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Costly Biotech Bet Still Worth It for J&J
MARKETWATCH 12:55 PM ET 11/28/2016
Symbol Last Price Change
JNJ 113.32 -0.81 (-0.71%)
ALIOF 173down -11.01 (-5.98%)
QUOTES AS OF 02:07:12 PM ET 11/28/2016
An acquisition by Johnson & Johnson(JNJ) of Europe's biggest biotech company would be expensive but is a risk worth taking.

The health-care giant announced last week (http://www.wsj.com/articles/johnson-johnson-approaches-actelion-about- potential-deal-1480092170) it had entered preliminary talks to buy Actelion Pharmaceuticals(ATLN.EB). Such a move would entail substantial risk, as deals of this size typically do. Actelion's(ALIOF) market value exceeds $18 billion and the shares trade above 25 times forward earnings, according to FactSet. Johnson & Johnson(JNJ) might need to pay a further takeover premium to close a transaction.

Adding to the risk, generic competition looms for Actelion's(ALIOF) best-selling drug, the pulmonary hypertension treatment Tracleer. Johnson & Johnson(JNJ) would be betting that two newer hypertension drugs, Opsumit and Uptravi, become blockbusters. Analyst consensus calls for nearly $3 billion in combined annual sales by 2021, according to FactSet. Sales are expected to be $1 billion this year.

Those warning signs aside, scaling up its pharmaceuticals business is a sound strategy for Johnson & Johnson(JNJ). Sales in its pharmaceuticals division (http://www.investor.jnj.com/releasedetail.cfm?ReleaseID=994072)grew by a heady 11.8% from a year ago in the third quarter, while growth at its consumer-health and medical-device businesses have lately stalled out.

That drugs portfolio could use some additional diversification--the best-selling drug Remicade faces new biosimilar competition in the U.S. Pfizer(PFE) and Celltrion have entered the market with a drug priced at a 15% discount to Remicade's list price. It remains to be seen whether new competition will actually put a damper on Remicade sales, but the stakes are high. Remicade sales accounted for more than a third of third-quarter pharmaceuticals revenue.

And a company with the sprawl of Johnson & Johnson(JNJ) only has so many options to boost its growth prospects. Years of deal-making in the drugs business has thinned the ranks of midsize biotechs with drugs on the market. Sales of businesses of similar size--like Medivation earlier this year and Pharmacyclics in 2015--have attracted feverish interest.

As a bonus, Johnson & Johnson(JNJ) would be able to put its significant overseas cash pile to work without having to wait for tax reform in Washington. And as one of the last corporations still boasting a triple-A credit rating, making a big deal splash hardly entails betting the farm.

Those factors won't eliminate the risk of a major acquisition. But they do offer reasons for Johnson & Johnson(JNJ) to roll the dice.

Write to Charley Grant at [e-mail] (mailto:[e-mail])

-Charley Grant; 415-439-6400; [e-mail]


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11-28-161255ET
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