Why I Won’t Cheer If Onyx Pharma Is Sold for Megabucks
Sometime in the coming weeks, South San Francisco-based Onyx Pharmaceuticals (NASDAQ: ONXX) will probably be acquired by some big drugmaker for more than $10 billion. Shareholders will count their profits. Analysts will applaud. Financial media will speculate about whether this deal will spark more acquisitions in the biotech industry.
But I won’t be cheering. I’ll probably be wondering about what might have been. I’ll wonder what Onyx could have accomplished for patients, employees, the industry, and its regional economy if it had chosen to chart its own course as an independent company.
Yes, I’m getting a bit ahead of myself here. Nothing has happened yet. But the arrows are all pointing in one direction.
Here’s what we know:
Onyx, a cancer drugmaker which has long been rumored as a takeover candidate, was approached by Amgen (NASDAQ: AMGN) last month with an acquisition offer worth $120 a share. That penciled out to about $8.7 billion. Onyx’s board considered the proposal—which represented about a 40 percent premium over its value on the Nasdaq—and wrote back Friday, June 28 to say thanks, but no thanks. Onyx issued a statement on Sunday, June 30 that it rejected Amgen’s offer because it “significantly undervalued Onyx and its prospects.”
That could have been the end of the story, as Onyx and everybody else went back to business. But Onyx said in the same statement that some other potential suitors have shown interest, so it decided to ask its financial advisor to look into other bids. The stock shot up to over $130 a share the next morning, sending Onyx’s valuation close to $10 billion. Analysts sent out a flurry of notes that estimated Onyx could fetch as much as $140 a share from an acquirer like Novartis, Pfizer, AstraZeneca, Bristol-Myers Squibb, Bayer, or anybody else with an interest in cancer.
Onyx tempered its statement a bit, warning there’s no guarantee it will strike a deal. But investors are counting on one, so the pressure is on. About 96 percent of investors expect Onyx to be acquired by the end of the year, for an average price of about $144 a share, according to a survey of 67 investors conducted by analyst Mark Schoenebaum of ISI Group.
Onyx, to my mind, doesn’t need to go this route. It is desired by acquirers for the same reason it has become so valuable as a standalone company—it has been quite good at developing and marketing cancer drugs the last few years. It went from being a one-drug company in search of a second act, to being a three-drug company, almost overnight. That’s the kind of diversified product lineup that’s a hallmark of the best in the business. It had $362 million in sales last year, and it’s just getting started, beating analyst expectations with its important new product for multiple myeloma.
Importantly, we’re not talking about a company that needs to seize the moment because it just had one big break at the FDA, or it’s the flavor the moment. Onyx has been gaining strength as an independent company for years.
It built its own sales and marketing team to pitch sorafenib (Nexavar) for kidney and liver cancer, and had steadily grown its staff to more than 800 employees. That gives it enough human horsepower that it doesn’t have to rely entirely on global pharma partners. It made a shrewd decision to acquire South San Francisco-based Proteolix in 2009 for $276 million upfront and $535 million in milestones to get carfilzomib (Kyprolis), a potent new drug for multiple myeloma. Many analysts now believe that drug has potential to be a $1 billion a year seller.
Onyx even got a bit lucky in the past couple years, as it settled a legal dispute clarifying its 20 percent royalty stake in one drug, Bayer’s regorafenib (Stivarga), just before the clinical trial results proved this was going to be another winner. The latest word is that Onyx stands to collect 8 percent royalty checks from sales of an exciting Pfizer breast cancer drug called palbociclib.
As Onyx has grown, it has shown signs of becoming the kind of organization that’s measured in more than just dollars. CEO Tony Coles moved the company offices from Emeryville, CA, to South San Francisco, in the middle of one of the world’s top biotech centers, making it easier to recruit top talent. Coles has embraced his growing role as an industry leader, speaking out on industry issues, like NIH budget cuts. He’s even done little things to demonstrate community leadership, like opening up his new building for an Xconomy event about new biotech business models that I organized last fall.
When I wrote a column last year about how Boston was stealing away San Francisco’s mojo as the No. 1 industry hub, he let me know he was taking this issue seriously and meeting with other Bay Area CEOs to talk about maintaining the region’s leadership. He didn’t have to do that.
Onyx, with a young and dynamic leader in his early 50s, and a growing product lineup, looks to me like the kind of company that could be a cornerstone for the regional biotech economy, along with Gilead Sciences, BioMarin Pharmaceuticals, and yes, Genentech. Not everybody in the industry is sincere when they say they want to help patients, but Coles and his predecessor Hollings Renton have established a culture of valuing patients at Onyx that you can’t miss.
Few companies get this kind of momentum, and can think seriously about how to really run with it. As a company with three products on the market, it can’t be completely derailed by one pesky side effect in one trial, one manufacturing screw-up, one botched product launch—the kind of mistakes that can kill one-drug companies.
Instead of being acquired, Onyx could use some of that stock market wealth to acquire a small cancer drugmaker that needs its expertise to get to the next level in development, regulatory affairs, sales and marketing. By buying another Proteolix, and doing something good with it, there’s no reason to think Onyx couldn’t be worth $200 a share, have a staff with 2,000 people or more, and have products that help more tens of thousands of more patients.
This isn’t to say that there’s anything dead wrong, or boneheaded, about an Amgen acquisition. Amgen has a history of selling products that are important for cancer supportive care, but it has never made much headway in selling direct anti-tumor medicines like Onyx’s. In the hands of the sales and marketing team at Amgen, or another big drugmaker, you can be sure that Onyx’s cancer drugs would sell quite well and do a lot of good for patients. No problem there.
But you can also be sure of a few other things if Onyx is sold. Shareholders will make money. Jobs will be lost at Onyx, as the acquirer will seek to cut expenses to boost profits. The San Francisco Bay Area will lose one of its brightest biotech stars, a company with anchor-tenant potential. Various service providers—lawyers, accountants, financial advisors—will make a bundle in fees. Other biotech companies will be motivated to sit down with their bankers, and consider whether they, too, can strike a big M&A deal.
There are plenty of examples where acquisitions make good strategic sense. Little companies, like Proteolix, sometimes need the help of a bigger player to make the most of an asset. Pharmasset, the last biotech company to draw megabucks acquisition interest, would have been nuts to turn down an $11 billion takeover offer. It had zero products on the market at the time, and was several years away from getting its first.
Onyx isn’t in that kind of situation. It has what it takes to stand on its own two feet. It’s one of these mid-sized biotech companies that’s just gotten into a groove. It’s like a band that’s making great music, but hasn’t quite gone platinum yet. I’d like to see what this band can do for a while longer before it breaks up.