Pharma’s Cutting Edge

At the time of the announcement that OSI was buying Eyetech, prior to the market open today, OSI was offering what amounted to $20 a share for Eyetech, a 43% premium over Eyetech’s closing price last week. The offer consisted of $935 M (75% cash, 25% OSI stock at $40.73 a share). OSI would be issuing additional stock, giving EYET shareholders 10% of the combined entity and OSIP holders an 11% dilution. As I write this, Eyetech is trading up roughly 30% over Friday’s close at 18.10 a share, and OSI is trading down roughly 21% at $32 a share. Is this a good deal for stockholders of either company? Based on “analysts” comments, the Street believes that the deal is bad for both parties, but worse for OSI holders; they argue that OSI is overpaying for Eyetech and that OSI will have difficulty creating synergies from the merger. I believe the opposite–Eyetech is worth far more than what OSI is offering, made even worse by the pounding OSI stock is taking. Post-Reg FD, the Street gets long-term product sales projections wrong as often as it gets them correct (i.e. you could do just as well flipping a coin). In the case of Eyetech, they have it wrong. Specifically, most analysts have overestimated the impact of competition from Lucentis (Genentech) on sales of Eyetech’s Macugen by a large margin. No doubt OSI recognized this, as will any other firm that looks carefully at Macugen’s potential. As a result of the depressed market value for Eyetech, OSI correctly assumed that they could convince Eyetech’s management to sell out for less than the IPO price with a sweet package that provides bonuses and employment contracts. But it needn’t be so. Eyetech shareholders have the opportunity to vote down the deal, and they should. In the meantime, look for the distinct possibility of Pfizer making a counter-offer for Eyetech. (Disclaimer: I own shares and/or options in Eyetech and OSI).