Japan's Western M&A Targets Drying Up? Astellas-OSI Bid Underscores Hostile Pressures - BIO Asia

TOKYO - Japan's leading pharma companies have made a number of high profile M&A moves in the past two years, and there are no signs that they are done with their pursuits. However, the number of attractive biotechs at the right stage of growth and value has decreased drastically.

Stephen Sands, the vice chairman of U.S. investment banking and global co-head of Lazard's healthcare group, believes there are currently only a handful - maybe two or three - ideal biotech acquisition targets. Sands, speaking at BIO Asia in Tokyo Jan. 24, said that this select group of companies will be a major focus among interested buyers in the coming year.

The pool of potential biotech acquisitions has shrunk largely due to big pharma's appetite for biotechs. Among Japanese pharma alone, Astellas, Takeda and Eisai have all undertaken large acquisitions recently (Also see "Takeda To Rely On M&A, Emerging Market Expansion To Offset Patent Losses" - Scrip, 5 Nov, 2009.) and (Also see "Will 2009 Be The Year Of M&As For Japanese Drug Makers In Antibody Space?" - Scrip, 26 Jan, 2009.).

In addition, some biotechs already face looming patent cliffs while others are still in the growth process, yet to reach a size large enough to draw interest from large pharma.

Sands estimated that there are only 30 biotechs valued between $2-30 billion in the U.S. right now, which he said is the fewest amount of companies in that range in a long time. However, he said he is not concerned about the future prospects of acquisition candidates because it only takes positive results from one clinical trial to catapult a company's worth.

When asked whether the pool of viable acquisition targets has been exhausted, Sands - who represented OSI Pharmaceuticals during Astellas' bid for the company and Abraxis Bioscience for its acquisition by Celgene - quipped, "I'm not stopping work this year, so I hope not."

The M&A appetite of Japanese companies expanding to new markets is similar to the global transactions executed by U.S. and European pharma in the 1990s, Sands said. Japanese pharma have room to scale up in the U.S., just as major European firms once did, and he expects the trend to continue. Japanese pharmas also are looking to overseas markets, particularly the U.S., to compensate for regulatory and pricing challenges at home.

But Japanese pharma are now broadening their reach in a different environment. "What will be limiting will be attractive targets at an appropriate price," Sands said.

Astellas-OSI Scenario

Even an appropriate price can't completely ensure securing a deal. When Astellas first approached OSI with a nonbinding letter in February 2009 stating its interest in acquiring the company, the Japanese firm offered $55-57 per share, which at the time was at a 54-60 percent premium, but OSI rejected the offer. Astellas came back in June 2009 with a $55-57 per share offer, despite an OSI stock price drop from $40 in February to $28 per share, which OSI again rejected. Astellas went public with a $52 per share hostile acquisition attempt, sued OSI for rejecting the offer, and finally reached an agreement after OSI shopped around for other bidders (Also see "Astellas Wins OSI But Victory Comes At A Price" - Scrip, 17 May, 2010.).

Astellas' transaction advisor, Michael Braun of Morrison Foerster, told the BIO Asia audience that Astellas secured the deal with the clock ticking. Astellas expected OSI to hold a stockholders meeting in June 2009, and the Japanese company wanted to be present at its side, including nominating members to OSI's board of directors.

As it turned out, OSI knew a sale was likely in its future, and determined that it hadn't properly shopped for its value, despite the premium Astellas placed on the company. As Sands put it, the board needed to secure for shareholders a good price and full value.

"For good, bad or different, we are headed down the path of the sale so we decided to shop for the company," Sands said.

Hostile Bids On The Rise

In the end, Astellas and OSI reached an agreement, and both sides state that integration has been smooth.

According to Sands, life sciences companies are increasingly turning to hostile bids, once a rarity in the sector. "It has gotten much more common in the last 24 months, like all sectors. In '08/'09, almost a quarter of deals out there were hostile."

The most high profile hostile bid in recent months has been the attempt by French pharma Sanofi-Aventis to take out the large cap Boston biotech Genzyme, a long-running saga that has bogged down over valuation and the failure of a white night to emerge (Also see "Genzyme, Sanofi Mum On Merger Negotiations At JPM Conference" - Pink Sheet, 11 Jan, 2011.).

In another much-watched drama, Eli Lilly & Co. and Bristol-Myers Squibb duked it out over ImClone in 2008, with Lilly swooping in to buy the New York biotech after BMS made a hostile bid for its Erbitux partner (Also see "Lilly Snatches ImClone Away From Bristol" - Pink Sheet, 6 Oct, 2008.).

And while hostile takeovers become more common in the life sciences industry, the Lazard exec says they are a much more polite affair than other sectors. For OSI and Astellas, that meant both sides putting together management presentations to highlight any value in the company. "We laid our soul bare," Sands said.

So, would Astellas go down the hostile path again? It first tried friendly negotiations with OSI before turning hostile, just as it had in its failed attempt for CV Therapeutics, which found a white knight bid from Gilead (Also see "Astellas Bows Out Of The CVT Sweepstakes, But What’s Next?" - Scrip, 20 Mar, 2009.).

"We don't like to do hostile takeovers. Our CEO is a gentleman," Astellas Licensing & Alliances VP Chihiro Yokota said. But only time will tell.

- Daniel Poppy ([email protected])