Exelixis Swings for a home run
Rule Breakers is one of the three newsletters I subscribe to. In a recent update Karl Thiel said the following about Exelixis ‘retaining’ co-partnering rights for XL413 which BMY has ponied up $20M for the right to develop.
Interestingly, Exelixis opted to make this a co-development, co-commercialization agreement. It could have chosen to let Bristol take on most of the development responsibility, which would have saved money now at the cost of trading away potential future upside from a successful product. Exelixis didn’t do it, which shows confidence in the compound and in its ability to raise the capital it needs to keep up its share of development. Let’s hope that signals more good news on the deal-making front.
Karl may be 100% right in all his statements, but when I read it all I see is a long list of hypotheses. I can either trust Karl is correct or I can do some digging to check the information.
I’ve bolded a word in the assumptions I noticed. It boils down to whether the decision to co-develop was Exelixis’s alone. Perhaps they didn’t have the choice? Well Karl as usual is correct. It took a minute to track down the press release which states EXEL exercised their option to co-develop.
XL413 has not yet started P1.
I have been watching EXEL for years. It is finally at a price where I am interested. Limited risk and a lot of easy gains possible from multiple catalysts of monetising their pipeline. Despite recent rises the current price of $3 is almost an option. It is worth noting EXEL’s enterprise value is 10 times that of Biota.
Another concern is that even if Exelixis management are confident they can raise capital, they need to do that within a quarter or two. The current share price represents a possible large dilution. There are 105.60M shares outstanding. In a recent call the CEO said they were looking to rapidly monetise their pipeline. As there are plenty of large companies looking to fill their pipelines this could work out well. Though keep in mind GSK have passed on their rights, so just how good is that pipeline? If they have to raise capital it is likely to be dilutive, either through direct shares or warrants on debt offering. October next year they have to start paying GSK back, they have a cash burn rate of…umm not sure..but $150M-$200M safely covers it. There is risk, but EXEL are certainly worth further consideration.
Resources and Filing
- EXEL’s Pipeline of partnered and proprietary compounds, still impressive.
- Large insider buying, 3M shares in late October by a Director
- Good article on seeking alpha. “the company intends to aggressively monetize its assets by striking licensing deals for some of the compounds. This step will not only bring a much needed cash infusion”
- TMF take on the deal
- Great summary by Java in March 08
- record a restructuring charge of approximately $3.3 million in the fourth quarter of 2008 for laying off 10%, 78 people, with cash impact of $2.9M spread over Q4 and Q1
- T. Rowe Price ownership change
No position in EXEL as of writing.
Old Notes
I plan on editing these over time.
Near Term and Long Term Opportunities
Before my notes please indulge me with dribble from my chin.
You can’t have you cake and eat it too.
I like the model EXEL are following and see great opportunities in both the near term (1-3 years) and longer term (4-10 years). There is no way a small biotech could have that many drugs in development without the partnering model they have used. Yes they have sold their near term dynamite potential for a less risky path to success. To me it appears they are playing a long term game, not a short term craps shoot. If they were funding their development via investors they’d have one maybe two drugs in development. While if one of these were a success it would be fantastic, the risks are enormous. They appear very confident in their research and discovery so why not remove short term risk to ensure longer term gains. They are learning and growing and should survive to bring 50/50 partnered drugs to market perhaps followed by some 100% drugs. So that is the long term.
I see the near term opportunities in what some here call the <b>Chris Model</b>. Selling covered calls or if allowed Puts. The discussion in the Best place for new money now thread helped convince me this has a fantastic risk/reward profile. As although EXEL have sold out their short term explosive gains they have also hedged many of the risks of small biotech. If one of their compounds tanks we shouldn’t see a 50-90% drop in price. If one succeeds the price shouldn’t double overnight.
…
I don’t have a position in EXEL and if I wish to take a position a covered call or more likely Puts look like a great trade to me. [Remember that's 2007, now buying stock is what I'm considering] If you already have a position the same logic holds for selling the calls except I calculate the CAGR slightly differently and it drops to 47% and 67%. This is because for a new position I calculate CAGR based on Strike/Current Price-Premium while for a held position I prefer to calculate it as Strike + Premium/Current Price. That’s just my preference.
The one thing I feel you shouldn’t do is anchor to your paid price. If you paid $12 and think the above is simply guaranteeing you a loss on the trade, then take another look at the current price. I don’t care what you paid, not does the market, what will your return be from this point?
If you feel sure EXEL is the next big thing and you prefer possible large payoffs over likely very good payoffs then ignore all the above. We’re all different and there are many paths to success.
My Partners Thoughts
- Exelixis – stupid name – front page looks like a cosmetic company. www.exelixis.com [They have redesigned their home page now and it's much more appropriate]
- Now she is looking at jobs with them, there are lots…umm do we want to move to South San Fran…it would save us buying stock as they are probably generous with stock options.
- Look at their employee benefits – they’re spending big, and seem to treat their employees very well.
- Very cancer focused could be overkill in one therapeutic area.
- Fantastic partnering.
- Good publication dissemination.
- They look good.
Valuation
Charly sent me his Biotech Valuation spreadsheet, and I must say his responsiveness and generosity of spirit were fantastic. I’ll take a while to get up to speed with the spreadsheet and for now will stick with the modified WRHAMBRECH+Co I’ve done below.
I was inspired to dig deeper into EXEL by the fantastic Answer Beth and John provided. EXEL has been on my watchlist all year, though I have never made the time to do any real DD.
I was surprised to see I had posted on this board before, back in April 06.
Looking at the chart, http://stockcharts.com/charts/gallery.html?exel , I once again see that I need to find a better way of tracking my watchlist. I need to put in more alerts or similar to ensure I don’t miss opportunities like EXEL under $8, not once but twice. I get my five year old to gleefully kick me up the arse for that tomorrow. Referring back to my first post here I said “having money in the game to concentrate your mind as the story develops” Alerts are good, but with this many compounds in trials some money in the game is probably essential, as it will allow you (and when I say you I mean me) to know how to react to news.
Enough dribble I hear you scream.
CLICK101 linked this report back in April http://www.wrhambrecht.com/sector/biotech/notes/exel20060328.pdf
I’ve taken that and giving it a little update on my limited knowledge of EXEL’s current position. My spreadsheet values them at $9.37 (accuracy is of course inverse to certainty). <Pre> <b>
Program Est wrhambrecht My Probability Expected Value Per
Peak Sales (M) Old Probability of success Value (M) Share (M) </b>
999 1000 50% 10% 100 $1.04
784 1000 10% 10% 100 $1.04
647 1000 50% 30% 300 $3.13
880 500 15% 15% 75 $0.78
820 350 20% 20% 70 $0.73
884 1000 10% 10% 100 $1.04
184 350 15% 15% 52.5 $0.55
Est Rev. 100 100% 100% 100 $1.04
<b> $9.37 </b>
No. Shares (M) 95.78 </pre>
kyle42 did a similar estimate back here to get a price of $12 http://boards.fool.com/Message.asp?mid=24773895
He also has a later wrhambrecht report linked.
Spreadsheets are fun and perhaps provide a tool for some comfort though at the end of the day I’m not a big fan of DCF or most formulaic valuations for a company like EXEL. I think Tinker captures it best in these posts: http://boards.fool.com/Message.asp?mid=23964154 <i> As for EXEL, I look at their market cap of around $950 million. Just one of the cancer drugs coming up the pipeline may easily be worth more than $950 million. All EXEL needs is one reasonable success to more than justify its current valuation. </I> from another post <i> With EXEL, same thing. Either EXEL gets fortunate and a few of its earlier cancer drugs hit the mark, or it doesn’t and you have to wait for later and later drug candidates.
Along the way the share price of EXEL will fluctuate wildly based upon general market sentiment, and hype and expectations surrounding EXEL’s drugs. </I> another good point <i> The Rule of biotech:
It always, always takes longer, sometimes much longer, than anyone ever anticipated for a drug to get approved to market and making money. PERIOD. </I> here finally found it <i> My issue with this methodology is that once a drug is approved, and if the drug starts blockbuster sales the market will not give a rats arse how long it took to get to market, how much it cost to get to market, etc. The stock price will rise based upon the sales of the drug, and often, given that it might be a novel and near monopoly product for the foreseeable future, to some very high multiples. </I> http://boards.fool.com/Message.asp?mid=24193107
The later report that doctorpraveen linked http://www.wrhambrecht.com/sector/biotech/notes/exel20060424.pdf shows estimated funds in of $80M in 2007. That may be around 8M share issued, maybe with rights as well. Though perhaps <i> Importantly, GSK could exercise its first drug option on this data in 2007,
triggering a significant selection milestone payment to Exelixis that we
estimate could reach $70 million. </I>
More
you want a price, how about 11.50.
Why? Why the hell not. It was yesterday low. I think a great comment in g’s post was buy in thirds There is no real action with company’s pipeline until June, so any price action up to then is speculation.
I strongly believe the price you pay is very important, of course a few cents here or there don’t make much difference, but dollars add-up.
Technical analysis is a great weapon to add to your armoury. If you want to be a rounded investor get comfortable with reading charts and their many indicators.
My partner used to work for Amgen and still works in biotechnology. From that experience I say that if Exel is the next big thing there will be many chances over the next ten years to profit handsomely from it with less risk that now.
I may buy some shares sometime after I do some DD, but only with money that I am happy to see a 50% haircut on in the short term. I think it was Buffet who said no-one should invest unless they are prepared to have a 50% haircut.
If you buy some now with money you can afford to leave sitting there through a drop then go ahead. The biggest benefit of this is not getting in early; it is having money in the game to concentrate your mind on the story as it develops. It will make you watch the story and if milestones are positive you will know to add more, with less risk. You might not make as much, but this game is about capital protection, position sizing and always having some opportunistic cash on the sidelines. That might not sound very Rule Breaker, but there it is. Oh yeah and there is always another great opportunity just around the corner.
One final thought. As I said I liked Charly’s report, and if you bought the stock on his initial recommendation you probably loved it. I like to think about things from different perspectives, for example what would Charly have said if he was Short Exelis instead of Long?
I wish all the best with Exel and hope you hold on to see a one billion dollar biotech become a 86B biotech behemoth. Just remember to keep adding to that winner.
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