OSI Shares Hammered Over Eyetech Price
PHILADELPHIA – Shares of OSI Pharmaceuticals Inc. (OSIP) dropped 22 percent Monday after the drug company said it would expand beyond its core cancer and diabetes market and buy Eyetech Pharmaceuticals Inc. (EYET) for $935 million in cash and stock.
Shares of Eyetech, which focuses on developing drugs and treatments for diseases affecting the back of the eye, gained 29 percent as investors celebrated the 43 percent premium that OSI agreed to pay, traders said.
Wall Street analysts criticized OSI for moving into an area in which it has no expertise and paying a high price. Under terms of the deal, OSI will pay $20 a share, compared with the $13.99 closing share price on Aug. 19.
"Although this transaction is clearly a positive for Eyetech shareholders, we view it as a merger of weakness," First Albany Capital analyst Lucy Lu said in a research report.
Lu said Eyetech's main product Macugen will lose market share in 2007 and show declining sales due to expected competition from other drugs, such as Genentech Inc.'s (DNA) Lucentis.
Eyetech partnered with Pfizer (PFE) to launch Macugen as a treatment for neovascular age-related macular degeneration in January. The two companies are studying other potential uses for the drug.
OSI defended its price for Eyetech, saying it saw financial benefits from the deal, even under the most conservative forecasts of sales and profits.
"We've beaten up the numbers a lot to make sure we're comfortable. We still see this deal as being accretive for the combined company ... and provide for double-digit revenue growth over the next five years," OSI Chief Executive Colin Goddard said in a conference call with analysts and investors.
"This deal may be something of a surprise to people ... but once we get out to talk to people, we feel the deal will be much better understood and much better accepted going forward," Goddard said.
He said OSI decided to move into the eye-treatment market to broaden the scope of the company beyond the cancer and diabetes markets. OSI will benefit through accelerated profitability, cost savings and improved research and development efforts, he said.
Morgan Stanley cut its price target for OSI's stock to $60 from $74, saying the Eyetech deal was a surprise, and that it did not see many benefits from the merger. The brokerage firm has an "overweight" rating on OSI's stock.
Eyetech's shares have slumped 69 percent so far this year and plummeted in late May after Genentech reported positive results from a trial of Lucentis. Eyetech's stock jumped last week on market rumors that Pfizer may acquire the company, traders had said.
Bear, Stearns & Co. Inc. was the financial adviser for OSI, while Merrill Lynch & Co. advised Eyetech.
Shares of OSI fell $9 to $31.77 in Monday trading. Eyetech added $4 to $17.99. Both stocks were among the most actively traded issues on Nasdaq.