Astellas Seals the Deal With OSI After Rocky Courtship

Includes: ALPMF, OSIP
by: The Burrill Report

By Michael Fitzhugh

Astellas Pharma (OTCPK:ALPMF), Japan's second-largest drugmaker, is paying $4 billion for OSI Pharmaceuticals (OSIP) and its profitable cancer medicine, Tarceva. The pricey victory is a triple-win for Astellas, likely to bolster its revenue, geographic base, and pipeline.

Revenue from Tarceva, Astellas' first cancer drug, will help replace declining profits from its top-selling organ-rejection preventative Prograf and the urination-helper Flomax. Securing a substantive stake in the U.S. oncology market will diversity Astellas' geographic base at a time when Japan is embracing less-profitable generic medicines. The deal also gives Astellas two other late-stage cancer drugs, Erlotinib and OSI-906.

The agreement ends a rocky courtship in which Astellas held fast to a $52 per share offer for more than two months, a figure OSI rejected as undervaluing the company and its pipeline. When Astellas finally raised its bid to $57.50 per share after reviewing non-public information about the company, OSI's board gave its unanimous consent. A simple majority of OSI's common stock shareholders will still need to tender their shares for the deal to close.

“The merger with OSI provides Astellas with a top-tier oncology platform in the U.S. and an expanded product portfolio and pipelines,” says Masafumi Nogimori, Astellas' president and CEO.

In addition to Tarceva, Astellas picks up OSI’s diabetes and obesity drugs, which generated $67 million in milestones and royalties during 2009, and it expects that revenue to grow 30 percent in 2010.

“It will take time to evaluate OSI’s R&D pipeline so we assume synergies from the merger will be limited in the foreseeable future,” says Barclay's Capital analyst, Atsushi Seki.

Tarceva is already FDA-approved as a second-line treatment for non-small cell lung cancer and as a first-line combination treatment for advanced pancreatic cancer. But it became even more valuable when the FDA and the European Commission approved it as a maintenance treatment for certain cases of advanced non-small cell lung cancer.

Lung cancer is the leading cause of cancer death in the United States, where it killed about 159,000 people in 2009, according to the American Cancer Society. Non-small cell lung cancer is the most common variant of the disease.

Seki estimates that patent protection for Tarceva could expire in 2018 in the United States and 2020 in Europe, but says that "generic competition could potentially emerge earlier depending on factors such as patent litigation."

Astellas tried to pick up Palo Alto, California's CV Therapeutics in 2009. That bid ended in failure when Gilead Sciences (NASDAQ:GILD) won over CV with a better offer.

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