At Exelixis, Morrissey Dreams Of Getting the Band Back Together

Xconomy San Francisco — 

Mike Morrissey is a self-described meticulous planner. Last fall, when the CEO of cancer drug developer Exelixis saw dismal data crush hopes of having his flagship drug cabozantinib (Cometriq) approved in prostate cancer, he already had the next move in place: 160 layoffs, or 70 percent of the company.

“We spent four or five months last summer before the readout planning for successes and failures,” says Morrissey. “Unfortunately it was negative data, and it was terrible to go to Plan B, but we had Plan B on the shelf ready to go.”

Now, with its stock price languishing in the low single digits, the South San Francisco, CA-based company needs a series of milestones to go its way in the next few months, and yesterday’s update of promising lung cancer data at the American Society for Clinical Oncology (ASCO) conference was a small first step.

There’s even a scenario in which Exelixis—which in recent years has pushed most of its chips behind cabozantinib in prostate cancer (which failed) and other disease areas—could try to recapture its heyday, when it had a humming drug-discovery engine and a brimming pipeline.

It would be a reversal akin to an aging rock star, amid tough times and a mid-life crisis, finding fresh inspiration and booking a tour of college campuses. “The issue is just having a strong cash position,” says Morrissey. “If we’re successful with the milestones coming up, you could see a resurgence from us. The goal is to get back to our roots and rebuild the portfolio.”

There’s cash in the bank: $243 million at the end of 2014, but only $144 million of that is available for day to day stuff. The rest is tied up in investments and debt service.

And there’s not much cash flowing in. Cabozantinib is approved to treat a rare form of thyroid cancer, but in two years it has brought in only $40 million total.

Morrissey acknowledges that a lot has to go right in the next few months. First up are the ASCO data, highlighted by the Phase 2 trial of cabozantinib in lung cancer.

But the big events come after that. At some point in the third quarter, Exelixis will have Phase 3 data for cabozantinib in renal cell carcinoma (RCC), a type of kidney cancer. A lot of drugs are already approved for RCC, so the pivotal data—the final shot before asking FDA for approval—would need to make a strong case not just to get cabo, as it’s known, to market but to convince oncologists to use it.

Also in the third quarter—August 11, to be specific—the FDA is due to rule on Exelixis’s other drug, cobimetinib. Roche controls cobi, as it’s called, thanks to an exclusive licensing deal that its Genentech division struck with Exelixis nearly 10 years ago, before Roche bought out the part of Genentech it didn’t already own. Roche is hoping to have cobi approved to treat a subset of metastatic melanoma in combination with another Roche drug, vemurafinib (Zelboraf).

Genentech updated its Phase 3 data from the combination at ASCO yesterday, with nothing to derail the push toward approval. If approved, Roche will share profits with Exelixis. (Roche and Exelixis start with a 50/50 split, but once sales go past $200 million in a year, the split ratchets down to 70/30. Each year, the split resets to 50/50.)

Competition could limit sales, especially if the so-called “checkpoint inhibitor” immunotherapy drugs continue to evolve and improve. That said, Roche is also testing cobi with its own checkpoint inhibitor, and there could be some early clinical data this year.

Consensus analyst estimates peg top cobi sales at about $150 million a year. If cabo eventually wins approval for kidney cancer and later for other cancers, perhaps add a few hundred million dollars more per year.

Even if all that goes right in a few years, getting back to roots and reviving R&D at Exelixis will be a tough sell. Despite last fall’s layoffs, plus some slimming down before that, Exelixis still had a net loss of $268 million in 2014. (The firm has racked up a $1.8 billion deficit since it was founded in 1994.)

It also has nearly $500 million in debt on its books. Much of that is due toward the end of this decade, but still, just ask Dendreon what happens when a big debt load meets high R&D costs and meager product revenue.

One of Exelixis’s debtors, Deerfield, could turn into an investor; Exelixis has the option to pay at least some of the debt in either cash or stock. According to recent regulatory filings, the company’s top investors are hedge fund Meditor Group, Fidelity, BlackRock, State Street, T. Rowe Price Associates, Eastern Capital, and the Vanguard Group.

An interesting side note: former CEO George Scangos owns more of Exelixis (1.6 percent) than current CEO Morrissey (1.1 percent). Scangos ran Exelixis for 14 years and built its early exploration of genetics into a pipeline that, thanks to lucrative licensing deals with Big Pharma, fueled the company’s work for years.

Scangos remains a director, and others from that era remain on board, says Morrissey. “In our past lives, we’ve had 20 INDs”—the FDA’s green light to move a drug into clinical trials—“in five or six years. We know how to do that.”

But they don’t have the bandwidth or the cash at the moment. If Exelixis wants to “come full circle,” as Morrissey puts it, it first needs to jump through a lot of hoops.