Flotation of Siemens’ healthcare unit to be the largest German IPO in two decades

Hyesung Lim

On Wednesday, the European engineering conglomerate Siemens AG announced its plans to list its diagnostics technology division Healthineers on the Frankfurt stock exchange during the first half of 2018. The partial flotation of this €40bn medical solutions business is anticipated to be the largest public offering in Germany since the €13bn listing of Deutsche Telekom in 1996.

Michael Sen, a member of the Siemens supervisory board overseeing the Healthineers IPO, described Frankfurt as “one of the world’s largest trading centres for securities [whose] importance will continue to increase due to Brexit.” In explaining the board’s decision to favour Germany over other perhaps more popular cities like New York, Hong Kong, and London, he said “As a highly liquid trading venue, Frankfurt is attractive for investors from around the world.” And indeed Frankfurt has a special edge over exchanges in other financial hubs when it comes to its strong appeal to Asian investors and its perception as being “truly global.”

In the third quarter of this year, Healthineers was the best performing of Siemens’ nine divisions. Offering a wide variety of products and services in healthcare IT, laboratory diagnostics, medical imaging, and therapy systems, the unit reached a quarterly sales of €3.7bn. Besides contributing the largest fraction to its parent company’s €21.4bn revenue, it was also the most lucrative unit with a profit margin of 19 percent. Siemens did not provide further details about the upcoming flotation of this medical solutions unit, but persons familiar with the company predicted the size of its listing to be a slice of up to 25%. The IPO of this minority stake, which could be worth anywhere between $6 billion and $12 billion, will be ranked as one of Europe’s biggest listings over the last few decades.

The Healthineers IPO is thought to comprise a part of the industrial giant’s latest move to revamp its wide structure of four sectors—industry, energy, healthcare, and infrastructure—and transform itself into a holding company. In 2014, Siemens chief executive Joe Kaeser unveiled the group’s Vision 2020, which sets forth a central mission to “strengthen core.” The plan seeks to gather the firm’s focus on its core industrial operations by spinning off other less relevant units in a business model described as a “fleet of ships.” As a direct consequence of this huge restructuring movement, there have been a multitude of M&A and sales activities along the peripheries of Siemens. In April, the group’s renewable energy unit merged with the Spanish wind turbine company Gamesa. The engineering group holds 59% of the shared capital while Iberolda holds 8% of the sum. The rest has been listed separately in Madrid. In a similar fashion, the lighting business Osram, the household appliance division Bosch Siemens, the chipmaker Infineon, and a range of other telecommunications units have all been sold off. The next in line is the rail division, which is set to merge with the French company Alstom before being listed in Paris.

Kaeser emphasised that “The individual Siemens businesses must be able to keep up with the specialists in the industry and be at least as good as their strongest competitors.” With a firm conviction that “conglomerates have no future,” the engineering firm has been reinforcing a strategy that seeks joint ventures or partnerships where it can act as an investing partner or a holding company. With the growth of IT and automation causing multidimensional disruptions across the industrials sector, Siemens has been truly diligent in their efforts to break away from the outdated structure of a conglomerate and generate smaller specialised entities that can respond faster to the rapid changes in consumer and market sentiments.

“It won’t be the largest or the most diversified companies that will be successful in the era of industrial digitisation, but those that are best adapted to the rapidly changing market conditions.”

Pharma companies are safe from Amazon – but for how long?

Jake Buckley

For the past few weeks it has appeared increasingly likely that e-commerce giant Amazon has been preparing for a move into the drug selling business. In the last couple of days, however, Amazon has told regulators it will not ‘ship or sell drugs’ and instead seem set to tackle the simpler market of selling medical devices and supplies. This will come as a relief to Pharmaceutical companies, with Amazon likely to act as a significant competitor should it move to start the sale of drugs, due to its distribution channels and ability to offer products at a lower price than its competitors in the same market. Some analysts have suggested that the recently announced CVS-Aetna deal was a pre-emptive consolidation of its position by CVS, highlighting the threat many companies in the industry already feel from Amazon. Additionally, there have been moves from some pharmacy chains to begin offering next day delivery for the medicines they sell, an indication of an industry preparing to compete on a new front.

Yet the collective sigh of relief from Pharmaceutical companies may well be short lived. Amazon are still likely to enter the drug selling business eventually, and quite possibly in the near future, having already applied for a licence to distribute drugs in some states across the US. They are a company known for their long term strategies, and considering the numerous meetings Amazon have held with industry executives, it seems likely that they will make their move sooner rather than later.

If and when Amazon do decide to enter an industry worth $450 billion a year in the US, they will likely do so at the benefit of the consumer. The cost of medicine in the US is widely accepted as being too expensive for consumers – Amazon can change this. Should Amazon compete against the wholesalers they would be expected to operate on thinner margins, allowing the company to distribute its products for a lower price, which would benefit consumers. The synergies available to Amazon also suggest that it will have a competitive advantage over its rivals, something that will likely drive the remaining wholesalers to improve their services so as not to lose market share. Amazon has vast warehouses of space for production, huge delivery networks capable of revolutionising the drug delivery business, and the possibility of selling medicine through the 450 Whole Food stores Amazon owns.

The question for Pharmaceutical companies is how to best fend off Amazon if they do enter the drug delivery business. CVS have turned to the acquisition of Aetna as their solution, something that Morgan Stanley analyst Ricky Goldwasser believes is a good move. According to Goldwasser, CVS, and other similar companies, should focus on vertical integration rather than attempting to go head to head with Amazon in next day or same day delivery. This seems a sensible suggestion, with Amazon’s mass delivery network better prepared than any of the Pharmaceutical giants, such as CVS, for the delivery of drugs.

For now, Pharmaceutical companies do not have to contend with Amazon as a serious competitor, but for any company looking to retain its market share they should be well underway in planning for the event that Amazon do enter the market. If /when Amazon begins the sale and distribution of drugs remains to be seen, but should they go ahead with what most analysts expect and delve into healthcare, then expect them to become a serious competitor to the current market leaders.

The implications of technology in healthcare

Hyesung Lim

With advancements in technology causing far-reaching disruptions across the business landscape, there has been a race among companies in all regions and industry sectors to reap the competitive advantages offered by the latest innovations. Pharmaceutical and healthcare companies have not been an exception to such a pervasive trend. Recent movements show that they have begun to harness the benefits of technology by using AI to develop effective vaccines and digital sensors to collect data on drug intake.

Towards the end of October, the French drugmaker Sanofi announced its plans to collaborate with the US tech firm Berg in beating viral infections. The partnership, the first of its kind in the world of vaccines, will involve a synergistic exchange of medical data and technology between the two companies. Sanofi will share human blood plasma samples and patient records with Berg, which will then use its clinical database to analyse variances in vaccine efficacy among “different populations, races, different ages, and different geographies.” Enabling quantitative prediction of human immune response to pathogenic invasions and subsequent vaccine administration, the initiative will expedite development of next generation influenza vaccines. With the flu virus leading to over 200,000 complications and tens of thousands of deaths a year in the US alone, the keenness of pharmaceutical companies to embrace technology as a catalyst for vaccine R&D has been welcomed by the public and investors alike. As Sanofi were indeed the first to recognise the potential of AI to interpret immunological reactions, it is not surprising that sales in their global vaccine business unit rose by 8.8% to €4.5bn last year, generating as much as 13.5% of the company’s €33.8bn annual revenue.

Recent months have also seen significant cross-border efforts by Proteus Digital Health and Otsuka Pharmaceuticals to incorporate an innovative sensor technology into the widely used antipsychotic drug Abilify. Their joint efforts came to fruition this week, with regulators at the US Food & Drug Administration (FDA) giving approval to the world’s first digital medication. The pill, forming an interface between traditional pharma and the “internet of things,” has an inbuilt sensor which collects data on the exact time and dose of the medication taken. This information can then be accessed by both patients and doctors on their mobile phones, facilitating easier tracking and management of treatment schemes. The hope is that this invention will provide a definitive solution to the longstanding and pervasive problem of non-adherence, where patients do not take drugs as prescribed by their doctors. Lowering the consumption of existing medications while increasing the costs that result from the consequent exacerbation of disease, poor compliance to drug regimes cost the worldwide healthcare industry an estimated $100bn per year. Thanks to their innovative solution to such an expensive problem, Otsuka shares rose above their 200-day moving average to ¥4906.00 on the day following the announcement. This positive trend continued into the week, with Friday’s trading volume exceeding the daily average by an impressive 37.6%.

The integration of technology into healthcare will bring with it not only a vast number of benefits, but also significant drawbacks. On the one hand, it will serve as a catalyst for R&D and enable treatment of the diseases previously deemed untreatable. On the other hand, it will leave individuals exposed to a wide range of breaches in medical cybersecurity. Unlike any other form of cyber criminality, hacking of medical devices will have direct ‘life or death’ consequences. As such, the cost of data breach per capita is expected to be the highest in healthcare at $380, far greater than the $250 for financials, $190 for life sciences, and $170 for technology. Therefore during times of rapid progression such as now, it is of paramount importance that pharmaceutical companies and healthcare providers review the issue of medical cyberattacks and take the necessary steps to ensure security.

Increase in Biotech M&A activity set to make up for reduced Pharmaceutical M&A?

Jake Buckley

2017 has seen a reduction in Pharmaceutical M&A activity, mainly driven by the lack of clarity over the potential US tax reforms. Leading pharmaceutical companies, for example Pfizer, have decided to put on hold their M&A activity until it is clearer what the US tax reform policies will be. This of course has a knock on effect on the whole of the pharmaceutical sector M&A activity.

Compared with the same period in 2016, there have been 106 fewer transactions completed as well as a 9.9% dip in value. This level of inactivity in the sector has not been seen since 2013, however there is much to suggest that 2018 will see a pickup across the sector, particularly in Biotech.

It seems logical that the industry needs to pursue an increase in M&A activity in 2018 for multiple reasons. The potential for tax reform coupled with robust balance sheets make M&A strategies an attractive prospect for pharmaceutical companies. This coupled with the fact that major biotech firms are somewhat struggling for organic growth makes it seem likely that M&A activity will pick up in 2018 as companies in the pharmaceutical sector seek new growth opportunities.

While the pharmaceutical sector as a whole has had an inactive and low value year for M&A, this has to a certain extent hidden the recent positives for Biotech stocks. Gilead’s $10.2 billion deal for the buyout of Kite is one example of a significant biotech deal, and there are prospects for more in the coming months.

Also factoring in that it appears Trump will fail with his attempted Obamacare repeal-and-replace legislation, 2018 could see a big recovery in pharmaceutical M&A in general. Biotech stocks may particularly rally after Trump’s attempted reform against high drug prices seems to be falling on deaf ears in Congress.

Biotech ETF is up nearly 9% from August 18, compared to 2.9% for the S&P 500, and with stocks rising at a faster rate than the rest of the market it is increasingly looking like the tide is turning once more in favour of biotech stocks. It is not just US politics and recent deal-making that is positively affecting biotech stocks, but an increase in Food and Drug Administration (FDA) drug approvals is generating a positive feel around biotech stocks.

So, there is much to be optimistic about when assessing biotech companies, but what affect will this have on the pharmaceutical sector as a whole? Activity breeds activity, and the increased expectations in biotech companies has come at the right time for the pharmaceutical sector. Merck, and potentially Pfizer, are planning sales of their consumer healthcare units, both of which would be large M&A deals, so an increase in biotech M&A activity and stock performance alongside this could be enough to kick-start activity across the whole sector.

Inherent risks in biotech stocks remain, with many biotech products failing to produce the desired results, or gain access to the marketplace – but following a lean year for pharmaceutical M&A, a pickup seems like a necessity for 2018. Now may be the time to invest in biotech as it seems increasingly likely that pharmaceutical M&A may be about to kick-start once again.

Slowing growth of consumer healthcare and the rise of precision therapies

Hyesung Lim

Millennials, one of the largest cohorts in history, are about to enter their prime spending years. Having grown up in a time of rapid globalization and technological advancement, the 17-37 year olds will bring with them a new attitude towards spending, a different approach to determining value, and a set of priorities dramatically different from those of past generations. Necessitating change across all areas of businesses, their influence will permeate every nook of the global economy. Even pharmaceuticals companies, usually insulated from macroeconomic trends, will not be immune to such a radical change in consumer behaviour.

As native users of technology, millennials will show a strong preference for companies that deliver high-tech services. Born into the world of social media, they will rely on online reviews and independent means to judge product value. With less disposable income but greater access to information, they will be more prudent about how much and where they spend their money. They will follow a clear-cut hierarchy of needs and be reluctant to invest in the mediocre. With such consumers growing in number, the pharmaceuticals industry will be encouraged to develop medications that promise higher success rates and reduced side effects. This demand will diminish the growth of Over-the-Counter (OTC) businesses and promote the development of precision therapies.

The 5% compound annual growth of OTC businesses has been maintained by a generation of ageing baby boomers, who generally have more money to splurge on healthcare and thus worry less about cost-effectiveness. However, with financially constrained, choice-conscious millennials beginning to occupy a larger fraction of the worldwide consumer base, this $1.07bn market may begin to show a decline in its growth. Last month, the German pharmaceuticals group Bayer reported a 2.9% drop in their consumer health revenue. Adjusted earnings in this division fell by 16.5% to €274m, cancelling out the company’s ‘strong performance’ in other key business areas.  Despite a significant 13.2% rise in their sales of oral anticoagulant ‘Xarelto’, eye injection ‘Eylea’, cancer drug ‘Stivarga’, and pulmonary hypertension treatment ‘Adempas’, Bayer’s total revenue for the third quarter was just €8.03bn, down from €8.26bn last year.

As a result of low (albeit steady) profit in the OTC business, large pharmaceutical companies have begun to question the merit of their consumer healthcare units. Pfizer, for one, have been debating a number of “strategic alternatives” for their $3.4bn consumer health business, a division which makes the popular pain-killer ‘Advil’ as well as the vitamin supplement ‘Centrum’. Similarly, Merck expressed their interest in negotiating the sale of their €860m consumer healthcare arm, which generates around 13% of their yearly revenue. Morgan Stanley agrees that their OTC unit would benefit from being moved to fast-growing emerging markets, where it could reach a sales potential of €4bn due to higher demand.

Young consumers in developed countries will not settle for one-size-fits-all solution to their medicals problems. Traditional OTC drugs have a wide target range associated with lower success rates and higher risk of side effects. Precision medications, on the other hand, have a much narrower target range and tackle illness at its biological source. Strong millennial preference for the latter is poised to reshape the pharmaceuticals industry. And this industry-wide transition will be sped up by breakthroughs in technology. The senior vice-president of Illumina Europe noted that “in 2001, it cost the industry $3bn and 13 years of groups and tailor treatments to each subgroup. In October, there was a unanimous vote research to sequence a single human genome. Today we can do that for less than $1,000 in a couple of days.”

Advancements in DNA sequencing have not only helped us understand the genetic underpinning of illnesses, but enabled us to classify diseases into smaller segments, shown by the Food and Drug Administration (FDA) advisory committee recommending the endorsement of Luxturna, This pioneering gene therapy, developed by Spark Therapeutics, targets a subset of patients suffering from severe vision loss known as Leber congenital amaurosi. Thanks to a series of successful clinical trials, Spark saw their shares soar by 72% over the course of this year. At around the same time, Gilead Sciences won the FDA approval for its cutting-edge cancer therapy Yescarta. With a price tag of $373,000, this chimeric antigen therapy works by extracting immune cells from a patient and genetically modifying them to attack cancer cells. With their shares jumping by 3% to $82.47, Gilead followed suit in a string of successes started by Norvartis, a Swiss healthcare group who in August had won approval for a similar Car-T therapy aimed at childhood leukaemia.

This progress in precision therapy has been hailed by many venture capitalists around the world. The amount of money invested in genomics is expected to hit $3.2bn by the end of 2017, an impressive 88.2% rise from the $1.7bn of last year. This robust funding will fuel R&D, reduce costs, and make precision medicines available not only for serious diseases like cancer, but also for milder conditions like common flu and migraines.

The Heroes of CRISPR?

Patricija Petkeviciute

The US Patent Office has handed the win in CRISPR battle to the Broad Institute of Cambridge that is affiliated with Harvard and MIT. The case was originally brought by the University of California, Berkeley, that challenged the patents held by the Broad Institute.

It was Jennifer Doudna, a biochemist of UC Berkeley, and her collaborator Emmanuelle Charpentier who were first to publish their findings on the CRISPR system The mid-2012 publication is a description of a gene-editing system that allows to precisely cut the DNA in a test tube – a genome editing technique naturally occurring in bacteria. It was Feng Zhang of the Broad Institute who, in January 2013, published the applications of this system that allowed the scientists to adapt CRISPR to work inside of more complex organisms such as plants and animals.

The three judges of the Appeal Board decided that there is ‘no interference in fact’, meaning that the patents awarded to UC Berkeley and the Broad Institute are sufficiently different. In other words, Doudna’s and Charpentier’s publication was not so all-encompassing as to make Zhang’s advances ‘obvious’. Zhang’s patent documents, however, have caused consternation. CRISPR’s main appeal is its easy reproducibility. In fact, several scientists were able to use CRISPR to work on human cells. This would suggest that it was obvious that CRISPR would work on human cells and the Zhang’s invention might not be worthy of its own patent. The ruling is also at odds with the opinion of the science world. Doudna and Charpentier won the $3 million life sciences Breakthrough Prize and $0.5 million Gruber Genetics Prize in 2015, and more recently, the $0.45 million Japan prize in 2017. Yet, the decision of the Patent Office gives Feng Zhang and his research centre control over every important commercial use of the technology.

Given the opacity about Doudna’s further moves, the commercial consequences will not be realised immediately. Intellectual property experts are certain that UC Berkeley will appeal. The stakes are especially high, given CRISPRs potential to treat genetic disorders, including cancer. For the licensees of CRISPR patents, UC believes that one must obtain patents from both the Broad Institute and UC Berkeley. Hank Greely, law professor of Stanford University, agrees that “someone wanting to use the Broad patent would also have to license the UC patent.” The UC patent would be for the use of any cells, and the Broad patent would have to be obtained for the use on plant, animal and human cells, proving costly and inefficient for the scientific community wishing to use the miracle invention. Regardless of the future outcome, what once started as an insightful story about a curious, hypothesis-free breakthrough has now turned to a harmful and embarrassing scientific food fight.

Integra Acquires J&J Neurosurgery Unit

Pavit Bangur

Fresh from its $30 billion acquisition of Actelion, Europe’s biggest biotech company, Johnson & Johnson (J&J), the largest publically traded healthcare company, are on the opposing end. Integra LifeSciences Holdings Corp is looking to acquire J&J’s Codman Neurosurgery unit for $1.045 billion; its intention is to expand its presence outside of the United States.

Integra, which makes products used in reconstruction, neurosurgery, wound and dental care, made an offer for Codman Neurosurgery which it hopes will strengthen its offerings for tissue ablation, cranial stabilisation and spinal cord repair. Codman Neurosurgery is part of Depuy Synthes Companies, one of the 250 subsidiary companies of J&J. They offer a diverse portfolio of devices for cranial surgery, neuro intensive care- the management of the build-up of fluid in brain amongst other treatments. The deal, however, excludes Codman’s neurovascular and drug delivery business.

Codman Neurosurgery made around $370 million in sales in 2016. Acquisition of the company leads to Integra expecting the transaction to be accretive to adjusted EPS by at least $0.22 by the end of closing of the first full year and increasing afterwards. It expects to add the same amount to the reported EPS by the end of the third full year. Integra predicts that the acquisition will help them accelerate towards achieving their target of $2 billion in revenue. Integra expects the Codman Neurosurgery revenue to be volatile in the first year following the acquisition, but expects to grow (around 4.5 ± 1.5) % in the longer term. The transaction is expected to close in 24 different countries by the end of the fourth quarter of 2017, and subsequently the other remaining countries will be dealt with on a rolling basis. If the proposed deal is not closed, a termination fee of $60 million will be paid out, or $41.8 million if the grounds of termination are based on Depuy Synthes’ breach of exclusivity obligations. Bank of America Merrill Lynch is serving as Integra’s financial adviser, Latham & Watkins LLP as its legal adviser. The former, along with JPMorgan, has provided financing for the acquisition.

Since the announcement of the deal, Integra’s shares rose by 6% to around $46, whilst J&J’s stock was also marginally up. Over the past twelve months, Integra’s shares have risen by 56%, reaching the highest point in the past year. In the same period J&J’s shares have risen by around 15% to $118 per share. This is the second of Integra’s major acquisitions for 2017, with it also announcing that it would be buying Derma Science, a tissue regeneration company, for $204 million in mid-January. In 2015 Integra bought TEI Biosciences and TEI Medical for $312 million, aiming to expand its portfolio in wound care and reconstructive surgery. On the other hand, J&J are looking at options for their diabetes care unit, which includes its Animas, Calibra Medical and LifeScan companies. Analysts have indicated that divesting these assets is likely to be the most likely outcome, netting J&J around $2 billion to $2.5 billion.

Both companies are undergoing major changes, Integra is looking to expand its growth in orthopaedic and tissue technologies whilst J&J is currently undergoing the restructuring of its medical device business, more deals are sure to come.

Tackling Drug Resistance

Pavit Bangur

Elon Musk’s SpaceX is planning on sending up a sample of MRSA to the International Space Station (ISS) on its next flight on the 14th of February. MRSA is a prevalent type of staph bacteria. Around 1 in 3 people carry harmless staph bacteria and 1 in 30 are colonized by the MRSA strain. Although largely harmless, the bacteria is becoming increasingly resistant to almost all antibiotics that are currently available, and is becoming more lethal. Backed by NASA and the Centre for the Advancement of Science in Space (CASIS), the experiment aims to study the impact of near zero-gravity on gene expression and mutation patterns. The theory is that the environmental conditions on the ISS will result in accelerated mutation rates of MRSA, allowing essentially to predict what will happen back on Earth, allowing scientists to intervene and understand how to prevent infection.

A woman recently died in January 2017 after being killed by a superbug that she contracted whilst on holiday to India. Her treatment in the USA proved ineffective; the bacteria strain was resistant to every currently available antibiotic in the United States. Although this is an extremely rare case, scientists globally are concerned that they will become more widespread. There has been no new antibiotic created for over 25 years and current estimates suggest that by 2050 deaths due to antibiotic resistant microbes will be 10 million a year and cost the global economy up to $100 trillion.

There is new research making inroads into overcoming this bacterial resistance. Drugs have been developed that change the way they attack the bacteria, effectively tearing holes into the microbes or altering their enzyme structure so they are no longer resistant. A UK-USA partnership has been set up to spend hundreds of millions of dollars to tackle the antibiotic resistance, while the US Department of Health and Human Services aims to invest around $300 million over the course of five years.

On the flip side, there is not much being done by the big pharmaceutical companies. The world market for antibiotic drugs is around $40 billion a year but only 12% of it was spent on patenting new, high-cost drugs. From 2003 to 2013 only 4.7% of venture capital in pharmaceutical R&D went towards antibiotic resistance. This gap is further amplified by the lack of development, in 2014 there were 800 new, forthcoming cancer drugs, in comparison there was only 50 new antibiotics.

There is a lack of incentive for big pharmaceutical companies to produce new antibiotics. The companies cannot try to maximise their revenue through maximising sales as the usage of the drug requires moderation to inhibit the bacteria’s development to resisting it. Jim O’Neill, current chair of UK Antimicrobial Resistance Commission suggests that companies that develop new antibiotics should receive award of up to $1 billion, allowing them to offset the costs incurred from R&D. The award would be funded by an investment charge on the pharmaceutical industry, those who are actively pursuing antibiotic R&D do not have to pay the charge. By removing the relationship between profit and sales volume, more companies would be encouraged to research antibiotics.

The rise of resistance bacteria could soon become the world’s biggest threat and global pharmaceutical companies need some form of incentive to tackle this issue. Although some progress is being made, exponential increase is required to truly combat it.

Creative Deal-making in Big Pharma: J&J-Actelion

Patricija Petkeviciute

Following months of complex negotiations, the US pharma giant Johnson & Johnson is acquiring Actelion for $30bn in an all-cash deal. Actelion is a Swiss blood pressure specialist and a leader in the field of pulmonary arterial hypertension. The acquisition marks the first big pharmaceuticals transaction of the year.

Actelion is being sold for $280/share, reflecting a 23 percent premium to its share price before the news of the acquisition broke and 80 percent above the price before reports emerged that Europe’s biggest biopharma company had attracted takeover interest. French company Sanofi had also been interested in acquiring Actelion, but was side-lined after J&J began negotiations in December.

The bid values Actelion at 30 times its expected profits in 2017. By contrast, J&J trades on a multiple of less than 11. The price tag of Actelion is expensive compared to the recent industry takeovers, such as Pfizer’s $14bn acquisition of Medivation last year. However, the analysts at Jefferies argue that it is a good use of J&J’s cash reserves, since the deal adds 5% to J&J’s adjusted earnings per share in 2018 and is expected to be immediately accretive.

Actelion’s top selling drug is Tracleer. Together with other high-price, high-margin medicines already in the market, Tracleer will feed J&J’s pipeline and help diversify its portfolio just in time J&J’s biggest product, Remicade, is facing cheaper competition. The acquisition will also give J&J exposure to a new therapy area and immediately boost profits. Alex Gorsky, the CEO of J&J, noted that the acquisition is a unique opportunity to expand the company’s portfolio.

The acquisition is not straight-forward. Before the deal takes place, Actelion will spin out its R&D into a publicly listed Swiss company called R&D NewCo. The current chief executive and one of the founders of Actelion, Jean-Paul Clozel, will remain a boss of R&D NewCo leaving him to develop riskier early-stage R&D assets. J&J will have a 16 percent stake in this new company and a right to acquire more. The transaction is the second-largest biotech deal since 2001 and is also the largest European pharmaceuticals merger in 13 years, according to data from Megamerger. It is yet another example of the creative deal-making that is taking place in big pharma.

Bank of America Merrill Lynch was Actelion’s lead advisor, while Lazard acted as a lead financial advisor to J&J. The transaction is expected to close by the end of the second quarter of 2017.

 

The Trumpscare

By Patricija Petkeviciute

On 20th January, the 45th US president was sworn in. Donald Trump’s healthcare agenda represents a complete turnaround from the previous eight years under the Obama administration. The new president has promised to repeal the Affordable Care Act (ACA) and introduce new reforms in line with free-market principles. The Republicans support minimal government interference in the industry, limited regulation and a shift to private administration. In early January, the GOP already used the process of reconciliation and passed a budget resolution that laid the groundwork for repealing many of the ACA provisions.

The Republican majority in both the House and the Senate means that repealing significant portions of the ACA should not be met by major obstacles, even though the only aspects that can be repealed at this stage are those that impact the budget. For now, it is difficult to tell the implications for the drug pricing. Nevertheless, Trump, at his first press conference as president-elect, suggested that Centres for Medicare and Medicaid Services (CMS) should be allowed to negotiate drug prices, and that the suppliers should shift manufacturing to the US, making the low-cost generic drugs less competitive. It was, however, the proposal to introduce competitive bidding and direct price negotiations that sent the biopharma stocks into a nose-dive. The NASDAQ Biotech Index was down 3.5%, and large cap companies like Biogen and Celgene were all down between 2% and 4%. The threat for the biopharma is not yet tangible, but if the Trump administration repeals the current model that allows reimbursement of drug manufacturers based on the average sales price and invites them to make competing bids instead, then the industry may face a significant price erosion.

Despite the general optimism after the elections last November, the chief of Allergan, Brent Saunders, warned that Trump’s populism could make the biopharma industry a target. He suggested that the industry should be proactive in making their medicines more affordable in order to limit price hikes and fend-off stringent regulations. Moreover, the environment is changing from a fee-for-service to a value-based model of healthcare. To thrive, companies will need to demonstrate evidence for the value and benefit of their products.

The Trump administration has also some good news that will benefit biopharma. It is likely that the corporate tax rate will be lowered, fundamentally increasing the available funds for R&D. The approvals for new drugs might also be sped up, given the rejection of the Senate to allow the importation of cheaper prescription drugs from Canada. At worst, the biopharma industry can hope that the Republican staffers will keep the new President in check on the issue.