Will J&J Buying Actelion Be Good For Investors?

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Johnson & Johnson (NYSE: JNJ) has reportedly approached pharmaceutical company Actelion to negotiate a potential acquisition, which could be valued upwards of $20 billion. [1] Overall, we believe that a deal such as this, would make sense for J&J at this point and the market is likely to be forgiving as far as the huge investment goes. Here are a few interesting observations that suggest that buying Actelion out might not be bad for J&J’s investors.

Our price estimate of $118 for Johnson & Johnson is slightly above its current market price.

First, J&J’s stock history shows that investors have valued J&J’s focus on pharmaceutical business. The EBITDA contribution of pharma segment increased from 39% in 2010 to >50% in 2015, which led to 400 bps increase in margins and nearly 60% jump in the market cap. This growth was being driven by Immunology and Oncology drugs. With a Remicade (an immunology drug) biosimilar around the corner, J&J will entirely rely on oncology drugs to offset the expected sales slump. That’s not very comforting since the cancer market itself is getting increasingly competitive with nearly every big player investing heavily in immuno-oncology research and marketing. To have any realistic opportunity of adding further value, J&J will have to look at at least 1-2 new avenues for growth. This is where Actelion comes in, with has a focus on rare diseases which tend to have more price protection and fewer competitors.

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Second, the acquisition, if it happens, will boost J&J’s cardiovascular portfolio, which doesn’t have much except blood thinning drug Xarelto. This will diversify some risk. Moreover, this is a smart way to boost cardiovascular portfolio since the segment’s mainstream drugs are facing strong competition from generics and there hasn’t been a lot of innovation in recent years.

Third, the market for drugs aimed at rare diseases (orphan drugs), is growing quietly and steadily. Global orphan drug sales are expected to grow at a CAGR of 11.7% between 2015 and 2020, adding more than $55 billion in incremental revenue. [2] This is much higher than the expected growth for the overall pharma market. Additionally, the number of orphan drug designations have grown substantially over the last decade, and orphan drugs are becoming an increasing proportion of overall drugs approved in the U.S. [2]

Fourth, the market reaction to the deal gives us some clues into the investor sentiment. Despite this news, J&J’s stock was up slightly which could be due to the sentiment that in the current scenario, an acquisition would be an acceptable method of growth for the company.

Do you agree? Please let us know your views by commenting in the box below.

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Notes:
  1. Johnson & Johnson approaches Actelion about takeover deal, Reuters, Nov 25, 2016 []
  2. Orphan Drug Report 2015, EvaluatePharma [] []