J&J Bets on Vaccines
Posted by: Arlene Weintraub on October 01
How smart is it for a century-old company to buy its way into a new product line rather than trying to build it from the ground up? If you’re Johnson & Johnson, a company with $9.5 billion in free cash, it might prove to be very smart. On September 28, J&J bought an 18% stake in Dutch vaccine maker Crucell for $441 million—marking J&J’s first entrée ever into vaccines. Over the summer, J&J bought biotech company Cougar for nearly $1 billion, instantly boosting J&J’s limited in-house expertise in oncology. Sure, the two deals brought J&J a couple of late-stage pipeline products, but what makes them most valuable is that they infused the health-care conglomerate with capabilities it did not have before.
Take Crucell, for example. The Leiden, Netherlands based company is working on a universal monoclonal antibody against flu—a biotech vaccine that could potentially protect patients against all strains of influenza A, including swine flu. But this partnership wasn’t just about one product: Paul Stoffels, J&J’s global head of research and development, says Crucell offers the complete package of what J&J needs to take a leadership position in vaccine development. In addition to the promising experimental flu vaccine, it offers technology for making the booster shots that are required in many vaccination programs, as well as a widely applicable production platform. Crucell engineered a cell line that can pump out antibodies at very high yields, possibly providing an alternative to the stodgy method of making vaccines in eggs. “Moving from egg-based to cell-based production is a critical shift,” Stoffels says. And J&J has expertise to offer Crucell, as well. “Crucell does basic research, we do global development. We can be complimentary.”
This may be exactly the right time for J&J to be taking some big risks. With the recession pushing sales down in all three of its major divisions—prescription drugs, medical devices, and consumer products—the company needs to find new opportunities for growth.
Crucell and Cougar are part of a string of recent deals that started with J&J’s December purchase of medical-device maker Mentor. Now some analysts are wondering if the company is warming up to make a really big buy. In a Sept. 17 report, Credit Suisse analyst Catherine J. Arnold suggested that J&J is among the drugmakers that should consider a major acquisition, because companies with “more diversification could benefit from augmentation of revenue growth,” she wrote. She pointed out that J&J could easily pick up a company like Vertex, with which it is co-developing a promising Hepatitis C drug. Vertex has a market valuation of $6.6 billion, making it rather big bite for a company that tends to shy away from earthshaking deals. (J&J’s biggest acquisition ever was its 2006 purchase of Pfizer’s consumer health division, for $16.6 billion.)
During lunch at J&J’s headquarters a few weeks before the Crucell deal was announced, J&J CEO William Weldon reflected on the challenges of dealmaking during a recession. “I don’t think we look at things any differently than we ever have,” he says. “The question is can we create shareholder value, does the deal accelerate growth in the short and long term, does it put us into good therapeutic areas?” When it comes to really big mergers, akin to Pfizer’s plan to buy Wyeth for $68 billion, the answer is usually no, Weldon says. “Mega-deals have just not been the way we’ve chosen to do acquisitions.”
Weldon says that J&J will continue to be conservative when it comes to thinking about all deals, even though valuations had dropped considerably during the recession. He fears that acquiring companies that are down-and-out might actually be more risky than buying healthy assets. “There are a lot of companies that cannot raise capital to get products further along on their own, so they may be for sale earlier,” he explains. “That means there’s more risk associated with the acquisition, and more costs after you acquire it.”
Many industry experts agree with Weldon’s assessment, and they expect he’ll continue to look for small but valuable assets to add to its stable of well-known products. “J&J is like the mutual fund of health care,” says Eric Gordon, professor at the University of Michigan Ross School of Business. “They’ve got hip replacement, stents, Neutrogena. Buying Cougar is not like Pfizer buying Wyeth. It’s not about combining salesforces,” or making other consolidation-like moves to save money, Gordon sayss. “J&J is purely buying oncology and biotech capabilities. It’s totally consistent with their approach.”
What’s more, Gordon points out, J&J isn’t hoarding cash like a company considering a big purchase might: J&J increased its dividend last year and again this year, and it has been buying back its own shares over the last three years. So while J&J could very well continue its buying spree, it’s likely to nibble at small targets, rather than gobbling up giant assets.