Seeking Alpha
Special situations, micro-cap, biotech, healthcare
Profile| Send Message|
( followers)  

When I last covered Onyx Pharmaceuticals (ONXX) on June 19, the company was trading at a market capitalization of approximately $3 billion dollars ahead of a review of Kyprolis (carfilzomib) by the FDA's Oncologic Drugs Advisory Committee (ODAC). Anyone who read the article and was bold enough to get long in anticipation of a favorable vote by ODAC was rewarded with a 43% rally the next day based on the 11-0 vote in favor of approval. Onyx's business partner for Kyprolis, Ligand Pharmaceuticals (LGND), also saw a massive rally (about 28%) over the next two trading days.

In the other article, I also mentioned the 11% of shorts that were likely betting on an unfavorable ODAC decision. The short interest is now down to about 9.3% of float, which still allows for big short squeeze potential after the recent FDA approval for carfilzomib in the treatment of multiple myeloma for patients who had failed two previous therapies.

The FDA decision, which was issued on July 20th, limits the downside of Onyx (and partner Ligand) due to the lack of alternatives in the treatment of multiple myeloma. There is also ever-present takeover speculation for Onyx, which may grow now that Kyprolis has its approval in hand. We are expecting Bayer to be the buyer (if it happens) due to the existing partnership for the drug regorafenib between the companies. Regorafenib has also recently received FDA priority review designation, which establishes the PDUFA action date four months close (to October 2012 instead of February 2013).

Multiple myeloma, which is a particularly nasty and fatal plasma-cell cancer that is very rare (with about 1-4 cases per 100,000) has historically been very difficult (and unprofitable) to treat. This is why we are expecting Kyprolis to have great drug penetration rates and bring Onyx (and Ligand) some better financial figures when the drug gets brought into the market.

In addition to Kyprolis, Onyx has the ~$300,000/year oncology drug Nexavar which has been approved for the treatment of liver and kidney cancer in the US and EU. Onyx is working towards expansion of its clinical applications (with phase III trials still underway in thyroid and breast cancer), which provides more catalysts down the road for the company to grow in value.

Even after major jumps in ONXX and LGND following developments in Kyprolis, there could be some additional upside left in the near term for traders who are willing to wait for shorts to shake out of their positions (which seems quite likely). These companies are both beginning to enter the "profitability" zone, and the 5.9 million shares betting against ONXX and the 1.3 million short on LGND are likely stuck in the red hoping something goes wrong.

Speaking of Ligand Pharmaceuticals , there was important news for the stock during Wednesday's session. Ligand announced that its partner GlaxoSmithKline (GSK) has been granted priority review from the FDA for the supplemental new drug application for Promacta® to treat thrombocytopenia caused by the hepatitis C (HCV) virus. Thrombocytopenia is a shortage of platelet cells, which help with blood clotting and as biotech investors know, stocks tried to the treatment of hepatitis C have seen valuations increase dramatically during the past year given that the hepatitis epidemic continues to spread.

The bullish Hepatitis space`s activity; including moves from Gilead Sciences, Inc. (GILD) paying $11 billion in cash for Pharmasset and Bristol-Myers Squibb (BMY) snagging Inhibitex for $2.5 billion in cash. The strong volatility seen for hepatitis c players Idenix Pharmaceuticals (IDIX), Achillion Pharmaceuticals (ACHN), Abbott Laboratories (ABT), Vertex Pharmaceuticals (VRTX) and Merck & Co. (MRK) is understandable, given the suspected infection cases in more than 5 million people in the United States, and perhaps as many as 200 million around the world.

This priority review designation is given to drugs that if approved, offer major advances in treatment, or provide a treatment where no adequate therapy exists. Under the Prescription Drugs User Fee Act, the goal for completing a Priority Review is six months.

Recently, Cantor Fitzgerald reiterated a Buy rating on LGND and raised its price target from $19 to $24. It will be interesting to see if that firm increases their price target on the stock given the latest developments.

Earlier the same day, the firm had announced that it plans to report second quarter 2012 financial results on Wednesday, August 8, 2012. Recently, Ligand reaffirmed fiscal 2012 revenue guidance to be approximately $30 million and we know that one of Ligand's core goals is to produce a bottom line that supports a sustainably profitable business.

Technically speaking, LGND shares have a real opportunity to break past some resistance that has kept prices in check lately. As followers of the stock point out, the shares appear poised to say goodbye to the teens, but the $18 to $18.15 mark has proven tough to break through. It has withstood some positive news events, but is worth watching because the stronger the resistance, the greater the reaction when the resistance is crossed. In turn, that resistance usually becomes strong support.

All of these factors makes us particularly bullish about LGND in the short and long term.

Source: Short Squeeze And Speculation Could Push Onyx And Ligand Higher