OSI Pharma to fund $935 million Eyetech acquisition with 75% cash, 25% stock, sees profitability in 2006

By Ronda Fears

Nashville, Aug. 22 - OSI Pharmaceuticals Inc. said Monday it is buying Eyetech Pharmaceuticals Inc. in a cash-and-stock deal valued at $935 million, which OSI Pharma chief executive Colin Goddard said will transform it into a "bigger, more mature company."

OSI Pharma is paying $20 each for Eyetech shares - a 43% premium over Friday's closing price of $13.99. The deal will be funded with 75% cash, or $15 a share to Eyetech holders, and 25% stock, or 0.12275 OSI shares for each share of Eyetech. OSI Pharma estimates issuing 5.7 million shares of stock, which will amount to a pro forma 10% equity stake in the combined company and dilution of about 11% to current OSI Pharma holders.

On the news, which was announced by the companies on Sunday, OSI Pharma shares were off sharply in pre-market activity and at midday were more than 20% lower. Eyetech shares were up nearly 30%.

With $584.5 million of working capital and cash and equivalents at June 30, OSI Pharma executives said the company does not anticipate any debt issues to fund the transaction. The company does plan to draw down about $75 million from a $150 million bank revolver, however.

"We believe the proposed transaction will deliver scale to OSI's current business, bring forward profitability and provide for double-digit revenue growth over the next five years," Goddard said.

Profitability seen in 2006

OSI Pharma executives said the combined company will be a powerhouse financially with very little debt and anticipated 2006 revenues of more than $600 million. Profitability also is anticipated in 2006.

With combined revenues of more than $600 million projected for 2006, OSI will be well positioned to accelerate profitability into 2006. Moving beyond 2006, OSI believes that revenues of the combined company will grow at a compound annual growth rate in the mid-teens for the five-year period starting in 2007 and that EBITDA and adjusted EPS compound annual growth rates during the same period will be greater than 30% and 25%, respectively.

Eyetech already had forecast its operations would turn profitable in 2006.

The only debt on either company's books is OSI Pharma's 3.25% convertible bond due 2023, a $150 million issue. The convertible went out Friday at 107.75 bid, 108.5 offered but was off sharply on Monday with the underlying stock.

Around midday, the OSI Pharma convertible was quoted at 95 bid, 96 offered with the stock at roughly $32.

Looks can be deceiving

OSI Pharma, focused on cancer and diabetes drugs, will be adding eye treatments with the Eyetech acquisition, and executives at both companies told analysts on a conference call that it was not as much as a conundrum to combine the two companies at it might first appear.

"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 on the conference call.

Beyond the financial scenario, there is a direct link in potential research programs related to eye treatments and diabetes.

David Guyer, chief executive of Eyetech, said "OSI is the ideal partner for Eyetech. With OSI, we create a powerful new biopharmaceutical franchise, one with scale, depth of resources as well as strength and security of a diversified and growing revenue base."

The numbers were compelling, Goddard said. "We've beaten up the numbers a lot to make sure we're comfortable," he said. The merger will "provide for double-digit revenue growth over the next five years."

Eyetech could fetch rival bid

Although Eyetech shares are off 69% so far this year, some analysts assert OSI Pharma is paying too much for Eyetech, largely because of stiff competition for its eye drug Macugen from giant biotech Genentech Inc.'s Lucentis.

Eyetech took a hard hit in May from positive trials for Genentech's Lucentis but has recently been on an upward trend. Traders said recent spikes in Eyetech shares, particularly last week, revolved around chatter that its Macugen partner, Pfizer Inc., might be looking at Eyetech as a takeover target.

"Everybody with a strong buy sentiment is relying on Pfizer to swoop in and bid higher for Eyetech," one buyside market source said.

A sellside biotech analyst, however, said the general feeling in the industry is that Macugen will lose market share and show declining sales in 2007 when Genentech's Lucentis is launched. The buysider said that Infinium Capital Corp. said in a research report OSI was overpaying for Eyetech by $5 to $7 a share, or $200 million to $300 million.

Genentech may eye combo

Moreover, some onlookers said the deal with Eyetech also might strain OSI's partnership with Genentech for the cancer drug Tarceva. Yet, some also thought the deal might cause Genentech to consider snapping up the OSI Pharma/Eyetech combo.

"DNA [Genentech] co-markets Tarceva by OSIP. After the EYET/OSIP deal goes thru, DNA might buy OSIP,' said a buyside market source. "In this way, DNA will save their face about Lucentis if ever it does not get approved. I am keeping all of my EYET just in case there is another bid. That would be a win-win and win situation."

Another buysider said that event probably would be way down the pike, once the OSI Pharma merger with Eyetech is completed and the two companies are totally integrated. Then, however, he said it might make sense for a bigger company like Genentech to step in, unless the combined price tag gets too high.

"The $100 million cost savings from the merger translates to savings of about $2 a share, plus Eyetech's $5.70 cash net of debt, so OSI is actually paying $12.30 per share and EYET will earn $0.98 per share in 2006," he said. "I expect OSI will go sharply higher on the financial aspect of the deal. I expect more upgrades to come when the numbers are analyzed. That could be a deterrent, but not if the numbers really turn out to be this good."

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