Our choice for Deal of the Month carries the largest price tag for February, and reflects a recent surge of interest in the Biotechnology sector. It is the largest deal this sector has seen since Amgen (NASDAQ: AMGN) acquired Immunex for $11.1 billion last year. After the ImClone (NASDAQ: IMCL) debacle (just ask Martha), this deal may signal that big pharma companies are no longer spooked by biotechs.
Johnson & Johnson (NYSE: JNJ) is offering to pay $45 per share in cash, for a total of $2.7 billion, to buy the California-based biotechnology company Scios (NASDAQ: SCIO).
Johnson & Johnson is one of the world’s best known manufacturers of health care products for the consumer, pharmaceutical and professional markets. Formed 116 years ago, JNJ now includes some 198 companies under its corporate umbrella. On a trailing 12-month basis, JNJ generated revenue of $36.3 billion, EBITDA of $10.7 billion and net income of $6.7 billion.
JNJ is most familiar for such consumer products as Band Aids; however, of its $36 billion in 2002 sales, $17 billion, or nearly half, came from prescription drugs. Another $13 billion came from medical devices while sales of consumer products accounted for just $6.6 billion. Moreover, prescription drugs proved the highest margin segment, accounting for 60% of JNJ’s 2002 earnings. Clearly, the pharma segment is where JNJ is concentrating its efforts.
The company currently markets about 100 prescription drugs. Like other pharma companies, though, it is faced with patent expirations and generic competition on a number of drugs. To enhance its pipeline, it is seeking out new drugs, and, as in the recent past, is looking among biotech companies for likely candidates.
Based in Sunnyvale, California, Scios discovers, develops and manufactures human therapeutics based on the company’s strengths in protein-based and small-molecule drug discovery. It concentrates primarily on cardiovascular conditions.
Unlike most biotechs, Scios actually has a drug on the market, one for congestive heart failure which could bring in an estimated peak $500 million a year in revenue. The strong selling point for this drug, which has been marketed for two years, is that it is the first big drug approved in a decade for congestive heart failure, and so does not face the patent expiration problems facing similar drugs on the market.
Scios is also developing an oral rheumatoid arthritis drug that could rival Amgen’s Enbrel and complement JNJ’s own Remicade. Readers will recall that Amgen acquired Immunex last year largely to get hold of Enbrel.
On a trailing 12-month basis, SCIO lost $98.4 million on revenue of $77.2 million. The company has nearly $300 million in cash on hand.
Under terms of the deal, JNJ is to pay $45 in cash for each share of SCIO common stock outstanding. Based on SCIO’s diluted shares, that amounts to a total $2.7 billion. However, after giving effect for SCIO’s cash on hand, the net purchase price is approximately $2.4 billion.
This deal offers SCIO shareholders a 30% premium over the stock’s prior-day price. More precisely, over the price on the day before the announcement, before news of the purchase leaked out. SCIO’s stock ran up sharply on that rumor, narrowing the premium ultimately offered the next day. Even JNJ’s stock rose on news of the deal. So the market appears to roundly approve of this transaction.
Scios management may also find it attractive since companies under the JNJ umbrella typically retain their original management and enjoy a fair amount of autonomy while gaining access to the parent’s capital, managerial resources and sales force. It is this last component that SCIO will count on to realize the $500 million annual sales of its heart drug.
With almost 200 companies, JNJ is certainly no stranger to the acquisition market. This deal follows two larger investments JNJ has made in the biotech sector. In October 1999, the company acquired the Pennsylvania-based, publicly traded biopharmaceutical firm Centocor for $4.9 billion. Centocor’s therapeutic products are derived through its monoclonal antibody technology.
In 2001, the company undertook its largest deal ever with the $13.2 billion acquisition of biopharmaceutical company Alza Corp. Since JNJ also acquired Alza’s $1.8 billion in cash, the net equity value of the deal was actually somewhat lower. In that deal, JNJ acquired a set of drugs that sell well as well as a number of drug-delivery technologies for improving medicines.
A few weeks before the Scios deal, JNJ announced another, smaller biotech deal. It is offering to acquire 3-Dimensional Pharmaceuticals (NASDAQ: DDDP) for $5.74 per share in cash, or a total of $88 million. DDDP’s technology combines expertise in determining protein structures with a large library of small-molecule compounds. This helps to shorten the time from drug discovery to clinical development. Its proprietary technology is particularly focused on developing small molecules for cardiovascular disorders, oncology and inflammation.
This transaction is not likely to strain JNJ’s pocketbook, as DDDP comes with over $70 million of cash on hand. This deal yields a price to revenue multiple of 3.1x. JNJ is offering DDDP’s shareholders an 89% premium over its prior-day price.
With JNJ’s reputation as a conservative company, the Scios deal may signal that big pharma is again interested in biotech. Given all the recent M&A activity in the biotech sector (see the opposite page), we expect further deals to acquire biotech companies, particularly those that have or are close to having a marketed product.