Onyx Attractive, but Issues Remain

Case in point: analysts expected Onyx to earn a penny a share in the third quarter, but the range of those estimates goes from a loss of 18 cents a share to a gain of 15 cents of share.

Every quarter, the profit or loss from the Nexavar joint venture is a total guessing game. The new Onyx CEO Tony Coles is saying the right things about getting Onyx to a significant and reliable level of profitability, but investors are waiting to see real evidence of that in the company's income statement.

Last point: Onyx has almost $500 million in cash. That's great, but what will the company do with the money? Onyx is a one-drug company with Nexavar, even if you buy into the stuff about Nexavar being a "pipeline in a drug." The company needs to get bigger.

Will they license a new drug or go whole-hog and make an acquisition? Do you (as an investor) have confidence in management that they will make a smart deal? At this point, nearly everyone has given up on the notion that Bayer buys Onyx.

Onyx's valuation is attractive down here. The stock deserves to be higher, but some or all of the issues I lay out above need to be resolved in the right way for that to happen.

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Andre K. asks, "What is your take on Exelixis(EXEL Quote)? I've read a lot of positive things about the company. Is it a long-term buy and hold? Should I buy the dips?"

I answered my first reader email about Exelixis in a Feb. 10, 2007 Biotech Mailbag. At that time, Exelixis was a $10 stock. Here's what I had to say back then:

I like Exelixis for all the reasons F.M. states. The company's pipeline of targeted cancer drugs is deep -- 11 compounds in or near clinical development, including four drugs in phase II trials. Another three drugs should be entering clinical development in 2007. All the drugs are designed to interrupt multiple signaling pathways that cause tumors to grow. Many of these drug targets have been validated by drugs currently on the market.

And then there are partnerships with Genentech(DNA Quote), GlaxoSmithKline(GSK Quote) and Bristol-Myers Squibb (BMY Quote).

Some of these Exelixis drugs are going to fail. Blowups in biotech drug development are inevitable, and cancer is especially tough. But Exelixis' deep pipeline provides some cushion from failure. I see the company as a way to diversify risk with a single investment.

There are some things I worry about with Exelixis. The stock sports a market cap just under $1 billion already, so it isn't cheap. Developing all those drugs costs a lot of dough, too, which could mean significant dilutive financings ahead. (To its credit, Exelixis has used some creativity to raise money while sparing shareholders a ton of dilution.) Finally, I worry that while the pipeline provides diversification, all the drugs are still emanating from a single lab and technology platform. If that's flawed, it could mean trouble.

For all these reasons, a conservative way to invest in Exelixis is to take advantage of drug-development stumbles or dips in the stock price to buy shares. Last November, for instance, Exelixis temporarily suspended patient enrollment in one of its phase II studies because of an unexpected adverse event. The stock dipped from $9-plus to around $8 per share. If you had bought the stock on the day the bad news hit the tape, you'd be up more than 25% today.

Exelixis closed trading Thursday at $3.62. That $1 billion market cap has been whittled down to under $400 million.