Forget much of what you have heard about disciplined acquisitions and waiting for valuations to become realistic. Johnson & Johnson’s $30bn strike for Actelion today points to the M&A sweet spot – lower-risk, commercial-stage, mid-cap companies with a growing top line.
There is still a wide gap between forecasts for Actelion’s assets and the agreed price, but J&J had offshore cash to burn and was just two days from releasing disappointing 2017 guidance, so executives had motivation for a strategic play. Deal bankers working with companies similar to Actelion – such as Biomarin and Seattle Genetics – must now be reviewing their pitches to see if they can successfully argue for better terms based on the J&J payout (see table below).
Buy and spin
The deal will see J&J acquire Switzerland-based Actelion’s marketed products and late-stage clinical projects ponesimod and cadazolid for $280 a share. The remaining pipeline will be spun into a development group headed by Actelion's chief executive, Jean-Paul Clozel, which will start with $1bn in cash, part from Actelion and part from J&J’s purchase of a 16% stake.
The deal represents a 77% premium over Actelion’s price November 24, the day before it announced it had been approached by J&J (Why J&J shouldn’t buy Actelion, January 25, 2016). This followed a period in which Sanofi was rumoured to have been in the running, although Sanofi executives recently tried to throw cold water on the notion that they had been interested at all (JP Morgan day two roundup – all talk, very little action, January 11, 2017).
A competitive process might very well have driven the price up, but it leaves a yawning gap between the price paid and the net present value of Actelion’s marketed and low-risk clinical assets. To be exact, the price is 4.1 times the combined NPV of the assets.
If this is the new takeout benchmark for companies that look like Actelion – mid-cap groups with a mix of commercial and developmental assets – then shoppers for the following companies might need to start budgeting accordingly.
|Getting to yes – illustrative prices based on J&J-Actelion ($bn)|
|Company||NPV of derisked portfolio||Potential takeout value (4.1x NPV)||Market cap||Valuation gap|
Assurances about the deal’s positive aspects from J&J’s top executives – who said the transaction would be immediately accretive, driving topline growth at a 1% higher rate than analysts currently forecast – did not fully satisfy investors who drove shares down by 1% in early trading today.
As a measurement of forecast cumulative profit, net present value does not take into account M&A premium, and it can obviously misjudge the distinctive profitability of individual products, particularly those like Opsumit and Uptravi in a rare disease area like pulmonary arterial hypertension.
Obviously J&J saw something beyond the sellside numbers that persuaded it that Actelion was worth a lot more – J&J's finance chief, Dominic Caruso, lauded Actelion’s “impressive operating margins”. Remarkably, instant profitability would not come from massive job cuts, particularly to the Actelion sales team. “Synergy is not the motivation and is not the way to create value from the deal,” Mr Clozel said.
A large chunk of R&D costs – which stood at $445m in 2015 – will be offloaded to the new R&D company, and other savings can be expected from the general and administrative lines, said Mr Caruso. Furthermore, use of ex-US cash to buy Actelion will avoid repatriation taxes, another cost saving – J&J has the biggest overseas cash pile in all of pharma (Repatriation windfall could spur US M&A, November 15, 2016).
Meanwhile, J&J executives suggested that the company would be able to drive greater sales growth from the established products because of potential combination uses, global sales infrastructure and expertise in reimbursement negotiations. Opsumit costs about $36,000 a year in the US, which is low by rare disease standards, so J&J could see an opportunity for price rises.
The circumstances of every deal are unique, and it might be too sweeping a conclusion that all targets can expect to receive Actelion’s premium – although it does provide a useful yardstick. The lesson from Actelion is that, while investors may clamour for a strategic play, management must be mindful of their tolerance for a high-priced deal.