OSI Pharmaceuticals Inc.'s (OSIP) board has rejected a $3.5 billion hostile takeover bid by Japan drug maker Astellas Pharma Inc.'s (4503.TO, ALPMY) as too low, and has begun to talk with other companies that could offer a higher price.

In its rejection of the $52-a-share offer, OSI cited expectations for future sales of cancer drug Tarceva, its potential in other multiple cancers, and the value of its product pipeline. The rejection wasn't a surprise, as the Melville, N.Y.-based company had snubbed a similar offer and had concluded that Astellas's preliminary indication, at $55 to $57 a share, was also too low.

Shares of OSI recently rose 32 cents to $57.98 after hitting a five-year high earlier Monday.

Astellas responded Monday to the OSI rejection by reiterating that its offer conveys "full and fair value" for OSI. Furthermore, Astellas said it will nominate a full slate of directors for OSI's coming shareholder meeting, which it traditionally holds in June.

OSI said it is now "engaged in preliminary discussions with a number of other parties, including major pharmaceutical companies, regarding potential transactions," according to a regulatory filing.

In an interview Monday, OSI Chief Executive Colin Goddard declined to discuss any aspects of those talks. He expressed a willingness to allow Astellas conduct due diligence, if it is willing to sign a nondisclosure agreement.

After brushing aside overtures from Astellas for more than a year, OSI in February offered to provide Astellas with certain non-public information in exchange for Astellas signing a nondisclosure agreement. According to OSI, Astellas never responded to that offer and instead announced its intention to launch a hostile offer earlier this month.

In deciding not to sign, Astellas has argued that the nondisclosure agreement proposed by OSI contained a two-year standstill agreement. The pact would prevent Astellas from acquiring any securities of OSI or making any proposal to acquire securities for a period of the agreement.

The current tender offer doesn't seem to have much chance of success because the shares remain well above the tender offer and OSI has a shareholder rights plan, a so-called poison pill, that would block the success of the hostile offer.

Astellas has sued OSI and its directors to stop them from getting in the way of the tender offer by preventing the use of the poison pill. Astellas argued that any such move would be "inconsistent with the directors' fiduciary duties."

On Monday, OSI's Goddard repeatedly highlighted that the Astellas offer doesn't reflect "the unique scarcity value in the mid-cap biotech space." His highlighting of the biotech deal environment comes as several companies have been successful in grabbing large premiums, and often generating interest from other parties.

ImClone Systems rejected a bid from Bristol-Myers Squibb Co. (BMY) and got a higher bid from Eli Lilly & Co. (LLY) in a $6.5 billion deal in 2008. More recently, Facet Biotech Corp. (FACT) agreed to a takeover for $27 a share from Abbott Laboratories (ABT) after rebuffing a $17-a-share hostile offer from Biogen Idec Inc. (BIIB).

Although OSI is painting itself as a biotech company, Tarceva and its entire pipeline are actually small-molecule drugs, which are chemical compounds more commonly developed by the traditional large pharmaceutical companies.

Both ImClone and Facet had biotech drugs, which are produced from living organisms and are more attractive to suitors because they offer better margins, a higher barrier of entry for competition and, currently, no risk of generic threats. Many larger drug makers have expressed a continued interest in acquiring such drugs to help fill their struggling pipelines and replace blockbuster drugs that will face generic competition in coming years.

OSI's sole marketed product is Tarceva, which it sells with Swiss drug giant Roche Holding AG (RHHBY, ROG.VX). The pill, used to treat advanced forms of lung and pancreatic cancer, had worldwide sales of $1.2 billion in 2009.

Its pipeline currently has one late-stage cancer treatment, two early-stage cancer drugs and two mid-stage obesity/diabetes treatments.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com
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