The courtship is officially over. As reported by the Associated Press on Tuesday, Dec. 13, Johnson & Johnson (NYSE:JNJ) is no longer actively pursuing Swiss drugmaker Actelion (NASDAQOTH:ALIOF) after making two separate bids for the lung disease specialist.
Johnson & Johnson bids adieu to Actelion
Initially, Johnson & Johnson had offered to buy Actelion for $26 billion in an effort to gain hold of its portfolio geared at treating pulmonary arterial hypertension (PAH), a disease characterized by high blood pressure in the arteries between the heart and lungs. Actelion's products cover every stage of PAH, giving it unique market share and pricing power within its niche.
For Johnson & Johnson, Actelion's PAH portfolio would presumably have been a great addition at a time when biosimilar competition is entering the market and expected to chip away at sales of J&J's anti-inflammatory Remicade, which is a drug capable of more than $6 billion in annual sales. In particular, PAH drugs Actelion's Opsumit and Uptravi are each expected to generate $2 billion in peak annual sales.
After its initial bid was rejected, Johnson & Johnson then reportedly upped its bid north of $27 billion, according to various news sources. Now this bid is being abandoned by Johnson & Johnson after sources suggested that Actelion was looking for closer to $30 billion. While some might see J&J walking away from Actelion as a disappointment (and the 1% move lower in J&J's shares could confirm that disappointment), it could prove to be an extremely smart move.
J&J shareholders should be thrilled that it walked away
One of the biggest issues with J&J's bid for Actelion was the outlook for Actelion's most mature drug, Tracleer, which has generated $539 million in sales during the first half of 2016. While it might appear appetizing to acquire a blockbuster drug right off the bat, PAH drug Tracleer is set to face competition from generic drugmakers in 2017. Generic drugs, which are often priced well below branded therapies, have a tendency to take 50% of a branded drug's sales (or more) within the first year. Nearly half (46%) of Actelion's total sales through the first half of 2016 were derived from Tracleer, meaning if J&J had purchased Actelion, it would likely be facing a sales decline in Actelion's product portfolio as a whole in 2017.
Secondly, the perceived valuation of the deal seemed somewhat astronomical. Actelion's request for $30 billion in market value seems out of touch with reality given that it would have implied a valuation of roughly six times the peak annual sales of its product portfolio. In recent years, we've witnessed biotech and pharmaceutical deals made at three to four times the peak product sales of a portfolio or lead drug, and even that seemed like a stretch in some cases. Had J&J agreed to pay $27 billion-plus, or even $30 billion for Actelion, it could have taken a really long time for the deal to pay off in J&J's and shareholders' favor.
Thirdly, it's not in Johnson & Johnson's nature to make large deals. J&J has historically done its best when integrating small- and medium-sized businesses into the fold, since this allows J&J to guide the development of early-stage drugs and medical devices. For instance, J&J's $21.3 billion acquisition of medical device giant Synthes, which was completed in 2012, took longer to integrate and recognize benefits from than expected. It's not that J&J shuns larger acquisitions, but they're considerably tougher to integrate with the company's more than 250 subsidiaries. A $27 billion-plus deal could have led to integration troubles for J&J.
Finally, there was a lot of premium being placed on Actelion's pipeline, which isn't a guarantee to succeed despite having a handful of phase 3 trials ongoing. For example, FierceBiotech pointed out recently that ponesimod, an experimental treatment being examined in relapsing multiple sclerosis in the OPTIMUM trial, would need to really stand out to unseat Novartis' Gilenya. Simply meeting its endpoint in pivotal phase 3 trials may not be enough.
You might be wondering what's next for both of these companies. For Actelion, it looks as if it could renew talks with Sanofi over a possible buyout, but this has yet to be confirmed. However, Sanofi has expressed interest in Actelion in the past, so a deal could be a possibility. Actelion's CEO has also opined often that he'd like his company to stay independent, so no deal is a real possibility, too.
On the other hand, Johnson & Johnson should still actively be seeking M&A opportunities, especially with $40.8 billion in cash on its balance sheet as of the most recent quarter. While there may be no way to avoid the loss of revenue from biosimilar competition going after Remicade, J&J also needs to be prudent about sticking to its game plan, which usually involves gobbling up small- and mid-sized businesses and forging collaborations.
A possible deal could be had with Geron (NASDAQ:GERN), which it's already partnered with, depending on mid-stage data from IMbark and IMerge. Both trials are evaluating Geron's imetelstat as a possible treatment for myelofibrosis and myelodysplastic syndromes. Imetelstat is of particular interest since it generated partial and complete responses in myelofibrosis patients in early-stage trials, becoming the first clinical therapy to ever elicit a response in trials. If J&J likes what it sees from imetelstat, it could choose to gobble up Geron rather than just simply license its lead product.
For the time being, nothing changes for J&J or its shareholders, and I believe that's a good thing. J&J will retain its AAA credit rating, and it continues to boast an above-average yield based on a dividend that's increased in value for 54 consecutive years. For conservative investors seeking income, J&J continues to be a wise choice, especially now that it's bid adieu to Actelion.