Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Actelion Ltd. is a $20 billion company with ambitious founder-owners known for spurning takeovers, two potential blockbuster drugs, and a strong late-stage research pipeline. If Johnson & Johnson is going to buy this company, then it will likely have to pay up.

At first glance, such a deal would seem to run counter to J&J's promises to be disciplined about acquisitions. But some things are worth a higher price.  

J&J doesn't really need to splash cash to pack its drug pipeline. But it could use a near-term revenue jolt as its biggest drug, Remicade, faces off against a biosimilar competitor that launched last week. Sales boosts of the sort Actelion offers are few and far between in biotech land.

Off-Peak
J&J shares hit an all-time high earlier this year, but have slumped lately due to worries about the company's medical-device business and blockbuster inflammation drug Remicade

Thanks to an industry-leading spate of licensing deals in recent years, along with its own research, J&J is not starving for pipeline candidates. In the nearer term, products such as the psoriasis treatment Stelara and the cancer drugs Imbruvica and Darzalex already offer a steady base of growth; Wall Street analysts expect those three alone to contribute $6.5 billion in sales next year. 

J&J hopes to file for approval for more than 25 new drugs between 2020 and 2024. But none of those are guaranteed to succeed. And should Remicade sales decline more rapidly than expected -- analysts currently project sales to peak at $6.9 billion this year and decline to $5.2 billion in 2019 -- then adding Actelion could help J&J cushion the blow.

Back in Black
Johnson & Johnson's pharmaceutical business returned to sales growth after a dip last year
Source: Bloomberg

Wall Street consensus sees Actelion's total revenue hitting $2.37 billion this year and $3.32 billion in 2020. The list of biotechs around Actelion's likely price range with more than $1 billion in trailing 12-month revenue is already small, and Actelion may be the most appealing of the bunch. The company lost exclusivity on its current best-selling drug, the pulmonary arterial hypertension treatment Tracleer, last year. But Wall Street expects its two new treatments for the same disease will more than make up for that. 

Vertex Pharmaceuticals Inc. is another option for J&J, and one that may offer more revenue in the future -- possibly more than $4 billion in annual sales by 2020, according to Wall Street consensus -- but a lot has to go right for that forecast to become reality. For one thing, Vertex's cystic fibrosis franchise faces major regulatory, scientific, and commercial risk. Vertex would also likely cost substantially more than Actelion, with a market cap $4 billion higher than Actelion's before deal speculation sent that company's shares up last week. 

Slow and Steady
Few companies offer the combination of strong current sales and future growth that Actelion does
Source: Bloomberg

There may be competing bids; a Bloomberg Intelligence note released on Monday suggested Novartis, Roche, and Sanofi as potential suitors. But no company can go cash-to-cash with Johnson & Johnson and come out on top. What might be a stretch for other firms will be a yawn for the world's largest health-care company, which has far and away more net cash than any of its rivals:

Cash on Handy
Johnson & Johnson has more net cash than any other biopharmaceutical firm, and substantially more than potential rivals for Actelion
Source: Bloomberg
*FY 2015 figure

J&J projects optimism about being able to prop up Remicade sales for years to come and for its current roster of drugs to help it weather any decline. But if it's wrong on either front, then an insurance policy that seems expensive today will end up being a bargain.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net