Who Is the Best Suitor for Onyx?

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Cancer-drug maker Onyx Pharmaceuticals (NASDAQ: ONXX) recently rejected an $8.7 billion unsolicited acquisition offer from Amgen (NASDAQ: AMGN). Onyx also said that it is looking for potential suitors. The move has triggered speculations of a bidding war, sending the stock up 51.27% on Monday to $131.33.

Amgen had offered to pay $120 per share in cash, a 38.2% premium to Onyx’s closing price of $86.82 on Friday, June 28. However, Onyx CEO Dr. Tony Coles felt that Amgen’s bid significantly undervalued his firm.

Onyx has an envious product portfolio

Onyx makes cancer drugs that generate high margins. It has liver- and kidney-cancer drug Nexavar, colon-cancer drug Stivarga and the newly launched Kyprolis. Analysts believe annual sales of Kyprolis could reach $3 billion. The peak sales of Nexavar and Stivarga could reach $1.4 billion and $1 billion, respectively. While Nexavar is established in the market, the other two drugs are yet to reach their sales peak. Onyx also has several promising drugs in the pipeline.

Large pharmaceutical companies have been eyeing cancer drugs because they require small sales forces and are usually covered by medical insurers. The potential acquirer has to take a bullish view on the future sales of Nexavar and Kyprolis. Onyx’s breast cancer molecule palbociclib has also showed promising results. The company has licensed palbociclib to Pfizer, for which it would get an 8% global royalty when the product hits the market.

Amgen is desperate for acquisitions

Amgen plans to expand its business overseas and add new products to its portfolio as sales of its blockbuster drugs Aranesp and Epogen continue to decline. These two anemia drugs generated about $4 billion in sales in 2012. Moreover, some of Amgen’s major drugs will witness patent expiry starting 2015.

Amgen is planning to launch as many as six biosimilars by 2017. Kyprolis could complement Amgen’s product portfolio of cancer drugs and benefit from Amgen’s sales and marketing infrastructure. However, equity research firm ISI Group says that the $120-per-share share offer could work for Amgen only if it can attain 75% cost savings in sales and administration and 25% in R&D. That kind of cost savings looks impossible, given Amgen’s lack of experience in the hematological cancer market. And Onyx has already rejected the $120 offer, so raising the bid would put further pressure on Amgen. If you are an Onyx shareholder, you shouldn’t pin much hope on Amgen.

So, who is the right fit?

After the rejection of Amgen’s unsolicited offer, there have been reports that large pharmaceutical companies are gearing up to enter the bidding war. Large firms are trying to boost their product portfolio and add new drugs to their pipeline as their major drugs go off patent. But I believe Bayer (NASDAQOTH: BAYRY.PK) to be the best suitor for Onyx.

Of Onyx’s $362 million revenues in 2012, 80% came from two drugs, Nexavar and Stivarga, sold in partnership with Bayer AG. Onyx gets 20% royalty on the sales of Stivarga, and 50-50 profit split on Nexavar.

Bayer seems to be a logical choice. The German company has good relations with Onyx, and they have the same end-goal. Bayer has experience selling the two most important drugs of Onyx for years. It may want to forgo the royalty relationship and enjoy the full ownership of Nexavar and Stivarga drugs.

So far, the German company hasn’t been interested in the acquisition because it didn’t have a strong presence in the United States. But Bayer has acquired Schiff for $1.2 billion and Conceptus for $1.1 billion over the past 10 months to boost its U.S. presence. Gobbling up Onyx would further strengthen its position in the United States.

Bottom line

Onyx can drive a hard bargain, given its strong cash position of about $541 million. Analysts expect its revenues will reach $624 million in fiscal 2013, $881 million in 2014 and $1.2 billion in 2015. With such huge growth potential, offers may come from even unexpected companies. But I believe Bayer would offer great synergies.

If you are an Onyx shareholder, you can sell at current record-high levels, or you may continue to hold the stock hoping that it will get a better offer. But if you don’t have a position in the stock, I recommend you to wait and watch rather than jump into the buyout buzz. Yes, the company has an attractive product portfolio, but the current speculative spike poses the risk of a downside. What if the potential acquirers get reluctant to pay the kind of premium Onyx is expecting? Think about that and wait until you see a clear picture. 

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Vikas Shukla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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