Staff Writer

After optioning rights to XL880 last year, GlaxoSmithKline plc decided not to exercise its option to license a second compound under its six-year collaboration with Exelixis Inc.

Shares of South San Francisco-based Exelixis (NASDAQ:EXEL) fell 97 cents, or 21.6 percent, to close at $3.53 Thursday amid investor worries that GSK's decision stemmed from safety or efficacy concerns about the compounds up for grabs.

Yet Exelixis' executive vice president and chief financial officer, Frank Karbe, told BioWorld Today that the "decision by GSK is actually one that we're extremely happy about."

That's because the top contender to be optioned - XL184 - is Exelixis' most advanced pipeline candidate. The inhibitor of MET, RET and VEGFR2 is being studied in a Phase III trial in medullary thyroid cancer, as well as a Phase II trial in glioblastoma, and a Phase I/II trial in non-small-cell lung cancer. (See BioWorld Today, June 17, 2008.)

If GSK had picked up XL184, Exelixis would have received a $55 million milestone payment that would have been applied toward repayment of an $85 million loan. Karbe noted that the drug is worth more than that in today's partnering market.

Other candidates GSK could have optioned include XL820, an inhibitor of KIT, VEGFR and PDGFR, that is in Phase II in gastrointestinal stromal tumors; XL228, an inhibitor of the T315I mutant form of Bcr-Abl and other kinases that is in Phase I in blood cancers; XL281, which targets RAF kinase and is in Phase I testing in solid tumors; and XL844, an inhibitor of CHK1 and CHK2 in Phase I in solid tumors.

Under the original 2002 deal, GSK could option up to two compounds - the first of which it picked up late last year. That compound, XL880, is a MET and VEGFR2 inhibitor now advancing through three Phase II trials in papillary renal-cell carcinoma, gastric cancer and head and neck cancer. (See BioWorld Today, Dec. 17, 2007.)

GSK previously passed on two other compounds: the lung cancer drug XL647 and the diabetic peripheral neuropathy drug XL784. Those drugs, along with lung cancer candidate XL999, are the property of Exelixis' joint venture with Symphony Capital LLC and currently are not moving forward. (See BioWorld Today, June 14, 2005, and July 27, 2007.)

Exelixis previously said its collaboration with GSK was scheduled to end Oct. 27.

In addition to the $85 million loan from GSK, Exelixis has received about $150 million in up-front, milestone and research and developing funding associated with the deal. The biotech could get another $90 million in milestone payments and double-digit royalties if XL880 proves successful. (See BioWorld Today, June 30, 2008.)

As the deal comes to an end, Exelixis regains full rights to XL184, XL820, XL228, XL281 and XL844, although the company eventually may owe 3 percent royalties to GSK on net sales of XL184. Those five compounds more than double Exelixis' existing internal pipeline, which consists of the Phase II solid tumor drugs XL765 and XL147, the Phase I cancer drug XL019, and cancer drug XL888, for which an investigational new drug application recently was filed.

Karbe acknowledged that nine clinical assets are "more than we can take forward ourselves," and said the company expects to announce "one or several deals" by its R&D day in December.

He added that he expects those deals to help the company become financially independent from the current capital markets. As of June 30, Exelixis reported cash, equivalents and investments (including long-term investments and restricted cash) of $189.8 million, after posting a net loss of $45.1 million for the quarter.

Analyst Edward Tenthoff of Piper Jaffray and Co. wrote in a research note that the "silver lining" to GSK passing on Exelixis' compounds is that the company is now "well positioned to partner any drugs in its pipeline and thereby bring in cash, cut the burn and potentially address the larger balance sheet/viability overhang."

Several other analysts agreed that despite the negative stock reaction, GSK's decision is a net positive for Exelixis due to increased partnering flexibility.

Karbe called out XL765 and XL147, both of which target PI3K, as particularly attractive for partnering because they are leading compounds in their space and have potentially broad utility. "In order to fully exploit that, you would need someone who could put a lot of resources" toward their development, he said.

On the other hand, he said Exelixis may look to hold on to compounds that provide a fast route to market in a small indication, with potential for later expansion into larger indications. He noted that XL184 fits that bill, although he said that "doesn't necessarily mean we will take it forward 100 percent on our own."

He said the company is sorting through its strategy and expects to provide more guidance in its third-quarter earnings call Monday and the R&D day in December.