For the second day in a row, the hot topic in the market is the bidding war for Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). After rejecting Amgen, Inc. (NASDAQ:AMGN)’s $120 a share offer, some analysts are predicting the bidding war could reach $160. While many have come to the defense of Amgen, saying that $160 is too much, I think we should look back on recent history as proof that this acquisition could be wise.
The Benefit Of Billions In Biotechnology
Nov. 21, 2011, University of Michigan business professor Erik Gordon stated that
Gilead is paying too much, paying all in cash, borrowing money to do it, diluting earnings for three or more years — to get a drug candidate or two in an area that was supposedly a core strength at Gilead.
He added, “You can do a lot of research for $11 billion.”
The above was in response to the massive acquisition that Gilead Sciences, Inc. (NASDAQ:GILD) paid to become a leader in the emerging hepatitis C space. The acquisition of Pharmasset was important for Gilead because it gave the company an oral drug in a market dominated by vaccines, a $20 billion market by 2020.
While Gordon was obviously wrong, he wasn’t the only one who shared these feelings. On that day, shares of Gilead Sciences fell 9.1% to $36. Today, shares sit at $52, and many believe it has more upside than any large pharma in the space.
You might ask why? The company has $10 billion in annual sales, and that “overpriced” acquisition is about to produce top-line growth of 40% over the next few years.
$160 Might Not Be That Bad
Pharmasset’s lead candidate, the oral hepatitis C drug PSI-7977, has peak sale potential of $4 billion. With other drugs in the pipeline, Gilead paid about two times peak sales potential for Pharmasset.
Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) at $160 would be valued at $11.6 billion. The company has three different FDA-approved cancer drugs, two of which partnered with Bayer. The company also has a small pipeline that many expect to expand in the coming years.
The consensus is that Onyx products combined could create peak sales of $4.5 billion. Therefore, if it’s acquired for $160 a share, the acquirer would be paying 2.5 times peak sales. While this is more expensive than what Gilead paid for Pharmasset, it is still in the same realm.
Who’s In The Running?
As you can see, Gilead’s acquisition of Pharmasset has become a blessing, creating optimism and excitement in shares of the company. In an industry that is struggling with new generic drug introductions, these exciting acquisitions might be expensive, but do provide a spark.
With that said, the companies who are reportedly in the hunt to acquire Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) in the bidding war are Pfizer, Novartis, Bayer, AtraZeneca, Eli Lilly, and of course Amgen, Inc. (NASDAQ:AMGN). While all of these companies would be likely suitors due to the oncology pipeline expansion that Onyx would create, I think Gilead Sciences is yet another dark horse that might make a move.
Gilead Sciences has already proven that it is more than willing to make large offers, and after a one-year 100% gain, there is a lot of value for its stock to be used in a potential deal. The company has almost $2 billion in cash, has paid off more than $1.5 billion in debt over the last year, and has the financing available to make such an offer. After seeing the long-term performance of its stock – following the Pharmasset buyout – I wouldn’t be surprised if it arises as a lead bidder.
In my opinion, Amgen, Inc. (NASDAQ:AMGN) will also increase its bid, and will have no problem raising its offer. We often see companies in biotechnology make low ball bids at first to test the waters, and then come back with larger offers.
Amgen, Inc. (NASDAQ:AMGN) is one of the only companies that really needs Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). Amgen has very few growth opportunities with a dwindling pipeline, and only one Phase 2 blood cancer product in its pipeline. Amgen, Inc. (NASDAQ:AMGN) currently trades at 4.20 times sales, and an acquisition of Onyx could boost its top-line by nearly 30% over the next five-six years; which could result in a higher multiple.
Final Thoughts
In the past, I have wrote about not chasing the rumors of an acquisition. I have shown how it almost always ends badly for retail investors, but in this case, we already know that Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) is for sale and that there are interested buyers.
At $134 a share, Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) could see a 20% premium on an acquisition, which could be a very nice short-term return.
Then, it also benefits large pharma, as the acquisition of Pharmasset proves the level of optimism that a high-profile big revenue generating acquisition can create. Thus, in this one particular case, an acquisition is good for all parties involved: the buyer and the seller!
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences.
The article Is This A Good Acquisition For All? originally appeared on Fool.com.
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