Onyx Pharmaceuticals, Inc. (ONXX), Amgen, Inc. (AMGN): Is This A Good Acquisition For All?

For the second day in a row, the hot topic in the market is the bidding war for Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). After rejecting Amgen, Inc. (NASDAQ:AMGN)’s $120 a share offer, some analysts are predicting the bidding war could reach $160. While many have come to the defense of Amgen, saying that $160 is too much, I think we should look back on recent history as proof that this acquisition could be wise.

The Benefit Of Billions In Biotechnology

Nov. 21, 2011, University of Michigan business professor Erik Gordon stated that

Gilead is paying too much, paying all in cash, borrowing money to do it, diluting earnings for three or more years — to get a drug candidate or two in an area that was supposedly a core strength at Gilead.

He added, “You can do a lot of research for $11 billion.”

The above was in response to the massive acquisition that Gilead Sciences, Inc. (NASDAQ:GILD) paid to become a leader in the emerging hepatitis C space. The acquisition of Pharmasset was important for Gilead because it gave the company an oral drug in a market dominated by vaccines, a $20 billion market by 2020.

While Gordon was obviously wrong, he wasn’t the only one who shared these feelings. On that day, shares of Gilead Sciences fell 9.1% to $36. Today, shares sit at $52, and many believe it has more upside than any large pharma in the space.

You might ask why? The company has $10 billion in annual sales, and that “overpriced” acquisition is about to produce top-line growth of 40% over the next few years.

$160 Might Not Be That Bad

Pharmasset’s lead candidate, the oral hepatitis C drug PSI-7977, has peak sale potential of $4 billion. With other drugs in the pipeline, Gilead paid about two times peak sales potential for Pharmasset.

Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) at $160 would be valued at $11.6 billion. The company has three different FDA-approved cancer drugs, two of which partnered with Bayer. The company also has a small pipeline that many expect to expand in the coming years.

The consensus is that Onyx products combined could create peak sales of $4.5 billion. Therefore, if it’s acquired for $160 a share, the acquirer would be paying 2.5 times peak sales. While this is more expensive than what Gilead paid for Pharmasset, it is still in the same realm.