Fade The Huge Pop In Onyx Pharmaceuticals

Jul. 9.13 | About: ONYX Pharmaceuticals, (ONXX)

Onyx Pharmaceuticals Inc. (NASDAQ:ONXX) is a biopharmaceutical company that develops and commercializes therapies that target molecular mechanisms that cause cancer. It got a huge pop on June 30, 2013, when it received a $120/share unsolicited buyout bid from Amgen (NASDAQ:AMGN). On June 28, 2013 -- a Friday -- ONXX stock closed at $86.82/share. On July 1, 2013 -- a Monday -- it closed at $131.33/share. ONXX's supplemental New Drug Application (sNDA) to the FDA and its simultaneous application to the EMA (European Medicines Agency) for marketing authorization for Nexavar use to combat thyroid cancer on July 1, 2013, probably added to the lift in the price of ONXX's stock. It has subsequently risen to a current price of $135.31 as of this writing. This is down from its recent high of $136.87/share. The current price is approximately a 56% pop from its June 28, 2013, closing price.

The continued rise of ONXX has likely been due to heavy speculation that ONXX will receive a still higher buyout bid(s). It rejected AMGN's $120/share bid ($8.7B) as too low. However, it is unclear that such bids will be forthcoming. Equity research firm ISI group said that the $120/share offer from AMGN would be profitable for AMGN only if it achieved 75% cost savings in sales and administration and 25% cost savings in research and development. ISI Group seemed to think that was impossible. In other words, the $120/share bid from AMGN was fiscally irresponsible in their view. Given that, a higher bid from AMGN seems unlikely.

Some think Bayer (OTCPK:BAYRY), ONXX's partner in development and sales, would be a better fit. However, it has said it likely wasn't interested because it did not have a strong enough presence in the U.S. Plus its royalty deal with ONXX represents much less risk. ONXX may realize the potential some see for it. On the other hand, it may not. Plus, its costs have been increasing. Non-GAAP research and development expense was $88.8 million in Q1 2013 vs. $78.7 million in Q1 2012 (or +12.8%). Non-GAAP selling and general and administrative costs were $66.5 million in Q1 2013 vs. $34.1 million in Q1 2012 (a +95% increase). Other expenses are climbing, too.

To pay for this, ONXX's three biggest drugs are Nexavar (a liver and kidney cancer drug), Kyprolis, and Stivarga (colon cancer drug). Kyprolis is a new drug to combat multiple myelomas. Analysts believe sales of Kyprolis could reach $3B annually. They believe annual sales of Nexavar and Stivarga could reach $1.4B and $1B respectively. However, sales from these drugs are far from those goals currently. Q1 2013 sales of Nexavar were $70.3 million, which was down from $72.0 million in Q1 2012. There was weakness in European sales. Kyprolis Q1 2013 sales were $64.0 million; and Stivarga Q1 2013 sales were only $9.2 million. This amount of sales won't make ONXX hugely profitable. The numbers don't add up.

The analysts' expectations are quite good though, although a bit speculative, especially given the actual fall in Nexavar sales year over year for Q1 2013. Analysts expect ONXX's revenues to reach $624 million in FY 2013, $881 million in FY 2014, and $1.2B in FY 2015. This is impressive growth, but it is again only estimates. Estimates can end up being far from reality. Given the recent downward trend in global economic growth estimates, analysts' estimates may turn out to be far from reality.

The IMF cut its world economic growth estimates by -0.2% for FY 2013 (to +3.1%) and FY 2014 (to +3.8%) on July 9, 2013; and this is just a continuation of a downward trend in estimates. It cut its estimates for U.S. economic growth to +1.7% in FY 2013 and +2.7% in FY 2014. There are numerous reasons to believe that further cuts will be forthcoming later this year. The article "10 Reasons To Beware This Market Short And Long-Term" provides a brief synopsis of why investors should be worried.

About +$10 in the current price pop is probably due to the submission of the supplemental NDA for Nexavar for thyroid cancer. Often this pop disappears after the application announcement until actual approval is acquired. In other words, NDA submission announcements often lead to stock price pops and fades.

AMGN has now been told by ISI Group that it effectively overbid for ONXX. It doesn't seem likely to raise its bid anytime soon. Other companies may be even worse fits. This means that ONXX's stock price will likely fade in the near term. It could even return to its approximate $87/share value (or lower if there is a significant overall market sell off). This means that ONXX is a Sell currently. For aggressive traders it may be a good short.

No company is likely to want to bid on ONXX when its stock price is far above a price ($120/share) that the ISI Group thought was uneconomical for AMGN and most buyers. It seems virtually a given that ONXX's stock price must fall to the $120/share level or below in the near term. It may fall far below that. If the world economy weakens significantly, which it seems to be doing, the $120/share bid by AMGN may never be equaled, much less exceeded. ONXX could be just another stock that didn't take a high bid at the right time. ONXX has no P/E, and it has a forward P/E of 225. It has an analysts' average next five years EPS growth estimate per annum of 44.40%. This is good, but the estimate would fall dramatically in a world economic slowdown, which seems to be happening.

Insiders have only been selling this stock this year. In the last six months, they have sold -26.3% of their shares. Institutions have been selling too to a lesser degree. This is not the mark of a stock that is going to skyrocket in the near future. It instead indicates that the 9.50% short interest (as of June 14, 2013) may have significantly added to the recent upward push of the stock price. Many of the shorters who covered recently seem sure to get back in at the currently much higher stock price. They may just have been waiting to see the upward momentum disappear. That seems to have happened. ONXX is a Sell at its currently far elevated price.

This two-year chart of ONXX provides some technical direction for this trade:

Click to enlarge

Both the slow stochastic sub chart and the RSI sub chart show that ONXX is at overbought levels. The main chart shows that ONXX's stock price is far above both its 50-day SMA and its 200-day SMA. When this happens a stock usually falls back toward those two SMAs in the near term. A new buyout offer might throw a wrench in this logic, but the ISI Group's analysis argues against a further offer at this time. The weakening U.S. and global economies argue against a higher offer at this time too. This leaves investors with technicals; and technicals tell investors that ONXX is a huge Sell.

Yes, it does have a good pipeline for further new drugs. However, as mentioned above, its R&D costs are increasing; and not all of its new drug candidates may be successful. In fact new drug candidates are historically very speculative. Prudent investors will sell now. If they like the stock, they can buy it back when it drops. The risk on ONXX no longer justifies the potential reward. ONXX could drop to $88/share or below quickly. A higher buyout offer would likely only be marginally higher. Given ISI Group's comments, I would not expect anything above $135/share within the next six months, if one comes at all. This means you might get the current stock price if there is further good news (0% gain). Alternatively, you might lose -35% or more of your current value if you do not sell now.

Cramer has an apt saying, "Bulls make money. Bears make money; but pigs get slaughtered." Don't be a pig. It's time to sell. For aggressive traders it may be time to short. If you want to limit your possible losses due to a possibly higher buyout offer, you may want to use put options or options spreads.

Note: Some of the fundamental financial information above is from Yahoo Finance.

Disclosure: I am short ONXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.