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Shares of Melville, N.Y.-Based OSI Pharmaceuticals Drop 22 Percent

Posted on: Monday, 22 August 2005, 21:00 CDT

Aug. 23-- Shares of OSI Pharmaceuticals, the Melville-based drug development company, plummeted almost 22 percent yesterday as investors booed the company's plan to buy the maker of a treatment for eye disease.

OSI on Sunday evening said it planned to spend about $935 million for Manhattan-based Eyetech Pharmaceuticals, which has developed a drug to treat age-related macular degeneration, a common cause of blindness among older adults.

"We believe the proposed transaction will deliver scale to OSI's current business ... and provide for double-digit revenue growth over the next five years," OSI chief executive Colin Goddard said in a statement.

But investors and analysts criticized the $20-per-share deal, saying Eyetech falls far outside OSI's current expertise in cancer and diabetes drugs.

"Had OSI acquired another oncology company, you would've seen substantial upside in the share price," said Andrew McDonald, a biotech analyst at research firm ThinkEquity.

Analysts also expressed concern that Eyetech's drug, Macugen, may face a stronger rival by 2007.

That rival is Lucentis, currently under development from Genentech. According to Genentech, Lucentis was effective in treating 95 percent of patients in a recent study. That compares with Macugen's rate of 70 percent effectiveness in Eyetech's trials.

Given the prospect of competition between the two drugs, analysts said OSI is paying too much for Eyetech.

At $20 per share, the deal represents a 43 percent premium over Eyetech's closing stock price of $13.99 on Friday.

"Macugen appears to be a clear second-class molecule in its class (after Genentech's Lucentis), and we are left scratching our heads at this point on this acquisition," Morgan Stanley analyst Steven Harr wrote in a research report yesterday.

Executives at OSI were not available for comment yesterday.

OSI shares closed at $31.92 yesterday, down 57 percent from their 52-week high of $74.95. Eyetech's stock jumped nearly 30 percent to close at $18.13.

In a twist that speaks of the tangled relationships among pharmaceutical firms, OSI and Genentech are partners in marketing Tarceva, the lung-cancer drug that OSI developed.

Analysts said OSI needs to ensure that the competition between Macugen and Lucentis doesn't affect the companies' ability to work together on Tarceva.

They also questioned whether OSI would be able to wring cost savings -- a key justification in most mergers -- from the Eyetech deal, given that there is little overlap between the two companies' core strengths.

OSI said it expects to save money by centralizing some of Eyetech's corporate functions.

Merrill Lynch analyst Eric Ende maintained his "buy" rating on the stock and noted that OSI's "underlying story" -- in particular, the outlook for Tarceva sales -- "remains intact."

But other analysts were skeptical of the deal.

"I think people have to question logic and thinking here," McDonald said. "Either he's a lot smarter than everyone else or he made a big mistake."

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Source: Newsday, Melville, N.Y.

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