Onyx, a Sweet Deal for Bayer?

Onyx Pharmaceuticals (ONXX)—52-week stock price

By Gene Marcial, Business Week

The German drugmaker already has teamed up with Onyx to sell the smaller company's drug to fight kidney cancer. Could it be the next pharma to make a move?

Big pharmaceutical makers, of late, have dominated the business news as the world's largest drugmaker, Pfizer (PFE), agreed on Jan. 26 to acquire Wyeth (WYE) for $68 billion. Now the buzz on Wall Street is, "Who's next?"

Certainly the Pfizer-Wyeth deal has brought a large dose of excitement to the otherwise moribund world of pharmaceuticals and biotechs. And analysts say the deal has stirred interest among some in the industry to hatch their own buyout or merger plans.

Some targets may be companies still below the radar of most investors, and may already have close partnerships with big drugmakers.

Competing with Pfizer
One such is Onyx Pharmaceuticals (ONXX), which is developing oral anticancer therapies designed to prevent cancer cell proliferation. Sales of Onyx's drug Nexavar have been strong for the treatment of kidney cancer (renal cell carcinoma), and analysts say it has the potential to become a blockbuster.

Interestingly, Nexavar competes with Pfizer's Stutent, which the Food & Drug Administration approved in 2006 for the treatment of both advanced kidney cancer and gastrointestinal tumors. Wyeth also has a new drug for kidney cancer called Torisel, approved by the FDA in May 2007. Onyx's Nexavar, O.K.'d by the FDA in December 2005 for kidney cancer and in 2007 for liver cancer, also got a green light for marketing in the European Union as well as in Japan, China, and South Korea.

Like other small drug companies, Onyx has partnered with a global drugmaker. Germany's Bayer, which trades in the U.S. over-the-counter market under the symbol BAYRY, and Onyx split the development cost of Nexavar and will divide profits on a 50-50 basis worldwide, except in Japan, where Bayer will pay a percentage of royalties to Onyx on sales in that country. In the first quarter of 2007, Nexavar sales produced a $3 million profit for Onyx, making the product a moneymaker for the first time.

Bayer, which offers a wide variety of products, including prescription drugs, diagnostics, and health-care consumer items as well as chemicals and agricultural products, "is the ideal company that could logically acquire Onyx," says Grant Zeng, health-care analyst at Zacks Investment Research, who rates Onyx a buy.

Bayer Gets Entreé to Cancer Market
The German company, says Zeng, is starting to shift some of its focus to oncology, where it isn't a big player yet. Buying Onyx would quickly advance its position in the huge cancer market, says Zeng. Onyx and Bayer are working on expanding the application of Nexavar to other cancer indications, including non-small-cell lung cancer.

"Obviously, with its close collaboration with Onyx on Nexavar, Bayer already knows Onyx very well and could easily assess its value to its own operations," says Zeng. He figures that by 2010, sales of the drug will balloon, to $1.1 billion. In the third quarter of 2008, sales totaled $181 million, up 73% from a year ago. Based on Nexavar's strong sales in the first nine months of 2008, Zeng expects Onyx to post its first full-year profit in 2008. He figures the company earned 79¢ for the full year.

Zeng puts the value of Onyx at 45 a share based on his 2010 earnings projection of $2.14 a share. In an acquisition, it could fetch a higher price, says Zeng. Other large drugmakers, he adds, could also be attracted to the company.

Affordable
Surely Onyx's large institutional investors, which control some 90% of shares outstanding, will back a reasonable deal. The largest holder is OrbiMed Advisors, with a stake of 7.3%, followed by Fidelity Management & Research with 6.7%, Wellington Management, 5.8%, and Barclays Global Investors (UK) Holdings (BCS), 4.3%.

With a market capitalization of $1.8 billion, Onyx would be easily affordable for Bayer, whose market cap exceeds $43 billion. Shares of Onyx hit a 52-week high of 49.97 a share on Jan. 30, 2008, but tumbled to a low of 21 in October. The stock has since recovered, to 31 on Jan. 27. Bayer, on the other hand, has climbed from its 52-week low of 44 in November to 55 on Jan. 27, but is still below its 52-week high of 89 last May.

The recent rebound in Onyx shares is seen by some investors as an indication that the stock may be attracting new buyers, especially in light of Pfizer's acquisition of Wyeth. It would make sense for Bayer to act sooner than later if it is interested in acquiring Onyx, says Zeng.

But will it? Bayer spokesman Guenter Forneck declined comment on Bayer's possible acquisition targets, but says the company will "expand its business through both internal and external growth." Onyx spokeswoman Lori Murray says the company "doesn't comment on market speculation."

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.


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