By Steve Johannsen

Important Trade Considerations

• Catalyst Date: PDUFA Nov 29th
• Option Expiration: Dec 21 (16 trading days)
• Implied Volatility: ~118
• Options implied trading range: ±$1.30 (~$4.00-6.50)
• Option Max Pain: $5 strike
• Sentiment: Approval
• Market Cap: $976M
• Outstanding Shares: 183.6M
• Short % of Float: 44% (10-31-2012)
• Cash Balance: $674M (Sep 30, 2012)
• Debt: $497.5M
• Recent dilution: August 8, 2012 at $4.28 per share.
• Burn rate (R&D + SG&A): ~$150M/yr
• Pipeline: Multiple out-licensed compounds w/ latest in phase 2

Brief Overview

Exelixis is a company focused on cancer drugs. On Nov 29th their lead compound cabozantinib (Cabo)

will receive an FDA decision for the treatment of advanced medullary thyroid cancer (MTC). This rare

type of thyroid carcinoma effects 5-8% of all thyroid cancers overall. The NCI estimates 56K cases of

thyroid cancer in 2012 affording only 3-5K cases as MTC.

Vandetanib was approved in April 2011 and is the current best therapy for those whose disease is not

controlled by surgery but has drawbacks including QT prolongation and other serious side effects (12%

in PIII discontinued due to side effects).

Cabo is the first agent to show improved PFS in MTC but has not shown an improvement in OS (although

final analysis has not been done). Cabo has its own set of toxicities which need to be considered and

doctors will need to decide between vandetanib or Cabo as the first line therapy.

The big market for Cabo is not in MTC but in castrate resistant prostate cancer (CRPC). EXEL is running

two phase 3 trials with results expected in 2Q 2014 (link to trial 1, trial 2). While the market is much

bigger for CRPC there is much more competition including Zytiga and Xtandi. In the US ~220K men are

diagnosed with prostate cancer each year and 15-40% of these men will go on to have recurrent disease

following an attempt at curative therapy (market Cabo would compete in).

Trade Idea and Thoughts

When the advisory committee was canceled and EXEL did not receive an immediate CRL the market has

began assuming approval. EXEL has traded in a range between $4.50-5.00 for the last two months and

as the PDUFA nears has broken out of that range to the upside. On approval I expect a pop to the $6

level followed by a rundown to the $5.00 range (possibly below if overall markets are weak due to fiscal

cliff, etc).

My Trade

I chose a short straddle centered at $5 (short $5 put and short $5 call). I hedged my position to the

downside with long $4 puts. All in a 1:1:1 ratio filled for a credit to my account of $1.10/spread. With

this structure I have unlimited risk to the upside. I calculated my risk on how much I was willing to lose

in the unlikely event that EXEL were to retest and close on options expiration at 52 week highs of $6.95.

This structure profits anywhere below $6.10

• $5 call: -1X (short)
• $5 put: -1X (short)
• $4 put: 1X (long)

The PnL graphic shows maximum profit at $5 and breakeven point at 6.10.

How to Close the Trade

• Pop on approval during market hours:

I hope for EXEL to pop to $6 on approval during regular trading hours. If this happens I will buy back the

short $5 puts and look to switch to a long position in the $6 or $7 puts depending on price action.

• No pop during regular market hours

I will likely hold the position to expiration (theta). If I have a chance to close out the position for ~80% of

theoretical max I would likely close the position and move on.

• CRL:

I will do nothing. I will let the options be exercised at expiration (essentially buying the stock at $5 and

selling at $4, but keeping the premiums from the options).

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Note: This article is intended for informational and entertainment use only and should not be construed

as professional investment advice. This article contains my opinions as a writer and my personal trading

plan. Always do your own complete due diligence before buying and selling any stock or options. 100%

loss with options is possible (I typically risk 1-5% of my total account value depending on my conviction).