Any way you look at, Exelixis (NASDAQ: EXEL) just reported an impressive second-quarter performance. The biotech posted its second quarter of profitability, with earnings topping Wall Street expectations. Revenue for Cabometyx soared. Exelixis even emerged from the period without a penny of debt.
Despite all of this good news, Exelixis shares fell on Thursday after the company announced its second-quarter results late Wednesday. Still, though, the stock is up more than 70% so far in 2017. Should investors move on after the biotech's big run-up and solid quarterly update? I'll be the first to admit that I've been leery of just how much the stock can keep up the momentum. However, I think Exelixis remains a stock to buy for the long run. Here are three reasons why.
1. Bigger-than-expected potential for Cabometyx
Most of the focus for Exelixis' top drug Cabometyx is in the great opportunity in the renal cell carcinoma (RCC) market. That's for good reason. Cabometyx already has roughly 35% of the market share as a second-line treatment for RCC and is widely expected to win approval as a first-line treatment. (Exelixis plans to submit for Food and Drug Administration approval for this additional indication soon.)
The potential for Cabometyx could be even better than expected, though. Several studies are in progress for other types of cancer. The most promising right now is hepatocellular carcinoma (HCC), the most common form of liver cancer. More Americans die each year from HCC than RCC.
Perhaps the greatest reason for optimism about Cabometyx's opportunities is the potential for the drug in combination with other therapies. Bristol-Myers Squibb (NYSE: BMY) currently has a couple of key studies underway with combos of its cancer drugs Opdivo and Yervoy with Cabometyx targeting treatment of first-line RCC and advanced HCC. Roche (NASDAQOTH: RHHBY) is evaluating a Tecentriq/Cabometyx combo in treating both RCC and bladder cancer.
2. Cotellic -- a possible sleeping giant
Amidst the fanfare for Cabometyx, it's sometimes easy to overlook that Exelixis has another approved cancer drug -- MEK inhibitor Cotellic. (Technically, the company has two other approved drugs counting Cometriq, but Cometriq and Cabometyx are just two brand names for the same drug.) Cotellic hasn't racked up tremendous revenue for Exelixis so far, despite having won approval for treating advanced melanoma in combination with Roche's Zelboraf nearly two years ago.
Exelixis splits U.S. profits for Cotellic with Roche. The biotech receives low double-digit percentage royalties from Roche for sales of the drug outside of the U.S. Exelixis recently won a favorable arbitration settlement that increases how much it will receive from Roche on Cotellic sales.
In spite of the lackluster start, Cotellic could possibly be something of a sleeping giant for both Exelixis and Roche. There has been a lot of interest lately about the potential for MEK inhibitors in combination with immuno-oncology (I-O) therapies. Roche is moving forward with clinical studies of a Tecentriq/Cotellic combo targeting treatment of several types of cancer, including colorectal cancer, non-small cell lung cancer, and melanoma. Exelixis has a head start of three years or so over potential rivals with MEK inhibitors.
3. Shopping spree coming
Another important reason Exelixis is still a good stock to buy is that a shopping spree is on the way. No, I'm not referring to the potential for Exelixis to be acquired by a bigger player (although that remains a real possibility). Instead, Exelixis appears to be looking to make some deals of its own.
As of the end of the second quarter, Exelixis is sitting on a cash stockpile totaling more than $380 million (including cash, cash equivalents, short- and long-term investments and long-term restricted cash and investments). The company intends to use some of that money to reinvest in its own internal research and development but also plans to beef up its pipeline with external candidates.
Exelixis CEO Michael Morrissey said on the company's second-quarter earnings conference call that the biotech will either partner or acquire to pick up more oncology assets. He indicated that the focus will be on early-stage or late pre-clinical stage candidates that aren't as likely to be scooped up by big pharma companies.
The biggest biotechs on the market today started out following the same path that Exelixis is taking. They achieved success with one product then used the cash flow generated by that product to develop more successful products, often through partnerships and acquisitions. Don't think for a second that Exelixis will be a one-trick pony.
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