I don't see why a Cave Story sequel or prequel couldn't happen. There are far simpler games out there than spawned sequels, and they've turned out great. At the very least, there's definitely enough story content to make a prequel.
And to all the people who say that sequels usually don't work unless the original is written "with a sequel in mind," I really don't understand how you could think that. Consider these movies and games...
-All three Toy Story films were written to stand alone, and most critics agree that each subsequent installment was better than the previous one. And they definitely could still make a fourth one if they wanted to (there's even rumor about that).
-Pirates of the Caribbean was written to stand alone. And despite the mixed opinions surrounding the last two sequels, they've been wildly successful, so apparently a lot of people loved them.
-The majority of Mario, Zelda, and Metroid games are written to stand alone, and yet they make up great stories and ideas for new sequels that usually turn out great (Metroid: Other M being an exception). And you may not know this, but close to its time, the creators very heavily implied that Super Metroid was to be the concluding chapter of the series, and there would be no others. And what happened? We ended up getting Metroid Fusion and the Metroid Prime Trilogy.
-Mega Man Zero 3 and Mega Man ZX were meant to be the concluding titles of their respective subseries, but fan opinion convinced Capcom to change its mind and make one more installment in each of those, and they turned out pretty decently.
-I think it's safe to say that Halo 4 is the ultimate example of a story that was completely resolved (Halo 3), only to be brought up with a fresh, new story that looks to be pretty great, at least to me.
I could go on and on, but you get my point: There's no reason to think that it's "impossible" to make a Cave Story sequel/prequel because of the finality to the ending or supposed lack of story content, especially when there's still so much backstory that remains a mystery. Heck, just take a look in the "theories" section on this forum.