Last week, Exelixis (EXEL) lost 47% after announcing the COMET-1 trial was not stopped for efficacy at the interim analysis. The reaction implies investors were expecting a positive outcome based on experience with other prostate cancer phase III trials that had been stopped early due to efficacy. These include Medivation’s (MDVN) Xtandi and Bayer’s Xofigo.
Even after the disappointing announcement, I still think Exelixis has significant upside potential for 2 reasons:
1) There is still a possibility for a positive surprise in COMET-1 based on at least 1 precedent for a prostate cancer drug that did not “pass” the interim but eventually demonstrated a survival benefit.
2) Excluding the prostate cancer opportunity, Exelixis has multiple near-term, low risk value creation events.
Xofigo and Jevtana as precedents
Going into COMET-1’s interim analysis, investors relied on experience with other prostate cancer drugs, which demonstrated a survival benefit already at the interim. A comparison to Xofigo’s phase III appeared the most relevant as both drugs target bone metastases with similar statistical assumptions and trial sizes. Xofigo’s interim analysis demonstrated a highly statistically significant survival benefit of 2.8 months based on 320 events. Exelixis’ cabozantinib, on the other hand, did not pass the statistical hurdle despite a higher number of events (387 events). Importantly, it is unclear whether there was even a trend favoring cabozantinib.
Failing to hit the primary endpoint at the interim analysis is clearly disappointing and implies that cabo’s benefit is not spectacular. However, there is one recent example of a prostate cancer drug that demonstrated a survival benefit despite not meeting the primary endpoint at the interim analysis.
Sanofi’s (SNY) Jevtana was approved in 2010 after demonstrating a 2.4 month survival benefit with a HR of 0.7. Jevtana’s phase III trial (TROPIC) included an interim analysis after 365 events, which did not demonstrate sufficient benefit for stopping the trial early. Sanofi had to wait until the final analysis (513 events) in order to meet the primary endpoint. From a hazard ratio perspective, Jevtana’s benefit was identical to that of Xofigo. Therefore, despite the low likelihood of success, cabozantinib might still demonstrate a statistically significant and clinically meaningful survival benefit at the final analysis.
Exelixis has value beyond prostate cancer
Exelixis’ current market cap ($660M) represents a very low likelihood of success in prostate cancer. Even if one assumes COMET-1 fails, Exelixis has multiple assets beyond prostate cancer.
Cabozantinib for MTC ($60M peak sales)
Cabozantinib was launched in 2012 for medullary thyroid cancer (MTC), a niche indication. The drug had US sales of $14M in 2013, its first full year on the market. Approval in MTC was based on a remarkable improvement in PFS (11.2 vs. 4 months, HR=0.28) without a survival benefit. Subsequent analysis showed that the effect is driven almost exclusively from patients with RET+ tumors, who represent ~50% of cases. This is not reflected in the FDA label but the recent approval decision in Europe noted this differential activity profile.
Updated survival data this year may fail to show a statistically significant difference in the overall population but the drug could demonstrate a positive signal in RET+ tumors. Although such signal may not reach the label, it should increase market adoption in RET+ MTC.
Assuming moderate growth and a similar opportunity ex-US, peak sales for cabozantinib in MTC should reach $60M a year.
Cobimetinib ($150M peak revenues in BRAF+ melanoma)
Cobimetinib (MEK inhibitor partnered with Roche) remains the only meaningful program in Exelixis’ partnered pipeline. The drug is in a phase III evaluating cobimetinib when added to Roche’s BRAF inhibitor, Zelboraf, in BRAF+ melanoma. Based on good phase I results and positive p3 data for a similar combination from GSK (GSK), probability of success is high. Top line results are expected in the coming months.
Exelixis has co-promotion rights in the US (30-50% of profit depending on sales) and is eligible for royalties in ex-US territories. Cobimetinib’s commercial potential can be approximated based on Zelboraf’s performance, which brought ~$500M in 2013, half of which in the US. This translates to a conservative assessment of $150M in total revenues for Exelixis (assuming intensified competition and minimal growth).
Roche is evaluating cobimetinib in several other trials, including a combination trial for cobimetinib with its PD-L1 antibody. Any positive indication that ties cobimetinib to a PD-L1 regimen could have a dramatic effect on the drug’s market potential.
Cabozantinib for RET+ NSCLC ($80M peak sales)
Exelixis is expected to launch a phase II pivotal trial for cabozantinib in non-small cell lung cancer (NSCLC) patients with RET-mutations. RET mutations in NSCLC have been recently discovered and they occur in 0.5-0.7% of NSCLC (~1000 cases in the US). Several RET inhibitors are being tested in this rare tumor type, with Cabozantinib being the most advanced. At last year’s ASCO, investigators presented promising preliminary efficacy (discussed here). Updated results may be available in 2014, which (if positive) should increase confidence in the upcoming pivotal trial.
RET+ NSCLC represents a commercial opportunity of $300M-$400M globally. Cabozantinib can generate $80M given its first mover advantage.
Additional tumor subsets with RET fusions may emerge, further expanding RET inhibtors’ market opportunity. For example, a recent paper describes a previously undescribed RET fusion in secondary AML which appears to be an oncogenic driver.
Cabozantinib in additional indications (pipeline value of $200M)
Cabozantinib is in phase III for renal and liver cancer, with top line results expected in 2015 and 2016, respectively. Although there is no robust randomized data for the drug in these indications, it is clearly active, especially in heavily pretreated RCC patients (discussed here). In addition, cabozantinib is in tens of active trials (most are NCI or investigator sponsored) across many tumor types. Some studies are 1-2 years into enrollment and could have data in 2014. A program in 2 phase III trials and 20+ phase II studies of can be (very) conservatively valued at $200M.
Combining the near term opportunities in Exelixis’ pipeline leads to annual revenues of $290M: Cabozantinib in MTC ($60M), Cabozantinib in RET+ lung cancer ($80M) and cobimetinib for melanoma ($150M). Importantly, these assumptions include only low hanging fruit, high-probability opportunities and factor in significant competition. Applying a sales multiple of 5 and discounting 4 years with a discount rate of 15% results in a valuation of $830M. Adding $200M for cabozantinib’s additional indications brings valuation to just over $1B in net present value, assuming the prostate cancer program fails.
We are adding another position (4th) in Exelixis in anticipation of positive results for cobimetinib and cabozantinib in melanoma and RET+ lung cancer, respectively.
Portfolio holdings – March 30th, 2014