Some days as a biotech investor, no matter how savvy you think you are, you just have to bury your head in the sand because you're bound to experience a bad day. That's what happened last week to shareholders of Exelixis (NASDAQ:EXEL), a company I've been very bullish on for more than a year which reported an uninspiring update to its phase 3 results for Cometriq (also known as cabozantinib) as a treatment for late-stage prostate cancer.
In a press release issued on Tuesday evening, Exelixis announced that the independent data monitoring committee overseeing its COMET-1 phase 3 trial involving Cometriq in metastatic castration-resistant prostate cancer (mCRPC) had recommended the trial proceed to its final analysis. Normally a trial proceeding is good news as it would signify the safety, tolerability, and potentially efficacy of an experimental therapy. However, with the metastatic prostate cancer field beginning to get crowded, this IDMC recommendation could signify that Cometriq doesn't offer a superior risk of death reduction compared to already existing therapies from Johnson & Johnson (NYSE:JNJ), Medivation (NASDAQ:MDVN) and Astellas Pharma (NASDAQOTH:ALPMY), and Dendreon (NASDAQOTH:DNDNQ). In other words, investors were looking for the trial to be stopped early due to strong efficacy.
The most readily apparent risk from the continuation of this trial is that Cometriq won't be able to stand out in a crowded field of therapies.
Dendreon's immunotherapy vaccine Provenge is one later-stage option that did provide a four-month median survival benefit, but has failed to see sales take off due to its comparatively higher costs relative to Johnson & Johnson's Zytiga and Medivation/Astellas' Xtandi. Zytiga not only cost less within a single year than Provenge, but it also offered a median overall survival benefit of 5.2 months relative to the placebo.
The real star, though, and Exelixis' main threat if approved, is Medivation & Astellas Pharma's Xtandi which improved median overall survival in late-stage prostate cancer patients by 4.8 months versus the placebo. Furthermore, it also demonstrated incredible efficacy in its PREVAIL study in chemotherapy-naïve patients, reducing risk of death by 29% and delaying the initiation of chemotherapy in patients by a whopping 17.2 months over the placebo (28 months versus 10.8 months). In other words, if Medivation gains this new pre-chemo indication it could stand out as a great all-around therapy for later-stage prostate cancer patients.
In phase 2 studies involving cabozantinib in heavily pretreated men, median overall survival clocked in at 10.8 months – a respectable figure considering that 73% of the 144-patient population had received at least two prior therapies. Its study also noted a bone scan response (i.e., a greater than 30% decrease from baseline in lesion area as determined by CT scan) was observable in 65% of patients. The concern is if the IDMC wants the study to continue then its median OS is likely to be little changed from what Zytiga or Xtandi offer patients.
The advanced prostate cancer market is huge given that prostate cancer is the most diagnosed type of cancer in the United States, so meeting its primary endpoint but underperforming its peers could set Exelixis' Cometriq up for a very limited ceiling in mCRPC. With Cometriq being its only currently approved therapy for a rare type of thyroid cancer, pessimists believe that Exelixis' current revenue potential is capped.
The opportunity (and why I bought Exelixis)
Despite Exelixis' tumble, which at one point equaled nearly half of the company's value in a four-day span, I decided to purchase the company for my own personal portfolio as I see a bright future for Cometriq and its overall pipeline.
Let's take things step-by-step and I'll show you why I'm so optimistic about Exelixis.
To begin with, we have the ongoing COMET-1 trial which I anticipate will demonstrate superior death risk reduction relative to the placebo (prednisone) in men with bone-dominant mCRPC who had progressed while using the combination of docetaxel and either Zytiga or Xtandi. Although it may not "stand out" per se, the drug itself should still see revenue on par, if not slightly better than Dendreon's Provenge which is also failing to stand out. Dendreon's drug is capable of approximately $400 million in peak sales, which I believe is a fair estimate worldwide if Cometriq is approved in mCRPC.
Second, we have Cometriq already approved to treat metastatic medullary thyroid cancer by the FDA and just recently receiving EU clearance to market its therapy to MTC in Europe. Based on company projections of roughly 500 to 700 patients in the U.S., and my own personal estimate of a similar amount in the EU, peak sales in this indication could total around $200 million at a price of $9,900 per month.
Added together, I already believe there's peak potential of $600 million if Cometriq gains the mCRPC indication inclusive of its U.S. and EU approval for MTC. Based on its current valuation of around $700 million we're looking at a company trading at just over one times peak sales. Given that we're seeing clinical-stage companies valued at three to five times annual peak sales estimates regularly, I have to believe either the entire market is overvalued or Exelixis is being brutally undervalued. Regardless of which one it is, further downside appears minimal in my opinion.
My other contention relates to its pipeline which is being largely discounted throughout this process. First, Cometriq is also being studied in two other phase 3 trials METEOR and CELESTIAL to study its effects against a placebo (usually a high-profile branded drug) in metastatic renal cell carcinoma and hepatocellular carcinoma patients who've received treatment with Nexavar. Why aren't investors giving these potentially life-altering studies any credit?
In addition to other ongoing studies with Cometriq, Exelixis has a mountain of ongoing collaborations that range between preclinical and phase 2 in nature (nine studies altogether). The breakdown includes four therapies partnered with Bristol-Myers Squibb, two with Sanofi, and one each with Merck, GlaxoSmithKline, and Daiichi-Sankyo. The result is ample upfront cash from these collaborations and plenty of marketing firepower should these collaborative therapies be approved.
In sum, I believe we've seen a classic overreaction to modestly bad news from the COMET-1 trial and a complete disassociation from investors as to the potential of its remaining pipeline and partnerships. I'm now long Exelixis and hopeful that Cometriq's additional indications may help move the company's total annual revenue to more than $1 billion before the end of the decade.