Will This Biotech Bidding War Lead You to Larger Gains?

Sherrie 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) added 3% to its one-month 60% gains on Monday because of continued speculation of a buyout. Reportedly, four companies are prepping bids to acquire Onyx. What is a fair price for the company, and should you buy now?

Why the Interest?

If $120 a share significantly undervalues the company, according to Onyx, then what is a fair price? This question can only be answered when you understand the fundamental upside of Onyx. The company is an oncology-focused drug developer with three total FDA approved drugs.

Nexavar is used to treat common forms of kidney and liver cancer. Investors anticipate Nexavar’s approval in thyroid cancer as well, after it slowed the progression of the disease compared to placebo in a Phase 3 trial. Nexavar has peak sales potential of $1.2 billion and is co-marketed with Bayer.

Bayer and Onyx also market a colorectal cancer drug called Stivarga, but Onyx receives just 20% of net sales. The peak sales are estimated at only $500 million, but if the drug is successful in treating liver cancer, its sales could rise to more than $1 billion.

Onyx markets its multiple myeloma drug Kyprolis alone. Canaccord estimates that peak sales of this drug could reach $2.1 billion by 2020, an outlook consistent with other analysts' views.

Onyx could earn peak revenue of nearly $3 billion with these three drugs. Since Onyx’s pipeline is rather small, the company’s upside is tied to the upside of these three drugs. According to Deutsche Bank analyst Robyn Karnauskas, “you’ve probably missed the boat” in regards to Onyx. The analyst downgraded the stock from buy to hold with a $140 (buyout) price target -- but is he right?

Who’s in the Running?

There are a lot of companies reportedly attempting to acquire Onyx: Amgen, Pfizer, Novartis, and AstraZeneca.

Amgen (NASDAQ: AMGN) made the initial $120 offer that Onyx rejected. Therefore, Amgen is the only company with any action in the Onyx sweepstakes, and Amgen really needs Onyx. Amgen lacks growth, and Onyx could give Amgen this growth driver. Moreover, Onyx would make Amgen an instant leader in treating both blood-based and solid tumor cancers.

Pfizer (NYSE: PFE) is believed to be in the Onyx sweepstakes because of its competing products. Pfizer’s renal cancer drug Sutant has fallen short of revenue expectations during the last three quarters, and Onyx’s Nexavar is Sutant’s main rival.

While Pfizer is presumed to have interest because of Nexavar, I think the deal is unlikely. The renal cancer space itself is getting congested, with six targeted drugs in the space. Pfizer’s drug Inlyta also competes with Onyx’s Nexvar. Therefore, I don’t see what Onyx has that Pfizer wants. Pfizer already has a presence in all of Onyx’s markets.

Novartis (NYSE: NVS) has reportedly been interested in acquiring Onyx for the last three years, yet has not. Novartis was probed about the possibility of acquiring Onyx on its earnings conference call last week. Unsurprisingly, Novartis wouldn’t disclose its interest. However, speculators believe that Novartis is seeking growth through acquisitions, and with Novartis’ cancer drug presence and their lack of growth, they finally might be interested in acquiring Onyx.

AstraZeneca’s (NYSE: AZN) CEO Pascal Soriot has already said he wants to focus on core research areas like cancer. Therefore, investors assume Onyx is the acquisition target. AstraZeneca does have a large hole left by the generic introduction for its blockbuster schizophrenia drug Seroquel, and its ulcer drug Nexium, which will expire next year. In 2010, Nexium and Seroquel combined for more than $10 billion in revenue. Therefore, Onyx’s revenue potential could be attractive to AstraZeneca.

How High Could the Bidding Go?

Bristol-Myers and AstraZeneca joined forces to purchase the diabetes drug maker Amylin Pharmaceuticals for $7 billion. Fellow Fool Sean Williams found that Amylin’s lead drug, Bydureon, had peak sales of just $1.5 billion, which represented a price/sales ratio of 4.6. 

If Deutshe Bank is right with their $140 price target, then Onyx would sell for $10.2 billion, or a price/sales ratio of 3.4. This ratio would be significantly less than the premium of Amylin.

With the exception of Pfizer, I think any of the noted companies could acquire Onyx. I also think there are several dark horses such as Gilead or Celgene that might bid. Celgene is already a cancer research leader. Gilead's anti PD-1 cancer therapeutic had a good showing at this year's ASCO. Gilead could build on its cancer-fighting pipeline.

With that said, I think it is highly unlikely that Onyx is sold for 3.4 times peak sales. In fact, I think Onyx could easily see the same 4.6 times peak sales that was paid for Amylin. Therefore, I think a price closer to $175 is reasonable and that you might want to explore a potential investment as big pharma goes to war to acquire Onyx.

In regards to who acquires Onyx, I think Amgen wants the growth badly. Amgen has already tested the water, is the only company to make a public bid, and now it’s time to jump in. Amgen has over $20 billion in cash, making it a rather uncomplicated acquisition. Nonetheless, I think the Onyx drama is far from over, and that more gains are to come.

Sherrie Stone 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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