Onyx Pharmaceuticals, Inc. (ONXX), Amgen, Inc. (AMGN): Why Getting Rich Quick Doesn’t (Always) Pay

We have a bona fide biotech soap opera going on these days. Spurned love. Possible romance. Disgruntled suitor. And, of course, the unknown villain. In this drama, though, the villains get caught before too many dastardly deeds can be done.

Romance in the air

Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) is playing the role of the wanted damsel in this soap opera. Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) spurned the amorous advances of Amgen, Inc. (NASDAQ:AMGN) earlier this month. Amgen, Inc. (NASDAQ:AMGN) offered $120 per share for the biotech, but Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) turned the larger company down to play the field.

Several companies appeared to possibly participate in a budding romance with Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). One, though, apparently threw the roses in the trash can early on. Word leaked out on July 18 that Pfizer Inc. (NYSE:PFE) decided not to move forward because the price was just too high. However, Pfizer Inc. (NYSE:PFE) has not made any public comments yet about a potential acquisition of Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX), and some are still speculating that the company is still in the hunt.

So much for the “romance.” What about the villains?

Vile villains
“Unknown traders” who knew about Amgen, Inc. (NASDAQ:AMGN)’s offer before it was publicly announced began buying call options in Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) starting on June 26 and kept on scooping up more calls through June 28. Many of these options were inexpensive out-of-the-money calls that require the stock to rise rapidly for the buyer to make a profit.

On Wednesday, June 26, abnormally high volumes of call options expiring on July 19 with strike prices of $95 and higher were bought. Onyx traded at around $84 per share at the time, so someone was banking on at least a 13% increase within a three-week period. Call option trading volumes at these strike prices increased over the next couple of days.

News about Amgen, Inc. (NASDAQ:AMGN)’s offer to buy Onyx was first reported after the market closed on Friday, June 28. Onyx announced that it was rejecting Amgen, Inc. (NASDAQ:AMGN)’s bid on Sunday. Shares in the biotech skyrocketed 51% the following Monday. The “unknown traders” were sitting on a tidy profit of $4.6 million deposited in foreign accounts. But not for long.

Justice prevails
The Securities and Exchange Commission tends to notice when unusual trading occurs right before a major event is announced by a public company. It didn’t take them long to realize that mischief was afoot.