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TOKYO (Reuters) - Astellas Pharma Inc (4503.T) shares fell on Tuesday after it went hostile with a $3.5 billion bid for U.S.-based OSI Pharmaceuticals OSIP.O and its prized Tarceva cancer drug, highlighting concerns over the Japanese firm's drug pipeline and whether it would get into a bidding war against other possible suitors.
Astellas on Monday put its offer to OSI's shareholders, its second attempt to push into the U.S. market after it failed last year with a hostile bid for CV Therapeutics. Then, Astellas refused to raise its offer and lost to Gilead Sciences (GILD.O).
A successful bid for OSI would be the fourth-largest overseas acquisition by a Japanese drugmaker after deals in recent years by leader Takeda Pharmaceutical (4502.T), third-ranked Daiichi Sankyo (4568.T) and No.4 Eisai (4523.T).
Shares in second-ranked Astellas, valued at around $18 billion, closed down 2.1 percent after earlier dropping 3 percent to a near 3-week low. The drug sector index .IPHAM.T was flat.
OSI shares soared by more than half on Monday to $56.20, well above Astellas' $52 per-share offer, as analysts predicted a higher price, or a rival bid from potential suitors such as Swiss drugmaker Roche Holding AG ROG.VX, OSI's partner on Tarceva.
"Astellas' tender offer for CV Therapeutics ended in failure when Gilead unexpectedly emerged as a white knight. We await moves from rivals, Roche included, and they could push up the price," wrote JPMorgan Securities analyst Masayuki Onozuka.
OSI said it previously rejected Astellas' offer -- which represents a 40 percent premium to the biotech firm's Friday close -- as too low.
Astellas said it had unsuccessfully tried to reach a friendly deal with OSI through a 13-month-long dialogue.
"We see no financing needs based on the $3.5 billion price tag and Astellas' holdings of approximately 500 billion yen in cash and equivalents," said Morgan Stanley analyst Mayo Mita.
"But OSI management's response was not exactly receptive."
Some analysts questioned whether a deal -- even at the offer price, which is equivalent to over 8 times OSI's annual revenues -- would be positive for Astellas.
"We think the potential synergies are limited for the foreseeable future as Roche already has overseas marketing rights to Tarceva, thereby limiting future sales growth prospects," said Barclays Capital analyst Toshihide Yoda.
Yoda noted OSI's R&D pipeline meant new drugs were still at the early stages of development and wouldn't be coming to market anytime soon.
Credit Suisse analyst Fumiyoshi Sakai suggested OSI may be using price as an excuse, and could prefer Roche to step in as a white knight.
"What I see as a problem is that Astellas couldn't win OSI's agreement after discussions for 13 months. OSI may be citing the price only as a nominal problem. It has a strong partnership with Roche," he said.
Kenji Masuzoe, analyst at Deutsche Securities, said Astellas was in a tough position between its shareholders and those of OSI.
"Astellas would have to sweeten its offer to satisfy OSI's management and shareholders. If OSI's top management leave the company in protest against a takeover, OSI would be of little use. On the other hand, Astellas' shareholders may not like to see a higher offer," he said.
Spokesman Takeshi Suda said Astellas considers the announced offer as fair and the company would not comment further on the price, such as whether it would keep or raise the offer.
Analysts said Astellas' second hostile bid in as many years would increase the pressure on CEO Masafumi Nogimori.
"There are lots of other companies seeking to beef up their cancer drug business," said Deutsche's Masuzoe. "I don't know what Astellas' next step would be, but failing for a second time may lead for calls for Nogimori to shoulder the responsibility."
Astellas' operating profit is expected to drop 13 percent to 178 billion yen ($2 billion) in the year starting April 1, after an estimated drop of 18 percent this financial year, according to a survey of 13 analysts by Thomson Reuters I/B/E/S.
Earnings have been hit by patent expirations in the United States, the world's largest drug market, for its two biggest drugs; the Prograf transplant drug in April 2008 and the Flomax urination drug last October.
Takeda and Eisai used acquisitions to boost their cancer drug pipelines, while Daiichi Sankyo's deal saw it enter the generic drug market.
Astellas already operates in North America, where it has around 1,900 staff and annual sales of $1.9 billion. In 2007, it bought California-based Agensys, which is developing antibodies to treat solid tumor cancers.
Ratings agency Moody's placed Astellas on review for a possible downgrade on Tuesday.
Reporting by Yumiko Nishitani, Editing by Ian Geoghegan