Astronomers have grown very cautious over the years about predicting which comets will brighten the night skies, as all too many have failed to live up to expectation. Small biotech Exelixis(EXEL 2.00%) own comet, the COMET-1 study of cabozantinib in metastatic castration-resistant prostate cancer, likewise has failed to live up to the most optimistic hopes. Although the stock's 25% drop on Wednesday may seem like an overreaction, the reality is that the company badly needed a winner and the absence of an early halt due to efficacy suggests that the company could face a tough battle in getting market share in the prostate cancer space.

No early halt
Exelixis designed the Phase III COMET-1 study to include an interim analysis that would assess the drug's efficacy and progress toward achieving its primary endpoint, overall survival. Importantly, the trial design did not include a futility analysis that would stop the study if the results were clearly not going to achieve statistical significance.

Exelixis announced Tuesday night that the independent data monitoring committee recommended that the study continue through to its scheduled end. That decision does not prove that the drug failed, but it does prove that the data were not overwhelmingly positive.

Why does this matter?
Studies are designed to be completed, so why is it such a big deal that the COMET-1 study won't end early? The problem is competition. Johnson & Johnson's (JNJ -0.65%) Zytiga and Medivation's (MDVN) Xtandi have established themselves as very strong treatment options for metastatic prostate cancer, so much so that both are well on their way to blockbuster status. Likewise, Bayer's Xofigo has shown to be highly efficacious in patients with bone metastases, with better toxicity and efficacy in patients otherwise ineligible for chemotherapy.

All of these drugs – Zytiga, Xtandi, and Xofigo – had their pivotal studies stopped early for positive efficacy. With survival benefits in the range of 3.5 to 5 months, that would seem to be the relative bar that cabozantinib has to hit, but now that is in question.

Comps are challenging
Comparing across clinical studies is tricky, as the enrollment and trial design criteria vary from study to study and those variations can have a meaningful impact on comparability. In the case of COMET-1, for instance, patients enrolled were already nonresponsive to docetaxel, Zytiga, and/or Xtandi. Obviously that is a different enrollment standard than for those prior Zytiga and Xtandi studies that were stopped earlier. It is possible, then, that this drug is still effective, but not as dramatically so due to a sicker patient pool. Likewise, there could be issues like a higher-than-expected response rate in the control (prednisone) arm that is skewing the result.

Exelixis needs this one
Exelixis does have other clinical compounds, but management has put a very large percentage of the company's eggs in the cabozantinib basket. The drug is already approved for medullary thyroid cancer (as Cometriq), but the addressable market is small and Exelixis would likely be fortunate to see $250 million in peak revenue from that indication.

Success in prostate cancer could be worth over $1 billion in sales, but it is not going to be easy. Oncology drugs are not as difficult or expensive to sell as drugs targeted for a primary care setting (like depression or cholesterol), but Johnson & Johnson, Medivaion, and Bayer have meaningful head starts and strong clinical data packages. Prior Phase II studies of cabozantinib have supported the notion of a four-month survival advantage for the drug (putting it close to par with these other three), but "good enough" for FDA approval may not be good enough for market acceptance unless the company is willing to be aggressive on pricing.

The bottom line
The market's reaction to the continuation of the COMET-1 study is not so unreasonable if you believe that the implied absence of superior efficacy reduces the peak sales potential from $1 billion to $500 million. Exelixis is definitely a high-risk proposition now, particularly when considering the prospect that the company will have a harder time distinguishing its drug in the market, assuming it even gets there in the first place.