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Sealing the deal
TOKYO—Following a very colorful lead-up that began in September, Otsuka Pharmaceutical Co. Ltd. announced on Oct. 11 simply, of its planned acquisition of Astex Pharmaceuticals Inc., that it had “successfully completed, through its wholly owned indirect subsidiary Autumn Acquisition Corp., its acquisition of Astex Pharmaceuticals Inc. for $8.50 per share, net to the seller in cash, without interest and less any required withholding taxes.”
There were other technical details, of course, including how many shares had been tendered—a little more than 50 percent as of that time, which was enough to complete the process of tendering the $886-million acquisition offer—but the announcement by the Japanese acquirer was very sedate and formal.
However, the weeks previous had seemed more like a soap opera at times, with a deep division internally at Dublin, Calif.-based Astex, with the board and management insisting they were getting the best deal possible, and one of the single-biggest shareholders suggesting that management was, at worst, engaged in shenanigans to line their own pockets or, at best, woefully short-sighted. Astex, in turn, maintained that the investor, Sarissa Capital Management LP, was spreading misleading statements and failing to see the big picture.
The story began in early September when Otsuka, known for its blockbuster schizophrenia and depression therapeutic Abilify, announced an agreement to acquire Astex, which focuses on the development of therapeutics in the field of oncology. Although the price offered represented a premium of 48 percent to Astex’s average closing stock price in the previous 30 days, and a premium of 27 percent to Astex’s closing price two days before the announcement, several investors and other market-watchers maintained that the purchase price undervalued Astex considerably.
This was based in part on the company already having a drug on the market, Dacogen, but mostly because of the perceived potential of its pipeline. For example, the company had positive top-line results in late August from the ongoing clinical trial of its candidate SGI-110 for acute myeloid leukemia and myelodysplastic syndrome. SGI-110 is also being evaluated for a variety of other hematological and solid tumor oncology indications, including ovarian cancer and liver cancer, and Astex also has a compound, designated AT13387, that is being evaluated for the treatment of prostate and lung cancers.
In an interview with Bloomberg a few days after the announcement of the acquisition offer, Alex Denner, cofounder of Sarissa Capital—one of Astex’s single-largest investors—said, “We think that the bid price seems exceptionally low given the promise of the pipeline of the company.”
Aquilo Capital Management, which also owned shares of Astex, added its own opinion that the stock price of the company could double or triple in a year-and-a-half and also was disappointed that Astex took Otsuka's offer. Marc R. Schneidman and Adam S. Bristol—the chief investment officer and portfolio manager, respectively, of Aquilo—wrote in an open letter dated Sept. 9, “the company is currently on the path to success, making great strides in becoming an important player in the oncology market. In a robust capital market environment in which biotech companies with fewer resources, lower commercial potential and minimal clinical pipelines are being valued for far more, the board has decided to short-change shareholders of the value that they have supported and helped to create.”
Meanwhile, JMP Securities analyst Mike King was another critic of the deal, and he expressed confusion as to why Astex would take an acquisition offer before presenting results of its SGI-110 Phase I/II study at the American Society of Hematology meeting in December.
However, Keith Speights of The Motley Fool wrote on Sept. 5 that “this looks to be a pretty good deal for Otsuka. The Japanese drugmaker and its partner Bristol-Myers Squibb 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.” He added: “It’s quite possible that Astex could have gotten a better deal. However … just because someone thinks a lot more money can be obtained, doesn’t mean that it actually can be obtained.”
Zacks Investment Research was generally positive about the acquisition, noting, “Shares of Astex Pharma reacted positively to the news. We are positive on the acquisition. We believe the acquisition of Astex Pharma will boost Otsuka Pharma’s pipeline for neuroscience, cardiovascular and oncology. It will also provide Otsuka Pharma access to Astex Pharma's proprietary drug discovery platform, Pyramid.”
After that point, the analysts having chimed in, the situation became more of a back-and-forth, “he-said-she-said” set of exchanges between Astex and Sarissa in the form of open letters.
In an letter to investors on Oct. 2, for example, the board of directors of Astex wrote, “A number of misstatements and falsehoods have recently been circulated regarding the current tender offer from Otsuka to acquire Astex. Our public statements and SEC filings have been consistent as to the thoroughness of the sale process and the resulting merger agreement.”
Astex insisted the deal was “the culmination of a comprehensive process to maximize value for Astex stockholders” and that in that process, 33 pharmaceutical companies across the globe were contacted to assess their interest in acquiring Astex. Reportedly, only five responded, one of which was Otsuka—which the board says was the only company to actually submit a final proposal after signing non-disclosure agreements and conducting due diligence. Reportedly no other companies stepped forward with better, competing bids after the Sept. 5 acquisition announcement.
A letter the same day from Sarissa, which owns about 5 percent of Astex's shares, took an entirely different position, and stated flatly, “We believe the recently announced merger transaction with Otsuka Pharmaceutical significantly undervalues Astex and therefore we do not intend to tender our shares. It seems clear to us from both analyst commentary and press reports in response to the announcement of the Otsuka transaction that many shareholders concur with our view of the valuation of Astex and perhaps share our concerns about both the timing of the auction process and the manner in which it was conducted.”
Sarissa expressed its belief that “Astex did not reach out to all potentially interested bidders, and we are troubled by the carefully worded language in the various public disclosures by Astex that suggests that the auction process may have been inappropriately biased towards a transaction that would preserve the existing infrastructure of Astex rather than obtain the highest value transaction for shareholders.”
The exchanges culminated in an Oct. 9 open letter, in which Astex wrote, “We are disappointed that Sarissa Capital continues to mislead Astex stockholders with information that is incomplete, taken out of context and does not provide full and accurate information to Astex stockholders.”
In what Astex characterized as “a last-ditch attempt to unnecessarily delay and possibly derail the premium, all-cash transaction with Otsuka,” it pointed to Sarissa Capital having issued a press release about the compound LEE011, a clinical-stage, potential cancer treatment being developed in partnership with Novartis, as one sign that Astex was worth more than Otsuka was offering.
Among other things, Astex noted that the board had considered LEE011 in its deliberations, but added that the compound was still many years from approval. “Despite Sarissa Capital's hype, LEE011 is still in Phase I/II clinical trials and Novartis has not informed Astex of any patients treated in Phase II trials, let alone in Phase III trials,” Astex noted. “While Novartis has recently made the decision to enter Phase III clinical trials with the experimental drug, LEE011 is still many years away from potential FDA approval and market entry. Furthermore, while Astex has confidence in LEE011, as we have referenced historically, there is high risk associated with the development of any drug, in particular one that is still only in Phase I clinical trials.”