I learned about the Biotech Disappointment Curve from watching Onyx Pharmaceuticals. I started following Onyx (Nasdaq: ONXX) in 2005 and first bought stock in 2008. Often new biotechs run up large market capitalizations when they have their first positive Phase II or Phase III data in. After FDA approval, however, investors sometimes start looking at a company differently. They want to see market caps based on earnings, not on future expectations. We recently saw the down side of this curve again when Dendreon announced that its ramp of Provenge had slowed in Q2 [See Dendreon Provenge Demand Questioned].
In the case of Onyx, if you look at the stock price going back a decade, the stock in 2002 was under $7 per share. The 2003 ramp was impressive, with a peak of over $48 in April of 2004. Nexavar (sorafenib) data for advanced kidney cancer was positive, and in December of 2005 the FDA approved the therapy. Then came the show-me-the-money slump, as it takes a while for a sales force to actual get traction for a cancer therapy. At the bottom of the slump, in late 2006, you could buy the stock for under $11 per share. Then in 2007 there was another ramp when Nexavar was getting approved for liver cancer. From 2008 until present Onyx stock has mainly stayed in a broad range around $30 per share.
Another factor is that Nexavar is sold by Bayer. Onyx gets a share of the profits after Bayer's expenses. But in most quarters Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer.
Bayer and Onyx have been running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III clinical trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.
Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the losses, end Q2 2011 at $550 million.
Given the background of success with Nexavar, tempered with losses due to R&D spend, Carfilzomib is the key to Onyx's future value. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated.
If carfilzomib is approved by the FDA, either based on current data or after Phase III results, the nature of Onyx's model will change. Again, there is likely to be a phase of investor euphoria followed by disappointment at the time needed to ramp a new cancer therapy. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the use of Nexavar and carfilzomib without actually throwing the bottom line into the red. If profitability comes earlier, so much the better.
Even should carfilzomib and new indications for nexavar fail, Onyx could show profits by cutting back on R&D and because it has a long ramp ahead for Nexavar for liver cancer in Asia, where the majority of global liver cancer cases occur.
Today Onyx ended with a market capitalization of $2.1 billion, at $33.52 per share. I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute. However, I am a long term investor in Onyx Pharmaceutical based on the potential of Nexavar and carfilzomib. I have no plans to sell or buy ONXX in the immediate future.
See also my notes on the Q2 2011 Onyx Pharmaceuticals analyst call.