Wednesday, April 18, 2012

ONYX under the microscope

Related to FierceBiotech's Top 10 Promising Cancer Drugs mentioned in my last post, there's one company with two drug candidates in the Top 10 - Onyx Pharma (ONXX).

Each Onyx program is reaching an important milestone/inflection point over the next year, making this an interesting year for the stock, which makes it worth putting under the microscope.

First a refresher: ONXX has an enterprise value of $2B, largely based on Nexavar, their FDA-approved small molecule multi-TK inhibitor. (Inhibiting VEGFR, PDGFR, and Raf, and approved for RCC and HCC.) What makes Nexavar unique is that it is the only approved MAPK inhibitor. (Indeed the only survivor from very intense pharma R&D over the last 15 years.)) Nexavar sales totaled $1B in 2011, and grew 8%. ONXX stock is up 20% over the last 12 months (vs. 10% for NAS), but at 57% vs 81%, ONXX lags the NAS over the last three years.

The partnership between Bayer and Onyx is a bit messy accounting-wise (and was very messy in every other way until last fall), but a half-interest in a growing billion dollar drug is probably worth ~$1.25B. (Quick n' dirty: 50% of $1B in annual rev * 2.5X average price to sales ratio for pharma industry.)

2012: this year Onyx might transform from a company with a single product for two disease indications to a company with three products for five disease indications based on developments in the two programs highlighted by FierceBiotech - Regorafenib for CRC and GIST (CRC is a big market, GIST is small), and Carfilzomib for multiple myeloma (huge market, with Velcade (Millennium) and Revlimid (Celgene) together accounting for >$4B in multiple myeloma drug sales.)

Regorafenib is an interesting story. Regorafenib is very similar to Nexavar, but Onyx's partner Bayer developed the drug on their own. Both sides wrestled over the IP, but eventually settled with Bayer sharing a 20% royalty to ONXX on Regorafenib. I am guessing the amended partnership agreement also included an agreement to market the two similar drugs at different markets, as Regorafenib is seeking approval in new markets relative to Nexavar.

An FDA decision on Carfilzomib will be announced before August, while Regorafenib will file for approval with the FDA later this year. (But with approval in 2013?). Both drugs have supportive late stage trial data.

So, what's ONXX worth? 

The sum of:

value of their interest in Nexavar + value of their 20% interest in Regorafenib, adjusted by the probability of FDA approval value of Carfilzomib, adjusted by the probability of FDA approval.


(Acquisition rationale: 1) pharmas buy growth products, 2) pharmas buy blockbusters, and 3) Bayer in particular is likely to want to buy out their partner.)

If everything was FDA approved, I think ONXX would be worth roughly

$1.25B for Nexavar
$500M for their 20% interest in Regorafenib (at $1B peak sales x 2.5 P/S ratio).
$2.5B for Carfilzomib (also $1B peak sales x 2.5 P/S ratio. $1B in revenue at peak assumes ONXX takes 25% of the $4B multiple myeloma market, likely displacing Millennium, not Celgene.)

Operating value total: $4.25B

Adding a modest 25% acquisition premium assumption would yield a predicted future value of ONXX of $5.3B, or 2.65X the current enterprise valuation.

(technically you'd discount back from the period of peak sales for each drug for it's present value, but let's keep things simple.)

The expectations for ONXX's prompt FDA approvals obviously would change (reduce) the final corporate valuation a great amount. I have absolutely no insight into what ONXX's chances are with the FDA, nor do I have any reason to make a prediction of ONXX's probability of prompt approval, so you need to adjust the ONXX valuation by your own expectations. But, another way you could look at ONXX is to infer the market's expectations of FDA and product success from today's valuation.

If ONXX's enterprise value is ~$2B, and Nexavar is "worth" $1.25B, you could infer that the discounted value of Carfilzomib + Regorafenib totals $750M. (I'm simplifying here - this analysis assumes no future value for anything else in ONXX's pipeline, which isn't fair.) By extension then, the market says that there is a 18% probability (750/($5.3B-1.25B)) of the scenario I outlined above, including acquisition of ONXX at a premium.

It's up to you to add your own perspective - this is not a recommendation to buy or sell ONXX stock. As of this writing, I hold no ONXX shares and can state definitively that this will not change over the rest of the week. If/when my disposition changes, I will update this page.

Please let me know in the comments section what you think of the above "under the microscope" analysis, and if you would be interested in my duplicating it with other bio-pharma companies in the future.

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