Pharma, BioPharma

For J&J, $30B Actelion deal is less about synergies, more about future promise

Biotech dealmaking such as the one by J&J underscore big pharma’s hunt for new markets as opposed to making synergies the primary purpose to drive growth.

presented by

buy, purchase

The rationale for big deals in the devices sector in the past few years has been about synergies. Think about the $49 billion mega-merger of Medtronic and Covidien. Or the combination of Biomet and Zimmer.

But in the world of Big Pharma, especially in the last few years, acquisitions are about finding new markets and growth as patent cliffs loom. Johnson & Johnson’s $30 billion purchase of Swiss biotech firm Actelion should be seen in that light. Synergy is more of an afterthought in this deal. Here’s a quick breakdown of the transaction announced Thursday:

  • J&J will pay $30 billion ($280 per Actelion share) in cash to acquire Actelion, mainly known for drugs treating pulmonary arterial hypertension.
  • A new unnamed (NewCoR&D) company will be spun out in which the New Brunswick company will have a 16 percent equity stake that will work on pipeline products. They will include treatments for specialty cardiovascular disorders, central nervous system disorders, immunological disorders and orphan diseases.

“The main reason of this deal is to continue to build on the strength of the pulmonary hypertension franchise and the late-stage pipelines of Ponesimod, Cadazolid as well as the agreement to commercialize the ACT 577,”said Joaquin Duato, executive vice president and worldwide chairman, J&J, according to a webcast of a press conference held at the company’s headquarters in Switzerland. “Synergies will play a small role and they will come mainly from administrative areas.”

Ponesimod and Cadazolid are drugs being developed to tackle multiple sclerosis and Clostridium difficile-associated diarrhea. ACT-577 is a resistant hypertension drug in Phase II trials. The new research company is expected to be spun out in June and floated in the Swiss exchange.

J&J’s move is to shore up Big Pharma’s position in new markets even though the price tag is high.

“While some investors may question the price JNJ is paying for Actelion, the deal reflects the scarcity value of assets large enough to move the needle on revenue and EPS (earnings per share) growth,” wrote Glenn Novarro, an RBC Capital Markets analyst, in a research note.

In other words, there aren’t a lot of biotechs out there that can provide immediate and noteworthy revenue upside. But J&J’s chief financial officer pushed back on this idea of how some investors are viewing this deal.

“We have higher expectations on the penetration and the expansion of these products that maybe currently anticipated by the investor community and that’s a result of our in-depth discussions with Actelion, our review of the potential here and so we feel very confident that there is plenty of upside over and above what’s been currently modeled,” said Dominic Caruso, according to a transcript of a conference call from Seeking Alpha.

There is a reason for investor concern.

Patents of blockbuster drugs expiring mean more generic competition for Big Pharma. The mood was best captured at a morning reception during J.P Morgan’s annual healthcare conference in San Francisco recently. After attendees responded that large pharma companies won’t see growth much at all in 2017, a Merck executive explained that as a result, dealmaking for biotechs will be up.

“So then the corollary becomes, ‘what do you do to fix it’ and that’s when you pay too much for a biotech company,” declared Sunil Patel, vice president and head of corporate development at Merck.

J&J may have paid too much, but one good news that J&J is that there are no U.S. tax implications.

“The purchase at $30B is more than steep and the contribution to J&J’s top-line outlook is de minimis, but because it effectively puts the company’s OUS cash to work, it is easily accretive,” wrote Michael Weinstein, an analyst with J.P. Morgan, in a research note Thursday.

Photo: freedigitalphotos user renjith krishnan