We recently compiled a list of the 10 Largest Biotech Hedge Funds and Their Top Stock Picks. In this article, we are going to take a look at where Exelixis, Inc. (NASDAQ:EXEL) stands against the other biotech stocks.
The ability to successfully make money through investment requires deep thinking and analysis. Even then, it’s not a sure shot, and oftentimes, investors end up losing money regardless of how sound their decisions might have appeared on the surface. This is why most business schools teach portfolio diversification, to ensure that an investor’s risk is managed by allocating money across different stock categories.
One of the riskiest categories in which anyone can invest their money is the biotechnology industry. While the broader pharmaceutical sector enjoys some stability in the form of large pharma companies being able to stay cash flow positive through selling approved drugs, the biotechnology industry removes this stability by focusing only on future treatments. These treatments might or might not see the light of day, and developing them is expensive, so if they fail to yield any benefits, the shares drop.
Since their business is dependent on their treatment development, the risk associated with investing in biotechnology stock reduces the further down the development pipeline a firm is. Drugs that are in late stage clinical trials are more likely to secure regulatory clearance, and drugs that have secured approval are more likely to make money for companies in the market. Looking at these trends, the next question to ask is, what effect do clinical trials have on the stock returns of biotechnology stocks?
On this front, research from Harvard University provides some insight. It analyzed the research and development activities of large biopharmaceutical firms which earned at least 50% of their revenues (greater than $5 billion) from branded products. Then, data was gathered for FDA unapproved positive or negative outcomes from clinical trials. These data points were analyzed to check for the simple effect of positive or negative trial news on the stock returns of the companies. The results of the research confirmed that stock prices react accordingly to positive or negative news, but interestingly, it also revealed that the reactions were asymmetric.
For instance, the median cumulative annual returns (CAR) for t0, t+1, and t+2 (the day of the announcement and the two following days) saw the negative returns generate by negative news outpace the returns for the positive news by approximately 1.25 percentage points, 1.35 percentage points, and 0.50 percentage points, respectively. The researchers use these findings to “confirm and extend previous scholarship on the significant market reactions to clinical trial results for biotechnology companies with few compounds in development.” As for the asymmetry, they speculate that the “negative events may have a ‘reputational’ effect” on management’s ability to conduct trials and add that ” one could argue that as the results of clinical trials are anticipated events, market participants have already factored risk-adjusted expectations about their outcomes into the stock price.”
So, this makes it clear that biotechnology stocks are among the riskiest investments in the market, and even well capitalized firms are very vulnerable to bad news. Adding to this, raising funds for research often requires issuing more stock, which ends up diluting value for existing shareholders. For early stage and small biotechnology companies, this dilution is inevitable. Data from Deloitte shows that the average cost to develop a drug from R&D to launch sits at $2.3 billion while the average peak sales sat at $362 million in 2023. This suggests that, on average, it should take a little under eight years for a firm to completely recover the money that it has invested in a drug. This picture is further complicated by the fact that the average ROI for R&D investment sat at 4.1% in 2023, and R&D intensity for these firms is 35 percentage points higher than the average intensity of all other firms.
Combining all these data points shows that biotechnology companies might very well be ‘investment graveyards’ for inexperienced investors. The investment horizon for these stocks stretches for years, which means that only the most disciplined investors who are capable of not only conducting in depth research but also having nerves of steel to hold the shares, make it out on the other side with more money in their pockets than they put in. The nerves of steel are particularly important when we analyze the two decade performance of a biotechnology index and compare it with the performance of broader global stocks.
While biotech stocks do lead the world stocks, the difference between the returns varies from ~125 percentage points to a whopping ~420 percentage points within a time span of less than two years. These uncertainties also appear to be priced into the biotechnology stocks themselves, as data shows that 15% of these stocks trade below their net cash value – a figure that grows to 25% during times of economic peril.
To find out which biotechnology stocks might be worth investing in, one approach to take is to see what hedge funds are doing. These funds spend considerable resources analyzing biotechnology stocks, which means that they might be able to separate the wheat from the chaff as they say.
Our Methodology
To make our list of the ten biggest stocks of the 10 largest biotechnology hedge funds we scanned through the Q2 2024 SEC filings of OrbiMed Advisors, Deerfield Management, Magnetar Capital, Farallon Capital, RA Capital, Survetta Capital, Glenview Capital, Cormorant Asset Management, EcoR1 Capital, and Redmile Group and picked out their ten biggest biotechnology stakes.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of scientists in lab coats surrounded by pharmaceuticals and medical equipment, researching a life-saving oncology-focused biotechnology.
Exelixis, Inc. (NASDAQ:EXEL)
Number of Hedge Fund Investors in Q2 2024: 32
Farallon Capital’s Q2 2024 Investment Stake: $608 million
Exelixis, Inc. (NASDAQ:EXEL) develops treatments for cancer and hypertension. Some of its products target kidney, thyroid, and skin cancer. It is another commercial stage biotechnology stock, which provides it with a lot of stability compared to other firms that are in clinical trial stages. Exelixis, Inc. (NASDAQ:EXEL)’s bread and butter drug is cabozantinib, which is a diversified cancer drug that targets thyroid, kidney, and liver cancer. Exelixis, Inc. (NASDAQ:EXEL) is also a profitable biotechnology firm as it generates positive earnings per share (Q2 adjusted EPS was $0.77 which more than doubled analyst estimates of $0.34). Cabozantinib, sold as Cabometyx, showed positive impacts on patients suffering from neuroendocrine cancer in October last year, and if the drug is approved for this ailment by the FDA, then Exelixis, Inc. (NASDAQ:EXEL)’s shares could see more fireworks. The stock is up 9.95% year to date, making it a rare biotechnology firm that has done well in a tough economy, and the shares gained 15.86% in August after Exelixis, Inc. (NASDAQ:EXEL)’s Q2 2024 earnings report.
During the call, management shared key details for cabozantinib’s expansion to include neuroendocrine tumors. Here’s what they said:
“I’m happy to share our progress across our pipeline with you all today, starting with Cabozantinib and an exciting status update on our filing activities with the Phase III CABINET study in neuroendocrine tumors, or NET. As Mike mentioned, we are pleased to report that Exelixis’ filing for a supplementary NDA for Cabozantinib in pancreatic or extrapancreatic neuroendocrine tumors has been accepted by the FDA with a target PDUFA date of April 3, 2025. The FDA also granted orphan drug designation to Cabozantinib in pancreatic NET. As a reminder, the Phase III CABINET study evaluated Cabozantinib 60 milligrams daily versus placebo in patients with previously treated advanced or metastatic pancreatic or extrapancreatic neuroendocrine tumors, which I will refer to as pNET or epNET, respectively.
By way of background, NET sometimes referred to as carcinoid tumors are a diverse group of malignancies that arise from neuroendocrine cells of various organs. While previously thought to be fairly uncommon, there has been a marked increase in the incidents over the past 20-years. And in 2024, approximately 15,000 people in the U.S. will be diagnosed with this tumor type. Well-differentiated neuroendocrine tumors develop most commonly about 55% of the time in the GI tract, followed by lung at approximately 25% and the pancreas just under 10%. They may also arise from other tissues like prostate, breast, thymus and skin. To-date, FDA-approved therapies have been directed at stimulating somatostatin receptors and inhibiting angiogenesis. Somatostatin analogs were first approved for the treatment of symptoms related to functional tumors and subsequently to delay disease progression.”
Overall EXEL ranks 4th on our list of hedge funds’ top biotech stock picks. While we acknowledge the potential of EXEL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EXEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
