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Is Exelixis a Buy?

By Keith Speights – Jun 30, 2019 at 9:15AM

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This biotech might be a one-trick pony for now. But it's got a great horse to ride.

After a dismal performance in 2018 with Exelixis (EXEL -0.34%) shares sinking 35%, the biotech stock is doing much better so far this year. But Exelixis still trails behind the top two biotech exchange-traded funds as well as the major market indexes.

Is Exelixis a smart pick to buy now? Here are the top arguments for and against the stock.

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Image source: Getty Images.

The case for Exelixis

Exelixis' sales appear poised to shoot through the roof. Actually, they already are to some extent. The biotech posted a 20% year-over-year revenue jump in the first quarter of 2019. That increase was less than it could have been due to an inventory drawdown and higher discounts and allowances given for patients covered by government healthcare programs. 

The company's top drug, Cabometyx, has gained a significant market share as a second-line treatment for renal cell carcinoma (RCC), the most common type of kidney cancer. Exelixis picked up an additional approval for Cabometyx as a first-line treatment for RCC in December 2018 followed by another approval as a second-line treatment for liver cancer less than a month later.

Cabometyx is still in the very early stages of competing in its latest approved indications. Meanwhile, Exelixis is hoping to fuel even more growth by exploring opportunities for Cabometyx in combination with other drugs. Two late-stage clinical studies are currently underway evaluating combinations of Cabometyx with Bristol-Myers Squibb's immunotherapies. In addition, Exelixis thinks that there's potential for Cabometyx as a stand-alone therapy in treating other types of cancer.

Although Exelixis' melanoma drug Cotellic isn't a big winner for the biotech yet, there's a chance that it could become a more important contributor in the future. A couple of phase 3 studies are in progress testing Cotellic with Roche's Tecentriq and Zelboraf in treating melanoma. The company also has amassed a nice cash stockpile of more than $1 billion that it could put to work in augmenting its pipeline.

Still, the main attraction with Exelixis is Cabometyx. The drug could generate peak annual sales of around $2 billion. With Exelixis' market cap at only $6.5 billion, the biotech appears to be attractively valued. 

The case against Exelixis

Exelixis' greatest strength also appears to be its biggest weakness. The biotech's fortunes hinge on success for Cabometyx. Although the drug is very effective and likely to capture more market share, many investors might not be comfortable with Exelixis depending so much on one product.

Cabometyx competes in a crowded market against well-funded rivals. And those rivals aren't resting on their laurels. Merck, for example, recently won Food and Drug Administration approval for a combination of its powerhouse immunotherapy Keytruda with Pfizer's Inlyta as a first-line treatment for kidney cancer.

There's no guarantee that Exelixis will be able to broaden its lineup beyond Cabometyx in a meaningful way. Cotellic could flop in its phase 3 studies in combination with Tecentriq and Zelboraf. Exelixis might not be successful in acquiring other candidates to build out its pipeline.

It's also important to remember that the clock is ticking on Exelixis' patents for Cabometyx. The company's strongest U.S. patent for the drug expires in 2026. Exelixis does have other patents that could allow it to protect its market share several more years, but there's a real risk that those patents might not hold up in court challenges.

The verdict

As always with investing, the decision comes down to weighing the potential rewards against the potential risks. For Exelixis, I think that the potential rewards are greater than the risks.

Although the biotech might be a one-trick pony right now, it has a really great horse to ride with Cabometyx. I suspect that the drug will prove to be effective in combination with Bristol-Myers Squibb's Opdivo, clearing the way for even greater growth over the next decade.

The dynamics could change in the future for Exelixis. For now, though, I think the stock is a buy.

Keith Speights owns shares of Pfizer. The Motley Fool owns shares of and recommends Exelixis. The Motley Fool has a disclosure policy.

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