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TheStreet Open House

Onyx Pharma Must Start Delivering Profits

Stocks in this article: ONXX GILD AMGN

NEW YORK ( TheStreet) -- With a second cancer drug nearing approval, Onyx Pharmaceuticals (ONXX) must commit to delivering sustained profits to its long-suffering and very patient shareholders. The years of reinvesting the lion's share of revenue back into research -- and therefore bleeding red ink -- must end. It’s time for Onyx to grow up and make money.

Onyx should be commended because only a select group of biotech companies ever reach a point where management actually has the freedom to choose profitability over re-investment.

Late last month, the FDA's Oncologic Drugs Advisory Committee voted overwhelmingly in favor of accelerated approval for Onyx's carfilzomib, now branded Kyprolis, for the treatment of late-stage multiple myeloma. Kyprolis' approval on or before July 27 will add a second major cancer drug to Onyx's arsenal. The company and partner Bayer already sell Nexavar, which generates annual worldwide sales of more than $1 billion for the treatment of kidney and liver cancer.

When Nexavar was first approved for kidney cancer, Onyx chose to reinvest the revenue into clinical studies aimed at expanding the drug's use into other cancer types. The strategy yielded few positive results. While Nexavar was eventually approved for a second indication (liver cancer), the drug failed in other cancer subtypes, including breast, lung and melanoma.

Unless Kyprolis proves a commercial flop, which seems unlikely, Onyx management will need to decide whether to reinvest or reap Kyprolis' operational profits. This is the profitability paradox. It's not a bad problem to have, but this time, Onyx needs to take a different path than it did with Nexavar. Onyx now has the opportunity to join the ranks of Gilead Sciences (GILD - Get Report), Genentech and Amgen (AMGN - Get Report), all of which parlayed successful drug development programs and approvals into growth and profit machines.

What Onyx needs to avoid is once again squandering revenue on the ego-fueled fantasy of reproducible R&D and regulatory success. For every Gilead or Genentech there are too many Sepracors -- companies that promised vast profits, only to sink under the weight of poorly rationalized R&D despite major commercial successes. (Sepracor was eventually sold to Dainippon Sumitomo Pharma in 2009, after accumulating massive losses over a 25-year period.)

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