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.

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.

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.