I think Exelixis (NAS: EXEL) has an excellent chance at getting cabozantinib approved by the FDA later this year to treat advanced medullary thyroid cancer. The data showing that the drug slows tumor progression are pretty solid.

But approval isn't going to be enough.

Sure, going from no drugs to one drug will be a big boost for Exelixis. Having revenue is a necessity for becoming profitable. But medullary thyroid cancer isn't a particularly large market. And cabozantinib will only be approved to treat late-stage patients, which limits the market even more.

Investors should be focused on the potential of cabozantinib to treat other indications.

A good example
Bayer
and Onyx Pharmaceuticals' (NAS: ONXX) Nexavar treated kidney cancer, but sales only exploded after getting approved for liver cancer.

Exelixis is testing cabozantinib in a variety of other cancers. Earlier this month, the company presented data from a phase 2 trial hinting that the drug might work in liver cancer. For prostate cancer, Exelixis is taking an unusual route, testing the drug's ability to reduce pain in late-stage patients rather than its ability to stop the growth of the tumor or increase life expectancy. I think it's a reasonable strategy, but there's no guarantee the FDA will go for it. If the route fails, it'll be a waste of money, but not really time, because Exelixis is concurrently testing the drug's ability to extend survival.

The secret sales
Part of the advantage of gaining FDA approval for any indication is that doctors are free to use the drug off-label for any indication they choose. The company can't market the drug for the indication until the FDA signs off, but that doesn't stop doctors from using it.

Very few doctors use the noodle method -- use everything and see what sticks -- but it's possible sales can increase after a clinical trial has proven a drug is effective, but before the FDA signs off on the expanded approval. Medical meetings are the best place to promote the new indications, so you'll often see companies hold their data for these events.

High expectations
Of course, with added expectations come increased valuations. While Nexavar has done well in liver cancer, it has failed in a few others, causing shares to sink. Onyx still hasn't hit the highs reached back in 2007 when it seemed Nexavar could do no wrong.

Fortunately, I don't think that's really an issue for Exelixis at this point. The company only has a market cap under $700 million. By comparison, Onyx's market cap was over $3 billion when Onyx hit its high.

The biggest difference
Here's the big thing: Nexavar doesn't have much competition in liver cancer. One of the reasons it didn't perform well for kidney cancer is because Pfizer's (NYS: PFE) Sutent was already approved for that indication and appears to work better. The big money is in unmet needs.

Exelixis is going to have an uphill battle going after additional indications. It'll run into competition from Nexavar in liver cancer and there are plenty of drugs that have been recently approved to treat prostate cancer -- Johnson & Johnson's (NYS: JNJ) Zytiga and Sanofi's Jevtana -- and there are others, like Medivation's (NAS: MDVN) MDV3100, that will likely be on the market before cabozantinib.

Unlike Nexavar in liver cancer, cabozantinib is going to have to do more than just beat a placebo. It'll have to show a meaningful benefit compared to the other drugs on the market in order to justify sales beyond medullary thyroid cancer. That doesn't mean it can't do it, just don't expect it to be a cake walk for Exelixis.

Exelixis is a pick of the Fool's Rule Breakers newsletter. You can see what the newsletter's analysts believe is the next rule-breaking multibagger by grabbing a free copy of their new report.

At the time this article was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson and Exelixis. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Exelixis, and Pfizer. Motley Fool newsletter services have also recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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