Onyx Pharmaceuticals: A Diamond in the Rough

| About: ONYX Pharmaceuticals, (ONXX)
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The recent frenzy in the shares of Onyx (NASDAQ:ONXX) pharmaceuticals stem from the company's key cancer drug, Nexavar. The recent sales of Nexavar around the world have amounted to growing revenues at Onyx pharmaceuticals. The earnings, which were reported last week, were solid and analysts seem to be pleased across the board. However, more importantly than that, Nexavar is now on the verge of being used for additional treatments. The drug is currently used to treat kidney cancer. In this segment, Onyx Pharmaceuticals competes directly with Pfizer (NYSE:PFE).

logo_onyx When compared to Sutent, Pfizer's kidney drug, Onyx pharmaceuticals and Pfizer compete neck and neck. Each of the drugs treat cancer by restricting the flow of blood to the tumors and the drugs have each been proven to prolong the lives of patients taking the drug between 5 to 10 months. But Kidney Cancer is relatively rare. In 2006 roughly 1.4 million cases of cancer were diagnosed in the United States, however, there were only approximately 30,000 cases of kidney cancer. Of these about 10% have adverse side effects to these drugs which prevent them from being used. The market for these drugs, therefore, is relatively small. In addition, Onyx Pharmaceuticals has a more difficult time competing in this segment because Pfizer is such a large company and therefore Pfizer has brand recognition and a strong influence over the hospitals and physicians which administer their drugs.

ONXX needs to set itself apart to be a stronger competitor, and it seems to be doing that with Nexavar. Last week the company released data that suggested that phase III studies prove that Nexavar also helps treat liver cancer. Onyx Pharmaceuticals hopes that Nexavar will be the first drug on the market approved by the FDA which is designed to treat liver cancer. Typically, liver cancer occurs because other cancers have spread to the liver. Pure liver cancer cases in the United States are again relatively small in number; Liver cancer cases are estimated to be between 15000 and 19,000 a year in the USA. However, liver cancer is the 5th most common cancer throughout the world. Roughly 500,000 cases of liver cancer are diagnosed every year worldwide.

The next step is FDA approval. Onyx Pharmaceuticals is on the verge of applying for FDA approval so that Nexavar will be allowed to treat liver cancer in the United States, and that usually opens the door to approval in most other major markets.

Brand Recognition

Name brand recognition is the name of the game in this business. With the addition of Liver Cancer treatment Nexavar will become a much better known drug and Onyx Pharmaceuticals will become a better recognized company at the same time. Its ability to compete with Pfizer in the Kidney segment will strengthen and worldwide Onyx pharmaceuticals is likely to be the sole provider of liver cancer treatments. The potential reward for these discoveries is significant.

Potential Market:

We will separate the potential market for Nexavar into two segments: 1) the United States, and 2) the entire world.

First of all, there are roughly 30,000 cases of kidney cancer in the United States every year. There are roughly 16,000 cases of liver cancer in the United States every year. Nexavar's potential market in the United States for kidney cancer treatment could be reasonably estimated at 50%. Remember Onyx competes directly with Pfizer. That puts the potential Market for Nexavar with respect to Kidney treatments at 15,000 cases. Single drug cancer treatments typically cost between $4,000 - $10,000 per month depending on the availability of the drug and the competition from alternative treatments. With respect to Nexavar, the pricing power is quite strong. Both Sutent and Nexavar are relatively new drugs and they command premium prices; estimate $8,000 per month. Assuming this pricepoint, the Market for Nexavar is roughly $2.98 Billion That equates to $1.44 Billion from the Kidney Segment and $1.54 Billion from the Liver Segment.

Worldwide, there are roughly 208,500 new Kidney cancer cases every year and roughly 500,000 new liver cancer cases every year. The pricepoints will be different from country to country, but the potential returns are massive.

ONXX We can't tackle the valuation model for Onyx pharmaceuticals the same way that we tackle most of the other valuation models for the stocks that we have featured as the stock of the week in the past. The valuation for Onyx is based on a comparative analysis of the company's current market cap versus the potential revenues for Nexavar going forward.

The current Market cap of ONXX is $1.4 Billion. Understand that our annual US estimates are near $3 Billion. If Nexavar is approved for treatment of liver Cancer in the United States the stock could easily double; much higher levels are fathomable as well if you include estimates from around the world. If, instead, Nexavar is not approved to treat liver cancer, the stock still appears to be fairly valued at current levels. Remember, the potential US based Market for Nexavar in relation to liver treatment is $1.44 Billion annually and ONXX currently has a $1.4 Billion market cap.

Additional Information

There has been quite a bit of exuberance about the recent news and now the stock is being monitored by many analysts and institutions. Most of them are probably coming up with the same conclusions as I have presented here. That means that ONXX is probably on the radar of most big brokerage firms who do not yet cover the stock and by many mutual funds and hedge funds who may be interested in participating in the upside moves of pharmaceutical companies like ONXX. This could lead to favorable recommendations and support for the stock at current levels.

In addition, the partner company with Onyx pharmaceuticals in the development of Nexavar is Bayer AG (BAY). Speculators have already begun to visualize a buyout of Onyx pharmaceuticals by BAY. Clearly, we cannot build that into a valuation model, but it is a fact that could keep buyers interested in Onyx pharmaceuticals for the time being.

These two important facts suggest that buyers are still likely to remain interested in Onyx pharmaceuticals, at least for the near term.