Onyx has been transformed from a struggling biotech company to a $10 billion acquisition target in just a few years, the result of gambles made by its hard-charging chief executive, N. Anthony Coles who sued his company’s partner and agreed to pay more than $800 million for an unproven drug startup

July 1, 2013, 7:36 p.m. ET

How Onyx Transformed Itself Into a Target

JOSEPH WALKER

Onyx Pharmaceuticals Inc. ONXX +51.27% has been transformed from a struggling biotech company to a $10 billion acquisition target in just a few years, the result of gambles made by its hard-charging chief executive, N. Anthony Coles, who sued his company’s partner and agreed to pay more than $800 million for an unproven drug startup.

Now, Onyx is seen as a possible prize for large drug companies seeking a cancer drug with attractive business prospects. Onyx last week rejected an acquisition proposal from Amgen Inc. AMGN -1.19% News of the rejection and courting by other suitors sent Onyx stock surging 51% Monday to $131.33 a share, giving it a market value of $9.55 billion.Many on Wall Street were skeptical of Dr. Coles, a cardiologist and former Merck & Co. executive, when he joined Onyx in 2008. At the time, he pledged to beef up the company’s thin product pipeline and expand the business beyond a profit-sharing agreement with Bayer BAYN.XE +0.33% AG. The history of biotechnology, though, is full of promising drug makers that faltered on failed clinical data, and some analysts wanted Dr. Coles to play it safe.

“One of the things he said he was going to do was smart business development deals, and our space isn’t exactly known for 100% success” when you acquire new drugs, said Christopher Raymond, a Robert W. Baird analyst.

But shortly after joining Onyx, Dr. Coles instructed his management team to begin evaluating acquisition targets “that a small company like us could afford,” said a former Onyx executive. Onyx raised eyebrows in late 2009 when it acquired closely held Proteolix Inc. and its then-experimental blood-cancer drug.

Generally one-product biotech companies—as Onyx was at the time—are the targets, not the acquirers. Moreover, the multiple-myeloma drug wasn’t an obvious fit for Onyx’s portfolio, and some analysts were skeptical of the investment because of entrenched competition from Celgene Corp. CELG +1.65% and a drug sold byJohnson & Johnson JNJ +0.90% and Takeda Pharmaceutical Co. 4502.TO +1.10%

But Onyx succeeded not only in getting the drug approved—it’s now known by the brand name Kyprolis—but in doing so under an “accelerated approval” process from the U.S. Food and Drug Administration last July.

Dr. Coles has described the acquisition and the launch of Kyprolis as part of a strategy to build a broad-based sustainable biotech company. But it has also made Onyx a more attractive target for acquisition.

Buying Proteolix “was a key event that led to the offer” from Amgen, said Howard Liang, an analyst at Leerink Swann.

Dr. Coles’s other gamble was suing Bayer, which co-developed Onyx’s biggest-selling drug, Nexavar, for liver and kidney cancer.

Onyx accused Bayer of developing a variant of Nexavar for colon cancer without giving it royalty payments it was owed. The suit was settled in 2011, and Onyx was given rights to a 20% royalty payment for sales of Stivarga, the colon cancer drug.

The settlement not only gave Onyx an extra revenue stream but, more importantly, it lifted a restriction of its profit-sharing agreement for Nexavar. The companies’ agreement had dictated that if Onyx was acquired, it would lose its 50-50 profit split and instead receive a percentage of royalties from Bayer.