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.

(live link to chart.)

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.

here's the exciting part: the sum of the above is MULTIPLIED BY AN ACQUISITION PREMIUM, ADJUSTED FOR THE PROBABILITY OF A BIG PHARMA BUYING ONXX.

(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.

Top 10 promising cancer drugs in development

FierceBiotech - an indispensible web site (sign up for their daily news summaries) produces an annual list of most-intriguing/promising late stage cancer programs. Here's this year's edition - it's definitely worth a read.

I was struck by the diversity of approaches. The target/technology list includes:

cancer stem cells,
the proteasome,
androgen receptor signaling,
immunotherapy,
antibody-chemo conjugates,
tyrosine kinase signaling, and
anti-angiogenesis

The good news is that there is a broad and diverse anti-cancer effort underway. The bad news is……there is a broad and diverse anti-cancer effort underway….meaning we still don't know much about how to fight cancer effectively. From a decade ago, a few anti-cancer technologies have come (stem cells) and gone (gene therapy), and some technologies have increased validation (anti-angiogenesis) while others have fallen (immunotherapy), but the nature of the list hasn't changed a great deal.

One possible lesson from this list of candidates: anti-sense/RNAi and HDAC drug development are not currently as promising as they each were 3-5 years ago.

"Our life spans are much shorter than the FDA approval process."

Stunning story in today's WSJ about ALS patients who are making an experimental drug for ALS at home, on their own, and testing it on themselves. No FDA, no GLP, no IRBs, no control group - just patients in need doing what they can.

ALS (Lou Gehrig's disease) strikes fast, while the drug development, clinical testing, and regulatory approval processes moves slow. I understand the need of scientists and regulators for process, structure, and control, but I do not often enough see a reciprocal amount of flexibility or practicality in drug development. I've often wondered, for example, why we need placebo control arms in clinical trials targeting terminal diseases. Don't we already have a deep enough understanding of the life expectancy of a stage III lung cancer patient (for example)?


The one positive in the ALS article is the spirit of those with ALS who have taken up their own experimental effort. I admire their resourcefulness and fighting spirit.

Amazon.com & genomics

Amazon.com? Isn't this a biotech blog?

In the last month I've commented on mainstream players like GE and Google getting involved in making our molecular future a reality. (Hint: it's a good thing.) Continuing this theme is the news that Amazon is hosting the 200TB of data for the (misnamed) 1000 Genome Project (really 2,500 genomes.)

(Best news coverage here.)

One of Amazon's side businesses (besides selling books, music, etc.) is selling computing power on demand. By publicly hosting the datasets from thousands of genomes, Amazon is making available immensely powerful computing resources to anyone with a laptop and a credit card who wants to do some genomic data mining.

(AMZN isn't being entirely altruistic (@ <$100/TB storage costs, Amazon is only committing $20k in assets) - their hope is that researchers will use their on demand computing capacity, but the bill for any particular research project is likely to be <$1000 (depending on computing intensity. The press release makes mention of a big pharma project using supercomputer-like power for ~$1,300/hr.)

What's exciting to me - besides the message that another mainstream business like AMZN, GE, or GOOG recognizes the molecular future - is that Amazon is substantially reducing the capital required to conduct bioinformatics R&D. Instead of building expensive computing clusters and hiring an IT staff just to keep the system "up," you can now conduct informatics research with virtually zero start-up costs. It may cost you more to incorporate your start-up than to do your first project.

Amazon will impact more than genomic analysis - their on-demand computing will be very helpful for many other computational-intensive areas of life sciences, like rational drug design.

You can learn more about Amazon's efforts in life sciences here.

(btw: I hope no US Federal government employees hurt themselves falling all over Amazon's announcement trying to gain credit. The sub-headline to the press release states "Project is exemplar of new White House Big Data Initiative," and the Scientific American article pointedly states "The deal is a part of a new initiative from the Obama administration that will invest $200 million…." (in genomic R&D), The NIH press release credits "at least" six different federal agencies for working together to make this happen. Does it really take 6 agencies and the executive branch to convince Amazon to invest ~$20,000 to make a whole lot more money? The cost of press coverage (including press contacts at BOTH NHGRI and NCBI) on the part of AMZN & the NIH represented almost as much of an investment as the storage capacity.)

AMGN & AZN get creative

Suspicions are often aroused when two of the biopharma "big boys" partner up. Is the company originating the technology trying to hedge their bets and take some money off the table? Is the 'buying' partner inadvertently saying that their R&D efforts are inferior to their new partners'?

I would ignore the doubts in the case of last week's announced partnership between AZ and AMGN. The 2 companies will work together to develop 5 different anti-inflammation biologics, splitting costs and program responsibilities. The prospective costs and benefits are measured in billions.

Abbott's Humira (anti-inflammation biological) is a $9B product. No need to be greedy with a market that big. Both AZ and AMGN increased the chances of gaining a slice of that market, with the risk & costs roughly halved. Where some analysts are sour on the tie-up, I think it is good risk management, and I'd like to see more deals like these rather than less. (I also think this is very creative. More of that too, please!)

I like the deal a lot, but I'm not too sure that Wall Street does. Here's a quick look at how both stocks have performed in the <2 weeks since:

(Link to dynamic GOOG finance chart.)

So, AMGN is down with the market, AZ up 1.2%, so perhaps the Street thinks this is a win for AZ, and nothing new for AMGN.

I think the stakes for these two companies are higher than most recognize. For AMGN, this deal preserves their independence for a half of a decade. Without a partner, AMGN would either be betting the company on their inflammation program, or pruning the five programs just to save cash (or both.)

For AZ, they've just fattened their pipeline with high leverage R&D assets. If you believe that the cost of getting a drug to market is largely static independent of market size, AZ just gained some mid-stage leads that only cost half as much as usual to bring to market and while they only get half of the upside, halving a ginormous market 9X larger than a 'basic' blockbuster while halving the costs is a GREAT trade.


(Side note: I wonder how it would look if we similarly evaluated pharma pipelines not for risk adjusted expectations, but instead as a ratio of upside$ per R&D investment $. I'll put a little more thought into this, as my quick guess is that GENZ's rare disease approach would rank dead last in terms of upside per R&D dollar, even though we know it is a great business for them.)