Onyx Adds Blood Cancer Drug in Proteolix Buy

EMERYVILLE, Calif. ( TheStreet) -- Onyx Pharmaceuticals ( ONXX) is acquiring privately held cancer drugmaker Proteolix in an all-cash deal that adds a mid-stage blood cancer drug to the company's portfolio.

Under terms of the agreement, Onyx will pay $276 million upfront for Proteolix. Another $575 million in payments from Onyx to Proteolix's shareholders are contingent on the future development and success of Proteolix's lead multiple myeloma drug, carfilzomib, the company said Monday.

Wall Street has been waiting with mixed feelings for Onyx to acquire another cancer drugmaker ever since the company raised about $300 million in August. Onyx's reliance on its partnership with the German drug giant Bayer and the cancer drug Nexavar for its sole source of profit is widely seen by investors as a liability. But investors also have worried about Onyx's ability to pull off a smart acquisition that would deepen its product portfolio without overpaying.

Onyx shares are down 21% year to date.

By buying Proteolix, Onyx CEO Tony Coles may have successfully threaded the needle of investor expectations.

Proteolix is a private company, but its main drug carfilzomib is fairly well-known to biotech investors and analysts. Data from phase II studies presented at medical meetings last December and again in June showed the drug to be a potentially strong competitor to two well-established multiple myeloma drugs - Takeda's Velcade and Celgene's ( CELG) Revlimid.

The structure of the transaction is back-end loaded, so Onyx doesn't have to pay a significant portion of the $851 million total purchase price if carfilzomib's development falters.

Carfilzomib also belongs to a class of cancer drugs known as proteasome inhibitors, which are well understood and have a proven track record of success. Velcade was the first proteasome inhibitor approved for multiple myeloma and had sales of $1.16 billion in 2008.

In an interview Sunday night, Coles describes carfilzomib as a "next generation" proteasome inhibitor designed to be more potent and cause fewer side effects, particularly the numbness and nerve pain that are well-known issues with Velcade.

A phase IIb study of carfilzomib in 250 patients with late-stage multiple myeloma is underway. The study could be completed in the second half of next year and if positive, allow Onyx to seek regulatory approval by the end of 2010 as a third-line multiple myeloma treatment, says Coles.

This is a similar regulatory strategy to the one that Millennium Pharmaceuticals used successfully for Velcade. Takeda acquired Millennium in 2008.

Studies combining carfilzomib with Celgene's Revlimid in multiple myeloma are also planned.

Coles says that Onyx's spending will increase due to the Proteolix acquisition but the company intends to remain cash flow positive on an operating basis in 2010, per previous guidance.

"Investors have been keen on us becoming a multiple product company. I think this deal gives us a great opportunity to do that," says Coles.

Onyx shares closed Friday at $26.90.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet.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; click here to send him an email.

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