Onyx: Don't Hold Your Breath for $180/Share

NEW YORK (TheStreet) -- A combination of takeover speculation and short covering is once again lifting shares in Onyx Pharmaceuticals (ONXX), recently by 2%, Tuesday. On Monday, Onyx shareholders enjoyed the largest one-day increase in shares after soaring over $40 (50%) above Friday's close.

Amgen's ( AMGN) unsolicited $10 billion ($120 per share) proposal to acquire Onyx was rejected before the opening on Monday. It didn't take long for Onyx CEO Anthony Coles and the board to take a pass on Amgen's offer.

The quick rejection doesn't indicate the company isn't for sale; it certainly is based on the company's previous comments. The question isn't if, but at what price.

Obviously, Cole believes Onyx is worth much more than $120 -- but can he get it? The answer is yes, but how much more depends on the feasibility of slicing up parts and selling each component to the highest bidder. Think of it as a car that is worth more in parts to various buyers instead of selling the car complete.

While the major pharmaceuticals I follow are currently generating strong cash flow and profits, they also face a patent revenue cliff. I wrote on Monday the usual suspects for an Onyx takeover include Pfizer ( PFE), Bristol-Myers Squibb ( BMY), Novartis ( NVS), or Merck ( MRK).

Other companies may have an interest in various parts, but the company to watch is still Amgen. Amgen shareholders haven't enjoyed the takeover news and rejection in the slightest. While the overall market is trading higher, Amgen's shares are down about 2%. Other strong suitors are lower in the wake of takeover speculation, too. Pfizer and Bristol-Myers are trading lower for the second day, and Merck is treading water.

We can ascertain from pharmaceutical space weakness that the market isn't viewing a buyout favorably from the buyer's point of view. Sanford C. Bernstein biotechnology analyst Geoffrey Porges suggests a takeover price north of $170 is possible using the above-described multiple-buyer parceling out of the company.

It appears the most likely way Onyx will receive over $150 requires multiple buyers. For shareholders willing to sit on their hands for months, it may pay off handsomely.

However, as I wrote yesterday, the probability of receiving over $140 a share drops exponentially as the hoped-for target price is raised. Using 2014 earnings estimates of 60 cents a share, the valuation is over 230 times earnings. Looking forward even further to 2015 with estimated earnings of $1.50 per share, the valuation is still over 90.

After removing cost savings but adding in acquisition costs, I can't say Onyx won't receive a bid over $160, but it does appear the buyer(s) may wish they didn't pay such a high premium.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Robert Weinstein currently blogs, mentors traders, and writes several weekly columns in Rocco Pendola's Option Investing newsletter from his home in northern Wisconsin. Robert tends to focus on the psychological importance of goals, risk mitigation, emotion, and relatively short term market exposure. With nearly 30 years of studying and investing experience, Robert has experienced the many ups and downs in the financial markets and uses the knowledge gained to maintain balance. Robert believes the best way to make money investing is to avoid losing it. The best way to avoid losing is to know what emotional traps lay in the path of investors and learning how to avoid them. Robert is a voracious reader of financial related books often completing more than one book a week while not trading or writing. Robert contributes to his blog at paid2trade.com on a regular basis with an emphasis on studying behavior finance.


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