Exelixis and Onyx Await Their Cancer-Drug Fates

9/18/12Follow @Tansey_Xconomy

Two kids who grow up in the same dodgy neighborhood can end up worlds apart—depending on the choices they make, and often, a big dash of luck.

Two South San Francisco companies born in the risky environs of biotechnology in the early 1990s have both survived through two decades of twists and in turns on the path toward new drug development. Both Exelixis and Onyx Pharmaceuticals are hoping for FDA approvals within the next two months. Exelixis has attained a market capitalization of more than $800 million. But Onyx, its neighbor down East Grand Avenue, is worth over $5.2 billion.

At least some of the difference has to do with timing and chance. Both companies started out as explorers in a range of different therapeutic avenues. Each later decided to bet the farm on a single promising cancer drug.

Onyx, founded in 1992, made that bet relatively early. In 2003, it threw the dice and devoted all its resources to the study of a drug candidate called sorafenib, in a partnership with Bayer. That meant Onyx (NASDAQ: ONXX) had to give up another program in therapeutic viruses.

The big risk in such a laser focus is that a biotech company’s entire value can turn on the unpredictable results from a single experimental drug. Great science doesn’t guarantee successful treatments. The strategy of Exelixis (NASDAQ: EXEL), on the other hand, held out possibilities for multiple chances of success. The company dedicated itself to a sweeping search for promising drug candidates. It built an automated industrial plant that screened millions of compounds for their potential to inhibit molecules in the body suspected as disease factors.

Exelixis’s approach yielded partnerships with large drug companies including GlaxoSmithKline, Sanofi, and Genentech, and revenue from licensing and milestone payments. However, the risks for any biotechnology company spreading resources over a range of programs are higher costs and a constant need for capital.

The narrowly focused path paid off for Onyx when its drug candidate sorafenib was approved in 2005 as a treatment for kidney cancer. Under the brand name Nexavar, the drug pulled in $165 million in 2006. The FDA extended Nexavar’s use to liver cancer in 2007, and sales topped $1 billion by 2011.

Onyx broke through to profitability in 2008. Building on that success, Onyx received FDA approval in July for a second new treatment, carfilzomib (Kyprolis), for certain forms of multiple myeloma. Onyx and its partner Bayer hope to see another new compound, regorafenib, get the nod in October as a treatment for metastatic colorectal cancer.

While Onyx is awaiting a possible third new drug approval, Exelixis is hoping for its first.

Over the past two years, Exelixis has streamlined its operations to concentrate on its leading drug candidate cabozantinib, which is under FDA review as a treatment for certain patients with medullary thyroid cancer. The agency’s decision deadline is Nov. 29.

Exelixis’s road to that milestone first approval has been bumpy. Its array of drug programs and partnerships had brought in revenues, but not sustained profits. It gained Bristol-Myers Squibb as a partner for its lead candidate, cabozantinib, in 2008. But in 2010, Bristol-Myers, which was developing its own cancer drugs, ended the alliance.

Despite the ensuing company crisis, Exelixis reinforced its commitment to its lead drug. By the end of June 2012, it had reduced its workforce by 422 employees, vacated or leased out space in three of its buildings, and pressed ahead on clinical trials in thyroid and prostate cancer. The company says cabozantinib blocks tumors from developing their own network of blood vessels, and prevents them from releasing cells that allow cancer to metastasize to other parts of the body.

Exelixis got a boost in the spring when favorable preliminary data presented at the big cancer meeting ASCO suggested that cabozantinib could have disease-fighting potential in several different cancer types. That’s when David Miller, CEO of Biotech Stock Research in Seattle, concluded that Exelixis might have a “real drug’’ that could work in one or more indications. “It’s unlikely that all of them are going to come up bust,’’ Miller said in an interview.

Exelixis is betting that its lead drug will work across a range of cancer types.

“Cabozantinib has the potential to be a franchise for the oncology setting,’’ said Exelixis CEO Michael Morrissey during a recent round of presentations at investor conferences. Morrissey, who took over the top post in the midst of the company crisis in 2010, said Exelixis has enough money to fund both of two ongoing trials of cabozantinib in prostate cancer, where he anticipates data in the first half of 2014. He said the company is also considering a trial launch in 2013 in another cancer type he did not specify.

Miller thinks Exelixis should now consider finding another partner for cabozantinib, rather than trying to go it alone.

Even if the FDA grants approval this year in thyroid cancer, Exelixis would gain only a small niche market. The company will probably need to wait three years or more for significant revenues from its proprietary compound, cabozantinib, if it proves successful in ongoing prostate cancer trials.

Biotechnology companies sometimes resist partnering up on a promising drug, because they’d need to split any eventual profits. But smaller companies often need partners to help shoulder the big costs of clinical trials.

Onyx, after developing two drugs under partnerships, is now taking on the further development of carfilzomib alone, except for a partnership in Japan. It will foot the bills for three late stage trials to expand the drug’s label in multiple myeloma, and as a result it does not expect a profit in 2012.

But Onyx has some distinct advantages, including a strong drug development track record, $590 million in cash by the end of the second quarter, and a share price hovering near $80. That high stock price would be a boon if Onyx were to issue new shares to help fund its carfilzomib trials.

By contrast, Exelixis’s longer path to the approval runway has created a legacy of shareholder dilution, lower share prices, and debt from multiple rounds of fundraising over the years.

The last round came in August, after Exelixis announced in its second quarter report that it had about a year’s worth of operating capital, or $294.8 million. The new fundraising netted $417 million, Morrissey told investors this month. The company sold 30 million shares at $4.25, and reaped the rest of the new capital by issuing convertible notes.

The future impact on shareholders can be seen through a back-of-the-envelope comparison with Onyx, which has issued only 65 million shares since its 1996 IPO. With its August deals, Exelixis added 30 million shares to the 148 million outstanding at the end of June. So $100 million in new profit would add earnings of $1.53 for each Onyx share, but only 56 cents for an Exelixis share. Exelixis shares closed at $5.42 on Monday, while Onyx shares closed at $81.26.

Whether Exelixis has enough capital to carry multiple trials for several years depends on how much it spends testing cabozantinib in a third cancer type, and whether it is willing to partner up on the drug, Miller said.

Miller sees a “murderer’s row’’ of debt repayment due dates for Exelixis through 2019, with the first payout of $124 million due in 2015. (Onyx has payment due in 2016 on $230 million in convertible notes.)

Although Miller is critical of the design of the August fundraising package, he said the deal might help Exelixis hold out for better terms if it engages in partnerships talks.

But Morrissey has been emphasizing in his recent investor talks that his company is the sole owner of cabozantinib, calling it a distinction few biotech companies can claim.

Choose your flavor of risk: Focus or hedge your bets; partner or not. The best decision often depends on the greatest unknown—whether the promise of lab science will produce a great drug.

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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