Invest Alongside Icahn in Exelixis with Less Risk

Exelixis Inc. (NDAQ: EXEL) shares moved higher after Carl Icahn purchased a 1.3 million share stake in the drug maker. The news comes as the San Francisco company is seeking partners to help develop the cancer-fighting compounds that it is researching. The firm has also been active in working to sell its research to potentially interested parties.

Bristol-Myers Squibb (NYSE: BMY) recently counted itself among these partners. The large pharmaceutical firm picked up development of XL413 - a pre-clinical drug candidate that inhibits a protein required for DNA replication and therefore might be useful in treating tumors that increase production of the protein.

Bristol-Myers exercised its option to continue development via a $20 million milestone payment to Exelixis. The agreement also gives Exelixis two choices: The ability to co-promote the drug and get half the profits in exchange for 35% of the development costs, or give Bristol-Myers the rights to the drug in exchange for future milestone and royalty payments.

Regardless, the $20 million cash infusion will help Exelixis towards its guidance of $200 million in the bank, but will fall short unless they sign another deal. The good news is that management seems confident that it will be able to find partners for one or more of its drugs. And these prospects are likely the reason that Carl Icahn got involved.

So, how can individual investors take a stake alongside Carl Icahn without taking on as much risk? LEAPS, or long-term equity anticipation securities, are long-term options that act similar to regular stock. The difference is that it costs less than buying stock outright while also lowering the risk.

Currently, the January 2010 calls with a strike price of $5.00 are trading for between $0.25 and $0.85. Investors would therefore have the right to purchase 100 shares at $5.00 anytime over the next 415 days for just $25 to $85 down right now. Also, the total loss is limited to those amounts rather than a $300 payment to establish a regular stock position.

 Email This Story
Join LEAPSInvestor.com