Seeking Alpha
Profile| Send Message|
( followers)  
I bought Exelixis on June 17, 2005 at $7.66.

Since this stock had a big pop on Friday, it seemed like a good one to write up now. It looks like the reason for the 12% rise on Friday was a brokerage upgrade as Banc of America started coverage at "buy."

Exelixis is a pretty small biotech company with a promising pipeline of cancer drugs that appear to have better than average chances of eventual FDA approval (nothing revolutionary in terms of targets or in terms of the technology applied -- sometimes "revolutionary" is a bad word if it means trying to get the FDA to approve a whole new way of treating a disease instead of an improved drug that does something similar to existing treatments, only better).

Some of my other biotech holdings, including both Vertex and CV Therapeutics, have had much more coverage in the press and seem to be more fully hyped. That isn't necessarily a bad thing, but I think that these smaller companies with somewhat less attention might be priced at discounted levels in comparison to their more widley understood compatriots.

Biotech has certainly been in the news a lot over the past six months or so, with Genentech blasting off thanks to lots of good drug news -- including lots of coverage of Avastin, which looks like it might be the most important cancer drug in the world (and on which one of my other holdings, Protein Design Labs, makes a nice royalty for use of their proprietary antibodies).

That has led to some good price climbs for a number of stocks, but I don't really have much interest in the huge biotechs like Genentech and Amgen -- I think those ships have sailed, for the most part, and that the explosive growth and exciting potential lie with the smaller biotechs with promising but mostly early-stage drug programs. Biotech is a relatively small proportion of my portfolio, and I treat these investments as very long term holds. Ideally, I like to pick companies that I think have the potential for long term growth into powerhouse companies -- the Genentechs and Amgens of a decade from now.

That kind of growth and future generally is built first on one or a few very successful drugs, but also on very deep pipelines and strong science going forward -- I'm not interested in investing in the one trick ponies of the biotech world, the companies that have one booming drug to make money for a few years, but nothing in the pipeline behind that the help them grow into a significant company.

Biotech is also an area I don't personally understand very well, so I rely on reading the advice and analysis of people who do understand the science and who can explain it in terms that a non-scientist can understand. The first person I found like that is Charly Travers over at the Motley Fool, though there are certainly others. Charly and his colleague, Karl Thiel, have both done some nice writeups of biotech companies and Charly writes a monthly biotech column in the Rule Breakers newsletter that I find provides a great education.

This article on the Motley Fool site is very useful in summing up reasons for investing in Exelixis.

Exelixis has a very promising mid-stage pipeline of primarily cancer drugs, including one currently involved in stage 3 trials for bile duct cancer (and which has orphan drug status, which provides extended exclusivity rights and some tax credits). Their full pipeline of drugs is explained on their website, and they have had a busy year -- aside from the ongoing stage three trials they have several drugs in or just beginning Phase 1 trials, and three applications pending with the FDA as of this summer to begin additional clinical trials.

Exelixis is unlikely to be one of the biotech takeovers, in my opinion, because they have followed a strategy of partnering and licensing their drug programs in order to offset the cost of research and development and, indeed, the high costs of the clinical trials themselves. I see them as a separate company going forward, and I trust the analysis of Travers and others that the drug programs themselves seem very promising and are aimed at known cancer targets.

This strategy is both good and bad, in that it helps to keep the company from going boom or bust with each FDA approval or denial, but also moderates the impact of a blockbuster. I'm pleased to see with their XL119, the drug closest to market, that they have partnered with Helsinn for a good amount of upfront money and ongoing milestone and royalty payments, but that they have retained the rights to repurchase the North American rights from Helsinn if the drugs performance warrants.

This one is going to be a wild ride, as it has been already from its IPO at nearly twice this price until now, but I think the solid science, low profile and good pipeline that includes several promising programs but also one drug that's in the final stages of approval make for a worthy bet.

This, like most of my biotech investments that have very long time horizons, is a "set it and forget it" stock that I'm not going to sell for the next ten years unless they receive a huge buyout offer, which I do not expect, or unless their proprietary science is discredited (in which case, I wouldn't likely sell anyway, since the stock would then be all but worthless).

And for those interested in investing in biotech who aren't doctors or pharmacologists, I strongly recommend finding advisors who you trust who understand the science and the investing theses for these companies -- in my opinion, Motley Fool's Rule Breakers is a great and affordable resource, but there are certainly others as well.

Source: Exelixis Continues Its Wild Ride (EXEL)