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Exelixis and Onyx Await Their Cancer-Drug Fates

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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.

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