Exelixis Inc.: Cancer Crusader With A Bright Future

Thesis

Over the past year, Exelixis stock (NASDAQ:EXEL) has fallen 14.78% reflecting an increased cost of expenses and a decline in profit margin. However, on the flip side, when looking from year-to-date, stock price has increased 5.09%. There are positive markers that indicate a good future for the company, such as success with their paramount drug CABOMETYX and their presence in a growing industry. Yet contrasting, there are risk factors present, such as a decrease in profit margin and uncertainty in development. Even with this accounted for, EXEL's tailwinds and valuation continue to inspire confidence, warranting a buy rating.

Company Financials Overview

EXEL deals in the development and commercialization of cancer-related treatments and drugs. EXEL primarily sources most of their income and business from their flagship molecule, Cabozantinib, which creates the two commercial products of CABOMETYX and COMETRIQ, with those two alone comprising over 90% of their most recent revenue figures in Q4 2022. EXEL's research and development operations are headquartered in Alameda, California.

From 2021 to 2022, EXEL's financials performed well in multiple areas, with less desirable results in others. Over this period, revenue increased by 12.27%. However, net profit decreased by 21.1%, with the profit margins also decreasing in the same time period, specifically, decreasing from 16.1% in 2021 to 11.3% in 2022. The sudden decrease in profit margins is a result of an increase in research and development. The increase in revenue marks a company with solid financials, which may indicate long-term growth in store.

Tailwinds

Successful Presence in Cancer Treatments

The primary treatments EXEL produces and distributes are products of the molecule Cabozantinib, creating the drugs CABOMETYX and COMETRIQ, tasked to block the multiplication of cancerous proteins in the body. CABOMETYX, the more prominent drug of the two, treats patients with kidney, liver, and thyroid cancer. Used for supportive care, CABOMETYX slows cancerous progression and increases life expectancy for these patients on average by 8-9 months. The sibling drug, COMETRIQ, temporarily reduces spread of cancerous cells across the body. The success of these treatments can be associated to the wide category of patients, projected to be 1 million per year. Although not all patients require these treatments, contributing factors to the success of these particular medicines are the partial exclusivity in drugs tasked to increase cancer life expectancy, along with the large patient array, with CABOMETYX approved to aid patients of 12 years or older; this is a feat no competitor has obtained. Overall, EXEL's business is only slated to increase through capitalizing on increased demand.

Growing Financials from Cabozantinib Treatments

After releasing 2022's 2nd quarter metrics for revenue and sales, Chief Executive Michael Morrissey announced a 22% growth increase in the Cabozantinib franchise, per strong financial performances from CABOMETYX and COMETRIQ year over year. In conjunction to this number, Q2 2022 reported a $419.3 million revenue number, exceeding street forecasts by $26 million. These projections were constructed based on how EXEL has grown from past years, as well as comparing how other competitors in the industry have performed in recent quarters. The standard of exceeding forecast projections repeated in the remaining two quarters of the 2022 business year. Repetition in furthering estimated revenues signals a strong outlook for the future growth and performance of EXEL, internally as well as compared to competitors.

Located in a Growing Industry

Per multiple projections, as well as past precedent, the sector of the biotech industry EXEL is located in, along with Cabozantinib's market size and compound annual growth rate, is set to reach the multimillion USD by 2029. This marks a significant improvement from last year's analysis, with 2022's forecasts holding unexpected compound annual growth rates. A number of factors can be contributed to the recent success of this market, such as the constant growth and increase in patients being diagnosed with certain cancers, therefore requiring treatments to extend life expectancy. Additionally, the larger margin of accessibility for younger patients is only located with EXEL's products, arranging for thousands of teenagers to seek the only available treatment, CABOMETYX.

Risks

Increases in Costs Leading to Decreased Profit Margins

From the business year of 2021 to the business year 2022, EXEL net income decreased by 21.1% despite revenue increasing 12.27%. This factor directly contributed to 14.78% decline in stock valuation from the last year, including a 10.2% decline from August 5 2022 to August 10 2022, due to similar results from Q2 2022. The increase in spendings, mainly sourced from a 28.56% increase of investment into research and development, came as a result of poor trial results in drug testing, specifically for cancer research. With said results, EXEL increased research funding to expedite trial processes, leading to a lower profit margin of 11.3%, as compared to 16.1% in 2021. The uncertainty from the disappointing results along with the decrease of nearly a third of EXEL's profit margin have already led investors to sell shares and may continue to do so, pending Q1 2023 financial reports.

Minimal Diversification

Despite the success of CABOMETYX, a risk factor EXEL possesses is the lack of diversification of their products. With more than 90% of their income being generated from Cabozantinib medications, investors should be aware of the risks of investing into a company reliant on a single product. CABOMETYX, the leading drug, is not a treatment for various cancers previously mentioned; instead, it is only a drug utilized to extend life expectancy, rather than a remedy used to treat the cancerous tumor. As medical research for cancer progresses and treatments start to hold higher rates of success, drugs similar to CABOMETYX will be less needed. In order to combat this, EXEL has begun to research and develop additional drugs and treatments for cancer, not just those of life expectancy. However, in July 2021, EXEL shares dropped by more than 20% in a day due to disappointing clinical results, as previously mentioned. These results have since been improved, but setbacks may occur during the development stage. Investors should be aware of the risks involved with lack of diversification, though measures are in place to reduce these risk factors.

Valuation

EXEL's PS ratio has been on the decline reflecting reduced investor hype which may have otherwise overvalued the stock, suggesting that EXEL is at a historical bargain price in terms of valuation.

Yahoo Finance's aggregate of 10 Industry Analysts puts price targets at a high of $32.00, a low of $17.00, and an average of $25.15 indicating that it is an industry consensus that EXEL's stock is undervalued (albeit with a single extreme outlier). This is further supported by Credit Suisse's "outperform" rating of the stock.

ESG

Exelixis Inc. already has a number of strategies and policies in place to regulate their sustainability and impact on their field of work. Currently, EXEL's main ESG focus themes are access to innovative and safer cancer medicines, community engagement and advocacy, people and culture, and environmental management. All of these are repeatedly improved through the materials used to research and develop their products, the waste created via their production, as well as the proceeds and income generated from salves. More can be read from EXEL's 2022 Corporate Values & Sustainability Report.

Conclusion

Overall, EXEL is a good stock, providing both already successful and incredibly prospective drugs. Even with the risks and concerns provided by some financial red flags, EXEL's tailwinds and attractive valuation still make the stock a "buy" worthy of the attention and investment of anyone interested in the biotech space.