Onyx Bidding Wars: Who Would Be the Best Suitor?

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A lot of activity is happening in the biotech industry which would change the dynamics of the large cancer related drug makers.

Recently, Amgen (NASDAQ: AMGN) made a surprisingly low offer to acquire the pharmaceutical company Onyx (NASDAQ: ONXX). Amgen offered $120 per share or roughly $10 billion. Onyx rejected the offer right away and is looking for other buyers now. With a successful cancer drug in the market and significant potential for future growth, Onyx is looking for buyers who would truly value its potential. This opens up opportunities for other cancer related drug makers like Celgene (NASDAQ: CELG) and Gilead (NASDAQ: GILD) to see if they want to expand their market share by acquiring Onyx. Let’s analyze which of these companies will benefit most by acquiring Onyx.

Onyx’s current potential

Onyx is one of the leading biotech companies in US with three successful drugs in its arsenal.

Its main revenue driver is Kyprolis which is solely owned by the company and treats multiple myeloma cancer. The compound of the drug for relapsed and refractory therapy has been approved by FDA. The compounds for other focus areas are in Phase III stage of clinical trials. The other drugs include Nexavar, which treats unresectable liver cancer and advanced kidney cancer, along with Stivarga which is a drug for mCRC and GIST monotherapy.

Onyx’s Nexavar is co-developed and co marketed with Bayer from which the company gets 50% share in profit whereas Stivarga is a Bayer compound from which Onyx receives only 20% in royalty fees on net sales. The company also has pipeline products like oprozomib and palbociclib which are investigational compounds -- palbociclib is a Pfizer compound from which Onyx will receive 8% royalty on its net global sales.

Celgene

Celgene is one of the most profitable growth companies in the current US biotech market.

The company has six approved drugs for the treatment of hematology, three for oncology (treating breast, lung and pancreatic cancers) and one for inflammation and immunology. Along with that, it has a huge number of drugs in phase I, phase II and phase III trials  along with others in pre-clinical and discovery stages.

The addition of Kyprolis may not be as beneficial to the company as it has a large range of drugs of its own in that segment of cancer treatment. Celgene has recently inked a deal with a German drug company MorphoSys to co-develop an oncology drug MOR202 for treatment of multiple myeloma and other forms of cancer. The company has decent revenue growth and its current net margins stand at 25.3% against the industry average of 13.7%. The company’s Return on Equity stands somewhere around 24.8% against the industry average of 13.5%.

Thus by just looking at the solid financial performance of the company, its brilliant growth prospects through its own pipeline products and its partnership with MorphoSys, I would give Celgene a buy even without the acquisition of Onyx.

Gilead

Among the giants of the biotech market, Gilead is a prominent name. Right now its main focus is on HIV/AIDS treatment components whereas oncology and inflammation are among its new focus areas.

The company's leading oncology drug is idelalisib which would be used for chronic lymphocytic leukemia once it gets the FDA approval. Gilead is working on its oncology focus area with a lot of partnerships and also through the acquisition of YM BioSciences. It may find the inclusion of Onyx somewhat valuable because it can open a new area of focus for multiple myeloma. Now it depends on Gilead whether it wants to add up a new focal point or it wants to stick to leukemia. On financial grounds, the company is a charmer. It has a net margin of 28.9% and ROE of 32.9%. Both of these figures are much greater than what Gilead’s competitors report. Like most of the analysts, this company is a strong buy even without the acquisition of Onyx.

Let’s analyze the implications for Amgen of letting go of this opportunity to buy Onyx.

Amgen

Amgen seems to have some serious problems ahead. Investors are now rating it as a low growth company because it is not too close to achieving a breakthrough.

The financials of the company are strong along with the profitability margins, but on future prospects its revenues might get jolted because its best sellers. Neulasta and Neupogen would lose their patent protection by 2015. The company still has not been able to get its drugs related to cancer treatment approved by FDA. I believe Amgen needs Onyx most because its current situation is not attractive.

Final assessment

I think Amgen should reconsider and should offer a better quote to Onyx. Onyx has a decent growth potential and would help Amgen in its troubled times. Amgen needs the revenue base of Kyprolis as its main drugs lose patent protections soon. Even though Amgen is still among the better investment options,with the inclusion of Onyx it would manage to remove the stigma placed by investors of being a slow growth company and I would consider Amgen a strong buy if its deal with Onyx materializes. 


usman iftikhar has no position in any stocks mentioned. The Motley Fool recommends Celgene and Gilead Sciences. 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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