The past six months have been quite frustrating for Exelixis (EXEL) investors (myself included). The company had a string of positive announcements for cabozantinib (cabo) and Roche-partnered cobimetinib (Cotellic) including positive overall survival readouts for both drugs. Since the July announcement on the METEOR study in renal cancer, the stock is up only 16% despite having a wholly owned drug with a blockbuster potential, imminent approval and significant label expansion potential.
Market skepticism was best examplified by the mute reaction to last week’s announcement about cabo leading to an overall survival benefit in the METEOR study, probably the most meaningful announcement in the company’s history. Overall sentiment around biotech certainly isn’t helping Exelixis but it seems that market is more skeptical than ever about cabo’s commercial potential in renal cancer.
The bear case for cabo
The bear case for cabo in renal cancer (RCC) assumes Opdivo will take the majority of 2nd/3rd line renal cancer market based on its proven survival benefit (Exelixis still hasn’t provided actual survival numbers) which will be hard to beat and a better safety profile.
Exelixis’ press release stated there was a “highly statistically significant and clinically meaningful increase in OS”. Cross-trial comparison of the interim OS curve in METEOR with Opdivo’s survival curve demonstrates a similar pattern up to 1 year (data were too immature to conclude anything beyond that time point). Based on this, the language in the PR and the strong updated PFS data last month, cabo has a reasonable chance of demonstrating a strong survival benefit, perhaps even similar to that of Opdivo (5.4 months, HR=0.73). Full results will be presented at ASCO 2016 (June) but if cabo gets approved before that, the label might include actual survival numbers.
Source: N Engl J Med. 2015 Nov 5;373(19):1803-13.
Source: N Engl J Med. 2015 Nov 5;373(19):1814-23.
Not a zero-sum game
While I also expect Opdivo to become the cornerstone of RCC treatment, I still think cabo is going to be a dominant drug with good market penetration in Opdivo-failures who will need additional treatment options (Opdivo is not curative and eventually all patients progress). Investors understandably want to know how cabo’s survival benefit stack up against that of Opdivo but in my opinion this question has little relevance in the real world where RCC patients are treated sequentially with multiple agents. The introduction of two highly effective drugs will only augment this trend, as patients now have better options.
Historically, an RCC patient was treated with a 1st line kinase inhibitor (Sutent or Votrient) that kept the disease under control for a median of ~10 months. After that, physicians had very little to offer patients with multiple agents that provide a ~4 month PFS without proven OS benefit (20 months life expectancy). Today for the first time, patients have two drugs that prolong survival including one drug that keeps the disease from progressing for 7.4 months (an almost doubling compared to available drugs). Even if we assume Opdivo takes 100% of the 2nd line market, I find it hard to believe that physicians will not use cabo extensively as a third line option based on its compelling clinical profile (today they are using other less effective agents for third line patients)
Significant market opportunity
Third line renal cancer represents a significant opportunity. Of the estimated ~40k metastatic RCC patients in developed countries who are treated in the first line setting, ~23k are expected to receive second line treatment. This figure will probably grow as now there are 2 drugs with a clear survival benefit for pre-treated RCC (so far drugs were mildly active and no OS benefit).
Assuming Opdivo or other PD-(L)1 antibodies take the lion share of second line RCC and cabo is restricted to third line patients, cabo could be given to 10k patients using conservative assumptions. An average cost of $70,000 per patient translates to $700M in RCC sales. Adding $150M in combined global revenues for cabo in MTC and cobimetinib, (Roche’s MEK inhibitor for which Exelixis has co-promotion rights in the US) in melanoma, Exelixis is looking at a de-risked revenue stream of $850M per year. This figure excludes label expansion potential for both drugs in significant indications like liver cancer for cabo (P3 readout next year) and KRAS+ lung cancer in combination with Roche’s PD-L1 antibody for cobimetinib.
I am adding a second position in Exelixis ahead of an eventful 1H:16 which should include FDA/EMA approval, positive survival data in renal cancer and a lucrative deal (licensing or acquisition). Assuming conversion of all convertible debt (worst case scenario because a portion may be repaid in cash), the company has ~347M shares on a fully diluted basis which translates to a market cap of ~$1.6B. Using a 3x multiple on peak sales, adding ~$500M in cash (assuming debt conversion) and $250M for pipeline results in a valuation of $3.3B, representing a 100% upside.
Going forward, I still prefer to have limited exposure to biotech as I expect negative sentiment to continue in 2016. My biggest holdings right now are cash (~30% of portfolio) and ProShares UltraShort Nasdaq Biotech (BIS) (~25% of portfolio), which is unfortunately and unsurprisingly my most profitable position so far in 2016.
Portfolio holdings – February 7, 2016