Shares of Exelixis (NASDAQ:EXEL) continue to chug higher and specifically are up nearly 33% since I last covered the company in early-mid July, primarily helped by the recent comeback in the biotech sector (NASDAQ:IBB) with the index posting a record 14% gain over the past month. This past week, the company reported strong initial sales of Cabometyx, recording $17.6 million in sales in just the nine weeks that were left in Q2 post-launch. Now sporting a market cap of $2.5 billion, Exelixis appears to be fairly-valued at the moment but should have more room to run if Cabometyx continues to outperform heading into the end of 2016. That said, I am raising my 12-month target derived utilizing the same blend of 70% rNPV and 30% M&A (4x peak sales) to $12/share, implying additional upside of ~12% from current levels.
Initial Cabometyx Sales Come Well-Ahead of Consensus, Looking for a Strong Close to 2016
Initial sales for the first-nine weeks definitely represented a strong uptake, even considering the $6.5-$7 million inventory build which technically takes sales for actual demand down to around $10.6-$11.1 million. Regardless, the launch appears strong with nearly 75% of scripts coming from physicians who are new to cabozantinib. Around 200 scripts seem to have been filled in the nine weeks assuming ~4.3 weeks/month and an adjusted monthly WAC of $12,375. Note however that the company utilizes the "sell-in" method of revenue recognition which means that sales aren't directly tied to patients treated in essence. Management did state that the uptake was relatively balanced and strong amongst both second and third-line patients which is excellent news and indicates that the compound is competing well and that physicians do indeed see it as a viable second-line option. Recall, I mentioned in my previous piece that cabozantinib did surprise with some diarrhea and fatigue in the ongoing METEOR study, which I believed physicians would overlook given the trifecta of PFS, OS, and ORR data. Moreover, it appears that physicians are either taking the chance upfront or in fact following through on dose-modifications as I predicted, which is a healthy sign for Cabometyx and the company. Perhaps the biggest surprise comes in terms of actual gross-to-net versus what I initially projected, with the company reporting ~10% for adjustments in the second quarter, well below my conservative outlook of 30%. Thus, I am adjusting my model accordingly which in turn drives my rNPV/share projection for Cabometyx in 2nd-line or later advanced RCC to $7.58 from $6.67. Keep in mind that the company did not breakdown gross-to-net adjusmtents by product and the ~10% reported is overall for both Cometriq and Cabometyx. Nonetheless, this comes as a pleasant surprise and demonstrates the pricing power the drug commands in an indication so severe.
A spark in Cometriq sales growth also helped the company beat consensus estimates, delivering growth of over 50% on a sequential q/q basis. Note however, I continue to share the same view as management regarding a gradual decline in Cometriq sales in the coming quarters, primarily due to the approval in Cabometyx. As Cabometyx was on the market from around the end-May and onwards, the majority of sales from Cometriq still came from providers prescribing it for the treatment of advanced RCC at their own discretion. That said, I am maintaining my outlook for FY 2016 Cometriq sales to come in at just over $40 million. Knowing that demand for Cometriq in MTC patients is expected to be relatively stable according to management, I haven't modeled a drastic or sudden decline in Cometriq sales, though investors shouldn't expect growth of any kind as patients gradually switch over to Cabometyx from Cometriq.
With Initial Uptake Overhang Removed, Dilution Risk Comes Into Focus
There's little doubt now regarding the potential and speed of Cabometyx's penetration, but with the company now increasing its guidance for operating expenses to $250-$270 million for FY 2016, I wouldn't be surprised if the company takes advantage of the stock outperformance and raises additional equity at current levels. Moreover, with the increase in headcount for the team handling Cabometyx's launch and management of ongoing studies, the company could use an additional in $150-$200 million in my view.
With sales for demand for Cabometyx appearing to come in around $10.6-$11 million for the first-nine weeks, I am now projecting full year sales to come in at around $70.7 million for the first ~7 months the drug is on the market. Suffice to say that this is a significant move upwards from my initial projection of only ~$26 million, which was primarily driven by higher gross-to-net adjustment projections and slower uptake. Additionally, I am increasing my peak sales projection to ~$634 million from ~$527 million, and factoring in gross-to-net adjustments of 12.5% and 15% starting in 2019 and 2023, respectively. Further, I have altered my WAC pricing model to now forecast a 3% increase in 2018 and 2019, followed by 5% increases on a yearly basis starting in 2020. The drop in sales in 2025 is due to patent expiry in September 2024 for cabozantinib's use in RCC.
Figure 1: Cabometyx Updated Model in 2nd-line or Later Advanced RCC
Moving on to cabozantinib in HCC, the company reaffirmed its timeline of reporting top-line results from CELESTIAL in 2017 and is targeting enrollment of 760 patients. Clinicaltrials.gov (NCT01908426) lists October 2016 as the estimated primary completion date which should allow for an early-mid 2017 top-line readout. In terms of changes to my model, rNPV/share attributable to cabozantinib in HCC has increased to $1.56 from $1.08, primarily driven by changes to expected gross-to-net, like the change in Cabometyx's model. Peak sales for the agent in HCC are around $304 million and I am staying consistent with my risk-adjustment by keeping the LOA (likelihood of approval) at 50%.
Figure 2: Exelixis Updated Valuation Summary
Note: Data as of market close, August 8th, 2016
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EXEL over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.