A chill pill for the Onyx buyout bulls

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Make no mistake: Onyx Pharmaceuticals is riding the crest of a wave. The stock hit record highs on the back of a surprisingly strong US panel endorsement for its multiple myeloma drug Kyprolis, and the company is increasingly being linked with the word “takeout” – speculation that Bristol-Myers Squibb and AstraZeneca’s acquisition of Amylin has done nothing to dispel.

There is no doubt that Onyx’s late-stage oncology focus would make a welcome addition to many a big pharma R&D pipeline. But the question is, at what price? Not that it definitely will not happen, but it is hard to see why companies that declined to pull the trigger two years ago, a time when many uncertainties around Onyx started to clear and an obvious opportunity to pounce opened up, would consider doing so now, when the stock is trading over three times higher.

The story

EvaluatePharma’s consensus data support the thesis that the Onyx story is basically about Kyprolis. The drug’s NPV of $2.4bn accounts for 56% of the company's current market cap. Kyprolis looks set to secure US approval by its July 27 FDA action date (Onyx soars as Kyprolis backing allays safety concerns, June 21, 2012).

Consensus forecasts are for global revenue of $943m by 2018, and Deutsche Bank recently initiated coverage, citing peak sales of $1.5bn. But the drug is by no means a shoo-in for blockbuster status, the sell-side bulls notwithstanding.

For one thing, concerns over cardiac toxicity that featured prominently in FDA briefing documents have yet to be allayed, and will likely continue to dog Kyprolis until data from two phase III trials are announced next year. For another, banks have a clear vested interest in seeing a target’s price rise in the hope of lucrative corporate finance commissions when a deal is done.

The Bayer question

It might not be too outlandish in the current climate to see an acquirer making a bet on Kyprolis even at the current price. The problem is that the only obvious name here is Bayer.

Bayer’s relationship with Onyx is one of the longest-standing in the sector, dating back to 1994 when it started as a research alliance in which the German conglomerate acquired a 15% equity stake. The two firms were intimately involved in the development of Onyx’s two other key projects, Nexavar and regorafenib, and there is probably no one who knows Onyx as well as its German partner.

The trouble is that Bayer is a notoriously conservative company, and passed up a golden opportunity to buy out Onyx two years ago. Hindsight is always 20/20, and it is easy now to look at Onyx’s share price chart and see what an opportunity the mid-2010 enterprise value of barely $1bn presented, but the signs were clearly there.

In 2010 Nexavar was on the cusp of becoming a blockbuster, the stock had hit a 12-month low and Bayer’s new CEO had, by all accounts, an M&A brief. An acquisition seemed the most obvious way to settle a legal dispute between the partners relating to regorafenib, but Bayer instead seemed to do everything to avoid M&A, and settled by restructuring the Nexavar/regorafenib deal.

Third party

The takeover bulls therefore might be hoping for a third party to pull the trigger, and for a precedent one needs to look no further than Lilly's takeout of ImClone and Daiichi Sankyo's of Plexxicon, though these deals represent the exception rather than the rule (BMS bows out of ImClone race, October 6, 2008).

In the case of Amylin, it had to undergo a costly deal termination with Lilly before its acquisition came about, and even this might not have happened without a certain Carl Icahn pulling the strings.

However, a third-party scenario also seems implausible when one bears in mind that the restructured Bayer deal contains a clause under which the German company immediately regains Onyx’s US co-promotion rights to regorafenib – an important Nexavar follow-on – in the event of a change of control.

So given the messiness of having to unwind the Bayer alliance and the risk still attached to Kyprolis, it might take a clinical setback that brings Onyx’s share price back down to earth to present an acquirer with a much more realistic takeout opportunity.

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