Johnson & Johnson eyeing Actelion; who wouldn’t with a “pro-biotech” Trump administration?

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Johnson & Johnson (New Brunswick NJ) said Friday (November 11, 2016) it is in “preliminary discussions” with Swiss drug company Actelion Pharmaceuticals Ltd. (Basel CHE), a deal that would help the health-products company overcome any lost momentum for its top-selling drug.

@JNJNews is in “preliminary discussions” with Swiss drug company Actelion Pharmaceuticals Click To Tweet

J&J has been trying to reassure Wall Street that it can withstand looming competition to its drug Remicade, an autoimmune therapy that had $4.5 billion in U.S. sales last year, according to a Bloomberg report.

Pfizer Inc. (New York City) has said it plans to start selling its copy, Inflectra, in the U.S. as early as this month. J&J says it has several new drugs in development whose launch could make up for any revenue loss.

A deal for Actelion, however, would help J&J quickly plug the lost sales, which analysts estimate could amount to $1 billion in 2017.

Actelion sells drugs for rare diseases, such as an artery disorder that affects the lung and heart known as pulmonary arterial hypertension. The company reported about 1.785 billion Swiss francs ($1.8 billion) in sales for the first nine months of this year.

A deal for all of Actelion would come at a steep price. Bloomberg reported J&J’s interest in the Swiss company on Thursday. Applying a typical takeover premium of 25% or more to its market capitalization, Actelion could fetch more than $20 billion.

Shares of Actelion rose to 182.50 Swiss francs ($184.03) on the SIX Swiss Exchange on Friday, after the company confirmed J&J had approached it about a possible transaction. Shares closed the week up 17% at 184.50 francs.

With a market value of more than $300 billion and nearly $40 billion in cash overseas, J&J could afford the high price. J&J’s biggest deal to date was the $21 billion acquisition of trauma-device maker Synthes in 2011.

Both J&J and Actelion cautioned in their statements that a transaction wouldn’t necessarily happen. It wasn’t clear where talks between the companies stand or whether Actelion is receptive. Shares of J&J closed the week down 1% at $114.13 on the New York Stock Exchange.

Actelion was founded in 1997 by husband-and-wife team Jean-Paul and Martine Clozel and other former Roche Holding Ltd. (Basel CHE) employees who left the Swiss drug firm after it decided not to pursue a project on which their group was working, according to Actelion’s website.

In 2000, Actelion went public and its valuation has climbed sharply since then. Last year, the company reported revenue of 2.05 billion Swiss francs and a profit of 551.9 million Swiss francs. This year, it averted a decline in revenue after its best-selling drug, Tracleer, lost patent protection, thanks to rapid sales gains for new pulmonary arterial hypertension drugs Opsumit and Uptravi.

Steve’s Take:

Let the post-election raindance begin. With a “pro-biotech” Trump administration headed into 2017, not just the heavyweights like J&J are flexing their wallets but the cruiserweights like Amgen, Biogen, Celgene and Gilead could seek M&A to shore up their drug portfolios.

How subtle was diversified J&J in making its intentions known?

“Johnson & Johnson today confirmed it is engaged in preliminary discussions with Actelion Pharmaceuticals Ltd. regarding a potential transaction,” J&J said in a statement Friday. “There can be no assurance any transaction will result from these discussions. Johnson & Johnson does not intend to make any additional comments regarding these discussions unless and until it is appropriate to do so, or a formal agreement has been reached.”

Geez, just the sheer formality of the announcement alone is intimidating, what with the gargantuan wallet J&J can use to flick others aside and get what it wants.

Sure, European drugmakers Novartis and Sanofi also could bid for Actelion, Bloomberg reported, citing sources. But I wouldn’t recommend it. What would be the point?

Actelion has relied on Tracleer, which treats a form of blood pressure that affects arteries in the lungs, for more than half its revenue, notes Investors Business Daily. Tracleer faces generic rivals in early 2017. But the drugmaker has two new lung treatments, Opsumit and Uptravi that may soon boast billion dollar annual sales.

Celgene and other big biotechs could see a more M&A-friendly climate under President-elect Trump, says RBC. Amgen, Biogen, and Gilead Sciences could look to M&A following Trump’s election as 2017 sets up with fewer regulatory hurdles and a likely biotech resurgence, RBC analyst Michael Yee said last week.

Biotech stocks have surged since Trump’s election, largely on the notion that he will be less likely to pressure drug prices than Hillary Clinton and likely to push business-friendly legislation, including tax incentives to repatriate cash to the U.S.

With the election uncertainty over, Yee expects the big four biotechs to make good on M&A plans as capital remains inexpensive and organic growth slows. Trump appears poised to embrace innovation within his administration, Yee wrote in a research report dated November 21.

To that end, Trump met with Patrick Soon-Shiong the previous weekend. Soon-Shiong is a biotech exec and the former CEO of Abraxis BioScience, which Celgene acquired in 2010 for $3 billion. There’s no telling what will come of Trump’s meeting with Soon-Shiong, Yee noted.

Regardless, investors are starting to key in on the pro-business environment.

Since the election, shares of Investors Business Daily’s 421-company Medical-Biomed/Biotech industry group and the SPDR S&P Biotech ETF (XBI) are nearly 15%. The iShares Nasdaq Biotech ETF (IBB) is up more than 9%.

“Barring any big policy surprises out of Trump, there is an increased feeling of pro-business including pro-biotech within the GOP,” Yee wrote. “So we see it as unlikely that any major legislation should derail innovation.” Those increases are merely the beginning, Yee wrote, noting, “If good things happen, we believe stocks can go much higher.”

Alzheimer’s data in late 2017 or early 2018 from Eli Lilly could be a catalyst. Biotechs will also likely update 2017 guidance in January, potentially pushing stocks higher.

No. 3 biotech Celgene is most de-risked in the postelection world, with no near-term catalysts and no “fear of any big disappointments,” Yee wrote. Celgene has multiple sclerosis data due in the first half of 2017, but likely won’t raise 2020 guidance in January.

But Celgene stock could dip on a dilutive deal, Yee noted.

“We’d view any pullback as a buying opportunity because the long-term tail question is sufficient pipeline–and that’s what long-term investors want to see (near-term earnings variance is less important than tail questions),” Yee wrote.

Yes, these are times fraught with the specter of big, and I mean colossal, dollar signs–in biotech and even big pharma. There is an almost palpable, irresistible scent of big M&A in the air these days with a Trump White House in the offing, rather than a Clinton one, what with her dire warnings about reigning-in drug prices.

Steve's Take: There is a scent of a big M&A in the air with a looming #Trump WH Click To Tweet

Still, there could be a surprise waiting for us starting at noon, local time, on Friday, January 20th. But I don’t think so.