Onyx at High Seen Poised to Reap 40% More in Any Takeover

Onyx CEO Tony Coles
N. Anthony Coles, chief executive officer of Onyx Pharmaceuticals Inc. Photographer: Jeremy Bales/Bloomberg

Onyx Pharmaceuticals Inc., which surged to a record last week, is poised to hand shareholders 40 percent more after a regulatory panel’s support for a cancer treatment heightened its allure as a takeover target.

U.S. Food and Drug Administration advisers said on June 20 that the benefits of Onyx’s medicine carfilzomib outweigh its risks, boosting optimism that the blood-cancer drug will gain approval as soon as next month and prompting the stock’s biggest gain in more than five years. Helped by sales from the new treatment, analysts now estimate Onyx’s revenue will more than double by 2014, four times the median growth rate of biotechnology companies with a market value greater than $1 billion, according to data compiled by Bloomberg.

With sales of carfilzomib projected to reach as much as $2 billion a year, Deutsche Bank AG said the South San Francisco, California-based company could attract Bayer AG, which already markets a cancer treatment with Onyx, and other pharmaceutical companies facing competition from generics as drug patents expire. Takeda Pharmaceutical Co., which is pursuing acquisitions, and Celgene Corp. may also be interested, according to Tullett Prebon Plc. Onyx could command $6 billion in a takeover, about 40 percent more than the company’s current market value, Stifel Nicolaus & Co. said.

The FDA panel’s support “definitely does make Onyx a lot more attractive” as a takeover target, Navdeep Singh, a New York-based analyst at Deutsche Bank, said in a telephone interview. “The market’s indicating that. This drug is really attractive. It’s a good tack-on to a sales force that is already selling to the same doctors.”

Cancer Drugs

Danielle Bertrand, a spokeswoman for Onyx, said the company doesn’t comment on market speculation when asked about the possibility of a takeover.

Onyx, founded in 1992, is a biopharmaceutical company focused on developing cancer treatments. The company’s only approved product at present is Nexavar, a kidney-and-liver-cancer drug it markets in collaboration with Bayer. Globally, Nexavar sales reached $1 billion last year, with Onyx recording $287 million in revenue from the medicine, according to a filing. Onyx, the sole developer of carfilzomib for treating the deadly blood cancer multiple myeloma, is also working with Bayer on a colorectal-cancer therapy called regorafenib.

The company was exploring options including a potential sale process last year, two people familiar with the situation said in November.

Stock Surge

Onyx last week soared 43 percent, the most since February 2007, after the FDA panel voted unanimously to recommend carfilzomib for approval. The stock reached an intraday high of $67.29 on June 22 and closed at $65.19 yesterday. Before the vote, Onyx had gained 1.4 percent this year.

Today, Onyx gained 3 percent to $67.12, the third-biggest gain among 97 stocks in the Russell 1000 Health Care Index.

If approved by the FDA, which is scheduled to make a decision as soon as July 27, carfilzomib’s annual sales could reach $684 million in 2016, according to the average of six analysts’ estimates compiled by Bloomberg as today. That would exceed Onyx’s entire revenue last year of $447 million. About 50,000 people in the U.S. are living with multiple myeloma and 20,000 new cases are diagnosed each year.

Carfilzomib is “a pretty unique asset” that increases Onyx’s allure as takeover target, Sven Borho, general partner of New York-based Orbimed Advisors LLC, which owns 1.65 million Onyx shares, said in a phone interview. “All of the big companies, all of the big pharmas, all of the emerging companies like the big Japanese companies trying to get into this market, everybody wants to be in the oncology space.”

Growth Rate

Analysts project Onyx’s total revenue will increase more than 108 percent between 2012 and 2014, according to forecasts compiled by Bloomberg. That compares with a median estimated growth rate of 24 percent among global biotechnology companies with a market capitalization greater than $1 billion, and an average projected growth rate of 45 percent for the group, the data show.

Stephen Willey, an analyst at Stifel Nicolaus in New York, said Onyx could be worth $6 billion to an acquirer, more than 40 percent higher than its current market value of $4.2 billion, based on the sales multiples paid by acquirers in recent oncology deals.

Deutsche Bank’s Singh late yesterday boosted estimates for peak annual sales of carfilzomib to at least $2 billion from $1.5 billion. The drug increases Onyx’s allure as a takeover target for pharmaceutical companies such as Bayer that have an established sales force in oncology and face the loss of patent protection on some of their own medicines, he said.

Heightened Need

Bayer is among large pharmaceutical companies whose patents will expire on a combined 104 key medicines by the end of 2016, according to data compiled by Bloomberg.

“It kind of heightens the necessity to acquire smaller companies to plug those patent expirations,” said Singh. He said Onyx could fetch as much as $90 a share in a takeover given approval for carfilzomib, up from an earlier estimate last week of as much as $76 a share.

Rosemarie Yancosek, a spokeswoman for Leverkusen, Germany-based Bayer, declined to comment when asked if the company was interested in pursuing Onyx.

While Bayer would be a logical buyer given its relationship with Onyx, Singh said the biotechnology company increased its appeal to other potential acquirers as well when it amended its collaboration agreement for Nexavar last year.

The amended agreement maintains Onyx’s profit-sharing, co-development and co-promotion of the drug with Bayer in the event that Onyx is bought.

Celgene may be a potential bidder for Onyx because it could use the same sales force that markets its current multiple-myeloma drug to sell carfilzomib as well, said Ling Wang, a New York-based analyst with Summer Street Research Partners.

Cost Efficiencies

“It’s easy to see the leverage, the synergy they could achieve by marketing three potential backbone therapies for multiple myeloma,” Wang said in a phone interview.

Greg Geissman, a spokesman for Summit, New Jersey-based Celgene, declined to comment when asked whether the company was interested in Onyx.

Takeda also could make sense as a buyer because it needs growth opportunities and also has experience with blood-cancer drugs, said Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon. Takeda, Asia’s biggest drugmaker, is losing patent protection on its best-selling diabetes treatment Actos. The Osaka, Japan-based company in September bought Swiss drugmaker Nycomed for 9.6 billion euros ($12 billion).

‘Pretty Aggressive’

Takeda has been “pretty aggressive not only in acquisitions but because in Japan they have a zero cost of capital and need to grow,” Shah said in a phone interview. “They know that if this is for real and from the FDA this is positive, they don’t mind paying up for it.”

The Bank of Japan kept its benchmark interest rate between zero and 0.1 percent this month as it grapples with an economy that has contracted in three of the past four years, according to data compiled by Bloomberg.

Elissa Johnsen, a spokeswoman for Takeda, declined to comment on whether the company was seeking to pursue Onyx.

While last week’s FDA vote was positive for Onyx, the agency isn’t obligated to follow the panel’s recommendation, and pharmaceutical companies may not want to bid on Onyx before the regulator makes its decision, Stifel’s Willey said.

Marketing Plans

If the FDA doesn’t approve the drug next month, it may not be on the market until 2014 after further studies are conducted. Before the positive panel recommendation, Robert W. Baird & Co. analyst Chris Raymond said in a note to clients he didn’t expected carfilzomib to be approved until then.

Even if it is approved next month, Onyx may decide to stay independent and sell carfilzomib itself rather than accept a takeover offer. Chief Executive Officer Tony Coles said during a conference call last week that the company is prepared to market the drug if it’s cleared for sale next month.

“We have done everything necessary to this point to be ready for launch, short of hiring the sales force,” Coles said. “It is certainly our intent to be prepared for a launch very shortly after the approval and to do that as quickly as we possibly can, with an appropriate number of sales reps and all of the management infrastructure and marketing planning.”

Onyx Appeal

Potential acquirers that projected the company was likely to win approval for carfilzomib could have saved at least $1 billion by bidding before last week’s run-up in the stock.

Still, some drugmakers may be willing to pay a premium for Onyx now that the FDA panel’s vote made approval of carfilzomib more likely, Tullett Prebon’s Shah said.

Orbimed’s Borho said Onyx has appeal that goes beyond carfilzomib. The company is seeking to expand Nexavar for use in treating other cancers, while its experimental treatment regorafenib has promise.

“It’s not just a one-product company,” Borho said. “There are not many other companies out there like it. For investment bankers, if they pitch to their clients about a possible target, for sure Onyx is on every single one of their lists.”

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