EXEL - Exelixis: Stock Likely To Break Out Of 5-Year Inertia

2023-07-18 02:00:00 ET

Summary

• Exelixis, an oncology-focused company, has reported a sixth consecutive profitable year in 2022, with about 30% revenue growth due to increased sales of its drug, cabozantinib.
• EXEL reported total revenues of $408.8 million in Q1 2023, up from $356.0 million in Q1 2022, and is expected to see EPS growth from $0.63 in 2023 to $1.22 in 2025.
• Solid fundamentals, growth prospects, and strategic changes make investing compelling despite patent and profitability uncertainties.

Introduction

Exelixis ( EXEL ), a frontrunner in the field of oncology, is distinguished for its commitment to the advancement of next-generation cancer therapies. It's particularly focused on cabozantinib, a multi-tyrosine kinase inhibitor authorized for various types of cancer. The company earns a significant share of its revenue from four pharmaceutical products, most notably cabozantinib. Other products in its portfolio include Cotellic (cobimetinib) and Minnebro (esaxerenone), developed in partnership with Genentech and Daiichi Sankyo respectively. In 2022, Exelixis marked its sixth consecutive profitable year, boasting a revenue growth of roughly 30% thanks to the increased sales of cabozantinib. This profitability is reinvested in researching new applications for cabozantinib and propelling a diverse assortment of biotherapeutics and small molecules down the pipeline.

In my previous analysis , it was noted that Exelixis regained momentum, as demonstrated by over 50% net revenue growth year-on-year (YoY), following the approval of its drug Cabometyx, in combination with Opdivo, as a first-line treatment for renal cell carcinoma ((RCC)). Despite robust competition from rivals like Inlyta and Keytruda, Cabometyx managed to secure new patients in the first-line RCC market, thereby increasing its market share. Notably, these patients were living longer, which in turn extended the treatment duration. The drug also maintained its robust presence among second-line patients. These trends suggested a potential for continued revenue acceleration for Exelixis. However, the market appeared to overlook these positive trends, possibly due to a broader downturn in the biotechnology sector. As of my last analysis, with a market cap of $6.5B, zero significant debt, over $1.5B in cash, and over $1.25B in annual revenue, Exelixis seemed to be conservatively valued. Despite a "Buy" recommendation in September 2021, both Exelixis and the general market ( SPY ) have remained relatively flat, with a 5% decrease and a 1% increase, respectively.

Recent Developments

Piper Sandler recently assigned an overweight rating to Exelixis, setting a target price of $28, backed by the strong performance of Cabometyx and the company's promising pipeline. In a move to effect major strategic changes, Farallon Capital Management, which controls funds owning approximately 7.2% of Exelixis, Inc.'s shares, has nominated three candidates for the company's Board of Directors. It is expected that the nominees, including Tom Heyman and Bob Oliver (who were agreed upon previously), and Dave Johnson, who is anticipated to replace the outgoing director Lance Willsey, will significantly alter the company's R&D focus and capital allocation. Farallon believes that the new board members can improve Exelixis' performance and shareholder value. It urges other shareholders to back their nominees in order to influence the company's trajectory in the biotechnology sector.

Q1 2023 Earnings

Exelixis reported total revenues of $408.8 million for Q1 2023, up from $356.0 million in Q1 2022. This total includes net product revenues of $363.4 million, up from $310.3 million the previous year. Collaboration revenues saw a slight decrease to $45.4 million. Research and development costs rose to $234.2 million from $156.7 million, primarily driven by increased expenses across various sectors. Selling, general, and administrative expenses also rose to $131.4 million. However, income tax provisions declined to $8.3 million from $16.7 million. The GAAP net income for Q1 2023 was $40.0 million, or $0.12 per share, compared to $68.6 million, or $0.21 per share, in Q1 2022.

EXEL Stock Assessment

According to Seeking Alpha data , EXEL's prospects are mixed. While earnings estimates demonstrate a promising trend-expected EPS growth from $0.63 in 2023 to $1.22 in 2025, translating to YoY growth of 12.22% in 2023 and 22.47% in 2025-the stock's valuation is concerning. With a high trailing P/E ratio of 41.22, EXEL could be overvalued. Moreover, an even split between upward and downward FY1 revisions indicates uncertainty regarding future earnings.

Despite the mixed outlook, growth indicators reveal a healthy revenue growth YoY of 9.41% and a three-year CAGR of 19.33%. Nevertheless, significant YoY decreases in EPS and levered free cash flow hint at profitability concerns. Exelixis' profitability metrics are strong, with a gross profit margin of 96.45% and a net income margin of 9.24%. However, return on equity and assets remain relatively low, at 6.34% and 3.17% respectively.

In comparison to the S&P500 (+18.86%), EXEL's momentum over the past year has been negative (-9.18%).

Yet, the company's capital structure is robust, with a market cap of $6.31B, total debt of $186.95M, and cash holdings of $1.31B.

Q1 2023 Earnings Call Review

During the Q1 2023 earnings call , Exelixis' management declared the period as a strong one for cabozantinib, as it retained its position as the top prescribed TKI in RCC and second-line HCC. The combination of Cabometyx and nivolumab remained the top TKI plus I-O combination for first-line RCC. The 44-month follow-up data from the CheckMate -9ER study, presented at ASCO GU, revealed a compelling median overall survival of 49.5 months, which was well received by prescribers. Cabometyx's prescription volume grew by 12% YoY in Q1 2023, and the demand from new patients remained robust. The management expressed satisfaction with the drug's performance and anticipated continued growth and momentum.

Cabozantinib Patent Review

Cabozantinib, sold as Cabometyx and Cometriq, represents a crucial revenue source for Exelixis. Its patent protection is solid in the U.S., with more than 15 patents set to expire between 2026 and 2033. These patents cover vital aspects such as the drug's composition, various forms, treatment methods, and pharmaceutical compositions. Exelixis is proactively seeking additional patents and extensions, aiming to prolong Cabozantinib's exclusivity until 2037, further bolstering its revenue stream. Internationally, cabozantinib's issued patents in the EU and Japan are set to expire between 2024 and 2030. However, extensions are either already in place or anticipated until 2029.

Still, this strong patent portfolio is facing scrutiny due to ongoing legal disputes over attempts by competitors to introduce generic versions of Cabometyx. The outcomes of these legal battles could significantly impact the durability and strength of cabozantinib's patent protection. If Exelixis does not prevail in these legal challenges, the exclusive revenue stream from Cabometyx could be jeopardized, highlighting the crucial role these patents play in the financial health of Exelixis.

My Analysis & Recommendation

Exelixis' stock performance has been primarily static over the past five years. However, despite this inertia, the company boasts a robust financial foundation, a compelling lineup of pharmaceutical products, and a strong patent protection scheme. Coupling these factors with the company's ongoing research and development efforts, the future growth potential of Exelixis appears promising, even if certain elements of uncertainty exist.

The revenue from Cabometyx, which is Exelixis' main revenue source, has demonstrated robust and continuous growth, particularly in the first-line RCC market. This performance underlines the strength of Cabometyx, which has managed to outperform rivals, even amidst competition from drugs like Inlyta and Keytruda. This trend suggests a likely acceleration of Exelixis' revenue, indicating that Cabometyx will continue to be a significant contributor to the company's growth.

Recent strategic changes at the board level, led by new members nominated by Farallon Capital Management, could inject new vigor into the company's trajectory. These shifts seem to be poised to alter Exelixis' focus on R&D and capital allocation, which should prove beneficial in terms of the company's performance and the creation of shareholder value. Furthermore, the recent positive rating from Piper Sandler supports the view of Exelixis as a promising investment opportunity.

While it's true that the ongoing patent disputes pose a potential threat to cabozantinib's exclusivity, Exelixis has a strong patent portfolio that should help it defend its interests. Moreover, the company is actively working on prolonging Cabometyx's exclusivity until 2037, which could further enhance its revenue streams.

Even though there are concerns about EXEL's high trailing P/E ratio and an even split in FY1 revisions, the continued strength of Cabometyx's revenue in RCC and Exelixis' robust R&D efforts should more than offset these worries. Investors should, nonetheless, continue to monitor the outcomes of patent disputes and the impact of strategic changes influenced by the newly nominated board members.

Upon weighing all these factors, my recommendation remains 'Buy' for EXEL shares. While there are a few uncertainties, the company's strong fundamentals, coupled with the projected growth prospects and strategic changes at the board level, present a compelling case for investing in Exelixis. This stance, however, calls for regular monitoring of the company's advancements in R&D, the legal outcomes of patent disputes, and strategic shifts affected by the board's new members.

Risks to Thesis

When the facts change, I change my mind.

As I propose a "Buy" recommendation for Exelixis, it's important to consider that every investment carries its own set of risks. In the case of Exelixis, several potential threats could challenge my recommendation.

First, the foremost risk revolves around patent disputes. Exelixis' cabozantinib, which is its main revenue driver, is currently facing legal challenges from competitors aiming to introduce generic versions. The outcome of these disputes could significantly impact Exelixis' exclusive revenue stream. If the company does not succeed in defending its patents, it could face an earlier-than-expected competition from generics, which would erode Cabometyx's revenue stream.

Secondly, Exelixis operates in a highly competitive field. The pharmaceutical and biotech sector is marked by rapid innovation and frequent introduction of new drugs. Even though cabozantinib has performed well against rivals like Inlyta and Keytruda, there is always the potential for new entrants to disrupt the market dynamics.

Thirdly, while Exelixis' recent strategic changes at the board level may hold promise, these changes could also introduce uncertainties. It is yet to be seen how the new board members will influence Exelixis' R&D focus and capital allocation. Any unfavorable shifts could impact the company's future performance and profitability.

Lastly, much of Exelixis' future success is dependent on their robust pipeline. However, drug development carries inherent risks and uncertainties, particularly in the areas of clinical trials, regulatory approval, and market acceptance. Any setbacks in these areas could significantly impact the company's growth prospects.

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