The Street Has Finally Recognized The Exelixis Clinical Program Potential

Leerink downgraded shares of Exelixis, Inc. EXEL and lowered its price target, citing an $8.6 billion diluted market cap. The firm thinks the consensus estimates now adequately reflect the commercial potential for Cabometyx in renal cell carcinoma, and the valuation implied additional value for key near-term label extension opportunities in 1L RCC and liver cancer.

As such, the rating on the shares was downgraded from Outperform to Market Perform and the price target is reduced from $34 to $28.

At the time of writing, Exelixis shares were down 12.82 percent at $24.42.

Constructive On Cabometyx Long Term

Analysts Michael Schmidt, Varun Kumar and Jonathan Chang said they are constructive on the long-term potential of Cabometyx in combination with immune-checkpoint inhibitors. However, on a more deep analysis, the analysts said opportunity for Cabometyx in HCC would be significantly smaller than expected.

The analysts said their long-term forecast for Cabometyx is now below the consensus estimate. Even if the CELESTIAL results are positive, the analysts feel additional upside is limited.

"We are constructive on potential Cabometyx label extension opportunities in combination with Opdivo/Yervoy long-term as part of EXEL's collaboration with Bristol-Myers Squibb Co BMY and believe EXEL mgmt. has done an excellent job in creating opportunities to maximize the potential of the drug," the firm said.

See also: Attention Biotech Investors: September Ushers In Another Slew Of PDUFA Catalysts

Near-Term Headwinds

However, the firm said it is increasingly wary of potentially emerging near-term headwinds for the stock that could create uncertainty among investors. The uncertainties include:

• Potential additional competitor product approvals in HCC such as Lenvima, Opdivo, and others.
• Increasing uncertainty around the evolution of the 1L RCC market following recent positive BMY CM-214 data.
• Pfizer Inc. PFE's phase III JAVELIN Renal 101 results, which are potentially available in late 2018.
• AVEO Pharmaceuticals, Inc. AVEO re-emerging as a dark horse in RCC.

As such, the firm lowered its Cabometyx forecast in HCC and bladder cancer but incrementally raised its estimates in RCC based on recent prescription trends in the approved RCC indication.

Risk/Reward Less Favorable

The firm noted that Exelixis shares have gained 575 percent since it upgrade the stock to Outperform in January 2016, while the NASDAQ Biotechnology has been up a more modest 19 percent. In the year-to-date period, Exelixis shares are up 89 percent.

Related Link: 4 Reasons To Buy, 2 Controversies Surrounding AstraZeneca