Why The Exelixis Offering Makes Sense

Exelixis (NASDAQ: EXEL) is the clinical stage pharmaceutical company whose shares we’ve been watching since ASCO 2012.

Cabozantinib, their flagship drug, is in a large number of clinical trials including phase III trials for the treatment of Medullary Thyroid Cancer (MTC). Medullary Thyroid Cancer is the third most common type of Thyroid Cancer by incidence, representing about 3% of cases. Out of a population of approximately 500,000 in the United States, this would imply roughly 15,000 patients that could be targeted by Cabozantinib if they can get an FDA approval with their phase III data for MTC treatment.

On August 9th, Exelixis offered 30 million shares of newly issued stock at $4.25/share and sold more debt to raise funds, although their balance sheet on June 30th showed $295 million in cash. Although it may seem excessive at this point, it makes sense when looking at the company’s next few years (which will be tough).

Exelixis has already submitted the NDA for cabozantinib in the treatment of MTC (which will be officially started once it is accepted in the rolling process). Once it’s accepted, the waiting process will begin (which will likely be the standard ten months). We can infer that the revenue from the development of cabo for MTC will not come for a very long time (even if everything does go smoothly). Exelixis will be increasing its cash-burning rate quite a lot as the cabo development for Metastatic Castration-Resistant Prostate Cancer enters phase III trials. The company currently loses approximately $130 million per year (based on just last quarter’s expense), but we may see costs return to 2011 levels where the MTC phase III trial known as ‘EXAM’ was going on.

We can’t really tell how high costs will be with the next developmental step of cabo underway, but $200 million sounds reasonable. The $128 million raised from diluting shares, and the new debt that was issued should give the company about two extra years of development. If Exelixis is aggressive with bringing other treatment programs into phase III, like their dual studies on non-small cell lung carcinoma and small cell, we could see costs skyrocket although loyal shareholders may argue that the added value that these studies would bring is well worth the short-term pitfalls.

Ultimately, investors need to be careful about how they interpret Exelixis’ methods of financing itself. Although we have just seen a share dilution, another one may be possible – especially if MTC-derived revenue disappoints. We should also assume that the real value of cabozantinib is going to be slowly uncovered in the next few years as it undergoes testing for more prominent types of cancer, like ovarian. I’d also expect fresh investors to pay attention once cabo’s NDA is officially submitted, because it will set EXEL up for a classic anticipation frenzy once the FDA’s decision date is known. Exelixis is not a cheap company to buy, with a market cap of about $664 million, but if cabozantinib does well in the MTC market it’ll pave the road for success later on – this is where the real value potential comes into play.