Onyx Pharmaceuticals
Acquires Proteolix, Carfilzomib


October 12, 2009

Today Onyx Pharmaceuticals announced it is buying Proteolix in a structured deal that includes a $276 million cash payment (at closing) and potentially $575 million in payments based on clinical developments and regulatory approvals. It is a pretty sweet deal for both biotechnology companies.

Onyx is acquiring a great deal of risk in that Carfilzomib may not do well enough in Phase III trials to get regulatory approval for marketing. But Onyx is acquiring even more opportunity since if Carfilzomib is as successful as the Phase II trials indicate, the revenue stream should eventually pay for the deal many times over. On the whole Onyx is reducing its risk by acquiring a late-stage drug development company with a specialty adjacent to, but well-differentiated from, Onyx's own blockbuster Nexavar for kidney and liver cancers.

Carfilzomib is a pretty good bet. It is a proteasome inhibitor. A healthy person would not want to take proteasome inhibitors, since proteasomes are a key element of cells that break up and recycle damaged and over-abundant proteins. When proteasomes don't do their jobs, damaged proteins can build up in a cell, causing disease including cell death. However, cancer cells tend to be over-dependent on proteasomes because they have acquired a variety of mutations that create damaged proteins (which is how they became cancer cells). So a proteasome inhibitor can kill cancer cells without causing too much damage to healthy cells, particularly if they are somehow selectively targeted at cancer cells. There is already an approved proteasome inhibitor, Velcade. Carfilzomib represents a new generation inhibitor designed to be more selective than Velcade.

Phase II studies have shown Carfilzomib to be compellingly effective for multiple myeloma (MM), which is a type of hematological malignancy.

However, investors should be aware that the good results in the MM were for a trial involving only 46 patients. There are currently five ongoing Phase I or II trials; one has 155 patients and should be a far more compelling indicator if the results are statistically significant.

In theory Carfilzomib should work with cancers other than MM. This is a good example of how drug development works: you want to pick a roadmap that will get a drug its initial approval from the FDA based on its safety and efficacy. If that is achieved, then you can go back and try to expand the label for the drug to other indications. This is what Onyx has already succeeded in doing with Nexavar, which began as a kidney (renal) cancer drug, has been expanded to liver cancer, and looks like it may eventually be extended to breast cancer as well. As with carfilzomib, new drugs are typically brought in as second line therapies when established therapies have failed. If they can show better safety and efficacy than the standard of care, they may eventually be approved as a first line therapy.

The earliest we might see an FDA approval for Carfilzomib would be 2011. So in the meantime Onyx's expenses will go up. This acquisition is a play for long-term value, which fits into Onyx's past style.

In 2010 Onyx, in partnership with Bayer, expects Nexavar revenues to exceed $1 billion for the first time. Onyx splits expenses, and profits, evenly with Bayer. For the second quarter of 2009 global revenues were $201 million. Onyx ended up with GAAP net income of $9.4 million and non-GAAP net income of $15.3 million. Net income should grow much faster than revenues even with the increased expenses from the Proteolix acquisition. For details of Onyx's second quarter results, see my Onyx Q2 2009 analyst conference summary.

In summary, the Proteolix acquisition is a good bet, but involves significant risks. Onyx is not yet a stock for investors looking for safety. It does have a great deal of long-range appreciation potential.

So keep diversified!

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2009 William P. Meyers