Amgen Puts Onyx Pharmaceuticals In Play

By Stephen D. Simpson, CFA | July 02, 2013 AAA

Funny how an unsolicited bid will suddenly alert Wall Street to the value of a strong biotech.

While Onyx Pharmaceuticals (Nasdaq:ONXX) was generally a pretty well-regarded biotech, the news over the weekend that Amgen (Nasdaq:AMNG) had made a bid, and that management was now soliciting higher offers, has sent the shares rocketing up in pre-market trade. Given its solid collection of oncology/hematology assets, it won't be surprising if Onyx draws a crowd to its bargaining table before declaring a winner.

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Good Reporting Triggers A New Era
Financial Post's Barry Critchley offered quite the scoop late Friday when he reported seeing a letter wherein Amgen made a formal bid for Onyx in the amount of $8.7 billion or $120/share. Onyx ultimately acknowledged the bid, but declared it insufficient and that the company was now going to begin an active sales process. To that end, it's worth noting that Onyx's press release acknowledging Amgen's bid made it clear that the company has received other indications of interest.

Who Will Step Up?
Onyx has what almost every pharmaceutical company wants today – a collection of oncology/hematology assets that are of good quality, relatively early in their commercial life-cycle, and likely to offer solid growth in the near term. Accordingly, I don't think Onyx management or investors need to worry about a lack of interest in acquiring this company.

Maybe one of the first companies to consider in any auction process is Bayer – the company's OUS partner for Nexavar and Stivarga. I'm skeptical of the potential that Bayer will get involved. Bayer is pretty rigid when it to return on investment and debt targets, and a bid into the $130s or higher would seriously challenge both of those. While Bayer might like to have the other 50% of profits from Nexavar and Stivarga, Bayer has relatively little direct presence (or assets) in the U.S. and would likely need to do further deals to really leverage a new U.S. presence.

SEE: Evaluating Pharmaceutical Companies

Amgen certainly has to be a name high on the list of potential acquirers. Biotech M&A has long been a market where “if at first you don't succeed...” is very relevant – just because Onyx management didn't like the initial bid doesn't mean the door is closed to a higher offer. Of all the companies potentially interested in Onyx, Amgen may be among the most motivated – Amgen is trying to build an oncology franchise and is presently quite weak in terms of growth, and Onyx would help both issues.

Almost any large pharmaceutical company with a presence in oncology and the US could find some use for Onyx. Novartis (NYSE:NVS), Bristol-Myers (NYSE:BMY), Pfizer (NYSE:PFE) could all fit the bill, and I wouldn't rule out AstraZeneca (NYSE:AZN) which, like Amgen, badly needs near-term growth. I'm also surprised there isn't more initial buzz on Roche (Nasdaq:RHHBY), given the company's huge presence in oncology, its need (arguably) to diversify its oncology assets, and its willingness to pay up for assets.

Last, and certainly not least, are some “mid-majors” with solid oncology footing – Celgene (Nasdaq:CELG) and Gilead (Nasdaq:GILD). Both are strong in hematology, which makes me wonder about the extent to which Onyx would really improve the companies' growth profile over the long-term.

How High Will The Bidding Go?
Although I think Onyx is probably worth about $110 to $125 on its own, the company will clearly go for more than that in a public sale process. Not only do strategic buyers have the opportunity to take out SG&A expenses and leverage complimentary R&D assets, but a strategic buyer may also be able to enhance the long-term revenue potential of Onyx's marketed drugs and pipeline. As such, I could see the price going above $140 and still offering some value for the right buyer.

The Bottom Line
If you don't own Onyx already, this news doesn't really create an investment opportunity. On the other hand, traders may find that trying to play the spread between its open on Monday morning and the eventual deal price is worthwhile. If I were an Onyx shareholder, I'd definitely sit tight – it seems highly improbable to me that the company won't get multiple bids, and I think the odds of the company overplaying its hand such that all of the bidders walk away are relatively low.

Disclosure – As of this writing, the author owns shares of Roche.

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