Exelixis: A Busy Year Ahead For Company Buoyed By High-Profile Trial Win

Summary

• Exelixis is an oncology-focused biotech developing treatments for difficult to treat cancers. Its flagship molecule is Cabozantinib - an inhibitor of multiple tyrosine kinases.
• The company's flagship product Cabometyx - a tablet form of Cabozantinib for treatment of kidney and liver cancer - was responsible for 98% of Exelixis' net product sales in 2019.
• The company has 3 other approved treatments including another Cabozantinib derivative Cometriq, indicated for a rare form of thyroid cancer.
• The strong efficacy profile of Cabozantinib is highly promising - the drug is currently involved in 85 ongoing or planned clinical trials.
• Crucial to the company's fortunes are 6 key data readouts due in 2020 including Cabozantinib in combination with Opdivo, Tecentriq and as a first-line monotherapy.
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Investment Thesis

Exelixis 1-year share price performance. Source: TradingView.

Exelixis (NASDAQ:EXEL) stock surged 61% in late April to a price of $26.3 on news that its flagship drug, the tyrosine kinase inhibitor ("TKI") Cabozantinib, had met its primary endpoint in a combination trial alongside Bristol-Myers Squibb's (BMY) best-selling cancer drug Opdivo for previously untreated advanced Renal Cell Carcinoma ("RCC").

The market had gone a little cold on Exelixis since the company's shares traded at an all-time peak (excepting a brief period in 2000) of $30.4 in January 2018, probably due to the fact that, despite its notable achievement of successfully commercializing Cabozantinib against the odds - securing approval for 2 derivative drugs, Cabometyx and Cometriq - sales have been somewhat sluggish, not quite meeting the blockbuster targets that analysts forecasted.

The strong efficacy profile of Cabozantinib, however, means it has the potential to become an effective first-line treatment for a range of cancers, either as a monotherapy or in combination with other treatments such as Opdivo, or Tecentriq - Roche's (OTCQX:RHHBY) $5.5bn selling treatment for bladder and lung cancer.

Whilst Exelixis is heavily dependent on the long-term success of Cabozantinib - since its pipeline will take time to develop and its other commercialized drugs require more time to build sales - the signs look very promising. Cabozantinib is currently the subject of 85+ clinical trials, many of which are evaluating the drug as a first-line treatment, meaning Exelixis will have the opportunity to target these more lucrative markets going forward.

Whilst the company has forecast an overall decrease in revenues for 2020, based on broadly flat sales of Cabometyx and Cometriq and fewer milestone payments from its collaboration partners, the future revenue streams that the company can achieve more than outweigh the short-term headwinds, in my view. With 6 major data readouts from trials due in 2020, I believe Exelixis' share price has good upside potential and hence I am bullish on the stock.

In this article I will discuss the company and these price catalysts in more detail and present a case for a current fair value price >$30, exceeding the consensus analyst target price of $29.09 (high of $40, low of $21).

Company Overview

Exelixis' CEO (and previously head of R&D at the company) Michael Morrissey is credited with switching the company's focus from being a platform developer of drug candidates to devoting substantially all of its efforts to Cabozantinib, after both GlaxoSmithKline (GSK) in 2008 and Bristol-Myers Squibb in 2010 turned down partnership opportunities - in BMY's case, despite the fact that it held the rights to the drug, which was about to enter phase 3 trials.

The results from these trials - METEOR and CABOSUN - showed that Cabozantinib demonstrated statistically significant and clinically meaningful improvements in three key efficacy parameters: overall survival ("OS"); progression-free survival ("PFS"); and objective response rate ("ORR") when treating advanced stage renal cell carcinoma ("RCC") as a single agent therapy. Cabozantinib also outperformed current TKI standard-of-care Sunitinib in previously untreated advanced-stage RCC patients, demonstrating superior PFS and ORR.

Cabometyx - a tablet form of Cabozantinib - won FDA approval in April 2016 as a second line treatment for RCC - a disease which causes >700,000 deaths every year globally and has a survival rate of just 12.1% - and secured approval as a first-line treatment in December 2017, where it competes in a crowded field against treatments including Pfizer's (PFE) Inlyta and Sutent, Novartis' (NVS) Afinitor, BMY's Opdivo and Yervoy combo and Merck's (MRK) mega-blockbuster Keytruda (in combination with Inlyta). Cabometyx has also recently gained FDA approval as a second-line treatment for Hepatocellular Carcinoma ("HCC").

Exelixis has agreements in place with Ipsen Pharma (OTCPK:IPSEY) who markets and sells Cabometyx outside the US and Japan (where it is approved for RCC and HCC in 51 countries), and Takeda Pharma (OTCPK:TKPHF), to develop and commercialize Cabozantinib in Japan. Besides Cabometyx, both companies also market and sell Cometriq - Exelixis' other commercialized, capsule form of Cabozantinib, which is approved for treatment of a rare form of thyroid cancer - approved in the US and EU.

Exelixis also markets and sells 2 other commercialized drugs. Cotellic - an advanced melanoma combination treatment marketed in collaboration with Roche subsidiary Genentech - and hypertension treatment Minnebro, which is approved in Japan and licensed to Daiichi Sankyo (OTCPK:DSKYF). The revenue contribution from these 2 drugs is negligible, however, and it would be fair to call Exelixis a one-drug company at this time, although its clinical pipeline consists of a handful of promising early stage treatments mainly licensed to development partners, including Sanofi (SNY) and Bristol-Myers Squibb.

Recent Performance

In FY19 Cabometyx made sales of $733m and Cometriq, $26.5m whilst collaboration revenues earned by Exelixis totaled $207m, meaning the company posted top-line revenues of $967m - a 13% year-on-year increase. Net profits were $321m and EPS $1.02 - giving a P/E ratio of 22x based on current share price.

In Q120 the company posted revenues of $227m, with the Cabozantinib franchise contributing $194m. The top line was down 5.6% on a sequential basis but up 5.3% on an annual basis. Net income was $48.6m (EPS = $0.2).

During its recent Q120 earnings call Exelixis management informed analysts that the company has suffered minimal disruption as a result of COVID-19 and that it would be maintaining its full-year 2020 guidance of net product revenues of $725 - $775m and total OPEX of ~$750m, meaning 2020 EPS is likely to be ~$0.5, and forward P/E >55x.

Ordinarily, given mounting concerns around Cabozantinib's profile as a "blockbuster" drug (capable of delivering sales in excess of $1bn) Exelixis stock might have suffered as a result of these steady-but-underwhelming financials, but the company's announcement that Cabozantinib had met its primary endpoint in its pivotal phase 3 CheckMate-9ER trial in combination with Opdivo sent the share price in the opposite direction.

Exelixis short-to-long term growth strategy to create a robust, diverse pipeline. Source: Q120 earnings presentation.

The CheckMate-9ER combination trial evaluated Cabozantinib and Opdivo (a monoclonal antibody) against sunitinib (Pfizer's Sutent) in previously untreated advanced or metastatic RCC and the combination impressed, extending PFS by a statistically significant amount, and also demonstrating significantly improved OS, and OR. The companies plan to announce results at an upcoming conference and commence regulatory filings. Should FDA approval be secured, as now seems likely, the combination treatment may persuade physicians to make it a standard-of-care treatment in the lucrative first-line market.

There has rarely been much doubt concerning Cabozantinib's efficacy - it is the no. 1 prescribed TKI in RCC - hence it is easy to see why Exelixis management have gone "all-in" on developing the treatment. There are numerous data readouts to come in 2020 which ought to rightly distract attention away from the recent mediocre sales performance and provide positive short-term price catalysts as well as, longer term, the prospect of a treatment that could sell in the multi-billions annually.

Exelixis 2020 milestones. Source: Q120 earnings presentation.

Exelixis is also partnering with Roche to test Cabozantinib in combination with Roche's ~$2bn per annum selling Tecentriq - an immune checkpoint inhibitor - as a treatment for prostate cancer, urothelial cancer ("UC"), and non-small-cell lung cancer ("NSCLC") (the COSMIC-021 trial), with results expected to be available in May. The company also plans to initiate 3 new pivotal trials in combination with atezolizumab (Tecentriq) and provide data readouts from a phase 3 trial for HCC.

Readouts from a further trial in combination with Opdivo for RCC as well as a phase 3 trial of Cabozantinib as a monotherapy for thyroid cancer are also in the offing, making for an exciting second half of 2020 which, if efficacy data continues to impress - as it should - has the potential to significantly move Exelixis' share price needle.

Fair Value Price

Whilst the trial results and subsequent regulatory filings may move the share price in the short-to-medium term, long term, Exelixis will be progressing Cabozantinib from peripheral markets to mainstream ones, where it will face significant competition from current therapies and rival checkpoint inhibitor / TKI combinations - most notably from Merck's (my note here) Opdivo rival Keytruda.

If Cabozantinib can capture market share in these new markets in the way it has in its existing ones, the drug ought to have no trouble achieving "blockbuster" status. Cabometyx has steadily gained market share from rivals in its existing markets to become, for example, the top-selling TKI for Kidney cancer, ousting Novartis' Votrient, which implies that the treatment has found favor with physicians, and does appear to be the real deal.

Although it is difficult to forecast what sales of Cabozantinib may look like in 5 years' time, and Exelixis management have not provided any guidance, for guidance FiercePharma estimates that the top-15 best-selling cancer drugs in 2020 will rake in ~$90bn in revenues giving us reason to believe, that Cabozantinib - already a billion-selling drug - could become a multi-billion seller in time.

Exelixis 5-year financial forecast. Source: my table using company historical data, analyst and company forecast guidance plus my assumptions.

I believe a realistic scenario - given the size of its addressable markets which may include kidney, prostate, bladder, and lung cancers - could see sales of Cabozantinib grow to $3bn by 2025 - at an annual CAGR of 27%. Of course, because of its overseas licensing agreements Exelixis will not earn that entire figure on its own, but if we plug YE 2025 revenues of $2.5bn (CAGR of 23%) into a DCF model, then we can clearly see the Exelixis value proposition.

The company's OPEX looks set to increase significantly to around 82% of sales (from 67% in 2019) in 2020, so I have massaged OPEX back down to 63% over a five year period, and, accounting for taxes and interest income plus working capital and capital expenditures (using 2019 figures as my guide) I arrive at a free cash flow of ~$480m by 2025, a present day firm value of $9.9bn, and hence, a fair value price (using an expected market return of 9% and WACC of 10.7%) of $32.

Exelixis fair value price estimate using DCF analysis. Source: my table using company historical data plus my assumptions.

There are several reasons to believe that this may be a conservative estimate. Firstly, the best-selling kinase inhibitor drug currently on the market is AbbVie's (ABBV) Imbruvica, which analysts believe will generate $8.4bn of revenues by 2024. Secondly, kinase inhibitors have been responsible for almost $100bn of M&A deals over the past decade, which brings the prospect of an acquisition (at a significant premium to current share price) into play, and thirdly, Exelixis has other strings to its bow besides Cabozantinib.

New candidates and cash reserves

Although overshadowed by Cabozantinib, Exelixis does have a promising pipeline of drugs in development, and clearly, the company and its management team have a proven ability to identify and develop winning candidates. Esaxerenone - a hypertension treatment being developed in collaboration with Daiichi Sankyo has entered phase 3 trials in Japan, and there are 2 new kinase inhibitors, licensed to Sanofi, in clinical development, as well as a collaboration with Bristol-Myers Squibb to develop an LXR modulator and dyslipidemia and atherosclerosis treatment - in exploratory phase 1 trials.

The fact that Exelixis is partnering with the likes of Pfizer, Sanofi and Bristol-Myers Squibb can be taken as an encouraging sign - the company appears to be forming a lengthy and fruitful relationship with the latter, which bodes well for the future and keeps the possibility of an acquisition in play.

Additionally, Exelixis management estimates that they will have $1.6bn of short-term assets at the end of 2020 - a huge cash pile with which to invest in new treatments - and very little debt - its debt to equity ratio currently stands at 0.3x.

Risks

The main risk that is usually brought up in relation to Exelixis is the threat of generic treatments decimating its sales of Cabozantinib. Whilst this is a prospect to be taken seriously, Exelixis does appear to be well-protected here - at least until 2026 when its most important composition of matter patent expires.

Generics may enter the market and present competition a little earlier than that as rival TKI treatments such as Sutent and Inlyta have earlier loss of exclusivity ("LOE") dates. Exelixis is currently engaged in litigation in response to an ANDA submitted to the FDA by a generic manufacturer (named as MSN Pharmaceuticals in its latest 10K) and is seeking to push back its LOE date to 2030. In my view, Exelixis will not face a significant generic threat until 2025 at the earliest, and by then, the entire landscape may well have shifted and Cabozantinib indicated for several new treatments.

The second major risk is the company's reliance on a single drug treatment. I hope I have addressed this concern in this article by pointing out that, whilst most drug developers have perhaps 10-20 major clinical ongoing across a number of candidates, Cabozantinib is involved in 85, alone!

Hence, I believe many of the risks associated with developing a single drug candidate don't apply to Exelixis since their candidate is unusually impressive, demonstrating best-in-class (or competing to be best-in-class) efficacy, whilst its safety profile has also improved significantly (see my previous note on Exelixis) across several different types of cancer. Arguably, there is a great deal more to come from Cabozantinib and as such Exelixis would be foolish to diversify away from that.

Conclusion

I am always attracted to biotechs whose drug candidates exhibit strong efficacy data, firstly because it greatly enhances their chances of success in clinical trials, secondly because it attracts the attention of big Pharma (which means lucrative partnerships or possible acquisition), and thirdly because they will provide the best treatments for patients which is a biotech's "raison d'etre".

Hence, I am pleased to see that Cabozantinib keeps delivering in this regard, and may well be approved for multiple indications by the end of the year like the majority of the most successful cancer-treating drugs.

Additionally, unlike many analysts, I find the current global sales volumes of Cabozantinib to be reasonably impressive, and admire management's ability to run so many pivotal trials whilst managing costs and making profits - which is quite rare in biotech. Adding to the bull case are the investment war chest of over $1.6bn, and the goodwill generated by having multiple commercial partners.

Hence, I believe there is sufficient justification in my fair value price of >$32, and I will "guestimate" an optimistic but achievable high of $50 based on the very exciting remainder of 2020 in store and the increase in market value that new indications will bring. Factor in the recent price correction from $30 to $24 and I believe there is a good case to be opening a position in Exelixis - or continuing to hold the stock.

Analyst’s 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.