Earlier today, Rule Breakers pick Exelixis (NASDAQ:EXEL) announced that partner GlaxoSmithKline (NYSE:GSK) had chosen not to codevelop lead drug XL647.
Back in 2002, GSK and Exelixis signed an agreement giving GSK the option to take over development of as many as three of Exelixis' compounds in phase 2a clinical testing. In exchange, Exelixis would receive milestone payments and royalties on future sales.
XL647 was the first compound to become eligible for the GSK option, with two more drug candidates likely joining it later this year. Currently, XL647 is in two phase 2 studies as a treatment for non-small-cell lung cancer. It may also enter earlier-stage testing as a treatment for other indications, such as breast cancer.
Since Exelixis has more than $300 million in cash and investments on its balance sheet, it hardly needs the immediate cash infusion that the GSK deal would have provided. Now that GSK has chosen not to pick up XL647, Exelixis has the right to find another partner for the drug, or even develop it solo.
While there's no guarantee that Exelixis will find another partner, the longer it waits to make a deal on XL647, the better the terms it will get in any deal. Later-stage compounds that have done well in testing command better terms, since the risk and uncertainty about them dwindles as more clinical data becomes available.
Rejecting XL647 also makes sense for GSK. Its recently approved oncology compound, Tykerb, is similar to XL647. Developing and marketing XL647 could possibly cannibalize future sales of Tykerb and inhibit patient recruitment for its other non-small-cell lung-cancer targeted therapies in development. Its rejection of XL647 still gives it the option to choose three out of at least 10 drugs in development by Exelixis, and it's no signal that Glaxo is unhappy about the quality of Exelixis' pipeline.
On the conference call this morning, Exelixis' management stated that GSK's decision not to pick up XL647 might have been the best option for both companies. Normally, when a company says such things, it's just trying to make a bad situation look better than it is. But this is one of the rare cases where a partner's rejection of a drug may actually be a good thing for all concerned.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. GlaxoSmithKline is an Income Investor recommendation. The Fool has a disclosure policy.
