Onyx Pharmaceuticals stock rose 3% today to $28.11 per share. Lately it has been on a bit of a run, after hitting a near term low of $20.37 on July 19, versus a 52 week low of $19.54. This was not, in particular, due to Q2 results reported on August 8. GAAP net income for the quarter was negative $97.2 million. Taking away a $92 million charge for a carfilzomib milestone being reached, Onyx still lost $5.2 million GAAP. Non-GAAP net income was $2.9 million, not much to crow about either.
As I have discussed before, Onyx could have had a nice profitable business if they had just stuck to selling Nexavar for kidney and liver cancer. Nexavar sales are still growing, mainly internationally, since it has taken time to get approvals in many nations. But instead of ramping some profits, and the short term stock price, management decided to use cash to do studies of Nexavar for more forms of cancer, and to acquire companies or drugs to broaden their pipeline. R&D expense in Q2 was $43 million.
In pharmaceuticals and biotechnology research and development is a risky business. Drugs can fail in stage I clinical trials, or in Phase II or Phase III trials. Good Phase III data can be disputed by the FDA, as we saw with Dendreon's Provenge. And drugs that have been on the market for years can be brought into question. Plenty of examples there.
So the strategy mapped out by Onyx management could just amount to blowing profits. Or it could be the beginning of a round of new profits. You can look at the data and make educated guesses, but you can't know for sure. If we could know for sure, we would not need double-blind clinical trials. Wise biotech investors want diversity. You can get this by spreading your bets over many small companies, or by investing in companies that have pipelines with multiple good candidates. You can bet some candidates will fail, but a company has, say, five candidates with good Phase II results, it is unlikely that all of them will fail Phase III trials. It is a probability-driven business.
Which brings us to carfilzomib for multiple myeloma. Onyx bought the potential therapy, partly for cash and partly for further payments if positive milestones are reached, because they looked at the early data and the commercial potential and thought they were making a good bet. They could have been wrong, they could still be wrong, but recent data pushes us strongly in the direction of being winners. You can learn more from the July 26, 2010 carfilzomib press release.
The hope is now that the FDA will approve carfilzomib for multiple myeloma based on the data already available. But if that does not happen, Onyx would just design and conduct a Phase III trial (or two). That is more expensive and takes longer, but it would still lead to approval if the data is good.
Add that to the possibility that Nexavar will prove to be a therapy for cancers beyond liver and kidney, and you have the potential that Onyx will be, in five years say, a company that you wish you had bought when the stock was cheap.
See also my Onyx (ONXX) Q2 2010 analyst call summary and my tools for biotechnology investors page.