovigilance activities and milestones we are eligible to receive, as well as modify certain cost-sharing obligations related to the Japan-specific development costs associated with CONTACT-01 and CONTACT-02.

Takeda is responsible for a portion of the costs associated with the cabozantinib development plan’s current and future trials, provided Takeda opts into such trials, and 100% of costs associated with the cabozantinib development activities that are exclusively for the benefit of Japan. Takeda has opted into and is co-funding CheckMate-9ER, certain cohorts of COSMIC-021, CONTACT-01 and CONTACT-02. Under the collaboration agreement, as amended, Takeda has exclusive commercialization rights for current and potential future cabozantinib indications in Japan, and the parties have agreed to collaborate on the clinical development of cabozantinib in Japan. The operation and strategic direction of the parties’ collaboration is governed through a joint executive committee and appropriate subcommittees.