Exelixis – Setting the Facts Straight

Exelixis (EXEL) saw its share price cut in half last week, due to a regulatory setback. Based on what others have published and questions I received there appears to be some confusion with respect to  the implications for the company. I decided to address this issue using a questions and answers format, based on the many inquiries I received. Hope this format sheds some light on the situation.

What just happened?

Earlier this week, Exelixis announced it could not reach an agreement with the FDA regarding a phase III trial for its lead agent, cabozantinib (cabo), in prostate cancer. The company intended to run the study under special protocol assessment (SPA), which is an agreement with the FDA regarding the trial’s design. An SPA details study parameters such as patient population and endpoints that the FDA sees as sufficient for approval.  Consequently, cabo’s phase III trial will be run under standard regulatory framework.

Why is this bad?

SPA is an important risk mitigator in registration clinical studies. It does not guarantee or predict a drug’s performance in a given study but it substantially decreases the likelihood of being turned down due to technical issues with trial design and endpoints.

An SPA is particularly important in settings where no clear precedent exists. For example, indications for which no drugs have been approved specifically, drugs with new modes of action or endpoints that are not classic ones (like overall survival). As I previously discussed, Exelixis’ drug has some unique properties turning into one of the most promising yet controversial in development. These unique features prompted Exelixis to design a unique study for which it attempted to get the FDA’s blessing.

What’s so special about cabozantinib?

Originally, cabo was designed and studies as a standard anti-cancer drug. Last year, investigators discovered the drug leads to resolution of bone scans, which are used to image bone metastases in cancer patients. The most profound effect was seen in prostate cancer patients. To date, no approved or investigational drug has demonstrated such a signal. Cabo stirred a lot of controversy, as many believed the effect observed in the bone scans is not real or simply too good to be true. In addition, since there is no experience with drugs that lead to bone resolution, the clinical relevance of such a treatment modality is unproven. Cabo also appeared capable of reducing pain in prostate cancer patients, which is typicsally associated with presence of bone mets.

Does cabo have anti-cancer activity besides the bone met effect?

On top of the drug’s alleged activity on bone lesions, it has clear activity on non-bone lesions (soft tissue lesions) across a variety of tumor types, including prostate, renal, ovarian and liver cancer. This activity by itself merits further development of cabo, even if the bone met effect turns out to be unreal. A striking proof for this activity arrived last month, when cabo demonstrated overwhelming activity in a pivotal trial in medullary thyroid cancer (MTC), this time under SPA.

What is Exelixis’ clinical strategy in prostate cancer?

Acknowledging the unique activity profile of cabo, Exelixis wanted to pursue approval using two pivotal studies. A standard trial that measures overall survival, similarly to other drugs (study 307) and a trial that evaluates cabo’s effect on bone pain and bone scans (study 306), which, it hoped would be enough for approval.  The pain trial aims at taking advantage of cabo’s activity on pain and bone scans, differentiating the drug in the increasingly crowded field of prostate cancer. Originally, it was viewed as a fast route to market although now the company expects both studies to have data in the same time frame (probably H1 2014).

Does it mean cabo cannot be approved based on the pain trial

No it doesn’t. Having an SPA is not a prerequisite for approval. However, the trial should be viewed as more risky now that it is unclear whether in case of a positive outcome, the design and endpoints used by Exelixis will be endorsed by the FDA. It is important to note that the FDA has already approved drugs solely based on their pain benefit in cancer patients and according to Exleixis, the agency still views pain relief as an approvable endpoint. The FDA and the company did not see eye to eye, though, on a list of additional issues, including using bone scan resolution as a pre-defined endpoint.

Is the FDA being unfair with Exelixis compared to other companies?

No. The FDA has the complex mission of introducing new treatments to the market while making sure only the most effective and safest drugs get approved. In order to do so, the agency has to weigh many factors and could sometimes make drug developers’ lives frustrating. Although there were cases where the FDA has been too conservative, in this case the refusal to award an SPA was reasonable. After all, the design Exelixis suggested has never been used in a registration trial.

Why did the market respond so brutally?

The market punished Exelixis not only because it could not obtain an SPA, but also for setting high expectations which turned to be unjustified. If there is one thing Wall St. hates is credibility issues, especially when a company over-promises and under-delivers. In this case, Exelixis made the SPA sound like a done deal that was just a matter of time. There is no doubt management truly believed they would reach an agreement with the FDA in a timely manner, but if there is one area where a company needs to be as conservative as possible is interaction with regulators.

A good example of a company who knew how manage investors’ expectations is Incyte (INCY) with the SPA for the pivotal trial of ruxolitinib in myelofibrosis. This was another case of a trial in uncharted waters which required a lot of back and forth discussions with the FDA. In fact, the FDA dragged Incyte for many months with requirements which were not always decisive or consistent. Yet Incyte kept things vague enough until an agreement was reached.

How severe is the damage?

The recent clash with the FDA certainly tarnished Exelixis’ reputation but one has to admit that putting the SPA fiasco aside, the company has been executing very well. In the last year, the company refocused its operations around cabo and executed on a broad clinical program. It is important to note that Exelixis is running everything independently without a partner, which is unusual for programs at this stage.

How important are the results in thyroid cancer?

Extremely important. Although MTC is a relatively indolent disease representing a tiny commercial opportunity, it is the strongest proof for the drug’s activity to date. Cabo’s numbers were phenomenal: Based on Exelixis’ announcement the drug almost tripled progression free survival from 4 to 11 months, in a particularly sick patient population. This degree of improvement (Hazard ration of 0.28) is extremely rare in patients who are not biomarker-defined. This trial should result in the first regulatory approval for cabo next year.

Does the MTC trial increase chances of success in prostate cancer?

To some extent, as the effect on soft-tissue lesions could contribute to overall survival in prostate cancer. Nevertheless, since over 90% of metastatic prostate cancer patients develop bone mets, which are considered a highly unmet need, the effect on bone mets should play a crucial role in the 307 study. From that standpoint, the MTC trial does not strengthen Exelixis’ case in prostate cancer in a substantial way (even though in other indications, it certainly does).

Has your assessment of cabozantinib changed ?

Nothing changed fundamentally. The main question still has to do with how real the bone effect is and whether this effect together with the classic effect on soft tissue lesions can prolong survival. I still believe there is a good chance it can. The data in MTC actually proves the drug is very active, regardless of the bone effect.

What could improve the sentiment towards Exelixis?

The single most important future milestone is pivotal data from the 307 study (overall survival) in prostate cancer. Results are more than 2 years away and in the meantime, Exelixis is looking at several catalysts in 2011 and 2012.

Next weekend, the company will report updated results from a large phase II prostate cancer trial In Taxotere failures. The data set should demonstrate the bone met effect in an advanced homogeneous population and shed more light on durability of response, which is still an open question. Investors are also expecting evidence which shows that the effect on bone scans represents a real change using complementary imaging methods.

Also next weekend, results from a low dose study will be reported. This could alleviate a lot of the fears with respect to the drug’s tolerability, which proved to be problematic at the original dose. Evaluation of cabo in earlier treatment lines, primarily prevention of bone mets, requires a milder safety profile.

In 2012, cabo should receive approval in MTC based on the spectacular results in the EXAM trial. Cabo could become the leader in that market, as it looks much better than AstraZeneca’s vandetinib, another recently approved drug for the indication. The financial implications are low even though off-label use could boost sales dramatically. Additional data from other indications where cabo has interesting signs are also expected next year. Lastly, the company is expected to sell Asian rights for the drug in a deal that was pushed back from 2011 to 2012.

What about Exelixis’ financial position?

The company has been notorious for its gigantic R&D budget, which is creating some concerns about its ability to execute on a fully fledged registration program. However, going over the financial needs of the company until mid 2014, where pivotal data is expected, things actually look quite reasonable. Assuming the company finances the 306 trial (pain study), 307 trial (overall survival study) as well as starts a combination trial sometimes in H2 2012, it needs ~$230M just for prostate cancer. On top of that, the company would probably want to conduct several large randomized  phase II trials in other indications or a phase III study in a single indication (could be liver or ovarian cancer), this will add another ~80M. Adding G&A expenses of $120M for 2.5 years brings Exelixis’ financial needs to $430M.

The company expects to end 2011 with $300M in its coffers, so it is short of $130M, assuming it pursues a very aggressive development plan. On top of selling its stock (which would be unfeasible at current levels), Exelixis could get this amount from several sources including milestone payments on partnered programs and an Asian deal for cabo, which together could easily reach $80M in the next 2.5 years. Exelixis could probably generate several tens of millions in MTC given the stellar results, the premium pricing it could obtain and the long treatment duration, but establishing a dedicated sales force will probably consume most of these revenues. Therefore, the company will have to bring in additional $50M over a 2.5 year period, which should not be too hard.

Would you buy Exelixis at these levels ?

Absolutely. The burden of proof regarding the bone met effect still lies on Exelixis, making the company very risky. But fundamentally, the company has never been more attractive with undeniable activity in its first indication, potential approval next year and a growing data set of over 1000 patients. Exelixis made a grave mistake, but the market’s reaction seems exaggerated and created a buying opportunity in my opinion.

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