DNY59
Funding Overview
It has been almost three years since I final coated Exelixis (NASDAQ:EXEL) for In search of Alpha, and in that point, the share worth has moved simply 9% – in a downward course. There have been peaks and troughs, however general, the inventory has not exceeded highs of $27 per share, and never sunk decrease than $15 per share – a reasonably slim vary for such an prolonged interval.
Exelixis’ enterprise is constructed nearly completely round a single molecule, cabozantinib – as per the corporate’s Q2 2023 submission:
Cabozantinib is an inhibitor of a number of tyrosine kinases together with MET, AXL, VEGF receptors and RET and has been authorized by the U.S. Meals and Drug Administration (“FDA”) and in 69 different international locations as of the date of this Quarterly Report, as CABOMETYX tablets for superior renal cell carcinoma (“RCC”) (each alone and together with Bristol Myers Squibb Firm’s (BMY) OPDIVO (nivolumab), for beforehand handled hepatocellular carcinoma (“HCC”) and for beforehand handled, radioactive iodine (“RAI”)-refractory differentiated thyroid most cancers (“DTC”); and as COMETRIQ (cabozantinib) capsules for progressive, metastatic medullary thyroid most cancers.
Cabozantinib is a member of the tyrosine kinase inhibitor (“TKI”) drug class, and it’s one in all 50 FDA-approved TKIs, in accordance with the Nationwide Institutes of Well being (“NIH”). The truth that the orally administered drug (all TKIs are orally administered) drug is authorized in indications similar to kidney and liver cancers, as a primary or second-line monotherapy, or in combo with a “megablockbuster” drug like Bristol Myers Squibb’s Immune Checkpoint Inhibitor (“ICI”) Opdivo, is a testomony to the flexibility, efficacy and security of Cabozantinib, though the competitors inside such profitable markets is especially intense.
Exelixis has pushed revenues of $1.38bn, $1.1bn, and $719m in 2022, 2021, and 2020, with the overwhelming majority coming from gross sales of Cabometyx, returning internet revenue of $182m, $231m, and $112m – margins of ~13%, ~21% and 16% respectively. While the speed of income development has been very spectacular, profitability has wavered, which can assist to elucidate the flat share worth.
Firstly of 2023, Exelixis inventory traded at ~$16 per share, its lowest worth because the onset of the pandemic triggered a mass market sell-off in March 2020, however lately a collection of developments has offered some robust upside, momentum and despatched the inventory worth to $22 (on the time of writing) – its highest worth for over a 12 months.
Upward Momentum Begins With Farallon Problem
In March, Exelixis shared the unhealthy information that its Part 3 examine of Cabometyx in combo with atezolizumab – Roche’s (OTCQX:RHHBY) immune checkpoint inhibitor and Opdivo rival Tecentriq – in second-line RCC had surprisingly failed to satisfy its essential endpoint of Development Free Survival.
Presumably in a transfer designed to placate shareholders, Exelixis introduced later that month that it had authorized a $550m share repurchase program, however regardless of this gesture, administration quickly discovered themselves below assault from one in all its largest shareholders, the activist Hedge Fund Farallon, which owns a >7% stake within the firm.
Farallon accused Exelixis administration of getting “neither a coherent R&D technique nor a disciplined method to spending” in a letter despatched to the Board, which additionally accuses administration of making an attempt to maneuver research from Part 1 to Part 3 too rapidly, leading to a succession of late stage examine failures, and of investing an excessive amount of in R&D. The letter states:
In 2023, Exelixis plans to spend extra money than ever on R&D – greater than $1 billion – with a lot of it going to discovery and pre-clinical tasks throughout a variety of modalities and targets, many in scientific and medical areas during which Exelixis lacks differentiation and a aggressive benefit. As a substitute of changing into extra targeted and disciplined, Exelixis is doing exactly the other, sponsoring almost 80 trials concurrently, a complete that’s far greater than any of the Firm’s friends.
This undisciplined spending on R&D is just not good for sufferers or buyers. We imagine zanzalintinib and different ADCs within the Exelixis pipeline can prolong 1000’s of lives and turn into nice business successes. However we concern the Firm is unfold too skinny and lacks experience throughout its many various trials, mechanisms of motion and indications. The result’s unproductive efforts and wasted sources, neither of which sufferers or buyers can afford.
Zanzalintinib is a promising “subsequent era” TKI that appears prefer it may very well be a long-term alternative for Cabozantinib, whose patents will doubtless expire early subsequent decade. A number of generic drug makers have already got submitted Abbreviated New Drug Functions (“ANDAs”) in search of to market and promote generic variations of Exelixis’ flagship drug. Exelixis has agreed that generics large Teva (TEVA) will likely be permitted to market its generic from 2031 (in accordance with Exelixis’ newest quarterly report).
Exelixis points a strong response to Farallon, however finally the hedge fund efficiently led a marketing campaign to have three of its nominees elected to the board of administrators. As alarming as it could be for administration to lose the battle within the boardroom, typically such a shake up may also help to handle points which have been stifling development, and extra particularly, share worth development.
Q2 2023 Earnings Present Cabozantinib Revenues Rising – However Backside Line Wants Consideration
Beneath strain to indicate its guiding Exelixis in the appropriate course, administration was in a position to ship a decent set of Q2 2023 earnings.
Complete revenues for the quarter have been $469.8m – up 12% year-on-year – which included $60m of collaboration revenues – French pharma Ipsen owns the rights to market and promote Cabozantinib abroad.
Complete R&D bills have been $232.6m, which represented a second straight sequential decline – in Q422, R&D expense had hit $337m – albeit a year-on-year enhance of ~17%. SG&A bills elevated for the third straight quarter and have been up 16% year-on-year, however internet revenue got here in at $81.2m on a GAAP foundation, and $100.3m on a non-GAAP foundation – not an enchancment on the prior 12 months quarter, however a powerful comeback after the corporate recorded a internet loss in Q422 and solely $40m of GAAP internet revenue in Q123, and $52.8m on a non-GAAP foundation.
The corporate additionally offered steerage for the total 12 months 2023 for $1.775bn – $1.875bn, R&D bills of $1bn – $1.05bn – a bone of rivalry with Farallon – SG&A bills of $475m – $525m, and an efficient tax price of twenty-two%. Do the maths, and the EPS implied is ~$0.6 – roughly the identical as final 12 months, and implying a ahead worth to earnings ratio of ~36x. For a corporation advertising and promoting a blockbuster (>$1bn income every year), that may be a excessive determine. Maybe Farallon is correct when insisting Exelixis is neglecting its backside line – massive business stage pharmas are inclined to drive revenue margins >20%, with PE ratios within the 20s.
A New Chief Medical Officer And Extra Good Information For Cabo
Exelixis administration could nicely have taken additional satisfaction from the success of Cabo in its Part 3 CONTACT-02 examine of the drug in combo with Tecentriq in sufferers with metastatic castration-resistant prostate most cancers (“mCRPC”) given it seemingly validates the “quick monitor to Part 3” method on this event, and opens up a brand new market alternative.
Cabo demonstrated a “a statistically vital discount within the danger of illness development or dying” in accordance with Exelixis’ press launch, which additionally identified that “In 2020, there have been greater than 1.4 million new instances of prostate most cancers and about 375,300 deaths worldwide, highlighting the dimensions of the unmet want on this indication.”
After a collection of failures, the Tecentriq / Cabo combo is now starting to indicate some promise, maybe discovering its area of interest in prostate most cancers – and there was extra excellent news for Exelixis administration to announce yesterday, this time in relation to Cabo as a monotherapy. In accordance with a press launch, the:
Alliance for Scientific Trials in Oncology unbiased Information and Security Monitoring Board (DSMB) unanimously beneficial to unblind and cease the section 3 CABINET pivotal trial early as a result of a dramatic enchancment in efficacy that was noticed at an interim evaluation.
CABINET is investigating Cabo as a monotherapy in sufferers with superior pancreatic most cancers, one other underserved indication, and the truth that the trial was halted early is probably going very encouraging for Exelixis.
Wanting Forward – Will The Uneasy Marriage Of Administration and Activist Investor Bear Fruit?
Cabo is clearly an necessary and efficient drug able to holding its personal in opposition to the perfect the business has to supply – for instance, the Opdivo / Cabo kidney most cancers combo is the #1 prescribed combo in first-line remedy, beating out the combo of Merck’s (MRK) >$20bn promoting ICI Keytruda and Pfizer’s (PFE) Inlyta.
When, as an organization, you nearly double revenues inside a three-year interval, however your internet revenue shrinks, then arguably it is proper for shareholders to start asking questions, as Farallon has executed.
With that stated, though administration could have been responsible of making an attempt to pressure the difficulty with a few of its late-stage trials, in addition they will likely be nicely conscious of the necessity to put money into R&D with a purpose to discover the sources of income to offset sharply falling gross sales of Cabo as soon as generic opponents enter the market early within the subsequent decade. Usually, a patent-expired drug’s revenues decline at a price of 25-35% every year – which spells actual hassle for Exelixis except it might probably discover various sources of revenues.
Clearly, Zanzalintinib is the “subsequent Cabo off the rank,” f you will excuse the pun, and the drug is displaying promising indicators in indications similar to kidney most cancers, the place it has achieved a 34% general response price (“ORR”) of 34% as a second line remedy – doubtless adequate for an approval shot.
The rest of the pipeline could be very early stage – an antibody-drug conjugate (“ADC”), XB002 has progressed into Part 1 research – ADC is an thrilling new area of remedy that a lot is predicted of – however there are 4 preclinical belongings whose destiny could also be extra unsure give the strain on administration to ease R&D spending.
Exelixis President and CEO Michael Morrissey spoke on the Q2 2023 earnings name about M&A – the corporate is carrying >$1.2bn on its steadiness sheet in any case – the CEO instructed analysts that:
Enterprise improvement actions stay a precedence as we proceed to hunt alternatives to entry medical belongings with the potential to generate differentiating medical knowledge in strong tumor indications.
We now have a number of late-stage discussions ongoing and whereas there isn’t any assure of success in closing these transactions, we glance to proceed utilizing this method to fortify our product portfolio.
The corporate additionally introduced yesterday that it had appointed a brand new chief medical officer, who joined from CytomX, beforehand serving as president and chief working officer.
It is fascinating to take a position about who could also be behind these modifications – long-term CEO Morrissey or Farallon? In my opinion, a wedding between an activist investor and a extra drug development-focused CEO can definitely work, nevertheless, my essential concern round Exelixis stays the one asset danger, and that’s the reason I’m not giving Exelixis a “Purchase” suggestion.
Drug improvement is a hit or miss enterprise, and it is fairly uncommon to discover a firm that follows up a serious hit similar to Cabo with one other blockbuster.
As promising as Zanzalintinib appears, progress must be framed within the context of the extreme competitors inside oncology markets – which is rising much more intense as main pharma’s more and more view drug improvement as the most effective and most profitable area to be in – witness the variety of main pharmas spinning out their client or legacy medicine companies with a purpose to focus extra on drug improvement – Pfizer, Merck, GSK (GSK), and Johnson & Johnson (JNJ) have all opted to go down this route.
Exelixis has executed exceptionally nicely, in my opinion, to extract the utmost profit from Cabo – a drug that was first authorized in 2012 – and it definitely appears as if there will likely be many extra years of income development earlier than the patent expiry arrives. Farallon has a share worth goal of $33 in thoughts for Exelixis inventory, and if it fixes the underside line whereas administration retains the trial wins coming, that focus on might be achievable.
Longer-term, nevertheless, the patent expiry is a looming challenge the market will need Exelixis to resolve as rapidly as doable, however it could be an actual problem for the corporate. Blockbuster medicine don’t develop on timber.
