Exelixis' COMET-2 Failure And A Discussion Of Potential Future Cash Flow

| About: Exelixis, Inc. (EXEL)
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Summary

In my initial piece, I highlighted that I believe that Exelixis is a sell given its substantial debt load and significant cash burn.

Given the negative COMET-1 results and the fact that COMET-2 was halted, I believed it to be self-evident that we would not see anything positive out of COMET-2.

The NDA for cobi in metastatic melanoma should be filed by Roche by year-end, and this could provide shares with a 5-10% pop, though this won't likely stick.

I expect cash and equivalents in the neighborhood of $150 million by the time of METEOR results in Q2 with shareholder equity declining as cash is burned.

While positive METEOR results is not a high probability event, success would provide Exelixis with a similar revenue opportunity as Novartis' Afinitor in RCC.

I initiated Exelixis (NASDAQ:EXEL) on November 17th at $1.74 with a sell recommendation as I believed that any chances at future revenue would be overshadowed by the company's substantial burn rate (even with the significant job cuts), and I highlighted the enormous debt on the company's balance sheet leading to its negative shareholder equity. Since the sell recommendation initiation, the stock has declined 16% based on the current price of $1.47.

Early on Monday December 1st, the company issued a press release stating that its COMET-2 pivotal phase 3 trial of cabozantinib in men with metastatic castration-resistant prostate cancer failed to meet its primary endpoint of alleviation of bone pain as there was not a statistically significant difference between the cabo arm and the control. This result was largely expected. Based on the COMET-1 failure in early September, the company had already gone ahead and halted enrollment in COMET-2. CEO Michael Morrissey emphasized this by stating that, "following the COMET-1 top-line results announced in September, we deprioritized the cabozantinib development program in mCRPC."

Given the clear likelihood of negative results from the halted COMET-2 trial with the negative COMET-1 trial, I was certainly very surprised to see the stock down 15% at one point on the day of this news on substantial volume. While I think the company has the potential to reach bankruptcy due to its high burn rate, this COMET-2 failure does not really have much of any incremental meaning given the COMET-1 result and investor focus should be on the METEOR results on track for Q2 2015. Potential revenues from cabozantinib for patients with progressive, metastatic medullary thyroid cancer (MTC) as well as potential sales for cobimetinib in metastatic melanoma patients should be data points of interest for investors. Seeing how much the cuts put in place in September actually cut expenses will also be an important factor that I will be watching.

Expense Projections

In my previous articles, readers had requested more discussion in regards to potential revenues for the various pipeline assets and indications as well as a clearer breakdown of expenses. While I do not believe that these revenues will be enough to cover debt and expenses in the longer term, this is nonetheless a beneficial exercise to understand cash flow going forward.

In terms of expenses, I think it would be most helpful to have a good understanding of what the company's balance sheet might look like at the time of the release of METEOR results.

What We Know:

-The company ended Q3 with $293.5 in cash and the company has guided that it will have greater than $200 million in cash as of year-end.

-Fiscal year operating expenses have been guided for a range of $250-$260 million for the full year 2014 period. Given operating expenses of $196 million through the first three quarters of 2014, that gives us an estimate of $54-$64 million for expenses in quarter 4.

EXEL Total Operating Expenses (Quarterly) Chart

EXEL Total Operating Expenses (Quarterly) data by YCharts

Given expenses from trials like COMET-1 and COMET-2 beginning to wind down, and given the recent restructuring, I think it is pretty reasonable to assume that expenses will be roughly equal or even slightly less than last quarter, when we saw $57.29 million in expenses. Given last quarter's expense level, and given the company's operating expenses, I think is reasonable to narrow their projected operating expenses to a range of $54-$58 million for quarter 4. While the expense range given by the company did include most of the restructuring expenses per the latest quarterly call, it did not include the costs related to potential building exits. Per the most recent 10Q:

We have recorded restructuring charges of $3.3 million from inception of the 2014 Restructuring through September 30, 2014 and anticipate that we will incur additional restructuring charges related to the exit of all or portions of certain of our buildings in South San Francisco, California. These charges will be recorded through the end of the building lease terms, the last of which ends in 2017.

This restructuring was initially put in place in early September after the COMET-1 failure. While it is prudent to not speculate too much in terms of how the potential building exits might affect financials given all the various factors such as potential lease exit costs and the sublease market, it is certainly pertinent to build in some potential costs to be on the conservative side, which is why I will use a Q4 estimate of $60 million for operating costs and potential building exit costs.

What will expenses look like in Q1 and Q2 2015 as we approach METEOR results? 90% of the one-time restructuring charges associated with the terminations from the 2014 restructuring will be taken in 2014. We know that restructuring charges were guided to be between $6 and $8 million per the company's September release. Given the $3.8 million restructuring charge in Q3, that would leave us with an estimate of $1.6-$3.4 million for the Q4 restructuring charge related to terminations and approximately $0.7 million of this type of charge in 2015. I have already built a bit of a buffer into my Q4 expense number should there be any odd building expense costs. The company should receive some sort of sublease revenue so at this point I am comfortable using just the buffer in Q4 to address this potential cost until we receive clearer guidance from the company.

In regards to expenses from clinical trials, while we have received results from the two P3 COMET trials as well as the EXAM trial, the company is still incurring reasonably substantial expenses from these as it takes significant time and money to wind down large-scale late-stage trials. Given this, we will probably need to wait to close to mid-2015 until we can see a larger reduction in R+D expenses. Given that restructuring charges in terms of terminations will be mostly dealt with in 2014 and given that we should see SG&A significantly reduced, operating expenses should more in the range of $50 million each on average for Q1 and Q2 2014. In terms of SG&A, while it no doubt will be reduced with the restructuring, expenses for marking COMETRIQ as well as potential expenses related to the copromote agreement for cobi with Roche (OTCQX:RHHBY) would be possible items within this number. I would expect the Q2 number to be less than the Q1 number as R&D costs slowly subside, but, given the time and costs necesary to wrap up R&D, I do not think it is appropriate to expect a more substantial reduction in R&D costs until Q3 2015. In terms of the income statement, note that interest expenses have been in the range of $12 million in the most recent quarters.

COMETRIQ MTC Revenues

Given that we have not been given estimates for future revenues of COMETRIQ, this is something we will need to project.

Backing out the $1.8 million project management fee paid to Exelixis' European distribution partner (Sobi), revenue for COMETRIQ in Q3 would sit at approximately $8.1 million, suggesting a 69% increase year-over-year. I have applied this same year-over-year figure to calculate estimates for the next two quarters shown on the above chart, also including the $0.6 million fee that the company expects to pay to Sobi in Q4. My Q1 2015 estimate would imply annual revenues of approximately $33 million. I have chosen to use this same figure for Q2 2014 until we see another quarter of revenue and hopefully receive some guidance from the company. What gives me pause is determining how quickly we can expect revenues to ramp up in Europe. Per the most recent EXEL report, "Timelines for securing reimbursement in the individual European Union countries can vary considerably, with some countries taking twelve to eighteen months to approve products for reimbursement." While this is no doubt something that the company will work through fine, this could mean that the ramping of sales in Europe could be a bit slow as we wait for this be addressed and for things such as promotional activities to have an effect.

Given the numbers I have presented, this would suggest cash and equivalents in the neighborhood of $150 million by the time of METEOR results in Q2. I would expect stockholder's equity (-$58.5 million as of Q3 2014 end) to decline at a rate similar to cash burn.

Other Future Revenues

One of the main question remaining is what can we expect for future revenues. Given that the company has not yet provided any revenue projections for cobi in metastatic melanoma, the best methodology we have for analyzing this is looking at analyst opinions as well as considering comparables. I highlighted in my previous piece Leerink's estimate of $150 million in peak sales. Leerink's main points in deriving this estimate are the fact that there are four other MEK inhibitors in development for melanoma, the broader shift to immunotherapy, and the pricing competition with GlaxoSmithKline (NYSE:GSK)'s combo of trapetinib and dabrafenib, which is also a combination of a MEK inhibitor with a BRAF inhibitor as is the cobi-vemurafenib treatment. As I previously noted, opinions do vary on the potential revenue opportunity for Exelixis here as some have even suggested the cobi-vemurafenib combo could see north of $1 billion in worldwide sales. Also of note is that CEO Mike Morrissey did not completely shoot down the idea of monetizing the company's stake in cobi when this topic was brought up by an analyst in the most recent quarterly call, so this is a low-probability event that would likely provide shareholders with some upside.

While cobi in metastatic melanoma will no doubt be a nice little revenue opportunity for EXEL, I have stated that I believe that success in METEOR is pretty essential for Exelixis' survival. METEOR is looking at using cabo to treat metastatic renal cell carcinoma (RCC). In terms of time of the data release, our point of reference is that the 375th patient was enrolled in June 2014 and that EXEL is assuming a 7.5 month progression-free survival (PFS) for the cabo arm and a 5 month PFS for the comparison arm. The primary analysis for this study is based on the first 375 patients enrolled. While the primary endpoint is based on PFS, overall survival (OS) will be an important data point. While the FDA has recently showed the willingness to approve based on PFS, a statistically significant OS results would give both the market and the FDA significant confidence in cabo for this indication. As far as comparable drug, we can go ahead and look at Novartis' (NYSE:NVS) Afinitor, which is being used in the METEOR comparison arm. Afinitor was originally approved as a second line of treatment for RCC in 2009. In the most recent quarter, Afinitor sales totalled $408 million, with 25 percent of these sales associated with the RCC indication. Being a student of the potential future trends in the RCC market is very important. A late 2011 report by Decision Resource Group projected that the RCC market will grow by 3.7% annually through 2020. A recent report by Datamonitor Healthcare though suggested that the RCC market will peak in 2019 and then decline significantly due to generic competition.

Concluding Remarks

In my initial piece, I highlighted that I believe that Exelixis is a sell given its substantial debt load and significant cash burn, which I do not envision being offset by revenue before its financial position gets significantly worse. Given the negative COMET-1 results and the fact that COMET-2 was halted, I believed it to be self-evident that we would not see anything positive out of COMET-2. While I have clearly highlighted my position believing that this stock is a sell in my original piece, this sell-off from what really was known for the most part provides entry for those that believe the company will be turned around by spectacular METEOR results. The purpose of my updated piece is dig into what financials will look like as we get closer to the METEOR data release as well as provide a bit more discussion on potential future revenues. I encourage others to combine the framework of the information I have provided with their own assumptions. In terms of upcoming events, I would note that the NDA for cobi in metastatic melanoma should be filed by Roche by year-end, and I would think this could provide shares with a 5-10% pop, though this won't likely stick. I will continue to look to provide more details on cash runway and potential revenues in future pieces. If the company seems more willing to consider strategic alternatives (this would potentially be the case in the event of a METEOR failure), this is something I also look forward to writing about and would have the potential to provide the company with a way to avoid bankruptcy.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.