Buy, Sell, or Hold: Exelixis

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Exelixis (NASDAQ: EXEL  ) today, and see why you might want to buy, sell, or hold it.

Founded in 1994 and based in South San Francisco, Calif., Exelixis is a biotech company specializing in small-molecule cancer-fighting therapies. The company has a market capitalization of about $850 million, and its stock is down about 18% over the past year and down nearly 4%, on average, annually over the past decade.

Buy
A key reason to consider Exelixis is the business it's in: health care. With our planet's population growing, getting older, and living longer, demand should only grow for medical products and services.

Beyond that, Exelixis stands above many other biotechs because it actually has an FDA-approved product, Cometriq, which treats metastatic medullary thyroid cancer, or MTC. The drug aced its trials, and bulls think that it might eventually be approved to treat other conditions. It's already in trials addressing a wide range of cancers. One hope is that it might treat prostate cancer, which affects many men – with more than 200,000 cases expected to be diagnosed in the U.S. this year.

Another reason one might buy a company such as Exelixis is over speculation that it might be acquired by a bigger company, as often happens with small biotechs. That can be great when it happens, as purchases tend to happen at premium prices, giving the stock a nice boost. But it's not guaranteed that a buyout will happen, and there's a downside if it does, too – you'll no longer own a smallish, potentially fast-growing company. Instead, you'll probably own shares of the big acquirer, which isn't likely to grow as briskly.

Exelixis has partnered with a handful of big pharmaceutical companies on a number of compounds in development. It has licensed Foretinib to GlaxoSmithKline (NYSE: GSK  ) , for example, and the drug, which might fight breast cancer  among other things, is in trials. Exelixis discovered the SAR245408  compound and licensed it to Sanofi, which has trials under way for it to treat endometrial cancer, among other things.

The company's financial condition seems sound, too, as it recently had more than $400 million in cash and short-term investments, and it burned up $126 million in free cash flow over the past year. Its latest earnings report was disappointing, though.

Sell
One reason to stay away from Exelixis and other biotech companies is that most of us know very little about biotechnology and related fields. Thus, it can be especially hard for us to discern which companies are best poised for success, and what the risks are for each. It can make a lot of sense to just steer clear, or to invest in a bunch of biotech companies at once, via an ETF. SPDR Biotech (NYSEMKT: XBI  ) , for example, can instantly have you invested in more than 40 companies, such as Sarepta Therapeutics (NASDAQ: SRPT  ) , which is gathering interest due to its promising Duchenne muscular dystrophy drug eteplirsen. The formula may end up winning accelerated FDA approval, and there's speculation that the company may end up acquired. Its recent reported loss isn't as worrisome as it may seem, either.

Then there's this: Exelixis' stock price, which has been under $5 per share, though recently not much under it. That's penny-stock territory, where many investors have lost fortunes on extra-risky companies and more easily manipulated stocks. A very low stock price is not a definite portent of doom, and some penny stocks end up doing well, but it's a red flag to consider.

Meanwhile, the company's big drug, Cometriq, isn't cheap. It costs more than $9,000 per month, which can be an issue for some patients or medical-care providers. Fellow biotech Dendreon (NASDAQ: DNDN  ) has been in a similar boat, with its prostate-cancer drug Provenge, which carries a price tag of about $93,000 for its treatment. The company has been aiming to improve its financial condition in part through cost-cutting.

Exelixis's financial statements are not all perfect, though. Long-term debt has been rising significantly, going from about $75 million in 2008 to $323 million recently. Its share count has gone from 105 million to 160 million over the same period, diluting the value of existing shares.

You might also choose to avoid Exelixis as it is today, with Cometriq approved just to treat MTC, because its estimated patient market is fewer than 1,000 people. That makes it an "orphan drug" at the moment, addressing a relatively rare condition. Orphan drug developments offer pros and cons for investors to mull over. For example, they often face little competition, but their drugs can end up quite expensive.

Hold (off)
Given the reasons to buy or sell Exelixis, it's not unreasonable to decide to just hold off on it. You might want to wait for Cometriq to be selling briskly and leading to one or more profitable quarters, or for debt levels to fall significantly. You might wait for the drug to be approved for one or more other conditions, as well -- such as prostate cancer.

The verdict
I'm holding off on Exelixis for now, though it does seem quite intriguing. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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Comments from our Foolish Readers

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  • Report this Comment On March 28, 2013, at 6:58 AM, retiredpharma wrote:

    Foolish Blogger,

    I'm adding to my LT position which now stands at 7622 shares at net $3.15 as I believe the LT ramifications of Cometriq in treating PC, particularly the Bone Scan documented cancer cessation and the symptomatic resolution of accompanied crippling pain as it relates to ambulation have me convinced that over time EXEL will be rewarded add on indications and sp will move commensurately!

    In other words FOOLS should be accumulating!

    retired pharma

  • Report this Comment On April 16, 2013, at 1:19 PM, wolfwork wrote:

    I believe EXEL is priced the way it is given the limited options for Cometriq. Better to hold or sell.

    Prostate Cancer? Even if it does well in either the COMET-1 and COMET-2 trials, it won't be used until after all other approved options [such as newly approved Zytiga (J&J) or Xtandi (Medivation/Astellas)] are used. This pushes Cometriq back to third or fourth line. Much smaller patient pool.

    It is in PII (read: smaller and more risk) trials in NSCLC, sarcoma, triple-negative breast cancer, GBM and a few other tumor types. These are either very competitive (NSCLC or breast) or notoriously difficult (GBM, sarcoma).

    EXEL only has one other drug listed in their pipeline - a small molecule MEK inhibitor. This will be another "me-too" drug since there are others, such as GSK's trametinib, which are in much later stages of development.

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