Shares of Exelixis (NASDAQ:EXEL), a biotech company focused on the development of novel therapies to fight cancer, plunged 16% in May, according to data from S&P Global Market Intelligence. With little in the way of news last month, the drop appears traceable to two likely sources.
The first likely problem looks to be a case of "buy the rumor, sell the news." On May 1, Exelixis reported stellar first-quarter earnings results. However, the company's share price had already risen by greater than 200% on a trailing year-over-year basis, so matching the heightened emotions of short-sighted traders proved tough.
For the quarter, Exelixis generated $62.4 million in revenue from Cabometyx, its lead drug for second-line advanced renal cell carcinoma. It also generated $6.5 million from Cometriq in a rare form of advanced thyroid cancer, and $12 million from its various collaborations. Most importantly, it reiterated its previous full-year expense guidance and generated a $16.7 million profit, or $0.06 per share. In other words, Exelixis is now delivering recurring profits because of Cabometyx. Nonetheless, after such a huge run higher, investors may have used this earnings report to take some of their chips off the table.
The other potential issue is President Trump's push for drug-price controls. Though the Republican-led Congress is having more than enough issues trying to pass a replacement for Obamacare, Trump has suggested that the Obamacare replacement bill should contain ways to reduce drug prices. Since Exelixis makes specialty medicines with six-digit annual price tags, the fear is that Exelixis could have a major component of its profitability stripped away if such legislation were to pass.
Despite what was a rough month, everything looks to be all systems go with Exelixis.
The prospect of drug-price reform seems low considering the amount of focus it'll take just to get Obamacare repealed and replaced in Congress. What's more, Republicans typically favor free-market pricing, meaning artificial price caps would go against their ideology.
Exelixis' earnings results were also right on point, or even better than many had expected. Based on Wall Street's projections, Exelixis is expected to grow its full-year EPS from $0.18 per share in 2017 to $1.41 per share by 2020. That's pretty inexpensive, even after a major run higher.
The key catalyst that investors should home in on in 2017 is the CELESTIAL study for advanced hepatocellular carcinoma involving Cabometyx. Exelixis' lead drug looks well on its way to expanding into first-line renal cell carcinoma, based on the CABOSUN trial results, but an entirely new label indication in liver cancer could be big. Unlike the METEOR study that led to its second-line RCC approval, a statistically significant improvement in progression-free survival isn't the primary endpoint of CELESTIAL. Cabometyx will have to show a statistically significant improvement in median overall survival to meet its primary endpoint. That's no easy task, but it's sailed through its initial interim analysis and has a second interim analysis at the 75% event rate mark coming up in the second half of 2017.
As a shareholder of Exelixis, I continue to see a favorable risk-vs-reward. If CELESTIAL finds the mark, the sky could be the limit.