Exelixis, Inc. (NASDAQ:EXEL) investors have learned the hard way that highly successful drug launches can be awfully tricky. Shares of this cancer drug developer rocketed 439% higher during the two years leading up to 2018, but investors are worried that a combination treatment from Bristol-Myers Squibb (NYSE:BMY) will make life very difficult for the smaller company's U.S. sales force.
Exelixis stock has tanked around 37% this year even though the company's lead drug wasn't showing signs of a major slowdown during its latest quarterly report. Has the market overacted and driven Exelixis stock down to a bargain-bin price?
Exelixis has reported a slight slowdown in net product sales of its kidney cancer drug, Cabometyx, but it doesn't look like something to get too worked up about. Net sales during the first quarter of 2018 rose 107% compared to the previous-year period, but they only climbed 75% during the second quarter.
If we consider royalties from partners marketing Cabometyx abroad and some one-off payments from those partners, total revenue in the first half of 2018 rose 122%. It seems silly to complain about a slowdown with figures like these -- and there are reasons to expect more going forward.
Partnership revenue will probably become far more significant in the quarters ahead now that foreign sales achieved predetermined targets. Now, Ipsen is required to cut Exelixis 22% to 26% of net sales in the EU, which should produce a noticeable result. The previous tier topped out at 12% of sales.
Quarterly revenues have been a bit lumpy over the past several quarters, so we shouldn't read too far into quarterly growth figures. Smoothed out over the trailing-12-month period, total revenue doesn't appear to be tapering off at all.
Why investors are so jumpy
Cabometyx sales to advanced-stage kidney cancer patients who just received their first diagnosis surged last year, and expectations that the growth would continue in the long run made Exelixis a top performer in years past. There's a ton of competition for first-line indications because they generally involve large groups that stay on therapy much longer than patients who have relapsed. Unfortunately for Exelixis, a combination of two well-understood treatments from a big pharma that has a ton of experience marketing blockbuster drugs could overtake Cabometyx in this first-line setting.
During the Checkmate-214 study, 42% of patients given Opdivo plus Yervoy showed tumor reductions compared to 27% of those given Sutent. Last September, investigators shut down the study early because those responses also led to a clear overall survival benefit during an interim analysis. Patients given the combo treatment from Bristol-Myers showed a 37% reduction in the risk of death.
During the Cabosun study that convinced the FDA to approve Cabometyx for the first-line kidney cancer indication, Exelixis' drug didn't produce a statistically significant overall survival benefit compared to the same drug that Opdivo and Yervoy wiped the floor with.
Curiously, Cabometyx produced a significant progression-free survival benefit compared to Sutent, which is something Bristol's combo couldn't do. Since oncologists are far more concerned with long-term survival than the tumors themselves, Cabometyx's hold on the first-line indication isn't looking too strong.
What's next for Exelixis?
While it looks like Cabometyx will take a backseat to Bristol's combo in the first-line kidney cancer setting in the quarters ahead, it could also end up replacing Yervoy as Opdivo's partner a couple of years from now. Bristol's sponsoring a 630-patient phase 3 trial to see if Opdivo plus Cabometyx can outperform Sutent. The experimental combo should produce progression-free survival results next year, but we'll have to wait much longer for overall survival figures to measure against Opdivo plus Yervoy in this group.
Liver cancer revenue could help Exelixis offset first-line kidney cancer losses beginning early next year. Right now, the FDA is reviewing an application supported by impressive results from the Celestial trial with advanced-stage liver cancer patients, which is a terribly difficult group to treat. Tumors showed a response to Cabometyx just 4% of the time, but the drug still managed to produce a significant overall survival benefit compared to a placebo.
Exelixis stock has been beaten up recently, but it's still trading at 9.1 times trailing sales, while drugmakers exhibiting moderate growth generally trade in the low- to mid-single-digit range. If the threat from Opdivo and Yervoy blows over, bargain-hunters buying the stock now would do extremely well. If Cabometyx appears threatened in the quarters ahead, though, they'll lose a bundle because there aren't any new drug candidates in the company's pipeline for it to fall back on.
Since there's a solid chance that Bristol's combo will squeeze Exelixis' share of the lucrative first-line kidney cancer space much further, it's probably best to just watch and see with this risky stock right now.