Astex Becomes the Latest Biotech Domino to Fall

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Another domino has fallen in the world of biotech.

Astex Pharmaceuticals (UNKNOWN: ASTX.DL  ) is being scooped up by Tokyo-based Otsuka Pharmaceuticals. Otsuka announced on Thursday that it plans to buy Astex for $866 million, which represents an offering of $8.50 per share.

Dissecting the deal
This looks to be a pretty good deal for Otsuka. The Japanese drugmaker and its partner Bristol-Myers Squibb (NYSE: BMY  ) 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.

Astex brings some revenue to the table with Dacogen, its drug used to treat myelodysplastic syndromes, or MDS. Sales for Dacogen totaled more than $250 million in the 12-month period ending in July. However, with a generic threat now on the market in the U.S., Astex looked to its partnership with Johnson & Johnson (NYSE: JNJ  ) for international sales growth to help overcome expected revenue loss in the states.

Otsuka isn't buying Astex only for Dacogen, though. The larger pharmaceutical company public comments focused more on gaining access to Astex's Pyramid fragment-based drug discovery technology than anything else. Astex counts several drugs in development based on this 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. However, the stock has seen big gains over the last couple of weeks as many investors anticipated that Astex could be up for sale. Otsuka's price tag reflects a 48% premium over the average trading price for Astex over the last month.

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.

Falling better than standing
If everything goes as planned, Astex will become the third biotech to be bought by a larger company in the last month. Amgen (NASDAQ: AMGN  ) and Onyx Pharmaceuticals (UNKNOWN: ONXX.DL  ) entertained observers throughout much of the summer with multiple twists in their potential deal. That drama ended last week with Amgen's $10.4 billion acquisition of Onyx. AstraZeneca (NYSE: AZN  ) also picked up privately held Amplimmune last week in a $500 million deal.

I think that Onyx's experience could be instructive for Astex investors who are disappointed with the Otsuka deal. Onyx initially spurned Amgen's offer, thinking that it could get a much higher price. One analyst suggested that Onyx could go for as high as $180 per share -- 50% more than Amgen's initial offer. Others thought that around $150 per share was attainable. In the end, though, Onyx sold out for $130 per share.

It's quite possible that Astex could have gotten a better deal. However, as Onyx discovered, just because someone thinks a lot more money can be obtained doesn't mean that it actually can be obtained.

After its second-quarter earnings release on Aug. 1, Astex CFO Michael Molkentin said that 2014 probably wouldn't be as good of a year as 2013 because of Dacogen's generic competition in the U.S. At that time, Astex's stock traded around $5.50 per share. Now, it's up more than 50%.

My view is that this selling now to Otsuka at a nice premium is better than potentially going into a more challenging 2014 without a buyer. It's better to be a domino that falls than one left standing all by itself.

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  • Report this Comment On September 05, 2013, at 3:20 PM, Hope4GoodFuture wrote:

    Keith, thanks. Here's my guess: SGI-110 isn't as good as we were hoping. I made a big investment in ASTX on the hope that SGI-110 would very soon replace Dacogen due to better efficacy and better toxicity profile. I hoped that if there were to be the case, revenues would be significantly higher than Dacogen because SGI-110 (if better efficacy and less toxic) would be better suited for combination therapy with many other drugs, each with their own toxicity. If significantly more efficacious, maybe SGI-110 could have been moved up into front line treatment in AML. However, the data reported last week doesn't look that much better than Dacogen from an efficacy point of view. They didn't disclose toxicity so I assume it's not the home run I was hoping for. ASTX's HSP90 inhibitor probably doesn't have much of a future. On top of that, long time shareholder Abingworth bailed out on ASTX, selling all its shares over the past 2 quarters. Abingworth appears to stick with their core investments for very long periods of time. Abingworth had a seat on the ASTX board. I assume Abingworth saw ASTX pipeline as not having that high a level of potential. That's just my theory but I'm glad to be out of this stock at this point. I was getting very nervous. It's pretty funny that lawyers are going to base an investigation on a sell side analyst price target! They must take sell side analysts more seriously than anyone else!

  • Report this Comment On September 10, 2013, at 1:40 AM, chris293 wrote:

    Sometimes you win, but if you snooze, you lose. ASTEX I been watching over a year, yet, I did not buy any so that cost me.

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