An Old Biotech Friend Is Back in My Portfolio
Here's why I'm re-establishing a position in this mid-cap oncology name, even amid carnage in the space.
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I have been out of mid-cap oncology name Exelixis EXEL for a couple of quarters. This was mainly because the stock broke decisively out of a well-established trading range early in the fourth quarter of 2024 and my position was called from my portfolio. Prior to that Exelixis had been a fantastic "rinse, wash, and repeat" covered call trade for me over several years.
Well, thanks to the recent selloff in the market, and the more lucrative option premiums the spike in volatility has provided, I have re-established a new covered call holding in this old friend. EXEL stock has held up quite well amid the carnage that has occurred in so much of the biotech/biopharma space as equities have headed south. The stock is down just 10% from its recent highs. Meanwhile, the SPDR S&P Biotech ETF XBI is off some 30% from its highs in the fourth quarter of last year.
Exelixis has numerous attractive traits that have made the shares relatively stable while so many of its brethren have cratered since the market has gone into full on risk-off mode. First, the company is quite profitable and continues to ride the success of its franchise blockbuster drug Cabometyx. Late last month, this drug was approved for another label expansion — this time to treat patients aged 12 years of age and older with pancreatic and extra-pancreatic neuroendocrine tumors.
Cabometyx was originally approved in 2016 to treat advanced renal cell carcinoma in patients who have received prior anti-angiogenic therapy. It has added several approved indications since then.
Net product revenues rose 11% in 2024, almost all of this from Cabometyx. Exelixis took in another almost $360 million in collaboration revenues from partners during the last year.
Exelixis’s current market cap is just under $10 billion. The company ended 2024 with just over $1.7 billion in cash and marketable securities on its balance sheet even after buying back more than $650 million of its stock duiring the year. Management recently added another $500 million to its stock buyback authorization.
Cabometyx still has a few indications it should eventually be approved for, and management has guided to roughly $2 billion in net product revenues in 2025. Leadership also believes that Cabometyx can hit $3 billion in sales by 2030.
Thne company is also pushing another compound, zanzalintinib, into late-stage development for several indications. Management has stated this compound could do $5 billion worth of annual sales by 2033.
EXEL stock currently trades just over $35. Exelixis delivered two bucks a share in earnings in 2024 and the consensus analyst estimate is for $2.30 a share in 2025, and $2.85 a share in 2026. That makes the stock more than a reasonable value before considering the company’s cash hoard, and the equity lines up well for the covered call trade below.
Option Strategy
This is how one can initiate a holding in EXEL with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the November $35 call strikes, fashion a covered call order with a net debit in the $29.50 to $30.00 a share range (net stock price - option premium).
This strategy provides downside protection of 15% with upside potential of 17% even if this equity trades flat over the option duration.
At the time of publication, Jensen was long EXEL and XBI.
