Editor's note: Adam Feuerstein will pinpoint the biotech stocks with potential to take off in '09 at TheStreet.com Investment Conference on Saturday, Oct. 25.

Times are tough but not tough enough to keep a lid on the Biotech Mailbag. Kent P. asks:

"Is there any hope for Onyx Pharmaceuticals ( ONXX)? It has dropped to about $29 from $44 in August. Will there be any good news or quarterly reports coming down our way to erase this loss?"

Onyx started the year at $55, so the performance of the stock is even worse than Kent describes. Remember 2007? Onyx was the best-performing biotech stock of the year.

Here's what's happening: Nexavar is a very good cancer drug, but most of the sales growth in liver cancer (and to a much lesser extent, kidney cancer) is coming from Europe and Asia. That's a problem because Onyx doesn't seem to have very good visibility into those markets, especially Asia.

Investors get nervous when companies can't tell them with reasonable detail how their key products are performing. In this market, a case of nerves equals sell.

The consensus third-quarter sales estimate for Nexavar is about $175 million, which represents about 4% sequential growth.

First-half 2008 Nexavar sales totaled $321 million and the company has guided to total 2008 sales in the range of $600 million to $650 million. Clearly, if Onyx hits the $175 million Nexavar benchmark for the quarter, sales guidance has to be raised.

Biotech Select

That's good, except I think just about everyone who follows this stock knows that Onyx management low-balled the Nexavar guidance, so the reaction to a raise in that guidance on the third-quarter conference call might be muted.

Another Onyx issue: The Nexavar joint venture with German drug maker Bayer has been a buzz kill. It's totally junked up with launch and research costs. Investors are waiting for real earnings leverage to flow through to Onyx's bottom line from all the Nexavar revenue -- except it hasn't happened yet and no one is quite sure when it will.

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.

Andre K. asks, "What is your take on Exelixis ( EXEL - Get Report)? 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), GlaxoSmithKline ( GSK - Get Report) and Bristol-Myers Squibb ( BMY - Get Report).

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.

Not pretty.

My worries came true. Exelixis turned out to be an expensive stock with an early-stage pipeline. The company has a voracious and never-ending appetite for cash. And that pile of promising cancer drugs in the portfolio, far from being a "cushion from failure," has actually been a hindrance to intelligent clinical development. Exelixis has too many drugs in the hopper, to the point that nothing is getting done quickly enough.

If there's good news to come from this, Exelixis at around $4 is a more compelling investment than it turned out to be at $10. That's small comfort for those who owned the stock higher, I realize.

Don't be fooled into thinking that there isn't downside risk to Exelixis even at this level. The company has to start making meaningful progress with the cancer drug pipeline or the stock will go lower.

A phase III trial -- the company's first -- was initiated in July for XL184. The problem is that the drug is being tested against a rare form of thyroid cancer which means a very small commercial opportunity. And the study is going to take two years to enroll fully.

Exelixis needs solid clinical data from its other drugs so that larger phase II and III studies can get started. Watch to see what the company announces at a European cancer conference later this month. Glaxo is also expected to make a partnering decision on XL184 later this month.

Last week, Exelixis announced plans to bring another new cancer drug into human testing. Stop! How about moving faster with the drugs in the pipeline already? That's what investors want to see.

At the time of publication, Feuerstein's Biotech Select model portfolio was long Genentech.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.