The strange battle for Exelixis

Though biopharma shareholders often put up with failure, inefficiency and lavish C-suite remuneration, investor activism has recently been ticking up. The latest company to come under pressure is Exelixis, which yesterday received a series of demands from the hedge fund Farallon Capital.

This follows calls for change from activist funds at companies as varied as GSK, Illumina, Mereo and Jounce. The pattern is predictable: an entity builds up a significant minority stake, and then issues demands that usually include its target being sold or broken up. This is what makes yesterday’s development unusual, as Farallon has not called for an Exelixis sale or any divestments.

Rather, the demands are somewhat nebulous. Farallon, a 7.2% holder, calls on Exelixis to spend less on R&D than the $1bn in its 2023 budget, demanding more focus and the communication of a “coherent R&D strategy”. The reduction in R&D spend will clearly result in “excess capital” that Farallon wants returned to investors.

For its part Exelixis says it has a robust plan to maximise its Cabometyx franchise while developing the key pipeline assets zanzalintinib, a next-generation Cabometyx, and XB002, an ADC against tissue factor. Exelixis says it has met Farallon over 50 times since the fund first invested five years ago.

It claims to be willing to consider Farallon’s three proposed board nominees, but the sticking point concerns the sharing of confidential information. Exelixis says it is open to doing this under a standard non-disclosure agreement, but claims Farallon “demanded highly unusual ... unprecedented access” to Exelixis data, to which it cannot agree.

One-trick pony

Unsurprisingly, a key focus for Farallon is Cabometyx, Exelixis’s internally discovered blockbuster. Exelixis’s great success was to establish its own commercial infrastructure to turn Cabometyx into a formidable franchise, chiefly in kidney cancer.

Beyond Cabometyx, however, Exelixis has had little reason for cheer. Not only have no other significant projects reached the market, efforts to turn Cabometyx into a pipeline within a drug have seen a string of clinical disappointments, the most recent of which was last month's failure of the Contact-03 trial.

Now Farallon says Exelixis’s $6.4bn market cap, including $2.1bn of cash, fails to reflect the value of a brand the fund claims alone to be worth $33 per share, or over $10bn of NPV. Evaluate Pharma sellside consensus backs this up, calculating a Cabometyx NPV of $13.4bn.

But there is a large elephant in the room: Cabometyx patents might start to expire in 2026, and just last month Exelixis sued Cipla over that company’s filing of a generic version. However, Cipla has not challenged the 2026-expiring patent, and a separate action against MSN Laboratories yielded a win for Exelixis that could keep generics out until 2030.

Still, the generic threat goes to the heart of the problem for Farallon. A typical proxy battle would urge for a key product to be divested to release hidden value, or for the company to be sold. But Cabometyx is a dying brand, notwithstanding its success, and it is probably too late now for either option.

In the past

It is all very well for Farallon to rail against Exelixis’s R&D failures, but these cannot be undone. On the one hand the fund accuses Exelixis of spraying the R&D budget too liberally, and on the other it blames failures on hasty progression from phase 1 straight to phase 3. It says the R&D strategy “must change” but is vague as to how.

Interestingly, according to Evaluate Pharma key sellsiders do not even consider zanzalintinib and XB002 to be worthy of revenue forecasts. Perhaps one immediate task should be for Exelixis to generate sufficiently persuasive data for more analysts to include these increasingly important R&D assets in their financial models.

Big pharma needs to restock R&D pipelines, and Cabometyx must at one point have put Exelixis on the M&A track. But for whatever reason management did not sell Exelixis, and it is too late to bemoan what was not done. Farallon needs to come up with more concrete suggestions.