Regardless of size, what really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion. - Phillip Fisher (Warren Buffett's mentor)
Author's Note: This article is an abridged version of an article originally published for members of the Integrated BioSci Investing marketplace on May 14, 2022.
In biotech investing, it's a thing of beauty to follow a company from its early years of development into an aggressive growth phase and then maturity. To me, that's just like raising a child from the day she's born to when she became an adult, got married, has her own kids, and grows old with you. That is provided you have great longevity to become a centennial. Just like the process of raising a child, you'd see a company overcome trials and tribulations as it brings novel medicines to the FDA and delivers hope to countless patients worldwide.
On that note, it's been over a decade since I first introduced Exelixis, Inc. (NASDAQ:EXEL) to investors. This was way before I started my marketplace service. During that time, the lead medicine (cabozantinib) encountered early clinical trial setbacks. Nevertheless, I made up my mind about Exelixis's great prospects due to its lead medicine's ingenious mechanism of action.
That is to say, cabozantinib attacks multiple cancer targets simultaneously to confer great therapeutic efficacy. As such, I continue to follow Exelixis's growth story over the years as cabozantinib became a blockbuster. Despite sizable gains, I strongly believe there are substantial upsides that would reward a long-term investor. In this research, I'll feature a fundamental analysis of Exelixis and share with you my expectation of this stellar growth equity.
Figure 1: Exelixis chart
As usual, I'll present a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. I 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 launching 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). Notably, cabozantinib (i.e., Cabo) 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.
Not satisfied with Cabo already being a blockbuster (i.e., a drug that generates at least one billion dollars in annual sales), Exelixis is advancing Cabo in a vast number of indications. To give the pipeline more long term growth, the company is launching over 10 discovery programs and has four (i.e., XL092, XB002, XL102, and XL114) additional promising clinical-stage compounds with diverse mechanisms of action and modes of therapy. You can appreciate that more assets in-development increases the chances that there will be additional blockbusters.
Figure 2: Early-stage therapeutic pipeline
Shifting gears, let us analyze the latest development of the Cabo franchise. As you know, Cabo has come a long way since the day of its Phase 1 trial. The drug is now an aggressively growing blockbuster. For 1Q2022, Exelixis reported net product revenue of $310.3M from Cabo compared to $227.2M for the same quarter a year prior.
On a year-over-year (YOY) basis, the product sales grew by 36.5%. The big jump in sales volumes is due to the FDA approval of the Cabometyx/Opdivo combo for first-line advanced RCC back in January 2021. The longer duration of treatment for this therapy helps boosted the revenue growth.
Now, the product sales increase would have been even greater had there been no discounts/allowances relating to the 340B Drug Pricing Program and an increased Medicaid utilization as well as Exelixis co-pay assistance. Nonetheless, a socially-focused company like Exelixis likes to give its medicines to as many patients as possible. Commenting on the latest developments, the President and CEO (Michael Morrissey) remarked,
Exelixis had a strong start to 2022 as we continued to gain momentum across all components of our business. We are pleased with the growth of the cabozantinib franchise, driven by increased demand for Cabometyx in combination with Opdivo in the first-line renal cell carcinoma setting, as well as by the initial impact of the drug's most recent US label expansion into differentiated thyroid cancer. As we strive to help as many eligible cancer patients as possible benefit from cabozantinib, we look forward to top-line results from the COSMIC-313, CONTACT-01 and CONTACT-03 pivotal phase 3 clinical trials expected over the course of this year.
Regardless of the aforesaid discounts, if you multiply $310.3M by 4, you'll get $1.24B in estimated forward annual revenues. Keep in mind, that calculation did not take into account any growth yet it's still quite substantial. For Fiscal 2022, Exelixis projected the product sales to register from $1.32B to $1.42B.
Figure 3: Fiscal 2022 sales projections
As you know, Cabo is growing at a 36.5% clip. If you account for such a robust growth rate for the next five years, my estimate would give you $5.87B in future product sales. You might be asking me, how can we expect such phenomenal growth grate for the Cabo franchise? As the Chief (Dr. Morrissey) mentioned, you have the upcoming results from those three Phase 3 studies (i.e., COSMIC-313, CONTACT-01, and CONTACT-03).
Here are more proofs in the pudding for you. When you look at the figure below, you can see that one of Exelixis's early-stage development in genitourinary (i.e., GU) cancers alone is massive. Interestingly, Cabo is being developed for many other indications such as gastrointestinal (i.e., GI) cancers, gynecologic cancers, adrenocortical carcinoma, sarcoma, neurofibroma, gastroesophageal cancer, head/neck cancer, melanoma, multiple solid tumors, and pediatric cancers.
Even if a fraction of those additional indications hit, you're looking at more leaping revenues to come for the Cabo franchise. Growing by label expansion of an approved drug is a prudent and deleveraged way to unlock value for a franchise. Now, you can't do this for all drugs because only special ones like Cabo has the uncanny mechanism of actions to work phenomenally against many cancers.
Figure 4: Early-stage programs
Asides from the Cabo, you can appreciate that Exelixis is aggressively advancing its early-stage molecules. As such, it foretells that the firm is poised to become a giant pharmaceutical company of the future.
If you think about it, a company can't become a giant pharma riding on one franchise (no matter how big of a blockbuster it is). By hitting a good number of promising molecules for a vast number of indications, that substantially increased the chances that at least a few more would become a huge success like Cabozantinib. In looking forward, the excellent Chief (Dr. Morrissey) enthused:
Cabozantinib franchise revenues fuel the growth of our expanding pipeline, which now comprises four differentiated clinical-stage programs. We are on track to initiate the pivotal trial series for XL092 beginning in 2Q2022 with the first phase 3 trial, STELLAR-303, which will evaluate the compound in combination with atezolizumab in a form of colorectal cancer, and we expect to advance the ongoing phase 1 studies of XL092, XB002 and XL102, and to present initial data from these trials later this year. Additionally, in April we initiated the first-in-human phase 1 trial of XL114, our small molecule inhibitor of the CARD11-BCL10-MALT1 complex. As our pipeline advances, we are building out our infrastructure, both on our Alameda campus as well as in the Greater Philadelphia area through our Exelixis East expansion. I look forward to providing further updates on our progress throughout the year and want to thank the Exelixis team for their collective hard work and execution as we advance our mission to help cancer patients recover stronger and live longer.
Regarding competition, there are conventional pharma (i.e., established companies) and emerging players. For instance, Merck (MRK) and Pfizer (PFE)'s PD-1/TKI pairing - i.e., Keytruda and Inlyta - is a strong competitor of the Cabometyx-Opdivo combo. That aside, the conventional chemoradiation therapy would be a bread-and-butter competitor to Cabo and other Exelixis drugs.
More importantly, I believe that novel treatments like CAR-T, CAR-NK, and CAR-Macrophage in development pose a more significant threat than conventional medicines. In spite of the competitive pressure, there is always a robust demand for novel cancer drugs like Cabo.
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, I'll analyze the 1Q2022 earnings report for the period that concluded on March 31.
As follows, Exelixis procured $355.9M in revenue compared to $270.2M for the same period a year prior. On a year-over-year (YOY) basis, the revenues increased by 31.7%. Of that figure, the net product sales account for the bulk which is $310.2M compared to $227.2M. As you know, the product sales increased at an even higher pace at 36.5%. That tells you Exelixis has a great drug, in which they are doing an excellent job at sales/marketing.
That aside, the research and development (R&D) for the respective periods registered at $156.6M and $159.2M. I generally like to see an increasing R&D trend because the money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.
Additionally, there were $68.5M ($0.21 per share) net income versus $1.6M ($0.00 per share) net gain for the same comparison. On a per-share basis, the bottom line improved by multiple folds. And this is reflective of the lower expenses like that relating to R&D.
Figure 5: Key financial metrics
About the balance sheet, there were $2.0B in cash, equivalents, and investments. Along with the $355.9M quarterly revenues (and against the $272.7M quarterly OpEx), there shouldn't be any concerns about the cash runway. Simply put, the cash position is extremely robust relative to the spending rate. Put it another way, the company is already operating at net profits while having ample cash.
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 321.2M to 323.2M, my math reveals a 0.6% annual dilution. At this rate, Exelixis easily cleared my 30% cut-off for a profitable investment.
It's important that you appraise Exelixis to determine how much your shares are truly worth. Before running our figure, I'd like 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, I steer away from using DCF because it is most applicable for blue-chip equities. For developmental biotech, I leverage the combinations of both qualitative and quantitative variables. That is to say, I 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, I focus on market penetration and sales. Qualitatively, I rely heavily on my 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)
$36.74 (5% discount because Cabo is already approved and generating increasing sales)
Younger assets for various cancers
$2B (highly conservative estimates)
$1.54 (90% discount rate because compounds are in their earliest stage of development)
Even with the $500M estimated net earnings on the earlier stage franchises, most of them are discounted to account for their stage of development
The Sum of The Parts
Figure 6: Valuation Analysis
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 Cabo would continue to generate positive data in the advanced trials like COSMIC-313, CONTACT-01, and CONTACT-03. If those studies do not deliver positive results, they would substantially reduce Cabo's robust growth.
Moreover, there are risks that the younger pipeline assets would also not procure strong data. Furthermore, Exelixis may not be able to fully unlock the value of the Cabo franchise due to its launch alone in the key market (i.e., the USA). As an aggressive grower, Exelixis may overexert itself and thereby run into a potential cash flow constraint.
In all, I maintain my buy recommendation on Exelixis and increase my rating to 5/5 stars. On a one to two years horizon, I expect the new $38.28 (raised from $36.74) price target to be reached. Exelixis has come a long way since I first discovered the stock over a decades ago. Back in the day, the stock was worth around $3 a share. Riding on the therapeutic prowess of cabozantinib, the company has enjoyed substantial share price appreciation. Fast forward to 2022, the stock is now worth $20.08 per share while the market cap has grown to $6.4B (as of this writing).
Do not let that substantial market cap deters you from this investment. A growth company, as taught by Fischer, can enjoy much more upside over the year. The key is that there is ongoing and aggressive R&D to power future growth. That's exactly what Exelixis is demonstrating with the massive Cabo and younger assets expansion. Along with the 36.5% revenue leap for Cabo, you have solid evidence that this company will most likely grow into a giant pharma of the future. Later this year, you'll see the company reports data for three different advanced studies (COSMIC-313, CONTACT-01, and CONTACT-03), which would give the share price another boost.
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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.
Additional disclosure: As a medical doctor/market expert, I'm not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized. That aside, I'm not giving you professional medical advice. Before embarking on any health-changing behavior, make sure you consult with your own doctor.