Onyx's Cancer Drug: Potential Blockbuster - But With Competition

Onyx Pharmaceutical (ONXX) is enjoying the rewards of its potential blockbuster, Nexavar. On Monday, November 19th, FDA approved Nexavar, already approved for kidney cancer, for treatment of liver cancer. The product did so well in clinical trials that the company and its partner Bayer (BAY) had to halt the trials for ethical reasons to give Nexavar to the control group as well.

Onyx's stock has been doing tremendously well. In 2007, it rose more than 500% from about $10 to its current price of $53, but is off its 52 week high of $61.

But is this a good time to buy the stock?

Let's first look at the revenues and stock valuations.In the third quarter, Nexavar achieved global net sales of $104.6 million (half to Onyx). This included approximately $41 million generated in the United States and approximately $64 million outside the US. This growth reflects a 26% increase over the previous quarter's US sales numbers and a 30% quarterly increase in sales throughout the rest of the world. The majority of this sales and growth have come from kidney cancer and this growth is expected to moderate due to competition from Pfizer's (PFE) kinase inhibitor, Sutent.

The company and investors believe China could be a great source of growth with its growing middle class population. They expect the Chinese to be able to afford a $4,000/month treatment. I am not sure I agree that there will be significant sales from China in the near term as I believe $4,000/month payment is hard for people who are the cheapest labor force in the world!

On the other hand, Onyx has the advantage of having a pipeline-in-a product. Nexava, a multi-kinase inhibitor of cell growth and proliferation, has been shown to be safe and effective inkidney and liver cancers. The company is currently performing clinical trials to assess its performance in small cell lung cancer, melanoma and breast cancer. Theoretically, a multi-kinase inhibitor can slow down disease progression in all these diseases if they rely on the same kinases for their growth as the ones inhibited by Nexavar.

Given its specific mechanism of action with flexibility to treat many types of cancer, Nexavar can become a huge blockbuster. However, besides clinical challenges, the company may face increased competition from other companies. Almost every big pharma and many small biotechnology companies have been working on kinase inhibitors to treat cancer and immune diseases.

Nexavar's success may have paved the way for the competition. Statins and HIV protease inhibitors come to mind as fields with many copycat drugs. In the short term, Onyx will be spending a lot of cash on all of these clinical trials to expand usage of Nexavar, which will eat into its profits. Onyx has about $450 million in cash reserves and can afford to spend some money on these critical trials. I am guessing Bayer will pick up some costs as well. Onyx also has to share 50% of its revenues with Bayer which makes it more difficult to increase earnings per share.

However, I believe the company has a great head start and will have market exclusivity for the next 3-5 years. I think the early surprise profits have attracted some hasty investors which has made ONXX overvalued in the short term with a market cap of $3 billion. In other words, the easy money has been made. The company will most likely post some losses in the coming quarters and we may see the stock drift lower. In addition to sales growth, the success of Nexavar in trials for treating other types of cancer will be a key to the stock movement in 2008. I would recommend waiting for a better buying opportunity in ONXX.

Disclosure: The author does not currently have a position in ONXX.

ONXX 1-yr chart: