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Johnson & Johnson (JNJ -2.71%) reportedly just ratcheted up its bid to a whopping $247 per share for Actelion Ltd. (NASDAQOTH: ALIOF), a Swiss biotech focused on rare diseases such as pulmonary arterial hypertension (PAH).
The deal looks superficially attractive for J&J investors. But that's assuming you only consider how Actelion's fast-growing drugs could help J&J's 2017 sales outlook. J&J's most recent offer values Actelion north of $27 billion. That's a blistering 35% tacked onto Actelion's market value of around $20 billion before the companies confirmed they were in talks. J&J's willingness to pay such a huge premium may have something to do with analysts' forecasts that J&J will only grow by 5% in 2017, as well as the stock's poor performance in the second half of 2016.
And J&J's bid could go even higher. French multinational Sanofi (NYSE: SNY) is now exploring a bid, and Bloomberg claims Pfizer, Inc. (NYSE: PFE) and Roche Holding Ltd. (NASDAQOTH: RHHBY) might also throw their hats in the ring.
Securing the best drugs for the best prices is a core competency for big pharma, and there's a good chance this deal is already too costly. But let's look closer: Actelion's rare-disease focus throws another wrench into the works that investors need to know about, as it could further undermine the value of this deal.
Rare diseases offer premium pricing, but questionable synergies, for J&J
Rare-disease drugs are a drugmaker's dream, according to some analysts. That's because the U.S. Food and Drug Administration provides various incentives to encourage research, and these drugs tend to command premium prices.
But most big drugmakers know this category can also be a nightmare. In fact, J&J has historically avoided rare-disease drugs, with their nosebleed prices and tiny numbers of patients, in favor of treatments for huge patient populations.
Why? It takes extremely devoted research-and-development and sales efforts to succeed in the rare-disease market -- which doesn't mesh well with big pharma's sprawling business models and various competing research and sales agendas. There are exceptions, of course. Companies like Sanofi, Pfizer, and GlaxoSmithKline have research units exclusively focused on rare diseases.
But big pharma is late to the table in rare disease. It wouldn't be there at all without the financial success that smaller biotechs have had in this field. Unfortunately for big pharma, being late is a critical problem. Many more rare-disease drugs have become available in recent years, so it is becoming ever more difficult to expect governments and healthcare payers to reimburse the costs of development. Even now, prices for these drugs are controlled in many places outside the U.S.
PAH is facing generic threats
There's worse news in store. Trying to squeeze high profits out of this category is growing difficult, as so many rare-disease drugs are going generic. That's particularly true in Actelion's core product area of PAH, a life-threatening disorder that severely compromises the functions of the lungs and heart. While Actelion's newer PAH drugs Opsumit and Uptravi are growing rapidly, a generic version of the company's flagship drug Tracleer is expected soon. Going forward, Opsumit should also see growing competition, since GlaxoSmithKline and Gilead Sciences' Letairis, a competitor to Opsumit, loses exclusivity in a few years. Generics will likely undermine sales of Opsumit, not just Letairis.
Yes, J&J has a solid presence in cardiovascular disease, so there may be some overlap in sales efforts. But with PAH, we're talking about a relatively small patient market overall, with an estimated prevalence of 15 to 50 cases per million. In addition, due to the nonspecific symptoms of PAH, it is frequently undiagnosed until patients have reached an advanced stage.
R&D in rare disease can be a hornet's nest
R&D synergies will also be hard to come by. Rare-disease research attracts some of the brightest minds in science, but thanks to the extremely specialized nature of their research, they can also be some of the hardest to replace. Therefore J&J can't afford to tear up Actelion's R&D department to reduce costs, as often must happen to achieve enhanced cost efficiencies in takeovers.
And J&J can't focus solely on Actelion's PAH efforts, either, because Actelion has a number of ongoing phase 3 trials targeting other indications such as the rare disease Eisenmenger syndrome. Look at it this way: The scale of a big pharma requires industrialized development processes and mass advertising. By contrast, rare-disease research is built around individual patients. Finding those patients is harder than predicting the next lottery winner, to the point that it's not uncommon for clinical trials to fail to recruit a single patient at a trial site.
None of this is rocket science. But in big pharma, it takes years for new ideas and models to take root, and Actelion's powerful pipeline needs rapid-firing of its clinical machinery to stay ahead of the competition. Will that happen if J&J swallows it up?
I suppose it's possible. But it's one thing to talk about radical changes in research and sales perspectives at a management meeting, and another thing entirely to make those changes happen.
Innovative disease targets, innovative deals
J&J could try a creative approach, rather than a straightforward acquisition. According to Reuters, CEO Jean-Paul Clozel, who owns about 5% of Actelion's stock, has been trying to get the healthcare giant to go for an agreement that would allow it to benefit from J&J's scale without sacrificing its independence. Such a deal could be constructed as an asset swap, or J&J could become the largest shareholder in a new entity that would combine the Swiss group with some of J&J's activities.
Alternatively, J&J could take a lesson from Roche, which bought 60% of Genentech in 1990 before buying out the rest of it in 2009.
All that being said, this is one of those deals where one plus one equals less than two, and I'm hoping J&J decides it can get more bang for its buck elsewhere and backs away.
