Exelixis (EXEL - Free Report) is a $6 billion biotechnology company focused on cancer R&D and the producer of cabozantinib (sold under the brand names Cabometyx and Cometriq), a treatment approved by the FDA for several indications: medullary thyroid cancer, a second line treatment for renal cell carcinoma (RCC), and clinical activity in several other types of metastatic cancer.
Unique among small biotech companies, EXEL is a profitable mid-cap cancer fighter with projected 58% revenue growth and 68% EPS growth this year. The stock just became a Zacks #1 Rank this week after a very strong Q1 of big top and bottom line surprises reported on 5/2.
Here's how Oppenheimer analysts summed up the quarter and outlook, reiterating their $40 PT...
Cabometyx sales of $128.9 million were 34.5% higher than our estimated $95.9 million and 20.6% higher than consensus of $106.9 million. Based on Cabometyx demand increases and the strong start to the frontline RCC launch, we are increasing our sales estimate for 2018 by 16.8% to $510.5 million. Our outlook for 2019 – 2022 revenue is basically unchanged. While being partially offset by a small increase in estimated expenses, the sales estimate increase and milestone payments are leading us to raise our estimated 2018 EPS to $0.74 from our prior $0.37.
And Oppy is still $200 million under consensus for projected 2018 sales of $716M. I almost wonder if they made a typo given their high Street PT of $40, which was shared by SunTrust until today (more on this coming up). Here's a snapshot of how analysts got caught off-guard about the earnings power of EXEL...
William Blair analysts not only reiterated their Outperform rating after the report, they called EXEL their Top Biotech Pick of 2018. They were very impressed with the big sales and profit beats. Here was part of a research note from April (before the report) that details their long-term thesis (courtesy of TheFly.com)...
Analyst Andy Hsieh says he's an "aggressive" buyer of Exelixis with the stock down 28% since the Q4 earnings call on February 28. The previously announced Merck-Eisai collaboration agreement to jointly develop and commercialize Lenvima could serve as a comp to Exelixis's cabozantinib franchise, Hsieh tells investors in a research note. Eisai ascribes a value of roughly $7.9B for the Lenvima franchise, which equates to $26.66 per share for Exelixis, the analyst writes. With Exelixis trading at $6.3B in market cap or $5.8B in enterprise value, the current valuation does not account for the full potential of the cabozantinib franchise and does not include Cotellic, which is in three Phase III studies and being investigated in four oncology indications, Hsieh argues. He keeps an Outperform rating on the shares and believes the Merck-Eisai Deal highlights a "significant valuation disconnect."
A Long History of Genomic R&D
This bit of background from the company website is useful to see their long-term commitment to helping cancer patients recover stronger and live longer with specialized checkpoint inhibitors...
Founded in 1994, Exelixis is a commercially successful, oncology-focused biotechnology company that strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Following early work in model genetic systems, we established a broad drug discovery and development platform that has served as the foundation for our continued efforts to bring new cancer therapies to patients in need. We discovered our lead compounds, cabozantinib and cobimetinib, and advanced them into clinical development before entering into partnerships with leading biopharmaceutical companies in our efforts to bring these medicines to patients globally.
Why Was EXEL Down Over 10% Thursday?
On Wednesday evening, Exelixis announced that a Phase III study (IMblaze370) of the combination of cobimetinib (brand name Cotellic) and Roche's Tecentriq in third-line colorectal cancer, did not meet the primary endpoint of overall survival.
Exelixis said it will continue to work with Roche in evaluating the treatment on other tumor types. Several i-bank analysts reacted on Thursday morning and the response was mostly a shrug. RBC Capital and Suntrust issued price target cuts to $35 and $36, respectively.
And the "big bull" in EXEL, William Blair, put out a note saying "While we are disappointed by the result, we highlight that given the current valuation, the IMblaze370 opportunity is not in the stock, and we have not modeled any future revenues from the indication. In addition, our Outperform rating is primarily driven by the Cabometyx franchise and we view Cotellic as a call option for investors."
It's clear so far that none of the i-bank analysts covering EXEL were modeling much from this clinical trial. I have yet to hear from Oppenheimer or Piper Jaffray but probably will by the time you are reading this Friday morning.
Who Bought and Who's Adding?
The volume was pretty big on Thursday with 13.5 million shares getting unloaded and a close just above the next possible support level around $18.25, site of the year-ago May-June swing lows and the December 2016 new highs.
I think that once the news is understood better by large investors like Goldman Sachs that they will be net buyers of this growth story. Obviously, some of them were probably throwing in the towel today.
Goldman funds added over 600K shares in Q4 between $24 and $32, to bring their haul to 14.8 million. We'll know in a few days what all the funds were doing in Q1 as the SEC deadline for institutional 13F filings is next Tuesday.
And so the stock just became a better buy for all smart investors, even as it threatens further technical weakness. Now it has become a severely oversold fundamental and technical opportunity.
I just bought shares of EXEL for the Zacks TAZR Trader on Tuesday and I added in Thursday's drop to $19 because the fundamental story seems intact, even if the chart and volume selling are dramatic.
Bottom line for EXEL: If the primary pharma franchise is delivering 58% sales growth this year and projected 30% next year to over $900 million, I'm not worried about a failed combo trial in a drug that no analyst was modeling anyway.
Last minute update: As I "go to press" here Thursday afternoon, I have fresh reaction from Oppenheimer and Piper Jaffray now. Oppy is with the rest of the banks on never having included Cotellic trial results or sales in their growth estimates so they reiterated their $40 PT and stated "no change" in their outlook. PJ lowered their PT to $29 from $33 and I'm sure you'll be able to find further commentary from them in the coming days. Or just follow my research and analysis in the services mentioned in my disclosure.
Disclosure: I own EXEL shares for the Zacks TAZR Trader and Zacks Healthcare Innovators services.
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