By Ohad Hammer:
) 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 ((
)), 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
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
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(See earlier post on cabo
). 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 typically associated with presence of bone mets.
Does cabo have anti-cancer activity besides the bone met
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
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
Does it mean cabo cannot be approved based on the pain
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
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
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
A good example of a company who knew how manage investors'
expectations is Incyte (
) 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
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
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
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
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.
Biotech portfolio updates
We are adding another position in Exelixis in anticipation of
positive data at the EORTC meeting this month. This should be
followed by NDA filing in the coming months and initiation of the
307 trial in H1 2011.
Portfolio holdings as of Nov 7
(Click to enlarge)
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I am long
Staples Is 30% To 50% Undervalued