Who said mergers and acquisitions (M&A) were slowing down in the drug industry? Certainly not healthcare conglomerate Johnson & Johnson (NYSE:JNJ), which has made two bids now to acquire Swiss drugmaker Actelion (NASDAQOTH: ALIOF).
Johnson & Johnson ups its bid for Actelion
According to sources, Johnson & Johnson recently made an initial bid to acquire Actelion for $26 billion. The impetus for the potentially larger-than-normal acquisition for J&J is that Actelion has a cache of drug offerings in the pulmonary arterial hypertension (PAH) drug space. PAH, which describes a condition of high blood pressure in the arteries between the heart and lungs, has a few disease stages, and Actelion has therapies that can treat them all. Being focused on PAH gives Actelion unique pricing power, due to its strong PAH market share and coverage over all stages of the disease.
In particular, Johnson & Johnson was probably attracted to PAH drugs Opsumit and Uptravi, both which are believed by Wall Street analysts to have peak annual sales potential of around $2 billion. Opsumit, which was approved nearly three years ago, appears well on its way to blockbuster sales, with an extrapolated full-year sales outlook of about $750 million in 2016 (based on $373.6 million in sales through the first half of 2016). With Uptravi only launched earlier this year, its 2016 sales may total around $200 million.
Actelion also has 17 ongoing clinical trials, nearly half of which are in pivotal phase 3 studies. Intriguing pipeline opportunities include ponesimod for multiple sclerosis, and cadazolid to treat Clostridium difficile-associated diarrhea. Label-expansion opportunities also abound for Opsumit in pediatric PAH, portopulmonary hypertension, and Eisenmenger syndrome.
J&J's initial bid for Actelion was reportedly rejected, leading to J&J upping its buyout offer to more than $27 billion.
Can Sanofi come out to play?
However, J&J may not be alone in its pursuit of Actelion. According to a Bloomberg report, French drugmaker Sanofi (NASDAQ:SNY) may be planning to make a counterbid for Actelion, possibly inciting a bidding war between Sanofi and Johnson & Johnson. Per Bloomberg, Sanofi is working with advisors to "weigh its options."
Additionally, advisors have reached out to other drug giants to determine if there could be interest in bidding for Actelion. The only certainty for the time being is that Novartis (NYSE:NVS), a drugmaker previously included in the M&A discussion surrounding Actelion, has taken its name formally out of contention.
In one respect, it's pretty clear why Actelion is such an attractive buyout target.
For Johnson & Johnson, it's the fact that its best-selling anti-inflammatory drug Remicade could be facing substantial sales declines, as biosimilar competition begins chipping away at what's likely to be a $7 billion drug in 2016. Adding Opsumit and Uptravi could offset the expected sales decline in Remicade, buffering its downside. J&J is also sporting a healthy cash balance and pristine AAA credit rating, meaning it could easily finance the purchase.
The issue is pretty similar for Sanofi. Sanofi's bread and butter is its diabetes franchise, which is headed by the basal-insulin injection Lantus. Lantus' $1.49 billion in third-quarter sales accounted for 15% of Sanofi's total sales for the quarter. Last year, Sanofi struck a deal with Eli Lilly (NYSE:LLY) to keep a pen-based injectable biosimilar of Lantus off the market until mid-December 2016. With that time frame nearly up, Sanofi's nearly $7-billion-a-year drug, just like J&J's, could be exposed to biosimilar competition. Actelion's PAH drug portfolio would help fend off the expected loss in sales.
Fighting for the right to overpay for Actelion
However, both bidders could be headed down a path they may regret.
The biggest concern with chasing Actelion is that the company's leading product in terms of sales, Tracleer, is about to come off patent. Approved in 2001, Tracleer, another PAH drug, generated $539 million in sales during the first half of 2016, putting it on track to once again top the $1 billion sales mark. However, sales of Tracleer are down 18% in the first half of 2016, likely in anticipation of generic drugs entering the space in 2017, and weaker pricing power. Generic drugs have a habit of devouring around half of a branded drug's sales within the first year, if not more. That's worrisome because Tracleer made up nearly half (46%) of Actelion's total sales through the first half of 2016. This means J&J and Sanofi could get into a bidding war over a company whose sales could potentially plunge 25% or more (when taking into account growth from its other PAH drugs) in 2017. That doesn't seem particularly prudent on J&J's or Sanofi's part.
Secondly, it's an issue of valuation. Johnson & Johnson's current reported bid for Actelion values the company at north of $27 billion. This assumes a valuation of nearly seven times the peak sales estimates of its two core PAH drugs, or perhaps five to six times the peak sales of its entire PAH portfolio once Tracleer takes a backseat to generics. That's an unsightly premium to pay in the drug space, when deals are regularly being made at between three and four times the peak sales estimates of leading drug candidates. Worse yet, if Sanofi or another suitor got into a bidding war with J&J for Actelion, the premium could jump even higher. If either J&J or Sanofi wound up acquiring Actelion for over $27 billion, it could take many, many years before the winner would realize any true benefit for shelling out that much cash for a PAH product portfolio and pipeline.
A final issue is that Actelion's CEO, Jean-Paul Clozel, has never had any inclination to sell the company. He's repeatedly suggested that he'd like to keep Actelion as an independent company, which means only pie-in-the-sky bids may sway his thesis.
To be clear, Actelion is a good company with beneficial products. Opsumit looks well on its way to topping $1 billion in annual sales, perhaps by 2017 or 2018, while Uptravi's launch has been largely successful. But the valuation being bestowed on Actelion here doesn't make much sense to this Fool. While J&J and Sanofi are clearly eager to add portfolio diversification in the wake of expected biosimilar competition for their lead drugs, I personally believe Actelion isn't the right answer for either -- at least not at its current price.