Is This Biopharmaceutical Stock Still a Buy?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Onyx Pharmaceuticals (NASDAQ: ONXX) has recently experienced a significant jump of nearly 51.3% in only one trading day from $86.82 per share to $131.30 per share. The share price jump was due to the news that the company had received a $120 a share offer from Amgen (NASDAQ: AMGN) but rejected it as Onyx considered the offering price “significantly undervalued” the company. Let’s take a closer look to determine whether or not Onyx is a good buy after its significant rise of its stock price.

Growing revenue but fluctuating net income

Onyx is considered a biopharmaceutical company with two franchise platforms including kinase inhibition and proteasome inhibition. The kinase inhibitor franchise includes several products including Nexavar for liver and kidney cancer, Stivarga for metastatic colorectal cancer and advanced gastrointestinal stromal tumors, while the proteasome inhibitor franchise has Kyprolis for the treatment of patients with multiple myeloma.

In the past five years, Onyx has managed to grow its revenue, from $194 million in 2008 to $362 million in 2012, while the net income has fluctuated in the range of -$188 million to $76 million. In 2012, it generated a loss of $188 million with the negative operating cash flow of $230 million and the negative free cash flow of $242 million. The loss in 2012 was caused by much higher R&D and SG&A expenses.

What I like about Onyx is its conservative capital structure. As of March 2013, it had nearly $1.16 billion in equity, $731 million in cash and short-term investments, and only $178 million in long-term debt. It recorded a high level of goodwill and intangibles of $618 million. Thus, the tangible book value stayed at $542 million. At $131.30 per share, Onyx is worth 9.50 billion on the market. The market values Onyxx at as high as 14.5 times its sales. This valuation could be considered extremely high, compared to the valuation of Amgen and Celgene (NASDAQ: CELG).

Are Amgen and Celgene better picks?

Amgen is trading at $97.50 per share, with the total market cap of $73.10 billion. The market values Amgen at only 4.24 times its sales and 10.87 times its trailing EBITDA (Earnings before interest, taxes, depreciation and amortization). The EBITDA multiple valuation of Onyx is not valid due to its negative EBITDA.

For the full year 2013, Amgen expected to deliver revenue in the range of $17.8 to $18.2 billion, with the adjusted EPS staying in the midpoint of $7.05 to $7.35 per share. In 2015, Amgen estimated that its revenue would reach at least the upper end of $16-$18 billion while its adjusted EPS could be at least $8 per share.

The company has been preparing itself to enter the Japanese market. The Japan entrance could be established through the strategic alliance to commercialize the company’s projects in Japan with the first potential commercial launch estimated to be as early as 2016.

Investors might be excited with its plan to return more than 60% of its adjusted income to shareholders. At the current trading price, Amgen offers investors dividends with a yield at 1.9%.

Celgene also has a much lower sales valuation than Onyx. Celgene is trading at $118.90 per share, with the total market cap of $49.60 billion. The market values Celgene at 8.56 times its sales and 20.55 times its trailing EBITDA. Celgene is the global biopharmaceutical company focusing on cancer and immune-inflammatory related diseases with several famous brands including REVLIMID, VIDAZA, ABRAXANE and ISTODAX. Most of its sales, $3.77 billion, or 68.5% of the total sales, were generated from REVLIMID products while VIDAZA ranked second with $823.2 million in sales in 2012.

For the full year 2013, Celgene expected to grow its revenue by nearly 11% to $6 billion, while REVLIMID sales expected to increase by 10% to the range of $4.1 to $4.2 billion. Its adjusted diluted EPS iss estimated to come in at $5.55 to $5.65 per share, 14% higher than the adjusted diluted EPS in 2012.

What investors like about Celgene is its consistent share buybacks. In the first quarter 2013, the company has spent more than $400 million to buy back 4.2 million shares. Recently, Celgene authorized an additional share repurchase amount of $3 billion, in addition to the remaining $834 million under existing share buyback program. The total share repurchase would be more than $3.8 billion, representing a high potential yield at 7.7% for its shareholders.

My Foolish take

Onyx, despite quite an expensive price-to-sales ratio valuation, could get into the bidding war, which might push up its stock price even further. According to Barron’s, Michael King, JMP Securities analyst, “Onyx is in the hands of the arbs right now. Celgene remains a name for a fundamentalist.” He expected that Celgene might reach $148 per share in the next year, while Onyx could experience a nearly 10% rise to $144 per share.

Consequently, Onyx might be considered an opportunistic play on the potential future bidding between pharmaceuticals giants while Celgene and Amgen are better picks with their lower valuations, more established revenues and profits, and the potential to return more cash to shareholders with more dividends and increase share repurchases.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Celgene. 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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