Monday, May 21, 2012

Exelixis: all-in on cabo

Luke Timmerman @ Xconomy has an excellent preview of ASCO - definitely worth a read.

What really surprised me in Luke's article is how leveraged Exelixis is on Cabozantinib ("Cabo"), with 9 Cabo presentations at ASCO addressing 7 tumor types. At this point, EXEL is a pure-play gamble on Cabo, with no other pipeline products close to the same maturity. If Cabo fails, so does EXEL.

From the Exelixis web site, here's the clinical status of Cabo trials:

Cabo (a.k.a. XL184) is a dual-selectivity tyrosine kinase inhibitor, targeting MET and VEGFR - two very relevant drug targets. (Please withhold snickering that dual selectivity may equal non-selectivity all you med chemists!) 

What makes Cabo potentially great is that it attacks cancers on multiple fronts, with anti-angiogenic activity (like Sutent) and anti-metastatic activity (by targeting MET.) EXEL also suggest that the compound is also cytotoxic ("tumoricidal") 

EXEL's financials look OK. Market valuation: $717M. Cash on hand: ~$240M, burning ~$14M/quarter on an operating basis, so there should be enough cash to fund the advancement of Cabo in multiple indications. One problem, though: it looks like EXEL some significant debt to repay, cutting into the cash hoard.

But most importantly, is Cabo any good? Here's what's posted at Wikipedia:

"Positive data from clinical trials indicate cabozantinib is particularly beneficial in metastatic advanced prostate cancer. 97% of patients either had stabilization or improvement in bone malignancies. The median time to disease progression was 29 weeks.[2][3]
One US trial reported in May 2011 : The best results were seen in patients with liver, prostate, and ovarian cancer: 22 of 29 patients with liver cancer, 71 of 100 patients with prostate cancer, and 32 of 51 with ovarian cancer experienced either partial tumor shrinkage or stable disease. Fifty-nine out of 68 patients who had bone metastases had their metastases shrink or disappear during the trial.[4]"
(And no, I don't use the Wikipedia to evaluate compounds, but it is a nice succinct summary.)

3 possible explanations:

1. Problems @ BMS
2. Problems @ EXEL
3. Inconclusive or weak early data.

There's an argument for each of these reasons. BMS withdrew from a partnership after only 2 years and having spent ~$250M on XL184. That should set off alarms, but EXEL pressed on, even with other products in the pipeline and after a leadership change at EXEL. Also, as of 2010, the most significant data was from a Phase II trial in a very small disease (MDT, still EXEL's lead application.)

Here's the EXEL investment risks as I see them, besides the standard cancer drug development & regulatory risks (i.e. traditional fractional rates of success at any given stage of development.) 

1. Cash/liquidity risk - as demonstrated by their early 2012 financing, there's not a lot of additional liquidity available to EXEL.

2. Timing: in spite of the broad clinical agenda, it might be years before Cabo would receive approval in some of its' most exciting indications (such as lung cancer, now in Phase II.)

3. Competition: a lot is happening in prostate cancer. Even with FDA approval in this area, could EXEL trump offerings in this area from big (JNJ) to small (Medivation)? (This might not be a risk, as interest in this area could spur a pharma partnership/acquisition.)

4. Commercialization risk: can a small company like EXEL successfully bring Cabo to market without a partner? (I don't think this is EXEL's strategy - they should partner immediately following ASCO, but it wouldn't surprise me if Big Pharma waited until data or FDA approval in a larger application became available.)

5. Skepticism due to both EXEL's track record to date, and standard small biotech caution - as Adam Feuerstein at often points out, small, single product companies have a TERRIBLE FDA approval track record. 

6. (Update) Clinical trial design. Adam Feuerstein explains it best: history and competition suggest that approval in prostate cancer may be farther off than EXEL thinks.

On the other hand, here's the positives:

1. Upside. If FDA approved for even half of its' intended applications, Cabo would have peak revenues in the $1B-$2B range, equating to equity value of $3B-$12B. (EXEL's current enterprise value is ~$500M, equating to a 6X to 24X return, though this could be inhibited or perhaps amplified by a partnership with a Big Pharma. If an investment is made via call options, the leveraged return could be again boosted by 10X.)

2. No target biology risk - both MET and VEGFR2 are well known oncology targets, with clinical success. (Though I can't think of an approved MET inhibitor right now. Arqule's is in P2, I think.)

3. Negligible downside. (OK, not really a positive.)

4. Pipeline value: it's pretty clear that the market is not valuing the rest of EXEL's pipeline. One reason for this is the notion that EXEL is all-in on Cabo to the exclusion of the rest of the pipeline (which is true), but there are enough interesting early leads in the pipeline that any of these could eventually be partnered to unlock value.

5. Compound de-risking. Clinical efforts in so many different indications suggests that 1) there is an abundance of positive health, safety, and efficacy data, and 2) either the management team is suicidal, or has good reason to bet the company on Cabo.

Ultimately, I think EXEL is at an inflection point with their appearance at ASCO - if the data in one or more indications for Cabo is compelling, a pharma partnership in 2012 is likely, which would boost value and decrease risk. If no pharma partners emerge, that's a strong statement that Pharma is still skeptical about Cabo, because pharma desperately needs to add to its' pipeline. (I am ignoring the possibility that EXEL management might value Cabo too highly to partner - they need to do a deal ASAP, or they will lack the resources to bring Cabo to market and the Street will lose faith in EXEL.)

(I could be wrong, as EXEL stock barely moved with last weeks publication of the ASCO abstracts.)

So, EXEL is a high-leverage biotech casino, with a high likelihood of either complete boom or complete bust. I kinda wish more small-caps would take the same approach with their development efforts (all-in!) Of course, it is easy to say this as an outsider - investors can hedge risk in other ways - but for EXEL employees and management, there's no way to hedge an all-in bet.

btw: another company with a lot riding on ASCO is Onyx, which I reviewed last month.

Bonus idea: for being so leveraged to Cabo, shouldn't EXEL change their name to "The Cabo Co." and their stock ticker to CABO? Who knows, maybe they'd attract some investors thinking that CABO is a Mexican real estate portfolio.

Disclosure: as of the time of writing, I own NO shares of EXEL.

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