Why Exelixis Was a Top Stock in 2016 So Far

After suffering a big setback following a failed prostate cancer trial in 2014, Exelixis Inc. (EXEL 0.13%) has gone from dud to stud this past year. Positive trial data for Cabometyx last fall, followed by an approval of the drug in second- and third-line kidney cancer patients this spring, is catapulting revenue higher this year. Can Cabometyx's success keep shares soaring higher?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by Todd Campbell to discuss Exelixis' Cabometyx opportunity and what it may mean for investors in 2017.

 A full transcript follows the video.

This podcast was recorded on Nov. 18, 2016.

Kristine Harjes: We wanted to talk about some healthcare companies that are up very substantially year to date. The first one, I believe, is from your mid- to large-size healthcare companies on the major U.S exchanges, the best performer year to date, it's up around 200%. This is Exelixis.

Todd Campbell: Right, it's a mid-cap stock now, but it wasn't when you started the year, was it? Maybe that's one of the things that investors are going to be so very thankful for over the course of the past year, because if there was one stock that certainly suffered some pain in 2014 and the first half of 2015, it was Exelixis. This stock got absolutely hammered. I think it was trading about $7 at the peak in 2014, and fell to as little as $1.50 at the start of 2015. Just a really brutal period. And boy, how things have changed in 2016.

Harjes: Yeah, they really hit their stride this year. They essentially took flight commercially. This is a company that has two drugs, but they're kind of the same drug. The drug itself is called, chemical name, cabozantinib, and it sold under two different names. The first one is Cometriq, and the second one is Cabometyx. The first one, Cometriq, has been not doing the best.

Campbell: Yeah. It treats a tiny indication. It's been on the market since 2012. Last year, it brought in -- I don't want to call it a rounding error, it's not insignificant, but $37 million.

Harjes: When you're talking about the world of biotech companies, $37 million is a pittance of a sum.

Campbell: Yeah. It certainly wasn't a stock that would move the needle. And I think that's one of the reasons this stock got hit so hard not that long ago, because they had been doing a study to try to expand it into prostate cancer that fell flat. After that happened, it cast a lot of doubt on whether or not this drug would be able to be expanded into other indications. A lot of people walked away on that news. Yet, that would have been a big mistake, because late last year, they reported great results in kidney cancer trials, and in April, they won FDA approval for use as a second and third-line treatment for advanced kidney cancer cases.

Harjes: And this is Cabometyx.

Campbell: Right. It's the same drug but sold under two different brand names. It's a slightly different formulation. I think Cabometyx is a tablet, versus the other one, which is a capsule. I'm not 100% positive about that.

Harjes: The sales we mentioned for Cometriq -- which, remember, are pretty insignificant -- was $37 million in all of 2015. Meanwhile, Cabometyx, if you look at just its first full quarter on the market, which was the third quarter of this year, it sold $31.2 million.

Campbell: We're already at $120 million annualized run rate, in the first quarter post-launch. (laughs) That's a pretty significant catalyst for shares having head higher. Exelixis management has been very vocal this year, they think they can get a lot bigger on this drug. Not only do they think they can win more market share in the second and third-line setting, but they also think they can win market share in the first-line setting, displacing Pfizer's (PFE 2.40%) Sutent, which is a $1 billion drug in that setting.

Harjes: Right. This is a fairly competitive indication, kidney cancer. You have Pfizer's Sutent as the standard of care. You also have Bristol-Myers (BMY 1.30%) with Opdivo, you have Novartis, they have a drug called Afinitor. Right now, Cabometyx has a 20% market share as the second-line treatment for kidney cancer. They also have 35% as a third-line treatment, meaning after you have tried two drugs and they've failed. We recently got data that this drug beat the standard of care, Sutent, in the first line. So, going forward, you could see them start to win some market share away from this billion-dollar blockbuster drug.

Campbell: It hasn't been approved yet, Kristine, so we have to remind that to investors. There's the caveat: it hasn't been approved for that yet.

Harjes: Yeah. So, it's something to look for.

Campbell: It's hard to imagine, honestly, that they wouldn't approve the supplemental application. If so, then next year is when we'll start to see the tailwinds from that. We're talking, this could add hundreds of millions of additional dollars in sales to the company in 2017. I don't think the jury is out that this move in the stock is over, despite the fact that you're already talking about a company that has a $4 billion-plus market cap, despite only having, adding everything together, $160 million, roughly, in sales.

Harjes: Right. This company does feel to me like they're just at the beginning of their journey. One thing I will put up as a word of caution, Opdivo, which is the Bristol-Myers drug, we've talked about this on the program, that's also being studied versus Sutent in the first line. We'll get data for that probably in 2019. At that point, I'm not sure if I would want to be competing against Opdivo.

Campbell: Just to make this even more confusing for investors, there are actually combination studies going on right now evaluating the use of Opdivo plus Cabo. So, who knows how this is going to shake out over the course of the next three years or so? But it is an important market, and there are a lot of sales up for grabs.

Harjes: Exactly. All in all, this is definitely a stock that went from extremely high risk to slightly less risky. They now have this one drug on the market, and they have cash and equivalents of about $380 million at the end of the third quarter. They're expecting another $85 million in milestones later this year. They seem like they might be just heating up.