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Biopharmaceutical companies have been a key acquisition focus in the healthcare industry lately. From AbbVie’s acquisition of Pharmacyclics, announced in 2015 to Pfizer’s acquisition of Medivation, announced in 2016, this is a sub-industry that is attracting notable investments from the biggest players in healthcare. As of January 25, 2017, Johnson & Johnson has joined the mix with its announcement of the company’s intention to acquire Actelion for $30 billion. This deal is the largest Johnson & Johnson has ever conducted, and it is more substantial than the aforementioned AbbVie and Pfizer deals.
Actelion is a Swiss company, noted for its leadership in the field of pulmonary arterial hypertension (PAH) therapy. This is not a particularly common disease, though it has significant medical consequences with limited treatment options. With this condition, the arteries that carry blood to the lungs become narrow, which makes blood flow difficult. Blood moving to the lungs is obviously essential for that blood to pick up oxygen and transport it throughout the rest of the body. The narrow arteries with this condition generates greater pressure to move blood through the arteries, thus generating higher blood pressure, or hypertension. That kind of pressure in the pulmonary arteries causes the right side of the heart to work harder and weaken. The therapeutic treatments offered by Actelion are some of the limited treatment options for this disease, giving the company a high level of power in this niche of the industry. In addition to the treatments themselves, the company makes note of its highly productive discovery capability, continuously searching for medical innovations.
Giving a ‘tax holiday’ to US companies bringing cash back into the nation has been a big topic discussed by the Trump administration, as it would incentivize considerable re-investment into domestic markets. While Actelion is a Swiss company, it is important to note that Johnson & Johnson is funding the acquisition with its considerable overseas cash holdings of $42 billion. The acquirer’s basic goals are to bring a new drug category into its portfolio, as well as immediately boosting earnings. The deal also includes consideration for a spinoff of Actelion’s R&D division, indicating that the patent rights for their products are likely what the top priority for Johnson & Johnson. However, Actelion’s established commercial network is also of substantial importance. Johnson & Johnson CEO Alex Gorsky stated the following on a conference call with analysts: “We’re going to be able to apply considerably more global, clinical development, regulatory, commercial, reimbursement resources, to take the very strong foundation that Actelion has built, demonstrating 20 percent plus growth rates, and really take that to the next level.”
The premium that Johnson & Johnson is paying is also considerable. The offer is $280 per share in cash, which is 23 percent above the closing price on January 25, 2016. Actelion’s R&D division will be spun off to Actelion shareholders as a new public company with around $1 billion in cash and Johnson & Johnson minority interest (controlling 16 percent of the shares). Actelion co-founder, Martine Clozel, will be appointed CEO of the new R&D company.
To put this acquisition into perspective, it is important to look at the comparable purchase prices of similar acquisitions. Johnson & Johnson is paying 21 times Actelion’s estimated 2020 EPS, which is more than double the multiple of AbbVie’s Pharmacyclics purchase. The reasoning behind this exceptionally high premium is the fact that forecasts indicate that the Actelion would have a remarkably positive impact on Johnson & Johnson’s earnings. Johnson & Johnson’s drug portfolio would expand to include Actelion’s Tracleer, Opsumit and Uptravi, which all are used to treat PAH. These would be added to the company’s extensive offerings of autoimmune, heart, and cancer pharmaceuticals, and Johnson & Johnson expects the transaction to improve its long-term profit growth by as much as two percent above analysts’ expectations.
With both companies’ boards officially approving of the transaction, the closing will come to fruition if and when at least 67 percent of Actelion’s shares are tendered by its holders when the offer begins in mid-February. With many new shifts in US policy afoot, the long-term outlook of this deal remains somewhat uncertain. However, with the encouragement of repatriation of overseas cash holdings under the Trump administration, it is likely that we will see interesting shifts in corporate development strategies over the course of the next few years.
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