The buyout drama surrounding cancer drug maker Onyx Pharmaceuticals (NASDAQ: ONXX) is really beginning to heat up, and it's offering investors an in-their-face reminder that rapid growth and a promising pipeline are rare and come only for a high price in the health care industry.
Amgen originally offered to purchase Onyx for $120 per share almost seven weeks ago, but quickly found that offered rebuffed by Onyx, who was intent on shopping itself around and holding out for a better price. With Amgen now upping its offer to $9.5 billion, or $130 per share, some of the more serious bidders are beginning to bow out of the fray.
One of the potential bidders that have decided to step aside is oncology and hematology powerhouse Novartis (NVS 0.95%). According to a Bloomberg report, Novartis chairman Joerg Reinhardt is capping any future acquisition target at $10 billion, but he has no interest in acquiring Onyx at such a steep price. That doesn't, however, mean Novartis isn't on the prowl.
Source: Andrew Hecht, Flickr.
Novartis on the prowl
Novartis is certainly no stranger to the dangers of the patent cliff. Like many of the world's largest pharmaceutical companies, it's seen some of its biggest money-making drugs fall victim to generic competition. Last year saw the loss of high blood pressure medication Diovan, which had contributed $5.7 billion (about 10% of annual sales) in revenue in 2011, and breast cancer medication Femara. Looking ahead to next year, its blockbuster leukemia treatment Gleevec will lose its patent exclusivity.
New drugs are helping to curtail this steep revenue drop-off, including relapse-remitting multiple sclerosis drug Gilenya, which saw sales rise 66% in the second quarter over the year-ago period, and kidney cancer drug Afinitor, which delivered a 77% spike in sales. But, there's still nothing that can turn around an ailing pipeline quicker than an earnings-accretive acquisition.
Two companies on the radar
Here are two companies that I feel would be a good fit for Novartis.
Incyte (INCY -0.78%) -- current market cap, $4.18 billion.
Incyte would make a lot of sense as a potential buy candidate for Novartis given that the two companies already have an ongoing licensing pact with FDA-approved myelofibrosis drug Jakafi. Under the current deal, Incyte has the rights to Jakafi within the U.S. with Novartis claiming worldwide rights to the drug everywhere else. Jakafi (known as ruxolitinib in testing) is also being studied as a treatment for polycythemia vera, pancreatic cancer, and solid/hematologic tumors.
Incyte's pipeline isn't too complicated with numerous pharmaceutical pacts, either. Aside from a licensing deal with Eli Lilly (LLY -0.12%) over baricitinib, which is currently being studied in three trials (rheumatoid arthritis, psoriasis, and diabetic nephropathy), every other pipeline hopeful is either owned by Incyte, or licensed in some full or partial form to Novartis. With peak sales of Jakafi expected to be about $1 billion, and taking into account the potential of its remaining pipeline, as well as sales that would be taken by Lilly via baricitinib, I could see Incyte command a $5.5 billion to $6 billion price point.
BioMarin Pharmaceutical (BMRN -0.77%) -- current market cap, $9.24 billion.
I would certainly quantify BioMarin as much less likely a purchase than Incyte, but I wouldn't rule out its allure to Novartis, which is struggling to find ways to replace Diovan and Femara's rapidly tapering revenue.
The hesitation I could see Novartis having in purchasing a company like BioMarin is twofold. First, BioMarin's area of focus is on ultra-rare diseases, and its treatments often focus on some form of enzyme-replacement therapy. Novartis' focus tends to be on solid tumor and blood-borne cancers, with only a very minimal focus on rare diseases, so this would be quite the step out of its normal comfort zone. Second, BioMarin's valuation is already pretty steep, at $9.24 billion.
Despite these concerns, I still feel there is hope a deal here could get done. What BioMarin would bring to Novartis are four currently approved ultra-orphan treatments (three in the U.S. and one in the EU) that have absolutely no competition and hefty annual price tags that insurance companies seem more than willing to pay. This would give Novartis some cushion when its next round of big patent expirations rolls around in a few more years. Because investors have already priced BioMarin so loftily because of its unique position in the diseases it treats, I could see a deal getting done with little upside from here -- perhaps $10 billion to $10.5 billion.
