The current biotech industry breaks down into big fish and little fish. Right now, Big Pharma is looking to gobble up smaller medical firms with the latest enhancements in cancer treatment. We’ve seen this trend in the energy and tech industries, where smaller companies are out-competing larger and more established ones, and the medical field is no different.
Big Pharma is struggling to compete against generic drugs, and numerous patents are set to expire in the coming years.
That is why Amgen (NASDAQ: AMGN), considered the world’s largest pharmaceutical company, has decided to acquire Onyx Pharmaceuticals (NASDAQ: ONXX) in a $10.4 billion buyout deal.
Under the terms, Amgen will purchase all remaining shares in cash.
This could not have come at a better time for Amgen, since the patents for four out of five of the company’s top-selling drugs will expire by 2015.
To give you an idea of how eager Big Pharma is to attain smaller companies, consider that Amgen actually made a similar offer to Onyx in June for $120 per share. The medical firm, however, rejected the offer outright. But Amgen refused to give up, instead offering $125 per share – an underwhelming figure for analysts who were expecting $130 per share, but the deal was suitable enough for Onyx.
The deal will close at the start of the fourth quarter.
Overall, the deal marks one of the top five purchases in biotech history, and it is the second-largest deal Amgen has ever engaged in, after a $17 billion buyout of Immunex in 2002.
So what will Amgen get out of the deal?
The company will get access to Onyx’s latest cancer treatment drugs like palbociclib, Stivarga, and Nexavar, but according to the New York Times, the most coveted drug for Amgen is Kyprolis – a drug used to treat multiple myeloma, a type of bone marrow cancer.
Through the purchase of Onyx, Amgen will get all rights to Kyprolis, which is expected to make a sales peak of $2 billion in the next few years.
These are the kinds of medicines Amgen will need to update its medical catalogue.
The biotech giant has received a fair amount of criticism from investors about the lack of new cancer drugs on the market. A majority of the company’s revenue stems from older anemia drugs like Epogen and Aranesp, both of which are declining in sales.
The company has been known for selling drugs that treat chemo side effects and cancer symptoms, but rarely drugs that attack cancerous cells.
There is an Amgen-owned product called Vectibix that treats colon cancer, but it has not sold well.
When it comes to the biotech field, you want to watch out for cancer drugs that will directly attack cancer cells in any capacity. The FDA is in a rush to approve cancer treatment drugs that will improve quality of life for ailing patients.
From a market perspective, the medical establishment is trying desperately to remain relevant by joining the haste for cancer treatments, so these firms can charge higher prices for valued drugs.
Play or No Play?
Onyx alone is definitely worth an investment, but with the upcoming acquisition, Amgen stock has much greater value than before.
After the agreement was announced on Sunday, shares went up five percent for Onyx and nine percent for Amgen on Monday.
Analysts predict earnings for Amgen can increase by 5 percent in 2015 and 15 to 20 percent by 2018 with the Onyx deal.
But the Amgen-Onyx deal is not without risk
There is stiffer competition in the multiple myeloma field, with Celgene Corporation (NASDAQ: CELG) being the number one contender. Celgene has Revlimid, a popular drug on the market, and its other drug Pomalyst won approval from the FDA this year and has been in direction competition with Kyprolis.
Takeda Pharmaceutical Company (TYO: 4502) and Johnson & Johnson (NYSE: JNJ) also have a drug called Velcade – a similar type of drug to Kyprolis.
Nevertheless, the deal is a sign that Amgen is thinking forward, and the company has no other choice, since it is also facing more generic competition in Europe.
Onyx’s Nexavar and Stivarga are sold with business partner Bayer (FRA: BAYN). And Onyx has eight percent royalty rights to the drug palbociclib through Pfizer (NYSE: PFE).
Other deals to watch out for is the Actavis (NYSE: ACT) $8.5 billion purchase of Warner Chilcott (NASDAQ: WCRX) and the purchase of Human Genome Sciences (NASDAQ: HGSI) by GlaxoSmithKline (NSE: GLAXO) for $3 billion.
Another deal that came 24 hours after the Onyx announcement was the AstraZeneca (NYSE: AZN) purchase of private firm Amplimmune – a company known for developing therapies that will boost the immune system to fight cancer.
AstraZeneca will acquire 100 percent of Amplimmune shares for $225 million, and an additional consideration of $275 million will be given for medical breakthroughs.
It is the latest bid by AstraZeneca to get access to a new wave of breakthrough therapies, but in this particular instance, the medicines will not have commercial value for the next several years.
However, the method of enhancing the immune system to fight cancer will be one of the fastest growing subfields within the biotech industry.
The growth and buyout is there, but sales have actually been slowing down because the stocks of medical firms have risen in the past year. Smaller firms are on the cusp of monumental achievements, and many of them are doing just fine on their own, which is why companies like Onyx have the power to refuse or accept larger deals from Big Pharma.
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