Onyx's Double Dose of Trouble

Bam! Bam!

That wasn't the sound of Barney and Betty Rubble's son, but rather the one-two punch that Onyx Pharmaceuticals (Nasdaq: ONXX  ) has received recently. Poor results from the one-trick pony caused the stock to fall 31% over the past two days.

Let's take a look at the results and, more importantly, whether Onyx is a better value now that investors have knocked it out of the stratosphere in which it used to orbit.

No escape
When I saw Monday's announcement that Onyx and its partner Bayer were stopping their phase 3 clinical trial -- dubbed ESCAPE (Evaluation of Sorafenib, Carboplatin And Paclitaxel Efficacy in NSCLC) -- I figured that Nexavar had met its primary endpoint early, as it's done multiple times before.

But it was the exact opposite.

The data monitoring committee stopped the trial because there was no way for the trial to meet its primary endpoint of longer survival of patients with non-small-cell lung cancer (NSCLC). The trial compared Nexavar to placebo with all the patients getting the standard chemotherapeutic agents carboplatin and paclitaxel, both generic versions of drugs from Bristol-Myers Squibb (NYSE: BMY  ) .

But the trial's downfall could also be its saving grace as a treatment for lung cancer. Nexavar caused a higher rate of death in the approximately 25% of patients who had squamous cell cancer, a subtype of NSCLC. Genentech (NYSE: DNA  ) was able to get around the problem of its Avastin causing severe bleeding in patients with squamous cell cancer by indicating the problem on its label. Onyx doesn't know why Nexavar increased the death rate in patients with squamous cell cancer, but it did say that it wasn't the same bleeding problem that Avastin has.

It is possible that the duo could run an additional trial excluding patients with squamous cell cancer to show that Nexavar helps patients with other lung cancers. But management didn't seem to be holding its breath.

For those keeping score at home, that's two cancer types -- liver and kidney -- that Nexavar works wonderfully for and two cancer types -- skin and lung -- where it's failed. It looks as though the wonder drug isn't so wonderful after all.

The poor results probably won't affect sales for liver and kidney cancer patients, but lung cancer is a much larger market and could have doubled sales of Nexavar.

While Onyx scrambled to regroup after Monday's announcement, the results benefited companies that already sell lung-cancer treatments -- Tarceva from OSI Pharmaceuticals (Nasdaq: OSIP  ) and Genentech, and AstraZeneca's (NYSE: AZN  ) Iressa. It should also benefit ImClone Systems (Nasdaq: IMCL  ) , which should be able to get Erbitux approved for treating lung cancer after reporting strong trial data.

Back to red
After one quarter of profitability, expenses sent Onyx back into the red in the fourth quarter of last year.

Sales rose 19% over the third quarter of 2007, but the increase wasn't enough to overcome higher research and development costs for clinical trials and sales, general, and administrative costs for launching Nexavar as a liver-cancer drug.

Since Onyx doesn't really know how quickly Nexavar will be adopted for use in liver cancer or how much Pfizer's (NYSE: PFE  ) Sutent will cut into sales for kidney-cancer patients, Onyx wasn't willing to give a prediction for sales of Nexavar this year. The good news is that Onyx thinks it'll be cash-flow neutral for the year, so that's a good sign that spending and revenues are headed in the right direction.

Future
Clearly, Monday wasn't a good day to own Onyx, but with its new, smaller market cap, Onyx is looking a little more appealing.

The pipeline-less drugmaker will live and die with sales of Nexavar. Based on the most recent quarter, the run rate for Nexavar sales is about $500 million per year, but that should increase as it launches in more European countries and has full quarters of marketing for liver cancer in the U.S.

If Onyx and Bayer can get sales of Nexavar up to $1 billion per year over the next few years and hypothetically decrease expenses to 50% of sales (which would kill their entire R&D program for Nexavar), Onyx would bring in about $250 million a year -- half of the partnership.

Of course, the duo isn't going to kill its development of Nexavar for other indications, so the future value of Onyx will ultimately be determined by whether it's able to expand Nexavar's label further. The two most interesting possibilities are its multiple phase 2 trials for breast cancer (a very large market) and a planned trial to test it in combination with surgery for liver cancer.

If it can get Nexavar approved for either of those indications, Onyx's shares will soar again, but if they're flubs like its lung-cancer program was, there's little upside potential from here.


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