Exelixis Inc

NASDAQ:EXEL

Earnings Call Transcript 2019-Q3

[Operator]

Good day, ladies and gentlemen. And welcome to the Exelixis’ Third Quarter 2019 Financial Results Conference Call. My name is Gigi, and I will be your operator for today. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms. Susan Hubbard, Executive Vice President of Public Affairs and Investor Relations. Please proceed.

[Susan Hubbard, Executive Vice President, Public Affairs and IR]

Thank you, Gigi. And thank you all for joining us for the Exelixis’ third quarter 2019 financial results conference call. Joining me on today’s call are Mike Morrissey, our President and CEO; Chris Senner, our Chief Financial Officer; P.J. Haley, our Senior Vice President of Commercial; and Gisela Schwab, our Chief Medical Officer, who will together review our corporate, financial, commercial and development progress for the third quarter ended September 30, 2019. Peter Lamb, our Chief Scientific Officer is also with us and he will be joining us for the Q&A session following our prepared remark.

During the call today, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today’s press release, which is posted on our website for an explanation of our reasons for using such non-GAAP measures, as well as tables deriving these measures from our GAAP results.

During the course of this presentation, we will be making forward-looking statements regarding future events and the future performance of the company. This includes statements about possible developments regarding discovery, product development, regulatory, commercial, financial and strategic matters. Actual events or results could, of course, differ materially.

We refer you to the documents we file from time-to-time with the SEC, which under the heading Risk Factors identify important factors that could cause actual results to differ materially from those expressed by the company verbally and in writing today including without limitation risks and uncertainties related to product, commercial success, market competition, regulatory review and approval processes, conducting clinical trials, compliance with applicable regulatory requirements, our dependence on collaboration partners and the level of cost associated with the discovery, product development, business developments and commercialization activities.

Now with that, I will turn the call over to Mike.

[Mike Morrissey, President and CEO]

All right. Thank you, Susan. And thanks to everyone for joining us on the call today. Exelixis had a strong third quarter 2019 with important progress across all components of our business. We maintained significant momentum as we strengthened the CABOMETYX franchise, expedite our cabozantinib development program and diversify our oncology pipeline with new agents from internal and external sources.

I will begin today by providing a brief summary of our third quarter 2019 milestones and then turn the call over to Chris, P.J. and Gisela to review important components of our business.

Key highlights for today’s call include, first, Exelixis is continued to deliver strong financial performance in the third quarter of 2019. Total revenue for the quarter was approximately $272 million. Net cabozantinib franchise revenue was approximately $192 million.

Third quarter non-GAAP net income was approximately $108 million and non-GAAP diluted earnings were $0.34 per share. Importantly, for the first time, global cabozantinib franchise net revenue exceeded $1 billion over four consecutive quarters.

We don’t sell carcinoma, TKI market has been growing steadily over the last several quarters, as immune checkpoint inhibitors or ICI combinations have begun to dominate the first-line setting, which bodes well for cabozantinib if the CheckMate 9ER study generates competitive data.

Cabozantinib net product revenue was essentially flat quarter-over-quarter due to a delay in the transition of ICI TKI progressing patients from first to second-line. This result from the approximate four-month to five-month extension of progression free survival for the first-line ICI combos compared to first-line sorafenib. As you will hear, CABOMETYX continues to be the TKI of choice for patients progressing on any first-line ICI combination regimen.

Second, we continue to aggressively pursue development and regulatory efforts to expand the cabozantinib franchise. We are quickly advancing for ongoing pivotal trials, including the critical CheckMate 9ER trial in first-line RCC with the cabo and nivo doublet, and anticipate starting additional cabozantinib pivotal trials from emerging COSMIC-021 data, including potential studies for prostate cancer and non-small cell lung cancer.

We expect to start sharing key data from some of these trials in 2020. In addition, we are encouraged by the recent success of the atezolizumab, bevacizumab doublet to improve both overall survival and progression free survival in first-line HCC.

A third indication were an ICI anti-angiogenic combination has generated compelling efficacy data. This result provides additional support for COSMIC-312, investigating the cabo and atezo combination in first-line HCC and also highlights a potential expanded role for CABOMETYX in second-line HCC once this ICI containing regimen moves into the first-line setting.

While all these cabozantinib related activities are proceeding with the highest priority, our team is advancing XL092 and other internally and externally sourced assets to build a diversified oncology product pipeline.

Third, last month we received the paragraph for certification notice from a CABOMETYX ANDA filer and we have responded by filing a lawsuit yesterday to enforce our intellectual property rights. Based on the limited information we have received to-date, the ANDA filer has not challenged our composition of matter patent, which expires on August 16, 2026. Through our lawsuits, we are seeking among other relief and order that FDA may not approve this ANDA until after the expiration of our primal patent on October 8, 2013.

Our progress throughout Q3 2019 highlights the company’s performance across all components of our business during a very dynamic time for both RCC and HCC indications. Our overall strategic goals remain the same. We seek to grow revenues, manage expenses carefully and reinvest free cash to build a diversified business capable of long-term sustainable growth.

So, with that, I will turn the call over to Chris, who will provide more details on our third quarter 2019 financial results.

[Chris Senner, Chief Financial Officer]

Thanks, Mike. For the third quarter the company reported total revenues of $271.7 million. Total revenues for the quarter included cabozantinib net product revenues of $191.8 million. Total revenues also included the recognition of $79.9 million in collaboration revenues from the company’s commercial collaboration partners Ipsen, Takeda and Genentech.

Collaboration revenues for the third quarter included a recognition of a $50 million milestone from our collaboration with Ipsen for the achievement of $250 million of net sales of cabozantinib in their territories over four consecutive fiscal quarters.

We anticipate receiving the cash payment related to this milestone in the fourth quarter of 2019. Collaboration revenues also includes $16.4 million of royalties earned from approximately $73 million of cabozantinib sales by Ipsen in the third quarter for 2019.

Our total operating expenses for the third quarter of 2019 were $156.1 million, compared to $148.3 million in the second quarter of 2019. R&D expense was the primary driver of the increase in total operating expenses, which increased by $15.4 million and were significantly impacted by the license agreement we signed with Aurigene during the third quarter.

Under the terms of the agreement, Exelixis has made an upfront payment of $10 million for exclusive options to licensed three preexisting programs from Aurigene. In addition, Exelixis and Aurigene selected three additional Aurigene led discovery program mutually agreed upon targets and exchange for additional option payments totaling $7.5 million.

Income taxes for the quarter ended September 30, 2019 were $25.2 million and our effective tax rate for the quarter was approximately 20.5%, compared to $20.7 million and 20.8% for the second quarter of 2019.

The company reporting GAAP net income of $97.5 million or $0.31 per share on a fully diluted basis for the third quarter of 2019. The company also reported non-GAAP net income of $107.6 million or $0.34 per share on a fully diluted basis. Non-GAAP net income excludes the impact of approximately $10 million of stock-based compensation expense net of the related income tax effect.

Cash and cash equivalent, short- and long-term investments and long-term restricted cash and investments totaled approximately $1.25 billion at September 30, 2019, compared to approximately $852 million at December 31, 2018.

Now turning to our financial guidance. The company is updating its financial guidance for 2019. Cost of goods sold is expected to be between 4% and 5% of net product revenues.

Research and development expenses expected to be approximately $350 million and includes non-cash expenses related to the stock-based compensation of approximately $20 million.

Selling general and administrative expenses expected to be approximately $240 million and includes non-cash expenses related to stock-based compensation of approximately $40 million. Guidance for the effective tax rate in 2019 is between 21% and 23%.

With that, I will turn the call over to P.J.

[P.J. Haley, Senior Vice President, Commercial]

Thank you, Chris. I am pleased to review the commercial performance of CABOMETYX for the third quarter of 2019. CABOMETYX continues to be the number one prescribed TKI in RCC, which is notable in the context of three recent first-line launches of immune checkpoint inhibitor or ICI combinations. CABOMETYX demand grew by 14% in Q3 2019 relative to the third quarter in 2018 and declined by 4% in Q3 2019 relative to Q2 2019.

The prescriber base of CABOMETYX continued to increase and grew by 40% in Q3 2019 relative to Q3 2018 and grew by 7% in Q3 2019 relative to the prior quarter.

CABOMETYX continues to be used broadly in RCC across the academic and community settings, clinical risk groups and lines of therapy.

The first-line RCC market remains very dynamic as ICI and TKI combinations of both pembrolizumab axitinib and avelumab axitinib were launched in Q2 joining ipilimumab, nivolumab as first-line ICI combination options.

IQVIA brand impact data shows that ICI combinations now dominate the first-line RCC market as expected, resulting in the TKI monotherapy new patient class share decline driven by the new data and approvals.

CABOMETYX market share in the first-line declined as expected after the pem/axi launch, and then stabilized in late Q3 2019 and performed well relative to other RCC TKI monotherapies. CABOMETYX continues to be the number one prescribed TKI and RCC based on the Acuvia prescription data. Year-over-year for Q3, CABOMETYX was up 18% in TRx volume and Q3 over Q2 TRx volume declined by 1%.

And importantly, the overall TKI market grew by 8% in total volume year-over-year. Furthermore, this market grew 5% sequentially for each of the last two quarters, demonstrating that the RCC TKI market is expanding, driven by the adoption of ICI TKI combinations, particularly in the community setting. It is worth noting that CABOMETYX maintained overall market share in this growing and competitive TKI market.

Moving onto the dynamics of second-line RCC, CABOMETYX new patient market share increased in the third quarter 2019. Also, CABOMETYX continues to capture the majority of patients who progressed on first-line NivoIpi therapy according to brand impact. CABOMETYX continues to be well-positioned as the treatment of choice for patients who progress on ICI combination therapy, whether it is NivoIpi or pembro/axi.

An increasing number of patients in the second-line setting have been previously treated in first-line with an ICI combination and we expect this first-line to second-line transition to continue as the market dynamics have yet to reach steady state.

As this transition happens, the utilization of second-line TKI monotherapy should continue to increase, while the market per second-line ICI decreases as an increasing percentage of patients entering the second-line are ICI progressors.

Market research continues to point to CABOMETYX remaining the agent of choice in the second-line setting after any ICI combination, which we believe is largely due to the fact that it’s the only TKI with a strong OS benefit per the label in the second-line population.

Turning to the HCC market dynamics. Last week, Roche Genentech announced a positive study for the combination of bevacizumab and atezolizumab in first-line HCC demonstrating superiority to Serafenib in both progression free survival and overall survival.

This result is notable in the context of the recent negative CheckMate 459 study evaluating single agent nivolumab against Serafenib in the same setting. This announcement marks that third tumor type that a doublet combination of an immune checkpoint inhibitor and an anti-angiogenic therapy may reach the market.

We find this encouraging as we think about the future potential of Cabo in combination with ICI is across a wide range of indications. Should the combination of atezolizumab and bevacizumab get approved in first-line HCC, the HCC landscape will likely evolve in a similar fashion to that of RCC in that ICI therapy will move to the front-line. This would in turn increase the potential in second-line setting for the TKI monotherapy market as the utilization of second-line ICI monotherapy should decrease over time.

The data from our CELESTIAL Phase 3 pivotal trial demonstrated overall survival in a broad second-line population and positions CABOMETYX well for growth in second-line HCC if ICI therapy moves into the first-line setting, changing the treatment paradigm and ultimately potentially growing the market with more effective first-line therapies.

We strongly believe that many more eligible patients could benefit from CABOMETYX and it’s currently approved indications. CABOMETYX remains the number one prescribed TKI in RCC and we look forward to building on this momentum in RCC, HCC and other potential indications as the cabozantinib development program expands and progressive.

Future growth for Cabo and RCC, HCC and beyond, maybe driven by the outcome of our trials evaluating Cabo in combination with immune checkpoint inhibitors.

CheckMate 9ER is the first of these phase three Cabo ICI combination studies, which is expected to read out in early 2020. Our team remains highly focused and motivated to compete every day to bring the benefit of CABOMETYX to all eligible patients as we continue to build the franchise.

And with that, I will turn the call over to Gisela.

[Gisela Schwab, Chief Medical Officer]

Thank you P.J. I am happy to provide a brief update on our development and regulatory progress in the quarter. I will start with our current Phase 3 program for Cabozantinib as a single agent or in combination with ICI, which includes four ongoing studies.

First and most advised is CheckMate 9ER, Phase 3 trial comparing cabozantinib nivolumab with Sunitinib in first-line RCC in all risk groups. The study completed enrollment earlier this year and has previously reported, we are looking forward to results in early 2020. We are currently preparing with the BMS team, our clinical development partners who are executing the study to enable expeditious future regulatory filings once topline results are available and if warranted by the data.

Three additional pivotal Phase 3 studies, COSMIC-311, 312 and 313 that we initiated during the last nine months or so are making excellent progress and are actively enrolling patients globally. As a reminder, these three Phase 3 studies include COSMIC-311, a single agent placebo controlled study in radioiodine refractory DTC was previously received VEGFR inhibitor.

COSMIC-312, a Phase 3 trial comparing the combination of cabozantinib and atezolizumab with sorafenib in first-line advanced HCC. And COSMIC-313 our Phase 3 trial in first-line RCC in patients with intermediate or poor risk for IMDC, comparing the triplet of cabozantinib and nivolumab plus ipilimumab to the combination of nivolumab and ipilimumab. This is the first trial evaluating the approved nivolumab and ipilimumab combination as a comparator.

So the cabozantinib late stage development program is making great progress and we are working on further these three concepts and I look forward to updating you on these plans at the appropriate time.

In addition, COSMIC-021 in a Phase Ib study of cabozantinib and atezolizumab continues to make excellent progress. The study has been occurring patient actively across 20 expansion court and we are seeing encouraging early results and different tumor indication.

As a reminder, the key objective of the expansion course is objective response rate for RECIST version 1.1. Notably, early data from the mCRPC cohort in patient have received one novel hormonal therapy and could have received prior docetaxel in the hormone-sensitive stage has resulted in expansion of this cohort.

Additionally, our study oversight committee has also recommended expansion of the immune checkpoint inhibitor progressive non-small cell lung cancer cohort. This cohort includes patients who have received and failed prior standard chemotherapy and prior immune checkpoint inhibitor together or in sequence.

Both cohorts are actively enrolling an additional 50 patients to further evaluate the early evidence of activity seen among the first 30 patients enrolled. Additionally, we have added four new cohorts of CRPC patients to this study, bringing the total number of cohorts in the study to 24 including two cohorts evaluating the combination of cabozantinib and atezolizumab, and two cohorts evaluating single agent cabozantinib or atezolizumab in this indication.

These latter two cohorts aim to characterize the single agent activity of cabozantinib or atezolizumab in the same patient population with metastatic CRPC with visceral disease or measurable extra pelvic lymph nodes who have received one prior NHT and could have received prior docetaxel for hormone sensitive disease.

We are excited about the progress in the trial, while we are working hard on advancing the broader cabozantinib late-stage development that may include future Phase III trials in various indications including the mentioned CRPC and non-small cell lung cancer settings if warranted by the data.

On the regulatory side, excuse me, on the regulatory side there has been a lot of progress for cabozantinib worldwide. Our partner Ipsen has continued regulatory submissions in its EU and rest of world territories and to-date has obtained regulatory approvals for cabozantinib in 48 countries including the most recent first-line RCC approval in Canada a couple of weeks ago.

And in Japan our partner Takeda completed an NDA filing with the Japanese regulatory authority for cabozantinib in the treatment of patients with advanced RCC in April of 2019 and we look forward to update on their regulatory progress.

And with that, I will turn the call back to Mike.

[Mike Morrissey, President and CEO]

All right. Thanks Gisela. Exelixis maintained strong momentum in the third quarter of 2019 across all components of our business. The dynamic nature of both RCC and HCC markets especially in the context of each individual first-line setting provides an opportunity for potential upside with CABOMETYX in these important patient segments. We eagerly await the topline results for CheckMate 9ER in first-line RCC and the prospects for first-line for ICI-based therapies moving into the first-line HCC setting.

Notably, we continue to see strong revenue in third quarter 2019 due to the strength of the CABOMETYX business in the face of significant competition from ICI based combinations and its ex U.S. performance with Ipsen. It’s notable that the cabozantinib franchise achieved more than $1 billion in global net product revenue over four consecutive quarters for the first time in third quarter 2019. With this significant momentum Exelixis remains a compelling opportunity for potential long-term growth as we continue to invest in R&D with current and future cabozantinib label and trials and new product candidates.

I want to thank everyone at Exelixis for their hard work and collaborative spirit as we navigate the opportunities that lie ahead. The entire team is focused to make every day count as we discover develop and commercialize the next-generation of our medicines for cancer patients who need a better and more effective therapies. We look forward to updating you on our progress.

Thank you for your continued support and interest in Exelixis. And we are happy to now open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Andy Hsieh from William Blair. Please proceed.

[Andy Hsieh, William Blair]

Great. Congrats on the progress and thank you for taking my questions. Just first one, just wondering if you can educate us on the IP litigation process, so upon the filing of a lawsuit that really triggers the 30-month stay, which based on my calculation will probably occur in late first quarter of 2020. And so what are some potential scenarios after that or even before that and what I am really trying to understand is can you bring forth additional lawsuits, for example, specifically addressing the formulation patent that expires in 2033?

[Mike Morrissey, President and CEO]

Yeah. Andy, it’s Mike. Let me try and parse that out for you the best I can. I guess one note to start is that we certainly weren’t surprised by receiving the letter on the ANDA. As you know, most successful small molecules this is a normal part of the process, we have been well aware of that. We have been planning on that and prepared for that really going back 12 months, 18 months or so. So we have been very well focused on making sure that we have all the pieces in place to be able to very efficiently and I think very appropriately address these issues as we expected them to come up, okay? So that’s the first thing.

Second thing is we have got a strong team internally and externally as part of that process of legal experts to be able to address this for us. So I feel very good about the team we have got in place and certainly a high degree of confidence in both the IP and the data we have that supports the IP and enables the IP as we go forward.

In terms of our, I would say, litigation tactics and strategy, I really don’t want to say more than what we said in the Q and the press release and in my prepared remarks, obviously we don’t want to litigate this publicly and we want to let the team of legal experts that we have do their jobs behind the scenes and be as effective as they can without enabling the other parties involved in what we are thinking about doing.

So look at this as a first step in the process and as we hit other milestones that we believe are material we will be sharing that information with certainly the sell side and investors as we go forward.

[Andy Hsieh, William Blair]

Okay. Fair enough. So kind of moving on to the CABOMETYX franchise, curious how you think about maybe the relative impact of these two components? One is based on my calculation I think the gross to net this quarter is about 20% higher than what previously we have observed. And also that patient dynamic that I think P.J. elegantly laid out is basically pembro/axi kind of holding patients longer in the first-line setting expanding the prevalence if you will. So kind of maybe help us kind of parse out these two components?

[Mike Morrissey, President and CEO]

Yes. So thanks for the question. Why don’t we have Chris talk about the gross to net issues and then we will go back to P.J. to reframe and talk about some of the patients first-line, second-line transition issues. Chris?

[Chris Senner, Chief Financial Officer]

Thanks, Mike. So, Andy, it’s Chris. I guess the best way to describe it is last quarter it was in the mid-19% range. We did talk about we are expecting the year to come out around 20%. You are right in saying that this quarter was around 20% and what we did see during the quarter was that we saw the PHS 340B volume or utilization increase and also the discount -- the required discount that’s related to that 340B segment of the payer increase also. P.J.?

[P.J. Haley, Senior Vice President, Commercial]

Okay. Great. Hi, Andy. It’s P.J. and I will tackle the second part of your question. So, yeah, as you mentioned, what we have observed is in the first-line setting the ICI combinations particularly driven by the recent launches of the ICI TKIs pem/axi in particular have really come to take a lot of first-line share. So in the meantime as expected the TKI monotherapy first-line share came under pressure and what we saw in the latter part of the quarter is CABOMETYX first-line share stabilizing.

Certainly the -- that sort of market acceptance of ICI TKI is encouraging to us particularly in the community setting as we think about the results coming for 9ER early next year. And really what that does from the transition in first-line to second-line therapy is that’s adding that sort of four months to five months that both Mike and I referred to you as those patients have a longer PFS on the combination. So it will take a bit longer to reach the second-line setting.

In the second-line setting CABOMETYX is still capturing the majority of these patients and certainly all our market research and discussions with the KOLs indicate that that will continue to be the case that will capture the majority of ICI progressors in the second-line. So we see that -- as that market continues to be dynamic and is not at steady state we see that as a continued opportunity for potential growth for CABOMETYX.

[Andy Hsieh, William Blair]

All right. Great. Thanks for the additional color. Really appreciate all your answers.

[Susan Hubbard, Executive Vice President, Public Affairs and IR]

Great, Andy. Thank you.

[Operator]

Thank you. Your next question comes from the line of Michael Schmidt from Guggenheim. Please proceed.

[Charles Zhu]

Hey, guys. This is Charles Zhu on for Michael Schmidt. Thanks for taking the question. As a bit of a follow-up to the previous question a bit of a multi-parter here, how should investors think about the cabo trajectory going forward in both RCC and HCC based on the recent volume and sales trends and how much of this clinical backlog of patients are you seeing in the front-line that could eventually become eligible for cabo in the second-line? How long do you think this will take to reach the steady state that you referred to? Thank you.

[Mike Morrissey, President and CEO]

Yeah. Thanks for the question, Charles. We certainly want to avoid giving any sort of guidance forward-looking, but I guess the way I’d frame it is a couple of things. With regards to RCC as I mentioned, what we have seen is that first-line market shares stabilize last quarter for CABOMETYX. And as the first-line combination market has really become dominated by ICI combinations, most of them have yet to progress to the second-line. So we think that will provide growth potential for CABOMETYX in the second-line setting.

Moving forward I wouldn’t want to attempt to predict the timing of that but it’s clear that the market has yet to reach steady state and that could take some time to happen which would give CABOMETYX potential for some time there.

In HCC, it’s sort of a similar dynamic that could potentially play out. With the atezo/bev study being positive we could see immune checkpoint inhibitor therapy now moving to the first-line setting. We look forward to seeing that data in the coming months and that could really change that first-line landscape in a couple of ways.

First of all TKIs are the standard in first-line HCC now. So ICI combination therapy could then become the standard of care in the first-line. So that could potentially bring more patients into the first-line setting from sort of the local regional therapy setting.

And then what that will do is decrease over the long term the ICI market in the second-line and provide more potential in second-line HCC for TKI monotherapy where cabo is really well positioned is performing well.

We grew HCC in Q3 and we really look at the HCC market as a market that needs to be built which is what we have always said, and opportunity for potential growth in the future for cabo both in the second-line and then certainly we will look forward to the results of the CheckMate 312 study in first-line HCC as well.

[Charles Zhu]

Okay. Great. That makes sense. On CheckMate 9ER there’s obviously a bar for clinical success represented by SUTENT but obviously there are other ICIs in front-line. What are your thoughts around what cabo/nivo may need to report in order to be competitive not only in the clinical, but also in the commercial sense? Thank you.

[Mike Morrissey, President and CEO]

It’s Mike. We get that question a lot and it’s just not appropriate for us to speculate on what that might look like where the bar is, obviously, the data for KEYNOTE-426 is out there, everybody knows kind of where that stands from a competitive point of view in terms of both PFS and survival benefits.

So what exactly we will see there, how much different it has to be, et cetera. I think we would much rather wait for the data to come out and to be able to discuss that data in the context of all the competitive offerings that are available right now for first-line RCC.

[Charles Zhu]

Understood. Last one for me, so I think I see a few new expansion cohorts from COSMIC-021. I am also kind of wondering what is the thinking or the decision tree behind I guess adding patients to an existing cohort versus deciding to open up additional expansion cohorts versus going for a pivotal trial coming out of this?

[Gisela Schwab, Chief Medical Officer]

Yeah. Thank you for the questions. This is Gisela. We are obviously quite encouraged by the early data observed both on activity and safety from the COSMIC-021 initial cohort and that has sparked the expansion now in two cohorts in the CRPC setting and in the ICI pretreated non-small cell lung cancer setting. This is really intended to better understand and further expand the experience in these indications for the combination.

The addition of the cohorts that I described for prostate cancer is really intended to address multiple things. One, the activity of single-agent to address the contribution of components and to do so with a concurrent randomization to patients receiving the combination therapy, so that is the plan here and we are very encouraged by the early data.

[Charles Zhu]

Got it? Thank you very much for taking the questions.

[Operator]

Your next question comes from the line of Silvan Tuerkcan from Oppenheimer. Please proceed.

[Silvan Tuerkcan, Oppenheimer]

Hi. Thank you for taking my questions and congrats on the quarter. Just -- I just wanted to drill down a little bit more on the CABOMETYX sales. So if I look at the PFS increase of the ICI and TKI combo that was approved. I see 15 one months versus 11 up to four months increase in PFS. So would I be correct in thinking that the, well, obviously, with the checkpoint inhibitors there’s a long tail. But would I be correct in thinking that maybe one, two more quarters would be enough to reach equilibrium in the market of patients flowing into second-line?

[P.J. Haley, Senior Vice President, Commercial]

Yeah. Silvan this is P.J. I wouldn’t want to speculate exactly on the timing of that, but I think what’s clear is that the market hasn’t reached steady state and that could certainly take some time as I have mentioned given as you referred to the PFS increase of pem/axi and their relatively recent launch and that certainly gives CABOMETYX potential to continue to grow in a growing second-line RCC TKI monotherapy market.

[Silvan Tuerkcan, Oppenheimer]

Great. Thank you. And then in terms of your BD, you have quite an impressive amount of cash. You have very early partnerships. You are expanding your, let’s say, mid-line -- mid pipeline with COSMIC-021. You have some late-stage assets also reading out early next year. So what’s your focus here and has anything changed with the ANDA filing?

[Mike Morrissey, President and CEO]

Yes. It’s Mike. So as I said before on the question for Andy, again the ANDA filing wasn’t a big surprise to us and has had no impact. And our thinking around BD as we have talked about consistently over the last several calls, we continue to I think proceed in a very thoughtful and pragmatic fashion to be able to look for mid and potentially late-stage assets if not commercial assets that we think are attractive from a clinical commercial and competitive situation. We have a broad search and diligence effort ongoing to find assets in what’s arguably a pretty competitive space i.e. oncology and hem/onc if you will and that will continue.

So look we are very diligent here. We are being very careful and pragmatic about how we proceed. We don’t want to rush into a bad deal. We don’t want to go after assets that don’t make sense to us and certainly don’t want to overpay either.

So we are moving forward in a way that we think is appropriate based upon being good stewards of shareholders’ dollars and making sure that we can maximize the value of any investment that we make going forward. So as we make more progress and we do some of these transactions we will be sure to speak about that with investors in a public setting.

[Silvan Tuerkcan, Oppenheimer]

Great. Well, congrats on the quarter and looking forward to all the readouts early next year and thanks for taking my questions.

[Susan Hubbard, Executive Vice President, Public Affairs and IR]

You bet. Thank you.

[Operator]

Thank you. Your next question comes from the line of Kennen MacKay from RBC Capital Markets. Please proceed

[Kennen MacKay, RBC Capital Markets]

Hi. Thanks for taking the question. First on CheckMate 9ER just looking at the differences in baseline characteristics in the other I/O plus TKI frontline RCC trials and other I/O trials it strikes me that Merck really stacked the deck so to speak in their KEYNOTE-426 trial with 30% of the patients that are having low-risk disease that could have had a PFS numbers maybe OS numbers at least at the median and it’s sort of the highest proportion of any other I/O trial. I guess as we think about CheckMate 9ER is that 30% low-risk proportion set by Merck? Is that an appropriate part to think about CheckMate 9ER? And sort of on that same note as we are thinking about a frontline label for cabo axi’s label doesn’t include the pembro combo data. I just wanted to make sure that cabo’s label would include the CheckMate 9ER data if that trial is successful and if that indication is ultimately FDA approved?

[Gisela Schwab, Chief Medical Officer]

Yeah. This is Gisela. Thank you for the question. I think you hit on a very important point and that is really that it’s difficult to compare across trials, because patient baseline characteristics can vary and can influence outcome.

So with respect to your question on what to expect in CheckMate 9ER, obviously we are awaiting the data so can’t really speak to that at this current time and so we look forward to sharing the data of course when available and expected in early next year.

In terms of your regulatory question that inclusion of data and indications in labels, it’s obviously driven by regulatory submission and the intent of the company to pursue that labeling and so that’s as far as I can go. I think I indicated that we are working very collaboratively with our clinical development partner BMS and preparing for such findings when the time comes.

[Kennen MacKay, RBC Capital Markets]

Got you. Okay. Thank you. If I maybe a follow-up question for Chris, in the charts you -- or in the graphs you had shown of the TKI market shares, where is SUTENT and VOTRIENT still holding share in RCC and is the growth opportunity for cabo ahead of cabo/nivo combo? Is it only muscling out those other TKIs? And how do you do that from a marketing and medical education perspective? Thanks again.

[P.J. Haley, Senior Vice President, Commercial]

Yeah. This is P.J. I will address that question. So, first of all, the prescription data charts we are showing are for all indications there, so some of the SUTENT and VOTRIENT volume certainly for other indications, so it’s difficult to kind of parse that out by those segments.

That said, we see CABOMETYX competing well with those other TKIs SUTENT and VOTRIENT really across clinical risk groups and performing well relative to them as you can see from the data.

And we certainly view continuing to compete with them in the first-line setting for patients that for some reason may not be appropriate for an ICI combo as a high priority and competing for every eligible patient in RCC in addition to first-line and the second-line setting particularly in the ICI experienced setting.

[Operator]

Thank you. Your next question comes from the line of Yaron Werber from Cowen. Please proceed.

[Yaron Werber, Cowen]

Great. Thanks team and thanks for taking our questions. So maybe just the first question I don’t know if you can if possible give us a little bit of a sense in HCC, what are you seeing in terms of growth maybe quarter-over-quarter or since launch, I think in the last two quarters you have given us some sort of language on that and then I have a couple of follow-ons as well.

[P.J. Haley, Senior Vice President, Commercial]

Yeah. Hi, Yaron. This is P.J. So with regards to HCC we are very pleased with the performance since our launch in January. What we are seeing really is similar in terms of the proportion of our business in HCC to the first couple of quarters we have talked about. And HCC continued to grow for us in Q3 which we are very pleased with.

I think as we look forward we view HCC as a market that will be built as more and more better therapies potentially come to market with atezo/bev potentially getting approved in the first-line setting.

As I kind of mentioned that could bring more patients into the funnel getting systemic therapy generally and certainly then as ICI therapy moves from the second-line to the first-line and those patients transition to second-line more opportunity for TKIs where CABOMETYX is performing really well where we have an overall survival advantage and really confident in our data there.

[Yaron Werber, Cowen]

Okay. So is it fair that it’s a question of sort of bringing in more patients into the funnel as you mentioned in terms of market growth and then I don’t want to call it quite vacating but sort of moving ICIs to first-line and then really letting cabo then dominate the second-line setting is that sort of your vision?

[P.J. Haley, Senior Vice President, Commercial]

Well, I think, the potential is certainly there for that to happen in the relatively near-term as approximately half the market in the second-line is currently ICI monotherapy. So as that grows certainly gives us a nice opportunity for potential in that second-line setting in the relatively near-term before other trials like the cabo/atezo study would readout in the first-line.

[Yaron Werber, Cowen]

Okay. So…

[Mike Morrissey, President and CEO]

I think -- Yaron, it’s Mike. I think that’s the way to look at it from the standpoint of how you could logically see a progression there in terms of short term. Again capturing more second-line as we talked about previously as now in this case the ICI combo comes in the first-line and then certainly we are very excited about 312 and what that could do relative to the first-line setting.

So liver is a big area of growth potentially. We have talked about that extensively over the last couple of years, and hopefully, that will continue to be the case as time goes on and as more data comes out.

[Yaron Werber, Cowen]

And so is cabo -- has cabo expanded the second-line HCC market so far or is it really been sort of share gains from other drugs?

[P.J. Haley, Senior Vice President, Commercial]

Yeah. I think what we have seen is really -- is not really market expansion as of yet in the second-line setting but we have really seen cabo competing well particularly with the other TKIs and taking share from the TKIs there.

[Yaron Werber, Cowen]

Okay. Great. And maybe just a couple, just the housekeeping in terms of any sense you can give us a sense where inventories are and then also the price increase in January that was 4.5%, give us a sense how long does it take to actually see the typical sort of benefit because it didn’t seem like you have got a lot of it in Q3? Thank you.

[Chris Senner, Chief Financial Officer]

Yeah. Yaron, it’s Chris. So I guess I will take that in two pieces. So from an inventory perspective our wholesale inventory was essentially flat Q3 versus Q2. And then on the price increase we took it -- we took a 4.5% on July 1 and that all came through in the quarter, basically what happened during the quarter is as P.J. talked about we had a demand decline and then the price increase offset that demand decline and basically we ended up with essentially flat revenue Q3 to Q2. The only difference is the gross to net I talked about earlier during Andy’s question.

[Yaron Werber, Cowen]

Okay. Great. Thank you so much. Appreciate it.

[Susan Hubbard, Executive Vice President, Public Affairs and IR]

Sure. Yeah.

[Operator]

Thank you. Your next question comes from the line of Stephen Willey from Stifel. Please proceed.

[Stephen Willey, Stifel]

Yeah. Good afternoon and thanks for taking the questions. Maybe a couple of questions for P.J. and appreciate the commentary regarding some of the market share dynamics. But was curious if you have seen anything with respect to lenvatinib in renal cancer, I know Merck yesterday I guess called out renal as kind of a driver for lenvatinib sales. And was just kind of curious just because I think most of our diligence would suggest that lenvatinib and everolimus hasn’t really gotten much here time. But was curious if you are seeing anything in the market that would suggest otherwise?

[P.J. Haley, Senior Vice President, Commercial]

Yeah. I think -- thanks for the question. Really the len/eve combo as you suggested we really never saw that particularly get off the ground so to speak getting approved a couple of months after CABOMETYX did with our midyear label. What we hear from KOLs and physicians and see is it’s really just used in the salvage setting primarily given I think the toxicity issues et cetera and not seeing it really compete with CABOMETYX.

[Stephen Willey, Stifel]

Understood. And I know that there was some lenvatinib data presented at ESMO suggestive of I/O retreatment and just kind of curious as to kind of your perspective on that and whether or not you are seeing I/O retreatment in the marketplace as a potential headwind to second-line?

[P.J. Haley, Senior Vice President, Commercial]

Yeah. I mean, I think, so there’s been some a variety of data sets really small presented but we are not seeing retreatment with I/O at this point. There’s certainly no randomized data to suggest that there would be any rationale for doing that. So no it’s not something we are seeing.

[Stephen Willey, Stifel]

Okay. And then just lastly with respect to HCC, just kind of curious how do you anticipate I guess presuming you guys win in 312 how does that then kind of set up from a commercial and collaborative perspective with Roche in terms of their being active in the marketplace with atezo/Avastin and you guys also being there as well with atezo/cabo?

[Mike Morrissey, President and CEO]

Yeah. Steve, it’s Mike. That’s a great question. It’s tough to speculate on that in the absence of any data including the IMbrave data and 312 is still enrolling. So there’s many different levers one could imagine pulling there based upon how the data looked and based upon the differences in both activity and tolerability et cetera.

So probably wise if we kind of table that question for the future once we see the different components come out, again what we are hearing is that we will have the IMbrave data. We will see that sometime in the next month or so. So that will be a first stake in the ground and then obviously there’s lots of interest in 312 and being able to push that forward as aggressively and quickly as possible.

So we are excited about liver. We think that’s a growth opportunity for us and whether it would be getting more second-line utilization and a growing opportunity with first-line growing and then following up with that with a second 312 data set if positive could be very exciting for us.

[Stephen Willey, Stifel]

Great. Thanks for the color and rest of the quarter.

[Susan Hubbard, Executive Vice President, Public Affairs and IR]

Thanks, Steve.

[Operator]

Thank you. Your next question comes from the line of Paul Choi from Goldman Sachs. Please proceed.

[Paul Choi, Goldman Sachs]

Great. Good afternoon and thank you for taking our questions. I was wondering if we could maybe dig in a little more on the transition between the first-line ICI and the second-line and I appreciate that the process is still evolving. But can you maybe comment on for the patients who have seen prior immunocheckpoint therapy, can you maybe comment on what you are seeing with regard to duration and how that’s been potentially affecting -- duration of therapy and how that’s been potentially affecting utilization of CABOMETYX in the second-line?

[P.J. Haley, Senior Vice President, Commercial]

Yeah. Paul, this is P.J. Happy to address that. So I think what we have seen over time as patients have progressed off an ICI combination which at this point is really the nivo/ipi patients who have done that as we have seen cabo capture the majority of the patients in the second-line in that setting.

As far as duration goes in that setting it’s really I think too early to kind of speculate is that something you need time and lots of data to understand fully. There’s been certainly a lot of small data sets presented and the activity for all the TKIs in that setting seem reasonable but too early to really to get numbers there.

[Paul Choi, Goldman Sachs]

Okay. Thanks a lot P.J. And then one for Gisela, with the expansion cohorts in COSMIC-021, I guess what is the thinking with regard to timing and in terms of decision-making and prioritizing which cohorts to pursue next? And have you any sort of time line or strategic priority with regards to which cohorts you will advance and which ones you will win or prune potentially here?

[Gisela Schwab, Chief Medical Officer]

Yeah. It’s a large study of course with now 24 different cohorts, different tumor types and different settings and vary too much right and the dynamic decision making progress -- process with the first cohort expansion being 30 patients and based upon the data observed we can make decisions with a steady oversight committee to expand certain cohorts if warranted by the data both activity and safety. So that is an ongoing process and a very, very active process in a very active study and so in terms of prioritization we have the ability to expand multiple of those cohorts as we see the data come together.

[Paul Choi, Goldman Sachs]

Okay. Thank you for taking my questions.

[Operator]

Thank you. [Operator Instructions] Your next question comes from the line of George Farmer from BMO Capital Markets. Please proceed.

[George Farmer, BMO Capital Markets]

Hi. Thanks for taking my question. Gisela, could you comment a bit more on COSMIC-021 and how do you guys think about reporting that data out over time? Do we have to wait until all those cohorts are fully enrolled and complete or do you think we will see data as each cohort matures?

[Gisela Schwab, Chief Medical Officer]

Yeah. Thank you for the question. I think we said in first-line that’s still the position. We want to present mature data and that can be for individual cohorts. So it doesn’t have to be the whole study that has to mature as we move forward and we would expect in 2020 that we will begin presenting such data including the CRPC and lung cancer cohorts but perhaps others as the data mature.

[George Farmer, BMO Capital Markets]

Okay. And P.J. could you confirm again just the impact of the ICI therapies on cabo growth? Are you saying that those are taking over the front-line share that cabo has or is it really more about this pushing cabo at the second-line pushing, I guess, pushing -- a delaying cabo therapy into the second-line?

[P.J. Haley, Senior Vice President, Commercial]

Yeah. Hi, George. Thanks for the question. I think what we -- we had a slide and we showed that the ICI combinations have really come to take a large share in the first-line setting. So that’s put pressure on all the, excuse me, all the TKI monotherapies in the first-line and cabo share declined there and then stabilized in the third quarter.

So that’s one dynamic. And then the other piece of it is that those patients progressing of ICI combinations where PFS is four or five months longer than sort of the previous standard of care first-line TKI are taking longer to reach second-line.

So it’s really just sort of taking longer for those patients to get into second-line, where CABOMETYX is capturing the majority of the patients who have transitioned from first-line to second-line and progressed on an ICI combination therapy.

[George Farmer, BMO Capital Markets]

Okay. And is there any -- are there any differences in the various risk groups in RCC?

[P.J. Haley, Senior Vice President, Commercial]

Well, I mean, with regards to the risk groups I would just refer to the clinical data. Obviously, the favorable ones tend to do better and take longer to progress, and I think that’s sort of what we see in all the data that we have access to as well.

[George Farmer, BMO Capital Markets]

Okay. Thank you.

[Operator]

Thank you. Your next question comes from the line of Jeff Hung from Morgan Stanley. Please proceed.

[Jeff Hung, Morgan Stanley]

Thanks for taking the questions. You talked about the potential benefits of the ICI combo in front-line HCC for cabo monotherapy and second-line HCC. But can you talk about how IMbrave150 impacts your thinking on COSMIC-312?

[P.J. Haley, Senior Vice President, Commercial]

Well, I think, generally -- this is P.J. I think, obviously, there is an opportunity to expand the first-line market with newer better therapies and it’s certainly encouraging to see an ICI and antiangiogenic combination have a positive study in that setting where we have the cabo/atezo 312 study as Gisela and Mike referred to enrolling.

So certainly encouraging as we think about HCC going forward and nice to have the possibility of the pie sort of getting bigger in HCC bigger second-line opportunity for TKI monotherapy in cabo as ICI moves forward and looking forward to 312 study reading out in the first-line setting.

[Jeff Hung, Morgan Stanley]

And then in the new year do you plan to provide guidance on cabo sales or how do you think about timing for providing sales guidance?

[Mike Morrissey, President and CEO]

Yeah. Jeff, it’s Mike. Fair question. We will talk about that in 2020, stay tuned.

[Jeff Hung, Morgan Stanley]

All right. Maybe one last question, how do you think about capital allocation with regards to maintaining profitability?

[Mike Morrissey, President and CEO]

Yeah. So as we talked about previously there are both tactical and strategic reasons why being profitable is a good thing and that’s an important part of how we built the business over the last several years.

We have talked I think pretty extensively about being able to spend more as we make more and that’s still part of the plan too. We are a data driven business, more good data we get, more topline revenue and more profitability, so that will obviously continue.

We have, I think, big aspirations for what we think we can do internally, through our partnerships, through new collaborations, through companies that we might partner with or buy relative to how we can continue to build this diverse pipeline of oncology assets that we think can help a broad array of cancer patients, so that’s all part of the equation.

But it’s a pretty simple formula going forward for us, be careful, generate revenue, generate income, spend it wisely and continue to grow the business.

[Jeff Hung, Morgan Stanley]

Great. Thanks.

[Operator]

Thank you. At this time there are no further questions. And so I will turn the call over to today’s host Susan Hubbard. Ms. Hubbard?

[Susan Hubbard, Executive Vice President, Public Affairs and IR]

Thank you, Gigi, and thank you all for joining us today. We certainly welcome your follow-up calls with any additional questions you may have that we were unable to address during today’s call.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.