Two sides to the story

In the aftermath of many saying that Otsuka’s proposed acquisition of Astex undervalues the latter company, Astex weighs in with its defense of the deal even as a key investor provides a different take and declares it will not sell its shares

Jeffrey Bouley
DUBLIN,  Calif.—Inreporting on the proposed acquisition of Astex Pharmaceuticals Inc. by Tokyo-based Otsuka Pharmaceutical Co. Ltd., in an October DDNews article in print and online,a significant number of market-watchers and investors expressed concern thatthe $886 million deal undervalued Astex. Others thought the deal was a goodone, and that included a brief quote from Astex itself defending its position.
 
 
Now, shortly after that initial flurry of attention on thedeal, Astex has made its position and rationale more clear, and a particularlydubious investor has pledged not to tender its shares and been equally clearabout its reasons for doing so.
 
 
In an open letter to investors on Oct. 2, the board ofdirectors of Astex wrote, "A number of misstatements and falsehoods haverecently been circulated regarding the current tender offer from Otsuka toacquire Astex. Our public statements and SEC filings have been consistent as tothe thoroughness of the sale process and the resulting merger agreement."
 
 
The letter goes on to say that the deal is "the culminationof a comprehensive process to maximize value for Astex stockholders" and thatin that process, 33 pharmaceutical companies across the globe were contacted toassess their interest in acquiring Astex. Reportedly, only five responded, oneof which was Otsuka—which the board says was the only company to actuallysubmit a final proposal after signing non-disclosure agreements and conductingdue diligence.
 
 
Since the agreement with Otsuka was announced on Sept. 5, theboard notes, no third parties have approached Astex with an interest to acquireAstex.
 
 
"In assessing the valuation of Astex, the board took intoaccount not only the preliminary results that were announced on August 28,2013, but also the potential future economic risks and benefits of SGI-110 andthe other pipeline products, as outlined in Astex's Schedule 14D-9," the letternotes, and goes on to say that Otsuka originally offered $7.75 per share butthat the board negotiated upward for a final offer of $8.50 in cash per share. "Astexbelieves Otsuka's cash offer provides stockholders with immediate andsignificant value. Otsuka's offer of $8.50 per share in cash represents 52-percent,89-percent, 84-percent and 181-percent premiums to the closing trading pricesfor the 30 days, 60 days, 90 days and one year prior, respectively, to Sept. 3,2013, the last trading day before the board approved the Otsuka transaction."
 
 
According to the board, the deal would eliminate the need forissuance of significant dilutive equity capital in the future to funddevelopment programs.
 
 
The board also noted that although Otsuka indicated itexpects some continuity in management following the conclusion of theacquisition, "neither Otsuka nor Astex has conditioned the transaction onemployee retention nor has Otsuka or anyone in Astex management discussedconcrete employment arrangements."
 
 
As the board stressed in the letter, "If more than 50percent of stockholders do not tender their shares by the scheduled expirationdate of Oct. 10, 2013, it would impose substantial additional risk that Otsukacould ultimately walk away from the transaction. If Otsuka were to do so, Astexshares could retreat to pre-tender offer values substantially below $8.50 pershare … We thoroughly examined the Otsuka offer, firmly believe that it is inthe best interests of Astex stockholders, and unanimously recommend thatstockholders tender their shares pursuant to the tender offer." 
 
An open letter on the same day from Sarissa Capital, whichowns about 5 percent of Astex's shares, takes an entirely different position, andstates flatly, "We believe the recently announced merger transaction withOtsuka Pharmaceutical significantly undervalues Astex and therefore we do notintend to tender our shares."
 
 
"It seems clear to us from both analyst commentary and pressreports in response to the announcement of the Otsuka transaction that manyshareholders concur with our view of the valuation of Astex and perhaps shareour concerns about both the timing of the auction process and the manner inwhich it was conducted," the Sarissa letter continues, and points out thatcritical data on SGI-110 doesn't come out until December, making a deal now premature.
 
 
"The fact that Astex is trying to consummate the saleprocess before these data are available is inexplicable and disturbing," theSarissa letter notes. "With regard to the manner in which the auction wasconducted, we believe that the process was flawed. It is our view that Astexdid not reach out to all potentially interested bidders, and we are troubled bythe carefully worded language in the various public disclosures by Astex thatsuggests that the auction process may have been inappropriately biased towardsa transaction that would preserve the existing infrastructure of Astex ratherthan obtain the highest value transaction for shareholders."
 
"Among the many troubling aspects of the process is the factthat only a small number of bidders entered into a confidentiality agreementwith Astex (perhaps in part because of the extraordinarily long three yearstandstill and the fact that under the agreement, bidders could not even ask tomodify the terms!)," the letter adds.
  

Despite the Astex letter stating there is no plan in placefor existing employees to have guaranteed positions, the Sarissa letter points toa $2 million "merger success bonus" that has been disclosed, as wellas saying, "we recently learned that Otsuka expects to offer senior management 'compensationopportunities greater than thosecurrently available at Astex' if they complete the deal and would allow them toparticipate in a long-term compensation program that would 'provide forsignificant compensation incentives.'"
 
According to Sarissa, these offers put into question how objectivemanagement at Astex can be about this deal.
 
"As shareholders, we benefit from extending the offer periodas long as possible," Sarissa maintains. "Importantly, under the Otsuka mergeragreement, if a minimum number of shares are not tendered on Oct. 10, Otsukamust extend the offer for a period of at least 10 business days and must thenextend the offer for a second 10 business day period if this minimum conditionis again not satisfied after the expiration of the first extension. Thisprocess at least offers an opening to potential bidders who were shut out orwary of the process to engage with the company. We are reaching out topotential bidders who we believe were left out of the process. Bizarrely, Astexonly just yesterday released a potential bidder from the standstill where theycould not even communicate with Astex. Notably, since Otsuka does not have theability to terminate the transaction for any material adverse change related tothe results of any clinical trials being conducted by Astex, we believe thereis minimal risk that any negative clinical data presented during the successivetender periods could adversely affect the contemplated transaction."
 
 
"In summary, we believe near term clinical data and thepossibility of a properly run bidding process in the future could lead tosignificantly more value for our Astex shares," Sarissa concludes.



Jeffrey Bouley

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