As followers of this blog know, I have been a long term Exelixis (EXEL) bull for many years but to date the stock has been one of my biggest losers. Despite this experience and although I have been proven wrong on Exelixis in the past, I feel the recent P3 success in renal cancer makes it an attractive story based on (for the first time ever) good visibility on a significant commercial opportunity and a differentiated product profile.

Positive data in a competitive indication

Last month Exelixis announced positive results for cabozantinib (cabo, marketed as Cometriq) in previously treated renal cancer (RCC). The drug led to a statistically significant improvement in progression-free survival (PFS) with a strong overall survival trend vs. Afinitor, a standard of care drug for 2^nd line renal cancer. Although actual numbers were not disclosed, the magnitude of effect appears impressive based on hazard ratios of 0.58 and 0.67 for PFS and overall survival, respectively.

While approval of cabo for RCC is almost certain, this does not guarantee good market performance given the abundance of treatment options and the introduction of PD-1 antibodies, which is expected to make the market even more crowded. Still, based on the limited data published by Exelixis, cabo has the potential to become a dominant RCC drug (especially in PD-1 failures) given its unique clinical profile.

Cabo may be a differentiated agent

There are two approved agents for RCC patients who failed Sutent: Pfizer’s (PFE) Inlyta and Novartis’ (NVS) Afinitor. Both demonstrate a median PFS of approximately 5 months without an overall survival benefit (may be explained by crossover in the Afinitor study). Although the drugs differ significantly in terms of side effects, they have a similar market share (~35% each) with combined annual sales of ~$800M.

Exelixis did not report the median PFS for cabo and Afinitor but disclosed that the Afinitor arm performed as expected. Assuming a “homogeneous” separation of the curves, it is plausible cabozantinib led to a ~3.5-month benefit over Afinitor (8.5 vs. 5 months), which is not only clinically meaningful but probably the highest PFS reported to date in 2^nd line RCC. If cabo’s survival signal is corroborated by the final analysis (expected in 2016), it will become the only small molecule with a survival benefit in its label in 2^nd line RCC. (see table below)

Still a significant opportunity beyond PD-1

On the same morning that  Exelixis announced the RCC results BMS (BMY) also announced that its PD-1 antibody (Opdivo) demonstrated an overall survival benefit  in a similar setting (2^nd line RCC with Afinitor as a control). No details were given but the market reaction reflects investors’ concerns regarding cabo’s ability to compete with Opdivo. P2 data for Opdivo in 2^nd line RCC demonstrated disappointing response rate (~21%) and PFS (~4 months) but a promising overall survival (~25 months), which is dramatically better than the typical 15 months usually seen in 2^nd line RCC patients.

PD-1 antibodies will likely become the standard of care in 2^nd line RCC and may eventually be used as a first line treatment (alone or in combination with Yervoy). Importantly, experience to date clearly shows that in contrast to melanoma (where cure rates are significant) the vast majority of renal cancer patients eventually progress and require additional treatment options. At ASCO 2014, when Opdivo’s P2 was first presented, 149 of 168 patients who received Opdivo discontinued treatment primarily due to progression. These patients (who failed both Sutent and PD-1) may represent cabo’s primary indication.

2^nd line RCC represents a significant commercial opportunity with at least 25,000 patients who are eligible for treatment in developed countries. An average treatment cost of $50K per patient translates to a market opportunity of 1.25B. This is illustrated by the $800M Afinitor and Inlyta (which capture 70% of the market) generated in 2014.

Historically, the introduction of new drugs for cancer has expanded the overall market as it turned lethal diseases to more chronic conditions. This leads to an expanded target population, creation of new treatment lines and extension of treatment duration per patient (cabo can generate $80K per patient assuming treatment duration of 8 months).

A 30% market share of the previously treated RCC market translates to annual sales of $600M, which should be achievable given cabo’s superiority over currently approved drugs and the survival benefit (if corroborated).

$750M in risk-mitigated opportunities for cabo and cobi

In my opinion, the market ignores cabo’s potential to generate $600M in RCC plus ~$50M in medullary thyroid cancer for which it is currently approved. Exelixis also has co-promotion rights for Roche’s MEK inhibitor that is expected to reach the market next year for BRAF+ melanoma. As cobimetinib (cobi) will be the second MEK inhibitor approved for this indication, expectations are low but the drug could still generate $100M for Exelixis via direct sales and royalties. Both cabo and cobi are being evaluated in multiple clinical trials, which may expand the drugs’ addressable market.

The RCC data also makes Exelixis an acquisition target as the company holds global rights for a differentiated oncology product and co-marketing rights for another small product with some upside potential (especially in KRAS+ lung cancer). Applying a sales multiple of 4 on $750M in peak sales, Exelixis could be acquired for $3B, which represents more than 100% upside from the current valuation. This price excludes future optionality with both products.

Portfolio updates 

We are adding a new position in Exelixis ahead of full RCC data presentation later this year.

We are adding a second position in Esperion (ESPR) following weakness surrounding Praluent’s labeling. Esperion’s value proposition (oral drug with a new MOA, a 20%+ LDL reduction and an effect on hsCRP) remains unchanged, and so are the primary risks around  long term safety and combinability with other agents.

We are initiating new positions in Aurinia (AUPH) and Genocea Biosciences (GNCA) on which I will try to elaborate in the future.

Lastly, we are adding a second position in ProShares UltraShort Nasdaq Biotech (BIS).

Portfolio holdings – August 2, 2015