Astellas keeps powder dry as rivals go on M&A spree

TOKYO (Reuters) - An acquisition spree by local rivals has turned the spotlight on Astellas Pharma Inc (4503.T), the only major Japanese drugmaker not to purchase a big firm in the past year and arguably the one which needs a deal most.

Japan's top pharmaceutical makers have been snapping up foreign competitors to counter the expiration of patents on key drugs and find growth outside the stagnant domestic market, which they count on for nearly half their sales.

But Astellas, Japan's second-largest drug maker, has remained quiet, except for last year's relatively small, $387 million acquisition of U.S. biotech venture Agensys Inc.

"Astellas would probably love to take advantage of recent share price falls and make an acquisition," said UBS analyst Hirohisa Shimura. "But it faces the tough question of whether it can do a deal that is worthwhile and would be approved by investors given the grim outlook for its cashflow past 2011."

On the face of it, an acquisition would seem to make sense for Astellas, which is sitting on $3 billion in cash, has a clean balance sheet and, like other Japanese companies, now has more firepower for acquisitions thanks to the recent surge in the yen.

It also needs to secure revenue streams to offset the loss of patent protection on two major drugs in the United States.

Its Prograf transplant drug lost its U.S. patent protection in April, while its Flomax prostate drug will lose its exclusivity in the world's largest market in less than a year. They together account for about one-third of the company's annual revenues.

Astellas has said it is studying several possible options including license agreements and acquisitions to beef up its pipeline for oncology, infection, diabetes and other focus areas.

But other Japanese firms have stolen a march.

In the past 10 months, Takeda Pharmaceutical Co (4502.T) bought U.S. biotech firm Millennium Pharmaceuticals for $8.9 billion, Daiichi Sankyo (4568.T) grabbed a majority stake in Indian generic drug maker Ranbaxy Laboratories (RANB.BO) for $4.6 billion and Eisai (4523.T) spent $3.9 billion on cancer specialist MGI Pharma.

DIVERSIFY OR FOCUS?

On top of patent expirations, Astellas is struggling to get new drugs approved, clouding its prospects for growth.

The fate of its RSD1235, a trial fibrillation treatment, remains in limbo two years after it was put to U.S. regulators. Approval usually takes 10 months in U.S. but the authorities have requested more data and postponed their review.

Meanwhile, a clot prevention drug is stuck in Phase II clinical testing in several markets. A rival drug from Bayer AG BAYG.DE and Johnson & Johnson (JNJ.N) has been approved in Europe and another by Bristol-Myers Squibb Co (BMY.N) and Pfizer (PFE.N) is in Phase III, the final step before approval.

Daiichi Sankyo is also planning to advance its version to the Phase III testing by the end of this month.

Moreover, Astellas said last week it had withdrawn its submission of a new antibiotic drug candidate, Telavacin, in Europe following an unfavorable review by regulators, though it hopes to refile in the future with additional data.

Most analysts argue Astellas needs to narrow its focus to keep pace with larger rivals increasingly concentrating their research and development budgets on fewer drugs.

For instance, Pfizer is dropping efforts to develop medicines for heart disease, obesity and bone health to focus on a few key areas while Wyeth WYE.N is narrowing its research to a half-dozen therapeutic areas.

"In order to make the most of its limited resources, the company needs to narrow its focus like its local peers Takeda, Daiichi Sankyo and Eisai and be a specialty pharma," Daiwa Institute of Research analyst Kumi Miyauchi said.

But with no obvious pharmaceutical targets, Astellas might want to consider diversifying by buying a medical device maker such as Terumo Corp (4543.T), one analyst said.

"I think Astellas should use acquisitions to evolve into a hybrid pharma instead of trying to survive as a pure pharma," said the analyst, asking not to be identified.

And if Astellas isn't careful it may be the one being acquired. Its stock has fallen 20 percent this year, bringing its market value down to about $20 billion.

Astellas President Masafumi Nogimori last month acknowledged the need for measures to ensure the future of the company and said he would consider a takeover offer if it had merit.

But an aggressive buyback campaign suggests Astellas is not keen to be swallowed up just yet. The company has spent total 390 billion yen on share buybacks since April 2006 and announced plans this week buy back 40 billion yen more.

"The company may be more focused on trying not to be taken over than on searching for a good buy," UBS's Shimura said.

(Editing by Lincoln Feast)