Kyprolis Approval Could Drive ONXX Higher, DECISION Trial Results Also A Key Event

Among the next significant events in pharma and biotech is the FDA decision on Kyprolis (carfilzomib), Onyx Pharmaceuticals’ (NASDAQ:ONXX)next-generation treatment for multiple myeloma. On July 27th, the FDA will determine whether Kyprolis will be commercialized this year on current data, or have to wait for full Phase III results. Many speculate that ONXX could be the next mid-cap biotech to be acquired, and an approval of Kyprolis, the company’s lead value driver, may drive that outcome in the coming quarters. On June 20th, an FDA Panel unanimously recommended approval of Kyprolis, and the stock has risen approximately 50% since that decision. The issue is that Kyprolis has only completed a Phase IIb trial, and the primary study supporting approval was a single-arm trial (no control group). Pfizer’s (NYSE:PFE) Xalkori (crizotinib) was approved in August of last year under similar circumstances for the treatment of metastatic non-small cell lung cancer. After two successful single-arm trials involving 225 patients, the FDA approved the drug, albeit requiring continued studies to determine clinical benefit.

The FDA has actively discouraged drug developers from attempting to gain approval on Phase II trials with no control group, even in areas where there is an unmet medical need like cancer. That said, Kyprolis’ mechanism is well known as it works the same way as Johnson & Johnson’s (NYSE:JNJ) billion-dollar therapy for multiple myeloma, Velcade. Importantly, Kyprolis is more targeted than Velcade, and has been shown to be significantly less toxic and more effective vs. Velcade. Hence the FDA Panel’s overwhelming recommendation for approval on the early clinical trial data. While the stock has run significantly since the panel’s recommendation, shares of ONXX are still likely to climb on approval. Three key reasons that the shares have more room to run are:

1) Most, if not all, analysts are still modeling in a Kyprolis approval in 2014, not 2012 so financial estimates will rise upon approval.
2) An approval is a de-risking event, and therefore, the stock price should increase given the certainty that follows approval
3) The certainty gained on approval will not be lost on potential acquirers of the business, such as Bayer AG or most other major pharmaceutical companies. Therefore, the chance of a take-out rises.

Kyprolis is estimated to have peak annual sales of up to $2 billion worldwide, suggesting that this compound could drive a valuation on its own of $6 billion. Adding in about $1 billion in value for the company’s commercial treatment, Nexavar, plus over $600 million in cash and equivalents, one could see ONXX being acquired for up to twice its current valuation. In addition to the potential Kyprolis approval, upcoming data from the DECISION trial, which pursues Nexavar as a treatment for thyroid cancer, should be a key event for Onyx. Clinical data supporting Nexavar in thyroid cancer is strong and results of this trial, expected soon, are likely to be favorable.

On the downside, if ONXX sells off because the FDA does not approve carfilzomib this year, the stock is likely to present a buying opportunity. A large Phase III placebo-controlled trial supporting a new drug application (NDA) for Kyprolis is ongoing and will report out next year. If the FDA does not approve the drug early, the company will be on track to submit another NDA in late 2013 or early 2014. For long-term investors that are looking to speculate on FDA events and acquisitions in healthcare, a position in ONXX here makes sense, with dry powder to add to the position if Kyprolis is not approved by the FDA in July.