(Bloomberg Gadfly) -- Some entrepreneurs get rich because they want to make money, others as a result of pursuing their interest. For Bill Gates, it was software. For Jean-Paul Clozel, it is science.
J&J is paying
The founder of Actelion Ltd. and his board agreed on Thursday to sell the Swiss pharmaceuticals group to Johnson & Johnson for $30 billion. It's a deal that will give him and his shareholders a jaw-dropping return -- and enable him to carry on his lab work.
For Clozel, it's a fantastic outcome. For J&J, the payback will be much more distant.
J&J is paying 77 percent more than Actelion's market value before takeover talks emerged in November and 23 percent more than yesterday's closing price.
For this, it will get Actelion's pulmonary hypertension franchise -- a group of drugs that makes the heart's job a bit easier by alleviating blood pressure in the lungs. Sales of these are expected to increase to $3.4 billion in 2020 from about $2.4 billion this year.
Most of Actelion's early-stage R&D is excluded from the acquisition. It will be moved into a re-born Actelion biotech, run by Clozel. J&J is buying an initial 16 percent stake in this business.
This two-part transaction allows J&J to save costs from day one.
Actelion spends about 500 million Swiss francs ($500 million) annually on R&D. Most of this -- say, 300 million francs -- will now be the burden of the new biotech. Kepler Cheuvreux analysts reckon J&J could cut about 140 million francs annually in other costs. In total, that's a saving of nearly a third of Actelion's current expenses.
These efficiencies could lift the acquired business's operating profit from an estimated 1.6 billion Swiss francs in 2020 to 2.1 billion francs.
Even with Actelion's low Swiss tax rate, J&J's return on investment would still only be 6 percent. To exceed Actelion's 9 percent cost of capital, the purchaser will need more cost cuts, more patience or, indeed, more patients (some analysts believe pulmonary hypertension is under-diagnosed).
J&J is being equally generous in funding Clozel's new biotech. This will have 1 billion francs of cash. Actelion has an estimated 617 million francs right now, implying J&J is providing the balance in return for its stake.
If the biotech burns through about 300 million francs annually, it will need more funding -- perhaps from J&J -- in about three years.
Given that analysts ascribe little value to the biotech's pipeline, it could be a struggle for the business to attract a valuation that's higher than its net cash position -- even if J&J's cash infusion implies a much higher valuation.
Scarcity value and the threat that France's Sanofi would bid forced the U.S. giant to pay up.
J&J didn't have to buy Actelion. Its estimated $19 billion of net cash could have been spent on a clutch of smaller biotechs, or returned to shareholders.
Instead, J&J has prioritized acquiring certain near-term sales. It is Clozel who has got the better side of this deal by some margin.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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