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:UNKNOWN) 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 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.