- Exelixis shares are still down 42% in the last six months, mainly due to news in March that a clinical trial would continue to final analysis, disappointing the Street.
- Shares are on the mend, and have surpassed their 50-day moving average.
- Exelixis currently has over a dozen clinical trials ongoing for its flagship product Cometriq, which, if the data are positive, could send shares sharply higher.
- Revenues from Cometriq are up 65% year-over-year, but competition is fierce and the company has a significant cash burn rate, with financing to last until late 2015.
- Given the number of catalysts upcoming and the potential market for Cometriq, Exelixis has the potential for massive rewards for the risk-tolerant investor.
As a PhD-level epidemiologist and market analyst, there is no sector more interesting to me than biotech. I have opined on several of these names in the past. Those of you who follow my work know that I search for companies that are near-completion of developing new drugs, or have only a few licensed for use. In this article, I would like to discuss a company that currently has revenues, but is conducting numerous trials that have the potential to bring in exponentially higher revenues in the years to come. While there are always risks involved in this sector, my review of the data and the potential for Exelixis (NASDAQ:EXEL) makes me believe that shares have strong potential upside from their current levels, if positive data is reported. The reverse is also true, should the data be poor. But, I think after the sell-off in shares that occurred this spring, Exelixis may be one of the best opportunities for trading and profiting from data releases into 2015, if you can stomach the risk.
Addressing the stock's 2014 sell-off
Why do I see opportunity? Well Exelixis stock had performed well as we moved from 2013 into 2014. But, in March, Exelixis announced that the independent data monitoring committee overseeing its COMET-1 Phase 3 trial evaluating its leading drug Cometriq (also known as cabozantinib, or XL 184) for the treatment of metastatic castration-resistant prostate cancer recommended that the trial proceed to the planned ending and subsequent final analysis. I want to be clear. In most circumstances when a trial proceeds, that is, the data are not poor enough to cancel the trial, the news is usually welcomed, because it suggests that the safety and efficacy of the therapy is pretty darn good.
But here is the problem. There is competition. In fact, there are several drugs on the market for metastatic prostate cancer. Some competitors had their trials stopped early at the first review because the data were so strong (see below in the section "Risks"). I think back in March expectations had grown too high for Exelixis, and so when the trial was recommended to continue to its end point, the Street unfairly punished the stock, cutting the value of the company in half in one week, as shares plummeted from well over $6.00 to just $3.00.
Why did this happen? I think this occurred because investors began to believe that perhaps Cometriq did not reduce the risk of death, and thus may not have been better than standard therapy, and probably not as efficient as competitors' offerings. That, however, is just my opinion. What is reality is that the data was sufficient enough to have some effect, enough so that the data monitoring committee said "keep going." Further, the fact is that the stock got absolutely crushed on news that was not necessarily "bad". I think it was a situation, which often arises in the biotech sector, of shoot first and ask questions later. In this case, with the expectations the Street had, Exelixis shareholders got caught in the crossfire.
I've followed biotech for some time, and I can tell you a small sell-off was probably warranted, given what occurred with competitors' trials, but a 50% plus sell-off, to me, rang of opportunity once shares started turning around. To be honest, the Street reacted as if the trial had been stopped early because of safety or tolerability concerns. But the trial is going to its final analysis. Now that the stock is starting to come back on and technically the stock is looking better (Figure 1), with the potential number of data events coming from its various trials coming up, I am comfortable recommending this stock at current levels, if you can tolerate risk. It has surpassed its 50-day moving average of $3.70 (as of August 18th, 2014). Now, it did dip all the way down to $3.02, but has now recovered to $4.20, so it has appreciated nearly 40%, but I think the positive momentum can continue because of upcoming catalysts, in conjunction with good data to-date.
Figure 1. One-Month Share Price of Exelixis Relative To Its 50-Day Moving Average As of August 17, 2014.
Final COMET-1 Data
The final COMET-1 trial data could be a game changer. There is risk. If the final data is poor, shares will get slammed. However, if the data is strong, expect shares to rise. While I am not privy to the data, of course, I predict that the final analysis will show that Cometriq demonstrates superior death risk reduction relative to the comparison therapies. My hunch is that the statistical power was not strong enough to detect differences at the interim trial. This is because there were not enough events to adequately detect smaller differences between treatment and control groups.
In order for the trial to have been stopped early, the data would have had to have been so one-sided that it was overwhelming. Since the trial in question is powered to detect a 25% reduction in the risk of death (that is, to detect statistical significance at a hazard ratio of 0.75) at the time of final analysis, which requires 578 outcome events, the interim analysis suggests that the data was not overwhelmingly positive. Further, it only had 387 events, which is only 66% of those needed to detect with 90% power the 25% reduction. However, if we look at what happened to the stock, you would have thought the trial was ceased early for negative reasons. But with another third of the data yet to be collected, the sample size for analyses will increase, and data analysts will have a better ability to determine whether the effect of Cometriq in the COMET-1 trial is significantly better than standard therapy alone.
When top line data is reported later this year, if the drug shows a statistically significant positive effect, the shares will move higher. If not, they will move lower. Given the prior trials on Cometriq, I am hard pressed to believe there will not be an effect. If the data are positive and Exelixis eventually receives FDA approval for this condition, just how much in sales are we talking about here? Well, I believe Cometriq could do half a billion in sales for metastatic castration-resistant prostate cancer based on sales for competitor's products. Further, Exelixis has FDA approval for treatments, so it is already generating revenues. Cometriq was also approved to treat metastatic medullary thyroid cancer in the European Union. For this condition, Exelixis should see revenues in the coming quarters ramping up into 2015.
Other Cometriq trials
Cometriq is also being studied in many other trials. In fact, Exelixis has a dozen trials at various stages. Below is a very brief summary of other studies (with links to each provided in the "status" column). What is key here is that each trial and announcement regarding them serves as potential catalysts for the stock moving forward (Table 1). More specifically, significant catalysts will come in the form of data releases. Of course, these activities burn cash. Please see the quarterly results section below for more on the company's cash burn.
Table 1. Status of Exelixis Clinical Trials
Medullary Thyroid Cancer
Study of Two Different Doses of Cabozantinib (XL184) in Progressive, Metastatic Medullary Thyroid Cancer
Medullary Thyroid Cancer
Efficacy of cabozantinib (XL184) in Advanced Medullary Thyroid Cancer (NYSE:EXAM)
Castration-Resistant Prostate Cancer
Efficacy of cabozantinib (XL184) versus mitoxantrone plus prednisone in castration-resistant prostate cancer (COMET-2): evaluation of pain response.
Metastatic Renal Cell Carcinoma
A Study of Cabozantinib (XL184) vs. Everolimus in Subjects with Metastatic Renal Cell Carcinoma (METEOR).
A Study of Cabozantinib (XL184) vs. Placebo in Subjects With Hepatocellular Carcinoma Who Have Received Prior Sorafenib (CELESTIAL)
Randomized Discontinuation Trial
Study of XL184 (Cabozantinib) in Adults With Glioblastoma Multiforme
Study of Multiple Doses and Regimens of XL184 (Cabozantinib) in Subjects With Grade IV Astrocytic Tumors in First or Second Relapse
Safety Study of XL184 (Cabozantinib) in Combination With Temozolomide and Radiation Therapy in the Initial Treatment of Adults With Glioblastoma
Study to Assess the Pharmacokinetics of Cabozantinib (XL184) in Hepatic Impaired Adult Subjects
Healthy Hepatic Impairment
A Single-Dose Study to Assess the Pharmacokinetics of Cabozantinib (XL184) Capsules in Subjects With Impaired Renal Function
Healthy Renal Impairment
A Single-Dose Study to Assess the Pharmacokinetics of Cabozantinib (XL184) Capsules in Subjects With Impaired Renal Function
As we can clearly see, there are a number of trials being conducted at the present moment. It is important to note that although these trials serve as potential catalysts, with every data release comes the risk that the news is poor, thereby driving the stock price down. Given that Cometriq is already approved for other conditions, I think this helps quell some of the risk in the trials. Obviously, the trials in Phase 3 are the most costly and will serve as the largest catalysts, but positive news from some of the smaller trials can give the stock a boost. This happened most recently on May 7th, when Phase 1b trial data was reported for the BRIM-7 study. Essentially, the trial showed anti-tumor activity for the combination of cobimetinib and vemurafenib, and the stock got an 8% boost on the release. Expect the stock to move double digits when Phase 3 data is completed.
Recent performance and financials
Ok, so far I have presented the potential for the stock to move higher on news-driven events. I have avoided being too focused on the data, as it is available in many of the links provided. For the most part, things have been pretty good. I reiterate the statistical power issue of the COMET-1 trial that I outlined above. Because the data were not overwhelmingly one-sided, there lacked power to say "Yes, stop the trial early." However, we know that the data was good enough for the data monitoring board to say "Keep going." I think a lot of investors are overlooking this fact and instead focusing on the disappointment that the data was not a landslide. As such, the study goes on. So is the company going to go broke with all of its research and development expenses? The company pumps so much into research and development, it made the top 50 list of most innovative companies based on its spending in research, revenues and return to shareholders.
In the company's most recent quarter, it saw revenues of $6.6 million derived solely from product revenue from Cometriq sales. In the comparable 2013 quarter, revenues were $11.9 million. On the surface, the sequential year-over-year performance looks bad. However, the 2013 quarter included a special $7.8 million license and contract revenue line from a deal with Bristol-Myers Squib (NYSE:BMY). Product sales were only $4.0 million. Thus, if we back out the special revenue line, we see revenues increased year-over-year by $2.6 million, or 65%. Of course, such collaboration and license revenues are always welcomed to generate more cash, but the organic growth is extremely promising.
Now what about cash burn? Many of the clinical trial-stage companies in this sector burn significant cash, and Exelixis is no exception. It spent $51.0 million in Q2 2014 on research and development, $16.5 million in administrative expenses and $11.7 in other expenses (related primarily to interest expense and other financing costs). Thus, the company spent approximately $79.2 million in the quarter on these major areas. Factoring in the $6.6 million in revenues and other smaller costs, the company reported a loss of $73.4 million, or $0.38 per share. Ouch. This compares to a loss of $62.2 million, or $0.34 per share, in 2013. That is indeed significant cash burn. Granted, the company is financing a dozen trials (Table 1) and is working to secure ongoing partnerships with Roche (OTCQX:RHHBY) and Genentech. But, the company cannot burn cash at this rate forever, and this is a real risk for further shareholder dilution in the future. Thankfully, the company still has $352 million in cash, so assuming future quarters have the same burn rate (they won't, it will vary), the company has enough cash for the next 5 quarters, or to late 2015. This assumption does not take into account future partnerships and/or advances in sales of Cometriq, which would obviously slow cash burn.
Competition is fierce in this sector. There are many prostate cancer drugs on the market, including ones from competitors who had their trials stopped early. One example is Zytiga that was made by Johnson & Johnson (NYSE:JNJ). Another was Xtandi from the company Medivation (NASDAQ:MDVN). According to this article: "Given the sales potential in the prostate cancer market (analyst estimates for peak sales of Cometriq have run as high as $1.7 billion assuming an approval), there is lots of opportunity here if Cometriq can make it past regulatory review" for all of these other conditions. I also just spent a ton of time going over cash burn. It is high. Another dilutive equity offering could be around the corner in late 2015, if Exelixis cannot slow the burn rate. I have no reason to expect it will slow significantly, given all of the trials. Now, one positive is that Exelixis is focusing on its flagship product and trying to gain approval for added conditions, which has two benefits. The first is FDA has historically, in my experience, been more likely to grant approvals for other conditions (provided data is sound) if the drug has demonstrated effectiveness and safety previously. It also helps Exelixis get around some of the earlier expenses of developmental, animal and some pharmacokinetic studies. Second, each time a new condition is granted, it extends the life of a patent, which can help the company compete with other drugmakers, and also makes the company a potential buyout candidate, because a larger company may want access to the drug.
It is quite interesting that what makes this stock attractive is exactly what is scary about the name. Namely, the number of trials it is conducting. If the data is sound, the stock could skyrocket. But if it comes up short, shares will get crushed. With cash being such an issue, Exelixis really does need some of the Phase 3 trials to have excellent outcomes. This could drive approvals, and of course, drive future revenues, offsetting the cash issue at least temporarily. The biggest catalyst will be the final Phase 3 COMET-1 data. The interim data led to a 50%-plus haircut. If it is good data, expect shares to move significantly higher, given the potential market for specialized prostate cancer treatments.
Will the upcoming catalysts be positive?
I think that there is a strong potential that data will be strong, given the last few releases. Even the COMET-1 interim data, which disappointed the Street because it was not "overwhelming," was still positive overall. Further, some of the smaller releases made, including the BRIM7 Phase 1b study I mentioned above, have been positive for the stock. Further, while I have outlined all of the trials underway, what I cannot predict without indication from management is any upcoming contracts or partnerships, which are usually always well-received. Just over a month ago, Roche announced that in patients with advanced melanoma, the addition of Exelxisis' developmental-stage product, Cobimetinib, to Roche's zelboraf significantly improved progression-free survival, and as such, a continued partnership is likely. However, in the clinical trial world, it's all about the data. Past performance cannot guarantee future success in other trials, but I will say that for the most part, Exelixis has had much success with its Cometriq trials, and as such, I am opining on the stock now because I think the stock will trade on the headlines.
Exelixis has excellent potential, but comes with high risk. There are multiple catalysts that could move share prices with extreme volatility, either higher or lower, depending on the outcome. I suspect that the data for the COMET-1 trial will be favorable. It is just that the study lacked power, barring an overwhelmingly positive response, that suggests the trial should have been stopped early in March. With the METEOR, EXAM and CELESTIAL Phase 3 trials underway, investors are in for real moves in Exelixis share prices in the coming quarters as data is released. Keep an eye on Cometriq revenues, as I expect them to grow. But be mindful of the cash burn. A dilutive offering has the potential to put a lid on share prices, regardless of where the stock was historically valued. Despite the risks, I think Exelixis is a great speculative play in the cancer treatment space.
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