While most of the drug industry went through merger mania this decade, Johnson & Johnson (NYSE:JNJ) kept quiet. The company did a number of acquisitions, but they were all on the small side. It was a $4 billion deal here, a $2 billion there — nothing that would get arbitrageurs interested in JNJ stock.
Johnson & Johnson became known as a stodgy, steady dividend payer. Over the past five years the dividend has risen from 57 cents per share to 80 cents, while the gain in JNJ stock (86%) has not even kept up with the S&P 500, which is up 91%.
This may be about to change as it kicks the tires on Actelion Ltd (OTCMKTS:ALIOF), a Swiss drug maker. Actelion specializes in hypertension, specifically pulmonary hypertension around the lungs and heart.
Actelion has fended off numerous takeover bids in the last few years, from both European companies and hedge funds. It is, technically, Europe’s largest biotech firm. So why sell now, and why sell to Johnson & Johnson?
Why Actelion Fits
There are several reasons this deal could get done, starting with the stodginess of Johnson & Johnson itself.
Actelion prizes its independence. JNJ management could promise it that. Johnson & Johnson is having trouble filling its pipeline with new drugs, facing biosimilar competition to its blockbuster Remicade, and Actelion could be a good fit. ALIOF rose 17% Friday on speculation about a possible deal.
Actelion has been trying to go beyond hypertension, where its chief profit center is called Tracleer, but it needs capital to do that. Its current market cap is $20.25 billion, but JNJ stock as a whole is worth $360 billion. And Johnson & Johnson could in theory provide unlimited funds for its ambitions.
Then there is its base in Switzerland, whose corporate tax rate is half that of the U.S. While JNJ would be buying Actelion, Swiss authorities may look upon it as going the other way, and U.S. authorities are unlikely to object to what amounts to a tax inversion under the Trump administration.
There also is a possible personal fit. JNJ CEO Alex Gorsky spent four years with Novartis AG (ADR) (NYSE:NVS), another Swiss drug maker, before getting onto the fast track leading to his present job. That experience could help make the deal work — not just before it’s done but after.
Why There Is No Fit
There are good reasons for caution, however.
First, Johnson & Johnson is known primarily a consumer products company, not a cutting-edge drugmaker. It is best-known for Band-Aids, Tylenol, Neutrogena and Acuvue contact lenses.
Second, Johnson & Johnson has its own drug business, growing 40% over this decade, but mainly with in-house product development and licensing deals.
Third, Actelion will fetch an enormous price. The recent run-up accords it a price-to-earnings multiple of 30, against JNJ stock’s 20, its position as Europe’s leading biotech play gives it political cachet, and a successful bid would be at a hefty premium to its current price.
Johnson & Johnson has a cardiovascular division that is focused on diagnostics, and in fact, much of the specialty heart of Johnson & Johnson is focused on medical devices, not drugs. Buying Actelion, and making the deal work, would require changes within Johnson & Johnson that the company may be unwilling to make.
How to Play JNJ Stock
Most of the potential takeover premium is in Actelion. The best place to play in my view would be in JNJ stock itself — a bet on CEO Gorsky’s ability to manage the resulting company, not just doing the deal but making it work over a four-year time horizon.
That’s a conservative play, but that’s what Johnson & Johnson is all about.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
