EXEL - Exelixis: If It Ain't Broke...

2023-05-16 16:59:34 ET

Summary

• Today, we circle back on mid-cap oncology name Exelixis, whose shares have largely been rangebound for years despite consistent revenue growth and a fortress balance sheet.
• The company has recently drawn the attention of an activist fund that has won three board seats, and Exelixis in March announced a huge stock buyback authorization.
• Does that change the risk/reward equation for investors going forward? An updated investment analysis follows in the paragraphs below.

"No thief, however skillful, can rob one of knowledge, and that is why knowledge is the best and safest treasure to acquire. " - L. Frank Baum

Exelixis, Inc. ( EXEL ) is a mid-cap oncology company whose stock has been fairly rangebound over the past couple of years. This is despite the fact that the company has delivered consistent growth from its franchise product CABOMETYX and a huge cash hoard the company has on its balance sheet . The shares have been very profitable for me, as I have held them almost exclusively through covered call positions for many years. Options against the equity are quite liquid and offer solid option premiums as well.

Recently, the company has drawn the attention of an activist fund, posted first quarter results , and initiated a large stock buyback authorization. Given this, we are going to circle back and update the investment thesis on this oncology name. An analysis follows below.

Company Overview:

Exelixis, Inc. is an oncology-focused biopharma company based just outside of San Francisco in Alameda, CA. The company gets almost all of its revenue from CABOMETYX via net product sales and milestone payouts/collaboration revenues. This blockbuster drug is approved for a half dozen indications. CABOMETYX is the leading Tyrosine Kinase Inhibitors ((TKI)) for Renal Cell Carcinoma ((RCC)) in both first line I-O TKI market and the second line monotherapy segment. EXEL stock currently trades at just under $19.50 a share and sports an approximate market capitalization of $6.3 billion.

The company to developing/evaluating CABOMETYX to treat a variety of other indications as management looks to continue to expand the footprint of this blockbuster oncology drug. Those efforts drove the vast bulk of the roughly $875 million in R&D expense Exelixis incurred in FY2022. The company is also developing a compound called Zanzalintinib which is currently being evaluated in phase 3 studies for colorectal cancer and renal cell carcinoma. Exelixis has other earlier-stage compounds it is developing as well.

Recent Developments:

The company has attracted the attention of Farallon Capital Management, an activist investor in 2023. The fund has amassed a bit over a seven percent share in the stock, has called Exelixis and advocated for management to " refresh" the company's board of directors. So far, this has resulted in Farallon winning three board seats with Exelixis.

On March 20th, in response to activist pressure to a large part, the company announced a huge $550 million stock buyback authorization which management intends to execute in full by yearend. The total authorization is approximately eight percent of the outstanding float at current trading levels.

First Quarter Results:

The company posted its first quarter numbers on May 9th. Exelixis posted non-GAAP earnings of 16 cents a share, six cents below the consensus. Revenues did rise nearly 15% on a year-over-basis to $408.8 million, nearly $14 million below expectations. Net product revenues came in at $363.4 million compared to $310.3 million for the same year ago. Royalty revenues from partners like Ibsen who market CABOMETYX outside the United States were $32.7 million of net product revenues during the quarter. Collaboration revenues, which are composed of license revenues and collaboration services revenues, were $45.4 million, roughly flat from 1Q2022.

Management also reaffirmed full fiscal 2023 guidance:

Analyst Commentary & Balance Sheet:

13 analyst firms including Wells Fargo, Barclays, and Credit Suisse have reiterated/assigned Buy/Outperform ratings on EXEL so far in 2023. Price targets proffered range from $23 to $32 a share. Last week, Piper Sandler assumed coverage on Exelixis with an Overweight rating and $28 price target. Sandler's analyst noted that:

The company's Cabometyx (cabozantinib) business is robust, based on Q1 2023 results, and will continue to support the stock's valuation. In addition, the second half of the year will bring data updates for Cabometyx from the CONTACT-02 trial in metastatic contact-resistant prostate cancer. Additional phase I data for zanzalintinib and XB002 could also come this year, he added. That data would be for solid tumors ."

Stifel Nicolaus ($21 price target), Goldman Sachs ($17 price target), and Morgan Stanley ($21 price target) all have Hold/Neutral ratings on the stock.

Approximately two percent of the outstanding shares are currently held short. Several insiders have sold shares in 2023 and collectively have disposed of just under $5 million worth of equity so far this year. The company ended the first quarter of this year with approximately $2.1 billion in cash and marketable securities on its balance sheet.

Verdict:

The current analyst consensus has Exelixis, Inc. earning 62 cents a share in FY2023 as revenues rise some 13% to $1.82 billion. Similar revenue growth is projected in FY2024 as profits jump 50%.

On a P/E basis, EXEL may not look that cheap at 20 times 2024's projected earnings. However, taking into consideration the over $2 billion of cash on the company's balance sheet that drops to around 14 times FY2024 EPS. In addition, if Exelixis ever cut its R&D costs in half, profits would surge. If a larger player purchased Exelixis, there would be considerable synergies and opportunities to cut expenses significantly.

With some trial catalysts on the horizon (above), solid sales growth, and a fortress balance sheet; there is a lot to like about EXEL. However, outside of a buyout, the shares probably don't have a huge upside.

Given the rangebound nature of Exelixis, Inc. shares (the stock has largely traded between $15 to $25 a share for the past five years), there also appears little downside. Therefore, I plan to continue to hold a decent chunk of Exelixis, Inc. within my account via covered calls, and as my late father like to quip, " If it ain't broke, don't fix it."

"Our deepest fears are like dragons guarding our deepest treasure. " - Rainer Maria Rilke

For further details see: