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Onyx Pharma Poised to Crack Asian Market

Its Nexavar cancer drug may find a huge new market.

Onyx Pharmaceuticals


might be the new Chinese stock play.

Liver cancer patients in China are apparently digging into their own pockets to pay for treatment with Onyx's Nexavar, according to executives from the German drug firm


, speaking this week at a New York investment conference.

The upbeat comments about Nexavar's commercial prospects in China, and Asia in general, surprised investors and sent Onyx shares higher, adding to the stock's already impressive gains this year. The stock was recently up 1.1% to $45.22.

Nexavar is approved for treating kidney cancer, and approval for liver cancer is expected in Europe and the U.S. by the end of the year. The drug is co-marketed by Onyx and Bayer, which takes a lead role in selling overseas.

Onyx is up 267% since its positive liver cancer data was first announced back in February. At its current valuation, the stock is baking in a significant amount of future revenue from liver cancer patients in the U.S. and Europe.

Asia, however, is a different story. The number of people who die of liver cancer in China, Korea and Japan each year is five times higher than the amount reported in the U.S. and Europe combined.

Asia is a huge commercial opportunity, but investors and analysts have been reluctant to model meaningful Asian revenue for Nexavar because other than Japan, there isn't much of an insurance or reimbursement infrastructure for cancer drugs in the rest of Asia.

Onyx and Bayer announced last month that a study of Nexavar in Asian liver cancer patients was stopped early because of a significant survival benefit reported in patients taking the drug compared to placebo. This was followed by Bayer's upbeat comments Monday about Chinese liver cancer patients who are reportedly paying for Nexavar themselves.

Combined, this is prompting a recalculation of Nexavar's revenue model, adding in the potential for higher Asian sales.

"I don't expect Bayer

and Onyx to achieve anywhere near the kind of liver cancer market penetration with Nexavar in Asia that they'll get in the U.S. or Europe, but then, at this point, I didn't expect anyone in China to be paying for the drug," says one institutional investor who is long Onyx and had heard the Bayer executives speak at the UBS Global Life Sciences Conference.

"To me, Asia revenue is nice upside in my Nexavar model," he added.

Now the question becomes, is the stock fairly valued here? Or is there still fuel in the tank to send the stock higher?

With the stock at $45 and change and a market cap of about $2.5 billion, Onyx is pricing in Nexavar sales in the neighborhood of $1 billion. (Remember, it basically shares revenue and profit equally with Bayer.) That's a lot, considering that the drug hasn't yet been approved for the treatment of liver cancer (although that's widely expected by year-end).

Back in June, after the Nexavar liver cancer data was presented at the ASCO meeting with Onyx shares at $30, I

crunched some numbers to come up with a fair value for the stock in the low-$40 range. That valuation relied on a fairly conservative revenue model for Nexavar sales in the U.S. and Europe -- with no Asian revenue at all.

In February, right after that great Nexavar liver cancer data was first announced, I made a similar

valuation argument for Onyx with the stock in the low-$20s. This isn't a boast, but merely a reminder that while I do get some picks

wrong (like

Sonus Pharmaceuticals


), I also get some right.

If early sales of Nexavar in liver cancer are strong, and the drug does get traction in Asia, there's room for Onyx shares to move higher. A buy-side analyst who has overseen a long position in Onyx since it was in the low-$20s tells me that his fair value for the stock right now is in the low-$50s. That estimate does include modest Asian sales of Nexavar.

Full disclosure, though: He has been trimming his position somewhat with the stock in the mid-$40s to lock in profits, but he's also willing to add to his position if the stock takes any significant dips. There's still a possibility that Bayer buys Onyx outright, and if that happens, the German drugmaker will have to make a premium bid.

In recent weeks, some sell-side analysts covering Onyx have also raised their price targets into the $45-$50 range, including Bear Stearns, Bank of America and Wachovia Securities.

Cowen analyst Phil Nadeau says his Nexavar model takes the drug to $1 billion in sales on kidney and liver cancer sales alone and doesn't include significant Asian revenue. Based on peer group valuations, he thinks the stock can still go higher and that a Bayer buyout is still a possibility. Nadeau has an outperform rating on Onyx and his firm doesn't have a banking relationship with the company.

There is, of course, downside risk for Onyx, especially with expectations already so high for liver cancer sales. There are some skeptics out there, including Merrill Lynch analyst Eric Ende, who believes that the liver cancer market is actually quite small and that consensus sales estimates are unrealistic. Ende has a neutral rating on Onyx and his firm has a banking relationship with the company.

To this point, Nexavar sales have been holding their own in the kidney cancer market against tough competition from


(PFE) - Get Free Report

drug Sutent and



Avastin. There are other drugs entering this market, however, which could cause Nexavar sales to suffer.

It goes without saying that Onyx shares have had a great run this year, so with the calendar running out and expectations so high already, investors will be taking profits. Looking ahead, a lot of attention will paid to the third-quarter reports from both Onyx and Bayer, as investors look for solid evidence that liver cancer sales have already started.

A bit further into the future, the next big catalyst for Nexavar will be data from a large phase III study in front-line lung cancer. Results are expected in the second half of 2008.

If Nexavar succeeds in showing a survival benefit in lung cancer -- another large cancer drug market -- we'll be revisiting the Onyx valuation question again, although at much higher levels.

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

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