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:

ClinicalTrials.gov lists 19 open clinical trials involving Cabo.

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.)}

But if Cabo is that good, how come BMS canceled their partnership over XL184 in 2010?

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 TheStreet.com 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.

Who wins from DNA sequencing? (Multi-target drugs)

First came the notion of specific inhibitors of kinase signaling, and Gleevec was originally the embodiment of the idea of inhibiting just a single gene fusion - BCR-ABL. With the fine targeting came low financial expectations - I recall NVS predicting that Gleevec could have annual revenues of as much as $200M. (Actually Gleevec annual revenues for NVS are ~$4B, both because they had most expectations of the market, and because Gleevec isn't so specific, which is a good thing.)

Then, Exelixis introduced the idea of intentional multi-kinase inhibition, though some wondered if this was less of a design intention, and more of a tolerance of the notion that complete specificity may be impossible.

Last year saw the introduction of FDA approval of inhibitors not just for a single gene target, but a specific mutation of a specific gene (e.g. Zelboraf for BRAF V600E, though it comes with certain problems.)

It appears that the next wave is being unleashed by Foundation Medicine - DNA sequencing to match drug to cancer and suggest mixes of drugs, where appropriate.

The conclusions put forward by Foundation Med are not novel in theory, but a very exciting in practice.

What is also exciting is how use of DNA sequencing may unlock new markets for existing drugs. Big Pharma, I think, has generally worried that personalized medicine may result in lower revenue ceilings for new drugs, thus tilting the economics of drug discovery out of favor. (Because it generally costs about the same to develop a blockbuster as it does a niche drug.)

But if the Foundation Med results are indicative of future broader results, the economics may become even more favorable. Case in point is Pfizer's Sutent, FDA approved in 2006, and a $1B blockbuster as of 2010, based on its' application in renal cell carcinoma and GIST (specific stomach tumors).

Foundation Med's research is suggesting that Sutent could be very effective in about 2% of all lung cancer patients. What's that means to Pfizer?

US annual lung cancer incidences: ~225,000
Worldwide (rough): 675,000
Sutent-beneficial lung cancers: 13,500 (worldwide)
Sutent treatment cost (rough): $40,000 per patient
Sutent lung cancer "niche" market potential: $540,000,000.
Pfizer price/sales ratio: 2.43x
Implied increase in Pfizer's stock value from the new lung cancer "niche:" $1.3B or a stock price about $.17 higher.

Realistically, Pfizer & Sutent can't capture all of that market, but finding another half-a-billion dollar market - with the hope for more - has got to be exciting to Pfizer. It should also be exciting to other targeted drug makers and researchers.

Also exciting is the notion that Foundation's research results are the tip of the iceberg - we can expect tumor DNA sequencing research to reveal more mutations and drug gable opportunities. Let's just hope that the FDA becomes much more flexible in approving novel sequence-specific applications (or at least tolerating widespread off-label use).

Oncology-related stocks with profits and no R&D risk? Yes, please!

I can't give much of a recommendation on their choices, but SeekingAlpha puts forward a list of stocks related to oncology that are also profitable.
Take a read here.
Their choices are Quest (DGX), Genprobe (GPRO), and Genoptix (being acquired by Novartis.) I'd also nominate Genomic Health (GXDX), Myriad Genetics (MYGN), and Qiagen (QGEN).

Each of these companies are squarely in the diagnostics space, so they offer the stability of selling a product, rather than the ups and down of product development (as in drug discovery/development ventures), while, in many cases, having the same IP moat as the drug disc/dev companies, as the diagnostic technology or target IP is often patented, or the 510K FDA approval rserves as a barrier to entry for competitors.

It is generally perceived that diagnostics offer less upside than drug disc/dev companies, but if you consider how aggressively young biotech companies partner away risk (and upside), you wonder if the diagnostics companies offer the same upside, with much less risk.

Consider 3 companies:

Exelixis (EXEL), a biotech founded in 1994. Market cap: $1.2B
Myriad Genetics, a molecular diagnostics company founded in 1991. Market cap: $1.7B
Genomic Health, a molecular diagnostics company founded in 2000. Market cap: $725M.

There's a huge amount of selection & survivor bias in this analysis, but if you assume that each company was seeded with $20M in equity at founding, you would see the following CAGR in valuation:

Exelixis: 27%
Myriad: 25%
Genomic Health: 38%

This is not to say that these companies have generated internal rates of return (IRR) at these levels, as each company had a different financing strategy. Very light analysis indicates that Exelixis was much less capital efficient than either Myriad or Genomic Health

Exelixis:$1.11B in paid in capital 
Myriad: $580M paid in capital
Genomic Health: $255M in paid in capital

Without knowing the exact dates and amounts raised by each of these companies, a precise rate of return can't be calculated, but simple observation (compare today's market caps to the amounts previously invested) suggests that not only were the diagnostics companies much lower in inherent risk, they are also higher in investment returns.

So, before buying into a drug discovery/development stock, consider following SeekingAlpha's advice, and look at profitable and growing oncology stocks like those listed above.