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J&J's $30B Actelion deal bolsters its pharma business, analysts say

Johnson & Johnson's $30 billion acquisition of Actelion Ltd., which will also spawn a new company, will spur growth at the U.S. drugmaker, analysts said, although the price was higher than some had anticipated.

Under the unconventional deal structure, Johnson & Johnson will inherit Actelion's suite of five medicines for pulmonary arterial hypertension and certain late-stage candidates, while the early-stage portion of the Allschwil, Switzerland-based biotech's pipeline will be spun out into a new company. Johnson & Johnson will take a 16% equity stake in the organization, and has the right to an additional 16% stake through a convertible note.

After breaking off negotiations in December, Johnson & Johnson raised its offer following Sanofi's entrance into advanced talks to acquire the company.

Jefferies' Peter Welford wrote that the purchase price of $280 per share was above his base case of $250 per share. He is projecting Actelion sales of $2.4 billion in 2017, rising to $3.65 billion in 2020, led by the blockbuster medications Opsumit and Uptravi.

Leerink's Danielle Antalffy wrote that the "strategically positive" deal positions the company to drive even faster growth from Actelion's portfolio via sales synergies and further market penetration and expansion. She is estimating EPS accretion of 38 cents in fiscal year 2018, in line with the company's estimate of 35 cents to 40 cents per share in the first full year.

Antalffy raised her estimate of Johnson & Johnson's compound annual revenue growth rate through 2021 to 6%, up from 5.6%.

During the conference call, J.P. Morgan's Michael Weinstein said Wall Street tends to view the assets as "marginally accretive." Johnson & Johnson CFO Dominic Caruso responded that the new additions to the portfolio possess "upside potential" when coupled with the company's reimbursement and regulatory capabilities, as well as its global presence.

"We have higher expectations on the penetration and the expansion of these products than may be currently anticipated by the investment community," he said. Growth opportunities will be driven by the increased use of combination therapy and a longer duration of treatment, according to Caruso.

Johnson & Johnson will also obtain phase 3 candidates for Clostridium difficile-associated diarrhea and multiple sclerosis treatment, as well as an option to the commercialization rights of a phase 2 hypertension candidate.

The executives told Wall Street that the creation of a new company, to be led by current Actelion leadership, was designed to avoid the "dark side" of big M&A deals, such as the integration of different R&D units.

Johnson & Johnson will generate cost synergies by transferring expenses to the new company "while retaining the potential upside through ownership" in the new company, Antalffy wrote. The expenses to be shifted include the more than 60% of Actelion's current R&D that is devoted to the early-stage pipeline and about a quarter of its sales and administrative expenses, according to her analyst note.

Welford wrote that the formation of a new company "creates additional value." Key phase 2 assets include candidates to treat the rare genetic disorder Fabry disease, as well as insomnia and lupus, he wrote, adding that the pipeline also contains at least four phase 1 candidates.

He estimated that the new company could be valued at 5 CHF per share to 10 CHF per share, giving it an enterprise value of 500 million CHF to 1 billion CHF.

The transaction will enable the new company to launch with 1 billion CHF of cash on hand. Johnson & Johnson said during the call that it must hold the equity stake for a minimum of two years.

Actelion CEO Jean-Paul Clozel promised investors he will provide more details about the new company in the coming weeks.