$10 Billion Onyx Joke May Be On Amgen Holders

The wires have been buzzing with speculation about which Pharma company might step up to buy Onyx Pharmaceuticals (ONXX) at a price above the $120-a-share offer made by Amgen (AMGN), or even above the $130-a-share price Onyx and Amgen were discussing, according to reports, to seal a deal.

Don’t count on other offers. Below we take a tour through Onyx’s products and the competitive landscape and see that Amgen has offered a generous price and, indeed, one that may prove costly unless some major regulatory and marketplace events fall in Onyx’s favor.

ONXX Chart

ONXX data by YCharts

Onyx Chief Executive Officer N. Anthony Coles said in a statement that Amgen’s offer “significantly undervalued” the company. Onyx currently sells or co-markets three cancer drugs, two of which received regulatory approval last year.

Spurned (so far) bidder Amgen is in need of new income streams to help offset revenue declines due to reimbursement cuts and the introduction of biosimilar competitors to its anemia drug Epogen and white-blood cell booster Neupogen.

AMGN Revenue Quarterly YoY Growth Chart

AMGN Revenue Quarterly YoY Growth data by YCharts

A little market research: Nexavar (sorafenib), is indicated for the treatment of patients with advanced kidney cancer or unresectable liver cancer. Assuming anticipated regulatory approval in thyroid cancer, this small molecule inhibitor of growth factors is modeled to generate peak annual sales prior to patent expiry of some $1.7 billion by 2020 – an optimistic number, at best, given the drug has already failed in breast cancer trials.

Additionally, the lion’s share of annual sales will fall to the bottom-line of Onyx’s partner, the health-care unit of German manufacturer Bayer AG (BAYRY), which owns the global property rights. Despite worldwide 2012 sales totaling $861.4 million (excluding Japan), collaborative sales recorded by the company were just $288.4 million.

The company also co-promotes a recently approved multi-protein kinase inhibitor developed by Bayer for metastatic colorectal cancer (mCRC) called Stivarga (regorafenib). Although peak annual sales could reach $1.0 billion, this drug doesn’t offer much value to potential buyers: Onyxx receives a royalty of just 20% of global sales; and, Bayer has the right to terminate the company’s co-promotion if there is a change in control or acquisition by a competitor.

Given the existing relationship, some Wall Street observers speculate that Bayer could emerge as a white knight. Unlikely – if Bayer were truly interested, why did management not initiate first overtures two years ago at $30 a share?

Pfizer (PFE), GlaxoSmithKline (GSK), and Novartis (NVS), been identified in the financial press as possible suitors. The former because it has partnered with Onyx on palbociclib, a fast-tracked cell-cycle inhibitor (CDK-4, -6) for treating advanced post-menopausal breast cancer; the latter two because of common talk they need a potential blockbuster to replace drugs lost to generic intrusion.

Palbociclib offers little value to any potential buyer, as successful commercialization would result in Onyx receiving only 8% of global sales. Additionally, all three drug makers offer competing therapeutic treatments targeting similar pathways in advanced kidney and/or liver cancers, including Pfizer’s blockbuster Sutent (Sunitinib), Inlyta (axitinib), and Torisel (temsirolimus); Glaxo’s Votrient (pazopanib) and Novartis’s blockbuster Afinitor (everolimus).

The key asset driving the upside valuation for Onyx is Kyprolis (carfilzomib), a proteasome inhibitor recently approved for the treatment of patients with relapsed and refractory multiple myeloma (whose disease has progressed (got worse) on their last therapy or within 60 days of their last therapy). Analysts opine that this disrupter of cancer cell growth could generate peak annual sales of up to $2.1 billion by 2020.

Nonetheless, there are risk considerations that could thwart the assigned value attached to Kyprolis, including a failure to gain label expansion (earlier usage). Whether Kyprolis can take share from Celgene (CELG), whose $4.3 billion immunomodulatory drug Revlimid (lenalidomide) is used in all stages of multiple myeloma (MM), will depend on clinically significant improvements in comparative overall survival outcome studies.

In a recent research report, blood-cancer specialists told analytics firm Decision Resources that there persists a high level of unmet need for therapies with a more favorable neurotoxic profile. This survey response suggests that Kyprolis is favorably positioned to take share from Velcade (bortezomib), a $2 billion proteasome inhibitor co-marketed by divisions of Takeda (TKPHF) and Johnson & Johnson (JNJ). Peripheral neuropathy generally afflicts about 16% of relapsed/refractory MM patients on an IV version of Velcade and 6% in patients on injections of the drug (versus 1% in a single-arm study with 266 patients treated with Kyprolis).

Close to a year after the July 2012 U.S. regulatory approval of Kyprolis, 80% of specialists queried by Merrill lynch report having used the drug, up from 62% in December, with two-thirds of this experience directed at patients who had received at least three prior therapies. This usage behavior suggests that payer pushback could be an issue with prescribers too. Kyprolis costs about $1,658 per vial compared with about $1,470 a vial for Velcade.

Onyx reported Kyprolis sales of $64 million for first-quarter 2013, versus consensus estimate of $56 million.

Expanded use and sales growth will likely come when more data on earlier dosing becomes available. However, the company’s window to effectively promote product differentiation is closing quickly. In February, Celgene launched a direct competitor called Pomalyst (pomalidomide) – ruling out this company as a likely acquirer too.

Pomalyst (like Revlimid) is an immunomodulator that has a similar labeling and neurotoxic profile to Kyprolis. However, more convenient dosing with Pomalyst could affect treatment decisions: Oral dosing compared with office visits two days every week for shots with Kyprolis.

Further disruption to Kyprolis future success could come from Japanese-based Takeda, which is in late-stage clinical trials with ixazomib, the first oral proteasome inhibitor. Ixazomib is being studied across the MM disease spectrum, from a front-line setting to relapsed/refractory MM to maintenance therapy following autologous stem cell transplant. Regulatory approval in the U.S. for relapsed/refractory MM could come as early as 2015.

There are some companies desperately looking to bulk up their oncology portfolios, in particular, blood cancer products. For example, Gilead Sciences (GILD), a global leader of HIV drugs, has spent more than $1.2 billion in the last two years to build a clinical pipeline. Yet, the regulatory path to approval for its most advanced compound, the leukemia drug idelasib, is far from a certainty.

For a big pharma company like Gilead to tender an offer for Onyx at its current valuation would be placing a $10 billion (or higher) bet that the latter can successfully transform from a research and royalty-driven business model to a drug maker profitably earning income dependent on direct sales performance. Given competitive risks, future regulatory uncertainties, and a price-to-sales multiple almost twice the industry average of 11.2 times sales, Onyx management’s price could prove too rich a multiple even for the hungriest of dug manufacturers.

ONXX Price / Sales Ratio TTM Chart

ONXX Price / Sales Ratio TTM data by YCharts

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

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