Exelixis, Inc. (EXEL) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Morgan Stanley Global Healthcare Conference. I'm Jeff Hung, one of the biotech analysts. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For this session, we have Exelixis with CEO, Mike Morrissey. Welcome, Mike.

Jeff, good to see you.

Good to see you. So for those who may not be familiar with Exelixis, can you provide a brief introduction?

For sure. So before I begin, I'll just remind you that we'll be making forward-looking statements today. So please see our SEC disclosures for a description of the risks that we face in our business. So Exelixis is a commercial-stage oncology-focused biotech company. We have a long, rich history in drug discovery, development and now actually taking compounds to the commercial setting under the market. So lots of moving pieces with the company. We're certainly very excited about cabozantinib and its broad activity, across many different tumor types, strong commercial performance throughout the last couple of years, since 9ER was approved and launched, and we're looking to build a strong pipeline of additional molecules in both small molecules and biologics to be able to drive top line growth.

Great. I'm going to ask questions kind of in a backwards order. Only I would ask questions related to cash at the end. But I have a few -- I'd like to start with those upfront, and then we'll move to ESMO, CABOMETYX and then other pipeline assets. So you ended the second quarter with $2 billion in cash and equivalents. What is your latest thinking on capital allocation?

So yes, so we have certainly been a successful organization in driving the business in terms of our commercial operation. We've been profitable, I think, since 2017 or so. So free cash flow every quarter, about $2 billion in cash, as you mentioned, so we're very interested in using our financial strength in terms of the balance sheet, but also our free cash flow is to be able to, again, continue to drive the growth in terms of the company and our R&D operation. Top line growth for us is paramount in terms of having a portfolio of assets that we can eventually get into pivotal trials and if successful, get regulatory support for in terms of launching and commercializing. So that's a big part of our story and how we use that to drive the business forward in terms of our internal R&D efforts, looking at a lot of business development opportunities that we can talk about as well, and certainly always looking at ways to be able to give -- bring cash back to shareholders as well.

Yes. So what is your appetite for doing additional deals? And like what is the ideal profile of an asset you're interested in acquiring? And is there a particular stage of development?

Yes. It's a really good question. It's one that we're spending a lot of time on. And we have been for the last couple of years. As I'm sure you're aware, we've done a lot of early stage, low upfront backend loaded deals to be able to drive the growth of our discovery and development pipeline as we're getting back into discovery post the successful launch of cabo across numerous indications. Last few years, we have been focused on really early stage preclinical compounds and some platform deals, building up our expertise, again, reinforcing what we have in small molecules, but also in biologics, ADCs, bispecifics, a number of different deals. Right now, we're looking at, I would say, a range of deals that are really more focused on clinical-stage assets, what we'd like to call option deals, where with the state of small, mid-cap biotech right now. There's a pretty sizable number of companies with assets that we're interested in based upon early clinical data. Obviously, the upside for us would be to understand if that early clinical data can translate into proof-of-concept or POC clinical data and a lot of these companies don't have the cash or the I would say, the bandwidth or maybe the wherewithal to be able to do that themselves. So that's where we come in with our expertise and our cash. And we like the idea of being able to put as many of those kinds of option deals in place. So we can run the critical experiment, get key data with our insight and then if successful, then be able to option those deals for the appropriate amount of money. So it's a very good interplay between our expertise in drug discovery and drug development, certainly, highlights our ability as a commercial organization to opine upon that. But it's really all about conviction around the potential for these early-stage clinical assets with maybe a few responses or some really interesting early data to be able to then take that forward then and before spending a lot of money on a full development program generate that POC data. So you'll see, I would project some of those coming out over the next few months this year and then into next year, but it's a really good way to build momentum across the clinical pipeline. And at the same time, have these collaborators do that work while we're focusing on cabo and 092 and 002, et cetera.

And you talked about these earlier assets, but what is your appetite for later-stage assets or doing a big deal?

Yes. So that comes down to conviction. We have a large appetite for good molecules with good data that can benefit patients and help us drive growth. There aren't a lot of those assets out there to our -- at least from our point of view, with our filter. And to be quite frank, we come from a filter of cabozantinib, which has been very successful molecule globally and helping a large number of patients with kidney cancer and liver cancer and thyroid cancer and potentially many more if the trials that we're doing working on right now readout. So that lens has been very informative to us and it's one that we're really, really focused on in terms of putting our capital to work in a way that can drive upsized growth, right? I think a lot of the launches over the last 3, 4, 5 years in the small, mid-cap space, even in the large pharma space in oncology have been somewhat underwhelming. And we have to make sure that we're not following in that kind of line of work, and we're really focused on driving outsized growth, right? So it's all about growth. And I think we've got the scientific team, the clinical team and certainly the commercial team to make that happen. But it's about conviction in the assets that counts.

And so when you look at external assets, I guess, are there specific indications or groups of indications that you're more focused on?

Yes. Well, we're an oncology-based company. So certainly, that's the main focus. We have a lot of expertise in solid tumors. And I think if you look at oncology and where the standard of care is today, that is certainly our main area of really optimization and contribution. Hematology is a very, very congested area. And oncology, heme/onc, in general, is probably the most competitive area in terms of big pharma, big biotech, small, mid-cap biotech, even venture biotech investment, right? So you need to choose your targets and your molecules and your trials exceedingly carefully. And our job at the end of the day is to simply raise the bar for standard of care for patients with cancer. And we do that across different tumor types, different molecules, different modalities, obviously, a variety of different combinations. But I like, where we stand here today in terms of having the team that's growing rapidly with the confidence of the success from cabo and rebuilding our early-stage pipeline. And if there's assets out there early-stage, late-stage that makes sense, then that's great, I think the -- I think part of the challenge here is with the influx of cash into the system over the last couple of years, the idea of high-quality assets has just been -- those are hard to find. And we -- everyone is looking for, and we're looking for them. A lot of companies in our stage are looking for them, big pharma certainly is so. So you really have to look at it, at the opportunities through a lens very carefully and ask some very important questions, right, in terms of how you're going to be able to bring benefit to patients and then monetize that at the end of the day.

Great. Well, at ESMO, you presented XL092 Phase I data. What did you see as the important takeaways from that data set?

Yes. So we set out to really validate the hypothesis clinically that 092 had a cabo-like phenotype in terms of its clinical activity. And I think we did that really well in terms of the data that was presented in the Phase I setting, both in terms of the overall population, but also in the kidney cancer subset of 13, 14 patients, whatever the number was, where we saw very good activity for 092 in patients that were heavily pretreated, including many of which had seen cabo in the past. So that's -- I think that's pretty exciting and certainly validates that for us in terms of how 092 is designed, even with the shorter half-life, we're seeing good overall activity. Safety looks -- safety and tolerability look very encouraging with all the caveats of small numbers of patients and those kinds of things, but early days, but it certainly gives us a lot of momentum and confidence going forward as we move into pivotal trials with other combinations and additional work go in that.

Right. And then COSMIC-313 data were just presented as well. In July, you had actually announced that the significant improvement was observed in PFS, but the trial will continue to the next analysis in terms of survival. What would you highlight from the data and the significance of the subgroup analysis results? And then can you just remind us when the next analysis for survival might be?

Yes. So it's a really interesting subset. I have to tell you, I think we're really proud, a small company like us to be the first company to sponsor, the first triplet in the RCC space. Doublets have been the mainstay in that -- in the frontline setting for the last 5-plus years, and again, in the context of what our job is to raise the bar for standard of care. This was a great study design that our former or late Chief Medical Officer; Gisela Schwab and her team worked on with Dr. Toni Choueiri from Harvard and his team as the PI and I think, designed a really, really good study. Again, using ipi/nivo as a standard of care, first time that's been done outside of SUTENT and then building upon that with the triplet, but the idea of taking the best-in-class I-O/TKI and best-in-class IO-IO and trying to combine them together. So I'm really proud to have it at the Presidential Symposium yesterday. And between Toni's presentation and then Dr. Sumanta Pal from City of Hope having the discussion, really, I think, put the data in a really nice perspective back to back in those presentations. Again, PFS was successful as a primary endpoint. As you mentioned, the subgroup data was really, really interesting. The benefit really resided in the intermediate risk group population, which is about 60% of the overall population in frontline RCC. The poor-risk group is kind of a wash between the 2 arms. We saw about on a relative sense about 30% higher response rates in the intermediate versus the poor-risk group. Not surprisingly, we saw some tolerability and safety issues around liver enzymes, which cabo has that effect by itself, certainly, if ipilimumab does as well. So not surprising to see that. But we're certainly excited about the data. And again, it's the first step in a very important process to be able to, again, raise the bar for patients, right? In terms of survival, that's immature, obviously need more events there. And as I'm sure you're familiar with CheckMate 214. As you get out in time, event rate slows. So it's hard for me to give you an estimate today and when that will happen. The first look was again coincident with the primary end point. The second that will be at a later point sometime probably next year based upon hitting the event numbers, but it's all event-based, so when it comes, it comes. So stay tuned.

And maybe if I can just ask on the significance of the -- or the subgroup analysis in terms of the intermediate risk, was that a surprise to you? Or is that something that you guys had predicted ahead of time for that particular...

Yes. It was a bit of a surprise. If you look at CheckMate 214 is the other way around in terms of PFS, where the poor-risk group had the majority of the benefit. Certainly, in 9ER, it's more balanced. So that was a bit of a surprise. And the question is what's driving that, right, in terms of as we do additional data cuts and really analyze the data on a very -- with a very high level of resolution. Can we understand kind of what's happening there in terms of -- is it the patient profile was different in that population? Do they have more risk factors than what you normally see? Was it a tolerability issue? Was it a discount issue, et cetera? So we've had some more work to do. And as you know, these trials with 900 or so patients, and if there's a lot of data there that you got to kind of come through over time and a lot of programming that will kind of follow. So -- but it's a very exciting next step, and I think to have basically 313 and 092 kind of back-to-back. Yesterday was a really fun day for the team and shows the progress that we're making and the impact that we hope to have for patients. That's the goal. That's why we do [indiscernible].

And maybe it's a bit early to ask, but from what you've heard from the rest of your team, what is the initial feedback been on the 313 data from clinicians?

Yes. I think it's been very positive. I think everybody -- and this was very clear on social media as well, which is the way I track the meeting from both California and here. Yes, I think the recognition that is a really, really important trial and that any win is a big win, especially if it can impact bring clinical benefit. There's lots of questions that need to be addressed around patient outcomes around tolerability, around if there -- is there a specific phenotype of a patient that's most suitable for this versus one that's not. And that's where I think some of the subgroup data is really interesting. So -- but again, it's -- we're just really proud to be amongst the leaders in this space and cabozantinib with its best-in-class profile continues to perform well, and we're excited about that and having 092 come behind it, for sure.

Great. Let's move on to CABOMETYX. On the 2Q call, you reiterated net product revenues of $1.325 billion to $1.425 billion. You could have declining sales in 3Q and 4Q for CABOMETYX and still meet the lower end of guidance. Was that out of conservatism? Or what factors could result in net product sales for the year ending closer to the $1.325 billion?

Yes. That's an interesting way of putting it. Yes. I think we're -- look, we're a small company. We're conservative with how we give guidance and how we do our modeling. So I would take that to heart in terms of how we're viewing the rest of the year. The launch has gone really well. We're continuing to see good growth, good both NRx and TRx performance and lots of really solid feedback from the field in terms of how the doublet is doing to benefit patients. So we're pleased about that, and we're seeing revenues grow, which is always a good thing, right? So -- but again, that comes with good data that's differentiating from the pack, and that really reinforces what we're trying to do with cabo, with 092, with 002 with compounds that we might bring in, we need to generate differentiating data, because I think, in 2022 as well as in the last couple of years, met to data kind of equivocal data, it's not going to really help patients and not going to get you too far in terms of driving top line growth for sure.

And historically, 2Q is a seasonally stronger quarter. So beyond seasonality, are there any other factors that we should be thinking about as you head towards the rest of the year, like, say, in 3Q?

Yes, I wouldn't want to -- I would say, opine upon what we're doing in the current quarter, since it's almost done. You can look backwards in prior years and see various trends. But again, what happens this quarter. We'll talk about that when the quarter is done and we do the close and we have our call. So stay tuned.

And so we talked about COSMIC-313. Given that the growth of CABOMETYX is currently driven by the combination with nivolumab in frontline RCC, what kind of further growth do you think could occur with the CaboNivoIpi triplet? And how should we be thinking about the opportunity for the 313 regimen?

Yes. So I mean first step is to, again, talk to the regulators about kind of get their view on filing scenarios and what they want to see. And that's just good -- it's just a good practice to include them in the dialogue around next steps. So when that happens, then we'll have a better sense of where that goes. We've always looked at 313 as providing potential incremental growth on top of 9ER. It's really an opportunity to grow the pie, grow the market because we're not looking to grab share from another combination of molecule. We're looking to add cabo to an existing share, if you will, with ipi/nivo. So -- but that remains to be seen what happens, right? I don't want to get too far ahead of that. We've been very successful with 9ER launch and kudos to the team and the clinical team for generating great data and our collaboration with BMS. We'll see how this plays out. But again, we're looking -- really looking at potential incremental growth, which is based upon the overachievement of 9ER that makes sense, right?

Right. Yes. And so you're expecting PFS data from CONTACT-03 by year-end. Can you talk about the study and what you see as the opportunity for this patient population in RCC?

Yes, it's really interesting, right? So again, doubling down in that space were single-agent cabo is really the market leader in second-line RCC. Question comes down to what drives resistance to frontline IO-IO, I-O/TKI combination measurements, right? So we have some -- I think, some pretty good hypotheses around how a second, a different IO, especially a PD-L1 cabo combination could drive that. And there's emerging data about how single-agent cabo looks post-IO based upon the consolidated from California, maybe some of the data that came out yesterday from Nektar as well with cabo. So it's certainly interesting in that space, and we'll continue to see that. But that's a study that we're doing in collaboration with Roche, and I would expect to have that based upon their feedback top line data there later this year.

And then survival data are also expected for CONTACT-01 by year-end. Maybe if you can talk about this study and then the opportunity in non-small cell lung cancer?

Yes. So that's a study, again, which Roche is running looking at the combination of cabo with atezo versus docetaxel in second, third line non-small cell lung cancer with patients who progressed on either a PD-L1 molecule IO-IO combination or IO chemo, either combined or sequentially. So it's really the bolus of patients after they've been exposed to a BEV-based regimen in the frontline city, which is actually a very large unmet medical need. And there hasn't been a lot of deep work there and certainly a lot of patients as they progress are looking for better therapies and better options. So again, that's on readout. Its final survival end point this year, it's a big market, a success there with meaningful -- clinically meaningful data to really add a lot to patient benefit potentially going also for top line growth.

And you're comparing cabo to docetaxel. Can you remind us what the bar is on survival for this patient population? And like what kind of median survival or hazard ratio do you need to see?

Yes. So we haven't talked about the math, if you will, that went into sizing the trial. So I'll avoid answering that question. But certainly, chemo is 10 months or so in that range based upon kind of both contemporaneous and kind of older data. Now what that looks like post different segments of the IO frontline setting, we'll see that hasn't really been tested that well in the past. There are some recent examples, but I think just points of points in time. So we'll see. So it's a very -- again, we're driving the science forward. We're driving the clinical science for super proud of that and it's great to be working with Roche to be able to run trials in lung cancer, prostate cancer, renal cancer with the molecules from us and them. So it's a great study.

So maybe moving on to the pipeline, in June, you announced the start of the XL092 STELLAR-303 Phase III study in colorectal cancer. So can you talk about this trial and its design? And I guess, given that the endpoint is survival and you're looking to enroll 600 patients like what would be the likely next update we would hear from for the study?

Yes. We're just starting that trial. So it's hard to activating sites, getting things moving. Hard to predict when and how fast that will go. I mean certainly, the next update would probably be full enrollment, but that's a ways off in or just basically bringing up sites in countries across the globe. Again, you mentioned 600 patients looking at the predominant KRAS wild-type population. Microsatellite stable population as well. So again, the third line setting against regorafenib. So it's, again, a high level of unmet need, pretty important population as those patients kind of travel through their journey with both targeted therapies and chemo, lots of interesting, in CRC at ESMO with the some of the RAS data that came out over the weekend. So it's a great place for us to be involved in, and we had some pretty encouraging data in that population. Asked with GI earlier in the year, looking at cabo combinations with various IO molecules that I think keeps some pretty interesting. They get all the caveats of single-arm and randomized data, some pretty interesting data. So we're in that game now and we're excited to get that one moving and we expect to have a second pivotal trial with 092 starting this year as well. Details are to be talked about once we have that going.

Great. And then you're also planning to provide Phase I updates for XB002 and XL102 this year. Can you talk about these 2 programs and what excites you about these assets?

Yes, they're both really interesting. So XB002 is the next-gen tissue factor targeting ADC with the 2 components, I would say, pretty highly optimized in terms of the binding antibody being competitive with Factor VII against tissue factor, so to reduce the incidence of bleeding as well as the next-gen higher potency, better stability, linker payload from Zymeworks using this BLA backbone. So again, preclinical data looks good, super excited to be able to collaborate with iconic therapeutics to get the molecule going into the clinic at first. And then as we announced earlier in the year, basically buy out the vast majority of the rights and give us more optionality even for a second tissue factor targeting ADC with different linker payload. So lots going on there. We'll have our first update at the triple meeting in October, late October, I'll avoid preempting that now. And as the abstracts come out and the data comes out, we'll be able to talk about that more then. But I think it just reinforces our commitment to biologics. As I'm sure you're aware, we've signed a number of different deals with various platform players in the ADC space. We really have a nice a la carte menu and a growing team that works through this network of collaborations to be able to move many, both bispecifics as well as ADCs forward. So it's a big focus of emphasis for the R&D group at Exelixis. XL102 is a CDK7 inhibitor. That's a little bit different, whereas 002 has got a pretty good precedent with TIVDAK in terms of at least cervical being a sensitive tumor type, 102 with CDK7 it's really asking some fundamental biological questions in the clinic, right? So we think we've got a great tool compound to be able to use to dissect what's happening in terms of cell cycle regulation with CDK, a very potent, selective, irreversible CDK7 inhibitor, and that's going to help us understand how that biology plays out relative to having a pharmacological tool that helps us dissect that out. So that one, again, we'll have data on that first data update later in the year, but I think it just reinforces the momentum that we've got and how we're pushing forward on small molecules, on biologics as we're doing a lot of BEV with the cabo foundation, providing the -- really, the raw materials and the confidence and the momentum to be able to make a difference for patients. That's the goal across the pipeline every single day.

Okay. Well, maybe in the last few minutes, maybe one more question, and this is on your East Coast presence. Can you remind us the reason for expanding to the East Coast, like why now? And then what's the latest update? And how does that East Coast presence play into your vision for the company over the next 5, 10 years?

Yes. So to a large degree, we're in the talent game, right? And there's a lot to be said for what's happened in the oncology space over the last -- the last 15, 20 years, right, in terms of where the center of mass of oncology R&D is. Now 20 years ago, it was across the Bay in South City at Genentech, right? I think their success and others has really reignited the oncology passion and investment within big pharma. And I think today, at least from my point of view, you think about the tri-state area, however you want to define that relative up and down the Eastern seaborne. But it's -- there's a lot of great talent on the East Coast that we think is a very attractive place to put a stake in the ground and say, we've got [ EXEL West ], if you will, in Alameda, where we've got a strong presence and a great track record of success in recruiting and building, and we want to complement that on the East Coast as well, be able to tap into all the great talent here from kind of the big pharma perspective as well. So we started that off early in the year. We have temporary facilities as we build both office space and labs to be able to have a full R&D function. Vicki Goodman, our new CMO, who came over from the Merck is in the Philadelphia area. So we're building that with that in mind as well. So she's kind of running that process as we building that up with the strong teamwork and IT support to make that link to work well. And I have to say, we've had great success in bringing in talent as expected or as hoped from big pharma players for people who like our culture, like our style, like our overall approach to high-end risk-taking R&D with the financial phenotype that we present with very big cash position, free cash flows every quarter, in a way that really resonates with them. So we've added a lot of very experienced people already in the last few months on the development side, on the CMC side, within project management, within other groups that allows us to really feel good about how that's going. And that's always autocatalytic as you bring in more people and they get excited. They bring their friends and all of a sudden, you've got a full team in place. So that's gone well and that will continue to be the case, hopefully. And the whole goal is to have equally distributed resources and talents that are working together in a very integrated fashion to be able to move our initiatives and our science forward to help patients to grow the business.

Great. Well, looks like we'll have to leave it there. Thank you for your time.

All right. Thanks, Jeff.