Johnson & Johnson Eyes Actelion as Potential Takeover Target

Potential deal would help J&J quickly plug the lost sales estimated at about $1 billion in 2017

jj1Johnson & Johnson Inc. (NYSE: JNJ), the world’s biggest maker of healthcare products, announced that it is in preliminary talks with Actelion Pharmaceuticals Ltd., as reported by The Wall Street Journal on November 25th, 2016. Actelion, Europe’s largest biotech firm, is currently valued at about $20 billion.

A potential takeover deal would help Johnson & Johnson withstand looming competition to its blockbuster rheumatoid-arthritis drug Remicade, an autoimmune therapy that had $4.5 billion in US sales in 2015. This comes after Pfizer Inc. (NYSE: PFE) said it plans to start selling its biosimilar version called Inflectra, in the US at a 15% discount off the brand-name drug’s list price in November 2016. Inflectra is the first and only biosimilar monoclonal antibody therapy and the second biosimilar to be approved in the US. J&J says it has several new drugs in development whose launch could make up for any revenue loss. However, a potential deal for Actelion would help J&J quickly compensate for lost sales estimated at about $1 billion in 2017.

jj2Actelion, which employs about 2,500 people, sells drugs for rare diseases, including artery disorders that affect the lung and heart known as pulmonary arterial hypertension (PAH). The company reported about 1.785 billion Swiss francs ($1.8 billion) in sales for January-September 2016. Actelion’s focus on rare diseases makes it an attractive takeover target because drugs in that area are less prone to pricing pressure. A potential bid for Actelion could be worth up to 220 Swiss francs ($217) or 250 Swiss francs ($246) per share, respectively, stoked by appetite in the industry for fast-growing businesses.

Actelion deal could broaden PAH portfolio for J&J

A deal for Actelion would give J&J a portfolio of drugs predominantly focused on treating PAH, adding to its existing pharma franchise. J&J’s chief executive, Alex Gorsky, said earlier in 2016 that the company was interested in deals to expand its main consumer, medical device, and pharmaceuticals segments. Sitting pretty with nearly $40 billion in cash overseas, J&J’s biggest deal to date was the $21 billion acquisition of trauma-device maker Synthes in 2011.

Actelion was founded in 1997 by Jean-Paul Clozel and Martine Clozel and other former Roche Holding Ltd’s employees who left the Swiss drug firm after it decided not to pursue a project their group was working on. Actelion went public in 2000 and its valuation has climbed sharply since then. In 2016, Actelion witnessed a decline in revenue after its best-selling drug, Tracleer, lost patent protection, which was made up by rising sales of new PAH drugs Opsumit and Uptravi. Actelion’s Opsumit and Uptravi drugs are expected to generate more than $4.6 billion in combined sales by 2020, up from an estimated $1.4 billion in 2016.

Actelion has long been seen as a takeover target because of its strategy to use the same R&D approach of its small molecule lung treatment expertise in other areas such as oncology, cardiovascular, and infectious diseases. However, Actelion Co-founder and Chief Executive Jean-Paul Clozel, who holds a 3.5% stake in the company, said he wants the company to remain an independent entity. In 2011, Clozel rallied shareholders against activist investor Elliott Management’s campaign to put the biotech firm up for sale. Actelion’s shares have more than tripled since then.

Second potential major deal for J&J

jj3The potential takeover deal for Actelion would be Johnson & Johnson’s second major deal in 2016 after its takeover of Abbott Laboratories Inc.’s (NYSE: ABT) eye-surgery equipment business for $4.32 billion in an all-cash deal on September 16th, 2016. jj4The deal, to be closed in early 2017, would enable Johnson & Johnson to emerge as the second largest company in cataract surgeries, an $8 billion global market that is growing at a rate of about 5% annually. The strategic deal includes Abbott’s consumer eye health products, cataract surgery business and advanced laser vision (LASIK) technology and corneal care products. Abbott’s medical-optics business makes equipment used in cataract and LASIK vision-correction surgeries, as well as contact lenses.

For Johnson & Johnson, the deal assumes significance since it has also been acquiring medicaljj5 technology assets as part of efforts to accelerate growth of its Medical Devices segment, which includes its vision care business. Abbott’s medical-optics business, especially cataract-replacement lenses, is seen to complement well with Johnson & Johnson’s eye-care unit, which sells ACUVUE contact lenses, and help the Company diversify into the surgical suite of products. Johnson & Johnson’s portfolio of contact lenses and solutions is part of a $7 billion segment of the $68 billion eye-health market.

Pharma M&A frenzy picking up pace

Big drug companies such as Pfizer and Sanofi S.A. (NYSE: SNY) have prioritized rare diseases, because advances in understanding the molecular roots of disease have led to new treatments and health insurers have been willing to pay the high costs because few of their members require such treatments. J&J’s potential takeover of Actelion also underscores the recent wave of consolidation being witnessed in the pharmaceutical industry in 2016. Typically, these deals have yielded cost savings of 30% to 40% in the acquired company owing to synergies in R&D, sales and manufacturing.

So far in 2016, the pharmaceutical industry has witnessed a number of acquisitions, with companies looking to either bolster their products basket or gain synergies in R&D and product development.

  • Abbott signed a definitive agreement on February 1st, 2016, to acquire Alere Inc. (NYSE: ALR), a maker of medical tests and supplies, for about $5.8 billion.
  • On April 28th, 2016, Abbott entered into a definitive agreement to acquire medical devices manufacturer St. Jude Medical Inc. (NYSE: STJ) for roughly $25 billion.
  • In August 2016, AstraZeneca PLC (NYSE: AZN) agreed to sell its small molecule antibiotics business to Pfizer in a deal that could be valued at more than $1.5 billion.
  • Later in the year, Pfizer announced on August 22nd, 2016, that it has entered into a definitive merger agreement with Medivation Inc. (NASDAQ: MDVN), a biopharmaceutical company that develops and commercializes small molecules for oncology, for $81.50 a share in cash for about $14 billion.
  • In early September 2016, Allergan announced that it would pay $639 million for Vitae Pharmaceuticals Inc. (NASDAQ: VTAE), which is developing drugs for psoriasis, eczema and autoimmune disorders.
  • On September 6th, 2016, Allergan agreed to pay $60 million for RetroSense, a privately held company developing an ophthalmology gene therapy.
  • After its collapsed $160-billion merger bid with Pfizer in April 2016, Allergan announced on September 20th, 2016, that it would pay up to $1.7 billion for Tobira Therapeutics Inc. (NASDAQ: TBRA) to get a leg up in the race to develop therapies for non-alcoholic steatohepatitis (NASH).
  • On October 6th, 2016, Pfizer announced the sale of its global infusion systems business to ICU Medical Inc. (NASDAQ: ICUI) for $1 billion in cash and stock to better focus on its core pharmaceuticals business.

In 2015, overall M&A activity in the healthcare sector hit a record $724 billion, up 66% from $436 billion in 2014, and representing about a fifth of all transactions.

Stock Performance

jj6Johnson & Johnson’s stock ended the day at $114.13, gaining 0.94%, at the close on Friday, November 25th, 2016, having vacillated between an intraday high of $114.23 and a low of $113.38 during the session. The stock’s trading volume was at 3,433,340 for the day. The Company’s market cap was at $310.49 billion as of Friday’s close.

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