SAN FRANCISCO, CA--(Marketwired - Sep 9, 2013) -
Dear members of the Board and fellow shareholders of Astex Pharmaceuticals,
We are the Managing General Partner and Portfolio Manager of Aquilo Capital Management, a life science investment fund based in San Francisco. Our fund invests exclusively in small-cap biotech companies globally. We are long term, value-oriented investors with extensive experience in assessing the economic potential, operations and management teams of companies in the health care sector. We have been shareholders of Astex Pharmaceuticals (the "Company") for three years. At present, Astex is one of our top five holdings.
We are writing to express our extreme disappointment in the Company's recent announcement that it agreed to be acquired by Otsuka Pharmaceuticals Co., Ltd for approximately $866 million or $8.50/share (the "Otsuka Offer"). Based on our analysis of the Company, we believe the Otsuka Offer does not reflect the Company's current value, or its ability to generate value in the coming years, and we urge the Company to reconsider its options.
We believe the Company should: (1) remain independent and execute on important near-term milestones, and unlock the intrinsic value within the full development pipeline, or (2) seek to significantly increase the Otsuka Offer to account for the combined value of the current cash, the Dacogen royalties, two wholly-owned Phase 2 assets, a productive discovery platform, and five fully-funded partner programs, each with significant milestones and royalties, or 3) spin out a special purpose entity that allows the Company's shareholders to share in the future potential royalty streams from the partnered programs. The Company can easily be valued at $13 to $14 per share today, and potentially two to three times that amount within 18 months.
We base our opinion on the following:
- With ample cash resources, recurring revenues, and considerable financial flexibility, the Company can remain sustainably independent
The Company had $134 million in cash on June 30, 2013, enough capital to sustain operations for several years even under aggressive spending scenarios. In addition, the Company has guided to $65 million in royalty revenue in 2013 for its hematology drug Dacogen and acknowledged that generic competition is less severe than originally contemplated. With the recent approval and launch of Dacogen in Europe by the Company's partner, Johnson & Johnson, and the recent filing for regulatory approval in China, the Company stands to receive an unusually high royalty rate on net sales of Dacogen, up to 30%, for years to come. Owning a royalty stream of this magnitude is extremely rare in biotech and even a modesty successful product will yield meaningful recurring revenues. Our conservative estimates yield an NPV of $4 to $5 per share of value for the Dacogen royalty alone, since the Company spends nothing on Dacogen and the revenues drop straight to the bottom line. Considering the Company has nearly $1.50 per share in cash today, and a royalty stream that could earn up to $1 per share per annum on a single product, the $8.50 per share is paltry and insufficient. This is especially true considering that the Company could almost certainly monetize the Dacogen royalty stream today for a substantial payment, if it desired.
- There is a significant market opportunity for SGI-110 in multiple therapeutic indications with a major value inflection point in the coming months
The Company's lead development program is SGI-110, a wholly owned drug that is a more potent and more convenient formulation of Dacogen. Our view is that SGI-110's mechanism of action, validated by the clinical and commercial success of Dacogen, suggests a high likelihood of successfully reaching the market. To date, SGI-110 has shown compelling early clinical data in hematological settings beyond that for which Dacogen is used, was selected as a highly-promising investigational agent by the Stand Up to Cancer Foundation, and could be entering into pivotal studies as earlier as next year. Importantly, the Otsuka Offer clearly does not account for the fact that SGI-110 may have utility in numerous solid tumor indications, such as ovarian and liver cancers, which would dramatically increase the drug's peak value to well above $1 billion annually. Important data from several clinical trials with SGI-110 will read out in the next several quarters, including essential data to be presented at the annual meeting of the American Society of Hematology in December. If these data are positive, the value of the drug and the Company as a whole would increase dramatically and there would be several potential avenues to monetize the asset should the Company choose to do so. Selling the company on the eve of this important data release significantly undermines the value creation shareholders have worked hard to support.
- The Company's other development programs, both partnered and wholly-owned, have considerable value.
The Otsuka Offer does not reflect the value of the Company's pipeline of 11 additional drug candidates, including the five programs that are fully-funded by Pharmaceutical partners. For each of the partnered programs, the Company spends nothing, yet is eligible for nearly $2 billion in potential milestone payments and high-single to mid-teen percentage royalties on each product that reaches the market. Critically, these programs are just now, or will soon, reveal their potential clinical value and shareholders will have received zero value. The Company's second cancer drug, AT13387, is in well-designed Phase 2 trials in prostate and lung cancer, with data expected next year. A partnered program with Novartis, a CDK4/6 inhibitor called LEE011, is currently in eight clinical trials in multiple cancers. We note that a competing drug with the same mechanism of action recently received FDA's Breakthrough Therapy Designation, is expected to be a multi-billion dollar drug, and added hundreds of millions to the market cap of the originator company based on an 8% royalty. Two additional novel cancer drugs are progressing with partners. AstraZeneca is now running five clinical trials with an Akt inhibitor AZD5363 after presenting encouraging data earlier this year, and Janssen/J&J have recently initiated a clinical trial with an FGFR inhibitor, JNJ42756493. As these and other programs progress, their value could ultimately exceed the Company's currently market cap. The Otsuka Offer is particularly frustrating because the proposed acquirer has minimal operations in oncology and adding a ready-made pipeline of assets should be a center point in the deal. As it stands, the offer price clearly ascribes no value whatsoever to the Company's pipeline.
- The Company's proprietary fragment-based drug discovery platform has been highly productive and has favorable future prospects.
The Company's core chemistry technology, called Pyramid, has been highly productive in discovering small molecule drug candidates against a wide variety of disease targets. It has yielded at least seven drug candidates that reached the clinic in the last ten years. This output exceeds that of discovery efforts at far larger competitors. The value of the Pyramid platform is apparent in the unusually high number of industry and academic partnerships. Major pharmaceutical companies, such as Novartis, AstraZeneca, Janssen and GSK all collaborate with the Company on drug discovery, as do highly-regarded academic institutions such as Cancer Research UK, Canada's NCIC Clinical Trials Group, and the Stand Up to Cancer Foundation. Each organization has elected to spend their limited resources on testing the Company's drug candidates in clinical trials. The Pyramid platform has generated tens of millions in non-dilutive research funding and there is no reason to doubt that it will continue to be productive. As we noted for the clinical pipeline, the Otsuka Offer is upsetting because the Company's Pyramid platform will provide the acquiring company with a valuable discovery operation that they do not have, nor have ever had.
- Management's rationale for the merger of Supergen -- Astex has yet to be realized
Lastly, the timing and acceptance of the Otsuka Offer interrupts a new chapter in the Company's growth. Over just the next 18 months, the Company and its partners will complete numerous clinical trials, starting with the presentation of vital clinical data for SGI-110 in December. In addition, we anticipate important data for SGI-110 and AT13387 in various solid tumors in 2014. Partners will report progress with other programs, notably Novartis's LEE011 and AstraZeneca's AZD5363. After five years of indifference, the market began to recognize the Company's intrinsic value, bolstering the stock price more 100% in the months leading up to the Otsuka Offer. We are perplexed as to why the Otsuka Offer would be accepted now at this pivotal point in the Company's history. Major inflection points are within sight, material clinical data for the SGI-110 program just two months away, yet we, as shareholders, are being asked to tender our shares at the grossly inadequate Otsuka Offer price. Quite frankly, management's promise to shareholders at the time of the merger of Supergen and Astex Therapeutics in 2011 -- that of a robust combined entity with ample cash resources and a deep product pipeline -- is being inexplicably undermined by an ill-timed acceptance of exceedingly low bid for the Company.
- The Board and Management's fiduciary duty to shareholders was not fulfilled
The peculiar timing of the Otsuka Offer leads us to believe that the Board and current management did not fulfill their fiduciary duty to shareholders. We were disappointed that the conference call following the announcement of the deal was exceedingly brief, lacking in details, and did not allow for questions. We are left without answers to several important questions: Why would a 5 year business review, at this juncture, result in a decision to sell the company? Are executives from the former Astex Therapeutics in agreement with this decision? What other options did the Company consider? Without clarity on these and other issues, we are left to wonder if the lucrative change of control provisions and severance packages in management compensation packages resulted in a gross misalignment with shareholders and a distorted view of the Company's current situation.
In closing, we believe that the Company is currently on the path to success, making great strides in becoming an important player in the oncology market. In a robust capital market environment in which biotech companies with fewer resources, lower commercial potential, and minimal clinical pipelines are being valued for far more, the board has decided to short-change shareholders of the value that they have supported and helped to create.
Thank you in advance for your careful consideration. We would welcome the opportunity to speak with you in person to discuss our concerns.
Marc R. Schneidman
Managing General Partner
Adam S. Bristol, PhD