Coles Presses Home Onyx's Advantage

| About: ONYX Pharmaceuticals, (ONXX)
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Tony Coles has played his hand nearly perfectly since taking the reins as chief executive of Onyx Pharmaceuticals (NASDAQ:ONXX) five years ago, slowly consolidating the biotech’s position and turning it into a self-sufficient business that some logically see as a must-have asset.

His latest stroke of genius was to complete a $364m equity raise when Onyx was hardly short of cash, and he has now pressed home his advantage by rejecting a $120-a-share takeover proposal from Amgen (NASDAQ:AMGN) that would ordinarily have been jumped at. In stark contrast to many, Onyx is not desperate to sell itself – something investors who bid the stock up beyond $130 this morning should bear in mind.

True, the company cites other “expressions of interest” and has now formally invited higher bids, but this actually means little coming from a business long seen as ripe for takeover. One wonders whether any announcement would have been forthcoming from Onyx had the Amgen approach not been leaked to the Financial Post on Friday.


A takeover by Amgen makes sense – just about – given the big biotech company’s position in oncology, which could certainly do with the addition of Onyx’s Stivarga and Nexavar, not to mention its star asset, the multiple myeloma drug Kyprolis.

But whatever the strategic rationale, the central issue will be price, and $120 per share, equal to an equity value of just over $10bn, already looks heavy. On EvaluatePharma’s current consensus forecasts, for instance, Onyx has a basic valuation nearer $8bn.

Onyx: A simple valuation
Product 2018 in-market sales ($m) Peak in-market sales ($m) NPV ($m)
Kyprolis 1,686 2,524 6,298
Nexavar 1,427 1,449 718
Stivarga 598 690
20% royalty 405
Palbociclib 794 2,004
8% royalty 258
Net cash 553
TOTAL 8,232

Accordingly any acquirer has to take an especially bullish view of label expansions for Kyprolis and Nexavar, and of Onyx’s only significant R&D asset, the breast cancer project palbociclib, on which it gets an 8% royalty from Pfizer (NYSE:PFE). A buyer might also argue that Kyprolis would sell better in the hands of a bigger company, and would look to make severe cost cuts.

ISI Group’s Mark Schoenebaum, for instance, says that at $120 in cash the deal would be accretive to Amgen as long as cost savings of the order of 25% in R&D and 75% in sales and administration could be made.

But Amgen might be unable to make such savings given its lack of experience of selling a haematological cancer drug, for example. Onyx shareholders should probably not pin too much hope on Amgen increasing its bid.

Highly attractive

That said, their company does remain a highly attractive asset, having deftly positioned itself as one of the few biotechs in its valuation range with marketed products and a sales infrastructure.

It has achieved this thanks to an unusually high regulatory success rate, a litigation success against Bayer and the serendipity of seeing all this in the run-up to a near-unprecedented surge of U.S. biotech investor sentiment. Once the FDA made clear its favourable stance towards oncology – most recently at Asco – the die was cast.

Little wonder that Onyx felt able to reject an approach that carried a 38% premium and valued its stock 24% above its historic record price.

There are of course other potential bidders, not least Celgene (NASDAQ:CELG), which will likely want to consolidate a leading position in multiple myeloma that has been challenged by Kyprolis. There might also be interest from Johnson & Johnson (NYSE:JNJ), whose Velcade is another key player in the space. J&J and Celgene have both splashed out heavily on licensing deals to shore up their franchises (Event – Celgene aims to solidify Revlimid’s hold in multiple myeloma, July 1, 2013).

Pfizer, as a current partner, must also be seen as a candidate. On the other hand, Celgene’s longest-standing collaborator, Bayer, is unlikely to bid; the conservative German conglomerate has had plenty of opportunities – including when Onyx was worth a fraction of what it is now – without pulling the trigger, and tends not to buy out its partners (A chill pill for the Onyx buyout bulls, July 3, 2012).

Given Onyx’s strong cash position, fortified through January’s equity fundraising, Onyx can be certain to drive a hard bargain, and the biotech bubble has surely shown that nothing, however improbable, can be ruled out completely. But to bid above $120 will require a large company to put a remarkably bullish bet on a business with drugs whose markets are unlikely to be subject to huge upward revisions.

While Mr. Coles will be mindful of missing an opportunity that might not come around again in biotech’s current boom and bust cycle, he can at least rest assured that Onyx remaining independent is no bad thing.