Why Red Hat, Caesars Entertainment, and Exelixis Tumbled Today

Favorable economic news helped send the stock market higher despite the usual pre-weekend jitters on Wall Street, as larger gains earlier in the day gave way to traders once again choosing not to hold onto positions in light of geopolitical uncertainties and other risks. Yet, even though major indexes hung onto modest gains, Red Hat (NYSE: RHT  ) , Caesars Entertainment (NASDAQ: CZR  ) , and Exelixis (NASDAQ: EXEL  ) fell sharply on the day.

Red Hat dropped 7% despite reasonably encouraging quarterly results. Revenue growth of 15% led to year-over-year gains in adjusted earnings, and the balances on its deferred revenue arrangements tied to its long-term contracts jumped by 18%. Yet, even as subscriptions rose, Red Hat expects adjusted earnings for the current fiscal year to come in around 5% below what investors had wanted to see, with guidance for a 14% jump in revenue proving insufficient to satisfy shareholders. With intense competition for its Linux operating system, Red Hat's efforts to maintain its market share and invest in future-looking initiatives could hurt operating margins, and that has some investors nervous about whether Red Hat can successfully keep its rivals at bay.

Caesars declined more than 7% after reporting that it would sell seven million shares of common stock, hoping to raise between $130 million and $140 million in order to help finance its operations. With major investors Apollo Global Management (NYSE: APO  ) and TPG Capital guiding the company, Caesars said that it would close its Harrah's Tunica casino in Mississippi because of poor sales, and conditions on the Las Vegas strip have been poor, as well. Without the exposure to the fast-growing gaming market in Macau that most of its rivals have, Caesars faces billions in debt, and credit-default swaps are priced at levels that reflect a high probability of future default on bonds -- let alone possible returns on stock.

Exelixis plunged another 12%, extending its losses from earlier in the week after failing to hit a home run with its study of prostate-cancer treatment cabozantinib. The drop in Exelixis stock might seem unwarranted given that the only news from the study was that an independent committee recommended that it continue to its natural conclusion rather than stopping early. The problem, though, is that Medivation (NASDAQ: MDVN  ) , Johnson & Johnson, and Bayer all were so promising that they had their late-stage studies conclude early, and so Exelixis investors got their hopes up that cabozantinib would work out the same way. The news isn't fatal to Exelixis' hopes, but it does raise concerns about whether the drug's efficacy will match up to its rivals.

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  • Report this Comment On March 31, 2014, at 3:58 PM, duckduffer wrote:

    "The problem, though, is that Medivation (NASDAQ: MDVN ) , Johnson & Johnson, and Bayer all were so promising that they had their late-stage studies conclude early, and so Exelixis investors got their hopes up that cabozantinib would work out the same way"

    The problem with that statement is the math. All 3 of the above studies had interim analysis done with significantly more events (disease progression). While EXELIXIS had the interim done after 387, all the others were done after over 500. In this type of study of late stage disease, this is a huge point that the author does not address. At the same time another approved CRPC drug, Jevtana (cabazitaxel) had a similarly designed trial to Comet with similar patient counts and also had to continue to the final analysis, yet ultimately was approved.

    Another issue with the authors implication is failing to mention that the Comet trial was designed to go after the drugs mentioned above have stopped working. Thus Cabo is facing a much more difficult population then J&J and MDVN faced with their CRPC drugs. This is a very sick patient profile that has run out of options. Cabo has shown efficacy in this difficult space and as such is likely too meet its trial endpoints.

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