J&J Makes Big Bet on Rare Disease With $30 Billion Actelion Deal

  • Actelion shareholders to get $280/share in cash in deal
  • CEO Gorsky plan to take Actelion drugs ‘to the next level’

J&J’s Forecast Disappoints as Actelion Talks Continue

Johnson & Johnson made its biggest deal ever in a bold bet that it can bring medicines from a Swiss biotech company to the masses.

From left, J&J’s Paul Stoffels, Actelion CEO Jean-Paul Clozel and J&J’s Joaquin Duato in Switzerland on Jan. 26.

Photographer: Michele Limina/Bloomberg

With the $30 billion purchase of Actelion Ltd., funded with cash parked overseas, the world’s largest health-care company gets a leader in medicines for a rare type of high blood pressure, fulfilling its goal of gaining a new drug category at a time its own medicine sales are slowing down. J&J was ready to pay the price: the deal is expensive compared with recent industry takeovers such as Pfizer Inc.’s acquisition of Medivation Inc. and AbbVie Inc.’s purchase of Pharmacyclics Inc., according to an analysis from Bloomberg Intelligence.

But J&J says it sees upside in Actelion’s drugs that analysts haven’t factored in yet -- a way to boost their sales by broadening their indications and getting better reimbursement.

“We’re going to be able to apply considerably more global, clinical development, regulatory, commercial, reimbursement resources, to take the very strong foundation that Actelion has built, demonstrating 20 percent plus growth rates, and really take that to the next level,” Chief Executive Officer Alex Gorsky said on a conference call with analysts.

J&J -- whose sprawling businesses include consumer brands like Johnson’s baby care and Neutrogena as well as medical devices -- is relying on its pharmaceuticals unit to drive sales. And with its blockbuster  arthritis treatment Remicade facing cheaper competition this year, the New Brunswick, New Jersey-based giant was under pressure to make a deal. By using offshore cash to pay for the acquisition, J&J is also taking steps that might lower its future tax bills as the U.S. Congress eyes an overhaul of the U.S. tax code.

The agreement, which includes a spinoff of Actelion’s research and development, caps two months of stuttering negotiations to find a deal structure palatable to Jean-Paul and Martine Clozel, Actelion’s founders. The discussions stopped for several days after J&J walked away on Dec. 13, only to return to the negotiating table about a week later, interrupting talks Clozel had started holding with France’s Sanofi.

On top of getting $1.52 billion from his stake in Actelion, Clozel gets what he wanted: to stay in control of the pipeline. He will become the CEO of the new R&D company.

J&J will begin a tender offer to buy shares of Allschwil, Switzerland-based Actelion for $280 each in cash, the companies said in a statement Thursday. The price, which equals 280.08 Swiss francs, is 23 percent above Wednesday’s closing level. The research and development operations will be spun off to Actelion shareholders as a new publicly traded company with 1 billion francs of cash. J&J will keep a 16 percent stake in the new company.

J&J shares dropped 0.1 percent to $112.65 at 12:37 p.m. in New York. Through the Wednesday close, the stock had gained 11 percent in the past year.

Overseas Cash

J&J is paying more than 21 times Actelion’s estimated 2020 earnings per share, more than double what AbbVie spent on its cancer biotech, which “shows how hard it is to find an asset that actually makes a difference in your earnings,” said Sam Fazeli, an analyst for Bloomberg Intelligence in London. 

J&J holds about $42 billion in cash overseas, and the deal will significantly reduce that amount. Repatriating all of its funds to the U.S. could have tax implications, the drugmaker said last year.

As part of an overhaul of the tax code, House Republicans propose forcing companies to bring back, or repatriate, $2.6 trillion in untaxed profits held offshore at reduced rates. The plan calls for two rates: 8.75 percent for profit held as cash or cash equivalents and 3.5 percent for other investments. In buying Actelion ahead of that potential rate cut, J&J is reducing a pile of offshore cash that would be taxed 8.75 percent and boosting the amount that would get the lower rate.

“I’m expecting companies to do deals like this more readily in advance of the House plan -- they’re going to find ways to sop up that foreign cash to reduce their tax rate," said Robert Willens, an independent tax and accounting expert in New York.

Trump’s Plan

The Actelion deal comes just as President Donald Trump begins to offer details on his plans to create jobs and persuade U.S. companies to keep their operations in the U.S. Trump has also said he wants American companies to bring trillions of dollars in offshore cash back home, arguing that the money could be used to fund a manufacturing renaissance. (But J&J may have an inside track with the new president: Trump has tapped New York Jets owner Woody Johnson -- the great-grandson of J&J’s founder -- to serve as U.S. ambassador to the U.K., according to a person with knowledge of the matter. And CEO Gorsky was among the dozen of business leaders who met Trump Monday at a breakfast about jobs and growing the economy.)

Access to Actelion’s drugs, which all treat life-threatening pulmonary arterial hypertension and bring in about $2 billion in annual revenue, will make J&J a leader in treating the disease and help it expand beyond autoimmune, heart and cancer drugs. Pharmaceuticals is now J&J’s biggest unit after consumer brands and medical devices sales dropped in the past two years -- and the drug unit needs new areas of growth. J&J CEO Gorsky said he will continue to look for opportunities to do deals.

Actelion pioneered the treatment of pulmonary arterial hypertension, or PAH, in 2001 with the introduction of Tracleer, and still dominates the $5 billion global market. The newer drugs, Opsumit, Uptravi and Veletri, offer novel approaches that treat the entire spectrum of PAH, a form of hypertension in the blood vessels that run through the lungs and an alternative to Tracleer, which has lost patent protection and faces challenges from copycat drugs.

Some doctors backed up J&J’s hope that Actelion’s drugs can access a bigger market.

“It was considered a rare disease but we know there are many different causes of it,” Erika Berman Rosenzweig, medical director of the Pulmonary Hypertension Comprehensive Care Center at Columbia University Medical Center–New York Presbyterian. “Collectively, it’s been more common now that people know how to recognize it.”

The new deal will immediately start adding to J&J’s earnings when the transaction is completed by the end of the second quarter, the companies said. The U.S. behemoth expects the transaction to boost its long-term profit growth by as much as 2 percent over analysts’ expectations.

Actelion shares surged 21 percent to 273.90 Swiss francs as of 12:54 p.m., after having climbed 68 percent since early November.

New Company

Meanwhile, the transaction deals a blow to Sanofi, which had also courted Actelion. This is the second time the French drugmaker will be left empty-handed, after losing out on cancer treatment maker Medivation to another U.S. giant, Pfizer, in August. 

The Clozels and a team of scientists who split from Roche Holding AG founded Actelion about 20 years ago. The discovery of the blockbuster Tracleer propelled it over a decade ago to becoming a leader in the treatment of pulmonary arterial hypertension. Until now, Clozel and his wife had resisted takeover bids over the years.

Lazard Ltd. is lead financial adviser to Johnson & Johnson with Citigroup Inc. also providing advice. Cravath, Swaine & Moore LLP, Homburger AG and SextonRiley LLP are J&J’s legal advisers. Bank of America Corp. is Actelion’s lead adviser, with Credit Suisse Group AG also providing advice. Niederer Kraft & Frey, Wachtell Lipton, Rosen & Katz, and Slaughter & May are legal advisers to Actelion.

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