Exelixis Upgraded With Good Reason (EXEL)

Mar.29.06 | About: Exelixis, Inc. (EXEL)

Exelixis (NASDAQ: EXEL), one of my favorite small biotech companies, was upgraded today by WR Hambrecht and has seen a nice bump in share price. I think WR and other analysts who are starting to look at this company are on the right track.

I bought EXEL after reading a Motley Fool article on them back in June, and I added a bit to my position in November, so I'm now holding what is still a smallish position at an average cost of $8.13. I'm now regretting not adding more to my holdings, as this little guy seems to be finally getting some big attention for their early stage cancer drugs and their many collaborative research programs.

EXEL is also going to be presenting at an investor conference on Thursday this week, and if the past is prologue it should be worth tuning in -- the last time I listened to a round of their presentations I came away very optimistic and impressed with the quality of their pipeline and the strength of their ambition to grow into a leadership position in the biotech industry.

The pipeline looks pretty incredible at this point -- nothing has jumped out as a potential blockbuster yet, but the sheer number of promising compounds that are moving through into Phase II this year is extraordinary for a company of this size. In no way does EXEL depend on a single drug or even on two drugs, though of course their path is still quite risky since their key drugs are all still quite early in the FDA approval process and it will likely be years before they bear fruit (if they succeed at all).

EXEL's lead drug, XL119, is in Phase III trials for Bile Duct Cancer, but that's not likely to be the prime mover of the stock whether it's approved or not. The next batch will make a much bigger difference, and they're all moving almost in lockstep through the approval process, without a hitch so far. XL784, their first non-cancer drug for renal disease, is moving into Phase II now, XL 999 initaited Phase II in December, and three more cancer compounds -- XL647, XL880, and XL820 -- will be starting phase II by the end of 2006.

That will mean six drugs in or through Phase II or III by this time next year, most of them in oncology -- that's simply remarkable for a company that has just barely crested the $1 billion mark in market capitalization.

Risks remain, of course, as do significant expenses. EXEL has a lot of cash, good income from collaborative research work with Sankyo, Bristol-Myers and Wyeth, among others, and some innovative financing agreements with Symphony to cover some of the costs from the expensive trials that are now underway and that should be expected to mushroom in cost for the next couple of years.

But the risks don't seem to be bothering investors right now, and I don't blame them -- this will be a critical couple years as their Phase II trials run the gamut, but with the depth of their pipeline I'll be thinking about any dips as buying opportunities as funds allow.

EXEL 1-yr Chart

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