Astellas Pharma finally woos OSI Pharmaceuticals with $4 billion offer

Final price falls short of $60 per share amount that some had predicted would be necessary to seal the deal

Jeffrey Bouley
TOKYO & MELVILLE, N.Y.—Since January 2009, Japanese company Astellas Pharma Inc. has been angling to acquire New York state-based OSI Pharmaceuticals, repeatedly running into a brick wall when, for a long time, neither side would budge on its position. Now, as many market analysts had predicted, Astellas opened its coffers wider and has offered a half-billion dollars more cash in order to resolve things peacefully and convince OSI's leadership to say "yes."

So now, with an offer of $57.50 per share, or a total of about $4 billion, Astellas will be able to acquire OSI—a biotechnology company primarily focused on the discovery, development and commercialization of molecular targeted therapies addressing medical needs in oncology, diabetes and obesity—without having to resort to the hostile takeover bid it had set in motion (based on the $52 per share price that Astellas had stood firm on for so long). It also won't have to try to get its new full slate of directors voted in at OSI's annual shareholders meeting to replace the current board with more sympathetic members.

The agreement also wards off the specter of another failed attempt by Japan's No. 2 drugmaker to acquire a foreign company, as was the case in 2009, when CV Therapeutics was snatched out of Astella's grasp by Gilead Sciences Inc. in a $1.4 billion deal.

"Investors were worried that Astellas might fail to buy a foreign firm again," analyst Atsushi Seki of Barclays Capital told Reuters in mid-May. "That they have managed to clinch the deal will probably wipe out investor anxiety about Astellas' management."

The final price of $57.50 per share represents a premium of 55 percent to the closing price for OSI's shares of $37.02 on February 26, 2010, the closing price the day before Astellas made its earlier $52-per-share offer. The boards of directors of both companies have both unanimously approved the combination of the two companies.

OSI shares had closed at $59.80 in the United States on May 14, leaving some uncertainty over the response of some shareholders to the final offer, though Astellas' president and CEO, Masafumi Nogimori, said at a news conference: "As for how many shares we may obtain, we will carry out the tender offer, targeting at least 90 percent."

In the days following that jump in share price, though, OSI stocks have been trading more in line with Astellas' offer.

"Of course I would have loved to see more, but we're happy investors in OSI," said Sam Isaly, the managing director of Orbimed Advisors, on May 17. "Shareholders will sell their shares." Orbimed is OSI's sixth-largest shareholder with 1.7 million shares as of Dec. 31.

Most analysts, even those who didn't think a rival company would show up to try to snatch OSI away from Astellas, figured that the Japanese pharma would need to go up from the $52-per-share offer it has been sticking to for so long. But the final number falls short of the $60 or more per-share price that some had suggested might be necessary.

"It's positive that it was cheaper than some market expectations of over $60 a share," notes Seki. "But it will take a while for Astellas to generate synergies from the acquisition."

"I'm not surprised to see the deal get done but I am a little surprised by the price," Jason Kantor, an analyst with RBC Capital Markets Corp. in San Francisco, told Bloomberg. "A lot of people are going to be unhappy with the price, but it's a fair price. Clearly, the market was thinking higher."

As the BioHealth Investor blog noted in mid-March, the problem has always been wider than current OSI share prices, since "OSI has been public long enough that it is one of the oldest in its class. For a brief period in 2000 to 2001 its shares hit $80 a share. Then it even more briefly went up to almost $100.00 per share in 2006 and spent several months north of $60.00 on its own."

A lot of that—at least the share value from 2004 on—is due to OSI's successful therapeutic Tarceva, which is indicated for the treatment of patients with locally advanced or metastatic non-small cell lung cancer after failure of at least one prior chemotherapy regimen, and in combination with gemcitabine is indicated for the first-line treatment of patients with locally advanced, unresectable or metastatic pancreatic cancer. In addition, there is ongoing testing of Tarceva in patients with genetic mutations who may benefit from using the drug as an early treatment, now in the third and final stage of testing, and upcoming data on its potential for treating ovarian cancer, due in the first half of 2011.

With its plans for expanded indications for Tarceva, OSI believes it could boost annual sales over $1.2 billion, which was the approximate worldwide take for the drug in 2009. For its part, Astellas hopes that sales from OSI's products will offset the loss of patents on its blockbuster drugs Flomax and Prograf.

According to Astellas, the combined company creates a world-class oncology platform supporting Astellas' stated growth strategy of becoming a global category leader in oncology, a high- priority therapeutic area for the Japanese firm.

"The merger with OSI provides Astellas with a top-tier oncology platform in the U.S and an expanded product portfolio and pipelines," says Nogimori. "In addition to Tarceva, we are pleased to add its oncology infrastructure, discovery platform, expanded pipelines and talent base to our existing businesses. We look forward to working together with our OSI colleagues to grow the combined business and realize our shared goal of improving the health of the people around the world every day."
 
"We believe today's announcement recognizes the significant value we have built for our stockholders while providing the merged companies the opportunity to forge a stronger collective path forward in a shared mission to provide innovative new medicines to patients around the world," says Dr. Colin Goddard, CEO of OSI Pharmaceuticals.

The deal is for an all-cash transaction with no financing conditions to close, and the transaction is subject to other customary closing conditions, including the tender of a majority of OSI's shares of common stock on a fully diluted basis.


Jeffrey Bouley

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