Onyx Pharma Drawing Buyout Buzz

Will German drugmaker Bayer gobble up Onyx Pharmaceuticals(ONXX Quote) now that the latter's cancer drug Nexavar is a two-time winner?

On Monday, Onyx announced the early stoppage of a phase III trial of Nexavar in advanced liver cancer after an interim analysis showed the drug significantly improved survival compared with patients taking a placebo. Onyx now will seek U.S. and European approval of Nexavar in liver cancer, the company said.

Nexavar is currently approved to treat kidney cancer. The drug is owned by Onyx but co-marketed with Bayer. Per their agreement, the two companies essentially split profits of the drug equally in Europe and the U.S. In Japan, Bayer sells the drug and Onyx receives a single-digit-percentage royalty on sales.

With Nexavar appearing to be active in two cancers now, it starts to make more economic sense for Bayer to acquire Onyx in order to gain full control of Nexavar. My back-of-the-envelope calculations come up with a takeover scenario in which Bayer might be willing to double Onyx's current share price. And by current share price, I'm talking about intraday, where Onyx is up $10.39, or 85%, to $22.65.

I'll show you how I get to my numbers below (with the usual caveat that these are just rough estimates), and my crystal ball certainly isn't clear enough to tell me whether Bayer ever will actually buy Onyx. But I believe there's a convincing case for why it could happen.