Should Roche Buy Exelixis?

Investors in Roche (NASDAQOTH: RHHBY  ) and Exelixis (NASDAQ: EXEL  ) saw a bit of positive news Monday, when Roche announced that its phase 3 combo study of MEK inhibitor cobimetinib (licensed from Exelixis) and BRAF inhibitor Zelboraf met it primary endpoint. No details were supplied, other than that the company is moving forward with regulatory filings in the U.S. and EU.

Although this combo therapy is not likely to move the needle too far for Roche, it could be significant for Exelixis and talk is now circulating that Roche may buy the company to capture full economics on the drug.

A successful pivotal study
Roche announced Monday morning that the "coBRIM" study met its primary endpoint and that patients with advanced melanoma lived "significantly longer" on the combo drug therapy of cobimetinib and Zelboraf (which is already approved). Roche intends to present the data later this year at a medical meeting, so there was minimal detail in the release. As a reminder, an earlier phase Ib study showed a 13.7-month improvement in progression-free survival and 10% of the patients getting the combo showed a complete response.

By way of comparison, the similar combination of GlaxoSmithKline's (NYSE: GSK  ) Tafinlar and Mekinist showed a 9.3-month improvement in progression-free survival in phase 3 testing. Overall survival data will likely be the more significant information from a competitive perspective.

How much potential is there?
Melanoma is highly survivable if caught and treated early, but it can be deadly in more advanced forms. Luckily it is not particularly common, with only about 10,000 cases diagnosed each year (in the U.S.) that have spread beyond the primary site.  With that, it's not an especially large market (around $1.5 billion to $2 billion a year in the U.S., Europe, and Japan) and it is also a popular target for new immuno-oncology therapies from Bristol-Myers Squibb (NYSE: BMY  ) , Merck, Roche, and AstraZeneca.

Between competition from Bristol's Yervoy, Glaxo (soon to be Novartis') Tafinlar/Mekinst combo, and immunotherapies, I think it will be tough for Roche/Exelixis's combo therapy to become the go-to therapy for an extended length of time. Granted, I am making something of an apples-to-oranges comparison here, as not all of these treatments are/will be labeled for the same patients (the Roche combo will address the 40% to 50% of melanoma patients that have the BRAF V600 mutation).

I believe that $1 billion/year in revenue for 10 years would be quite an achievement, though the rate of inflation in drug prices does generate some upside to that figure. At Roche's current profit levels, that means $350 million in peak operating profits to split and given the splits specified in the agreement (a sliding scale of profits from 50% to 30% and low double-digit royalties on ex-US sales), I estimate about 30% going to Exelixis. Discounting that back at 8%, I come up with a value of just over $700 million for Exelixis's profit streams from cobimetinib.

Will Cometriq come through?
I think the above estimates for cobimetinib/Zelboraf are very aggressive and the company's development of Cometriq is a bigger driver today. Getting approval in prostate cancer (the COMET-1 and COMET-2 studies) would be significant, particularly as part of a combo, as would second-line liver cancer (the kidney cancer application is less promising with the emerging competition from immuno-oncology therapies). 

With a current enterprise value of over $850 million, I don't see a compelling value for Roche in buying Exelixis solely on the basis of controlling 100% economics on the melanoma combo therapy. Roche management may well have a more bullish outlook on Exelixis's pipeline and that changes the argument, but cobimetinib alone isn't enough. Add in some additional (substantial) potential value from these label extension studies for Cometriq and the argument for owning Exelixis gets stronger ... but that's predicated on successful trial results.

The bottom line
Later data releases on the coBRIM study will help refine the market potential of cobimetinib and Zelboraf further, as will additional data from immuno-oncology studies (including combo studies). As is, it's a welcome positive for Exelixis and should bring in some cash starting next year. For Roche it is a smaller positive, though still a positive all the same and a reminder that this oncology giant is about more than just mature antibody therapies and developmental immuno-oncology projects.

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