I doubt many investors or analyst on Onyx Pharmaceuticals' (NASDAQ: ONXX) conference call last week were most interested in the sales of the company's oncology drugs in the second quarter. Instead, they wanted to know whether Onyx would be sold and, if so, for how much.
They didn't get it.
The best Onxy CEO Tony Coles could offer was that there are "multiple parties currently engaged in discussions."
The front-runner to acquire Onyx appears to be Amgen (NASDAQ:AMGN), given that it made the initial bid that triggered the auction process, and media outlets have cited unnamed sources that say the bid is $130 per share.
Shares currently trade a little below the rumored $130 takeout price. There doesn't seem to be much confidence that there are "multiple parties" that will come in and top Amgen. Or even just one. At one point after the initial unsolicited bid, Onyx traded above $136.
The other possibility is that investors think Amgen will demand a higher price than $130, but they also see a decent chance that talks will break off -- which could send shares down sharply -- so investors are demanding more of a premium for taking on that risk.
When two parties can't work out an acquisition price, the disagreement on the value of the takeout target is almost always based on its future revenue potential. The seller has lofty goals; the buyer isn't quite sure the drugs can hit those goals.
The solution is to hold back part of the deal as a contingent value right, or CVR. Both sides end up happy, with the seller getting paid if the goals are met and the buyer willing to shell out more if it ends up getting more than it expected.
AstraZeneca (NASDAQ:AZN), for instance, held back more than a quarter of the potential payment to shareholders of Omthera Pharmaceuticals when it bought the company. The phase 3 trials for its lipid lowering drug, Epanova, were successful, but the drug's sales potential is still in question. Amarin's (NASDAQ:AMRN) competing fish oil, Vascepa, was off to a slow start when AstraZeneca announced the purchase back in May, and it looks like AstraZeneca made a good choice hedging its bet; in the second quarter, sales of Vascepa amounted to just $5.5 million.
For Onyx, Amgen could offer $130 and give investors a CVR that paid a few bucks if its cancer drug Nexavar hits certain annual revenue targets and/or if its blood cancer drug Kyprolis gains approval as a first-line setting. CVRs can pretty much be tailored to cover whatever is holding up the price.
And that's all it really is at this point, a guess. Onyx is no longer an investment; it's a guess as to who is going to win at the bargaining table.
A $130 per share, the offer looks like a fairly good deal for Amgen. But Onyx might not have much bargaining power left, with Pfizer (NYSE:PFE) dropping out a few weeks ago and Bloomberg reporting that Novartis is now out. I'm not sure there really are "multiple parties" left.
It would be helpful to know why Pfizer and Novartis aren't interested in buying, but we'll probably never get the full story. If the problem is fit -- Pfizer, for instance, has a drug that competes with Nexavar -- rather than price, it might give Onyx the courage to hold on for more.
My guess is that if $130 without a CVR becomes the final offer, it'll be hard for Onyx's board to turn it down, considering it's a 50% premium on the price before Amgen made its initial offer. The upside from here doesn't look tempting given the downside risk that a deal won't go through, however small it may be.