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

All right. Good morning, everyone. For those who don't know me, my name is Akash Tewari, a pharma and biotech analyst here at Jefferies. I hope you guys are all enjoying our health care conference and the weather outside. It looked like kind of -- it looked like Blade Runner, it was a little surreal. But anyway, I have the pleasure of hosting Exelixis and Mike Morrissey, President and CEO. Mike, maybe I'll hand it off to you for some brief introductions, and then we'll get into some Q&A.

Good. Sounds good. Good morning, everybody. Again, Mike Morrissey, Exelixis. Before I begin, I'll be making forward-looking statements today, so please see our SEC filings for a description of the risks that we face in our business. Go ahead.

Perfect. All right. So you and I were both at ASCO, our -- and we were talking. It seems like -- the conference was a bit more quiet than maybe it's been in the past, no standing-ovation data sets, let's just say that. But I think the -- covering your company, it does take a lot of work because there's so many indications, there are so many different lines of setting and then cancer is always evolving so much. So I think for a lot of investors, it's, okay, let me just put in whatever number that consensus has for cabo and then I'll -- that's all I'll do for now. And I think certainly, if you look at consensus, there's a lot of credit to RCC. There's not a lot of credit to the rest of the pipeline or even additional pipeline expansion with son of Cabo or cabo itself. So what did you see from ASCO in terms of building that longer-term story that could suggest that this is more than just an RCC opportunity with your TKI franchise?

Yes. Well, great way to start the discussion today. So I think the biggest -- look, the feedback we get from investors across the board is that the ANDA situation with cabo is the biggest overhang in the story. And I think a lot of people don't even start doing work to understand cabo or zanza or the pipeline because the binary nature of the -- why don't you sit down? We can have a...

I'll sit down.

Okay. My neck here. The binary nature of the ANDA situation is such that it really -- it's a road block to -- a lot people are actually digging in and doing the hard work to understand the pipeline. Look, cabo has really done quite well. We've achieved the goal. We -- as a company, as individual doing R&D, as -- certainly as a community, I think we, as an organization, focus on -- we have one goal and that's to improve standard of care for patients with cancer. And it's -- when you kind of take that down to the most minimal level that's what we're all trying to do. And when you do that, when you actually change the vector for patients with cancer, you can help a lot of patients and you can make a lot of money. And that's been the case with cabo. So we've gotten 6 approvals. We've ran -- I think we're up -- up to 13 pivotal trials there. So as an organization, we've been able to execute extremely well. We have 6 approvals. We did about $1.9 billion in global revenue in 2022. If you look at all the molecules from kind of biotechs that were launched since 2016, cabo is the #1 agent in terms of revenue on a global level. I think the closest one is maybe half of that or not -- barely half of that. So we really have, I think, shown the ability to take chemical insights, early preclinical insights and turn those into meaningful diverses for patients, and that drives the revenue. And that continues, right? So the -- certainly, RCC is the most sensitive tumor type. We had data with zanza, a little bit of an upshot on the Q1 earnings call. A lot of people missed that, which was disappointing to a certain degree, but it just, I think, reinforces the fact that people just -- with the ANDA there, they're not paying attention. But with a 50% response rate in the third-line RCC population that are cabo naive, I mean that's meaningful with a adverse event profile that is significantly improved over what cabo has relative to the severity and the incidence of the main adverse events. So we feel like we've got a lot of traction, a lot of movement, certainly in some of the some of the highlights at ASCO that I was excited about was actually finally getting out the CONTACT-03 data, and I think that was a negative trial. So cabo single-agent versus cabo atezo in a second, third-line population post IO, the 2 arms were identical. But the interesting thing was that cabo -- single-agent cabo by itself is the control arm performed extremely well, right? The PFS was almost 11 months. Response rate was in the low percent range. Compared to what we saw with METEOR in a pure second-line population, kind of pre-IO days where the PFS was 7.5 months and the response rate was below 20%. So really highlighting what a molecule like cabo can do either on top of an IO, after an IO, and certainly then with what we believe is the third-generation best-in-class molecule like zanza that can pick up where cabo is leaving up. So lots to do, lots of excitement going forward. So -- it was really good to be at ASCO to just feel the urgency and the -- back at full strength, there were 40,000 people there, plus all the swifties running around in their glitter. That was a -- it was great weekend, for sure.

Yes, there is probably not a lot of overlap between those bubbles.

I hope not, but you never know.

So I will say, critiquing myself, it's not like I sat here and said, "Wow, that signal that you showed in son of Cabo is something investors should be paying a ton of attention to." And I think part of that is it's top line data. We don't know how robust it is. We don't know really the durability of the signal that you're seeing -- and then also, I think, historically, the way that you guys have described son of Cabo, I think people look at that asked and they say, okay, like shorter half-life maybe better safety. But the efficacy angle was not maybe inherently obvious when you think about how the drug was designed or at least described preclinically. So number one, what makes you so confident that, that early signal that you're seeing in, to be fair, third line, it is -- it does stand out? What makes you confident that that's a signal that will hold up over time? And then number two, talk to me about son of Cabo and not just the safety advantage you might be able to have, but also what you're seeing that could suggest better efficacy.

Yes. Well, first, let's agree to call it zanzalintinib or zanza because son of Cabo is somewhat of a -- it's not a pejorative, but it doesn't really frame the opportunity here, right, from the standpoint that it really is potentially a best-in-class molecule. And what's interesting to me is we had, I would say, marginal, minimal follow-up from the sell side after our Q1 earnings call with that little slide and a little bit of data. On the strategic side, on the -- I would say, the biopharma side, the inbounds were fast and furious, okay? Because I think people who do this for a day job in terms of developed molecules and combination see the value of what a molecule with cabo's activity with a more user-friendly not only half-life of tolerability profile could do across a range of different tumor types and combinations going forward. So I think that's the issue. I mean, what stands out about zanza? Well, I can't think of very many second-line, first-line, third-line molecules that have a response rate that starts with a 5, right, right? So there's very few examples of that in the cabo pretreated arm of that. And well, caveats, small data set, early days blah, blah, blah. I accept that, and I've said that. We've had a 25% response rate. So patients that either saw a cabo in first-line setting, in a second-line setting, maybe had stable disease, maybe had progressive disease as their best response, then moving to zanza and having robust clinical benefit, including responses, I think that's notable to be able to salvage a cabo refractory patient with a molecule that is based on the cabo scaffold, but has different overall attributes, I think, is notable as well. So -- but look, nothing gets in the way. No one's going to take -- look at 30 patients and say, okay, this is going to be the next big blockbuster, obviously. But I think it adds a lot of support to the notion that, look, shorter half-life, every VEGFR targeting molecule will, at some point in time, need to be dose reduced. If that dose reduction holiday or that dose hold holiday is a couple of days as opposed to a couple of weeks, that makes a difference for patients, that makes a difference prescribers, for the nurses involved. If it's more user friendly, if you keep patients on drug longer, you're probably with the same inherent activity liable to have better outcomes. And again, it's all about raising the bar for patients, right, in terms of going...

So to that point, sure, like just to hone in on the efficacy advantage that could be here, with a shorter half-life molecule is the pitch here, I'm able to get to higher Cmax drug concentrations? Or it seems like what you're telling me is, actually, it's more that we're getting better cumulative exposure because there's...

Probably the latter. Cmax isn't going to change that much, and we know that already from some of the early PK. But it's can you keep patients on drug [indiscernible]? And that was the -- I mean, that was the charm. If you think about the cabo story over the years, starting at 140 milligrams per day going down to 40 milligrams per day, the trick with 40, why we have best-in-class data from 9ER is because that dose is the maximal balance of efficacy and tolerability. Patients stay on drug longer, and they feel better, right, relative to SUTENT. So that quality of life component of that has played a huge impact on patient outcomes on how patients feel and our ability to speak to that as we market the drug.

Understood. Now you've tried cabo and obviously, a lot of different indications. If you were to say, zanza -- like if you said, if we had zanza instead of cabo in XYZ trial, I think we would have seen a different result because of this enhanced exposure benefit that you could be seeing. Which one of those trials do you think would stand out where a molecule like this could really have an efficacy...

Well, it's not just cabo, it's other TKIs in the space, too, where there's been clear signs that cumulative toxicity in combination has actually driven a unfavorable outcome from an efficacy point of view because you can't keep patients on drug long enough to have the ability to show benefit over the control arm, right, which is usually a checkpoint by itself, right? So I guess the -- again, with all the caveats that I've got a hand in -- early data, I think the hypothesis is all of them right, if you believe the early preclinical data, if you believe the early clinical data in terms of what's happening with Phase I, Phase II combination cohorts in various tumor types, I think it's a wide open white space for us, right? Plus the fact that maybe even more importantly is, can you go up? Can you go up into the adjuvant space? Can you go up into the neoadjuvant space? Can you take cabo -- or can you take zanza with a checkpoint, say, in adjuvant RCC and improve upon what's there with the checkpoint inhibitor already? Can you go -- we have a lot of really interesting anecdotal data in terms of the neoadjuvant setting where a patient comes in, can't be resected, can have their tumor or their kidney removed because of just the local kind of invasive effects of that tumor, can you shrink that to the point where there's a surgical resection possible? And there's many examples with cabo, again, anecdotal, where you've seen long, long CRs by doing that first. So again, that's a huge opportunity from a market expansion point of view. You can go laterally across tumor types, again, front line is better. But you can always go up in terms of adjuvant, neoadjuvant with the appropriate combinations to be able to afford more benefit and then more topside revenue growth. But it's all about activity and tolerability. If your therapeutic index improves, then those become much more amenable, correct?

So maybe 2 more on zanza. A, you mentioned pharma, and it seems like externally, there was a lot of excitement about that asset. So -- and frankly, I should know this off the top of my head. Does Bristol have some type of like right to first approval -- refusal in terms of partnering with this asset? And then....

No. So we have -- Yes. Yes, so we have existing relationships with both Roche and Bristol on zanza checkpoint combinations, but they're pure clinical collaborations only. We're not tied down with anybody. We like to collaborate. And to be honest, I mean, that was a big part of the success with cabo, right? We had -- of the 13 pivotal trials that we've either run or are continuing to run, 12 of which have now read out, the vast majority of those were done in collaboration with pharma, either partners, commercial partners, Ipsen and Takeda, and/or clinical collaborations like BMS and Genentic. And -- it's -- Chris and I often laugh about this. But we -- 60% our funding for cabo development was paid by other people, right? $450 million worth of funding since 2017 was chipped in by our partners and collaborators. So it's a great way to spread the risk. If you win, you win big and everybody wins, then on the checkpoint side, on the TKI side. So -- yes, it's a great way to operate going forward, for sure.

Understood. And then maybe lastly, just on your clear cell trial. I feel like that is another trial that just got listed. I think a lot of people kind of ignored it, but it is potentially practice-changing in terms of what your design is. Talk to me about the size of that opportunity, when that data could potentially read out? And then why you kind of went with the approach you did in that indication?

Yes. So just to be clear, that's non-clear cell.

Sorry. Not clear cell, non-clear cell.

It's -- again, it was along with third line colon, it was the lowest of low-hanging fruit in terms of what's out there, standard of care, all the TKI checkpoint combos, their labels cover all forms of RCC, including clear cell and non-clear cell. There's very little existing data supporting the non-clear cell part of that indication. So again, from a sales marketing point of view, generating strong data could be a very important way to then market the drug. So it's low-hanging fruit. It's a served, but I would say, understudied population, and it's the first of many things. Now non-clear cells, 10%, 15% of the overall population for RCC. So by itself as a stand-alone. It's not nearly enough. It certainly is a -- it's a fraction of the income that we're generating and revenues that we're generating with cabo, but it's a good place to put a stake in the ground, invest there and go forward. But it's -- you'll see more with renal as well other indications with zanza going forward, for sure.

Understood. So we'll touch a bit on IP. And I realize there isn't a lot you can comment on. So maybe let's hit a bit on the regulatory standard. I mean, there was new draft guidance that was put out for cabo generics and some of the potentially additional requirements that generics would really have to hit in order to show bioequivalence and be able to have an ANDA that's good to go. Is this something -- given -- the way I kind of see it, it's like -- it's going to take till 2026 for the composition of matter patent to go off. So it doesn't seem like the end of the world if there are additional hurdles, but then part of you says actually this could be more complicated for generics and people are really appreciating. So what was your read internally of [indiscernible] guidance?

Yes. It's modest tweaks. I don't see it as a rate limiting or as anything new or novel. Look, the FDA is continuing across the continuum of things they work on to raise the bar for manufacturers in terms of patient outcomes, safety, efficacy, and that's great. It's good for patients, keeps everybody on their toes. I think the -- in terms of the typical generics, you think about what Teva has in the queue, they have tentative approval for N2 form, it's a pure generic play. That whole litigation is stayed while we work out the MSN issues. I just don't think these are really needle-moving types of things. MSN is what it is. It's a different polymorph. They have their own challenges built in, in terms of both chemical and crystal graphic stability. They don't have tentative approval yet, at least as of this morning, when I look every day. So that's a whole different story. We can talk about that more if you want.

Sure. Yes. I mean, this is something that it's hard to appreciate because you never know until you actually start getting this into litigation, but there is this sense you and Bristol really figured out all of the commercially viable scalable forms of cabo, and that's what you patented and kind of reinforced with your polymorph patents. And certainly, we've seen 2 CRLs from MSN. There are other companies that have filed patents for novel forms of cabo. A very few of them have actually moved forward with the ANDA. So...

Have you seen any other ones....

I -- as of now, no. So kind of remind us your confidence and including what you may have seen with MSNs in itself, is it possible to avoid the 776 patents and your other polymer patents, while also having something that would fall -- be considered commercially acceptable for the FDA?

Well, that's -- I mean that's an objective view that the FDA has to take. So I'm not going to certainly punch above my weight on that one. They are the ultimate arbiters of what's successful and what's not. And I think their bar for what they want to see is look, it's reasonable, it's in the best interest of patients. And they're not -- they don't play favorites in terms of who's first and who's second. They just want to make sure that whatever is out there is workable for patients. And that goes from the standpoint of all the inputs around the chemistry, around the PK, around the stability, which is super important but also the impurity profiles too, right? So all those things come into play, and that's one of the patents being litigated in MSN2. The second case is around an impurity patent that we have issued in the U.S. and Europe, which just reflects the kind of the care we take in terms of doing right science, the right chemistry, the right characterization. So we spend extra money, extra time to make sure that what we deliver to the FDA and, ultimately, the patients is as perfected in terms of its process, but also the analytics as possible. There's so much in news in the mainstream media now about generics with nitrosamine contaminations, other carcinogens, other genotoxic agents. Same issue potentially is there with cabo. Some of the pieces that we use to put cabo together have, by themselves, they're small, they interpolate well. They have the potential to cause harm if they're contaminants or a byproduct from the synthesis. Well, we've gone to extra lengths to rework the chemistry, to rework the purification schemes, to be able to make sure that's not the case. And of course, we've patented that. So it just further reinforces the fact that, look, we're here to win the short game, we're here to win the long game, and the collaboration with BMS was great for us because back in the 2008, 2009 time frame, having that level of expertise help us work through the details on picking the best polymorph, on characterizing the best polymorph, making sure the chemistry the large-scale API production was first class. All that pays off when you have a successful agent that's making billions of dollars of year, helping tens of thousands of patients every quarter live longer, right, that's what you want to do. So I feel really good about that. The chances of another polymorph popping up is low. I think the challenge is that the [indiscernible] presents are substantial and the fact that we've seen 2 CRLs so far and some of the stability data that came out of trial. I'm not surprised by it, not at all.

Got it. Now talking about kind of your next set of patents. And -- to call them polymorph patents is -- it's -- I don't even know if that's true because there's no peaks...

There's no -- they're not polymorph. They're not polymorph.

Yes. They're crystalline...

Yes.

So I guess, when -- let's say someone looks at this for the first time, the first thing I think they would think is, wow, very broad patents. Certainly, a non-infringement seems very unlikely. It would probably be more of an invalidity ARC because almost [indiscernible], you're going to be a [indiscernible] cabo, right? Otherwise, you're not a trial. So talk to me about what you learned in Europe, right? Because it's a different legal standard for sure, but you do have the potential to do these type of straw man arguments. What did you learn after these patents were litigated for 13 years in Europe that gives you confidence that from a non-infringement and invalidity perspective, you're in a strong place with the second MSN [indiscernible]?

So just to be clear, there's already -- I think, the other side already admitted to infringement. So it's really a validity question. And that was the main question in Europe as well. I won't go through all the data which we have, which is, I think, very supportive of the novelty that was basically discovered. I think the important framework is that the legal systems are different. The standards are somewhat different in Europe, especially on the appeal, you have a panel of 3 patent attorneys who basically have a 1-day hearing and make a decision on the spot. Bottom line is we won the challenge. So there were 3 generics that came forward to challenge those patents. We won the challenge initially. Those were -- that ruling was appealed to this appeal board, and we won that appeal as well, hands down. And so off we go, right? So -- but I think it just reinforces the depth of data we have around why we chose the [indiscernible] for superiority of the crystal and material compared to other forms that are viable, right, in terms of overall use for a molecule like cabo, which is, I would say, highly insoluble and has challenges as an insoluble drug in terms of just basic oral bioavailability and things. So -- yes, it will be interesting, right? And then you throw the impurity patent on top of that as well. So again, it's a legal proceeding. There's always risk involved there. We like certainly the data, the patents, the team we've got in place, and looking forward to getting this behind us, for sure.

Understood. Now a question I'll get often from my colleagues on the buy side is would they settle? Why would they settle? And -- to me and -- tell me why this the wrong way to think about it? The chances of you settling -- because it seems like you're so confident you're going to win from a legal perspective. So the carrot that MSN has is really your stock will be depressed for XYZ amount of time while this kind of goes on, right? And -- but as you're approaching October and you'll probably get a decision at the start of next year, that time arbitrage, that carrot that MSN could offer, is becoming less and less attractive. And probably in your head, you're like, look, we've got zanza, we've got enough of our story, let's just play this out, right? Let's just go out and win and I can wait another 3 months and just have an outright victory.

Yes. Yes.

How do you think about the balance of removing an overhang now versus just getting it fully resolved and not giving up anything as we're getting deeper and deeper into 2023?

Yes. So we've looked at this from the start very objectively from the standpoint of the science, the opportunity, the opportunity costs, the time as it goes, right? So I think it's been -- I've seen a very clear kind of frame shift with investors since JPMorgan beginning of this year. I think everybody sees this kind of on the glide path to landing. And I think that's become a less of a topic. Certainly today, and most one-on-one meetings that we have, the ANDA comes up towards the end, whereas in the past years, it has come up for a second or third, right? So it's really -- people are super excited about zanza. I think the ADC resurgence has gotten -- 002, prime -- a lot of prime time kind of upfront stuff as well as well as our complete ADC pipeline. So I -- again, would we settle if the terms were right? Absolutely, right? Is there an opportunity there? Sure. Are -- do we have a pretty stringent criteria and know where the bar is? Of course. And we'll see what happens, right? So in terms of where things stand in terms of the run up to MSN2, there may be an opportunity, and we'll see where that goes. Never say never. But it's -- we're very objective and I think, thoughtful and pragmatic about how to proceed here. But there is -- as you said, the time is on the horizon where we'll be at trial, and we like our chances there, big time.

Understood. Well, we are out of time.

All right. Super.

[indiscernible].

Yes, great. Yes. Good to see you again. Thank you.

All right. Thank you.