Why the Interest?
If $120 a share significantly undervalues the company, according to Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX), then what is a fair price? This question can only be answered when you understand the fundamental upside of Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). 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 Pharmaceuticals, Inc. (NASDAQ:ONXX) 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 Pharmaceuticals, Inc. (NASDAQ:ONXX) 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, Inc. (NASDAQ:AMGN), Pfizer Inc. (NYSE:PFE), Novartis, and AstraZeneca plc (ADR) (NYSE:AZN).
While Pfizer Inc. (NYSE:PFE) 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 Inc. (NYSE:PFE)’s drug Inlyta also competes with Onyx’s Nexvar. Therefore, I don’t see what Onyx has that Pfizer Inc. (NYSE:PFE) wants. Pfizer Inc. (NYSE:PFE) already has a presence in all of Onyx’s markets.
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, Inc. (NASDAQ:AMGN) 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 Pharmaceuticals, Inc. (NASDAQ:ONXX) drama is far from over, and that more gains are to come.
The article Will This Biotech Bidding War Lead You to Larger Gains? originally appeared on Fool.com and is written by Sherrie Stone.
Sherrie Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sherrie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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