Valuing One-Drug Wonders

The one-drug wonders of the pharmaceutical world fascinate me. These companies have shown they have the stuff to get at least one successful drug to market -- not a minuscule task, especially in today's FDA environment -- but they haven't proved themselves as successful drugmakers yet, either.

I've talked about the songs they sing, but since you might not pay much to see Right Said Fred on your own, let's take a closer look together at how sexy these drugmakers really are.

Valuing the unprofitable
A few of these companies have had positive earnings for a quarter or two, but none has been consistently profitable. They're busy sinking the cash generated from their drugs into research and development to find the next big thing. Since we can't look at valuations based on earnings, the best we can do is value the companies based on the sales of their drugs. So let's do just that.

Company	Price to Trailing-12-Month Revenue	Year-Over-Year Sales Growth of Lead Drug	Quarter-Over-Quarter Sales Growth of Lead Drug
Abraxis Bioscience (Nasdaq: ABII  )	7.5	13%	(10%)
Elan (NYSE: ELN  )	15.0	230%	24%
Amylin Pharmaceuticals (Nasdaq: AMLN  )	5.3	8%	(10%)
Onyx Pharmaceuticals (Nasdaq: ONXX  )	8.5*	149%	22%

*Based on half of the sales of Nexavar, the other half of which are recorded by Bayer.
Sources: Capital IQ, a division of Standard and Poor's; and companies' press releases. Year-over-year and quarter-over-quarter comparisons based on the quarter ended in March 2008.

Just getting (re)started
You'd think that Elan and Onyx had just launched Tysabri and Nexavar, respectively, with the companies' quarter-over-quarter growth sitting above 20%. But the FDA approved Tysabri back in 2004; Nexavar, in 2005. Now the drugs' sales are ramping up again, but for two different reasons.

Elan's multiple sclerosis treatment Tysabri was pulled from the market after two cases (and later a third) of a rare disease, called progressive multifocal leukoencephalopathy, showed up in patients taking the drug. Elan and marketing partner Biogen Idec (Nasdaq: BIIB  ) worked tirelessly to show that a combination of Tysabri and a weaker immune system was causing the disease. The duo convinced the FDA that with careful patient monitoring, the drug's benefit outweighed its risk.

Since its relaunch in 2006, Tysabri has been on fire. At last count, more than 25,000 patients were taking Tysabri, and a slowdown in its growth doesn't look all that imminent.

Sales growth for Onyx's Nexavar came after it had initially stalled out, when it ran into competition with Pfizer's (NYSE: PFE  ) Sutent for treating patients with kidney cancer. But Bayer and Onyx were busy testing it in treating other types of cancer, and they found that it performed wonderfully as a treatment for liver cancer -- a disease that has few treatment options. Since getting approved as a treatment for liver cancer, sales of Nexavar have picked up again, but management warned that we shouldn't expect this kind of growth to keep up. Guidance is for less than 5% sequential growth for each quarter through the end of this year.

Topping out, but looking for more
Abraxis' Abraxane and Amylin's Byetta have both topped out their growth curves for the time being, but both companies are trying to make the most of their molecules by extending their function.

Abraxis is trying to get Abraxane approved for treating additional cancers. It's planning to have phase 3 trials running this year for the treatment of non-small-cell lung cancer, malignant melanoma, first-line metastatic breast cancer, and pancreatic cancer. The taxane on which Abraxane is based -- Bristol-Myers Squibb's (NYSE: BMY  ) Taxol -- is approved to treat multiple types of cancer, so it seems likely that Abraxane will work for at least some of these additional cancer types.

Amylin probably has a longer road ahead for picking up the sales of its diabetes treatment, Byetta. It may be able to grow sales of the twice-daily version a little more, but its best hope sits with its once-weekly version of Byetta. The drug is injected, so fewer shots should make the drug more appealing. Once-weekly Byetta had good phase 3 data, but the drug is more than a year away from market, because the plant that will manufacture the drug is still being built. Of course, with Carl Icahn now involved, we could see a shakeup in sales -- of the drug or the company -- sooner rather than later.

It's all about the pipeline
Looking at the values of the drugmakers based solely on their current sales, I don't see a clear winner in this group. Elan is growing the fastest, but it's also trading at the most expensive multiple. Amylin's growth is uncertain, but investors have clearly factored that uncertainty in with a lower sales multiple.

Ultimately, how well these drugmakers perform in the future will depend on how the drugs in their pipelines perform. But for now, it's clear that the drugmakers are making the right choice by plowing their cash flow back into research and development.