Here's Why Onyx Pharmaceuticals Is Headed for Triple Digits

Shares of Onyx Pharmaceuticals (Nasdaq: ONXX  ) hit a 52-week high today. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
Who needs NASA when you have a space program in your own portfolio known as Onyx Pharmaceuticals?

Onyx has been the epitome of a top performer over the trailing 12-months after settling a long-standing dispute with Bayer (OTC: BAYRY), the marketing partner of its kidney cancer drug Nexavar, that resulted in a $160 million cash payment being made to Onyx. The settlement also allowed Onyx to keep its royalty rights to Nexavar even if it gets bought out -- a key selling point to many would-be suitors.

In addition to settling this spat with Bayer, Onyx received a surprisingly easy FDA approval for Kyprolis to treat multiple myeloma (a cancer of the marrow in bones). As my Foolish colleague Selena Maranjian noted, an analyst at Jeffries recently doubled his sales projections for Kyprolis, further extending the optimism already engulfing the stock.

Of course, it wouldn't be right to focus on the overwhelmingly positive news without mentioning that Onyx still faces heated competition from a number of other pharmaceutical companies. AVEO Pharmaceuticals' (Nasdaq: AVEO  ) tivozanib, for one, showed statistically better survival rates -- 11.9 months compared with 9.1 months for Nexavar -- as well as better tolerability, and could come to market as soon as 2013 if approved by the FDA. Pfizer's (NYSE: PFE  ) Inlyta also offers a new option for patients, as it slowed down progression by two months as compared to Nexavar in trials. Roche's (OTC: RHHBY) Avastin is also approved to treat kidney cancer and presents a constant challenge to Nexavar.

How it stacks up
Let's see how Onyx stacks up next to Pfizer.

ONXX Chart

ONXX data by YCharts.

Unsurprisingly, with a smaller pipeline and quicker growth rate, Onyx has vastly outperformed Pfizer.

Company

Price/Book

Price/Cash Flow

Forward P/E

Dividend Yield

Onyx Pharmaceuticals 7.7 209.8 N/M 0%
Pfizer 2.3 11.2 9.7 3.6%
Roche 12.5 11.5 4.3 3.9%

Source: Morningstar.

I'll admit it -- that this comparison isn't going to put Onyx Pharmaceuticals in good light among value investors. However, as with most biotechs, you're investing for the future drug value, not necessarily just present value.

Both Pfizer and Roche offer dividends and diversified pipelines, but their growth rates are severely lacking. That's where Onyx and its Kyprolis/Nexavar combo come in. These two drugs are expected to lead Onyx to a projected growth rate of 19.4% over the next five years.

What's next
Now for the $64,000 question: What's next for Onyx Pharmaceuticals? That question depends on the success of Kyprolis, Onyx's ability to become and remain profitable, and whether having two FDA-approved drugs will attract a buyout bid.

Our very own CAPS community gives the company a two-star rating (out of five), with 85.4% of members expecting it to outperform. As you can tell from this article's headline, I'm among the optimists having made a CAPScall of outperform on Onyx. Currently that selection is up 92 points -- and it could run further.

The approval of Kyprolis seemed sketchy at best with numerous side effect concerns, but investors seem to be whole-heartedly behind the drug now. Between Nexavar and Kyprolis, Bayer has absolutely no reason not to purchase Onyx in my opinion. It would be able to internalize all Nexavar revenue this way and would also be able to get its hands on multiple myeloma drug Kyprolis, which has market potential ranging from $1.5 billion to $2.5 billion, according to various analysts. It could still be quite some time before Onyx is profitable, but I suspect it won't be much longer before suitors start knocking at Onyx's door.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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