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

Good morning, everyone. I'm Sean Laaman, Head of U.S. Mid Cap Biotech Equity Research here at Morgan Stanley, and welcome to our Global Healthcare Conference. Before we begin, just to make you aware of some important disclosures for those disclosures, please visit the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. After this session, we have the pleasure of hosting Exelixis' and their President and CEO, Michael Morrissey. Thank you for your time and pleasure to host.

Yes. It's great to be back. Big invites. Before I begin, let me just remind do my safe harbor. 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.

Okay. Thank you, Mike. And you'd be actively involved in this first one, I believe. So how is the rise of China originated innovation, changing your competitive positioning, if at all, in your R&D and BD playbook? .

That is a great way to start the dialogue, and we could probably spend 33 minutes on a topical by itself. First, let me say again, it's great to be here. Really appreciate the -- and really value the relationship we had with Morgan Stanley on the reset on the bank side. It's just been just great. you guys for us. . So let's talk about China. And it's really a question of, at least in my mind, innovation first, and how you maximize the value of innovation, how you access innovation, how you pay -- how you value innovation, right, all across the board. No surprise, I think, to me and to us that there's lots going on in that space. If you go back even 10, 15 years, they were the top 2 or 3 checkpoint inhibitors, and then there were another 40 being discovered and developed in China. So that I would say that region, that country certainly is investing a lot in biotech right now. There's lots of movement inside China, in terms of BDX China, in terms of U.S. companies and European companies accessing that. We look at that very closely. I guess our focus is more on novelty than fast followers than kind of me-toos. And there's a lot of all those. So the question is really, how do you parse the risk award equation. How do you look at data preferably asymmetrically in terms of what we have in our pipeline, where will it be to move our pipeline. We have adopted this multi-product, multi-franchise approach. I mean cabo is a great example of that from the standpoint of a compound that has been looked at in tens, if not more pivotal trials, has labeled with 8 indications. So we're trying to complement that with Sands and a full pipeline. Sources of innovation that we look to buy, to partner or to collaborate is really important for us. So I think collaborative opportunities makes the most sense. But we're open for business and looking very clearly at trying to expand our portfolio of franchises, that could certainly include assets ex-U.S. side of the company.

Yes. Fantastic. Thank you, Mike. Next question on the macro side. So are you implementing AI across your business? And if so, can you point to an area where it's changed the decision cost down even POS?

So it's another great question on the macro side. A lot of companies are kind of opening the floodgates in terms of the kind of the -- I mean, on the expense side, to embrace AI and kind of an uncontrolled kind of do everything at once framework, that's not how we're operating. So from my point of view and what we've done, I think, within our business units within our IT infrastructure is really asked the question where do we have highly curated very valuable data because from our point of view, certainly, what I believe in is that AI, if you've got the right data is a very good way then to be able to understand the value of that data, maximize the utility of that data, analyze that data, both faster, but also maybe more deep in the process, right? So we've, again, got decades of data. And certainly, if you think about what we've got within discovery, first of all, but also maybe more importantly, within development, but critically in commercial. We have very, very deep data sets of longitudinal curated data that we've invested a lot of time and a lot of money in terms of kind of building on and maintaining the depth and quality. So we're using AI. Chris and I, we prioritize for the team kind of where we see the biggest potential impact of AI on our existing kind of data sets, data analysis, data utilization. And then the team we have can execute very quickly. So I don't think we're spending a lot of money, but I think we're doing the right level of investments and the right focusing in terms of priorities to maximize impact. And I can tell you that some of the things, especially in the commercial world, where we're already strong, I think this has the ability and the opportunity to make us even stronger. But it's all around speed, quality and security because those 2 -- those -- the speed and quality by themselves are great, but if you can't do it in a secure fashion as we've seen some of the more public examples that can be a real problem. So I think those three pillars are driving this forward, but in a very controlled kind of prioritized manner.

Got you. And last question before we dig into some Exelixis specifics. But which policy variable is it FDA Medicare negotiation, MFN, global pricing matters most of your economics? And what have you changed, if anything, because of any of those?

I guess I would answer yes to all those. Yes, I mean that's the bucket list of kind of topics and risks that the whole industry is facing and certainly us as a very important commercial concern are dealing with on a daily basis. The playing field is shifting. It's very dynamic. I think the way we look at it is there's today, there's tomorrow, and there's the future. . And you want to be really careful how you navigate today so you don't complicate what you might do or could do tomorrow and what might happen in the future. And for us, the time lines are basically real time today versus even after the midterms in '26, the time between '26 -- midterm in '26, it's just a few months from now, and then the next kind of election cycle and then new administration in '28 and then '28 to, say, maybe even early 30s. And I think the dynamics here are super, super important and nobody has a crystal ball into what could happen even a couple of months from now or even early '27. So we're -- we've got a great team. We've got a super strong team in D.C. I'm in D.C. a lot, on the Hill a lot, talking to members about things that are important to the industry things that are important to us in terms of whether it be pricing, whether it be regulatory issues, whether it be external innovation and competitive threats, all those things I would say, from an industry point of view, certainly, pricing, the whole MFN issue are top of mind for us. Lots of noise in that system right now. I'm not sure how much content is there. Maybe we find out in '27, maybe we don't, depending upon who is controlling what within Congress. But I think it's just so important for everybody to look at the landscape as -- it's just not today because there's so many other moving pieces that could impact our industry and our ability to deliver really novel medicines to patients in the out years, depending upon how this gets played in the short term. So stay tuned. It's going to be a wild couple of years, for sure.

Thank you, Mike. Now to get on specifically to Exelixis and Cabo. So solid growth at Q2, the kind of macro kind of not like -- like how do you think about the growth of the core carbo franchise before Xansa takes over? Are you managing the to deliberate handoff or letting them run independently in overlapping settings.

Yes. So -- the base business with Cabo continues to be really strong, pleased to take a step to look back where we were literally 10 years ago when it launched cabo and the amount of flack we got in terms of how we may or may not be able to compete in the solid tumor oncology setting with another TKI versus kind of where we are today. I mean, the run rate based on our Q2 2016 numbers is north of $3 billion a year globally. So it's a major drug. And certainly, we've had a big part of that in terms of how we've focused our clinical and regulatory and commercial efforts to grow the number of patients we serve. And to use as a kind of a foundational platform for how we build Zanza. So adding net on was a super important next step for us relative to building the franchise. It's growing a little bit shallower rate than we thought it would, and that's okay. It doesn't really impact our view on what if you use the pharmacokinetic terminology, what C-max could be, right? It's just going to take a little bit longer to get there, and that's fine. The team is doing great. And I think the effort is really understanding that this is a little bit different patient population than you normally see with metastatic solid tumor opportunities. Zanza following up beyond that, look, we've got the opportunity to build a durable second franchise that we think could exceed the cabo opportunity. maybe by several fold if we're successful with first wave and now we can get about the second wave of pivotal trials. It's one that continues to really get us excited. And the opportunities are broad and deep. And our job is to parse the risk and capitalize on the opportunity for success and make sure that we're serving as many patients we can across lines of therapies, across combinations across different histologies as we can. So lots to do there. It really plays into how we view building value through franchises. And we talked about at our R&D Day last year. Cabo is first. We think Zanza is going to be a great second a, if you will, and there's more on the way. With the pipeline opportunities externally to be able to build this multi-franchise view of success for the business as a whole.

So thanks, Mike. And just to touch on some recent patent news. So how do you think about the Cabo exclusivity runway out to the Federal Court decision with MSN and on handicaps, how are you thinking about potential entry in any competitive pressures on Cabo. From our understanding that the product is not AB related and not substitutable at the pharmacy?

Yes, yes. So look, any successful drug like Cabo is going to get it's going to get challenged. It's part of our -- our job is to be on the offense in terms of adding indications, adding -- making sure we're delivering on growth Q-over-Q, year-over-year, making sure that we're operating at a very high level of expectations for the team. . On the other hand, that we have to play -- have a strong defense, right, from the standpoint of making sure that we're doing the right work from a patent point of view, from a legal point of view to be able to maximize the value within the time frame that we've got. So as you know, we've settled with several generics for an entry date of January 1, 2031. Those that haven't, we're litigating with. Again, the appellate decision that recently came out was very strongly supportive of our approach. And there's other trials planned to continue to reinforce that I don't want to speak to those right now, obviously. But we're certainly going to continue to the appropriate level of investment and prepping to make sure that we can maximize our chance success there across all challenges. 505(b)(2)s, I won't mention any names, but again, we're not too concerned about that. As you mentioned in your question, history would tell you that those have a tough time of competing without additional data. The best example of a success with 505(b)(2) is the ABRAXANE example where Abraxis brand pivotal trials, they went into large patient populations did the right work to be able to frame the opportunity outside of making those big investments, it's really hard for all the obvious reasons to be able to see erosion or penetration. So Look, we have to be worried about everything. We think about everything, we track everything. We're not too concerned about that. We've got to keep our eye on the ball in terms of the cabo based business, growing that maximizing the value of Xansa and then pushing the pipeline forward. So that's more than enough to occupy my time for sure.

Maybe moving on to some Zanza questions, super important for the long-term future of Exelixis. And we're anticipating the metastatic colorectal cancer launch. And that's been pushed back by 3 months. So just for those that might not be on top of the new -- why the pushback? And does it change in any way, shape or form how you're thinking about the launch and your allocation of resources to do that.

Yes. So again, we had an 8-K Friday morning. Basically, we setting the PDUFA to Mark. I can't add more than what was in the 8-K, so I'd certainly refer you and listeners back to that. It's just the way it is and hasn't diminished our interest or confidence in the opportunity. We are essentially launch ready right now. As you know, talked about this earlier in the year. We added out the full complement of reps to our GI sales team late last year, early this year to kind of pick up the slack on the net side in anticipation of kind of getting that to a level where at the appropriate time, we could then kind of move full force into CRC based on the 303 data. That's still the plan. We just have an extra quarter to do it, which is fine. It's a really important first launch for us. Obviously, you got to get through the regulatory steps, and we community doing that. I still find a very reassuring back in our market research. The 303 data plays really well in market research, especially in the community. The just position between what we did in 303 and what we're planning to do with 316 this in post definitive therapy kind of maintenance approach almost from the standpoint of using the Natera technology to identify high-risk patients. 303 and 306 play together really well. We talked to investigators about one and they bring up the other in vice versa. So -- we're -- again, we're all about building franchises across multiple dimensions and certainly going into CRC with Zanza across several different lines of therapy with the opportunity to bring other molecules, other combinations, maybe earlier lines of therapy could be really attractive. So we're -- when we choose to go into an indication, we go all in and we're certainly very excited about being able to hopefully move the needle here for patients.

Definitely. And Zanza has been framed as a -- its edge is a differentiated kinase inefficient profile versus other TKI combinations. In practical terms, what is an IO containing regimen win in third line plus MSS colorectal, which has been seeing it's historically cold to immunotherapy. And what are you hearing from KOLs?

Yes. Yes. So it's certainly -- it's the exception to the rule, right? There have been five recent trials using checkpoint kind of platform therapies for third line plus non-MSI-high CRC. Four of those have failed only 1 that work was STELLAR 303 with Zanza and atezo. So the Zanza scaffold, certainly based on some of the Cabo data we generated in the past as recent data with Zanza really reinforces the idea that Zanza has the ability to impact all the key cell types in the tumor microenvironment. Tumor vasculature, important immune cells both on the positive side, inhibiting or inducing the positive CD8 positive T cells and then impacting the negative regulators as well. So it's a full really approach ful, holistic approach in the tumor microenvironment. So the fact that we saw a win in the ITT population and in the liver met population, I think, is pretty compelling. It's the first step. When you think about winning in a late-line heavily disease-burdened population and then you think about 316 where you're looking to basically go after tumor that you can't actually see, can't visualize radiographically, it's a pretty compelling connection from one to the other. So lots of enthusiasm there, but data speaks for itself, and we're certainly very excited, and we're really motivated by the feedback we're getting. Most of the patients with late-line CRC are treated in the community. And they feel somewhat shut out or foreclosed from checkpoints based upon their -- the vast majority of these patients with their genotype. So to be able to at the appropriate time bring this option to physicians and the patients is just the most rewarding thing. That's why we do this work, right? And we're super excited to be able to get in that space, maybe a little bit later than we had hoped, but that's fine. We'll get there soon enough, and it will be ready to go.

And I think you framed that third-line CRC plus setting is about 23,000 patients, $1.5 billion opportunity. I understand there's significant overlap to the current Cabo prescribing base. Can you give us a bit more granularity on your launch prep? And maybe some idea how you expect the launch curve to look?