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The Battle for OSI Pharma


Why a hostile takeover bid from Astellas Pharma could be only the beginning.

The biotech buy-up is potentially underway as OSI Pharmaceuticals (OSIP) announced that Japan's Astellas Pharma has made an unsolicited offer to buy the company for $52 per share in a proposal that values OSI at $3.5 billion. According to a statement from the company, the hostile takeover comes after a verbal offer from Astellas Pharma in early February was rebuffed.

While OSI Pharma turned down the offer, it made it clear to its Japanese suitor that it was interested in some sort of deal. "As I had suggested at our meeting, our board is not interested in undertaking a sale of OSI at that price, which we believe very significantly undervalues our company. However, I can confirm that we are prepared to provide you with certain non-public information regarding the company, which is fundamental to our view of the value of OSI Pharmaceuticals," said OSI Chief Executive Colin Goddard in a letter to Astellas in early February.

The OSI dismissal comes despite the $52 per share price being a 40% premium to its closing stock price of $37.02 on Friday, prior to the offer being made public.

The Melville, New York-based biotech's stock jumped 53% on Monday after the offer was made public, bringing the stock to linger near $57 per share in midday trading -- showing that investors agree that the company is worth more than the Japanese Pharma is willing to offer.

Analysts and industry insiders have been saying since last year that 2010 will bring a year of smaller deals in the pharmaceutical industry as the sector consolidates and reorganizes. Unlike 2009, when Big Pharma gobbled up some of its biggest brethren, this year is expected to bring a slew of deals focusing on smaller biotechnology companies with extensive pipelines in concentrated disease areas.

(See, What the Top Ten 2009 Pharma Deals Say About 2010)

Yet, it seems the time for consolidation is not yet right for OSI, which has been in talks with Astellas for more than a year. The company said in its most recent annual statement with the SEC that it is "committed to continuing to be a selective acquirer of attractive pipeline assets, technologies, and companies to supplement and complement our internal oncology and diabetes and obesity R&D efforts."

The combination would offer Astellas a shot at OSI's significant oncology pipeline, including Tarceva, which is used in the treatment of non-small cell lung cancer and pancreatic cancer. The drug has sales of $358.7 million in 2009. The pill is also in clinical trials for use in other forms of lung cancer as well as colorectal and ovarian cancer.

"We firmly believe in the compelling strategic rationale behind the combination and the opportunity it provides to the OSI stockholders to realize full and fair value, in cash, immediately. As recently as February 12, 2010, Astellas presented this proposal to acquire OSI, which reflected a 50% premium on that date," said Astellas Chief Executive Masafumi Nogimori in a statement on Monday. "However, we received a response stating that our offer 'very significantly undervalues' OSI. That response was the latest indication to us that OSI is not interested in engaging in substantive discussions. We are therefore taking our offer directly to OSI's stockholders. Our proposal and its significant premium recognize both the value created by OSI to date and its future prospects."

Astellas plans to nominate members to the OSI board at the biotech's upcoming annual meeting in an effort to secure its bid. This comes less than a year after the Japanese company unsuccessfully tried to acquire CV Therapeutics for $1.1 billion, losing out to Gilead Sciences' (GILD) $1.4 billion bid.

OSI shareholders should hold out; this could be just the beginning of a bidding war for the company. Roche is currently the international partner on Tarceva and is the most likely candidate to swoop in and throw down another offer. OSI shareholders will be waiting.
No positions in stocks mentioned.

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