Japan's Astellas Goes Hostile on OSI Pharma With a $3.5 billion Bid

Astellas Pharma, Japan's No. 2 drugmaker, has wanted to get a footprint in the U.S. market. And this means making an acquisition. So, Astellas has spent 13 months trying to purchase OSI Pharmaceuticals (OSIP), a biotech company that developed Tarceva, a lung cancer drug, but wants to stay independent.

That prompted Astellas to go hostile. Its unsolicited bid for OSI comes to $3.5 billion, or $52 per share, a sweet premium over Friday's $37 close. On news of this deal, the shares of OSI spiked 50% to $55.75. Clearly, Wall Street doesn't thinks this will be the end of the bidding.

Interestingly enough, this is Astellas' second hostile takeover bid. During the past year, it also tried to acquire CV Therapeutics for $1.1 billion but lost out to Gilead Sciences (GILD). However, with its bid of OSI, Astellas does have the upper hand.

50-50 Profit Split

OSI's strategy has been to forge an extensive strategic partnership with Genentech, which is controlled by Roche. For the U.S. market, it splits Tarceva profits 50-50 with Genentech. The main patent on this drug doesn't expire until 2018. OSI also has an international royalty deal, in which it gets 21% of the profits (from the investor presentation).

The combined revenues on these two arrangements came to $354 million last year. In fact, the compound annual growth rate of the revenues have been 21% (since 2006). And the company generates strong cash flow, which came to $110 million for the past nine months.

Despite all this, OSI remains a fairly small company. So, it will be difficult to keep cranking out new drugs, scale new licensing deals or buy other companies.

But OSI's Tarceva's franchise is definitely an attractive asset for a company like Astellas, which is desperately trying to find ways to bolster its pipeline. Other Japanese drugmakers are in the same boat and are reacting the same way. Some recent deals include Takeda Pharmaceutical's $8.9 billion acquisition of Millennium Pharmaceuticals and Eisai's purchase of MGI Pharma for $3.9 billion.

Shareholders Will Be Tempted

When it comes to a hostile takeover, OSI has few defenses. For example, all the company's board members are up for election this year. And not surprisingly, Astellas is prepared to offer its own slate of directors, which will put tremendous pressure on OSI.

Next, Astellas is offering an all-cash deal with a large premium, and it doesn't need to secure financing for the deal. How can shareholders pass that up -- especially in light of the volatility with biotech companies?

True, other bidders may come to the table. One possibility is Roche. But that company has shown restraint on deals, and OSI's current valuation looks frothy.

So ultimately Astellas will probably win. But to get OSI to say yes, the price tag will probably need to be bumped up.