Why Wall Street Hates Exelixis Inc.

Stocks with a high short interest can signal that something is fundamentally wrong with the underlying company. By the same token, short-sellers aren't always correct in their assessment of a company, and their mistakes can lead to a rapid upward movement in share price through a so-called "short squeeze."

Shares of biopharma Exelixis (NASDAQ: EXEL  )  got hammered earlier this year when the company's late-stage trial for its flagship cancer drug cabozantinib was allowed to proceed to its final analysis as a potential treatment for metastatic castration-resistant prostate cancer. Wall Street wanted to see the trial halted early for efficacy reasons given the diversity of new prostate cancer drugs hitting the market in recent years.

Put simply, the Street thinks cabozantinib will have a tough time gaining market share against the likes of Johnson & Johnson's (NYSE: JNJ  ) Zytiga, Medivation  (NASDAQ: MDVN  ) and Astellas Pharma's Xtandi, and perhaps to a lesser extent Dendreon's (NASDAQOTH: DNDNQ  ) Provenge. What's particularly noteworthy is that short-sellers have actually increased their position since the stock cratered in March, now holding close to a whopping 27% of outstanding shares. 

EXEL Chart

EXEL data by YCharts.

Does Exelixis have the firepower to force shorts to cover?
One reason cabozantinib could still be a major revenue driver for Exelixis is that the prostate cancer market has been unfortunately growing rapidly since the 1970s. Perhaps as a consequence of this large and growing market, both Zytiga and Xtandi have posted stellar sales increases since their respective commercial launches. In the first quarter of this year, Zytiga posted $512 million in sales and Xtandi garnered a little over $172 million worldwide. Dendreon's Provenge even raked in close to $70 million for the quarter.

So while cabozantinib's early trial results weren't as positive as investors hoped, if the drug shows some effectiveness and gets approved it would still probably do well enough to make an immediate impact on Exelixis' bottom line, especially in light of the company's market cap of $658 million. Add in the fact that Exelixis has a number of other ongoing clinical trials, and that cabozantinib is already approved as a treatment for thyroid cancer, this climbing short interest becomes even harder to understand. 

So why is short interest still rising?
I think there are a couple possibilities to consider. First, Exelixis' losses have continued to mount as the company moves closer to a top-line data read out for cabozantinib's COMET-1 late-stage trial. The company reported a loss of $74.6 million in the first quarter of 2014, up nearly 40% from the same period a year ago. With roughly $400 million remaining in cash and cash equivalents, Exelixis has a fair bit in the bank -- but perhaps shorts are betting that a dilutive capital raise will occur, causing shares to fall further. 

On the more speculative side, shorts may be betting that COMET-1 reports negative trial results later this year. I think this is unlikely given that the trial could have been halted earlier due to futility, but it's important to remember that the unexpected happens more often than not in clinical trials. 

Foolish wrap-up
While Exelixis' rising short interest is certainly noteworthy, keep in mind that short-sellers have been piling into a host of small-cap biotechs this year. One prevailing view is that clinical-stage biopharmas have risen too fast over the past two years, making them ripe for a pullback. Now that the pullback appears to have come and gone, we may soon see less pressure from short-sellers in smaller biotechs such as Exelixis. If not, they risk the possibility that COMET-1 posts stronger than expected trial results later this year, which could help Exelixis regain Wall Street's affections.   

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Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On May 30, 2014, at 10:33 AM, biogemfinder wrote:

    Short or not it is quite foolish to bet against a drug that has shown clear activity in one of the hardest cancer to treat -metastatic MTC- which will have results from 4 pivotal trials from within weeks to next year! Also, what WS hasn't quite grasped is the fact that patient population that Xtandi and other touted drugs which stopped trials in the interim is very different from what cabo has where they have failed multiple drugs including xtandi et al. So this is the population that cannot be treated with any other drug or failed them. So yu tell me if that was afair expectation.

    For sure, the mistake exeleixix made ws to just go after these patients only..they should have had a trial that directly competes with other drugs in earlier treatment schemes, but eventually that will happen as well.

    Let's see who was right and if shorts will make money shorting at 3---incredibly stupid idea that is driven not by science and logic but purely by greed!

  • Report this Comment On May 30, 2014, at 11:27 AM, NeedaClue7 wrote:

    IMO, short-selling EXEL or almost any clinical-stage biopharma is playing with fire. The short is just one positive press release away from total disaster, as the stock can jump into the stratosphere without there being any chance to cover. Think I'll stay long, with limited downside and the chance to enjoy a major upside...

  • Report this Comment On May 30, 2014, at 11:32 AM, erniewerner wrote:

    "I think this is unlikely given that the trial could have been halted earlier due to futility..."

    This was obliquely addressed by EXEL management. The interim did not include a futility analysis. In such cases, independent Data Monitoring Committees typically let a trial go to completion as long as the treatment group is not decidedly disadvantaged.

    I do agree with your premise about the market concern with the proliferation of potentially competing drugs, but this sort of ignores the reality that Cabo's first PC indication will be in fully refractory patients. Irrespective of how many courses of approved treatment exist, most metastatic PC patients reach the end of the available approved treatment regimens and this is the potential first market for Cabo. Then there are ongoing pivotal trials in RCC and HCC. The RCC trial has a PFC endpoint and the HCC trial has an OS endpoint, but in a placebo controlled trial. I view both of those opportunities as more likely to end positively than the Comet studies in PC. Also reporting out this year will be Roche's Cobrim trial featuring EXEL's partnered drug cobimetinib. I think the current market cap represents a significant buying opportunity, but for somewhat different reasons than your article posits.

  • Report this Comment On May 30, 2014, at 11:33 AM, usubanas wrote:

    "I think this is unlikely given that the trial could have been halted earlier due to futility, but it's important to remember that the unexpected happens more often than not in clinical trials."

    Actually no. The interim analysis did NOT include a futility analysis, so it could not have been halted. It's in the pr.

  • Report this Comment On May 30, 2014, at 12:37 PM, 7001ctc wrote:

    I'm a 16 year survivor of castrate resistant prostrate cancer, successfully treated to date by the founder of the Prostate Cancer Research Institute, Dr. Mark Scholz. I am also the president of the network serving over 100 worldwide patients of this worst kind of PC.

    Several years ago, during the annual PCRI annual conference, attended by over 500 oncologists and patients, Dr. Scholz showed the incredible results of a ,metastatic patient with tumors throughout his body treated with Carbo for 6 months. Every one of the multiple tumors, except one tiny one, had disappeared. Dr, Scholz said "in all my experience of treating many hundreds of metastatic patients, I've never seen such a positive result".

    That is why I'm a believer in the future of Cabo.

  • Report this Comment On May 30, 2014, at 1:45 PM, ShaneSkinner wrote:

    George, I have 26k shares of Exelixis so I'm definitely long but I believe you misreported on the futility analysis. The knucklehead management team didn't put a futility analysis in place at the interim check point so they could very well be wasting money on the trial proceeding. I think that's one of the reasons the stock has been hammered. It still has a shot to be positive and there's a ton of potential in the other indications in pivotal trials. If I'm wrong on the futility analysis, please let me know as I'd feel better about my investment. Have a great weekend, Shane

  • Report this Comment On July 06, 2014, at 4:56 PM, fuzzface52 wrote:

    My compliments to the author for a well written piece on EXEL. Looking forward to any follow-up articles you might have.

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