Wednesday, May 7, 2008

Onyx In The Black

Onyx Pharmaceutical reported GAAP net income yesterday for Q1 2008, a first. It has been a long road for Onyx, which was set up in 1992. Nexavar (sorafenib) for advanced kidney cancer (also referred to as RCC, renal cell carcinoma), was approved by the FDA in December 2005. It was developed with Bayer, which also does the sales and marketing.

Onyx reported no revenues for Q1. How, then, can it make a profit? All Nexavar sales are by Bayer. Onyx has always reported their joint venture as an expense item. Their joint expenses are deducted from sales. Half of the remaining profit or loss in the joint venture is transferred onto Onyx's statements. Until Q4 2007, this had been a loss. The joint venture loss was added to Onyx's own operating expenses to get their net loss.

In Q4, the joint venture netted Onyx $4.4 million from Bayer, but that was swamped by Onyx's own expenses. This latest quarter the joint venture was $37.7 million, quite a leap, and allowing Onyx to show an overall profit of $15.4 million, or $0.24 per share.

You might think the stock price would have jumped today, but it opened down. Maybe some traders just sold on the news. But probably this was a result of the guidance Onyx gave and its responses to analysts' questions about the guidance (See my Onyx Analyst Conference Summary for Q1 2008 for details). The low end of guidance for revenue for all 2008 was basically flat against Q1 revenue.

A couple of things might be going on here. This is the first time ever management has given forward guidance. They probably just wanted to give a number they are sure to beat. On the other hand growth in revenues has been heavily dependent on introducing Nexavar to new countries internationally. If for some reason introductions are delayed, it is conceivable that revenue growth could flatten out.

Right now Onyx is a one drug company, so growth depends on three things. Of course they will try to sell more Nexavar for liver and kidney cancer, for which they have received approval. They also have a number of trials underway for other types of cancers. Third, they may license other drug candidates for development.

Downside risks are the usual for a pharmaceutical development company. Some downside to Nexavar that did not show up in clinical trials could appear -- that is what happened to Amgen. And it might turn out that Nexavar is not good for anything besides renal and liver cancer. There has already been one disappointment, the failure of a study last year of Nexavar for non-small cell lung cancer.

Probably the future is bright for Onyx. I have it on my short list of potential buys.

Keep diversified.

More data:

Onyx Pharmaceuticals corporate web site
My main Onyx page

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