Exelixis: A Standout Pick On Acquisition Speculation

As Wall Street investors and traders turn their attention to the cancer specialists from around the world who gather in Chicago June 1 to 5 for the annual meeting of The American Society of Clinical Oncology, there are a number of companies that we will be featuring this week.

We kick things off with Exelixis (EXEL) is a biotechnology company that is heavily invested into the development of a drug known as cabozantinib, which is a dual-inhibitor of MET and VEGF receptors. MET is a receptor protein that was discovered in the 1980’s and has been found to be less active in the later stages of a human’s life. This trait makes MET a terrific protein for cancer-cell targeting. Overexpression of MET seems to be responsible for something known as MET driven tumor escape, which helps cancer cells to metastasize with new cells expressing more dangerous phenotypes.

The inhibitor of VEGF serves another purpose. Angiogenesis is a term used to describe the way that abnormal cells can induce blood vessel creation to feed a tumor with vital nutrients from your body. Since cancer cells are flawed and often require more sustenance than the typical cells in your body, angiogenesis inhibition is a common and effective way that oncologists treat cancer today.

Exelixis targets the VEGF pathway for a specific reason – the MET and VEGF pathways are believed to be linked. Cancer cells can undergo something known as hypoxia, which is a response to perceived danger (in our case due to lack of blood vessel growth). This could explain why traditional angiogenesis inhibitors (many of which target VEGF) have not been working. This can also imply that Exelixis’ drug cabozantinib can fill a major gap that has existed in the oncologic drug market for years.

Shares of EXEL have a surprisingly high short interest (at over 13%), which seems a bit unwarranted after the company’s ~20% drop since early February, after strong quarterly results which beat analyst expectations by enormous margins. The more recent Q1 2012 results showed much less revenue than expected, but solid earnings. Exelixis is one of the EPS-positive biotechnology companies as well, which is a plus.

After a massive wave of bullish speculation over cabozantinib prior, Exelixis shed about 60% of its value in the last 12 months, but it looks as if it’s bottoming out. Since short interest is so high, I would almost consider this a contrarian indicator which is supported by the large influx of clinical trial data we will be seeing in cabozantinib’s 5 active clinical trials. Phase III trials for the treatment of castration-resistant prostate cancer will also be underway soon as well.

A major strength of cabozantinib is that the targeted MET and VEGF pathways are common to a huge number of cancers, which implies that the drug potentially be a flexible option for oncologists dealing with a variety of cases worldwide. Exelixis will be presenting a whopping total of 9 abstracts at ASCO 2012 (The American Society of Clinical Oncology meeting being held June 1-5 in Chicago), most of which will discuss the drug’s efficacy in a variety of cancers.

To top it all off, we have begun to see acquisition speculation in the stock since it has been sold off so harshly in the last year. Damien Conover of Morningstar added Exelixis to a list of high-potential takeover targets. Given the increase in M&A activity in the biotech sector in recent years, investors should be keeping a close eye on larger pharmaceutical companies as they look for ways to replace lost revenue induced by patent expirations.

In conclusion, Exelixis’ drug might be one of the more underappreciated drugs undergoing clinical trials today. Cabozantinib’s presentations of data at ASCO may provide some major excitement and investor capital into shares of EXEL. When combined with the increasing likelihood of a leveraged buyout, EXEL looks like relatively strong buying opportunity, and a dangerous short.