This could be a crucial week for Exelixis (EXEL 1.80%). The biotech company awaits an FDA decision on cabozantinib, a treatment for medullary thyroid cancer (MTC). Cabozantinib would be Exelixis' first drug to market, offering a source of revenue beyond its current meager license payments. But the approval's real significance lies in its potential expansion to treat a different disease -- and help boost Exelixis' earnings.
Small-cap companies with one lead drug can be difficult to assess. There are three main points to keep in mind when considering Exelixis.
1. Approval for prostate cancer
FDA approval for cabozantinib seems like a given at this point, following positive trial results showing a seven-month improvement in progression-free survival. The drug received priority review status since it would fill an unmet need for MTC, a form of thyroid cancer that accounts for about 4% of cases. That makes the MTC market rather small. The only approved MTC treatment, AstraZeneca's (AZN 0.49%) Caprelsa, generated a meager $19 million in the first nine months of this year.
MTC approval would clear path to a more lucrative second indication -- another condition the FDA will allow the drug to treat. Cabozantinib is in two late-stage prostate cancer trials that will report data in early 2014. The prostate cancer market was approximately $4.1 billion last year, according to research firm Decision Resources, and is expected to reach $9.1 billion by 2021.
A growing market breeds increased competition. Johnson & Johnson's (JNJ -0.69%) Zytiga, approved last spring for prostate cancer, earned around $700 million so far this year. Xtandi, from Astellas and Medivation, received FDA approval in August.
Unfortunately for Exilixis, MTC revenues for cabozantinib will likely be low, and Exelixis could run out of cash before the time comes to market the prostate indication.
2. Cash needs
Exelixis had $484.6 million in cash, cash equivalents, and short-term investments as of the end of September. With a cash burn rate of around $11 to $12 million a month based on last quarter's numbers, that's plenty of money to keep operations running for a while and take cabozantinib to market under its MTC indication. However, it might not be sufficient to fuel long-term growth. The company may have to raise additional funds at some point to further develop its drug and, while that may turn out to be good for the company's long-term health, it may also result in shareholder dilution.
Investors need to keep in mind that it will be a couple of years, minimum, before Exelixis could have a solid revenue stream. Until then, the company has to rely on the MTC earnings and the sporadic, tiered milestone payments from its license collaborations.
3. Collaboration responsibilities
Exelixis has ongoing collaborations with a number of companies, including Merck and GlaxoSmithKline, but bears few cost responsibilities at its current stages of these projects. Specific deals vary, but Exelixis' entitlements involve some combination of royalties and milestone payments. Milestone payments from these deals, which hinge on satisfying a number of regulatory and commercial goals, could yield more than $3 billion. However, these drugs will have to make it far enough along the clinical trial and approval processes to activate the payments.
There are more obligations in Exelixis' collaboration with Roche on the phase 3 melanoma treatment GDC-0973. Exelixis will receive a percentage of initial domestic sales, and the company will contribute to the costs of marketing the drug, but that percentage payment decreases as sales increase. There's also an option to co-promote the drug in the U.S., but first, the company would need enough resources to afford such efforts.
Foolish final thoughts
This week's possible cabozantinib approval matters for both patients and Exelixis' future, and it also has implications for the drug's future approval to fight prostate cancer. Even if that comes to pass, investors can expect that this company will need to time to ramp up. Revenues will remain low, while the costs of cabozantinib's further development and the Roche collaboration loom in the distance.
It's too late for potential Exilixis investors to play the run-up for the MTC indication. Cautious Fools should wait for 2014 to see how the late-stage prostate trials pan out.
