What’s biopharma company Onyx Pharmaceuticals (ONXX) worth?
More than $10 billion, if you ask its board. That’s the amount Amgen (AMGN) offered to pay for Onyx in what would have been a friendly acquisition. Onyx politely declined, apparently seeking out bigger offers.
Any time a suitor announces it’s willing to pay a 38% premium to purchase a company (as Amgen did), heads turn. Any time a company rejects an offer to pay a 38% premium, questions understandably arise … and this instance is no exception.
The two top questions investors are asking of Onyx Pharmaceuticals now are, (1) what was Amgen going to get for its $10 billion, and (2) if not Amgen, who’s most likely to cough up the money ONXX is looking for?
Details of the No-Deal
The offer from Amgen was a sweet one. The bid was $120 per share, or a total of $10 billion. The deal would bring three new cancer drugs into the Amgen fold — Nexavar, Stivarga and Kyprolis. Two of the three are sold in partnership with Bayer (BAYRY), and royalties from these three drugs made up the vast majority of Onyx’s $362.2 million in revenues last year.
A $10 billion offer for a company only generating $360 million in sales per year? There’s more to the story.
Two of those three drugs were only approved last year and have yet to develop their full sales pace. Some analysts say newcomer drug Kyprolis, for multiple myeloma, could generate $2 billion in annual sales. Colon cancer drug Stivarga — also only approved by the FDA in 2012 — is targeting the smaller third- and fourth-line markets. Industry experts foresee annual sales of less than $200 million. Liver and kidney cancer treatment Nexavar has been around since 2005. That’s ample time to fully develop its full momentum, making last year’s total revenue of $1 billion a fair representation of its potential going forward.
Better than a dozen more cancer treatment trials are underway as well, including palbociclib, which could generate annual sales in a range of $2 billion to $5 billion if approved to treat other cancers aside from breast cancer. Although Onyx must split sales of two key drugs with Bayer (any suitor must do the same), their potential plus the upside of the pipeline is impressive.
In that light, the $10 billion offer still is frothy, sure, but not out of line — especially in this environment of pipeline-hungry pharma companies.
Yet according to Onyx, it still wasn’t enough.
Waiting in Line
So if not Amgen, what’s the right company, and who’s actually willing to come up with the right bid? Nobody has a crystal ball, but there are some frontrunners. The best-fit and most-willing candidates are (from most-likely to least-likely):
- Pfizer: A Pfizer (PFE) partnership with Onyx would be the ideal union, and unless Onyx is willing to bring more money to the table (not likely), Pfizer also is at the top of the most-interested list. The company already is developing breast cancer drug palbociclib with Onyx, and the two organizations will split revenue created by the drug if and when it’s approved. It may behoove Pfizer to forget the royalty arrangement and just buy the whole shebang outright, however, since this Phase 3 treatment has already been granted the FDA “breakthrough” designation. (Translation: The FDA is itching to get palbociclib on the market as soon as possible.) I’d say there’s a 65% chance Pfizer could make an offer, though that still leaves a 35% chance the company isn’t interested in spending more than $10 billion.
- Novartis: Novartis AG (NVS) might not immediately come to anyone’s mind as a potential buyer, but with some thought, a merger of the two companies would be a pretty good fit. Novartis could stand to beef up its cancer pipeline. Onyx Pharmaceuticals also would give NVS a much-needed boost in the U.S. market, where the Swiss company has been forced to lay off more than 4,000 workers since 2010 due to waning revenue potential. The odds in favor of an acquisition here are in the 60/40 range.
- Celgene: Celgene (CELG) already offers a decent selection of multiple myeloma drugs (Pomalyst, Revlimid and a drug it’s developing with MorphoSys). Some of these treatments are even used alongside Kyprolis; thus, adding it to the mix superficially seems like a nice fit. On the other hand, it’s possible some customers might view an extensive myeloma treatment library as needlessly overlapping, not to mention the potential antitrust arguments that could be voiced. Celgene is where the odds of an acquisition reach the 50/50 mark.
- Amgen: Amgen most likely gave Onyx its best offer. If Onyx declined, Amgen is apt to move on to other things. We’re now at 40/60 odds, meaning don’t look for a higher offer no matter what else happens from here.
- Bayer: If not Pfizer, Bayer would also do well to forgo the royalty relationship it has with Onyx for nexavar and stiverga and simply combine the efforts — both companies have the same end-goal. Bayer has had a relationship with Onyx Pharmaceuticals for years now, however, and has never been interested in an acquisition, possibly because it doesn’t have a strong U.S. presence. Given that, it’s unlikely the German drug giant is suddenly going to be willing to enter a bidding war. The odds of a Bayer purchase are apt to be in the 30/70 area.
While talk of stock-pumping buyouts are fun, just because a company rejected a nice offer and has put itself up for sale doesn’t always mean other buyers are interested enough to trump the already-frothy bid.
In the same sense that excessively worried economists have predicted seven of the past four recessions, the market has predicted seven of the past four corporate acquisitions. It’s entirely possible no new suitor will emerge — at least not right now — with a projected price tag of anywhere between $140 and $200 per share. Many would-be buyers might want to wait on Europe’s approval of Kyprolis, which should be announced later this year.
With or without good news from the European Medicines Agency though, with the stock priced around $131 per share, ONXX is now priced at seven times its forecast 2015 revenue. Some biopharma acquisitions have commanded a bigger premium, but not many.
Odds are, we’re already pretty close to the maximum price the market will bear for ONXX. The target prices near $200 are very long shots.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.