Based on recent market action and the unprecedented level of anxiety, it seems that the bottom is getting closer and hopefully, the markets will stabilize towards the end of 2008. Therefore, the coming weeks may be a good opportunity for increasing exposure to the stock market, which is why we intend to end 2008 with 90-95% of the portfolio in stocks.

More specifically,  the biotech industry may enjoy a meaningful catalyst in the coming months: The acquisition of Genentech (DNA) by Roche, which just recently reaffirmed its commitment to buy the 44 percent stake it does not already own. Unlike companies in other industries that are paralyzed by recession fears, pharmaceutical companies have both the willingness and the stability in order to get the funding necessary for large scale mergers and acquisitions because they are hardly affected by the economic downturn. In fact, the drug industry is probably one of the few places large financial institutions might feel comfortable putting their money at the moment. In the case of Roche and Genentech, the cash generating portfolios of both companies, which will not be facing substantial generic competition in the coming years, coupled with their focus on serious illnesses such as cancer and inflammatory diseases, will encourage stakeholders to achieve a deal already in the coming months. From the banking industry’s viewpoint, such a high profile deal could serve as the ultimate proof that the credit markets are starting their gradual recovery. We therefore decided to increase our position in Genentech, which now accounts for almost a fifth of the portfolio’s value.

Exelixis in the post-GSK era

We also decided to add more Exelixis (EXEL), which is in the process of transforming into a “leaner and meaner” company, according to the company’s CEO, George Scangos on today’s conference call. Exelixis lost 22% of its value on Thursday after announcing that GlaxoSmithKline (GSK) had decided not to license additional candidates included in the joint development collaboration between the two companies. This is certainly not a positive development for Exelixis, but it was somewhat expected after GSK’s decision earlier this year not to extend the agreement for another year. Looking at the half-full part of the glass, this decision provided the much needed clarity with regard to the ownership of Exelixis’ compounds, and now, Exelixis can start the long-anticipated monetization process.

Thursday’s announcement got investors worrying for two reasons. First was the issue of the quality of the compounds GSK decided to abandon, as it can be wrongly concluded that these compounds are not attractive for further development.