BST Trade Alert: April 30, 2014
April 30, 2014
Recommendation:
Buy Exelixis (NASDAQ: EXEL) up to $3.75
About the Company:
Exelixis is a small, development-stage biotech committed to developing small molecule therapies for the treatment of cancer. For purposes of this trade, we’re focusing on COMETRIQ® (cabozantinib), the company’s drug candidate for the treatment of metastatic castration-resistant prostate cancer.
With that said, Exelixis is no one-trick pony.
In fact, the biotech has a number of drugs in development.
One of the company’s most advanced drugs is cobimetinib, a potential treatment for solid tumors. This drug has been out-licensed to Genentech, which is currently conducting a phase 3 trial to determine if cobimetinib, in combination with vemurafenib, can successfully treat metastatic melanoma.
Top-line results from the trial are expected by the end of 2014.
In addition, Exelixis has nine other compounds in various stages of development. Four are undergoing phase 2 clinical trials, two are in phase 1 testing, and three more are in preclinical studies. And every one of them is being co-developed with a big pharma partner like GlaxoSmithKline, Bristol Myers Squibb, Sanofi, or Daiichi-Sankyo.
The extensive drug development pipeline and numerous co-development partnerships are bullish for the stock. Remember, institutional investors prefer biotechs with these characteristics.
Now, we’ll dig deeper into COMETRIQ in a moment… but first, let’s take a peek at the company’s cash situation.
At the end of 2013, Exelixis had a cash hoard of just under $416 million. That’s more than enough to satisfy our requirement for a cash moat. According to management, total costs and expenses for 2014 are expected to be between $250 and $280 million.
Let’s now dig deeper into the company’s leading drug candidate…
About the Drug:
Exelixis believes COMETRIQ has potential to be a high-quality, broadly-active and differentiated anti-cancer agent. As such, the company plans to develop the drug into a major oncology franchise.
To that end, Exelixis has established a broad development program to evaluate COMETRIQ. This program includes two phase 3 trials in metastatic castration resistant prostate cancer (CRPC), a phase 3 trial in metastatic renal cell cancer, and a phase 3 trial in advanced hepatocellular cancer.
Now, before we go any further…
It’s important to point out that COMETRIQ has already achieved regulatory success for a different indication. The drug was approved by the FDA in 2012 and then by the European Commission in March 2014 for the treatment of medullary thyroid cancer.
What’s more, Exelixis generated $15 million from the sale of COMETRIQ in the US last year.
How does the drug work?
COMETRIQ inhibits the activity of multiple tyrosine kinases, including RET, MET, and VEGFR2. These receptor tyrosine kinases are involved in normal cellular function. But they also play a role in pathologic processes such as oncogenesis, metastasis, tumor angiogenesis, and maintenance of the tumor micro-environment.
For purposes of our trade, we’re focused on COMETRIQ’s ability to treat CPRC.
In clinical testing so far, COMETRIQ has shown novel activity against bone and soft tissue lesions in patients with CRPC. In fact, interim data from docetaxel-pretreated patients with metastatic CRPC and bone metastases treated with COMETRIQ showed a median overall survival of 10.8 months.
That’s much better than the 4.6 month survival rate demonstrated by Johnson & Johnson’s CRPC-drug Zytiga in its phase 3 trial. (By the way, Zytiga generated over $1.7 billion in revenue for JNJ last year.)
What’s more, interim data demonstrated that CRPC patients with bone metastases and bone pain at baseline experienced alleviation of pain, were able to reduce or discontinue narcotic medication, and experienced a reduction in circulating tumor cell count.
So, what’s the next step?
We’re now awaiting top-line results from a phase 3 trial of COMETRIQ in 960 patients with CPRC. The primary endpoint is overall survival. If the results are good, EXEL should take off like a rocket.
About the Market for This Drug:
Prostate cancer is the second most commonly diagnosed cancer among men worldwide. Around 910,000 cases of prostate cancer were recorded in 2008, and that number is expected to nearly double (1.7 million) by 2030.
Fortunately, a few drugs to treat prostate cancer have been approved in recent years. And due to the large incidence rate of prostate cancer, the market for these drugs is large and growing rapidly.
According to Decision Resources, the prostate cancer drug market will experience robust 10% annual growth from 2012 to 2022 in the world’s major pharmaceutical markets (US, France, Germany, Italy, Spain, UK, and Japan). And by 2022, the market will have grown to a whopping $8.6 billion.
About the Potential Catalyst:
Top-line data from the phase 3 trial of COMETRIQ in CRPS are expected by the end of 2014.
About the Shares:
If you look at the chart of EXEL below, you’ll notice that the stock has not performed well of late. In fact, the shares have declined by nearly 60% from a recent high of $8.38 set in January 2014.
And most of that drop happened on one day in late March when the stock lost 40% of its value.
What happened?
The stock tanked after an independent data monitoring committee recommended that the phase 3 trial of COMETRIQ in CRPC continue to its final analysis. While that is actually good news – the committee could have recommended the trial be halted on safety or efficacy concerns – some investors were expecting more.
Those shareholders were hoping the committee would find the drug showed sufficient efficacy to recommend stopping the trial early. When the committee did not issue that conclusion, many investors took that as a bad sign and dumped their stock.
We think the selloff is a huge overreaction to what is essentially good news.
Therefore, we recommend you take advantage of this rare opportunity and snap up shares of EXEL at a significant discount. It’s just a matter of time before the market realizes the dramatic disconnect between EXEL’s share price and the potential value of COMETRIQ.
Key Facts:
| Company: | Exelixis |
| Ticker: | EXEL |
| Recent Price: | $3.38 |
| Market Cap: | $658 million |
| Avg. Daily Volume: | 5,041,100 shares |
Chart:
Category: BST Trade Alert
