Drug Industry Mergers: Astellas Buys OSI; Universal Health Buys Psychiatric Solutions
Shareholders in Japan-based Astellas have been worried for some time about the company's profits. Generic competition for two of its main drugs is bound to hurt earnings. Immunosuppressant drug Prograf started facing competition in August 2009, and generics of urinary disorder treatment Flomax hit the market in March 2010. Together, those drugs were responsible for 30% of Astellas revenues in 2009.
U.S.-based OSI, in the meantime, has a best-selling lung cancer medicine, Tarceva, which it sells with Roche's Genentech. It also has a pipeline of oncology, diabetes and obesity drugs, plus a U.S. sales force and market experience. Total worldwide net sales of Tarceva for 2009, were approximately $1.2 billion, and OSI's share of those revenues was $359 million. In the first quarter of 2010, Tarceva sales grew 10%.
Apparent Premium for OSI Was Fair Price
So when Astellas launched its hostile takeover bid for OSI in March, its reasoning was clear. Many other pharmaceutical firms have been trying to secure growth and revenue through acquisitions. And Astellas said the deal would add to earnings from the first year.
But of course, any acquisition is only worth so much. To win approval for its offer, Astellas raised its bid 11% from $52 to $57.50 a share for a total of $4 billion in cash. That represents a 55% premium over OSI's share price on Feb. 26, and is more than nine times OSI's $428 million in revenues last year. While these numbers might make it sound like Astellas overpaid, they are not much different from those in other recent acquisitions of U.S. drugmakers. And after Astellas lost to Gilead (GILD) in an earlier competition to buy CV Therapeutics, shareholders are no doubt relieved to see a deal go through.
Both boards approved the new bid, which is actually 3.8% less than OSI's Friday's close. OSI shares dropped over 4% in Monday's trading.
UHS and Psychiatric Solutions: Two Complementary Companies
Meanwhile, Universal Health Services, which operates 134 U.S. medical facilities, saw its shares rise to set a new all-time high Monday after it agreed to buy Psychiatric Solutions or about $2 billion in cash. PSI has 94 owned or leased psychiatric inpatient facilities in the U.S.
UHS will also assume $1.1 billion in debt, making the deal worth approximately $3.1 billion. UHS will pay $33.75 per share, a 3.4% premium over Psychiatric Solutions's Friday closing price.
In a statement, UHS said that its "acquisition of PSI is a highly strategic transaction that brings together two complementary companies to create a premier facilities-based healthcare provider with an industry-leading presence in the behavioral health care services sector."
The acquisitions will double Universal Health's revenue from its behavioral health care business and on top of the significant cost saving expected, the company added the transaction will "be significantly accretive to UHS's earnings per share." RBC Capital Markets analyst Frank Morgan told Dow Jones Newswire his firm's "quick back-of-the-envelope analysis put the upside at about 67 cents a share in 2011," a significant addition to Thomson Reuters' 2011 EPS estimates of $2.82 for the company.