Why I Bought Exelixis

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Some days as a biotech investor, no matter how savvy you think you are, you just have to bury your head in the sand because you're bound to experience a bad day. That's what happened last week to shareholders of Exelixis (NASDAQ: EXEL  ) , a company I've been very bullish on for more than a year which reported an uninspiring update to its phase 3 results for Cometriq (also known as cabozantinib) as a treatment for late-stage prostate cancer.

In a press release issued on Tuesday evening, Exelixis announced that the independent data monitoring committee overseeing its COMET-1 phase 3 trial involving Cometriq in metastatic castration-resistant prostate cancer (mCRPC) had recommended the trial proceed to its final analysis. Normally a trial proceeding is good news as it would signify the safety, tolerability, and potentially efficacy of an experimental therapy. However, with the metastatic prostate cancer field beginning to get crowded, this IDMC recommendation could signify that Cometriq doesn't offer a superior risk of death reduction compared to already existing therapies from Johnson & Johnson (NYSE: JNJ  ) , Medivation (NASDAQ: MDVN  ) and Astellas Pharma (NASDAQOTH: ALPMY  ) , and Dendreon (NASDAQOTH: DNDNQ  ) . In other words, investors were looking for the trial to be stopped early due to strong efficacy.

Source: PublicDomainPictures, Pixabay.

The risk
The most readily apparent risk from the continuation of this trial is that Cometriq won't be able to stand out in a crowded field of therapies.

Dendreon's immunotherapy vaccine Provenge is one later-stage option that did provide a four-month median survival benefit, but has failed to see sales take off due to its comparatively higher costs relative to Johnson & Johnson's Zytiga and Medivation/Astellas' Xtandi. Zytiga not only cost less within a single year than Provenge, but it also offered a median overall survival benefit of 5.2 months relative to the placebo.

The real star, though, and Exelixis' main threat if approved, is Medivation & Astellas Pharma's Xtandi which improved median overall survival in late-stage prostate cancer patients by 4.8 months versus the placebo. Furthermore, it also demonstrated incredible efficacy in its PREVAIL study in chemotherapy-naïve patients, reducing risk of death by 29% and delaying the initiation of chemotherapy in patients by a whopping 17.2 months over the placebo (28 months versus 10.8 months). In other words, if Medivation gains this new pre-chemo indication it could stand out as a great all-around therapy for later-stage prostate cancer patients.

In phase 2 studies involving cabozantinib in heavily pretreated men, median overall survival clocked in at 10.8 months – a respectable figure considering that 73% of the 144-patient population had received at least two prior therapies. Its study also noted a bone scan response (i.e., a greater than 30% decrease from baseline in lesion area as determined by CT scan) was observable in 65% of patients. The concern is if the IDMC wants the study to continue then its median OS is likely to be little changed from what Zytiga or Xtandi offer patients.

The advanced prostate cancer market is huge given that prostate cancer is the most diagnosed type of cancer in the United States, so meeting its primary endpoint but underperforming its peers could set Exelixis' Cometriq up for a very limited ceiling in mCRPC. With Cometriq being its only currently approved therapy for a rare type of thyroid cancer, pessimists believe that Exelixis' current revenue potential is capped.

Source: Geralt, Pixabay.

The opportunity (and why I bought Exelixis)
Despite Exelixis' tumble, which at one point equaled nearly half of the company's value in a four-day span, I decided to purchase the company for my own personal portfolio as I see a bright future for Cometriq and its overall pipeline.

Let's take things step-by-step and I'll show you why I'm so optimistic about Exelixis.

To begin with, we have the ongoing COMET-1 trial which I anticipate will demonstrate superior death risk reduction relative to the placebo (prednisone) in men with bone-dominant mCRPC who had progressed while using the combination of docetaxel and either Zytiga or Xtandi. Although it may not "stand out" per se, the drug itself should still see revenue on par, if not slightly better than Dendreon's Provenge which is also failing to stand out. Dendreon's drug is capable of approximately $400 million in peak sales, which I believe is a fair estimate worldwide if Cometriq is approved in mCRPC.

Second, we have Cometriq already approved to treat metastatic medullary thyroid cancer by the FDA and just recently receiving EU clearance to market its therapy to MTC in Europe. Based on company projections of roughly 500 to 700 patients in the U.S., and my own personal estimate of a similar amount in the EU, peak sales in this indication could total around $200 million at a price of $9,900 per month.

Added together, I already believe there's peak potential of $600 million if Cometriq gains the mCRPC indication inclusive of its U.S. and EU approval for MTC. Based on its current valuation of around $700 million we're looking at a company trading at just over one times peak sales. Given that we're seeing clinical-stage companies valued at three to five times annual peak sales estimates regularly, I have to believe either the entire market is overvalued or Exelixis is being brutally undervalued. Regardless of which one it is, further downside appears minimal in my opinion.

My other contention relates to its pipeline which is being largely discounted throughout this process. First, Cometriq is also being studied in two other phase 3 trials METEOR and CELESTIAL to study its effects against a placebo (usually a high-profile branded drug) in metastatic renal cell carcinoma and hepatocellular carcinoma patients who've received treatment with Nexavar. Why aren't investors giving these potentially life-altering studies any credit?  

In addition to other ongoing studies with Cometriq, Exelixis has a mountain of ongoing collaborations that range between preclinical and phase 2 in nature (nine studies altogether). The breakdown includes four therapies partnered with Bristol-Myers Squibb, two with Sanofi, and one each with Merck, GlaxoSmithKline, and Daiichi-Sankyo. The result is ample upfront cash from these collaborations and plenty of marketing firepower should these collaborative therapies be approved.

In sum, I believe we've seen a classic overreaction to modestly bad news from the COMET-1 trial and a complete disassociation from investors as to the potential of its remaining pipeline and partnerships. I'm now long Exelixis and hopeful that Cometriq's additional indications may help move the company's total annual revenue to more than $1 billion before the end of the decade.

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Read/Post Comments (8) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2014, at 1:19 PM, usfarbuo wrote:

    I'm sure hoping you are right on this one. I'm on board with exel but I sure have my doubts the last two weeks. Can't believe it has not bounced

    Back from last week.

    Good luck to both of us.

  • Report this Comment On April 04, 2014, at 2:05 PM, bhukaplan wrote:

    It is stunning to me how limited is the insight of the street on what is really going on. Let me, an experienced practicing oncologist explain: Provenge has a problem. It is complicated to use requiring harvesting of T cells and then sensitizing them with 3 visits to for example the NY Blood Center and there are no objective benefits. Xtandi and Abiraterone are excellent drugs but both have the same target and there is little or no evidence that when one fails the other will work. It is extremely unlikely so it is one treatment and while good palliation will not cure these patients who eventually develop total androgen independence. Radon irradiation is complicated with the patients requiring semi isolation for a few days. Hard to arrange and does not treat non bone lesions. Finally, in this population it would have been a near miracle for the interim analysis to have been positive. Look back at the exelexis board from months ago for an explanation. The street's reaction is thoroughly stupid. If Cabo works it will displace both Taxotere and Jevtana further down the road. There is plenty of need for this drug and an awful lot of very good scientists are involved in the trials. I own shares and am biased. I am also right

  • Report this Comment On April 04, 2014, at 7:15 PM, Pietrocco wrote:


    You did not mention the very important combo with Roche!!

    That alone is worth at least several hundred million dollars!

    Why didn`t you include it??

  • Report this Comment On April 05, 2014, at 3:02 AM, usubanas wrote:


    Sean didn't mention cobimetinib phase 3 because his understanding of Exelixis is very limited. But he'll probably be happy to find out.

    He got the pc indication totally wrong. Cabo is for 3rd line, not expected to compete with Zytiga, Ztandi or Provenge.

  • Report this Comment On April 11, 2014, at 6:04 PM, biogemfinder wrote:

    I am sure your reasoning for buying EXEL was good, but unfortunately, with the market tanking for different reasons, the timing may have been off. Perhaps today was the right time to buy because it is at 52 week and quite possibly all time low right now!

    But in the long run I have no doubts, the results from Roche/Genentech (for Cobi) and expected results from Comet1/2 and one more by the end of the year, the odds are one of them or even ALL of them will be successful. PPS will quadruple if there is one successful completion. Who knows what the limit is if there are multiple successes...

  • Report this Comment On April 13, 2014, at 8:16 AM, ellaerdos wrote:


    After DDD, the last two months and this muddy water I'm impressed by the passion in the comments because frankly I am clueless.

    I'm in because I think the odds are good and barring an international crisis we a getting close to or are at the bottom.

    As for the rest of you folks, this market is a repeat of 2011, just hang on and your money will return and bring plenty more with it.


  • Report this Comment On April 16, 2014, at 9:57 PM, A38FAR wrote:

    I'm not sure about this. They only have 12 months left of working capital, are closing up buildings and laying off sales people and researchers. It's unlikely they'll get any additional borrowed capital. The CEO fled for Genentech in 2010. It looks like they'll have to be taken over to survive, but with all their debt, license agreements with other companies and the poison pill in the by-laws that looks somewhat remote. Only two of trials are scheduled to end this year with several more needing until 2017 and 2018 just to finish. They renegotiated their 2015 debt to 2018 but at 15%! The May and June 2014 trials have to come through, or to paraphrase Gordon Gekko, their not a dog with fleas, but a dog with tire tracks.

  • Report this Comment On May 18, 2014, at 1:35 PM, offsitehelp wrote:


    Are you sure you don't want us to give you a mulligan on this one? The financials are horrific. They cut loose the CFO. There is no one out there pumping the company except Piper Jaffery, who I am sure would like a mulligan also, and the CEO, who every time he speaks the stock drops. They have no shareholder equity unless you include Goodwill! You are putting your name on that one? Dude, better to rethink your position and come to Jesus than to trash your reputation. The bank is going to own this company before the issue the next 10Q and EXEL will be another wallpaper pattern.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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