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Morningstar | Lowering Our FVE for No-Moat Exelixis to $24 Per Share

Exelixis is best known for its discovery of cabozantinib, a tyrosine kinase inhibitor (TKI) that was first approved in 2012 for medullary thyroid cancer (MTC). The small molecule was later approved in renal cell carcinoma (RCC), as well as hepatocellular carcinoma (HCC). The cabo opportunity has room to grow further, with late-stage trials in differentiated thyroid cancer (DTC) and in immuno-oncology combinations. Although we anticipate robust returns from cabozantinib, we believe the long-term outlook is uncertain given the company's pipeline outside of cabo, which is early-stage and relatively sparse. This is exacerbated by cabozantinib's eventual patent expiration; we believe generics could enter as early as 2026 (when the composition of matter patent expires) or later, depending on whether secondary patents are upheld in court.Cabozantinib experienced a rocky path through clinical development. Despite promising early trial results, GlaxoSmithKline turned down a partnership opportunity in 2008, and then Bristol-Myers Squibb returned the rights to then-phase-3 candidate cabo in 2010, leaving Exelixis to ultimately develop cabo on its own. This proved to be a fortuitous strategy, with Exelixis retaining all of the economic benefit from the successful franchise in the U.S. The company receives royalties on sales outside the U.S. from partners Ipsen and Takeda.Cabo--marketed as Cometriq in MTC and Cabometyx in RCC--has shown remarkable efficacy, despite competing with several other TKIs. Cometriq initially contributed only a small stream of revenue due to the small patient population associated with MTC, but DTC presents a much larger opportunity. Then, Cabometyx garnered approvals in both second- and first-line kidney cancer as well as second-line liver cancer in 2016, 2017, and 2019, respectively. Given cabo's success in these indications, we understand the company's focus on label expansions, namely into DTC, second-line HCC, and RCC with the combination with Opdivo. However, we're also watching how the company builds out its pipeline outside of cabozantinib, which we expect could be hit with generic entry near the end of our 10-year explicit forecast period.