J&J finally captures Actelion for $30 billion; deal looks good for both unless “what ifs” bite pharma giant’s shareholders

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The News:

It took months but Swiss biotech Actelion Ltd. (Allschwil) said on Thursday (January 26, 2017) it had agreed to be purchased by Johnson & Johnson (New Brunswick NJ) in a $30 billion all-cash transaction, following weeks of speculation a deal was imminent.

@JNJNews acquires @Actelion_com in a $30 billion all-cash transaction Click To Tweet

The offer to acquire all of the outstanding shares of Actelion for $280 per share, payable in US dollars, was unanimously approved by the boards of directors of both companies, Actelion and Johnson & Johnson said in a joint statement.

The offer represents a 23% premium to Actelion’s closing price on Wednesday of 227.4 Swiss francs in Zürich.

“We believe this transaction offers compelling value to both Johnson & Johnson and Actelion shareholders,” remarked J&J CEO Alex Gorsky. “Adding Actelion’s portfolio to our already strong Janssen Pharmaceuticals business is a unique opportunity for us to expand our portfolio with leading, differentiated in-market medicines and promising late-stage products,” Gorsky added.

Actelion has been the subject of takeover speculation for weeks after J&J launched and then discontinued discussions with the Swiss company, according to Fortune. French drugmaker Sanofi SA (Paris) had also been interested sources said, but was sidelined after J&J returned and began exclusive negotiations in December.

Through the acquisition, J&J will gain Actelion’s pulmonary arterial hypertension product franchise, including Opsumit (macitentan), Uptravi (selexipag) and Tracleer (bosentan), as well as rights to ponesimod, an S1P1 receptor modulator in Phase 3 development for multiple sclerosis, and cadazolid, an antibiotic in late-stage development for Clostridium difficile-associated diarrhea.

“We expect to leverage our established global presence and commercial strength to accelerate growth and patient access to these important therapies,” Gorsky said.

As part of the transaction, Actelion will spin off its drug-discovery operations and early-stage clinical development assets into a newly created company, in which Johnson & Johnson will initially hold a 16% stake, with rights to another 16%, says First Word Pharma.

J&J will also receive an option on the mid-stage drug ACT-132577, which Actelion is developing for resistant hypertension. The new firm, which will have 1 billion Swiss francs ($1 billion) of cash, will be led by Actelion’s current CEO Jean-Paul Clozel, with the Swiss drugmaker’s chairman Jean Pierre Garnier assuming the same role at the spin off.

Shares of R&D NewCo will be distributed to Actelion’s shareholders as a stock dividend upon closing of the tender.

J&J will initially hold a 16% stake in R&D NewCo and will have rights to an additional 16% of the company’s equity through a convertible note. It will also receive an option on ACT-132577, a product within R&D NewCo being developed for resistant hypertension currently in phase 2 clinical development. J&J said it expected to retain Actelion’s presence in Switzerland.

J&J said the purchase of Actelion is expected to be accretive immediately to earnings per share and accelerate the company’s revenue and earnings growth rates. The pharma giant suggested that after closing, the deal is forecast to boost its long-term revenue growth rate by at least 1% and its long-term earnings growth rate by 1.5% to 2% above current analysts’ consensus.

In response to the announcement, Bloomberg Intelligence analyst Sam Fazeli noted that J&J is paying more than 21 times Actelion’s estimated 2020 earnings per share, which “shows how hard it is to find an asset that actually makes a difference in your earnings.” Meanwhile, Jefferies analysts said they did not expect any counterbids or competition concerns to derail the deal.

Steve’s Take:

According to the majority of analysts and professional observers, the foregoing deal structure is good for shareholders of both companies. Growth-hungry Johnson & Johnson is paying entirely in cash such that Actelion shareholders have more flexibility than if they were receiving J&J shares. And the outstanding share count of the pharma giant doesn’t get diluted, thereby preventing EPS from falling.

Because Actelion is Swiss, J&J can deploy its overseas cash in payment. Such overseas cash was unavailable for potential US acquisitions and only accessible for shareholder returns after being repatriated and taxed. Accordingly, such cash hasn’t been earning any significant ROI, thus deploying it for this acquisition on the surface resembles a good tactical maneuver.

Actelion brought in 1.8 billion Swiss francs (about $1.8 billion) in the first nine months of 2016, so the deal will give J&J an immediate revenue boost–one large enough to swell sales growth at least 1% beyond Wall Street’s current estimates, FiercePharma notes.

Meanwhile, Actelion will spin off its R&D unit into a standalone company, basing and listing the new drugmaker in Switzerland and handing J&J a significant minority stake.

On the surface, J&J landed the type of deal that many big pharma firms long for these days. Major drugmakers have shown they’ll pay up for a company that combines currently sold products and their instant sales lift with pipeline prospects that can deliver more revenue. Pfizer paid a healthy $14 billion for the cancer-focused biotech Medivation last year after a bidding war that attracted both in the future in big pharma and big biotech.

In Actelion’s case, Sanofi jumped into the skirmish in hopes of a deal, but J&J shoved the French drugmaker aside to enter exclusive deal talks in December. Those talks yielded the combination sale-and-spinoff structure, in which Actelion’s CEO Jean-Paul Clozel will steer his company’s pipeline efforts going forward and which gives J&J that immediate boost to sales.

The companies expect to close the transaction by this year’s second quarter, whereupon J&J expects to add 35 to 40 cents to 2017 EPS. That’ll be a welcome change, considering the disappointing sales performance and flat expansion rate some of the company’s key products registered in the latest quarter.

“I do believe today that R&D NewCo will be a very successful company,” Clozel said.

J&J will also benefit from that company’s success. It’ll initially hold 16% of shares, and it’ll have rights to another 16% through a convertible note. J&J will also pick up an option on phase 2 hypertension candidate ACT-132577.

Finally, still in the category of advantages from J&J’s standpoint, despite its rather small size, Actelion is quite profitable. The company earned net income of $360 million in the first two quarters of 2016 (up 25% year on year). Assuming that those earnings will grow as well, the acquisition could add $1.1 billion to J&J’s bottom line in 2018, which would mean an increase of roughly 5%.

This does not factor in any cost savings after the acquisition is made, thus the actual impact on J&J’s earnings could be greater. Actelion also generates substantial cash flows (roughly $1 billion a year) and holds a net cash position of several hundred million dollars.

Now let’s hear from the contrarians, who think J&J’s purchase of Actelion is not only imprudent but will possibly appear foolish in the near future.

Let’s go back to November when J&J and Actelion held the first of two separate meetings.

It was initially reported that J&J was willing to pay around $26 billion for Actelion. After unsuccessful negotiations, J&J backed away for a short time. However the second round was a success.

Why was J&J so insistent on concluding talks? The reasoning is Actelion’s launch of Inflectra, a biosimilar medicine that’s being targeted at J&J’s top-selling drug, Remicade. Developed by Celltrion, but licensed to Pfizer, Inflectra, which was launched in November, is priced at a 15% discount to Remicade.

Simply put, J&J’s top drug could be facing a dip in mid-term sales, and the company wants to quickly fill the revenue gap. Actelion’s niche drugs, which include Opsumit and Uptravi, both of which have blockbuster potential, would do the trick.

It’s no secret, either, that J&J has been on the hunt for inorganic growth opportunities, points out Motley Fool. It had more than $40 billion in cash and cash equivalents on its balance sheet at the end of last quarter. However, it’s been far more customary for J&J to acquire smaller companies than a mature business like Actelion, given J&J’s penchant to control the development of drugs and devices ab initio.

Skeptics however, say Johnson & Johnson could be needlessly overpaying for Actelion considering the wide array of unknown variables lying in wait within its product portfolio and pipeline.

Case in point, on Monday Actelion announced that a 226-patient phase 3 trial involving Opsumit as a treatment for Eisenmenger syndrome failed to reach its primary endpoint of a statistically significant improvement in exercise capacity as measured by the six-minute walk test. Motley Fool notes that although success in the study would merely have expanded Opsumit’s label and possibly added up to $100 million to $200 million in peak annual sales, it nonetheless represents a reduction in peak annual projections for Opsumit’s annual sales of between 5% and 10%.

Considering the premium J&J is paying Actelion, the deal could pose about $1 billion in lost valuation (assuming a multiple of five times peak sales).

But there are other serious questions with the deal.

Tracleer, for example, which was approved in 2001 and is Actelion’s best-selling PAH drug, has lost its patent protection and is about to face generic competition. Generally, generic drugs eliminate out around half, if not more, of branded drug sales within a year. This would mean Tracleer’s more than $1 billion in annual sales could shrink to less than $500 million relatively quickly. Considering that Tracleer’s sales in the first-half of the fiscal year amounted to about half of Actelion’s total revenue, J&J could take a surprise thrashing.

There’s also an ongoing Phase 3 study examining ponesimod as a treatment for relapsing multiple sclerosis. Not only is it unknown if ponesimod will meet its primary endpoint in pivotal late-stage trials, but even if it does, will it offer any substantial benefits from current market leader Gilenya? If ponesimod doesn’t impress the market, it may log only mediocre sales stats.

At the moment, not only are we uncertain who will be the next secretary of Health and Human Services, but President Trump’s reconfiguration of the Affordable Care Act is far from settled. Even though the new president and Republicans in Congress haven’t yet come to an understanding about how to reshape the ACA, many of us believe the only substantive difference in the existing US health system will be a change in the name from Obamacare to Trumpcare.

Otherwise no one really knows what substantive economic impact the eventual Trumpcare system will bring to the pharmaceutical industry. That’s why J&J’s decision to make an acquisition rests on its own apparent guess that any substantive changes to drug payments under Trumpcare won’t have a deleterious effect on the Actelion portfolio it’s acquired.

That’s quite a gamble by J&J, and if it had waited just 12 months, it would have had a much clearer picture of what Actelion’s pipeline and product portfolio are worth. By executing a transaction now, J&J risks overpaying for Actelion and essentially wasting much of its $40 billion-plus in cash on hand.

Steve's Take: @JNJNews stubborn pursuit of @Actelion_com seems reckless in face of #Trumpcare Click To Tweet

It’s rare that J&J’s top-notch management team attracts criticism. After all, J&J is one of only two companies to enjoy a Triple A rating. But its stubborn pursuit of Actelion, apparently without evaluating the substantive variables and attending risks that could be in play, is a true disservice to its shareholders’ ultimate benefit from the deal. Especially during the early transition to the as-yet unfathomable realm of Trumpcare.

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