Exelixis Comes Up Aces (NASDAQ:EXEL)

Today, we are putting midcap oncology name Exelixis (NASDAQ:EXEL) as the company delivered standout second quarter results after the bell on Tuesday and the leadership also raised forward guidance. The stock moved up some 13% in trading yesterday, even on a down day for the overall market. There also might be more upside ahead, given the degree of the “beat and raise.” An updated analysis follows below.

Exelixis is headquartered in Alameda, CA. The company’s flagship product is CABOMETYX. These tablets are used for the treatment of patients with advanced renal cell carcinoma [RCC} who received prior anti-angiogenic therapy. This compound is responsible for more than 95% of the firm’s overall sales and is derived from cabozantinib, an inhibitor of multiple tyrosine kinases {TKI}, including MET, AXL, RET, and VEGF receptors. CABOMETYX is the leading TKI treatment for RCC in the U.S. The stock trades around $26.50 a share and sports a market capitalization of just north of $7.5 billion.

Second Quarter Results:

Exelixis posted its Q2 numbers on Aug. 5. They were excellent. The company delivered non-GAAP earnings per share of 84 cents share, more than twice expectations. GAAP earnings were 77 cents a share, compared with 25 cents a share in the same period a year ago. Both R&D costs ($211.1 million versus $232.6 million) and SG&A expenses ($132 million vs. $141.7 million) fell from 2Q2023. Income tax provisions did rise substantially on the increase, in profit to $66.7 million from just $19.2 million in the previous period a year ago.

Revenues rose nearly 36% on a year-over-year basis to just over $637 million. This bested the consensus by a tad over $170 million. To be fair, results including a $150 million sales-based milestone payment from the company’s marketing partner in Japan, Ipsen. This evidently was not factored into analyst firm estimates. Even with this non-recurring event, Exelixis would have easily bested top and bottom-line expectations, but obviously not to the same extent. Net product revenues rose to $437.6 million to $409.6 million in the same period a year ago. Collaboration revenues spiked up thanks to that milestone payout to $199.6 million for this quarter, compared to just $60.2 million in 2Q2022.

Management then boosted FY2024 revenue guidance to account for the sales milestone.

Analyst Commentary and Balance Sheet:

Both Morgan Stanley ($26 price target) and Barclays ($25 price target) chose to maintain their Hold ratings following second quarter results. However, eight other analyst firms, including RBC Capital, TD Cowen and BMO Capital reissued Buy ratings on EXEL. Price targets proffered were in a tight range of $26 to $29 a share.

One of the best parts of Exelixis’ investment thesis is its balance sheet. The company ended the second quarter with approximately $1.4 billion in cash and marketable securities on its balance sheet. The company lists no long-term debt on its balance within the 10-Q it filed for second quarter results as well.

Exelixis completed a $450 million stock buyback authorization during the quarter and then turned around and issued an additional $500 million stock buyback authorization going forward. The new program will run through the end of 2025. Over the past 15 months, Exelixis has repurchased $1 billion of its own stock.

Pipeline Update:

Personally, I wish the company used its cash to build out its pipeline instead of buying back its own stock to the extent that it does. A strategic acquisition of a small oncology name with late-stage small molecule candidates that had a nice overlap with existing assets would be welcomed by the market, in my opinion.

That said, Exelixis is expanding its pipeline and has some early-stage compounds in development. More importantly, the company believes it has a big opportunity developing treatments to treat Neuroendocrine tumors or NET, where there is a significant unmet need.

The company sNDA for CABOMETYX to treat NET has been accepted and, if all goes according to plan, will be approved by the FDA in April of next year. In addition, the company is developing Zanzalintinib, or XL092. This is a next-generation TKI treatment in development for multiple advanced tumor types. It’s being evaluated in numerous ongoing studies (some in the pivotal trial stage) for various indications such as RCC as part of a combination therapy.

Conclusion:

Exelixis made $1.22 a share on $1.83 billion in FY2023. The analyst firm consensus had profits dropping to $1.12 a share in FY2024 on sales of $1.88 billion. Obviously, based on Q2 results, both of those consensus estimates will be moving up in the weeks ahead. They project $1.47 a share in profits in FY2025 on 10% sales growth. Based on new guidance, that bogey could also be taken up a tad in the weeks ahead.

Taken out of the net cash on the balance sheet, EXEL trades just over three times revenues. A more than reasonable valuation. The company recent settled patent litigation around CABOMETYX with India’s Cipla which will keep them from producing a generic version of CABOMETYX until at least the start of 2031. The company reached a similar deal with Teva Pharmaceuticals (TEVA) last summer. Management had no updates for other patent litigation on its second quarter conference call.

CABOMETYX was approved in 2016 and loses patent protection in the U.S. in 2032 and in Europe in 2029. Exelixis is moving that compound’s eventual replacement, Zanzalintinib, through development on multiple fronts as well.

As you can see above, despite consistent and solid sales growth from CABOMETYX over the years, the stock has been range bound over the past half decade. Recent results probably put a higher floor on that range. Options against this equity liquid and provide solid returns. I have accumulated Exelixis on dips using covered call orders for many years now. This has resulted in myriad successful trades. And as my late father liked to quip, “If it ain’t broke, don’t fix it.” Therefore, that will remain my strategy around this solid midcap oncology concern.