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Is Exelixis, Inc. a Buy?

Yes.

I know I'm breaking all the rules about building up suspense, etc. But I think Exelixis (NASDAQ: EXEL) is a buy right now. I think the stock will go higher over the next few years. Don't just make any decisions based on a one-word response, though. It's important for investors to understand why a stock is a good pick -- or isn't.  

So why is Exelixis a good choice for investors? Here are the top three reasons. (I'll throw in at least a little suspense by listing them from least to most important.)

Image source: Getty Images.

Potential for Cotellic

Cotellic doesn't get a lot of attention from investors. That makes sense in one respect, considering the tremendous potential for Cabometyx. But Cotellic has plenty of potential, as well.

The drug was approved two years ago in combination with Roche's (NASDAQOTH: RHHBY) Zelboraf in treating advanced melanoma. Sales for the drug since then have been underwhelming. There are two things that could change the story for Cotellic, though.

First, Exelixis took Roche to arbitration over concerns about the commercialization and revenue-sharing arrangement for Cotellic. The resulting settlement provided Exelixis better terms and allows the company to co-promote current and future combinations involving the drug in the U.S.

Second, Roche is evaluating Cotellic in combination with Tecentriq in four late-stage studies targeting treatment of melanoma and colorectal cancer. Many other investigator-led studies are also underway featuring Cotellic as part of a combination therapy in treating various types of cancers. The reality is that MEK inhibitors like Cotellic have attracted considerable interest. I suspect the drug could be more important for Exelixis in the future than is the case right now.

Additional indications for Cabometyx

Cabometyx has already achieved significant success in treating renal cell carcinoma (RCC) after anti-angiogenic therapy (which refers to any drug that tries to slow down cancer growth by disrupting blood supply to tumors). But bigger and better things could lie ahead.

Exelixis is counting down the days until the FDA makes an approval decision on Cabometyx as a first-line treatment for RCC. That decision is scheduled to be handed down by Feb. 15, 2018. Approval seems likely, considering the tremendous clinical results for the drug. The company's Senior Vice President of Commercial, Patrick Haley, mentioned in the company's third-quarter conference call that the first-line indication has almost as many patients as the second- and third-line RCC indications combined.

I'm also upbeat about the possibilities for Cabometyx in treating other indications and in combination therapies. Exelixis intends to file for approval of Cabometyx in treating advanced hepatocellular carcinoma (HCC) in the first quarter of 2018. HCC is the most common form of liver cancer. Roche and others are evaluating Cabometyx in combination with other drugs in treating RCC, HCC, and other types of cancer. 

Long-term opportunity

I said that the reasons why Exelixis is a good stock to buy would be given in order of importance, with the most important reason provided last. So what's the most important reason to buy the biotech stock? Its long-term opportunity.

Isn't that basically the same thing as the potential for Cabometyx in treating other indications as a monotherapy or part of a combo? Nope. What I mean by Exelixis' long-term opportunity is that the company should be able to use Cabometyx (and to a lesser extent, Cotellic and its other cabozantinib product, Cometriq) as a foundation from which to expand.

Exelixis is now profitable, with a growing cash stockpile. CEO Michael Morrissey has stated in the past that the company will either partner or make acquisitions to pick up more oncology assets. Exelixis plans to focus on early-stage or late pre-clinical stage candidates that big drugmakers are more likely to pass up or overlook. 

I like that strategy. In my opinion, Exelixis is poised to "rinse and repeat," just like other successful biotechs before have done by starting with one successful product and then expanding their portfolios.

There is one possibility that could derail those plans, though, that I suspect could happen. However, the potential for this scenario to unfold makes Exelixis an even better pick. I'm referring, of course, to the prospects for Exelixis' being acquired. A few months ago, my colleague Sean Williams ranked Exelixis first on his list of mid-cap biotech stocks that would be great takeover targets. I think Sean was -- and is -- right on target. And if Exelixis is a smart buy for the "big boys," is it a smart buy for regular investors, too?

Yes.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Exelixis. The Motley Fool has a disclosure policy.