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The good news keeps coming for Onyx Pharma (NASDAQ:ONXX), which certainly deserves the trophy for Most Improved in biotech last week.

Thursday, after the closing bell, Onyx announced its Q4 and full-year 2006 financials, showing that its losses are being reduced because of better than expected revenues from cancer drug Nexavar.

On Monday, February 12, Onyx announced that Nexavar was so effective against liver cancer that the Phase III test was halted and Nexavar was given to placebo patients as well as the active drug cohort (see story). Specific results were not disclosed, because Onyx will save them for release at the ASCO conference in June. But the endpoint for the trial was a 38% improvement in overall survival. So Nexavar must have exceeded that level, or the data safety committee would not have recommended stopping the test.

The stock of Onyx responded to the earnings news by rising another 9%, climbing $2.44 to $27.14. Onyx started the week at $12.26. With the latest increase, the stock has a 123% gain this week.
In its earnings report, Onyx said that Nexavar sales for Q4 were $64 million, a 40% increase from Q3. The $64 million number was significantly higher than the $49 million expected by the street. For the year, Nexavar sold $165 million worth of product. Nexavar was approved for kidney cancer in December 2005; thus, 2006 represents a full year of sales, starting from zero. Onyx does not make predictions for the future, so analysts are left on their own on what to expect in ensuing years.

Bayer (BAY) and Onyx split costs and earnings on Nexavar. Onyx does not report the revenues from the product, only the net gain/loss of its 50% ownership of Nexavar, and for Q4 those results remain a loss, though a much smaller one than analysts derived from their financial models. Outside the U.S., Bayer and Onyx have a 50-50 partnership for Nexavar, but inside the U.S., the two companies each promote the drug separately.

In Q4, Onyx’s share of the Nexavar partnership was a net $13.3 million loss. But Onyx was reimbursed $9.6 million for its direct promotion expenses, presumably the costs for the U.S. sales operation. That left Onyx with a net loss of $3.8 million for Nexavar and total loss for Q4 of $20.7 million or 47 cents per share. Approval of Nexavar (or off-label use of the drug, for that matter) for liver cancer would substantially increase its revenues. Cowen estimates the 2006 revenues of $165 million for Nexavar will grow to $215 million in 2007, $500 million in 2008 (a big bump from liver cancer approval), and $750 million in 2009.

Cowen further says that the average biotech sells for about 4X 2010 revenues. Nexavar could easily be close to a $1 billion by then, and Onyx’s share of those revenues would be $500 million. That makes the company worth up to $2 billion, though it currently has a market cap of just $1.2 billion. And Onyx has $267 million in cash after a $75 million secondary offering in Q4 of 2006.

Speculation is rife that Bayer will make an offer to buy Onyx and bring the drug in house. After all, it knows the product well. Onyx hit a low of $10.38 last December after Nexavar failed to help patients with melanoma. When Nexavar was first showing efficacy, Onyx traded up to $60 per share. Now it is still under halfway between the low and the high. Nexavar is currently undergoing late-stage trials for non-small cell lung cancer, a much bigger market than either kidney or liver cancer. And it continues melanoma trials as an adjunct to other drugs. In the future, good news from these trials would provide more upside for the drug.

Disclosure: none.

ONXX vs. BAY 1-yr chart

onxx bay chart

Source: Will Bayer Buy Onyx, Its Nexavar Partner?