Exelixis: Beyond The Cabozantinib Franchise

Summary

• Driven by their blockbuster Cabo, Exelixis generated $1.43B in total revenues translating to a 45.3% year-over-year (YOY) increase.
• For further growth, the company is expanding Cabo's label in multiple ongoing Phase 3 investigations.
• Aside from Cabo, Exelixis is tinkering with small molecules, antibody-drug conjugates and other biotherapeutics that are addressing highly promising targets.
• I do much more than just articles at Integrated BioSci Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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Exelixis

Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. - Phillip Fisher (Warren Buffett's mentor)

Riding its flagship molecule (cabozantinib), Exelixis, Inc. (NASDAQ:EXEL) has made its name in the field of oncology. Cabozantinib has been the key growth driver of Exelixis, catapulting their success for the past decade, and Fiscal 2021 was no exception. That being said, most of Exelixis' revenues came from its blockbuster (cabozantinib) franchise which generated over $1B in revenue. Furthermore, 2021 gave Exelixis two new FDA approvals of Cabometyx for both renal and thyroid cancer, which boosted its sales to the next level.

Having booked a successful growth and transformative year, Exelixis is pushing for further growth by evaluating Cabo on broader label expansions and building a diversified/differentiated product pipeline. In this research, we'll feature a fundamental analysis of Exelixis, including the exciting developments in their pipeline, and provide our expectation on this stellar growth equity.

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About the Company

As usual, we'll present a brief corporate overview for new investors. If you are familiar with the firm, we suggest that you skip to the subsequent section. we noted in the prior research:

Exelixis is founded in 1994 and is operating out of South San Francisco CA. In focusing on the innovation and commercialization of medicines to service highly difficult-to-treat cancers, the firm is brewing the following approved cancer medicines: cabozantinib (Cabometyx) for the management of all cases of advanced renal cell carcinoma (i.e., RCC); cabozantinib (Cometriq) for progressive, metastatic medullary thyroid cancer; cobimetinib (Cotellic) for unresectable or metastatic melanoma with the BRAF V600E or V600K mutation (in combo with vemurafenib). Cabozantinib was developed in-house and in partnership with Ipsen for the exclusive commercialization right outside of the U.S.A (except in Japan, where Exelixis licensed it to Takeda). The company is also investigating cabozantinib plus other immune checkpoint inhibitors across 12 different cancers.

Viewing the figure below, you can see that Exelixis is currently advancing more than 10 discovery programs and has four (XL092, XB002, XL102, and XL114) additional promising clinical-stage compounds with diverse mechanisms of action and modes of therapy. As such, they provide multiple pathways to improve outcomes for a larger number of patients with cancer. That aside, you can appreciate that more assets-in-development increases the chances that there will be more blockbusters.

Exelixis

Since our initial recommendation on June 06 at $19.13, Exelixis is currently at $23.09. At this market quotation, the stock is trading at approximately a 10% discount from its 52-week high. And, we believe that Exelixis shares are on sale at a deep bargain. In other words, there are more upsides to this stock. On that note, let us dive deeper into the recent Cabo approval and reassess the investing prospects of Exelixis to gauge where the company is heading.

Regulatory Milestones for Cabo

As you know, Cabo received two FDA approvals in 2021. One is for first-line therapy in combination with nivolumab (Opdivo) for patients with advanced RCC. The other is as a monotherapy in the second-line setting and beyond for patients with differentiated thyroid cancer (i.e., DTC).

Following the Cabo approval as a first-line treatment for patients with advanced RCC, Exelixis announced two-year (25.4 months minimum and 32.9 months median) follow-up results demonstrating sustained survival and good response. Executive VP and CEO (Vicki L. Goodman, M.D.) remarked:

We are pleased that these additional findings from CheckMate -9ER showing continued superior efficacy and improved quality of life with longer follow-up are being presented at ASCO GU, as they further indicate the value of Cabometyx in combination with Opdivo as a first-line option for patients with advanced renal cell carcinoma.

As for DTC, Exelixis' partner Ipsen recently received a positive opinion from the Committee for Medicinal Products for Human Use ("CHMP"). That being said, we expect the EMA to approve Cabo for this label as well.

With every regulatory win, there is more value unlocked in this company. Due to these label expansions, you can anticipate Exelixis to ramp up sales growth for Cabo aggressively. As such, an increase in product revenues can be expected next year.

Cabo Label Expansion

As Cabometyx is the backbone of Exelixis' portfolio, you should explore its development in greater detail. From the figure below, you can see multiple ongoing Phase 3 pivotal trials to support Cabo's various label expansions. With more expansion achieved, Cabo can reach a greater number of patients and thereby generate increased sales.

Exelixis

Of note, Exelixis recently suffered from a clinical setback for one of Cabo's label expansions. On March 14, the company disclosed that they do not intend to submit a supplemental New Drug Application ("sNDA") to the FDA following the final analysis of the Phase 3 COSMIC-312 trial. After all, the study showed neither improvement nor detriment in overall survival.

New Pipeline Innovation

Shifting gears, let us now analyze the other pipeline assets. As you know, Exelixis is already successful with Cabo being a blockbuster. Not settling for just this success, the company has recently advanced XL092, an oral tyrosine kinase inhibitor (TKI). Being assessed in a Phase 1 trial, XL092 is the first drug to come out of the firm's initiative to discover new medicines. Interestingly, it hits several cancer targets like VEGF receptors, MET, and other kinases that are important for cancer growth and survival.

Like Cabo, the simultaneous multi-target attacking of XL092 gives it a superior mechanism of action compared to conventional drugs. Ultimately, this would translate into strong efficacy, additional approval, and continued sales growth. Back in 2019, XL092 already entered phase 1 clinical development. Later this year, it could enter a pivotal study. That aside, you can expect clinical updates from their other early-stage compounds such as XL002 and XL102 later this year.

Additionally, Exelixis also initiated the dose-escalation stage of the first-in-human Phase 1 trial of XL114. As a novel anti-cancer compound that inhibits the CARD11-BCL10-MALT1 complex, XL114 would be used as a monotherapy in patients with non-Hodgkin's lymphoma (NHL) who have received prior standard therapies. The objectives of the study are to determine the recommended dose and/or the maximum tolerated dose of XL114 and to evaluate the safety and preliminary efficacy of XL114 in patients with NHL.

Competitor Landscape

Regarding competition, there are emerging players and established companies. As for established companies, Merck (MRK) and Pfizer's (PFE) PD-1/TKI pairing - i.e., Keytruda and Inlyta - may go head-to-head with the Cabometyx-Opdivo combo. Cabo and other Exelixis drugs also compete with conventional chemoradiation therapy. Moreover, there are novel CAR-T, CAR-NK, and CAR-Macrophage in development. If their results proved to be positive in the future, Exelixis will have very strong competition. Despite the competition, there is always a strong demand for novel cancer drugs like Cabo.

Financial Assessment

Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, we'll analyze the 4Q2021 earnings report for the period that concluded on December 31.

As follows, Exelixis procured $451.1M in Q4 compared to $270.1M for the same quarter a year prior. On an annual basis, the revenues registered at a remarkable $1.4B and $987.5M for the respective Fiscal 2021 and Fiscal 2020. Therefore, the annual revenues increased at the 45.3% year-over-year (YOY) clip.

Compared to the $741.6M annual net product revenue of the prior year, Exelixis procured $1.0B net product revenue for Fiscal 2021. This increase is primarily attributed to the sales ramp-up following the approval of Cabo for patients with advanced RCC as a first-line treatment in combination with Opdivo. In addition, the Cabo approval to treat DTC in September also helps with the sales increase.

That aside, the research and development (R&D) tallied at $547.9M and $693.7M for Fiscal 2020 and Fiscal 2021, respectively. We view the 26.6% R&D increase positively because the capital invested today can turn into blockbuster profits tomorrow. With Exelixis already demonstrating this principle with its Cabo franchise, it made sense that you have to plant a tree to enjoy its fruits.

Exelixis

About the balance sheet, Exelixis has $1.9B in cash, equivalents, and investments. Against the $334M quarterly OpEx, there should be adequate capital to fund operations into 2Q2023. Simply put, the cash position is strong relative to its spending rate.

While on the balance sheet, you should check to see if Exelixis is a "serial diluter." After all, a company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 319.5M to 323.1M, our math reveals a 1.1% annual dilution. At this rate, Exelixis easily cleared our 30% cut-off for a profitable investment.

Valuation Analysis

It's important that you appraise Exelixis to determine how much your shares are truly worth. Before running our figure, we liked to share with you the following:

Wall Street analysts typically employ a valuation method coined Discount Cash Flows (i.e., DCF). This valuation model follows a simple plug-and-chug approach. That aside, there are other valuation techniques such as price/sales and price/earnings. Now, there is no such thing as a right or wrong approach. The most important thing is to make sure you use the right technique for the appropriate type of stocks.

Given that developmental-stage biotech has yet to generate any revenues, we steer away from using DCF because it is most applicable for blue-chip equities. For developmental biotech, we leverage the combinations of both qualitative and quantitative variables. That is to say, we take into account the quality of the drug, comparative market analysis, chances of clinical trial success, and potential market penetration. For a medical diagnostic device, we focus on market penetration and sales. Qualitatively, we rely heavily on our intuition and forecasting experience over the decades.

Molecules and franchises	Market potential and penetration	Net earnings based on a 25% margin	PT based on 323.1M shares outstanding and 10 P/E	"PT of the part" after appropriate discount
Cabo franchise for various cancers (kidney, thyroid, liver NSCLC, solid tumors).	$5B (estimated from the $581.25B global cancer market by 2030)	$1.25B	$38.68	$36.74 (5% discount because Cabo is already approved and generating increasing sales)
Younger assets for various cancers	Will wait for more maturity until valuing	N/A	N/A	N/A
The Sum of The Parts				$34.81

Valuation Analysis (Source: Dr. Tran BioSci)

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strength. At this point in its growth cycle, the main risk for Exelixis is whether various expansion label trials for Cabo can generate positive results. On that note, if the drug fails to post positive data, the stock can tumble by over 50%. Conversely, if the data reporting is positive, investors can expect the stock to be catapulted by a similar magnitude.

The other, more pertinent, risk is if the company can continue to ramp up sales of its Cabo franchise. Though sales are gaining traction, it's still difficult for a small grower to fully unlock the value of their medicine. As a young growth company, Exelixis might grow too aggressively and thereby run into the potential cash flow constraint.

Final Remarks

In all, we maintain our buy recommendation on Exelixis and increase my stars rating to from 4 to 4.8 out of 5 stars rating. On a one to two-year horizon, we expect the new $36.74 (raised from $35) price target to be reached.

Supported by revenues from the blockbuster Cabo franchise, Exelixis further improved its fundamentals by digging into Cabo label expansion and new pipeline innovation. Riding Cabo's recent regulatory wins, you can anticipate that Exelixis will ramp up its revenues and earnings in the coming quarters. As a special cancer drug attacking multi-targets, Cabo is poised to produce stellar clinical outcomes for its various label expansions. Ultimately, they will translate into more top and bottom-line growth.

Beyond Cabo, there are other innovative assets like ADCs to galvanize long-term growth. If any of these molecules becomes a hit, you can expect revenues to gap up in the coming years. Hence, make sure you continue to monitor clinical progress.

Author's note: This article is written in collaboration between Dr. Harvey Tran and our portfolio manager (PearlyShell).

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.