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.

Xcovery blog revisited (state of targeted Rx)

About five years ago I started a blog dedicated to targeted therapeutics, especially kinases inhibitors. The blog was an outgrowth of Xcovery, the kinase discovery spin-out from the Scripps Research Institute that I started and served as EVP of Business Development. 

I was already tracking developments in biopharm so the blog was an outlet for some of basic analysis and a fun way to share my opinion and connect with others in the industry. 

One of the regular bits of analysis was tracking the performance of FDA approved targeted drugs. Just for fun, here's a five year update, with some analysis:

 

Of note:

• The 17 approved molecularly targeted drugs accounted for $27B in global sales in 2011. Think about that for a second, then consider that most of these drugs have been on the market for only 5-6 years, and their approved indications are still growing. Consider too that most have not been applied as combination therapies.

• Even the senior citizen of the group (Herceptin, approved in 1998), has seen prolonged growth, averaging 36% per year over the last five years.

• With 8 blockbusters and several more close and still growing (Tasigna, Sprycel, etc), almost all of the targeted drugs are either blockbusters, or well on their way. So much for the concern that targeting drugs might limit the market potential.

• The top 4 (Avastin, Herceptin, Gleevec, and Lucentis) have made a mockery of their projected sales ceilings and are still growing strongly.

• On the other hand, the only assets that appear to be underperforming expectations are Amgen’s Vectibix, GSK’s Tykerb, and Pfizer’s Torisel (specific sales data isn’t available for 2011, as Torisel is listed under “other oncology,” totaling ~$130M across several drugs.)

• Vectibix is still playing catch up to Erbitux, and Tykerb hasn’t gained much traction against the Roche juggernaut.

• I wonder what Amgen’s new CEO will do about Vectibix. It seems that there’s 2 choices: go big (invest in expanding trials for more indications and in comparison with Erbitux) or go home (sell the product to another biopharm.)

• 4 of the top 6 are Roche drugs, which means that they were discovered by Genentech. Hats off again to the DNA team in South San Francisco for their amazing science and productivity. I wonder if we will ever see any other drug discovery effort be so inventive and productive for a prolonged period.

• Also: I don’t think anyone is doubting the wisdom of Roche buying the piece of DNA that Roche didn’t own. I haven’t run the numbers, but I’d be shocked if the DNA acquisition wasn’t a resounding financial win for Roche.

• Unfortunately, OSI’s acquisition of Macugen was a tremendous dud.

• I am encouraged by the progress since my last analysis in 2006 – an average of two new approvals each year, with most new products addressing new targets or diseases, in contrast to the incremental “me too-ism” in other pharma areas like ED or cholesterol drugs.

A few sweeping generalizations:

• FDA approval and sales success seem to be connected to corporate resources. Small to mid-cap biotechs have been chasing targeted therapies for ~15 years without much output. (I’m talking about companies such as Exelixis, Vertex (pre-HepC), Ariad, etc., though I don’t mean to pick on specific companies.) With three exceptions (Onyx’s Nexavar, OSI’s Tarceva, and the former ImClone’s Erbitux), the targeted therapies have largely been developed in-house by “old” companies with multi-billion dollar market caps and the resources to match. (You could make the case that Amgen’s Vectibix came from a small targeted effort at Abgenix, but I suspect that it was Amgen’s resources that got Vectibix through FDA approval. Similarly, Sutent started at Sugen, but Pharmacia and Pfizer seemed to have provided the big push.)

• A gross generalization: the small to mid-caps tend to lack broad biological or disease-specific expertise, instead investing in target-specific expertise, or platform-specific expertise, thinking that broad expertise (ancillary to their target or disease of interest) is expensive overhead. I wonder if the results to date argue for the big pharma discovery model, or just reinforces the need for a broad portfolio to be successful in drug discovery and development.

• With rare exception (as in Pfizer’s Xalkori and Novartis’ Gleevec), the path to FDA approval has been arduous for these drugs. There are a number of targeted drug developers who hold out hope that their P2 or P3 results will be so clear and strong that their clinical trials will be stopped early and approved quickly. That’s definitely the exception, unfortunately, and even in the positive trials for targeted drugs, the data has tended to be good, not great. I suspect that is a function of the requirements of clinical trial design and comparison to first-line chemotherapies. As a result the “new” drugs are posting smallish survival benefits when compared to the “old” therapies, with no accounting for how certain patient segments have had dramatic benefits. (Thus starting the vicious circular argument that targeted therapies ought to have stratified patient populations in clinical trials, but stratifying patients shrinks the market potential for such drugs, bring the business viability of the targeted therapy into question.) It seems that the FDA could take the Xalkori experience and develop a novel process for rapid approval based on patient stratification without derailing or obviating more broad approval for the drug.

The $27B in revenue in this segment (likely to grow past $50B in 2014) has hopefully served to further de-risk pharma R&D in molecularly targeted therapeutics. Coupled with advancements in medicinal chemistry, we will hopefully see more and better targeted therapies in the future.