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A real steal?
October 2013
by Jeffrey Bouley  |  Email the author
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TOKYO—Early September saw Otsuka Pharmaceutical Co. Ltd., known for its blockbuster schizophrenia and depression therapeutic Abilify, announce an agreement to acquire Dublin, Calif.-based Astex Pharmaceuticals Inc., which focuses on the development of therapeutics in the field of oncology, via an all-cash tender offer of $8.50 per share—coming to a total purchase price of about $886 million.
 
Although this price represented a premium of 48 percent to Astex's average closing stock price in the previous 30 days and a premium of 27 percent to Astex's closing price two days before the announcement, several investors and other market-watchers maintain that the purchase price is too low and undervalues Astex considerably.  
 
The perception of this being bad for Astex investors comes largely out of the fact the company already has a drug on the market, Dacogen—approved in the United States for myelodysplastic syndrome (MDS) in 2006 and in Europe for acute myeloid leukemia (AML) in patients above 65 years of age in 2012—and positive top-line results in late August from the ongoing clinical trial of its candidate SGI-110 for AML and MDS indications. SGI-110 is also being evaluated for a variety of other hematological and solid tumor oncology indications, including ovarian cancer and liver cancer, and Astex also has a compound, designated AT13387, that is being evaluated for the treatment of prostate and lung cancers.  
 
In an interview with Bloomberg a few days after the announcement of the acquisition, Alex Denner, co-founder of Sarissa Capital Management LP—one of Astex's investors—said, "We think that the bid price seems exceptionally low given the promise of the pipeline of the company."  
 
Aquilo Capital Management, which also owns shares of Astex, thinks the stock price of the company could double or triple in a year-and-a-half and also is disappointed that Astex took Otsuka's offer.   Marc R. Schneidman and Adam S. Bristol—the chief investment officer and portfolio manager, respectively, of Aquilo—wrote in an open letter dated Sept. 9, "The company is currently on the path to success, making great strides in becoming an important player in the oncology market. In a robust capital market environment in which biotech companies with fewer resources, lower commercial potential and minimal clinical pipelines are being valued for far more, the board has decided to short-change shareholders of the value that they have supported and helped to create."  
 
JMP Securities analyst Mike King is another critic of the deal who thinks Astex shares are worth far more than $8.50 and who has expressed confusion as to why Astex would take an acquisition offer before presenting results of its SGI-110 Phase I/II MDS and AML study at the American Society of Hematology meeting in December. "I don't understand why you sell a company in advance of the most important data point in the company's history," he told Bloomberg.  
 
However, in a conference call to investors and media, Dr. James Manuso, chairman and CEO of Astex, said the decision to sell came after a five-year internal review, and "Otsuka emerged as the highest bidder interested in acquiring Astex."
 
Keith Speights of The Motley Fool wrote on Sept. 5 that "this looks to be a pretty good deal for Otsuka. The Japanese drugmaker and its partner Bristol-Myers Squibb lose patent protection for antidepressant drug Abilify in 2015. With a big drop-off in revenue on the horizon, it made sense for Otsuka to find a smaller company to acquire that could help bolster its drug pipeline," adding that, in addition to Dacogen and other pipeline products, Otsuka seems possibly even more interested in gaining access to Astex's Pyramid fragment-based drug discovery technology.  
 
"If you only looked at Astex's Wednesday close price of $8.27 per share, you might think Otsuka's $8.50-per-share offer wasn't a very good deal for Astex," Speights acknowledged. "However, the stock has seen big gains over the last couple of weeks as many investors anticipated that Astex could be up for sale … Some Astex shareholders won't be happy, though. Gene Mack with Brean Capital thinks Otsuka's offer is too low. He estimates that Astex should fetch closer to $13 per share because of Dacogen's strength and the potential of experimental acute myeloid leukemia drug SGI-110."  
 
However, Speights also pointed to another recent acquisition deal, Amgen's pursuit of Onyx, in which market-watchers thought Onyx's value could go much higher, but no one stepped forward to offer a higher price to counter Amgen.  
 
"It's quite possible that Astex could have gotten a better deal," Speights wrote. "However, as Onyx discovered, just because someone thinks a lot more money can be obtained doesn't mean that it actually can be obtained."  
 
Zacks Investment Research was also generally positive about the acquisition, noting, "Shares of Astex Pharma reacted positively to the news. We are positive on the acquisition. We believe the acquisition of Astex Pharma will boost Otsuka Pharma's pipeline for neuroscience, cardiovascular and oncology. It will also provide Otsuka Pharma access to Astex Pharma's proprietary drug discovery platform, Pyramid."
 
Otsuka has noted that it aims to enhance its discovery and development of drugs with novel working mechanisms by combining Astex's fragment-based drug discovery technology with Otsuka's own R&D strengths in areas like central nervous system diseases. Otsuka also expects to strengthen its oncology development portfolio and inline oncology offerings with an Astex acquisition.
 
"Astex's unique fragment-based drug discovery technology and clinical oncology research and development capabilities, born out of the passion of its researchers, exemplify our corporate mottos and belief in Sozosei (creativity) and Jissho (proof through execution). I would like Otsuka Pharmaceutical to continue to respect Astex's uniqueness and leverage it to bring further growth for Otsuka Pharmaceutical," said Dr. Taro Iwamoto, Otsuka's president and representative director, in an official statement.  
 
"We believe that Otsuka's financial resources and development expertise will enhance Astex's ability to build further its oncology portfolio, pipeline and discovery prowess," added Astex's Manuso. "This transaction recognizes the meaningful assets our employees have created. Most importantly, however, patients will benefit substantially from the larger drug discovery, development and commercialization platform a combined Otsuka and Astex will deliver."
 
Code: E101308

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