September 15, 2005 (Vol. 25, No. 16)

OSI & Eyetech Sign Merger Agreement

OSI Pharmaceuticals (Melville, NY) and Eyetech Pharmaceuticals (New York City) entered a definitive merger agreement whereby OSI agreed to acquire Eyetech.

Under the merger agreement, OSI will acquire all outstanding shares of Eyetech common stock at a price of $20 per share in a combination of cash and OSI common stock, for an aggregate purchase price of approximately $935 million, representing a 43% premium over Eyetechs $13.99 closing share price on August 19, 2005.

The merger agreement calls for 75% of the purchase price, or $15 per share, to be paid in cash with the remaining 25% to be paid in OSI common stock using an exchange ratio of 0.12275 OSI shares for each share of Eyetech. Approximately 5.7 million OSI shares will be issued in the transaction.

The combined company will have two major marketed products. Tarceva is the first epidermal growth factor receptor (EGFR) inhibitor to demonstrate improved survival in both non-small cell lung cancer and pancreatic cancer. Macugen selectively binds to the pathological isoform of vascular endothelial growth factor (VEGF) to treat all forms of neovascular AMD.

The motivation is threefold as far as I can see it, says Jason Napodano of Zacks Investment Research (Chicago).

Both companies are now diversified from being a one-product story. The combined OS-Eye will have two multihundred million dollar products.

OSI is a cancer play with EGFR drug Tarceva and Eyetech is a opthomology play with VEGF drug Macugen, thats clear. But what is not so obvious is that both EGFR and VEGF are anti-angiogenesis inhibitors developed using similar science. OSI may use Eyetechs expertise in this area to help develop its next cancer drug.

Also, OSI Prosidion (OSIP) has a diabetes focus. There are 20 million Americans with diabetes, and 10% will develop some sort of eye disease as a result. Thats a two million patient overlap between two core focuses of OSI and Eyetech.

Finally, and this is just speculation, but the deal keeps OSI independent. Perhaps OSI was concerned that they would be acquiredby Genentechand certainly buying Eyetech (with Macugen) stops Genetech from buying them now, says Napodano.

As for the price, it really isnt that high if you think that Eyetech was $45 at the start of the year. Eyetech was $25 in May before the Phase III Lucentis data came out at Genentech. I was a believer that Genetechs data on Lucentius was impressive, but not the end for Macugen. Macugen certainly has its strengths in dosing (every 6 weeks as opposed to every 4 weeks for Lucentis) and potency.

This is not a super-sexy deal from OSIP shareholders view. They probably wanted the company to stay in the oncology focus. I think Eyetech shareholders got taken out at fair-value, maybe even a little below. Eyetech is still down 50% YTD and Macugen sales look strong so far.