What Astellas' Purchase of OSI Means for Biotech Investors

It used to be that figuring out which pharmaceutical giant was going to acquire a biotech was as easy as knowing the company the biotech was partnered with. Pfizer (NYSE: PFE  ) bought Warner-Lambert, its marketing partner for their cholesterol drug Lipitor; Eli Lilly (NYSE: LLY  ) bought ICOS to gain full control of erectile dysfunction drug Cialis.

Now it seems almost every pharmaceutical company in the industry has ties to another company: Pharmaceutical giants don't seem to think twice about buying a biotech even if it means gaining only part of a drug and inheriting a partnership with another drugmaker.

Witness Astellas acquiring OSI Pharmaceuticals (Nasdaq: OSIP  ) for $4 billion over the weekend. The more obvious acquirer would have been Roche, which co-markets OSI Pharmaceuticals' cancer drug, Tarceva.

The shift away from pharmaceutical companies buying their partners is great news for companies that have a single partner. Instead of having one potential suitor, the companies could be taken out by anyone.

Company

Partner

Drug

Vertex Pharmaceuticals

Johnson & Johnson (NYSE: JNJ  )

Telaprevir

Onyx Pharmaceuticals

Bayer

Nexavar

Momenta Pharmaceuticals

Novartis (NYSE: NVS  )

M-Enoxaparin (generic Lovenox) and M356 (generic Copaxone)

Sources: Company press releases and websites.

In theory, the increasing promiscuity of pharmaceutical companies should increase the value of the potential takeover targets. Unfortunately, it's nearly impossible to know when or even if an acquisition will happen, so factoring it into the price can be a risky move.

But you've still got to have a bidding war
Even if there's a bidder other than the partner, that's no guarantee that a company can get a good premium. It takes two to tango.

Astellas had to increase its offer to get OSI Pharmaceuticals' board to agree to the takeover, but even then the bid came in lower than investors were hoping for. The stock fell 4% yesterday when the bid came in lower than where OSI Pharmaceuticals closed on Friday. Without Roche or another drugmaker willing to pay up, Astellas got a pretty sweet deal at just 9.3 times revenue.

By contrast, look at how Facet Biotech fared by getting another bidder involved.

Acquired Company

First Bidder

Second Bidder

Premium Over Initial Bidder

OSI

Astellas

Astellas

11%

Facet Biotech

Biogen Idec

Abbott Labs (NYSE: ABT  )

54%

Sources: Company press releases.

Partnering kings
While companies with one partner might benefit from a takeover, I'm not sure that biotechs with multiple partners are likely to fare as well. Biogen tried to put itself on the block a few years ago, but being intertwined with two different partners on separate drugs seems to have scared off potential suitors.

Exelixis (Nasdaq: EXEL  ) is another company that isn't likely to be taken out, given that it's co-developing drugs with three companies and has out-licensed drugs to three additional companies. Even an acquisition by one of its partners would make for a messy integration.

That isn't to say that either company is necessarily a bad investment; you just can't expect to wake up one day and see its value increased by 50% because of a takeover offer.

Different company, same message
OSI Pharmaceuticals' situation hasn't told us anything that smart Fools didn't already know: Don't buy drug companies because you think they're going to be taken out. Sure, there are outstanding returns available if you guess right, but investing shouldn't be about guessing; head to Las Vegas if that's your thing.

Instead, invest in quality companies. If a pharmaceutical company or two agrees, they'll be happy to take it off your hands for a premium. Eventually.

Pfizer is a Motley Fool Inside Value selection. Exelixis, Momenta Pharmaceuticals, and Vertex Pharmaceuticals are Rule Breakers picks. Novartis is a Global Gains recommendation. Johnson & Johnson is an Income Investor recommendation. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Exelixis and has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1186196, ~/Articles/ArticleHandler.aspx, 12/18/2014 4:06:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement