Some may see the approval of Celgene’s (CELG) Pomalyst as a direct threat to Kyprolis, Onyx Pharmaceuticals’ (ONXX) multiple myeloma drug. And while Pomalyst may cause initial adoption of Kyprolis to take a bit longer given the new competitor, I believe that investors should look beyond the next several quarters when assessing the true value of Kyprolis. That, alongside a robust clinical pipeline, and a strong balance sheet, should position Onyx for long-term gains.
Little Need to Fear Pomalyst
On February 8, Celgene announced that the FDA had given its approval to Pomalyst, Celgene’s new multiple myeloma drug. Pomalyst is expected to be a blockbuster drug, with peak sales estimates of $1 billion a normal sight on Wall Street despite the presence of a Risk Evaluation and Mitigation Strategy (REMS) program. Pomalyst, as a thalidomide analogue, is known to cause severe birth defects and/or embryo-fetal death if taken by pregnant women, and can also lead to deep venous thrombosis and pulmonary embolisms, and as such, the FDA approved Pomalyst on the condition that it carry a REMS and black-box warning. However, Pomalyst’s black-box warning is actually less restrictive than that of Revlimid, Celgene’s earlier generation multiple myeloma treatment, which not only includes all of Pomalyst’s warnings, but adds hematologic toxicity as well. However, despite these restrictions on its distribution, analysts expect Pomalyst to see strong uptake by physicians, and it is widely expected to take some sale from the growth of Onyx’s Kyprolis product.
Pomalyst, unlike Kyprolis, is an oral drug, which are almost always preferred to injections like Kyprolis. Kyprolis itself received FDA approval in July of 2012 and had just 7 months on the market before Pomalyst received approval. Onyx reported earlier this year that 2012 sales of Kyprolis exceeded $62 million, and while even bearish 2013 estimates for Kyprolis call for sales of over $180 million (courtesy of Merrill Lynch), these estimates have steadily decreased as Pomalyst moved closer and closer to commercialization. While Pomalyst does carry a higher price tag than Kyprolis (at $10,500 per month versus $9,950 for Kyprolis), it is expected to be highly competitive given the strength of Pomalyst’s clinical data, as well as the strength of Celgene’s commercialization capabilities. But, as Onyx’s management team outlined on its Q4 2012 earnings call, Pomalyst should not be seen as a long-term threat. On February 21, Onyx posted a pro forma loss of $0.36 per share on revenues of $127.9 million, both of which beat consensus estimates that called for a loss of $0.76 per share and revenues of $113.2 million. However, this financial upside, on its own, did little to impress the markets. On the company’s conference call, one analyst after another pressured Onyx’s management team to comment on the launch of Pomalyst. In my view, Onyx’s management team delivered solid responses to these questions.
As Onyx continues to commercialize Kyprolis, the company has been conducting market research across its physician base to see how they are likely to respond to what the company calls “the entry of a second treatment for third and fourth-line patients.” Helen Torley, Onyx’s Chief Commercial Officer, stated that the company has conducted a survey of its physician prescriber base, and of the physicians that responded to the survey, 70% stated that they expect to increase their usage of Kyprolis. Onyx’s management team also noted on its Q4 earnings call that 80% of the top 2,000 accounts targeted by Onyx have used Kyprolis at least once. Ms. Torley also noted that physician feedback consistently highlights the favorable risk-benefit profile of Kyprolis, as well as the wide patient pool that is able to tolerate Kyprolis.
Since receiving FDA approval in July, Onyx has now been able to capture 30% of the 3rd line and later multiple myeloma treatment market, and the company expects that as Kyprolis expands throughout Europe, this share may rise. Onyx is preparing an expanded access program in Europe to make Kyprolis available to patients that have exhausted other multiple myeloma treatment options [the company will decide on a more material commercialization program once additional Phase III data from ongoing clinical trials (ASPIRE and FOCUS) is available]. Onyx views Pomalyst as more of a complimentary drug rather than a full competitor, a view articulated by Julianna Wood, Onyx’s head of public affairs, who stated at Citigroup’s Global Healthcare Conference on February 26 that investors should keep in mind the fact that it is “highly likely” that multiple myeloma patients will be given both Kyprolis and Pomalyst during the course of their treatment. Citigroup analysts also note that market dynamics will limit the threat to Onyx. The brokerage firm notes that its conversations with physicians suggest that in general, Pomalyst will be used over Kyprolis in patients that have failed both Velcade and Revlimid. However, this is a very general rule, and physicians told the firm that Kyprolis is more likely to be used after Revlimid, whereas Pomalyst is more likely to be used in patients that have failed Velcade. Upcoming clinical trial data for Kyprolis may make this issue moot.
An interim analysis of Phase III data from Onyx’s ASPIRE trial of Kyprolis in relapsed multiple myeloma patients could occur as early as Q4 2013 (however, the analysis may be pushed back into 2014) and should the data be positive, analysts expect that Kyprolis will begin to be used ahead of Pomalyst in 2nd-line multiple myeloma patients (Onyx is set to release data from its ‘006 trial of Kyprolis at the 2013 meeting of the American Society of Clinical Oncology (ASCO), but cautioned that investors should not read through to its ASPIRE trial results, given that many of the patients in the ‘006 trial were previously refractory to Revlimid, and they are excluded from the ASPIRE trial). In addition, Onyx is currently enrolling patients in its Phase III ENDEAVOR trial, which is designed to evaluate the superiority of Kyprolis relative to Velcade in patients that have relapsed after 1-3 therapies. Onyx’s third major trial of Kyprolis in multiple myeloma is the company’s Phase III FOCUS trial, which is designed to show the survival benefits of Kyprolis relative to steroids and optional cyclophosphamide, with the EMA serving as a scientific advisor. Onyx notes that top-line results from this trial may be available in the second half of 2013, and if successful, will be used as a basis for further regulatory approval outside the United States.
While Onyx declined to give concrete 2013 sales guidance for Kyprolis, the company affirmed its expectations of sustained sequential growth in quarterly Kyprolis sales through the course of 2013 (which implies full-year sales of $190-$200 million), and CFO Matthew Fust suggested that the company may issue detailed sales guidance once it gets further clarity on the usage growth of Kyprolis. In my view, the threat of Pomalyst is overblown, and in the long run, it’s likely that these 2 drugs will be complementary rather than true competitors. Analysts seem to believe that this is the case, as the consensus price target for Onyx currently stands at $98, implying upside of over 26% from current levels. Onyx has fallen from above $91 in October to its current share price of $77.69 as investors’ concerns about Pomalyst intensified, despite the fact that there was little in the way of analyst action to warrant such a move. And as Onyx’s management team outlined (and as clinical data set to be released in 2013 is likely to show), there is little need to fear Pomalyst in the long-term.
Financial, Estimates, and Expanding Existing Commercial Opportunities
Onyx ended Q4 2012 with $492.8 million in cash & investments and currently holds $174.4 million in convertible notes, which are due in 2016. After the close of the quarter, Onyx announced an equity offering, which closed at the end of January and raised over $350 million for the company. Onyx will now have over $800 million in cash & investments on its balance sheet, which will be more than enough to continue its pipeline advancement. On February 25, Onyx announced that the FDA granted approval to Stivarga (developed in collaboration with Bayer) for the treatment of unresectable or metastatic gastrointestinal stromal tumors (Stivarga was also approved in September 2012 for the treatment of metastatic colorectal cancer). Onyx has noted that physician interest in Stivarga in metastatic colorectal cancer has been strong, and the company receives a 20% royalty on all global sales of the drug. Bayer has gone on record to say that it expects peak sales of Stivarga to reach €1 billion, representing more than $260 million in potential annual royalty revenues to Onyx at current exchange rates.
Bayer is expanding Stivarga’s potential market, with plans underway to secure approval in Europe and Japan, as well as several new clinical trials to evaluate the use of Stivarga in hepatocellular carcinoma (also known as HCC) patients that have failed to respond to Nexavar, and a trial to expand Stivarga’s use in colorectal cancer. Onyx and Bayer are also preparing to expand the commercial opportunity for Nexavar, their blockbuster drug for the treatment of liver and kidney cancer (Onyx’s share of 2012 sales stood at $288.4 million). However, Onyx and Bayer see this as only the beginning of Nexavar’s global opportunity. The companies are currently conducting multiple Phase III trials of Nexavar in adjuvant liver and kidney cancer, as well as thyroid and breast cancer. Enrollment in RESILIENCE, the Phase III breast cancer trial (with a specific focus on metastatic HER-2 negative breast cancer), will be complete within the first half of 2013, with progression free survival serving as the primary endpoint. Phase III data from Onyx and Bayer’s DECISION trial of Nexavar in thyroid cancer was released in early January 2013, and Nexavar demonstrated a statistically significant improvement in progression-free survival, with a safety profile consistent with its existing profile. Onyx has indicated that this Phase III data will be presented at ASCO 2013, and that it and Bayer expect to file for FDA approval of Nexavar in thyroid cancer later this year.
The continued growth of Onyx’s oncology franchise will lead to sustained profitability and meaningful growth for Onyx, something that I do not believe is reflected in the company’s present share price. Consensus forecasts (provided by Zacks) for earnings call for sustained growth in the years to come (P/E multiples are based on Onyx’s closing share price of $80.02 on March 6).
Onyx Pharmaceuticals Consensus Forecasts
| Year | EPS | % Change | P/E Multiple |
| 2012 | -$2.50 | N/A | N/A |
| 2013 | -$2.87 | N/A | N/A |
| 2014 | -$0.59 | N/A | N/A |
| 2015 | $2.83 | N/A | 28.29x |
| 2016 | $6.37 | +125.09% | 12.57x |
Onyx is set to reach sustained profitability in 2015, and currently trades at just over 27x 2015 EPS, and around 12x 2016 EPS. Onyx will be making meaningful investments in its pipeline in 2013 and 2014 (R&D expenses rose by 21.34% in 2012). However, these investments are positioning Onyx for long-term success, and with hundreds of millions in net cash & investments, the company has the financial resources needed to continue delivering new therapies for patients, as well as value for its investors.
Conclusions
In my view, Onyx’s recent selloff from above $90 was unwarranted. Investors shouldn’t fear Pomalyst’s long-term impact, as physician feedback indicates that the two drugs will be complementary, and pending clinical data regarding Kyprolis is set to expand its market opportunities. In addition, Onyx’s addressable markets are expanding, as it and Bayer work to secure approval for new indications of Nexavar and Stivarga. While the company is not yet profitable, there is a clear pathway to profitability, and I believe that for investors in Onyx Pharmaceuticals, there’s long-term upside to be had.
