Cabozantinib's Momentum And Tactical Growth Amid Market Challenges Propel Biotech Innovation

Key Takeaways

• Strong commercial performance of the cabozantinib franchise, indicating sustained revenue growth through market penetration and diversification into new indications.
  
• Strategic financial moves and pipeline advancements signal confidence in future growth, focusing on enhancing long-term revenue and net margins.
  
• Exelixis faces challenges like competition for cabozantinib, regulatory approval uncertainties, pipeline development issues, and reliance on limited assets which could affect future growth and margins.

Catalysts

An oncology company, focuses on the discovery, development, and commercialization of new medicines for difficult-to-treat cancers in the United States.

• The growth in demand and revenue for the cabozantinib franchise, particularly with a 16% quarter-over-quarter increase and a 7% year-over-year growth, indicates a strong commercial foothold that is likely to continue fueling revenue growth.
  
• The expansion into new indications such as Neuroendocrine Tumors (NET) with the cabozantinib sNDA submission and the potential market leadership in this area suggests a pathway for diversification and expansion of revenue sources.
  
• Advancements in the industry-leading pipeline, specifically the focused development on generating differentiating clinical data, aim to improve the standard of care and potentially introduce new revenue streams through market leadership in underserved patient populations.
  
• The implementation of a $500 million share repurchase program, on top of previous share repurchases, demonstrates financial strength and management's confidence in future growth potential, indirectly impacting earnings per share.
  
• The ongoing focus on strategic and opportunistic capital deployment, along with business development and clinical collaboration discussions, suggests a proactive approach toward sustaining growth, enhancing long-term revenue, and improving net margins through portfolio expansion and efficiency gains.

Assumptions

• Analysts are assuming Exelixis's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.4% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $623.8 million (and earnings per share of $2.16) by about August 2027, up from $350.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $815.7 million in earnings, and the most bearish expecting $350.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2027 earnings, down from 21.0x today. This future PE is lower than the current PE for the US Biotechs industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 10.41% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.31%, as per the Simply Wall St company report.

Risks

• The potential for the Exelixis cabozantinib franchise to face significant competition in neuroendocrine tumors (NETs) with the development of zanzalintinib for similar indications, potentially affecting market share and revenues from cabozantinib.
  
• Uncertainty around achieving regulatory approval for cabozantinib in NET based on the CABINET trial results, impacting the ability to expand into new markets and grow revenues.
  
• Risks related to the discontinuation of the XB002 program, indicating challenges in the company's pipeline development that could affect future revenue growth and diversification.
  
• Heavy reliance on the cabozantinib franchise for revenue, making Exelixis vulnerable to competition and market saturation, which could negatively impact revenues and net margins.
  
• Exelixis's strategic focus on late-stage assets and potential M&A to drive future growth introduces execution risk and could impact net margins and earnings if these investments do not yield the expected returns or distract from core business operations.

Valuation

• The analysts have a consensus price target of $27.38 for Exelixis based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.07, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.4 billion, earnings will come to $623.8 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $25.73, the analyst's price target of $27.38 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.