* Sarissa says Otsuka's $886 million offer undervalues Astex

* Sarissa says Astex did not contact all potential bidders

* Astex says contacted 33 firms, only Otsuka made final bid

* Questions raised about timing, manner of auction

* Astex says made carefully consideration of economic risks

By Varun Aggarwal

Oct 2 (Reuters) - Otsuka Holdings Co's $886 million bid for Astex Pharmaceuticals Inc has run into opposition from an activist shareholder who says the deal significantly undervalues the U.S. biotech firm - a charge that Astex has denied.

Sarissa Capital, founded by activist investor Alex Denner, a former associate of billionaire Carl Icahn, said many shareholders agreed that Otsuka's bid was too low and the hedge fund also raised questions about the timing of the auction and the manner in which it was conducted.

The Japanese drugmaker has offered $8.50 per share for the U.S. firm, keen to tap its pipeline of cancer drugs.

After the announcement of the deal in early September, Astex shares initially traded above that price, indicating that investors expected a higher bid. The stock price gradually fell back to around $8.50 but shot to $8.64 on Wednesday after Sarissa's open letter to shareholders.

Sarissa, which owns about 5 percent of Astex, said it believed that U.S. firm did not contact all potential bidders and it was reaching out to companies it believed had been left out of the bidding.

In its own open letter to shareholders, Astex countered that it had contacted 33 pharmaceutical companies worldwide to gauge their interest, of which only five, including Otsuka, executed non-disclosure agreements.

The Japanese drugmaker was the only company to submit a final proposal, it said.

Astex also said it negotiated with Otsuka for a higher offer, gaining $8.50 per share from a previous bid of $7.75.

Sarissa questioned the timing of a deal that comes before the release of key data from a cancer drug, codenamed SGI110, expected as early as December. It also raised concerns over Otsuka's expectation of offering greater compensation opportunities and incentives to the U.S. company's senior management.

Astex said it had carefully considered not only the new, preliminary and interim results of the SGI110 trials but also the potential future economic risks and benefits of its products in development. It had also said Otsuka had not discussed specific employment terms or roles with Astex management.

Otsuka declined to comment on the open letters.

Others have questioned Otsuka's offer price.

Brean Capital analyst Gene Mack said in a note dated Sept. 5 that Astex should have rejected a bid below $13 per share as it did not reflect the royalties from its drug Dacogen and its portfolio of drugs partnered with companies including Novartis AG.

The Japanese drug maker is facing the patent expiry of its mainstay Ablify schizophrenia drug in the coming years. The European patent will expire around October 2014 and it will lose patent protection in the United States in April 2015.

Large pharmaceutical companies facing such patent losses have increasingly been looking to acquire smaller biotech firms to gain access to new drugs that could bolster income, with cancer therapy an especially hot area for deal-making.