Exelixis (NASDAQ:EXEL) shares have been on a tear since ASCO 2016 where the company presented follow-up overall survival data from its recently approved TKI, Cabometyx (cabozantinib). Being the only approved treatment for advanced RCC that has demonstrated improvement across PFS, ORR, and OS, I think Cabometyx stands to capture a significant portion of the 2nd-line or later treatment market despite competing head-on with Bristol-Myers' anti-PD-1 (NYSE:BMY) Opdivo. Note, both Cabometyx and Opdivo received BTD for advanced RCC in 2015 following readouts of their respective Phase 3 trials. With the $200 million upfront cash payment issued by new partner Ipsen, the company is in a healthy position to penetrate the market alone but also remains an attractive bolt-on acquisition for larger players like Astra Zeneca (NYSE:AZN), Sanofi (NYSE:SNY) or JNJ (NYSE:JNJ). Implied potential upside stands at ~28% given the 12-month target of $10 derived via a risk-adjusted NPV (rNPV) analysis and using a 4x peak sales multiple for potential M&A (70%/30% blend).
All Eyes Are On Cabometyx's Recent Launch
With the recent launch in April, questions remain on whether Cabometyx will be able to secure a significant portion of the market given some concerns regarding toxicity that arose during the METEOR trial. I believe physicians will overlook the diarrhea and fatigue concerns and follow through on dose reductions for the majority of patients in favor of prescribing Cabometyx over Opdivo given the significant benefit in PFS. Specifically, Opdivo demonstrated PFS rates consistent with the current standard of care, everolimus (4.6 months vs. 4.4 months), which gives Cabometyx some room for leverage given its drastic improvement of 7.4 months vs. 3.8 months. Thus, Cabometyx stands as an appealing treatment option for 2nd-line or later patients over Opdivo despite the $20,000 premium in price. The difference in OS improvements between Cabometyx and Opdivo (4.9 months vs. 5.4 months) should prove to play a minimal role in the decision for treatment, and physicians should favor Cabometyx given its more mature data set and 34% reduction in rate of death vs. 27% in the Checkmate-025 trial. Additionally, Cabometyx should displace current standards of care such as everolimus, sorafenib, and sunitinib as the launch progresses given its benefit across both PFS and OS data points, eliminating the need for additional lines of therapy in the future.
My model projects peak sales for Cabometyx in the 2nd-line or later treatment setting to reach ~$527 million, equating to an rNPV of around $6.67/share. Current standards of care Afinitor (everolimus) and Inlyta (axitinib) did ~$408 million and ~$410 million in RCC sales in 2014, providing a hypothetical floor for Cabometyx sales given its drastic improvements across major endpoints. Once more color is given regarding Cabometyx's approval in Europe, Japan, and Canada, updates will be added to the model.
The standard discount rate for biotech companies is utilized in all models. Typically, private ventures and projects use rates around 20% while public, developmental-stage companies use rates anywhere from 10%-20%. A 5% increase to the wholesale acquisition cost (WAC) was applied annually after two full years on the market (2018). Given that Cabometyx was approved in April, the likelihood of approval (LOA) is 100%, thus, the revenue was not adjusted for developmental risk.
Figure 1: Cabometyx model assumptions in 2nd-line or later advanced RCC
Figure 2: Cabometyx model in 2nd-line or later advanced RCC
Near-term catalysts include the 2017 readout of CELESTIAL, a trial testing cabozantinib as a 2nd-line or later treatment in patients with advanced HCC. Current standard of care Nexavar (sorafenib) was approved on the basis of OS data so cabozantinib shouldn't encounter any issues either considering the company has set overall survival as the primary endpoint. Phase 2 data demonstrated an OS of 15.1 months but lacked an active comparator, as does the Phase 3 CELESTIAL trial. Notably though, FDA guidance does not require an active comparator for submission but the data set could have been used as a commercial selling point. A rNPV analysis was conducted and I arrived at a value of ~$1.08/share (peak sales and market share of ~$202 million and 35%) assuming a launch in 2017/2018 and premium pricing of above $80,000 (Nexavar is $80,000).
Figure 3: Cabozantinib model assumptions in 2nd-line or later advanced HCC
A 5% increase to the wholesale acquisition cost was applied annually after two full years on the market (2020), and a 3% increase was applied annually after 2021. In the event that CELESTIAL succeeds, LOA will move to ~70% pre-NDA filing and to ~80% when pending approval.
Figure 4: Cabozantinib model in 2nd-line or later advanced HCC
Expecting Moderate-Flat Growth for Cometriq and Cotellic as Supplemental Assets
Based on recent Cometriq quarterly sales figures and management commentary, it seems evident that a significant portion of new patient starts and ongoing treatments are and were from patients with advanced RCC despite Cometriq only being officially approved for medullary thyroid cancer (MTC). Moreover, this leads to the conclusion that physicians have viewed cabozantinib as a viable treatment for patients with advanced RCC well before the readout of the METEOR trial and follow-up data. Therefore, with Cabometyx being the official use of cabozantinib in advanced RCC, an incremental slowdown and/or flat growth should be expected in Cometriq sales.
Cotellic's slow launch is likely attributed to the immense amount of competition entering the PD-1 and PDL-1 inhibitor space and will likely remain slow given the name that the nivolumab-ipilimumab (Opdivo-Yervoy) has already established for itself over the past year. Partner Roche reported ~$11 million (USD) in sales for the first quarter, and I project world-wide full year sales to come in at ~$45 million. Cotellic is set to receive "low double-digit" royalties on ex-US sales (modeled for ~12.5%).
Through a risk-adjusted NPV analysis of Cabometyx as a 2nd-line or later treatment in advanced RCC, Cometriq in MTC, Cotellic, and Cabozantinib in advanced HCC, I've arrived at a rNPV target of $8.97/share. M&A value stands at ~$14/share or a deal sized at about $3.1 billion. The blend of 70% rNPV and 30% M&A yields a 12-month target of ~$10/share. Astra Zeneca or Sanofi appear to be ideal suitors given Astra Zeneca's recent divestitures and Sanofi's desperation for a larger exposure in oncology.
Figure 5: Exelixis valuation summary
Given the recent contraction in multiples of both small-mid and large cap biotech names and a softer M&A environment, a 4x multiple was applied for M&A value. With Pfizer (NYSE:PFE) paying ~2.6x peak sales for its Anacor acquisition (approximately $2 billion in peak sales), it's evident the deal environment has clearly settled down. In oncology however, multiples seem to remain a bit higher, evident by Jazz Pharmaceuticals' (NASDAQ:JAZZ) purchase of Celator Pharmaceuticals (NASDAQ:CPXX) for 4x peak sales. Recall, Abbvie (NYSE:ABBV) paid a whopping $21 billion at the height of the biotech "bubble" in 2015 for 50% of Pharmacyclics' Imbruvica, which the street projected would net around $6 billion in peak sales.
Drivers for additional upside include a positive readout from the full CABOSUN data set (frontline treatment in advanced RCC) later this year and a smoother than expected launch for Cabometyx in advanced RCC. In the event that Cabometyx's launch is underwhelming and if Opdivo becomes an increasingly popular choice over Cabometyx, peak market share could drop to 15% from 25%, peak sales to ~$339 million from ~$527 million, rNPV per share to $4.90 from $6.67, and my 12-month target to ~$8 from ~$10. Additionally, Opdivo's ability to secure front-line approval will have an impact on CABOSUN's estimates, which shall be modeled once the full dataset is received.
Figure 6: Cabometyx bear-case model in 2nd-line or later advanced RCC
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EXEL over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.