Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Worst Deal I've Ever Seen

Yesterday, OSI Pharmaceuticals (Nasdaq: OSIP  ) announced that it is acquiring EyetechPharmaceuticals (Nasdaq: EYET  ) for a whopping $935 million. The release of this unexpected news caused OSI's stock to plummet by more than 20%. Good job, guys!

There's a reason that OSI's stock took such a hit. This deal, at this price, is lousy. It is quite possibly the worst buyout I've ever seen. I cannot believe that OSI is paying this much for Eyetech.

The skinny on OSI
During yesterday's conference call, Colin Goddard, CEO of OSI Pharmaceuticals, gave some sound strategic justifications for the purchase. He wants to transition OSI into a multiproduct company and move it beyond Tarceva, a cancer drug (and its lone product) that it shares with biotech titan Genentech (NYSE: DNA  ) .

I can buy that argument. I like companies with broad portfolios. Even blockbuster drugs level out eventually, and you'll often see a company become successful with one big product but have trouble coming up with a second act to keep growth in track.

So I understand why OSI wants to bring in some more drugs. We're cool there. But why Eyetech? And why $935 million?

The skinny on Eyetech
Eyetech is bringing its age-related macular degeneration drug Macugen to the table . and not much else. Macugen is a relatively new drug -- it launched in late 2004. It did $50 million in sales for the second quarter. The drug is doing well thus far, and Eyetech expects net product revenue from the sale of Macugen to come in at just less than $200 million for all of 2005.

But there are two problems here. First, while Macugen has performed well so far, Eyetech shares the proceeds with Pfizer (NYSE: PFE  ) . The profits are split 50/50 in the United States, and in international markets Eyetech will receive a royalty that is less than 20% of sales. So while OSI was touting the total revenue potential of the combined companies, that's a completely misleading metric -- it sweeps the revenue-sharing part of the equation under the rug.

The second problem is that Macugen has done well because it is a first mover. Other competitors are breathing down its neck. They include Lucentis from Genentech and Evizon from Genaera (Nasdaq: GENR  ) , both of which are in phase 3 development. Both of these drugs have looked good so far, and I expect both to be approved. This will put substantial pressure on Macugen, and it could really put a hurt on sales. I doubt that Macugen grows much beyond 2006.

Foolish final thoughts
Considering that Macugen is a huge risk and that the proceeds it does generate are shared with Pfizer, is it really worth almost a billion dollars?

I don't think so. And given the market's reaction yesterday, I'd say that's the consensus view.

I really have no idea what OSI is thinking. OSI has done well with Tarceva, and the drug should drive top-line growth for years to come. The company also has a number of interesting oncology and diabetes drugs in development that could drive future growth.

Although in principle I support OSI's acquisitive mood, there is no reason why it should have strayed from its circle of competence. Instead of bringing in drugs that mesh with its core competency, it's overpaying for a drug outside its therapeutic focus that will soon come under serious competitive pressure. This acquisition seems like a huge blunder.

Charly Travers is theMotley Fool Rule Breakersbiotech analyst. Take a free 30-day trial toRule Breakers byclicking here. Charly does not own shares of any company mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a strictdisclosure policy.

Read/Post Comments (0) | Recommend This Article (3)

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.

Compare Brokers

Fool Disclosure

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: 496830, ~/Articles/ArticleHandler.aspx, 10/23/2016 10:51:15 AM

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...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

3/26/2009 4:00 PM
DNA $94.97 Down +0.00 +0.00%
Genentech CAPS Rating: ****
GENR $0.24 Down +0.00 +0.00%
Genaera CAPS Rating: No stars
OSIP.DL $0.00 Down +0.00 +0.00%
OSI Pharmaceutical… CAPS Rating: **
PFE $32.18 Down -0.36 -1.11%
Pfizer CAPS Rating: ****