Onyx Halts Lung Cancer Study, Shares Plunge

Updated from 7:47 a.m.

Onyx Pharmaceuticals -- the feel-good biotech story of the past twelve months -- has hit a rough patch.

The Emeryville, Calif.-based biopharmaceutical firm said Monday that it was forced to halt a late-stage study of Nexavar in lung cancer patients after an independent monitoring board concluded that the study had no chance to succeed.

The setback disappointed investors who've been hoping for a more positive outcome from the lung cancer study to further fuel Nexavar sales growth and push Onyx's stock price much higher.

Fourth-quarter sales of Nexavar totaled $124.9 million, above consensus expectations, but this good news was overshadowed by the lung cancer study's failure.

Onyx shares were tumbling $9.89, or 22%, to $35.09 early Tuesday.

Onyx was the best-performing biotech stock of 2007, closing the year at $55, notching a one-year return of 440%. The stock's success was driven by the bright commercial potential of its cancer drug Nexavar. The drug was already a solid performer as a treatment for kidney cancer, but its prospects really took off last year when the drug was found to prolong the survival of liver cancer patients.

Revenue generated by Nexavar from liver and kidney cancer, combined, could easily top $1 billion at peak.

But the lung cancer indication on its own could have tacked on another $1 billion in sales.

Onyx announced the negative results of the phase III Nexavar "ESCAPE" lung cancer study with its partner, the German drug firm Bayer AG. The companies said that an independent data monitoring committee recommended halting the study after concluding that the primary endpoint of improved overall survival would not be met.

The study was testing the combination of Nexavar and the chemotherapy drugs carboplatin and paclitaxel in patients with non-small-cell lung cancer.

The companies also reported that a higher death rate was found in a subgroup of patients with squamous cell lung cancer being treated with Nexavar and chemotherapy compared to patients treated with chemotherapy alone.

Onyx and Bayer are running additional lung cancer trials with Nexavar, including a second phase III study that combines the drug with a chemotherapy regimen commonly used in Europe. Monday's negative results, however, raise doubts about their outcomes.

This, in turn, will prod investors to value Onyx based on where Nexavar is today, and not where the drug might be tomorrow had the lung cancer trial succeeded.

I've said this before so it bears repeating today, a fair value for Onyx based on Nexavar sales in kidney and liver cancer is likely in the mid-$40 range. (Although don't be surprised to see Onyx bears have their way with the stock in the near term and drop the price well below that range.)

Volatility in Onyx's stock price will now more likely be affected by quarterly operations.

Tuesday morning, Onyx reported a net loss for the fourth quarter of 21 cents a share, which included 7 cents a share in employee stock-based compensation expenses. Analysts polled by Thomson Financial were expecting a net loss of 7 cents a share.

Nexavar revenue in the quarter totaled $124.9 million, a 96% increase over the $63.7 million in sales in the year-ago quarter and a 19% sequential jump from the $105 million in Nexavar sales in the third quarter. Fourth-quarter Nexavar sales beat investor expectations, which were in the range of $115 million.

For the year, Onyx lost 67 cents a share, higher than the analyst consensus estimate of 52 cents a share. Nexavar sales for 2007 totaled $371.7 million, up 125% year over year.

[Onyx and Bayer co-market Nexavar under a joint venture where costs are shared and profits or losses are split evenly. Every quarter, Onyx reports it share of the Nexavar joint venture on its income statement.]

Spurred on by liver cancer sales, which only began in late November, the company is expected to earn 91 cents a share in 2008, which will be the company's first full year of profitability.