Insiders Are Buying Exelixis. Should You?

Bristol-Myers Squibb (NYSE: BMY) may not have much confidence in the future of Exelixis' (Nasdaq: EXEL) XL184, but Exelixis' management seems to. Both its chairman and its CFO have purchased Exelixis shares this week.

Shares spiked 7% yesterday after the Securities & Exchange documents were filed. Co-founder and Chairman Papadopoulos Stelios bought shares worth more than $610,000, while CFO Karbe Frank purchased nearly $50,000 worth.

Insider buying is rarely if ever a bad sign. But in this instance, I have a hard time seeing it as a neon sign flashing "BUY," either.

The price of Exelixis' shares in the near term is pegged to the success of its phase 3 trial testing XL184 against a type of thyroid cancer. Exelixis' management has likely seen more data from previous trials, and pored more thoroughly over the public data, than most outsiders have. However, I'm not sure that gives them much of an advantage in predicting the likelihood of success.

The phase 3 trial data is blinded, so people at the company don't know which patients are receiving the drug, and which are getting placebo. Once the results are known to the executives, they would have inside knowledge, and wouldn't be able to buy shares.

If Papadopoulos and Karbe don't have a huge advantage in predicting the trial's success, then why are they buying? For the same reason anyone buys a biotech company: The reward appears to outweigh the risk. Exelixis doesn't need to become the next Pfizer or Merck to produce stellar returns. Just look at where Exelixis is now, and what it could become shortly:

Source: Capital IQ, a division of Standard & Poor's.

If you can stand the risk -- Exelixis will plummet if the trial fails -- the rewards could be huge. Just don't buy solely because an insider did.

Rex Moore offers his take on why insider buying might be a good thing.