While that’s certainly not what Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) investors were hoping for — at one point, after Amgen, Inc. (NASDAQ:AMGN) made its initial $120 bid, shares of the biotech topped $136 — the deal looks healthy for the sector in general.
M&A still an option for exit
Without a doubt, M&A is still the easiest way to make money in the biotech sector. Unlike the typical binary event, an acquisition only has upside potential; unless it’s a take-under, there’s no downside related to the M&A event. Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) investors who were holding before Amgen, Inc. (NASDAQ:AMGN)’s initial bid was announced are sitting on a nice 44% increase.
Without a doubt, it’s good news for the industry that Amgen, Inc. (NASDAQ:AMGN) would go after Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) and still raise its bid when it appears no one else was interested in buying the biotech. Investors in other biotechs should see an increase in value simply because there’s a possibility that they’ll be bought. I wouldn’t buy for that reason alone, but it’s nice to have a valuation bump as long as it doesn’t get out of control.
Conventional wisdom says having a big pharma partner makes a biotech less likely to be a takeout target because potential buyers won’t want to work with the partner. The most obvious buyer is the current partner, and it’s hard to get a bidding war going with just one bidder.
But Amgen, Inc. (NASDAQ:AMGN) was still willing to purchase Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX), which markets Nexavar with Bayer. There’s more to Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) than Nexavar — its blood cancer drug Kyprolis was likely just as much a factor in the purchase — but the fact that Amgen, Inc. (NASDAQ:AMGN) wasn’t scared off by having to work with Bayer is a good sign for other commercial-stage biotechs with partners.
It’ll be interesting to see how far this “partners don’t matter” thought might go. Fellow Fool, Keith Speights, suggested that Seattle Genetics, Inc. (NASDAQ:SGEN) could be next, but the company has partnerships with 12 different companies. I’m not sure a big pharma would want to deal with that many of its competitors.
Not a bubblicious price
Sure, Onyx investors would have preferred a higher price, but as an industry, reasonable prices are healthier. Crazy valuations can only last for so long. Eventually they fall back to reality (often below it).
Amgen’s final offer looks like a pretty decent price. At $125, I expected a CVR that would have given investors a piece of the upside if Onyx’s drugs exceeded expectations. Amgen’s investors sure seem to think the company got a good deal; shares are up 8% as I write this.
It’s clear Amgen and the other potential suitors that bowed out before then weren’t willing to go overboard to acquire Onyx. After the recent run up in biotech valuations and the ease that biotechs have had in going public, I’ve become increasingly worried that the valuations have gotten out of hand. Amgen’s lower-than-expected takeout price is a sign that there’s some sanity to the market.
The article The Amgen-Onyx Deal Should Make All Biotech Investors Happy originally appeared on Fool.com is written by Brian Orelli.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Seattle Genetics.
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