Pharma Takeover The pricey path to growth

A lot of lively shopping is going on in the pharma industry. But Johnson & Johnson’s acquisition of Actelion shows companies are paying too much.
Quelle: Bloomberg
Hair today, gone tomorrow, or will the deal pay off in the long term?

Innovation is in demand in the pharma industry. Not just in product development but also with regards to mergers and acquisitions. And U.S. healthcare company Johnson & Johnson (J&J) is pointing the way. J&J paid $30 billion (€28 billion) for Swiss drug specialists Actelion. In order to convince shareholders led by the company’s founder, Jean-Paul Clozel, J&J was prepared to forgo Actelion’s research division. That was left behind with the present owners, in the form of a new company, along with a billion dollars in cash. J&J will only hold a small minority share in the new company.

This construct could become a model for future deals in the drug and biotech sector. As a rule, assessing the value of research and development is among the most contentious issues between buyer and seller. Factoring it out would make many a merger easier.

In other aspects, particularly the price, the Actelion deal doesn’t stand out as particularly innovative. Rather, it confirms a trend toward exorbitant value assessments in the pharma industry, already observed in a number of takeovers in recent years. J&J paid around 12 times Actelion’s sales volume and around 44 times its net profit. This makes the valuation more than twice as high as established drug producers – for a company lacking a research pipeline.

The U.S. group’s management did have a few arguments in favor of the deal. With its drugs, Actelion maintains a clear leading position in the treatment of pulmonary hypertension. The Swiss company’s most recently developed products were very well received on the market, generating strong growth and are likely to ensure a leading position in the field over rivals like Bayer in the coming years.

J&J may not currently have any acute difficulties in the pharmaceutical business; on the contrary, the group’s drug division is now one of the five largest producers of medical drugs worldwide. Just recently, its growth was above average at 7 percent. But it could certainly use some bolstering in the coming year, when a couple of patents run out. In principle, the Actelion takeover could do just that. Thanks to its latest product developments, the Swiss company’s product portfolio promises further organic growth, at least for the next couple of years.

With the Swiss company’s research left out of the deal, J&J may be buying a solid product program, but virtually no future prospects.

Added to that is another incentive. Actelion is one of few larger pharma assets available on the European market. At J&J, as at several other U.S. drug companies, there is likely to be pressure to invest. After all, the concern has amassed close to $60 billion in overseas profits that haven’t been taxed according to U.S. law. Europe likely accounts for a large portion of that. At the close of 2015, around $38 billion was parked in the form of cash in the accounts of foreign subsidiaries. Buying Actelion offered an elegant way to permanently reinvest this money abroad and thus elude the IRS. In this respect, J&J no longer need hope for tax reform from the new U.S. president.

Moreover, the American concern can look back on exceptionally good experience – admittedly some time ago – with acquisitions in Europe. The core of its drug division basically consists of Belgian company Janssen, which J&J took over in the 60s. In the subsequent years, the company’s brilliant founder and scientist Paul Janssen and his research team produced numerous new drugs, laying the foundations for J&J’s current position among the pharma industry top 10.

Yet this is precisely where the Actelion takeover differs from past success. With the Swiss company’s research left out of the deal, J&J may be buying a solid product program, but virtually no future prospects.

As with most of the other big pharma groups, it’s ultimately no big deal for J&J to spend a couple of billion too much here and there. Thanks to a healthy balance sheet and cash flows, it can buy its way to new growth.

That has set the stage for further major acquisitions in the industry. But a fat wallet doesn’t change the fact that ultimately, many of these transactions will barely pay off for the buyer. In this respect, the Actelion deal is no exception. It will provide growth and additional size, but from a financial perspective it is far too expensive.


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