Another huge biotech deal could be in the making. Johnson & Johnson (NYSE:JNJ) wants to buy Swiss biotech Actelion Pharmaceuticals (NASDAQOTH: ALIOF). According to the Financial Times, however, Actelion is playing hard to get and prefers a partnership rather than acquisition. But would a potential buyout or more complicated combination be good for J&J shareholders?
It's not hard to see why Johnson & Johnson is interested in Actelion. J&J has a solid presence in the cardiovascular market, but the big drugmaker doesn't have a pulmonary arterial hypertension (PAH) drug. PAH is Actelion's niche. While J&J's pharmaceutical segment growth so far this year hasn't been horrible, Actelion is growing sales faster.
However, Actelion's product lineup wouldn't come without some challenges. Actelion's PAH franchise is currently led by Tracleer, but revenue from the drug is slipping with generic competition on the way in the U.S. and already present in other parts of the world. On the other hand, sales for newer PAH drug Opsumit are soaring. Actelion has also enjoyed a strong commercial launch for Uptravi.
Johnson & Johnson isn't without its own growth drivers, of course. Cancer drug Imbruvica is leading the way with Simponi, Stelara, and Xarelto continuing to show solid growth. Actelion's PAH franchise would probably fit well with J&J's product lineup, though, and help spark more earnings growth than J&J would otherwise see.
There's also a tax angle that could be helpful. Actelion's effective tax rate is only 12% compared to J&J's 19% effective tax rate. This probably isn't a major benefit, though. Over half of Actelion's sales are in the U.S. -- and those sales are growing more quickly than in other parts of the world. Also, proposed tax changes by the incoming Trump Administration could possibly lower U.S. corporate tax rates, making them more competitive with the Swiss tax structure enjoyed by Actelion.
The devil's in the details
Johnson & Johnson is used to buying companies outright. That doesn't seem to be the path that Actelion wants to take. According to a report in the Financial Times, the biotech would rather have J&J buy a major stake, pour in additional cash, and throw in some of its own drug programs.
Details of a more complicated transaction such as this would need to be known before determining how advantageous the deal would or wouldn't be for J&J shareholders. It's not clear at this point if Johnson & Johnson would seriously entertain a structure combination instead of an acquisition.
Any deal where J&J didn't obtain majority control would mean that the healthcare giant is placing a bet that someone else can obtain better results with its money than the company can on its own. That's a bet that many J&J shareholders probably wouldn't like very much.
What if Johnson & Johnson did gain a majority stake in Actelion but allowed the biotech to retain independent control? The impact on J&J's shareholders would again depend on the details of such an approach.
Regardless of whether Johnson & Johnson acquires Actelion outright or enters into a different type of combination, the bottom line for J&J's shareholders should be... the bottom line. Investors want to know if a deal would improve J&J's financial position over the long run.
Bloomberg reported this week that Actelion rejected J&J's buyout offer of $26 billion. I don't think it's in J&J's shareholders' best interests to go any higher. Actelion's PAH franchise (including all of its PAH drugs) might hit peak annual sales of around $3 billion. Ponesimod, which is in late-stage testing for treating multiple sclerosis, could add maybe $500 million at most in additional yearly sales if approved. The reported offer from J&J reflects a price of nearly 7.5 times sales that haven't even materialized yet.
My view is that Actelion could be a good fit for Johnson & Johnson, but not at that price tag. There are plenty of other opportunities for J&J to use its cash to provide better returns to shareholders. My advice is for Johnson & Johnson to keep looking.