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Roche recently disclosed a decision to start phase III with GDC-0973 (formerly XL518), a MEK inhibitor licensed from Exelixis (EXEL) to Genentech 6 years ago. The trial is expected to start next month, and will evaluate GDC-0973 in combination with Roche's Zelboraf in patients with BRAF-mutated melanoma. This is an extremely positive catalyst for Exelixis, who now has a second drug in pivotal studies with a high likelihood of success and a substantial market opportunity.

Large commercial opportunity - The commercial opportunity for GDC-0973 in advanced melanoma is ~$1.5B globally, based on pricing and sales estimates for Zelboraf. MEK inhibitors have potential for many additional cancers, including lung and ovarian cancer.

Favorable deal terms - Deal entails a profit share agreement and an option for Exelixis to co-promote the drug in the US. Exelixis is eligible for additional milestones and royalties on ex-US sales.

Short timelines - The phase III trial will start next month with progression-free survival as the primary endpoint. Enrollment should be very quick, given Roche's experience in the indication (Zelboraf was the 1st approved drug for BRAF-mutated melanoma) and the fact that melanoma patients are routinely screened for BRAF status and treated with Zelboraf. Top line results could be available in mid-2014, and Roche expects to submit the combination for approval in 2014.

High likelihood of success - GSK (GSK) presented phase II results for a similar combination (dabrafenib plus trametinib), which proved superior to dabrafenib alone. Roche reported encouraging results for a small phase I trial for the Zelboraf-GDC-0973 combination in 25 melanoma patients. The combination led to meaningful tumor shrinkage in every patient (see figure below).

(click to enlarge)

Source: Roche's ESMO call, Oct 2012

Differentiated safety profile - Although safety data are limited, GDC-0973 appears to have a different safety profile compared to GSK's trametinib. In particular, it does not lead to fever and chills, which were observed in the majority of patients in the GSK trial.

Roche as an ideal partner

In retrospect, Exelixis could not have chosen a better partner for GDC-0973. On top of being the world's leader in oncology, Roche is facing a major threat to its position in the BRAF-mutated melanoma market.

As background, Roche pioneered the field of BRAF mutated melanoma with Zelboraf, the first BRAF inhibitor to get FDA approval. Although Roche dominated the market since 2011, it will face fierce competition from GSK, who recently submitted its BRAF inhibitor, dabrafenib, for approval for the treatment of BRAF mutated melanoma. GSK's Dabrafenib is perceived as equally effective but better tolerated than Roche's Zelboraf.

Last week at ESMO, GSK reported positive results for the combination of debrafinib and its MEK inhibitor (trametinib). The combination is already in phase III and is expected to become standard of care from 2014 onwards, pushing Roche's Zelboraf out of the market. The Zelboraf + GDC-0973 phase III trial is Roche's answer to that threat.

Fortunately for Exelixis, GDC-0973 represents Roche's main effort to protect its melanoma franchise. This guarantees an aggressive and efficient development program for the drug. Roche is 6 months behind GSK, but positive results should enable it to retain its presence in melanoma from 2015 onwards. In parallel, GDC-0973 is in several early stage combination trials.

Market ignores a major milestone - a buying opportunity

Exelixis now has a second drug in pivotal studies, in development by a strong and committed partner. Roche's commitment, a large commercial opportunity, favorable deal terms and a high likelihood of clinical success, make GDC-0973 an important asset for Exelixis that is still not reflected in the company's valuation. This creates a buying opportunity, as the market will eventually acknowledge the opportunity as well as the strategic importance of GDC-0973 to Roche.

I plan to post my ESMO 2012 summary and a portfolio update next Sunday.

Source: Exelixis: First Partnered Program Enters Phase III