By Sunanda Marella Ph.D., Kimberly McManus, Alicia Shiu, Kunal Mehta M.Sc.
Exelixis (EXEL) is an early-stage cancer pharmaceuticals company that won approval of its first drug, Cometriq (cabozantinib), in Fall 2012 for metastatic medullary thyroid cancer, and has a wide array of Phase II and 3 clinical trials in progress for cabozantinib and other molecules. The company has cash on hand to last approximately 1.5 years at current burn rates, and a modest new revenue stream from Cometriq which should amount to at least $10 million per year. The company has disappointed investors with a lengthy development period and a series of secondary stock offerings and debt to raise capital, but we believe it is now poised to realize significant upside from a broad and technologically strong pipeline once the first of a series of promising clinical trials ends in early 2014.
Exelixis is currently marketing their lead compound, Cometriq (cabozantinib), for treating medullary thyroid cancer, is testing that molecule for several other indications, and has numerous drugs in their pipeline being developed through partnerships with other biopharmaceutical companies. Cometriq is an inhibitor of MET and vascular endothelial growth factor receptor 2 (VEGFR2), which are both cell surface receptors known to be important in many different cancers. It won FDA approval to treat metastatic medullary thyroid cancer (MTC) in November 2012, and was commercially launched in late January 2013. Since metastatic (MTC) affects only 2250 patients in the United States per year, Cometriq was granted orphan drug status, which provides benefits including market exclusivity for seven years.
MET and VEGFR2, the two receptors targeted by cabozantinib, are components in generic signaling pathways involved in numerous cancers; cabozantinib thus holds promise for treating cancers beyond (MTC) and drastically increasing its market size. Currently, there are Phase III trials recruiting for castration-resistant prostate cancer and metastatic renal cell carcinoma (which are expected to produce data in mid-2014), as well as a planned Phase III trial with hepatocellular carcinoma. Numerous Phase II studies are underway for a range of cancers, including prostate, ovarian, brain, melanoma, glioblastoma, breast, non-small cell lung, pancreatic, liver, and kidney. Cometriq promises to be competitive in these other markets since in recent studies it has been shown to perform especially well in patient populations with RET mutations, boding well for other cancer indications that carry these mutations.
In 2011, Exelixis decided to focus all of its resources on cabozantinib. However, the company also has a large pipeline of other drugs, which it has out-licensed through partnerships with various larger biopharmaceutical companies. One drug in this pipeline, GDC-0973 (XL518), is currently recruiting for a Phase III clinical trial. GDC-0973 is an inhibitor of MEK, which is part of a pathway that mediates signaling with growth factor receptors and is prominently activated in a wide variety of cancers. The drug is being developed through a collaboration with Genentech/Roche (RHHBY.OB) and the Phase III trial will evaluate GDC-0973 efficacy with a subtype of melanoma. Roche is relying on approval of this drug to be able to compete with GlaxoSmithKline (GSK) in the metastatic melanoma market; the Exelixis drug has been performing well in clinical trials. Exelixis is eligible for substantial milestones and royalties for these partnerships and this will generate significant revenue upon approval.
Exelixis is developing nine other drugs through partnerships that are in various stages of development, from preclinical to Phase II. These drugs cover a range of disorders, including cancer, inflammatory disorders, and cardiovascular disorders, and Exelixis will be eligible for milestone payments and royalties from these drugs.
Since cabozantinib targets pathways that could be common to many cancers, Exelixis' goal is to use cabozantinib in a broad range of cancer indications. While competition for advanced medullary thyroid cancer is slim, some of Exelixis' other target markets are more crowded.
Although the market for advanced medullary thyroid cancer is small, there are not many options for these patients, whose cancer has continued to progress or spread to other regions despite surgery and chemotherapy or radiotherapy. As such, Exelixis is well-positioned to capture essentially the entire market with its drug, Cometriq. Cometriq was granted orphan drug status by the (FDA), a designation reserved for drugs developed for rare diseases. One of the many benefits of orphan drug status includes market exclusivity for seven years. One other drug, vandetanib [Caprelsa; marketed by AstraZeneca (AZN)], was approved for the treatment of late-stage/metastatic (MTC) in April 2011. However, due to the risk of a severe cardiac side effect that can lead to death in certain patients, prescription of the drug is restricted to physicians and pharmacists who participate in the Caprelsa Risk Evaluation and Mitigation Strategy (REMS) Program. Since Cometriq lacks this significant, risk and the additional barrier of the (REMS) program, we expect it to dominate the advanced (MTC) market.
The largest potential market for cabozantinib is for castrate-resistant prostate cancer (CRPC): prostate cancer is the most commonly diagnosed of all solid organ tumors, with approximately 240,000 new cases per year and a current prevalence in the United States of 2.6 million. Prostate cancer is defined as castrate-resistant once the tumor no longer responds to the standard androgen deprivation therapy, and almost all patients progress to the castrate-resistant stage after one to three years. Although prostate cancer could be Exelixis' largest market, several other companies are trying to get some of the action as well. The drug abiraterone, made by Janssen Biotech, Inc., a unit of Johnson & Johnson (JNJ), gained FDA approval for (CRPC) in December 2012. Two other drugs available are enzalutamide and cabazitaxel. Rather than planning to go head-to-head with these drugs, however, Exelixis intends to target patients whose disease progresses despite these treatments; cabozantinib is currently in two Phase III clinical trials, COMET-1 and COMET-2, that are recruiting patients previously treated with the chemotherapy drug docetaxel as well as abiraterone, enzalutamide, or cabazitaxel -- in other words, patients who have been heavily treated and are left with very limited options. A few other companies also have drugs in clinical trials for CRPC, including dasatinib from Bristol-Meyers Squibb (BMY), custirsen from OncoGenex Pharmaceuticals (OGXI), and tasquinimod from a partnership between Active Biotech (ATVBF.PK) and Ipsen (IPSEY.PK).
Both COMET-1 and COMET-2 aim to improve the outcome for patients with metastatic (CRPC), but differ in their primary endpoints: COMET-1 is looking at overall survival, while COMET-2 aims to use cabozantinib in combination with the drug mitoxantrone to decrease pain associated with bone metastases. Success in this latter trial could help Exelixis carve a niche for itself in the prostate cancer market by offering additional benefits beyond those of competing drugs. Results from the Phase II studies look promising, including improvement of median progression-free survival from 5.9 months on placebo to 23.9 weeks on cabozantinib, reduction in the size and severity of metastases in 72% of patients, and pain reduction in 67% of patients. With these results, we believe there is a good chance that cabozantinib will gain approval for metastatic castrate-resistant prostate cancer, allowing Exelixis to break into this lucrative market.
In addition to medullary thyroid and prostate cancer, Exelixis is aiming to enter the drug market for advanced solid tumors in a wide range of cancers, including breast, lung, liver, ovarian, and renal cancers. A few other companies are also currently testing compounds that, like cabozantinib, target pathways that may be central to many types of cancers, and thus be effective in a wide array of indications. Sunitinib [marketed by Pfizer (PFE)] and sorafenib [co-marketed by Bayer (BAYRY.PK) and Onyx Pharmaceuticals (ONXX)] have both gained approval for certain cancer indications: sunitinib is approved for advanced renal cell carcinoma, gastrointestinal stromal tumor, and pancreatic tumors, while sorafenib is also approved for renal cell carcinoma as well as hepatocellular carcinoma (it's important to note that Exelixis has clinical trials testing cabozantinib in all of these indications). Both drugs are currently in clinical trials for a broad range of other advanced solid tumors, many of which overlap with Exelixis' current trials, including lung cancer.
Thus, although there seem to be a few other top contenders in the market for prostate cancer drugs and the field of advanced solid tumors in general, Exelixis should have no problem capturing a portion of these very large markets upon gaining (FDA) approval - which seems likely based on data released so far - for cabozantinib in a given indication. Furthermore, we believe there is little doubt that Cometriq will gain the majority market share for advanced medullary thyroid cancer.
Exelixis' current financial position can be generously said to occupy shaky ground between mildly uncomfortable and dire. Cash and equivalents on hand amounted to $352 million (including short-term investments) as of June 30, 2013. Considering a loss from operations of $107 million (including $22 million in interest payments) in the first half of 2013, they have just over 1.5 years' worth of cash on hand; revenues from Cometriq, which were $5.9 million in the six months the drug has been on the market, will extend this somewhat, but not much (it is an orphan drug with a market of only about 2000 patients in the U.S.).
Complicating this is the unusual fund-raising scheme that has brought the company to this point since its founding in 1994 and (IPO) in 2000. Exelixis has raised additional capital through a series of secondary share offerings in 2003, 2005, 2006, 2007, 2011, and twice in 2012; 97 million shares were sold in these offerings, amounting to 52% of the total shares currently outstanding, and raising $597 million in capital. Moreover, the company currently has $336 million in debt, of which almost half was issued in August 2012, against $612 million in assets; interest payments on this debt amounted to roughly 20% of total losses in the first half of 2013.
These measures have seen the company through a lengthy development period and enabled it to launch its first (FDA)-approved drug in January of this year, which has gained them a much-needed but meager revenue stream. However, with a debt ratio of over 50% and an aggregated 1:2 share dilution already done through secondary offerings, we believe it is going to be difficult to turn to these sources of capital on favorable terms in the future. The company has shifted all of its resources to developing cabozantinib into a cancer drug franchise, and all of this makes it critical that some of their heavy bets pay off in the near future.
Based on a conservative risk-adjusted net present value analysis, we calculate a valuation for Exelixis of at least $1.13 billion (share price of $6.13). We have considered only the U.S. market and included only its approved drug, Cometriq; its four in-progress Phase III clinical trials; and its Phase II trial for lung cancer. These trials all involve the company's lead molecule, cabozantinib, and span three major markets: prostate cancer, lung cancer, and liver/kidney cancer. As mentioned before, data released so far from cabozantinib trials in prostate cancer, kidney cancer, and other studies look extremely promising, leading us to believe there is a strong chance of the drug being approved and launched for at least some of the indications listed below. These data were part of the reason for including these particular trials in our valuation.
Table 1: rNPV of Cometriq/cabozantinib in selected target markets currently undergoing Phase II or 3 clinical trials. A recent report forecast the overall cancer therapeutics market to grow at an annual rate of 18% through 2013.
Estimated market size
Assumed annual growth rate
Peak annual revenue
Metastatic medullary thyroid cancer (approved)
(Previously-treated) castration-resistant prostate cancer, metastatic or symptomatic
(Previously-treated) hepatocellular carcinoma
(Previously-treated) renal cell carcinoma
Stage IV non-small cell lung cancer
Outlook and Conclusions
Exelixis is pushing forward to gain a foothold in the cancer therapeutics market. Their lead drug, Cometriq, is poised to capture a substantial share of the market for metastatic medullary thyroid cancer in the U.S and Exelixis plans to expand the market into Europe. But the downside is the small size of the market which even if fully captured will only generate a modest revenue.
To expand the market for Cometriq, Exelixis has exploited the fact that it targets molecules that are implicated in many other cancers. It has developed a broad clinical program to study the effect of Cometriq in several other, much larger, markets. Clinical development of the lead drug is being carried out at Exelixis and of other compounds in collaborative efforts. This latter approach ensures that Exelixis does not draw on its limited resources for development while simultaneously benefiting from its partners' experience in developing drugs in those new indications. Preliminary data from trials currently underway for prostate and kidney cancer are very promising; nevertheless, challenges remain: the company still has low cash flow and limited financial resources. Furthermore, data from Cometriq trials currently underway will not be released until early 2014 and these drugs will likely not provide revenue until at least 2016.
Our calculations suggest that Exelixis, after a 30% run from $4.50 to $5.80 in the last three months, is roughly fairly valued at a market cap of $1.06 billion as of September 27, 2013. However, we believe the generality of Exelixis's lead molecule, combined with the breath of the trials currently underway and market success with Cometriq, more than warrant a second look at EXEL as a strong long-term pharmaceutical investment. Current cash reserves are limited, but there is enough in the bank to survive until the next major trials end in early-to-mid 2014, and we predict a long term potential for Cometriq based on trials underway in prostate, kidney, liver and lung cancers. Although significant share dilution and debt issuance justifiably raises eyebrows, the sheer strength of Exelixis's pipeline places the company in a position to realize a significant upside if they can see even a few of their current Phase II or 3 trials through to next year.