For Onyx Investors, Long Term Value But Short Term Uncertainty

After a choppy and relatively bearish 2013, the cancer drug company Onyx Pharmaceuticals (ONXX) is once again on the rise after the FDA approved the drug Stivarga (regorafenib) on February 25th, 2013 for the gastrointestinal stromal tumor (GIST) indication in patients who have previously been treated with imatinib mesylate and sunitinib malate. Stivarga was already approved by the FDA in September 2012 for the second line treatment of patients with metastatic colorectal cancer (mCRC), so investors should note that the GIST indication was actually an sNDA that greatly expands the market potential for Stivarga but doesn’t hold the same (positive) shock value of an initial FDA approval for a new drug even though it was given priority review and was considered an “easy win” by most people following.

It’s also important to know that Onyx has partnered with Bayer (BAYRY), which will be commercializing the product. While this expands the drug’s marketing resources and “general reach," it cuts Onyx’s revenues in the long run.

This may help explain why the market is only “cautiously bullish” on ONXX following the good news on Stivarga. I think that the market will be nervous about bringing ONXX to a new 52-week high, which should keep the stock below $93/share without another good piece of news. Then again it’s important to note that this can also be influenced heavily by the behavior of the broader market, which has been extraordinarily bullish.

Adding to the uncertainty, or even bearishness on Onyx is the mediocre financial data that the company put out in its most recent earnings report. Kyprolis sales were pretty good at $64 million, and flagship product Nexavar’s sales were solid at >$1 billion, but Onyx was only able to generate $128 million for the quarter in revenues. Nexavar sales have also reached their peak, as we saw Bayer report a 1% decline in Q4 2012 sales of the drug versus Q4 2011.

While I don’t think investors should be too worried about Nexavar at this point, I think they should realize that this puts much more pressure on the new drugs Kyprolis (carfilzomib) and of course Stivarga (regorafenib).

The kind of revenue that is generated by Onyx is not all that attractive given that the company is valued at $6.2 billion, which is worsened by the fact that the primary component of revenue (Nexavar) has already hit its prime. This seems to be what drove the equity research firm Zacks to drop its “outperform” rating on ONXX in favor of a more conservative “neutral” rating last Friday.

I’m inclined to agree with this general sentiment – at least in the short term. Onyx is not earning any money, and has a few headwinds that may prevent any serious buying interest in the stock at its current price.

Having said that, I think Onyx could see a lot of success down the road. While negative EPS looks ugly for a company with multiple FDA-approved drugs already on the market, realize that the company is funding an enormous R&D program which drains about $82.6 million each quarter. If things go well, these expenses will be well worth it.

Nexavar, which is current approved for liver and kidney cancer, may see more growth with indication expansion. The RESILIENCE trial, which is close to completing enrollment, is likely to provide the materials for an sNDA that could bundle Nexavar with the chemo agent capacitabine as a front-line treatment for breast cancer. Another phase III trial, “DECISION”, reported success in meeting its progression-free survival endpoint for thyroid cancer patients and will likely result in a successful sNDA that expand Nexavar’s indications (and hence, its sales).

We’re seeing the same thing for Kyprolis, with an intense focus on the various subindications in multiple myeloma. The ENDEAVOR and ASPIRE trials will expand Kyprolis’ label for patients who have relapsed multiple myeloma after 1-3 prior treatments, and FOCUS will study the drug in patients who had received at least three prior treatments. The successful completion of these will expand Kyprolis’ profile greatly, and should make it another Nexavar-like success (if not better) after a few years of adoption.

The takeaway is that investors shouldn’t be too concerned about Onyx’s current financials if they are serious about the company as a long term investment in the oncology drug space. Since we could see profit taking after the recent buying spree, I think investors should also want to consider starting with a small position in ONXX and averaging in rather than buying the whole lot outright (if they intended to buy shares in the first place, that is).

Onyx is an overall good core holding in the biotech space that is more likely to move up than down in a multi-year timeframe based on its prospects. It has a track record of greatness in the cancer drug space, which I think is one of the areas that healthcare investors should be looking for growth in the coming decade, as well as a great relationship with Bayer which stabilizes its financial resources.

So while I think Onyx is a bit on the expensive side, it warrants a bit of a premium due to its previous success in management and development of great cancer drugs alongside Bayer. As of now I own no shares of ONXX, but I would definitely consider a starting position after a pullback.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” -Warren Buffett