Will Amgen’s Acquisition of Onyx Pay off Soon?

Last year, Amgen (NASDAQ: AMGN  ) shocked the market with an aggressive buyout of the oncology drug developer Onyx Pharmaceuticals for $10.4 billion. Many investors still believe that Amgen overpaid for the deal, but it's clear that the company saw a lot of potential in Onxy's late-stage oncology portfolio.

Perhaps the most important part of the Onyx acquisition was Kyprolis – a blood cancer drug that is currently being marketed as a last resort option for multiple myeloma patients.

In Q1 2014, Amgen reported $68 million in Kyprolis sales. This is a far cry from the $500 million in quarterly sales needed to reach analysts' peak sales estimates for the drug (which hover around $2 billion), but it is a decent start for a drug that has yet to demonstrate survival benefit in patients. The FDA approved Kyprolis for multiple myeloma in 2012 based on the measured 23% response rate to the drug in just 266 patients.

But despite the FDA approval, many oncologists seem hesitant toward Kyprolis due to the drug's association with heart failure, ischemia, hypertension, and even infusion reactions. Although myeloma patients have a very poor prognosis after failure to respond to front and second-line therapies, oncologists typically want to avoid any chances of a drug-induced death.

What can fix this drug?
Kyprolis isn't going to be the next ibrutinib, but Amgen is set on bringing this drug to a larger pool of myeloma patients and eventually getting the drug to patients with related forms of blood cancer. To make this happen, Amgen will have to demonstrate meaningful, survival-based efficacy for Kyprolis in additional clinical trials.

There are dozens of clinical trials under way for Kyprolis, but we will narrow our focus to the single most important trial of the year – the now-completed FOCUS trial.

The Phase 3 FOCUS trial enrolled 302 patients into a control arm -- which receives the standard of care for untreatable myeloma -- and a Kyprolis arm. The point of this study is to demonstrate a statistically significant survival benefit (measured with overall survival) in the Kyprolis arm versus the control arm in patients who saw a relapse of the cancer after multiple conventional treatments.

Because the FOCUS trial is due to collect data for the primary outcome measure in June 2014, hopefully we'll be seeing data soon. This full data release will undoubtedly have a material impact on AMGN shares, even if it is somewhat of a "stepping stone" to Amgen's efforts to make Kyprolis a first-line myeloma drug.

Will Amgen make a good ROI?
With the current lack of data, it's impossible to say whether or not Onyx's oncology assets are going to generate over $10.4 billion in their lifespan. But what we can say is that Amgen could do well if Kyprolis succeeds in the three myeloma trials we just mentioned.

As mentioned earlier, Kyprolis is being used as a last resort therapy for patients with multiple myeloma. Because 1-year survival for these patients is only around 70%, and because many respond to some form of therapy, we know that Kyprolis has the ability boost revenues exponentially if it were marketed more freely to myeloma patients earlier in the treatment process.

This potential revenue boost could be large enough to justify a big chunk of the Onyx acquisition price, but there are some major limitations. Kyprolis is current priced at $10,000 per 28-day cycle, so the revenue potential -- while certainly substantial -- may be a bit limited in comparison to other oncology drugs. So even if Amgen succeeds, improvements on its bottom-line might be underwhelming.

It's also important to consider the possibility that this drug fails.

Kyprolis might end up demonstrating little to no overall survival benefit in any of the myeloma trials, which render the drug almost useless to Amgen. The trials could also enforce Kyprolis' nasty association with heart failure, organ failure, and other side effects that could cripple the drug's competitiveness on the market (although this situation is less likely).

The acquisition of Onyx also gave Amgen control of partnered compounds that could generate substantial royalty payments throughout the next few years. Although these payments may not be as large, they will come at no cost to Amgen now that the acquisition has been finalized.

Bayer's Stivarga/regorafenib is a colorectal cancer (CRC) drug that has recently been approved in to treat gastrointestinal stromal (GIST) tumors. Based on its potential to expand into both CRC and GIST, analysts estimate that the drug could generate just short of $1 billion in annual revenues. Amgen inherited Onyx's 20% royalties on global Stivarga sales, which makes a $200 million passive revenue stream possible just from Stivarga.

Having said this, Stivarga has a long way to go. The drug sold €197 Million in 2013, and will have to quadruple sales to reach its expected peak.

Pfizer's (NYSE: PFE  ) palbociclib is another drug to watch, although it is still waiting to receive FDA approval (the NDA was submitted back in May 2014). This breast cancer drug (when combined with another popular drug) did quite well in phase 3 trials, demonstrating that it added a ~10-month progression-free survival benefit to patients. Analysts have very different opinions regarding the commercial potential of this drugs, with peak sales estimates typically ranging between $1 billion and $6 billion. Amgen, which acquired an 8% royalty on this product, stands to benefit immensely if the more bullish analysts are right.

But ultimately, the pharmaceutical industry is very hit-or-miss. Amgen's acqusition of Onyx was still very expensive, and its success, in my opinion, still largely hinges on the relative success of Kyprolis. Until more data are released for this drug, we will have a hard time gauging its chances of becoming a blockbuster.

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