Omakase

Thursday, June 01, 2006

I bought: ONXX (Onyx Pharm)

I'm a big believer in targeted therapies, and Onyx is one of a handful of companies that offer one. Nexavar, developed by Onyx and marketed by Bayer, was approved in February, 2006.

But ONXX shares have been crushed, which makes the company a buy on valuation. Nexavar sold $23M in the first quarter, and per the linked article is projected to sell $144M in '06. (Which suggests an annualized pace >$200m at the end of the first 12 months - which is Avastin-like in performance.) I think this number will increase dramatically with penetration AND additional indication approvals. (I also think, based on the $23M 1Q number, that the full 2006 sales figure could be closer to $200M.)

(Nexavar sells for ~$50,000/year, so the 1Q data suggest ~2,000 customers in just 3 months. Could the combined Onyx/Bayer sales force add that many more each quarter? With ~33,000 new cases per year, with about half that number failing first line treatment. With that figure as the total potential market, how hard would it be for ONXX/Bayer to add 1,000 customers per quarter? 5,000 customers - annual revenue (pace) is $260M - not bad for the first year.)

In an odd arrangement, though, Onyx splits all Nexavar profits 50/50 with Bayer. This halves the upside, but increases the likelihood that Bayer will eventually acquire Onyx. With Nexavar expected to peak at over $1B in annual sales, the product represents $500m in 'revenue' to Onyx. Typical pharma price/sales ratios are 3-4X, while biotech tend much higher due to high growth (Genentech's P/S ratio is 12X, Celgene's is 23X.) Pick a midlling ratio (7X) and a slightly aggressive revenue rate of $400m one year from now, and Onyx could sell for >$1.4M (incl. cash), making a 75% return from today's valuation - though I think this represents the CONSERVATIVE scenario - it's more likely that in this case, Onyx management drives a better bargain, or holds on until Nexavar sales are closer to peak.

Another perspective is the earnings model. It's hard to get too particular in Onyx's case due to Nexavar launch costs, but Genentech consistently records 30% operating profit margins. At Nexavar's $1B peak, that's $150M in operating profit for Onyx. P/E multiples range are usually 15-20 for pharma, and at least twice that for biotech(Celgene: 42X), meaning that this values Nexavar at something like $4.5B at peak, using 30X OP. Discount that back 3 years at 20% per year, and today's value is ~$2.6B

The kicker here is the financial story. Onyx's market cap is ~$800m, and the company has $220M in net cash on the balance sheet. Is the rest of the company worth $580M? You bet!

Adding to the story is the current environment favoring the acquisition of biotech products by larger pharma. With success, I could see Bayer buying out Onyx for $2B this time next year.

Now for the negative: Nexavar is only approved for treatment of kidney cancer (RCC). Sutent, a direct competitor to Nexavar was launched by Pfizer in 1Q06, and a Genentech drug is used off-label for the same thing.

But while the drugs have the same therapeutic approach (starving tumors of blood), they differ in 3 important ways:
-Sutent is far more toxic than Nexavar
-Nexavar is an oral pill, while avastin is an antibody given intravenously. (Sutent is also a pill)
-Nexavar and Sutent inhibit a number of common proteins (VEGFR2+3, PDGFRB, Kit, Flt-3, and RET), but Nexavar also inhibits RAF, while Sutent inhibits 2 additional growth factors (PDGFRA and VEGFR1). Given a choice, I'd rather also inhibit RAF (and therefore the RAF/MEK/ERK pathway) versus 2 additional growth factors, but that's a strictly academic opinion from someone totally unqualified to give one. It could mean, though, that Sutent and Nexavar could be given in combination!)

While the above makes a case for better than average sales of Nexavar, one worry would be going up against the sales resources of Pfizer (though they don't have a history of selling cancer products) and Genentech.

Finally, the other reason to worry (or sit on the sidelines) is that the ASCO conference (beginning tomorrow) could completely upset the market, as additional data for all of the drugs mentioned above and more will be revealed. ONXX will be volatile for the foreseeable future, but I think a good buy, at $19.63, which is what I bought it at today.

Onyx Shares Seen Volatile Through ASCO - Forbes.com

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