Astellas Pharma <4503.T>, Japan's No.2 drugmaker, agreed to buy U.S. biotech OSI Pharmaceuticals for $4 billion in cash in a sweetened bid that will add OSI's blockbuster cancer drug Tarceva to its line-up.

Astellas has been chasing the deal, the third biggest in the Japanese pharmaceuticals sector, as it seeks to bolster a nascent cancer drug business as a future earnings pillar amid falling earnings in its core, transplant and urinary therapeutic areas.

Astellas, known for its urinary drug Flomax and transplant drug Prograf, wants OSI to boost its U.S. profile and oncology presence as it faces generic competition for these flagship drugs which recently lost patent protection in the United States.

Astellas will pay $57.50 per OSI share, 11 percent more than a previously proposed $52. The new price represents a 55 percent premium to OSI's last closing price before Astellas launched its hostile bid on March 1.

It's positive that it was cheaper than some market expectations of over $60 a share. But it will take a while for Astellas to generate synergies from the acquisition, said Atsushi Seki, a drugs analyst at Barclays Capital.

OSI shares closed up 4.4 percent at $59.80 on Friday in the United States, leaving some uncertainty over the response of some shareholders.

As for how many shares we may obtain, we will carry out the tender offer, targeting at least 90 percent, Astellas President and CEO Masafumi Nogimori told a news conference.

The boards of directors of both companies have unanimously approved the deal, Astellas said in a statement.

Buying OSI carries a major strategic significance for us. Most importantly, the deal will enable the early establishment of our cancer business base, Nogimori said.

The takeover could raise the profile of 62-year old Nogimori, who has led the firm's biggest M&A drive. While rivals Takeda Pharmaceutical <4502.T>, Eisai <4523.T> and Daiichi Sankyo <4568.T> have cut billion-dollar overseas deals, Nogimori has been viewed as a humble, ordinary man, with plenty to prove.

Investors were worried that Astellas might fail to buy a foreign firm again. That they have managed to clinch the deal will probably wipe out investor anxiety about Astellas' management, said Seki at Barclays.

RIGHT MOVE

Astellas expects the deal to add 34 billion yen in revenue in the year to March 2011, and predicts OSI earnings will grow in the years ahead to contribute an operating profit, after amortization, by March 2015.

Astellas shares were flat at 3,145 yen in a broader market <.N225> down 2.4 percent.

Tarceva, which totaled $1.2 billion in sales last year, is currently approved as a second-line treatment for patients whose lung cancer has worsened after at least one round of chemotherapy. OSI hopes to expand Tarceva's approved use for first-line maintenance therapy for lung cancer.

OSI's management has touted the firm as a rare profitable mid-cap biotech company fully integrated with discovery and commercial capabilities.

The OSI bid is Astellas' 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 out to rival Gilead Sciences .

(Reporting by Nobuhiro Kubo; Editing by Edwina Gibbs and Dhara Ranasinghe)

Japan Cancer