Biotech company Exelixis (EXEL 1.55%) is not the most famous name in the industry. But quietly, the oncology-focused drugmaker has provided excellent returns this year, even though it's been a bit of a roller-coaster ride.
If Exelixis can continue beating the market, investors would do well to purchase its shares now. But it's not a given that it will. Let's consider one reason the biotech could have a bright future -- and be an excellent investment -- and also why it may not be worth your hard-earned money.
Reason to buy: A successful cancer drug
Exelixis' crown jewel, cancer drug Cabometyx, continues to be successful. The therapy has been the key for Exelixis to deliver solid revenue and earnings growth, and Cabometyx has accomplished this feat due to several factors.
For one thing, it was the first treatment for renal cell carcinoma (RCC) approved by the U.S. Food and Drug Administration (FDA) that showed in clinical trials the ability to improve overall survival, progression-free survival (how long a patient lives with cancer without experiencing worsening symptoms), and objective response rate (the percentage of patients whose cancers respond to treatment).
Second, Cabometyx became the top-prescribed medicine of its kind prescribed for RCC patients. Third, the therapy has continued to grind out label expansions, leading to increased revenue. In January 2021, Cabometyx earned a significant regulatory win. The FDA approved it as a first-line combination therapy -- with Bristol Myers Squibb's Opdivo -- for patients with advanced RCC.
In 2021, Exelixis' top line increased an impressive 45% year over year, largely thanks to this new regulatory nod. Cabometyx has been instrumental in Exelixis's performance, and it will continue to play an essential role for the company.
Reason to sell: Lack of diversification
Exelixis' heavy reliance on a single product is a worry, even though this product is successful. Cabometyx could succumb to various headwinds. For example, it could fail to earn new approvals or run into clinical headwinds. Last June, Exelixis' shares dropped by more than 20% in one day after it reported disappointing results in a clinical trial.
If Exelixis had a diversified lineup of drugs, such news would still be disappointing, but it would likely not lead to such a dramatic plunge in its share price in just one day. New competition could also weigh on Cabometyx and erode some of its market share. These potential challenges (and others) could scare investors away.
Is Exelixis a buy?
The success of Cabometyx has been admirable, and the fact that Exelixis has outperformed the market this year partly reflects that fact, although it may also be benefiting from the perception that even in an economic downturn, healthcare companies are likely to continue to perform relatively well. However, management knows that it cannot rely on this single product forever, which is why the company is currently looking to diversify its lineup.
Exelixis is working on its next generation of innovative cancer therapies. In June, the biotech started a phase 3 clinical trial for XL092 as a potential treatment for metastatic colorectal cancer. This form of cancer is the third-deadliest in the U.S. It is particularly dangerous (like most other cancers) when it is not diagnosed early and has metastasized. A new therapy option to address the population of patients who have advanced to the metastatic phase would be a big deal.
Exelixis could also advance some of its early-stage cancer therapies in the coming year. Meanwhile, Cabometyx isn't done earning new approvals and increasing its revenue. Exelixis recently announced positive results from a phase 3 clinical trial for Cabometyx as a combination treatment in patients with previously untreated kidney cancer. Cabometyx is undergoing dozens of other clinical trials.
Even a modest 25% success rate for these studies could yield plenty of new indications for the medicine in the coming years. That's why Exelixis' revenue will likely continue growing for the foreseeable future. Although the company may encounter headwinds due to its reliance on Cabometyx, in my view, this biotech stock remains an excellent option for investors focused on the long game.