Morgan Stanley Drops Bearish Exelixis Stance, Sees 'Limited Downside Risk'

Morgan Stanley has dropped its bearish stance on Exelixis, Inc. (NASDAQ: EXEL), although the research firm hasn't gained enough confidence to recommend buying the drugmaker's stock. 

The Analyst

Analyst Jeffrey Hung upgraded Exelixis from Underweight to Equal-weight and increased the price target from $20 to $28.

The Thesis

Merck & Co., Inc. (NYSE: MRK)'s Keytruda in combination with Pfizer Inc.(NYSE: PFE)'s Inlyta was recently found to be effective in treating first-line renal cell carcinoma, or RCC.

Exelixis shares likely have limited downside risk in the near-term, Hung said in a Monday note. 

The analyst said he miscalculated the magnitude of adoption of Exelixis' cabozantinib in second-line patients following first-line treatment with Bristol-Myers Squibb Co (NYSE: BMY)'s Opdivo and Yervoy.

While noting that IQVIA scripts have remained strong for the most part of the first quarter, Hung said he expects them to remain strong given the 90-percent capture rate of first-line Opdivo/Yervoy progressors.

Even if there is a slight inventory drawdown, given the build for two successive quarters, the analyst said he expects the increased patient demand and 5-percent price increase in mid-January to provide a shot in the arm for cabozantinib sales.

The good Keytruda/Inlyta data released at the ASCO-GU meeting does not preclude caboxantinib/Opdivo from having a place in first-line RCC, Hung said.

"As a result, we believe there is limited downside risk ahead of the cabo/nivo data from CheckMate (CM) 9ER later this year." 

Morgan Stanley adjusted its RCC model, assuming 18-percent peak U.S. market share in first-line and 40-percent in second-line, which suggests peak sales of $1.6 billion.

The firm also updated its EPS estimates, as Exelixis will begin reporting non-GAAP EPS in the first quarter.

Positive expectations for cabozantinib in second-line RCC are already priced into shares, in Morgan Stanley's view. 

The Price Action

Exelixis shares were trading up slightly at $24.54 at the time of publication Monday. 

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