Onyx Attractive, but Issues Remain

Editor's note: Adam Feuerstein will pinpoint the biotech stocks with potential to take off in '09 at TheStreet.com Investment Conference on Saturday, Oct. 25.

Times are tough but not tough enough to keep a lid on the Biotech Mailbag. Kent P. asks:

"Is there any hope for Onyx Pharmaceuticals(ONXX Quote)? It has dropped to about $29 from $44 in August. Will there be any good news or quarterly reports coming down our way to erase this loss?"

Onyx started the year at $55, so the performance of the stock is even worse than Kent describes. Remember 2007? Onyx was the best-performing biotech stock of the year.

Here's what's happening: Nexavar is a very good cancer drug, but most of the sales growth in liver cancer (and to a much lesser extent, kidney cancer) is coming from Europe and Asia. That's a problem because Onyx doesn't seem to have very good visibility into those markets, especially Asia.

Investors get nervous when companies can't tell them with reasonable detail how their key products are performing. In this market, a case of nerves equals sell.

The consensus third-quarter sales estimate for Nexavar is about $175 million, which represents about 4% sequential growth.

First-half 2008 Nexavar sales totaled $321 million and the company has guided to total 2008 sales in the range of $600 million to $650 million. Clearly, if Onyx hits the $175 million Nexavar benchmark for the quarter, sales guidance has to be raised.

That's good, except I think just about everyone who follows this stock knows that Onyx management low-balled the Nexavar guidance, so the reaction to a raise in that guidance on the third-quarter conference call might be muted.

Another Onyx issue: The Nexavar joint venture with German drug maker Bayer has been a buzz kill. It's totally junked up with launch and research costs. Investors are waiting for real earnings leverage to flow through to Onyx's bottom line from all the Nexavar revenue -- except it hasn't happened yet and no one is quite sure when it will.