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Is this Exelixis Stock's Worst Nightmare?

Cory Renauer
July 22, 2014

Oncology specialist Exelixis (NASDAQ: EXEL) shares have been on a roller coaster over the past several years. The company has an impressive stable of clinical stage candidates, but its pipeline has yet to prove itself in the clinic, or on the market. Having lots of promising clinical stage candidates is great, if you can afford to develop them. Unfortunately Exelixis is stretched a bit thin.

Exelixis' only commercial stage product isn't providing nearly enough revenue to allow the company to reach its potential. So to my mind the biggest risk for the company is if it fails to get Cometriq approved and commercialized beyonds its current, limited thyroid cancer indication. Let's take a look at the nightmare scenario and see if there's a way out.

A necessary expansion
While Exelixis has done well to bring its first product to market, the company is hardly flush with cash. Following a late 2012 approval for advanced thyroid cancer, Exelixis began marketing Cometriq in January 2013. In its first year net product revenue reached just $15 million, or  less than one-tenth of that year's R&D expense. This year's first quarter sales improved to $4.9 million, plus EU marketing approval granted in January 2014 should help, but even a several fold increase in Cometriq sales won't bring the company to positive cash flow.

Rather than throwing resources at a stable of promising, but unproven pipeline candidates, Exelixis has circled its wagons around Cometriq in an effort to bring it to a wider market. Currently the drug is in a closely-watched phase 3 trial with advanced prostate cancer patients. During a scheduled interim analysis in March, data monitors allowed the trial to continue to completion.

Reasons to be nervous
If you think receiving a go ahead to complete the pivotal trial would delight investors, think again. Following the announcement, the market pounded the stock down by nearly half.

Apparently the market was hoping for a recommendation to quit early because of fantastic results. Reaching a level of statistical significance early suggests a therapy is much more effective than necessary to meet pre-determined endpoints. It doesn't happen often, although prostate cancer drugs Zytiga (Johnson & Johnson) and Xtandi (Medivation and Astellas) both had their trials stopped early for efficacy. Given the sales potential in the prostate cancer market (analyst estimates for peak sales of Cometriq have run as high as $1.7 billion assuming an approval), there is lots of opportunity here if Cometriq can make it past regulatory review and launch well.

Running out of time
Not only does the company need the prostate cancer indication, it needs it fast. Exelixis finished the first quarter with about $274 million in cash and short-term investments. With cash flow from operations of -$216 million over the trailing-12 months, according to S&P Capital IQ, it won't be too long before Exelixis needs to raise funds, most likely through another equity offering.

If having enough funds to maintain operations isn't scary enough, $287.5 million worth of convertible notes maturing in 2019 should have investors biting fingernails before long..

A way out?
Should Exelixis' worst nightmare come true, there's a chance investors could es