Bloomberg News

Onyx Spurs Pfizer Talk With Cancer Drug as Patent Cure: Real M&A

December 05, 2011

Dec. 1 (Bloomberg) -- The promise of an experimental drug for cancer means that Onyx Pharmaceuticals Inc. may reward shareholders with a record windfall by selling itself.

Onyx, which is developing a drug called carfilzomib to treat blood cancer, jumped this week by the most since July 2010 after two people with knowledge of the matter said the drugmaker is exploring options including a sale. Mizuho Financial Group Inc. says Onyx could command at least $70 a share in an acquisition, or more than 70 percent above its average in the past 20 days, according to data compiled by Bloomberg.

While a takeover offer at that price would be costlier for potential buyers than any biotechnology deal of comparable size, Onyx may interest companies such as Pfizer Inc. and Takeda Pharmaceutical Co. as their own drugs lose patent protections, Mizuho and Tullett Prebon Plc said. Onyx, which already sells a kidney-cancer treatment named Nexavar, may get U.S. approval for carfilzomib as early as March, helping it double sales within five years, analysts’ estimates compiled by Bloomberg show.

Drugmakers are “in the market for transactions and new drugs,” Walter Todd, co-chief investment officer at Greenwood Capital in Greenwood, South Carolina, which manages $940 million, said in a telephone interview. “You have huge patent expirations. Cancer is an area that a lot of companies are focused on. Large companies are looking for growth opportunities and these smaller names are going to be attractive.”

Todd said New York-based Pfizer, the world’s largest drugmaker, along with GlaxoSmithKline Plc of London, were among companies that could benefit from acquiring Onyx.

Takeover Speculation

Shares of Onyx surged 14 percent on Nov. 28 after two people familiar with the situation, who declined to be identified because the discussions were private, said that the company had hired investment bank Centerview Partners to help it review alternatives.

Potential buyers are studying Onyx’s business and its carfilzomib drug, which treats a cancer of plasma cells known as multiple myeloma, one of the people said.

While Lori Melancon, a spokeswoman for South San Francisco, California-based Onyx, said it doesn’t comment on rumor or speculation, Jefferies Group Inc.’s Biren Amin says the company signaled a willingness to sell itself in October when it settled a lawsuit with Bayer AG over the experimental cancer medicine regorafenib and amended its collaboration agreement for Nexavar.

The amended Oct. 11 agreement now maintains Onyx’s profit- sharing, co-development and co-promotion of Nexavar with Leverkusen, Germany-based Bayer in the event that Onyx, valued at $2.8 billion, is bought, data compiled by Bloomberg show.

Change of Control

“They’re definitely putting themselves out there,” Amin, an analyst at Jefferies in New York, said in a telephone interview. “At the end of the day, most of these small- to mid- cap biotech companies want to sell themselves.”

Onyx could be worth $70 a share to $80 a share in an acquisition, according to an estimate from Gene Mack, a New York-based analyst at Mizuho. Based on Onyx’s average price of $39.39 in the past 20 trading days, a $70-a-share offer would represent a 78 percent takeover premium.

That would exceed the 67 percent premium that Takeda, Asia’s biggest drugmaker, agreed to pay for Cambridge, Massachusetts-based Millennium Pharmaceuticals Inc. in 2008 in the costliest biotechnology deal between $1 billion and $10 billion, data compiled by Bloomberg show.

Driven by carfilzomib, analysts estimate Onyx will generate more than $1 billion in revenue by 2016, versus an estimated $443 million this year, data compiled by Bloomberg show.

Medical Need

Onyx could have the experimental medicine cleared for marketing by March if the U.S. Food and Drug Administration assigns “fast track” status to its new drug application, according to Andrew Berens, a senior health-care analyst for Bloomberg Industries in Skillman, New Jersey. The designation is used to “expedite the review of drugs to treat serious diseases and fill an unmet medical need,” the FDA’s website said.

Interest in oncology drugs has increased as aging societies become more prone to cancer and doctors get better at diagnosing the disease, according to Matthew DiFilippo, chief portfolio strategist at Stewart Capital in Indiana, Pennsylvania.

Sales of Revlimid, the blood-cancer pill that is Celgene Corp.’s top-selling drug, have jumped sevenfold since 2006 to almost $2.47 billion, data compiled by Bloomberg show.

Companies such as Onyx may entice drugmakers as patents of their best-selling treatments expire, leaving them vulnerable to declining sales as generic makers offer cheaper versions.

‘Unprecedented’

The world’s 10 largest drugmakers by sales, which include Pfizer and Glaxo, all have U.S. patents that will expire in the next two years, according to data compiled by Bloomberg. Pfizer, which lost patent protection on its cholesterol pill Lipitor yesterday, faces expirations on at least five drugs in 2012.

Sales of Lipitor, the world’s top-selling medicine with $10.7 billion in revenue last year, may drop by 58 percent to $4.5 billion next year, according to analysts’ estimates compiled by Bloomberg. Some patents on Glaxo’s Advair asthma inhaler, its best-selling product that accounted for almost 20 percent of revenue, will begin expiring in 2013, the data show.

“Large pharma is facing unprecedented revenue loss as these multiple blockbuster drugs lose their exclusivity,” Bloomberg Industries’ Berens said in a telephone interview. “Historically, they haven’t been able to replace them through internal R&D, so they have to look externally.”

Joan Campion, a spokeswoman at Pfizer, said in an e-mail that the company doesn’t comment on market speculation. Kevin Colgan, a spokesman for Glaxo, declined to comment on whether it is considering a purchase of Onyx.

Takeda, Celgene

An acquisition by Takeda would also make sense, according to Sachin Shah, a special situations and merger arbitrage strategist at Tullett Prebon. Actos, Takeda’s best-selling diabetes treatment, will begin facing competition from generic drugmakers starting in August. Analysts project that Actos will lose about $2.1 billion in revenue by next fiscal year, according to data compiled by Bloomberg.

Onyx would complement Takeda’s Velcade drug, a blood-cancer medicine that it acquired from Millennium Pharmaceuticals in 2008. Velcade will top $1 billion in revenue by 2016, analysts’ estimates compiled by Bloomberg show. Mizuho’s Mack estimates peak sales for Onyx’s carfilzomib of more than $2 billion.

“The synergies would be the greatest on the multiple myeloma side with Takeda,” which would otherwise compete with Onyx, Shah said in a telephone interview from Mumbai. “This is the time for them to take advantage of an opportunity where big pharma is looking to plug some of their holes.”

He also cited Celgene, which specializes in cancer therapies and offers a drug that would also compete with Onyx’s carfilzomib, as another potential buyer.

Risk-Reward Analysis

Mitsuo Oguri, spokesman at Takeda, declined to comment on whether the company is considering an acquisition of Onyx. Brian Gill, a spokesman for Summit, New Jersey-based Celgene, didn’t immediately respond to a message requesting comment.

While a deal for Onyx at $70 a share would be almost twice the industry’s median based on reported sales, Mizuho’s Mack says the potential reward is worth the risk.

Onyx “could be a good fit for anyone in large pharma that deals in oncology or would want a footprint in oncology,” he said in a telephone interview. “What sets it apart is they have very, very rich near-term revenue opportunities, which is important to pharmaceutical companies. This makes it easy for pharma companies to pay a premium.”

--With assistance from Sasha Damouni, Jeffrey McCracken and Drew Armstrong in New York, Ryan Flinn in San Francisco and Kanoko Matsuyama in Tokyo. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Nick Baker at nbaker7@bloomberg.net.


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