Thursday, May 10, 2007

Can Onyx Deliver?

Some biotechnology investors have done very well, as early owners of Genentech (DNA) and Amgen (AMGN) can verify. Other technology investors have done very poorly with companies that had promising drug candidates that failed to go all the way to FDA approval, or that were not able to successfully market drugs even when approved. Buying a basket of biotech stocks cuts your risk, but it also lessens your upside potential.

Onyx Pharmaceuticals (ONXX) is a company that can appear to be a victim of its own success or a potential big winner, depending on how you look at the tea leaves. It has a drug that is a pretty big hit, Nexavar for kidney cancer, that has global sales running at around $240 million in annual revenues. Yet it has consistently shown a loss, quarter after quarter, not just when the drug was under development, but even after over a year of sales.

Onyx is in a partnership with Bayer, which actually markets Nexavar. Both companies are continuing to do research and development on the drug. Both have SG&A expense. They total up their Nexavar expenses, subtract them from Nexavar revenues, and get a profit or loss. They split that profit or loss, which means they make a transfer between the two companies, depending on who spent what. Until Q1 2007 Onyx made transfers to Bayer under this deal.

So the good news from Q1 results (See my summary of the analyst conference) was that, finally, it worked out that Bayer made a payment to Onyx of $3 million. This is counted by Onyx as credit against expense rather than as income. But not all Onyx expenses are part of the agreement with Bayer. Given the other expenses, Onyx showed a net loss of $12.2 million.

It is also notable that the $3 million payment from Bayer does not mean Nexavar collaboration was profitable. Revenues were $61 million, but collaborative expenses were $70 million. It just happened that Onyx had more expenses than Bayer, resulting in the $3 million transfer.

There has been a great deal of disappointment that Onyx has been unable to make a profit on Nexavar for kidney cancer. But much of the Nexavar expense is not for kidney cancer, but to do R&D and prepare to market Nexavar for other types of cancer. Onyx expects Nexavar to be approved for liver cancer later this year. It is in clinical trials for lung and breast cancer that are reported to be pointing in the right direction.

So the company (and you if you own the stock; I don't at present) is betting that Nexavar will be approved for multiple cancer types. That is why Onyx's market capitalization today is near $1.3 billion.

But the risk is concentrated, too. There is not much of a pipeline aside from moving Nexavar to varying cancer types. Nexavar is a big bet, and like all patented drugs, the clock is ticking.

List of companies I follow
Onyx web site
My Onyx page
My Amgen page
My Genentech page

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