Exelixis (NASDAQ:EXEL) was one of the top biotech stocks of 2016. It's also one of the best biotech stocks so far this year. However, Exelixis shares have pulled back in recent days, primarily due to Bristol-Myers Squibb's (NYSE:BMY) announcement that it was halting a late-stage study of Opdivo and Yervoy in treating first-line renal cell carcinoma (RCC) earlier than expected because of positive results.
In my view, this latest pullback presents a solid buying opportunity. I think Exelixis stock could still be a gold mine for growth investors. Here's why.
Still a huge market for Cabometyx
While Bristol-Myers Squibb's results from its late-stage study of the Opdivo/Yervoy combination in first-line RCC might have some worried about the impact on Cabometyx, I don't think much has actually changed. The reality is that BMS was always going to be a major player in the RCC market (as it already is).
But there are two critical things for investors to remember. First, Cabometyx still appears to be the better treatment based on clinical studies. Exelixis and its partner, French drugmaker Ipsen (OTC:IPSEY), are hosting a call on Sunday prior to the presentation of data at the European Society for Medical Oncology (ESMO) conference in Spain. I expect the two companies will remind investors and the media just how good Cabometyx was in the phase 2 Cabosun study.
Second, BMS will almost certainly price its combo higher than Cabometyx if approved for the first-line RCC indication. The Opdivo/Yervoy combo currently lists at $256,000 per year for treating melanoma. Cabometyx is priced around $100,000 lower. With potentially greater efficacy and a lower cost, I think payers will inevitably do their best to steer patients and providers to Cabometyx.
Also, don't overlook the potential for Cabometyx in combinations of its own. BMS is evaluating the drug in combination with Opdivo and/or Yervoy in treating RCC. Don't be surprised if one of these combos proves more effective than anything else. In addition, Exelixis is studying a combination of Cabometyx and Roche's (OTC:RHHBY) Tecentriq in treating bladder cancer and RCC. Regardless of what happens, Exelixis wins.
Then there's the opportunity for Cabometyx in treating other types of cancer. Exelixis expects that a second interim analysis of its late-stage study of the drug in treating liver cancer will be completed later this year.
Another Exelixis drug, Cotellic, just might be a bigger winner than initially thought. Roche is evaluating the drug in three late-stage combination studies targeting treatment of melanoma and colorectal cancer. There are also several dozen phase 2 studies featuring Cotellic that are actively recruiting patients with various forms of cancer.
I think, though, that Exelixis should be able to go well beyond Cabometyx (and Cotellic). The company is now profitable and has no debt. As sales for Cabometyx ramp up, Exelixis will be looking for ways to use its growing cash position. In the biotech's second-quarter conference call, CEO Michael Morrissey didn't shy away from discussing plans to partner or acquire additional early-stage or late pre-clinical stage candidates.
Growth often begets more growth. While there's no guarantee that Exelixis will make smart acquisitions, there's also no reason to think the company won't find attractive opportunities. Most of the biotechs with larger market caps than Exelixis followed a common formula: Score success with an initial drug, then parlay that success into launching other successful drugs. I suspect that's exactly what will happen with Exelixis.
The Trump card
The other reason that Exelixis could be a gold mine for growth investors relates to none other than Donald J. Trump. President Trump is pushing hard for corporate tax reform, including a lower tax rate for repatriation of cash parked overseas. Even with Gilead Sciences' recent news about buying Kite Pharma, acquisitions activity in the biopharmaceutical industry has been sluggish in 2017. Tax reform would almost certainly cause mergers and acquisitions to shift into high gear.
I see Exelixis as a prime acquisition target if larger drugmakers find themselves with a lot more cash on their hands. It has what I consider to be a "Goldilocks" market cap -- not too high to be unaffordable, but not too low as a result of only having clinical-stage assets. With positive cash flow in hand, Exelixis could immediately add to the top and bottom lines for a larger company looking to boost growth.
Even if tax reform doesn't materialize, I still think an acquisition of Exelixis is possible. Some big pharma companies are holding off on making moves until they find out what happens with tax reform. Regardless of the outcome, I expect the number of deals to increase next year. I won't be shocked at all if 2018 is the last year for Exelixis to rank among the best-performing biotech stocks -- because of a buyout by a bigger company.