After a great 2012, Onyx (ONXX) is well positioned as one of the few remaining commercial stage biotech companies with a diverse oncology pipeline. The company has 4 assets: Nexavar [co-marketing agreement with Bayer BAYZF.PK)], Kyprolis (wholly owned in U.S. +EU), Stivarga (20% royalties from Bayer), PD-0332991 [~7.5% royalties from Pfizer (PFE)].
Market attention is gradually shifting from Nexavar to recently approved Kyprolis and to PD-0332991, two high profile programs with a multi-billion dollar potential. This makes Onyx an ideal growth story as well as an obvious acquisition target given the accretive nature of the deal to a company with hematology/oncology sales force.
Below is a sum of parts analysis for Onyx.
Onyx has a profit share deal with Bayer for Nexavar, which is approved for liver and kidney cancer. This asset is expected to generate annual revenues of $300M-$350M for Onyx based on current indications. Earlier this month, Onyx announced a phase III trial in thyroid cancer met its primary endpoint. This could add at least $50M to Onyx's revenue stream, if the drug is approved for this indication.
As the majority of Nexavar sales are in liver cancer, where there is practically no competition in the foreseeable future, Onyx is looking at a relatively safe revenue stream for the next ~9 years (patent protection at least until 2020-2022). Discounting the company's stake in Nexavar using a 10% discount rate values it at $2B. This excludes additional label expansions in adjuvant liver cancer or breast cancer, which should be viewed as free call options.
Onyx's 2nd marketed drug is Kyprolis, approved for multiple myeloma since July 2012. Onyx owns commercial rights to this drug in the US and EU, making it the company's most important asset.
The multiple myeloma market is dominated by 2 classes of drugs: IMiDs [Celgene's (CELG) Revlimid] and proteasome inhibitors [Takeda (TKPHF.PK)/J&J's (JNJ) Velcade]. Together with stem cell transplant, these treatment classes are the cornerstone of myeloma treatment. Kyprolis is a next-generation proteasome inhibitor currently indicated for patients who failed both Revlimid and Velcade (third line).
Oynx estimates there are 10-15 thousand patients in the US who are eligible for third line treatment. This translates to a $400-$600M opportunity. Earlier this month Onyx disclosed that Kyprolis generated $43.4M in the fourth quarter of 2012, the first full quarter of sales, which is a testament to the unmet need in patients who exhausted all other treatment options and validates the company's assessment. Kyprolis' market potential is over $3B in multiple myeloma alone, as exemplified by Velcade's commercial performance (see figure below from Takeda's recent R&D event).
Source: Takeda's R&D day Jan 2013
Kyprolis can be positioned either as a 2nd line proteasome inhibitor (for patients who failed Velcade) or a best in class proteasome inhibitor that will replace Velcade. As Kyprolis was approved based on a single arm phase II trial, there is still no concrete evidence neither for Kyprolis' ability to extend survival in Velcade failures nor for its superiority over Velcade.
Onyx is addressing these questions with 3 pivotal trials in relapsed/refractory myeloma patients. The FOCUS trial is evaluating Kyprolis vs. best supportive care and will have overall survival readout in the second half of 2013. Another trial (ASPIRE) is evaluating the addition of Kyprolis to Revlimid and should have PFS data in the fourth quarter of 2013. The ENDEAVOR trial, which started last year, is comparing Kyprolis and Velcade. Interestingly, this trial is using a modified dosing regimen for Kyprolis which appears more potent than the approved Kyprolis regimen but may also be more toxic in some patients.
When compared to Velcade, Kyprolis has several distinguishing properties, including a different spectrum of activity and irreversible binding to the target. Based on this and available clinical data in Velcade pre-treated patients, Kyprolis has a high likelihood of showing clinical superiority over Velcade. Even if Kyprolis does not beat Velcade in a head to head trial, it can still be a >$1B drug as a 2nd line proteasome inhibitor (Providing positive data in FOCUS or ASPIRE).
Competitive landscape in the proteasome inhibitor segment is surprisingly favorable. The only proteasome inhibitor in advanced clinical testing is MLN9078 an oral version of Velcade, developed by Takeda. It is expected to reach the market in 2015-2016 according to Takeda. Despite the obvious convenience of oral dosing, this drug does not seem to have robust activity. In addition, it is probably not interchangeable with Kyprolis given the different activity spectrums. Onyx is developing an oral derivative of Kyprolis (oprozomib), currently in phase I.
Based on Q4 sales and Velcade's sales trajectory, Kyprolis can reach $1B in sales in 2016. Applying a sales multiple of 6 and a 15% discount rate yields a ~$3.5B net present value. This excludes broader utilization in 1st line multiple myeloma or other indications.
Onyx has a 20% royalty stake in Stivarga, which is approved for 3rd line colon cancer and is expected to receive FDA approval in GIST next month. The drug is expected to generate modest sales in colon cancer and, combined with the expected GIST approval, current estimates are ~$300M globally.
Bayer, the owner of Stivarga, is about to start Phase III in 2nd line liver cancer. An ongoing randomized phase II is evaluating the drug in combination with chemotherapy in colon cancer. These indications could take sales to $1.5B, but there is still limited visibility and likelihood of success is unclear.
Excluding label expansion, Onyx is expected to receive $40M-$60M annual royalties for a long period of time (at least 10 years). The market usually gives a generous premium to biotech companies based on a royalty stake in oncology dugs. Immunogen (IMGN) and Curis (CRIS) are good examples of companies that derive most of their market cap from royalties in a similar range. Curis (peak royalties of ~$30M) has a market cap of $250M whereas Immunogen has a market cap of $1.27B (peak royalties of ~$70M). Based on this, Stivarga's royalty stake should be conservatively valued at $500M.
PD-0332991, developed by Pfizer, is a CDK4/6 inhibitor which is about to enter phase III in breast cancer. The drug has become one of the most interesting oncology drugs following data in breast cancer published in December. Results demonstrated a dramatic 3.5-fold increase in PFS (26.1 vs. 7.5 months), when PD-0332991 was added to hormonal therapy.
Finn R, Abstract S1-6, SABCS 2012
Although PD-0332991 is still 3 years from approval, it is expected to be a $2B drug based on the breast cancer indication alone. Onyx stated it has a single digit royalty rate on global sales of the drug and recently, analysts at Cowen and Company published a research note suggesting actual rate is 7.5% (based on discussion with management in 2003). They expect Onyx to generate $18.8M, $37.5M, and $75M in 2016, 2017 and 2018, respectively, based on annual sales of 250M, $500M and $1B in that time frame. Applying a similar multiple to the one I used for Stivarga and assuming PD-0332991 generates only $1B implies a $750M price tag for Onyx's stake in the drug.
We are buying Oynx based on the sum of parts analysis for Nexavar ($2B), Kyprolis ($3.5B), Stivarga ($500M) and PD-0332991 ($750M). Importantly, this analysis assumes little to no upside for existing programs, nor does it include an acquisition premium.
Portfolio holdings - Jan 27th 2013