Johnson & Johnson to Acquire Actelion for $30 Billion With Spin-Out of New R&D Company

Johnson & Johnson to Acquire Actelion for $30 Billion With Spin-Out of New R&D Company

Johnson & Johnson (NYSE:JNJ), the world’s largest healthcare holding company, with total registered worldwide sales of $71.89bn in 2016, has unveiled its intention to acquire the Swiss drug-maker Actelion Ltd (SIX:ATLN) with a move that will cost $30bn to the US company.

Johnson & Johnson

Johnson & Johnson is an American multinational medical devices, pharmaceutical and consumer packaged goods manufacturer founded in 1886. It has more than 250 companies located in 60 countries around the world while their products are sold in over 175 countries. Their companies are broken down into several business segments: consumer healthcare, medical devices and pharmaceuticals. Johnson & Johnson’s consumer healthcare segment produces a variety of consumer care products in the areas of baby care, skin and hair care, wound care, oral health, OTC medicines and nutritionals.
Johnson & Johnson’s brands include numerous household names of medications and first aid supplies.
Among its well-known consumer products are the Band-Aid Brand line of bandages, Tylenol medications, Johnson’s baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses. Its common stock is a component of the Dow Jones Industrial Average and the company is listed among the Fortune 500. Johnson & Johnson had worldwide sales of $71.8 billion during calendar year 2016.

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Source: Bloomberg

It’s easy to say that J&J is particularly active in the mergers sector: In July 2016, J&J announced its intention to acquire the privately held company, Vogue International LLC, boosting Johnson & Johnson Consumer Inc. In September of the same year, J&J announced it would acquire Abbott Medical Optics from Abbott Laboratories for $4.325 billion, adding the new division into Johnson & Johnson Vision Care, Inc.

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In January 2017, J&J subsidiary Ethicon announced it would acquire Megadyne Medical Products, Inc., a medical device company that develops, manufactures and markets electrosurgical tools.

Actelion

Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs. The company has its corporate headquarters in Allschwil/ Basel, Switzerland where it was founded in 1997. Its shares have been listed on the SIX Swiss Exchange (ticker symbol ALTN) since 2000. In September 2008, Actelion shares began trading as part of the blue-chip SMI® (Swiss Market Index). Since its founding more than fifteen years ago, Actelion has become a new kind of biopharmaceutical company: one that blends biotech‘s innovation, speed and flexibility with big pharma’s operating discipline and excellence in execution. With the intrinsic belief that innovation in all domains is the key to growth, Actelion has built a promising pipeline, seven approved products, and commercial operations in over 30 countries while employing more than 2,600 employees.

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Source: Bloomberg

Healthcare Sector – Overview

The value of M&A deals in the healthcare sector reached $546 billion in 2015, seeing a 2.5 times increase over the previous decade’s average annual value. During the year, 5 deals were announced over $20 billion, excluding the Pfizer-Allergan deal which was called off in April 2016. The value of this single deal would have been $160 billion and the merger was terminated after the U.S. government proposed regulations to crack down on corporate tax inversions.

Since in 2015 the global M&A deal value was nearly $5 trillion, it is possible to say that the healthcare sector accounted approximately for 10% of the total value. From 2012 to 2015, overall M&A grew at a CAGR of 24% while healthcare M&A grew more than twice as fast, at a 50% CAGR. By most measures, deal activity in the US health services industry declined in Q3 when compared quarter-over-quarter and year-over-year. The total number of deals decreased to 214, versus 252 in Q2 2016 and 262 in Q3 2015. Total deal value was recorded at $20.0 billion, increasing 23.8% when compared quarter-over-quarter. Although value decreased by 82.0% year-over-year, Q3 2015 is considered to be an exception compared to other quarters in terms of total deal value.

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Mergers by value and count in the Healthcare sector – Source: Bain Report

The factors that drove this sector to keep growing could be explained through:

  1. Economic strength: the combination of a low interest rate world with the continuing strength of the economic led to an outstanding scenario of M&A deals.
  2. Obamacare: this project along with the Affordable Care Act has deeply changed the health care insurance landscape. There was not only an improvement in affordability and availability of insurance coverage but also a reduction of uninsured people. These innovations might have influenced M&A activities both on a quantitative way, by increasing the number of deals, as well as on a qualitative way, by increasing complexity of deals in aspects related to the due diligence process.
  3. Health Insurance Mergers: there was a significant boost in this sub-sector. Despite the big growth rate, the governments are trying to stop the biggest mergers in the insurance sector. Two examples are provided: The justice department and several states sued Aetna and Humana in July to block their $37 billion merger deal, alleging that the acquisition would limit insurance choices for seniors in many parts of the USA and significantly boost prices. Moreover, the Anthem Inc. and Cigna Corp a Justice Department lawyer said at the beginning of November that the biggest merger in the history of the American health-insurance industry should be blocked because it will increase the companies’ dominance and cut consumer choice. An attorney for Anthem responded that the combined company will be able to lower rates paid to health-care providers and that those savings will be passed on to employers.
  4. Drug company consolidation and acquisitions: it is estimated that there were $221 billion in deals in the pharmaceutical sector during the first half of 2015. This is three times the amount than in the first part of 2014. In one of the largest deals of the year, Actavis bought Allergan in a stock and equity transaction valued at around $70.5 billion. In another deal, generic drug maker Teva Pharmaceuticals said it will buy the generics business in a spin-off from Allergan in a deal valued at $40.5 billion.
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CAGR of the mergers in the overall market and in the healthcare sector- Source: Bain Report

Deal structure

J&J will launch an all-cash tender offer in Switzerland to acquire all of the outstanding shares of Actelion for $280 per share, representing the biggest European drugs takeover in 13 years. French drug-maker Sanofi (SNYNF)had also been interested but was sidelined after J&J returned, and began exclusive negotiations in December. J&J said it expected the transaction to be immediately accretive to its adjusted earnings per share and accelerate its revenue and earnings growth rates. It will fund the transaction with cash held outside the United States. Now, following the merger J&J-Actelion, Actelion will spin out its research and development unit into a standalone company based and listed in Switzerland, under the name of R&D NewCo and led by Actelion founder and current CEO Jean-Paul Clozel. The shares of R&D NewCo will be distributed to Actelion’s shareholders as a stock dividend upon closing of the tender. The arrangements will result in R&D NewCo launching with cash of CHF 1 billion to be made available at the closing of the transactions. J&J will also receive an option on ACT-132577, a product within R&D NewCo being developed for resistant hypertension currently in phase 2 clinical development. Together, these arrangements with R&D NewCo will provide Johnson & Johnson with additional sources of innovation and value. R&D NewCo will inherit Actelion’s fully established and validated drug discovery engine based in Allschwil, Switzerland and its proven and experienced discovery and development team. It will be well positioned to continue Actelion’s strong legacy of innovation to discover and develop new and differentiated products in multiple therapeutic areas.

Benefits of the deal

  • This deal will give J&J access to the Swiss group’s range of high-price, high-margin medicines for rare diseases, helping it diversify its drug portfolio as its biggest product, Remicade for arthritis, faces cheaper competition.
  • The transaction structure will provide flexibility for J&J to accelerate investment in its industry-leading, innovative pipeline to drive additional growth.
  • J&J expects to retain Actelion’s presence in Switzerland and also leverages its complementary capabilities in shaping medical paradigms.
  • The transaction will deliver a significant and immediate premium to Actelion shareholders, with greater value certainty as compared to Actelion’s standalone prospects. Actelion shareholders are also expected to realize substantial additional value from their ownership interest in R&D NewCo.
  • The transaction is expected to be immediately accretive to J&J earnings per share and accelerate J&J’s revenue and earnings growth rates, while enhancing long-term growth and value creation of the Janssen Pharmaceuticals business. Post-transaction close, J&J expects the transaction to increase its long-term revenue growth rate by at least 1.0% and its long-term earnings growth rate by 1.5% – 2.0% above current analyst consensus while J&J estimates EPS accretion in the first full year of $0.35 to $0.40. J&J shareholders are also expected to realize additional value from the J&J convertible ownership interest in R&D NewCo.
  • Extends Actelion products’ geographic and commercial reach: The J&J global presence and commercial capabilities will help open new markets and opportunities for Actelion’s in-market products and provide additional support for the successful launches of its promising late-stage therapies in highly competitive therapeutic areas.

Roadmap to Completion

The transaction is expected to close by the end of the second quarter of 2017. Moreover, Actelion will convene an Extraordinary General Meeting for shareholders to approve the distribution of shares of R&D NewCo by way of a dividend in kind to Actelion’s shareholders upon closing of the tender offer. The Extraordinary General Meeting is expected to be held in the second quarter of 2017.

The transaction is conditioned upon:

  • At least 67% of all Actelion shares that are issued and outstanding at the end of the offer period, which may be extended, tendering into the offer
  • The approval of the Actelion shareholders of the distribution of the shares of R&D NewCo at the EGM called for this purpose
  • Further customary offer conditions described in the offer prospectus, including regulatory approvals

Tax clearances in relation to the spin-off of R&D NewCo have been received from both the Swiss Federal and the Basel-Landschaft cantonal tax authorities. Jean-Paul Clozel has committed to tender all Actelion shares he owns into the offer and vote his shares in favor of the transaction at the EGM. Actelion’s Board of Directors unanimously recommends that Actelion shareholders tender their shares into the offer and vote in favor of the distribution of shares at the EGM.

Johnson & Johnson is prepared to pay the price per tendered share to the retail shareholders in CHF and therefore provide a wholesale exchange facility. The exchange facility shall be provided only to persons who hold their Actelion shares in a bank deposit in Switzerland, and who hold no more than 1,000 shares each.

Advisors

Lazard and Citibank are acting as lead financial advisor to Johnson & Johnson. Cravath, Swaine & Moore LLP, Homburger AG and SextonRiley LLP are serving as legal advisors to Johnson & Johnson. Bank of America Merrill Lynch and Credit Suisse are serving as Actelion’s lead financial advisors. Niederer Kraft & Frey, Wachtell, Lipton, Rosen & Katz and Slaughter & May are serving as legal advisors to Actelion.

Comment

While some Analysts argue that the transaction is overpriced with respect to comparable transactions, the premium can be explained as a way to defeat competitive bidders. Moreover, the transaction price payment allows an efficient use of the significant amount of cash that Johnson & Johnson holds offshore so that no US tax for this invested money will be due compared to transferring it to the US.

Authors
Marcel Kwiatkowski
Virginia Bassano
Niccolò Di Lilla

A ghost in the Street?

A ghost in the Street?

Today, is Tech day. Snapchat’s parent company will be trading today in the New York Stock Exchange with a price tag of $17.0 per share for a total valuation of $24 billion. It is the most awaited and the largest IPO since Alibaba started trading in 2014 with a valuation of $168bn. American capital markets have not seen many tech companies going public despite the growing number of unicorns in the tech sector. Investor will look at this IPO also to evaluate  the health of the Tech IPO market. Many start-ups prefer to stay private where they can benefit astronomic valuation as emerged in the latest financing rounds of Uber or Airbnb. Investors are thirsty of new tech stocks and Snapchat valuation seems to support the view. Some concerns remain, such as the profitability profile of the company and growth prospects or the scalability of Snapchat customer base.

Snapchat is the first of the 154 unicorns. Will it be a success story like Facebook or will it fade waway as fast as its instant messages? This is a million-dollar question that nobody can answer as of now. The only thing an investor can do is to look at the numbers. Compared to its peers Facebook and Twitter, at the moment of the IPO, the perception is that Snapchat lags the competition.

In terms of profits, Snapchat reported a net loss of $515m in the last reporting year before the IPO, compared to the $1.0bn generated by Facebook. In terms of Revenue Facebook was already generating more than $3.5bn justifying the higher price tag, and even if Snapchat is better positioned than Twitter at the moment of its offering is still not clear how Evan Spiegel, Snapchat co-founder intends to scale and increase its customer base which is the diriment factor in the Tech landscape.

financials

Twitter stock has been hammered recently for discouraging data in terms of active user growth, despite improving financial performances, while Facebook has been the trendsetter both in terms of user growth and financial metrics. As of now, Snapchat is above Twitter but behind Facebook in terms of user base.

users

In terms of valuation, Facebook topped $100bn. The company was founded 8 years before, and it managed  to scale the customer base very quickly, transitioning from a tiny social network reserved to Ivy  League students, to the widest social media company in terms of active users. Its valuation reflected the higher premium paid for its wider base of users. Investors were willing to pay more to have their hands on this omnicomprehensive social network that from its IPO almost tripled the number of users. Snapchat is  more like Twitter, in term of multiple EV/users. The type of service provided is more  niche than Facebook, therefore its potential scalablity is less visible as of now.

valuation

Since the IPO, Facebook and Twitter had opposite faiths. Facebook investors at the beginning were reluctant. Upset by the lack of visibility of Zuckerberg strategy and the high valuation, they dumped the shares until August 2013. After losing more than 50% of its initial value, Facebook founder was able to restore confidence in the market improving user and revenue growth, diversifying its business model through key acquisition such as WhatsApp for the huge sum of $19bn and Instagram. On the other hand, Twitter reported strong performances in the very next days and weeks after its IPO, but then started to plummet on concerns regarding Monthly Active Users numbers. Since the IPO, Twitter share lost almost 70% of the initial value raising rumours of possible take-over by larger players.

performance

The competition is getting stronger and tougher for Snapchat. One of the key elements of its success story were the possibility to create the so-called Stories, within the instant messaging tools provided by Snap. Those stories were videos 10s long with a 24h lifecycle. Recently, Instagram replicated the format. The number of users that uploaded their stories through Instagram rose 150M per day, approximately the amount of Snapchat total users. In 2017, Facebook and WhatsApp did the same, in the effort of riding this new trend in mobile messaging.

Will Snapchat be able to cope with the increased competition in the social media landscape largely dominated by Facebook and its group of companies? Everything will depend on the strategy Evan Spiegel intends to implement in order to make the company profitable and increase the customer base on a long-term basis.

By

Tancredi Viale