One Biotech Pony, Lots of Tricks

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Exelixis (NASDAQ: EXEL) got some good news late last year when the Food and Drug Administration approved COMETRIQ for the treatment of progressive, metastatic medullary thyroid cancer. While the company is putting all of its effort behind this one drug, it looks like this pony might know a lot more than one trick. This could turn into a franchise drug and a big money maker.

Who's Exelixis?
Exelixis was founded in 1994 and became publicly traded in April of 2000. Its focus is on the treatment of cancer. In 2010, management made a major business shift, deciding to focus virtually all of the company's resources behind one drug. Cabozantinib, which goes under the trade name COMETRIQ, had shown great promise in treating several kinds of cancer, leading management to believe that it could turn it into a franchise product.

Calendar year 2011, then, was a transformation year, including headcount reductions and the rightsizing of the company so that it could focus all of its efforts behind cabozantinib. That decision, although risky, paid off as the company's research continued to support the efficacy of the compound.

In the company's 2011 annual report, chief executive officer, and medical doctor, Michael Morrissey described the opportunity behind this choice: “The potential is obvious – to date cabozantinib has shown anti-tumor activity in 12 out of 13 tumor types tested, and has induced regression of metastatic or primary tumor lesions in soft tissue, visceral organs, and the brain, and resolution of bone lesions on bone scan.”

Some companies have a one trick pony and try to get as much out of that one success as they can. It looks like Exelixis has one pony, but that the pony knows lots of tricks. Still, the other saying about putting all of one's eggs in a single basket still applies. So despite the potential, if there were to be severe negative reactions to this one drug, all of the company's efforts would have been for nothing.

A 2012 Success Story
The company's big success with cabozantinib came in late 2012 when the Food and Drug Administration approved it for the treatment of progressive, metastatic medullary thyroid cancer. That mouthful basically means thyroid cancer that is continuing to grow or that has spread to other parts of the body. This particular type of cancer is rare, so the market opportunity isn't material. The company has noted that its approval isn't a “game changer.”

However, the process of getting cabozantinib, as COMETRIQ, through the approval process is a notable success. It gives the company a blueprint to follow with the other potential indications for the drug. It also helps to prove the validity of the drug to the market and, as it gets used, its safety.

It's notable that Exelixis took cabozantinib from its Investigational New Drug (IND) filing with the FDA to approval in eight years while still retaining all of its rights. Often, small biotech companies have to sell their rights to a promising drug in order to get the funding needed to continue their research. Controlling the rights to cabozantinib will allow the full benefit of COMETRIQ sales to flow through to Exelixis and its shareholders.

Follow the Money
The company didn't manage to pay for its research with manna from the sky, however, so there is a cost. One of the most notable for investors is the issuance of new stock. This is a common funding source in the biotechnology sector, however, so it isn't a major concern. That said, every time the company issues new shares, its sales get divided by a larger number. So, the share of the pie that goes to existing shareholders gets smaller.

Exelixis had 166.4 million shares as of the end of September 2012, up from approximately 100 million shares at the end of 2007. That's a notable increase, making future stock issuance worth watching. While the opportunity for COMETRIQ appears large, its gets smaller and smaller for shareholders every time the company issues new stock.

More than One Trick
That said, the company also earns money from partnerships based off of its other novel compounds. So, while it has decided to back just one drug itself, it isn't exactly just a one-trick pony. It has 12 other “compounds or programs” being researched in the oncology, inflammation, cardiovascular disease, and metabolic disease space. As these drugs continue to progress toward market, Exelixis is in line for both milestone (achievement based) payments and licensing payments.

Some of the company's partners on these other drugs include household names. For example, in October 2010, the company entered into a global license agreement with Bristol-Myers Squibb (NYSE: BMY) in which Bristol received sole control of XL475, including the responsibility for all costs related to bringing the drug to market. Exelixis received an upfront payment of $35 million and the potential to earn development and regulatory milestones payments of up to $400 million and royalties on commercial sales of products based off of XL475.

The company has similar agreements in place with Merck (NYSE: MRK) for XL499 and its related compounds. This deal has a similar structure to the one with Bristol, so that Merck pays for everything and Exelixis receives milestone and royalty payments from any marketable drugs. Those are pretty nice deals. Exelixis, however, also has collaboration and co-development agreements with companies like Genentech, Daiichi Sankyo, and GlaxoSmithKline (GSK). Some of these deals require Exelixis to share in the costs and research efforts.

The Next Step
Gaining approval for COMETRIQ was a major step in the right direction; however, Exelixis still has a lot of work ahead of it. While it continues to research additional indications for the drug, it also must market and sell it for the treatment for which it has been approved. This is no small step.

The company's plan is to outsource as much of this process as possible. For a relatively small, research focused company that approach makes complete sense. This is particularly true since the downsizing of the sales organizations at large pharmaceutical companies means there is a lot of talent in the industry looking for work. Moreover, it allows the company to scale up its efforts behind the drug.

Included in this process is getting insurance companies to pay for the drug, which costs nearly $10,000 for a 28-day supply. With the company's expectation of only between 500 to 700 annual cases of metastatic medullary thyroid cancer, that high cost will be needed to make the drug financially viable. However, that's a huge cost that very few would be able to afford without an insurance company pitching in. Thus, gaining access to third party payments is a must if COMETRIQ is to succeed.

The Long Term Picture Could be Bright
While Exelixis has achieved important success in its efforts to bring COMETRIQ to market, it still has a ways to go. However, it is a notable opportunity and investors still have a chance to get in on the ground floor of what could become a meaningful franchise product in the increasingly important cancer space. Not a low risk investment, by any means, but a nice addition to a broader biotech portfolio that could easily turn into a home run for those willing to go along for the ride.

Yours,


ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Exelixis. The Motley Fool owns shares of Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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