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Is Exelixis the Best Small-Cap Biotech Stock?

What stock is "best" is undeniably subjective, but Exelixis' (NASDAQ: EXEL) 196% return this year certainly makes it worthy of consideration.

Shares in the once-maligned cancer drug developer have enjoyed a resurgence this year following the successful launch of its new kidney cancer drug, and meaningful sales are only now beginning to roll in. Can Exelixis continue to be one of the best-performing biotechs in 2017? Let's take a closer look.

An important win

Up until recently, Exelixis' only drug on the market has been Cometriq, a medullary thyroid cancer treatment that targets a small patient population and that generated a meager $37 million in sales in 2015.

Back in 2014, investors had hoped that a study of Cometriq in prostate cancer patients would pan out and send sales soaring much higher than that; however, disappointing phase 3 results shelved Cometriq in that indication and cast doubt on Cometriq's potential use in larger indications. Unsurprisingly, those concerns caused Exelixis shares to sink from a month-end peak of $7.06 in February 2014 to a month-end low of $1.44 in December 2014.

Exelixis' fortunes, though, have changed since then. Last year, management announced that a subset of kidney cancer patients given a reformulation of Cometriq called Cabometyx lived longer than patients who received the then-current standard of care drug, Affinitor.

Specifically, patients with advanced renal cell carcinoma who had received prior anti-angiogenic therapy received either cabometyx or Afinitor once-daily. Median progression-free survival was 7.4 months for the Cabometyx arm of the study and 3.8 months in the Afinitor arm of the study. Importantly, Cabometyx delivered median overall survival of 21.4 compared to 16.5 months for Afinitor.

That performance kick-started shares and ultimately resulted in Exelixis winning FDA approval for Cabometyx's use in these patients this past April. 

So far, Cabometyx is off to a fast start. Coming out of the third quarter, Exelixis' management pegs Cabometyx's market share at 20% in the second-line setting and 35% in the third-line setting. As a result, Cabometyx's sales in its first full quarter on the market totaled $31.2 million in Q3.

Expanding use

Cabometyx's overall survival benefit in trials is leading to doctors increasingly embracing it over Afinitor, a drug that brought in more than $1.6 billion in sales last year.

Exelixis management thinks Cabometyx can compete for up to 45% of the oral tyrosine kinase inhibitor drug market in the second- and third-line settings, and that Cabometyx could win away some of the 38% market share in the second-line setting held by immunotherapies.

If management is right, it could translate into hundreds of millions of dollars in additional Cabometyx sales.

In the U.S. alone, there are 17,000 renal cell carcinoma patients that have failed at least one treatment, and with a $165,000 per year price tag and an average treatment duration of 7.6 months, they represent a peak sales potential of $1.8 billion annually. Exelixis won't capture all of this market, but a doubling of its market share would result in significant sales growth.

An even bigger potential opportunity might come from expanding Cabometyx's label to include its use in the first-line advanced kidney cancer setting. 

There are over 300,000 cases of renal cell carcinoma diagnosed in the U.S. annually, and about a third of these patients are diagnosed with advanced cancer that could benefit from first-line use of a drug like Cabometyx. Currently, the first-line setting is dominated by Sutent, a Pfizer drug with $260 million in quarterly sales.

Last month, Exelixis rolled out trial data evaluating Cabometyx head to head against Sutent in the first-line setting, and the data was good enough for management to announce plans to file for Cabometyx's approval in that patient population.

Specifically, Cabozantinib improved progression-free survival versus Sutent, decreasing the rate of disease progression or death by 31%. The objective response rate was 46% in the Cabometyx arm of the study, which handily outpaced Sutent's 18% objective response rate.

Median progression-free survival for Cabometyx patients was 8.2 months compared to 5.6 months for Sutent, and at a median follow-up of 22.8 months, the median overall survival for Cabometyx patients was 30.3 months versus 21.8 months for Sutent.

Overall, those results are strong enough for me to think that this drug, if approved, could win away a good chunk of Sutent's sales.

Looking ahead

With a $4.8 billion market cap and annualized net product sales of around $160 million, Exelixis shares may already be pricing in a lot of Cabometyx opportunity. 

However, the company's valuation could be nudged higher if quarterly sales expand quickly -- and if trials evaluating Cabometyx in liver cancer patients succeed. Results from a phase 3 liver cancer study are anticipated next year.

Cabometyx makes Exelixis a stock worth considering, especially if management can leverage sales growth to turn profitable in 2017. Industry watchers think Exelixis will lose $0.47 this year and $0.02 next year, but if Cabometyx sales grow quickly, Exelixis could exit 2017 as one of only a few profitable mid-cap cancer companies.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle 

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