Awkward courtship

After more than a year of wooing OSI unsuccessfully, Astellas goes for hostile bid

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TOKYO—In an attempt to acquire its resistant and unrequited paramour OSI Pharmaceuticals Inc., Japanese suitor Astellas Pharma Inc. is now taking its case directly to shareholders and attempting to gain some control over the Melville, N.Y.-based company's board of directors, as well as filing a lawsuit to prevent OSI from using what Astellas calls a "poison pill" option.

For its part, OSI maintains that it is being undervalued and expects Astellas to show a bit more money before it plans to take the Tokyo-based company seriously.

Astellas began the dance in January 2009, when it first noted its interest in acquiring OSI during a meeting with OSI's CEO, Colin Goddard. Then came the first metaphorical love letter—an official written proposal in February 2009.

As Astellas noted on March 1 of this year, when it decided to turn up the heat, "Despite subsequent letters reiterating Astellas' interest in March and June 2009 and several face-to-face meetings, including a meeting between the two CEOs on Feb. 12, 2010, OSI has  refused to engage in a meaningful discussion."

It was that Feb. 12 refusal to Astellas' proposal that started the spat that dominated the entire month of March. Astellas felt that its proposal to acquire all of OSI's shares for $52 per share, a 50 percent premium to the closing price on Feb. 11, was more than a sufficient dowry to secure a marriage—seeing as it amounted to about $3.5 billion. OSI still felt unappreciated.

And so March 1 saw Astellas do the corporate equivalent of putting pressure on the friends and family of its intended—in this case, the stockholders—to convince OSI to make what Astellas felt was the right choice. Or, as Astellas put it, it "has decided to commence a tender offer and go directly to the OSI stockholders. Astellas will consider all means necessary to secure a completed transaction."

One of those other means was also a promise by Astellas that it would "nominate directors at OSI's upcoming annual meeting to give stockholders a voice in the outcome."
A spokesperson from communications group Brunswick New York, speaking to ddn on behalf of Astellas, said on March 12 that Astellas hadn't decided how many board members it would nominate.

"It may be all of 10 of them, it may be some of them," he said. "It may be a majority or a minority. But the idea is to put in place people who are in possession of all the necessary information to consider the best course of action for OSI and its shareholders and actually discuss the offer on the table—because Astellas believes the incumbent board has neglected its fiduciary duties."

Not surprisingly, despite the "we're not sure" proclamations, Astellas four days later had 10 names ready to announce, "in order to nominate a full and competing slate of independent directors at OSI Pharmaceuticals' 2010 annual stockholders' meeting."

When this would be decided depends on when OSI decides to hold said meeting, and a company spokesperson from OSI declined to say when it might be scheduled, or even what month it might occur.

But while OSI wouldn't say anything on record with ddn, it did have some choice public words for Astellas, saying the very same day of Astellas' announcement that "OSI believes the Astellas director nominees' only mandate is to support Astellas in acquiring OSI at an inadequate price."

A day before, OSI's board also unanimously rejected Astellas' unsolicited tender offer, and advised stockholders to reject the offer as well.

"After carefully analyzing and considering Astellas' offer, the board has unanimously concluded that the offer does not fully reflect OSI's fundamental, intrinsic value. We believe that OSI is a unique asset—the only profitable, mid-cap biotech company with a growing, high quality and fully integrated oncology franchise and a strong diabetes and obesity franchise which also has a proven track-record of success," notes Robert A. Ingram, chairman of OSI's board of directors. "The OSI board takes its fiduciary duties seriously and will continue to do what's right for OSI stockholders. In that regard, the board of directors has instructed OSI management, with the assistance of the company's financial advisors, to contact appropriate third parties in order to explore the availability of a transaction that reflects the full intrinsic value of the company."

"OSI is well positioned and we continue to successfully execute on our strategic plan. In addition to our blockbuster oncology drug, Tarceva, and our highly differentiated pipeline in two of the highest growth and most attractive therapeutic areas, we have substantial financial assets, including significant DPIV [Dipeptidyl Peptidase IV] patent royalties, substantial cash balances and net operating loss carry-forwards," adds Goddard. "Our business remains strong, as exemplified by our 13 percent revenue growth in 2009, which we accomplished while solidifying our patent position and advancing our pipeline. We expect 2010 to be another year of strategic and financial growth."

In response, Astellas released a statement saying, in part, "Astellas is pleased that OSI's board of directors has finally instructed its management to explore a transaction for the company. However, Astellas continues to firmly believe in its proposed transaction and the opportunity it provides for OSI's stockholders to realize full and fair value, in cash, immediately."

The continuing spat also involves a lawsuit filed by Astellas US Holding, Inc., a wholly owned subsidiary of Astellas Pharma Inc., in the Delaware Court of Chancery, against OSI and its directors. The lawsuit seeks, among other things, declaratory and injunctive relief enjoining OSI and its directors from engaging in any action or inaction, including applying OSI's "poison pill" rights plan, that has the effect of improperly impeding, thwarting, frustrating or interfering with the tender offer in a manner inconsistent with the directors' fiduciary duties.

Immediately after Astellas started turning up the heat, OSI's stock jumped 52 percent, to $56.43 per share, and has been trading anywhere from around $4 to $6 per share higher than OSI's unsolicited $52-per-share bid, which may very well force Astellas to make a higher offer if it wants to seal a deal in the near future, whether with the OSI board or with the company's shareholders.

Otherwise, some analysts suspect that Astellas may lose OSI to someone else. This current action follows Astellas' unsuccessful $1.1 billion bid last year for CV Therapeutics Inc., which ended with CV agreeing to be acquired by Gilead Sciences Inc. for $1.4 billion. In the case of OSI, Roche Holding AG is partnered with the company on its drug Tarceva, for pancreatic and lung cancer, and so some predict that Roche may emerge as a rival bidder.

In a March 1 note to clients, Eric Schmidt, an analyst with Cowen & Co., noted, "We anticipate Astellas will modestly sweeten its offer in order to complete the transaction on friendly terms."

Schmidt, who estimated in early March that OSI is really worth $42 per share, predicts that no other bidders will emerge.

"Given OSI's blockbuster cancer fighter Tarceva and pipeline of oncology, diabetes, and obesity compounds, the deal would arm Astellas with a leading oncology franchise in the United States, as well as expand the firm's development-stage lineup," notes Morningstar Inc. in a stock analyst note in early March. "However, OSI's share price…has risen above Astellas' $52 per share mark, indicating that the market believes the firm will raise its offer or be outbid by another player (reminiscent of Astellas' failed hostile takeover of CV Therapeutics last year)."

Samuel Isaly, a managing partner at New York-based OrbiMed Advisors LLC, which is OSI's fifth-largest shareholder, has said that Astellas should increase its bid by 15 percent, to almost $60 a share.

Steven Harr, a Morgan Stanley analyst, didn't predict that other bidders would emerge, but did note that he expects other companies to at least evaluate OSI, and he believes that Astellas will have to bid between 10 percent and 15 percent more than it is now.

Geoffrey Meacham, an analyst with JPMorgan Research, noted in a March 1 report that there are several reasons OSI is willing to stand strong against the current Astellas offer. For one thing, the company may win U.S. clearance of Tarceva as maintenance therapy for lung cancer by April 19, and by the end of the year, the company will have results from the third and final stage of testing Tarceva in patients with genetic mutations who may benefit from using the drug as an early treatment, he wrote. Furthermore, there will also be data in ovarian cancer in the first half of 2011, Meacham notes, saying, "this is perhaps why OSI management was bullish enough to walk away from the initial Astellas bid."

What is a poison pill?

If you're wondering what the "poison pill" rights plan is that Astellas Pharma Inc. is filing suit against in the Delaware Court of Chancery, here's a quick rundown: OSI has had a shareholder rights plan, which is the so-called "poison pill," since January 1999. The purpose of the shareholder rights plan is to protect stockholders against unsolicited attempts to acquire control of OSI that does not offer a fair price to OSI stockholders as determined by the board of directors.

Under the plan, the acquisition of 17.5 percent or more of outstanding OSI common stock by any person or group, unless approved by the OSI board of directors, will trigger the right of OSI stockholders (other than the acquirer of 17.5 percent or more of common stock) to acquire additional shares of common stock, and, in certain cases, the stock of the potential acquirer, at a 50 percent discount to market price, thus significantly increasing the acquisition cost to a potential acquirer.

In addition, OSI's certificate of incorporation and by-laws contain certain additional anti-takeover protective devices, such as:

  1. No stockholder action may be taken without a meeting, without prior notice and without a vote; solicitations by consent are thus prohibited.
  2. Special meetings of stockholders may be called only by the OSI board of directors, or by OSI stockholders holding 20 percent of outstanding shares upon 90 days prior written notice.
  3. Nominations by stockholders of candidates for election to the board of directors at OSI's annual meeting of stockholders must be made at least 45 days prior to the anniversary of the date on which OSI first mailed proxy materials for the prior year's annual meeting of stockholders; and
  4. OSI's board of directors has the authority, without further action by the stockholders, to fix the rights and preferences, and issue shares, of preferred stock. An issuance of preferred stock with dividend and liquidation rights senior to the common stock and convertible into a large number of shares of common stock could prevent a potential acquirer from gaining effective economic or voting control.

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