Onyx Pharma Drawing Buyout Buzz

A cancer drug makes a Bayer acquisition more appealing.
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Will German drugmaker

Bayer

gobble up

Onyx Pharmaceuticals

(ONXX)

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.

Peak worldwide sales for Nexavar's kidney cancer treatment are probably in the $200 million range, and the drug has significant competition from several drugs, most notably

Pfizer's

(PFE) - Get Report

Sutent.

But the worldwide sales opportunity for Nexavar as a liver cancer treatment might be double that of kidney cancer, or more. And here, Nexavar faces little competition, at least for several years. There are no approved drugs to treat liver cancer currently, although some chemotherapies are used off-label.

In the U.S., there are about 18,000 new cases of liver cancer diagnosed every year. A reasonable assumption would be that about 50% of these patients could be treated with Nexavar -- or 9,000 patients.

Calculating treatment duration for Nexavar requires some guesswork. The phase III liver cancer trial was designed with the assumption that Nexavar would boost survival by 40% to a median of 9.7 months, compared with six months for placebo patients. Again, to be conservative, treatment duration in liver cancer might be six months. The drug is currently priced at $4,300 a month, so assume a total treatment cost of $25,000 per patient.

Running those numbers gets to peak Nexavar liver cancer-treatment sales of $230 million in the U.S.

In Europe, the incident rate of liver cancer is about double that found in the U.S., so peak sales there could be twice as much. Realistically, however, accessing patients in Europe can be difficult, so I'll project peak European sales of $400 million for Nexavar in liver cancer. The rest-of-world opportunity for Nexavar in liver cancer is also very significant, but for now, we'll leave that out of the equation.

So, working with round numbers, my forecast gets to peak worldwide Nexavar sales of $800 million in both kidney and liver cancers. If Bayer wanted full ownership of the drug, it might pay two to three times sales for the half it doesn't already own, which would work out to an Onyx market value in the range of $1.6 billion to $2.4 billion.

Even with the stock up sharply Monday, Onyx's market cap is still around $1 billion.

I like my two-to-three times sales comparable because that's what

Eli Lilly

(LLY) - Get Report

paid recently to acquire

Icos

(ICOS)

to gain full rights to the erectile-dysfunction drug Cialis. The situations are somewhat similar.

Of course, these are just broad projections based on the information we have so far. The actual data from the Nexavar liver cancer study will be presented in June at the American Society of Clinical Oncology meeting. That's when the full extent of Nexavar's survival benefit and treatment duration will be seen for the first time.

Also, with Onyx and Bayer already linked together in a Nexavar marketing partnership, the likelihood of another bidder for Onyx is diminished. But keep in mind that Nexavar may one day work in other cancers. A phase III lung cancer trial was recently started.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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