Onyx Data Deliver the Goods

The company now has a groundbreaking liver cancer drug.
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CHICAGO --

Onyx Pharmaceuticals

(ONXX)

has a groundbreaking liver cancer drug.

Patients with advanced liver cancer given the company's drug Nexavar lived almost three months -- or 44% -- longer than patients given a placebo, according to results from a phase III trial announced Monday at the American Society of Clinical Oncology annual meeting.

"This is the first time that we've had an effective systemic treatment for liver cancer," said Dr. Joseph Llovet of New York's Mt. Sinai School of Medicine and the principal investigator of the study.

Onyx and its partner, German drug firm

Bayer

, had announced in February that the Nexavar liver cancer study, dubbed SHARP, was stopped early for efficacy. But the companies kept the details of the study -- including the specifics of the survival benefit -- under wraps until now.

Onyx shares have jumped 150% since that February announcement, closing Friday at $30.88.

Predicting the Nexavar survival advantage in liver cancer has been a favorite Wall Street parlor game since the February announcement, with most guesses ranging from one to four months.

Nexavar is already marketed as a treatment for kidney cancer, with current worldwide sales on a $240 million annual run rate, based on first-quarter sales of $61 million. But Nexavar's growth in kidney cancer is limited due to competition, mainly from

Pfizer's

(PFE) - Get Report

Sutent drug.

Liver cancer is the third-leading cause of cancer death globally, so the commercial opportunity for Onyx and Bayer is significant, with Wall Street estimates ranging from $500 million to nearly $1 billion a year.

And Nexavar has a generous head start over the competition. Pfizer just announced last week that it plans to run a phase III study of Sutent in liver cancer. Even then, Sutent's utility in this indication is under a cloud because the drug's toxicity and tolerability profile might not make it an ideal option for liver cancer patients.

Onyx and Bayer are expected to file Nexavar soon with the Food and Drug Administration. An approval could come at the end of 2007 or very early in 2008.

The two companies share profits equally from Nexavar under a joint business venture in U.S., Europe and Asia. In Japan, Bayer sells the drug and Onyx receives a single-digit-percentage royalty on sales.

Digging Deeper

The phase III SHARP trial enrolled 602 patients with advanced liver cancer who had not previously been treated with any systemic therapies. Patients treated with Nexavar at a dose of 400 milligrams twice daily reported a median overall survival of 10.7 months. By comparison, patients treated with a placebo reported a median overall survival of 7.9 months.

Based on a statistical analysis of the survival curves, Nexavar reduced the risk of death in liver cancer patients by 44%. This result -- the primary endpoint of the study -was statistically significant at a "p value" of 0.0006. In other words, the chance that this survival advantage was caused by random chance and not because of Nexavar was a puny 6/100th of 1%.

In a key secondary endpoint of the study, Nexavar patients reported a median time-to-disease progression of 5.5 months, compared with 2.8 months for patients on placebo. This result was also highly statistically significant.

It's this strong evidence of Nexavar's clinical benefit that caused the SHARP study's data overseers to stop the study early.

There are approximately 16,000 deaths due to liver cancer each year in the U.S., and about 30,000 such deaths in the five largest European countries.

Using a treatment duration of five months, a peak market penetration of 60% of these patients and Nexavar's current price, Nexavar's peak revenue in liver cancer could reach $300 million just in the U.S., and about $540 million in Europe. Total: $840 million. (Back in February, my rough back-of-the-envelope calculation was about $600 million.)

That doesn't even take into account sizeable commercial opportunities for Onyx and Bayer in Japan or the rest of the Asia, where liver cancer is also in desperate need for new treatments.

One wildcard in any revenue model for Nexavar must be potential competition in the liver cancer market from drugs like Pfizer's Sutent or

Genentech's

(DNA)

Avastin.

But Sutent data in liver cancer presented here Saturday wasn't particularly encouraging. In a small phase II study, patient response to Sutent was minimal and came with very high side effects, including four drug-related deaths.

Additional Sutent liver cancer data is being presented at ASCO later Monday, but at this point, the drug will need to reverse its fortunes if it's to compete with Nexavar in liver cancer.

Where To From Here?

With Onyx shares at $30.88, is the stock fully valuing Nexavar's commercial prospects in kidney and liver cancer? I think a case can be made for the stock moving higher, despite the nice move it's already had this year.

Working off the assumption of peak worldwide Nexavar sales of $1 billion, it's not unreasonable to value Onyx at between $1.6 billion and $2 billion in market cap. At its current price, Onyx sports a market cap of just over $1.5 billon.

Another way of looking at Onyx's valuation -- admittedly one more bullish and less certain -- is to consider what Bayer would pay to acquire Onyx in order to gain 100% of Nexavar. Again, assuming peak Nexavar sales of $1 billion, Bayer might pay 2 to 3 times for the half of the drug it doesn't own. That values Onyx at $2 billion to 3 billion.

And that calculation ignores giving Onyx any credit for the possibility that Nexavar might work in other cancers in the future. A phase III lung cancer trial is now fully enrolled, and while Nexavar suffered a setback in melanoma earlier this year, the company and Bayer are not giving up hope that a different combination of Nexavar and chemotherapy will prove effective.

A significant phase II program testing Nexaavar in breast cancer will also begin later this year.

And while I count myself an Onyx bull, there is the bear case to consider, which goes something like this: The run in the stock this year already fully values Nexavar's opportunity in liver cancer, and the liver cancer market isn't as big as Onyx bulls think it is. Sutent and Avastin will also be formidable competitors.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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