NYT: Johnson & Johnson Has Its Eye on Actelion

November 30, 2016

Actelion could give Johnson & Johnson hypertension, says the New York Times.

The Swiss drug maker Actelion, a specialist in blood pressure drugs, is being courted by the American giant, the company said on Friday, confirming a report by Bloomberg. Given Actelion’s high price — its market capitalization reached $18.5 billion in early trading on Friday — Johnson & Johnson would need big cost cuts to make the deal work. Moreover, Actelion is fiercely independent and faces mounting competition.

The Swiss company fought off an attempt by Elliott Management to force it into a sale in 2011, and a reported bid by Shire last year. That has had reasonable results for shareholders. Elliott thought Actelion could fetch 70 Swiss francs a share, less than half its current value. Shire’s approach, reported by The Sunday Times of London, would also have been below the current share price.

Johnson & Johnson’s approach looks a little odd. Actelion makes drugs for pulmonary arterial hypertension, which can be disabling and shorten lives. There is some overlap with the United States company’s pharmaceutical business, but it is a specialist area, meaning few synergies. The logic might just be that Johnson & Johnson needs to scoop up drugs to bolster a light pipeline and that Actelion’s drugs are growing quickly.

Actelion is far from cheap, trading at 20 times forecast earnings, compared with a sector average of about 13 times, according to Thomson Reuters Eikon. Assume Johnson & Johnson is forced to pay a 30-percent premium over a price of 150 Swiss francs a share. Then assume that Johnson & Johnson can rip out 20 percent of Actelion’s operating expenses. That would imply a return on investment of 8.4 percent, below Actelion’s cost of capital, which is likely to be about 10 percent.

Johnson & Johnson might be able to make the numbers work. If it tears up Actelion’s research and development budget, the return on capital would stretch to a more acceptable 9.3 percent.

Johnson & Johnson may also be looking for a home for its cash held outside the United States, Barclays analysts suggest, so there could be other indirect benefits for a buyer.

Still, this is a risky bet. The Actelion boss, Jean-Paul Clozel, may not want to sell, and may demand a fat premium. And Actelion itself faces competition as its drugs and those of its rivals lose patent protection. A generic version of its flagship drug Tracleer is expected soon . Letairis, the competitor to Actelion’s top-selling drug Opsumit, will lose exclusivity in 2018. Johnson & Johnson should avoid the tears.

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