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

Okay, Thank you so much. Good morning. My name is Peter Lawson. I am one of the biotech analysts at Barclays. Welcome to the Barclays Global Healthcare Conference, we're in Miami and if you have questions -- and from Bloomberg, my associates are also online, so do ping your questions if you have any. And any questions from the room, let me know. And really pleased to have on stage with me from Exelixis, the management teams, we've got Andrew Peters and we've got CFO, Christopher.

Thank you.

Long day. And first question really is just as we think about IP, I know there's not much you can kind of say around IP. But just how much time does it kind of take internally, how much effort as you kind of plan around IP, that would be kind of a good starting point?

Okay. Good. Yes. So during the course of today's discussion, we'll be making forward-looking statements, and we refer you to our SEC documents that show the risks encompassed in our business. So your question is around the IP and how much time does it take? I mean it takes time. It's really, Mike and the legal team that it takes time for. And it's really around -- now it's -- we're kind of on the glide path to the decision, which, as Judge Andrew said back in October when we finished the trial that the decision -- his plan was for the decision to come in the spring of this year. So it's -- we're getting towards spring here.

We get a lot of questions this week. The East Coast Spring, West Coast Spring, California Spring, it's Spring is spring.

Spring is spring. okay. There's no kind of final guidance. You can kind of heads up when the decision is coming? Or how does it value to you?

I don't actually know if we get a heads up or not. That's part of what the legal team does. So I don't -- I can't tell you. I know the answer to that question.

And how does planning happen with the decision around IP, how are you kind of thinking through whether effects guidance or internal capital allocation. So when we get an outcome of IP, whether it be a press release with other details in there and how it's affecting the paths of the company?

Yes. I mean -- so I guess a couple of things here, right? I mean we have a clear path from a composition of matter perspective until most of '26. So we have some time here, right? We're going to continue the development of zanza and XB002, as we've laid out already. I don't want to speculate on what we put out in a press release or not. But we've been through significant events in the company, and we feel we've reacted appropriately, including getting bad data back in 2014. So we will do the most appropriate thing to manage the company as we see fit to properly affect our strategy.

Okay. And it would be the case? Or is it kind of another -- why is we're thinking through this, but is it the case of there's an outcome, [ AB ] depending on the decision and that would drive you down a particular path or capital allocation, for instance, or...

Yes. I mean we're constantly scenario planning. That is part of my role, that's part of my team's role, that's part of the management team's role to look at different strategies and understand what those outcomes could be. I'm not going to speculate on what those -- we're not going to speculate today on what those might be, but we're constantly looking at different strategies based on positive outcomes, potential negative outcomes, but we look at all those types of scenarios and [indiscernible] on for those.

I appreciate the answer. And just the impact of IRA on 2024 guidance and going forward, how you kind of navigate that if this -- I know we've heard from a number of companies that you even think about it in terms of what indications they develop first, just what's the overall impact that you kind of think through there?

Yes. For 2024 guidance, I mean, it's -- as we've talked about previously, as a company, we took a 2.2% price increase. We looked at it as basically as part of IRA, there's a penalty if you go over the cumulative inflation from 2021 to whatever time frame it is in the period -- in the future period of time. That cumulative inflation was around 17.3% when we sat there at the end of last year and determining if we're going to take a price increase or not. So we took a 2.2% price increase because we had taken the 7.5% in '22 and 7.5% in '23. And so as we look forward, the price increases are going to be determined more around the inflation rate than it is going to be around at a market rate. And so -- but when we look at the IRA and its impact on our pipeline, we do look at how the sequence of potential indications, the size of indications and where we want to go first. And so we do take that into account.

Yes. I mean if you kind of go back to our R&D Day that we hosted in December, one of the things that I think comes out to a lot of folks is kind of the balance of small molecules and biologics. And we have made that strategic decision to get into biologics and ADCs much prior to the IRA. But from a kind of balanced portfolio perspective, as you look at the potential impacts on, say, small molecules and kind of versus biologics, I think we're in a really good position as we look forward to our earlier-stage portfolio beyond just zanza, because zanza we have 3 pivotal studies up and running already. And we're excited about those opportunities and certainly wouldn't frame those as driven by IRA. It's more driven kind of by opportunities, underlying biology, what makes sense and how we can kind of shift standards of care and help patients live longer.

And clinical trial sales helped revenues through '23. Is there any kind of visibility into how they could help in 2024? And should we anticipate that ending in [indiscernible]?

So I mean we did have clinical trials last year and also in 2022. For our guidance this year, we didn't include clinical trial sales because we didn't have a clear view on what those could be for 2024. That's all determined based on the trials that are ongoing and we get orders for those, and we don't get a lot of, I'd say, visibility to what that -- when those orders are going to happen. So we didn't include them. I can't tell you if they're going to end in '24 or not. Obviously, it's trial-dependent and based on trials we're not running. So that's basically the view on [indiscernible] for '24.

And there's still ongoing trials there. So...

There are still ongoing trials. I don't know the status of those trials or how they're progressing and do they need more drug or not. But the visibility we get, which is fairly real time.

And then cabozantinib expansion opportunities. So I guess the first one is in prostate and kind of the confidence level of what kind of helps us around that for the OS benefit?

Yes. So I mean, as we think about CONTACT-02, all of the buzz around the presentation, in particular, to discuss aside. I think taking a step back, I'd point you back towards the great job that Amy Peterson did, our CMO, on the last call, really framing that trial and that data set. As a reminder, CONTACT-02 was really the first pivotal study to look at what truly is a real unmet need in the prostate space, in those patients with baseline visceral disease, high disease burden that is really contrasted with a lot of kind of the contemporaneous trials that were ongoing. And so that benefit, the PFS benefit that we saw, the HR 0.65, the improvements in the medians, we think is particularly meaningful there in that patient population. And as you dig deeper into that data set and look at the subgroup, say, in liver mets or a patient with bone mets, prior docetaxel, all of those things we saw robust and substantial benefit. And so that's the sort of data that we keep coming back to kind of contextualize it. But we do get a lot of questions on overall survival. And as we've mentioned, our plan is to meet with FDA again as that data continues to mature. One of the important dynamics, just in general for any oncology study is what PFS with no detriment to survival is an approvable endpoint. A lot of that is really to make sure that, that data maturation is long enough that you're actually not going to see kind of a slipping in the other direction of that HR going to over 1. So as a reminder, I'd ask it to you when the primary PFS endpoint hit the information of traction on the number of events for overall survival is around 49%. So still relatively immature data. Obviously, the HR 0.79 that we saw is really encouraging. We're going to continue to follow that as it matures and kind of have those regulatory discussions with a more mature stable data set just to ensure that, that detriment to survival isn't there.

Got you. And then as we think about the market opportunity for both prostate and NET, kind of how should we think about that incremental benefit?

Yes, I think both are reasonably substantial. And I think the way that we've framed both 2024 guidance and beyond is, unsurprisingly, as we kind of enter and are going through now 12 quarters past approval for the 9ER combination in January 2021. It's not a surprise that, that indication is starting to mature. If you look back at other oncology drug launches, you tend to see kind of maturation around 5 to 6 quarters after indication approval. And so we're certainly doing quite well relative to how that -- how cabo has launched so far. But as we look at '24 with a little bit of a plateauing in kind of that 9ER driven opportunity, we can look ahead to both NET and then to prostate as potential for reacceleration of that cabo franchise. To give a little bit around numbers, we're not kind of framing guidance or anything around what that market could look like. But looking at other therapies and, say, the NET space is an example, Lutathera as a radiotherapy and a lot of the complications associated with it still does amount more than $400 million in revenue in the U.S. It just shows that it's a reasonably sized incident pool and a much larger prevalent pool because neuroendocrine tumors are generally kind of slower growing, and you see kind of an accumulation of patients over time. Similarly, CRPC and kind of that post-NHT space, is another kind of significant unmet need. I think there's something around 70,000 patients or so in the U.S. And they're really trying to kind of find an effective agent that gives them a non-chemo option. And one of the things that consistently comes up for us in market research is this idea of providing kind of the first IO-based combination in CRPC and kind of all of the interest and enthusiasm from patients and investigators there. I think PJ has done a really good job at prior earnings calls and Amy as well at frame both of those opportunities. So I think when you look at kind of the cabo story over the next several years, obviously, there's the RCC component and the kind of base business, if you may. And then the reacceleration from these two new indications. And I think that kind of just speaks to the strength and the breadth of cabo, and then kind of further enhances our enthusiasm for something like zanza, which takes that cabo profile and the potential breadth across a wide range of tumor types and improves upon it as well.

There's an interesting [indiscernible] as well for the first IO combination in prostate, that's a nice leg to that. Do you think you would get priority review for NET or prostate?

Yes. I mean in general, I don't want to speculate on kind of any FDA interactions before we have them. I think one of our favorite phrases internally is not wanted to break in the jail. So usually not a good thing to kind of get ahead of any sort of FDA interactions or announcement. So kind of stay tuned on all of that.

Got you. Okay. Just maybe a couple of more questions for Chris, just around -- I know at one point, there was kind of a long-term kind of 5-year guidance. Would you have a good back to that as we kind of get an IP decision? Or is there anything that kind of triggers that new approvals? Just curious.

Yes, I guess I'd reframe it a little bit differently than guidance. I mean it was kind of what could success look like, and that's what we were trying to frame at that point in time because we were in a point where we're in a constant loop of getting a 9ER question kind of like the constant loop of what's the end answer. And so we wanted to really frame, okay, we -- if we're successful in these 5 or 6 different indications that we laid out at the time what it would look like. I guess it will depend on what the future may hold here if we're going to provide longer-term guidance. It's not our plans right now, but things could change.

We have to keep on asking about prostate and...

Possible, yes. But hopefully, it's not as long as a period of time.

[indiscernible] opportunity. I guess the other one always comes up and just can give your scale, cash flows, et cetera, kind of how you think about capital allocation, whether it's buybacks, R&D spend and/or acquisitions? And whether external or internal factors are driving that as well?

Right. So I guess, from a capital allocation perspective, March of last year, we announced the $550 million buyback, and we executed that in 2023. At the beginning of this year, we announced a $450 million buyback, which we'll execute in 2024. So over the -- let's just call it approximately 20-month period of time, we'll have returned about $1 billion worth of cash to shareholders through buybacks. We continually look at the other area of capital allocation, we continue to look at BD opportunities, right? We're looking -- we've done a really good job on the earlier stage, and that's affected some of what we're doing from an R&D and cash and expense guidance and we can get into that. But from a BD perspective, we're really looking at later-stage opportunities, and that's what Andrew and the BD team are doing very frequently. Consistently looking at different opportunities out there to bring in an asset that's later stage. We've done a great job developing an earlier-stage pipeline. And then also we reduced our expenses this year, if you look kind of at the midpoint of about $180 million, $200 million if you compare it to 2023, a significant portion of that came from the R&D side where we reduced our discovery spend, but we're taking that and investing that in the development side of the house. So it's really moving it to the moving the expenses to the development side to push products forward. So we're thinking over the next 3 years, 2024, '25, '26, probably like -- potentially 9 or 10 INDs that could come down the pipeline and move into the development side. And so we'll continue to manage our expenses like we have and make the appropriate level of investments. I don't know if you want to talk about DD.

Yes. So I think what I'd do is kind of take a little bit of a step back and point to the R&D Day in December and then a lot of the priorities that we outlined earlier this year at JPMorgan is a little bit of a bookend to kind of frame how we think about science and how we think about the business. From the science perspective, as Chris mentioned, kind of the 9 or 10 INDs over the next several years, really kind of accelerating that through our clinical development then obviously, the focus on 309, the USPI, XB002 or tissue factor ADC and then obviously on zanza. That's kind of the internal development focus, but it also framed the sort of technologies, modalities, tumor types indications that not only we have an interest in, but we have scale and expertise in as well. And so when you think about kind of that component and then the -- earlier this year, JPMorgan commentary around this is how we think about the company from a business perspective, it's kind of the blending of the two. So from an external innovation perspective, I think our messaging is our discovery organization has been incredibly efficient, incredibly effective and is generating what we think are either first-in-class or differentiated and best-in-class molecules kind of across biologics and small molecules. And then we have a desire to supplement that externally kind of on the later-stage side because we think we're pretty good on the early stage kind of IND side, but how do we kind of build out that later-stage clinical assets. And so we outlined our priorities, our expertise. And one of the messages that's really stuck with me and I think has really started to resonate kind of internally at Exelixis, but externally as well when we're meeting with potential partners or investors or anything, is this idea that we've now grown to a scale that we're a big, small company. That we can execute at scale that capability on par kind of in our verticals with big pharma. We've now run 17 pivotal studies with cabo. We've been successful in 14 of them and really have that development heft to be able to take drugs, really execute them well at breadth. And then similarly, on the commercial side, obviously, with cabo, on the regulatory side, kind of each of those things that are involved in drug development, we're kind of big company like. But at the same time, we have the speed, focus, decision-making that's kind of more of a hallmark of biotech. It's a little bit of a mix of both worlds. So as we look externally and identify assets that we have high conviction on and that's really kind of the key here is we're not going to bring in some later-stage assets that we think either may not work clinically, may not shift standard of care. And if that doesn't happen, it's probably not going to do well commercially. And so our filter there, our bar there is pretty unique and we want to make sure we get it right. But I think we have the opportunity to begin to leverage the scale that we've built internally to kind of bring in those external opportunities and really kind of go off and run and build value there.

Because it feels like the sense of wanting to make an external acquisition for a later stage is increased -- has definitely increased over the last 6 to 9 months from the...

Yes. I mean I think the one caveat to all this is I don't think we have a mandate to go out and do a deal for the sake of doing a deal. I don't think it's going to help us internally. And certainly, it's not going to help patients or investors kind of build value if we go out and do some transaction because we can add another bar to the pipeline chart and kind of get everyone excited about something, if it really doesn't have that cabo-like effect of shifting standard of care, helping patients live longer, then it's not going to do well commercially. Or if we think the clinical risk is probably too high or any of those things, that's not something that we want to do. I think when we choose to pursue a transaction that's actually come from a place of high conviction that we think this is a novel mechanism, and this is a best-in-class modality [indiscernible] opportunities that we think we can really kind of leverage. That's the sort of transaction we're going to do. So it's really not -- let's do a late-stage deal because we have to. It doesn't make sense for us. So we have high conviction across each of those functional groups and move from there.

And has there been kind of increased external pressure, activism and et cetera? Has that kind of driven that? Is it lower interest rate environment? It's kind of helps add to that?

Going to a later stage?

Yes.

No, I don't think it's really just an evolution of our pipeline. I mean, our strategy to bring in products that are later stage, just trying to build that piece of the strategy in so that we can continue to build the company. It's not -- and that interest rates are obviously up, but our ability to do a deal right now is pretty significant. We have $1.7 billion of cash. We have the ability to borrow because we are a positive EBITDA company. So we have a lot of -- we have a broad range of possibilities just based on our financial wherewithal through our balance sheet.

Yes. So if you look historically, and a lot of the deals we've done that have been on the earlier side. It's kind of been done in parallel as our discovery organization has kind of ramped up and become productive. And so as our internal kind of discovery effort has [indiscernible] up and been exceptionally productive around generation of new, novel best-in-class, first-in-class [indiscernible]. Then we've kind of shifted that external focus away from those earlier-stage deals to kind of later stage opportunities. We've always evaluated and looked at it. But again, it's kind of that conviction level is that relatively high bar filtered through the cabo lens, cabo's successful not because it's the first [indiscernible], but it's because we think it's kind of the best and most differentiated that's been able to generate clinical data that has shifted standard of care for patients. And that's kind of the formula for success that we want to replicate over and over and over again, both internally and externally.

It seems -- I guess, the last few seconds. You're not adverse that debt is there? A leverage ratio you kind of have internally externally...

No, we actually -- no, we don't -- I mean, we don't have necessarily a debt -- debt-to-EBITDA ratio we're going for. I mean it's -- reality is when I joined back in 2015, we had close to $500 million of debt and a $900 million market cap. Little out of balance there. We'll definitely keep it with in balance of what the norms are from a debt-to-EBITDA ratio. So...

Perfect. Thank you so much.

Thank you.

Thank you. Pleasure. Thank you.