Deals Of The Week Wonders: Who Will Buy Onyx?

When was the last time biotech had a really juicy, successful, high-stakes bidding war? Likely the $10.2 billion Pharmasset acquisition by Gilead Sciences announced in late 2011, which since has played out quite nicely for the latter. Not only did that deal help drive Gilead shares up by about 150% since the deal announcement, but it also tipped off the start of a very long bull-run for the sector.

If Onyx Pharmaceuticals attracts a bevy of bidders, garners a tidy premium for shareholders, and proves a strong asset for an acquirer, its activities could help bolster a flagging biotech stock market. Mostly in June, the NASDAQ Biotechnology Index has shed almost all of a tidy 9% it gained in the first few weeks of May.

If a competitive Onyx acquisition plays out, a deal could come in the fall. That would coincide perfectly with a roster of large-cap clinical and regulatory milestones – which together might breathe life back into a biotech rally that’s getting very long-in-the-tooth.

For now, Wall Street seems certain that the biotech will attract a flock of suitors, culminating in a deal. In fact, Onyx shares are trading well above Amgen’s $120 per share bid, which Onyx publicly confirmed on June 30 that it had rejected. It hired Centerview Partners to contact other potential acquirers, but said it already had interest from undisclosed third parties. Onyx shares closed at $133.52 on July 3, giving the biotech a $9.7 billion market cap.

Potential bidders could include a number of pharmas with existing oncology franchises that need to bolster their bottom lines, such as Pfizer and Merck & Co. Also in line could be established players in the multiple myeloma (MM) market including Celgene and Takeda, in addition to likely pharma players betting on MM monoclonal antibodies such as Bristol-Myers Squibb and Johnson & Johnson. J&J is partnered with Takeda on MM treatment Velcade (bortezomib).

Onyx investor Oliver Marti of Columbus Circle Investors expects to see more than a half-dozen potential suitors emerge, with an acquisition taking about three months to play out. He expects other companies ultimately will prove more aggressive than Amgen, although he does expect Amgen to raise its bid. Marti thinks $140 per share would be an acceptable price.

Amgen has done only a handful of billion-dollar deals. In 2001, Amgen acquired inflammation company Immunex for $17.9 billion in cash and stock. That’s its only deal for more than a couple billion dollars. Since then, it’s done four deals in the roughly $1 billion to $2 billion range including $2.2 billion for antibody play Abgenix  in 2005, $1.3 billion in a stock swap for gene expression regulation company Tularik  in 2004, up to $1 billion in cash and milestones for cancer vaccine company BioVex  in 2011 and $1 billion in cash for antibody company Micromet in 2012, according to Elsevier’s Strategic Transactions database.

“Pfizer and Bayer are natural candidates, Takeda could be a player as well,” added Dallas Webb of BB Biotech, also an Onyx investor. He anticipates the next round of bids will start at $130 and “depending on the number of bidders should go north of that.” He expects more clarity within the next month on the acquisition process.

Various analysts have pegged a likely Onyx per-share sale price in the roughly $135 to $148 range. On top of that, there could be a contingent value right, particularly for oral MM proteasome inhibitor oprozomib. Gene Mack of Brean Capital proposed a $135 buyout share price, with a CVR of about $30 tied to oprozomib approvals in relapsed/refractory and newly diagnosed MM patients, as well as sales milestones based on up to $2 billion.

Pfizer and Bayer are major Onyx partners. Kidney and liver cancer drug Nexavar (sorafenib) as well as colorectal cancer and gastrointestinal stromal tumor treatment Stivarga (regorafenib) both resulted from the Bayer partnership. Bayer evenly splits Nexavar profits globally with Onyx, excluding Japan, and pays Onyx a 20% net royalty on Stivarga global net sales. The partners recently submitted in the U.S. and EU for Nexavar to treat thyroid cancer.

Onyx co-promotes Stivarga under a fee-for-service arrangement, Bayer has the right to terminate the Stivarga co-promote under a change-of-control agreement. But the Nexavar and Stivarga royalties would survive a change-of-control. Onyx was savvy enough to add that to an October 2011 renegotiation of its Bayer partnership, likely in preparation for a clean acquisition down the road.

Wall Street is skeptical that Bayer would buy Onyx in its entirety, although it may seek to fully capture Nexavar and Stivarga rights. Analyst Tim Race of Deutsche Bank, who covers Bayer, noted in a June 28 call that Bayer long has maintained that buying its biotech partners usually is too expensive and that, given its full pipeline, it doesn't need a major new product at this time. He added that Bayer is very hard-nosed about price and likely to walk away from a high valuation. In addition, Bayer would need to raise debt, a move that would damage its credit rating – something Race sees Bayer as unlikely to do.

Onyx partner Pfizer may be a more likely bidder, as the big pharma has made building an oncology franchise a top priority. Onyx and Pfizer have a partnership dating back to 1995 for high-profile Phase III breast cancer candidate palbociclib (formerly PD-991), which recently received breakthrough therapy designation from FDA.

Onyx stands to earn an 8% royalty on palbociclib should the compound get to market. That revenue stream could amount to almost a half-billion in 2026, when analysts expect the drug could generate around $6 billion in sales. If Pfizer really believes in this product, it might be motivated to capture all the palbociclib upside and also add likely blockbuster multiple myeloma drug Kyprolis (carfilzomib).

Existing MM competitors also are likely Onyx acquirers. Celgene's revenue is underpinned largely by MM immunomodulator Revlimid (lenalidomide), which increasingly is being used and tested in combination with Onyx’s Kyprolis. Takeda and J&J market MM proteasome inhibitor Velcade (bortezomib), which Takeda gained when it bought Millennium Pharmaceuticals Ltd.. With the same mechanism of action as Kyprolis and a 2017 patent expiry, Takeda likely needs a replacement. For now, it’s focused on developing its own oral MM proteasome inhibitor, MLN9708.

BMS and J&J also have bets on MM monoclonal antibodies, which are expected to bear fruit in the next few years. AbbVie and Bristol are partnered on Phase III elotuzumab, while Genmab and Janssen Biotech, a unit of J&J, have Phase I/II daratumumab. Daratumumab has Fast Track and Breakthrough Designations for fourth-line MM. These are likely to be used sequentially or in combination with Kyprolis, making Onyx a potentially good fit.

Speculation already has started about which biotech with potential oncology blockbuster companies could be next for a potential take-out. Mark Schoenebaum of ISI Group suggested Ariad Pharmaceuticals, Seattle Genetics and Medivation.

A long Onyx sale saga is likely just at the beginning of unfolding. While DOTW waits for the next shoe to drop, take a look at some actual deals in this week's edition of …

Pfizer/Bioventus: Pfizer will license worldwide rights to its bone morphogenic protein (BMP) portfolio to orthopedic biologics specialist Bioventus. In return, Pfizer will receive an upfront payment, milestones and royalties. Financial terms were not disclosed. The products include a BMP in development and an rhBMP-2 in unspecified indications. The rh-BMP-2 product appears to have entered Pfizer’s portfolio with its acquisition of Wyeth; Wyeth’s pipeline as of May 2009 described a BMP-2 program with indications in fracture repair and hip osteoporosis. Pfizer has agreed to undertake certain early development work for the BMP asset in soft-tissue indications and will manufacture the rhBMP-2 for Bioventus. Bioventus was spun out of U.K. device firm Smith & Nephew with funding from Essex Woodlands in 2012. The company recently has retained the services of BMP experts John Wozney and Howard Seeherman. It plans to soon open a research laboratory in Boston to develop and commercialize the BMP assets. With this deal, Pfizer continues to cull and prioritize its portfolio. The BMP agreement follows a spate of out-licensing in the wake of the Wyeth acquisition, including the CTLA-4 monoclonal antibody tremelimumab to AstraZeneca PLC and the irreversible TKI neratinib to newly formed Puma Biotechnology, both in October 2011. -- Mike Goodman

Merck/Xencor: Xencor already has a string of big pharma partners, but the small California-based biotech is hoping to get the financial flexibility to bring its own internal programs forward. Its latest deal brings the company one step closer to its goals.Xencor announced on July 2 that it has granted Merck a license to a Xencor Fc engineering patent for a monoclonal antibody for use in an undisclosed product that Merck is already working on. The New Jersey pharma also has an option to license the same intellectual property for future products. Merck paid an undisclosed upfront and agreed to pay annual maintenance fees, as well as milestone payments and sales royalties on any products that result. “Merck found an antibody that they needed that we had already patented,” said Xencor CEO Bassil Dahiyat. “They needed it for a use that we hadn’t thought of until they called us,” he added. The companies did not disclose what product the patent applies to or how it would be used. -- Lisa LaMotta

Avanir/OptiNose: CNS-focused Avanir Pharmaceuticals is licensing a proprietary intranasal delivery system from OptiNose for use in developing and commercializing a fast-acting, dry-powder inhaled form of sumatriptan for acute migraine. In the deal announced July 2, Avanir is paying $20 million upfront to license OptiNose’s Breath Powered delivery system; Avanir said it should be ready to file an NDA by early 2014 for AVP-825, the resulting drug/device combination product. The two companies will share development costs and work together on putting together the NDA submission. Avanir will assume responsibility for regulatory, manufacturing, supply-chain and commercialization activities for the product. OptiNose could earn up to $90 million in clinical, regulatory and commercial milestones related to ‘825, as well as tiered royalties on North American sales. Avanir says ‘825, if approved, would the first and only fast-acting, dry-powder inhalable version of sumatriptan for migraine. In a Phase III clinical trial, the OptiNose device demonstrated rapid absorption and provided relief using approximately 80% less drug than is contained in the most commonly prescribed oral sumatriptan product, the company added. -- Joseph Haas