Onyx Pharmaceuticals Sees Future Growth

Onyx Pharmaceuticals (ONXX) reported its first quarter (Q1) 2011 results and held its analyst call on Wednesday.

I like companies that invest in the future with healthy R&D spending, but usually a biotechnology company won't spend more than 100% of its revenue on operating expenses, unless it is in startup mode.

Onyx has had revenues from its liver and kidney cancer drug Nexavar for several years now. Bayer actually distributes Nexavar; Onyx revenues are from Bayer, so there is no cost of goods sold. Revenues were $67.1 million, down 4% sequentially from $70.0 million but up 7% from $62.9 million year-earlier.

But operating expense were $108.5 million. R&D was bad enough, at $62.5 million, but they spent $34.5 million on selling, general, and administrative expenses. Since Bayer does their selling, that seems like a lot. It appears they (management) are paying themselves in advance for carfilzomib.

Carfilzomib is an admittedly promising drug for multiple myeloma, but it has not been approved by the FDA yet. Onyx has a lot of cash (not generated by Nexavar, but put in by investors), so there is little to make management act frugal. Management, being management, thinks it is their cash.

On the plus side, because Onyx keeps failing the profitability test, the stock is cheap (but not dirt cheap), on the assumption (be careful here) that carfilzomib will become a profit-generating multiple myeloma blockbuster.

Another plus is ramping Nexavar sales in Asia, where there is a much higher incidence of liver cancer than in Europe and America. With some care, Onyx could have been managed to profitability in each of the four trailing quarters. The stock price would be higher, and I suspect the carfilzomib story would not be any different.

Thankfully I am a long term investor. Right now long-term means at least two years. But keep in mind we have a pattern developing. What should happen is that combined carfilzomib and nexavar sales in 2012 should be doable with less operating expense than we are seeing in 2012. Then the stock will start pricing at actual profitability, not the cautious prices that are fair when you show losses and FDA approval is still in question. What could happen, instead, is that management will find new indications for the drugs and spend all revenues on clinical trials for new indications, or even pick up the spending pace on other drugs in the pipeline. Managing to more losses.

A biotechnology company can grow quickly and profitably. Hopefully soon the FDA will approve carfilzomib and Onyx will shift to that ideal.

Another reminder to myself and all of you to: keep diversified.

For more insight see my Onyx (ONXX) Q1 2011 analyst call summary.

See also Onyx Pharmaceuticals