The lawyers began circling within hours of the official disclosure of the bid by Japan’s Otsuka Pharmaceutical Co. Ltd. for Astex Pharmaceuticals Inc. Days earlier, the Dublin, Calif.-based oncology drug developer reported positive top-line results from the Phase II trial of cancer candidate SGI-110 in acute myeloid leukemia (AML) and myelodysplastic syndrome (MDS).

The deal, unanimously approved by the boards of both firms, calls for Otsuka to acquire the outstanding shares of Astex for $8.50 per share in cash, representing a 48 percent premium to the stock’s average closing price for the prior 30-day period. The purchase price values the company at approximately $886 million on a fully diluted equity basis.

Otsuka plans to conclude the transaction through a tender offer, which is expected to close early in the fourth quarter.

On a call with investors early Thursday morning, James S.J. Manuso, president and CEO of Astex, said the company will remain intact and operate as a wholly owned subsidiary of Otsuka. The acquisition process began with an internal five-year review of Astex that included the prospect of a sale, he added. A subcommittee of the board confidentially contacted prospective buyers to see which best “would recognize the value of our pipeline, discovery process, development capability and people,” Manuso said, with Otsuka emerging as the highest bidder.

The company did not accept questions on its conference call and did not respond to interview requests.

The question is whether shareholders will view Otsuka as savior or scavenger. Though investigations of large biotech M&As are standard practice, the quick scrutiny by a half-dozen law firms could portend a rough road for Astex and its Tokyo-based suitor.

On the one hand, shares of Astex (NASDAQ:ASTX) have traded as low as $2.14 in the past year. The company has an approved MDS product, Dacogen (decitabine), but receives revenues largely through royalties from licensing partners Eisai Co. Ltd. in North America and Janssen-Cilag International NV, a unit of Johnson & Johnson, in the rest of the world. Royalty revenue amounted to $16.6 million in the second quarter.

When disclosing its second quarter earnings on Aug. 1, Astex revised its 2013 guidance for royalty revenue from $55 million to $63 million, due only to delayed entry of generic competition for Dacogen following the expiration of the drug’s market exclusivity in the U.S. in May. Dr. Reddy’s Laboratories Ltd. launched generic decitabine in the U.S. on July 12.

Although Dacogen recently was approved in Europe to treat AML in patients older than 65, the drug has not gained approval for that indication in the U.S. In March 2012, the FDA issued a complete response letter to partner Eisai for a supplemental new drug application to expand the use of Dacogen to AML patients who are not candidates for induction therapy. The FDA declined to approve the application because the pre-specified analysis of the primary endpoint in the Phase III DACO-016 study did not demonstrate statistically significant superiority of Dacogen over the control arm.

Company’s Value Largely in Its Pipeline

The questionable future for Dacogen leaves much of the company’s value pinned to its development pipeline. In that regard, second-generation MDS candidate SGI-110 has demonstrated clear potential. The subcutaneous DNA hypomethylating agent is being evaluated in multiple studies in hematological and solid tumor oncology indications, including MDS, AML, ovarian cancer and liver cancer. SGI-110 could vastly improve treatment over Dacogen and competitor Vidaza (azacitidine, Celgene Corp.) by dramatically extending the drug’s half-life and more than doubling exposure time.

In late August, Astex reported an overall complete remission rate of 25 percent in the randomized Phase II study. The drug was given at a dose of 60 mg/m2 or 90 mg/m2 daily for five days in a 28-day treatment cycle. Previous studies have shown activity in restoring silenced tumor suppressor genes in cancer cells. (See BioWorld Today, Aug. 9, 2013.)

The compound was among the assets developed by cancer specialist Supergen Inc., which merged with its privately held counterpart, London-based Astex Therapeutics plc, in a 2011 cash and shares deal valued at $120 million. (See BioWorld Today, Apr. 8, 2011.)

Among its later-stage assets, Astex also has AT13387, a second-generation heat-shock protein 90 inhibitor targeting prostate and lung cancers, in Phase II studies. All told, the company has moved eight candidates through investigational new drug filings in the past eight years and has a handful of compounds in early clinical development.

In addition, Astex has a variety of programs partnered with big pharmas. They include a cell-cycle inhibitor agreement with Novartis AG, of Basel, Switzerland, valued at up to $520 million, a potential $500 million fibroblast growth factor receptor inhibitor license and drug discovery agreement with Janssen Pharmaceutica NV, a unit of New Brunswick, N.J.-based J&J, and a fragment chemistry-based discovery arrangement with Glaxosmithkline plc, of London, that paid £20 million (US$33.1 million) up front. (See BioWorld Today, Dec. 7, 2005, June 10, 2008, and Nov. 13, 2009.)

Not insignificantly, Astex also reported $134 million in cash as of June 30.

Deal Positive for Players in Oncology Space

Some investors apparently anticipated any buyout would at least nudge $1 billion. Shares of Astex spiked Wednesday afternoon after rumors of the transaction began circulating, and the stock hit $9.39 – a 52-week high – before closing at $8.27 for a gain of $1.59, or 24 percent. Volume was 16. 1 million shares, or nine times the daily average.

Predictably, on Thursday the stock gained 28 cents to close at $8.55. However, volume soared past 50 million shares, suggesting the company might still be in play.

The acquisition bolsters Otsuka’s discovery capabilities and therapeutic pipeline – an important factor for the Japanese pharma, whose blockbuster depression/schizophrenia drug Abilify (aripiprazole) goes off patent in the U.S. in 2015. Although terms of the deal call for Astex to continue operating its research and development shop, Otsuka also will gain access to Pyramid, the drug discovery platform developed by Astex.

In a statement reiterated by Manuso on the call, Taro Iwamoto, Otsuka’s president, said the acquisition “will strengthen not only our cancer portfolio but also our drug discovery research in the central nervous system field, through the acquisition of Astex’s fragment-based drug design technology at its Cambridge, England, research headquarters and its California clinical oncology R&D department.”

In some ways, the deal harkened to the 2011 acquisition of oncology drug developer Plexxikon Inc., of Berkeley, Calif., by Japanese pharma Daiichi Sankyo Co. Ltd., of Tokyo. That transaction included $805 million up front and near-term milestones of $130 million linked to approval of a promising lead compound, PLX4032 (vemurafenib), partnered with Roche AG, of Basel, Switzerland. (See BioWorld Today, Oct. 5, 2006, and March 2, 2011.)

RBC Capital Markets analyst Michael Yee, who earlier cited a target price of $9 for Astex shares, wrote in a research note that the Astex buy “underscores our thesis of the attractiveness and scarcity value of hematological oncology assets, a positive for players in the space.”

He cited Celgene Corp., Pharmacyclics Inc., Ariad Pharmaceuticals Inc., Infinity Pharmaceuticals Inc., Seattle Genetics Inc., Ambit Biosciences Corp. and Oncothyreon Inc. as among the biotechs that might benefit from the Astex deal.

On Wednesday, before the bid was confirmed, Yee also commented on the takeout chatter, suggesting a potential acquirer “could conceivably pay more than $8-9/share.” He noted that small companies are typically acquired at 50 percent to 100 percent premiums, “given their lower cost of capital and lower tuck-in type operating expenses.” Based on its pharma partners, Astex could attract interest from a number of companies, Yee predicted.

The tender offer for the outstanding shares of Astex will be pursued by Autumn Acquisition Corp., a wholly owned subsidiary of Otsuka Pharmaceutical, in turn a wholly owned subsidiary of Otsuka Holdings Co. Ltd., the holding company for the Otsuka Group, which had consolidated global sales of ¥1,218.1 billion (US$12.2 billion) in fiscal year 2012.