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AstraZeneca plc (ADR) (AZN), Johnson & Johnson (JNJ): Will the Exelixis, Inc. (EXEL) Hype Catch Up to Its Valuation?

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The small patient pool for medullary thyroid cancer, or MTC, isn’t going to move the needle for a large pharmaceutical company. But Exelixis, Inc. (NASDAQ:EXEL) hopes the rare cancer will serve as launch point for a cancer-fighting franchise.

A small, important proof of concept

Only 4% of the roughly 60,000 people diagnosed with thyroid cancer this year will be diagnosed with the ultra rare MTC indication. For the most difficult to treat, Exelixis, Inc. (NASDAQ:EXEL)’ Cometriq — approved by the Food and Drug Administration last November — offers hope.

Exelixis, Inc. (NASDAQ:EXEL)

In phase 3 trials, Cometriq was studied across 330 hard-to-treat MTC patients, including 92% who had already undergone thyroidectomy and 21% who had previously been treated with a tyrosine-kinase inhibitor, such as AstraZeneca plc (ADR) (NYSE:AZN)‘s  Caprelsa, which gained FDA approval in 2011. In the study, patients treated with Cometriq had an overall survival rate of 11.2 months versus just four months for placebo. 27% saw tumor size decrease, compared to zero for those receiving  the placebo.

The results may be strong enough to threaten Caprelsa’s position as a first line treatment. Despite Caprelsa having median progression-free survival of 22.6 months versus 16.4 months for placebo in phase 3 trials, the drug carries a high risk of toxicity. As a result, doctors need to gain certification through the FDA’s Risk Evaluation and Mitigation Strategy, or REMS, program prior to prescribing the drug as a treatment.

The absence of such a restriction on Cometriq suggests that the drug may win a share of Caprelsa’s sales, which totaled $30 million last year. However, despite the advantage, sales of Cometriq for MTC are likely to remain small given that the addressable market is just 500 to 700 patients annually. As a result, Cometriq’s sales were just $4 million in the second quarter.

A big opportunity treating prostate cancer

Given the small market for Cometriq in MTC, the company’s success or failure is tied more closely to its ability to commercialize Cometriq for other, more lucrative indications, such as metastatic castration-resistant prostate cancer, or mCRPC.

At ASCO, Exelixis, Inc. (NASDAQ:EXEL) reported that mCRPC patients treated with Cometriq had median overall survival of 10.8 months. That’s good news since 73% of those patients were heavily pre-treated with big-money drugs such as docetaxel, Zytiga, Xtandi, or Jevtana.

Those drugs are racking up hundreds of millions in sales, suggesting a big opportunity for Cometriq.

Sales of Sanofi‘s Taxotere were $3 billion in 2010 prior to losing patent protection, and Johnson & Johnson (NYSE:JNJ)‘s Zytiga generated $395 million in sales during the second-quarter of this year. Xtandi — co-developed by Medivation Inc (NASDAQ:MDVN) and Astellas and approved in August 2012 — had $82 million in second-quarter sales. Sales of Sanofi’s Jevtana totaled $54 million in the second quarter, bringing first half total sales to $106 million.

It also suggests that Cometriq will have to battle for share with recently improved therapies, including Medivation Inc (NASDAQ:MDVN) and Astellas’ Xtandi.  In phase 3 tests, Xtandi patients had a median overall survival of 18.4 months versus just 13.6 months on placebo.

Johnson & Johnson (NYSE:JNJ) is unlikely to hand over its share of the prostate market either. As of December, Zytiga can be used prior to chemotherapy in late-stage mCRPC. That change helped drive 70% year-over-year sales growth for Zytiga. J&J also moved to shore up its prostate franchise in June, acquiring Aragon  for $1 billion to obtain Aragon’s next generation ARN-509, a long-term potential competitor to Xtandi.

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