writser Posted January 26, 2017 Share Posted January 26, 2017 Short writeup - I haven't done a lot of work on this. Curious to know if anybody else here has an opinion on it. JNJ (306b) is buying ALIOY (30b) for $280 per share or $70 per ADR. Current ADR price is $68 for a ~3% spread. - Deal is through a tender offer with a 67% minimum acceptance threshold. Given that there has been a bit of a bidding war and shares are now trading at ~$68 up from ~$35 in November the price looks to be on the high side (above analyst estimates, also at first glance at 30x FCF) and is supported by both boards. I see no particular reasons for the tender offer failing. - Deal also makes sense for JNJ, relatively small and they can use overseas cash for it, which would be taxed otherwise anyway (or so I would think). - According to the press release deal is expected to close by the end of Q2 with the tender offer commencing next month. The interesting part: JNJ will only take over the "core portfolio" of Actelion. Before the transaction, Actelion will spin off its research pipeline as a new company, called (very originally) R&D NewCo. NewCo will launch with ~$1b in cash according to the press release. Now, I'm no expert but if you are a 30b company and you spin off your R&D pipeline funded with 1b in cash then that should be worth something, right? Let's say at least 500m or ~$5 per share and probably more - these guys have a track record and are no biotech clowns. So, depending on how you value the spinoff the spread is 5%-7% by my rough calculations. Looks quite juicy for a deal that is supposed to close in a few months. No tax inversion shenanigans, just a honest deal. Am i missing something? Swiss taxes? Antitrust issues? I couldn't find anything but what do I know .. I bought a couple of shares. Link to comment Share on other sites More sharing options...
Haasje Posted January 26, 2017 Share Posted January 26, 2017 Cons -IF it breaks downside could be large -Looks like a high price which can't be good for close % Pros -Insiders insisted to keep the R&D core and adviced to hang on to the shares -Insiders built up $30 bil Actelion from a spin-out -Insiders will be doing what they do best: drug discovery and company building: https://www1.actelion.com/en/scientists/r-and-d-approach/index.page? -JNJ has a tax angle value likely split between parties, can only be good for the smaller party -Return ok without the R&D core, monstrous with it -JNJ has the cash -The deal is so JNJ continues to have a sizeable stake in the spin-off. I think this increases odds the spin-off is very undervalued. -Equity in spin-off may be attractive for JNJ from tax perspective (not sure) -Actelion shareholders likely to vote with founders -Actelion keeps a partnership with JNJ going Link to comment Share on other sites More sharing options...
writser Posted January 27, 2017 Author Share Posted January 27, 2017 More reading: https://valueandopportunity.com/2017/01/27/actelion-ch0010532478-merger-arbitrage-meets-spin-off/ . Not much news - not too much information out there yet afaik. Link to comment Share on other sites More sharing options...
Haasje Posted January 27, 2017 Share Posted January 27, 2017 https://www.bloomberg.com/news/articles/2017-01-27/hedge-funds-track-j-j-private-jet-for-an-edge-on-actelion-score Link to comment Share on other sites More sharing options...
Phaceliacapital Posted January 28, 2017 Share Posted January 28, 2017 JNJ needs this deal. I doubt it would not go through... Link to comment Share on other sites More sharing options...
indirect Posted January 28, 2017 Share Posted January 28, 2017 I agree. Spread is attractive for few months and Stub for free. Link to comment Share on other sites More sharing options...
ccplz Posted January 30, 2017 Share Posted January 30, 2017 What do they have in the pipeline? What is JNJ buying these guys for if not for their drug discovery ability? Link to comment Share on other sites More sharing options...
chrispy Posted January 30, 2017 Share Posted January 30, 2017 This is a pretty interesting deal. One question for those that are more familiar with these; if there is a market correction but the deal continues forward and completes, would the $68ADR price stay relatively stable and only fluctuate based on the likelihood of this deal completing? Link to comment Share on other sites More sharing options...
JayGatsby Posted January 30, 2017 Share Posted January 30, 2017 Has anyone checked the fees on the ADR? I haven't done much similar with ADRs but the dividends I get from other companies can sometimes have hefty fees attached. Link to comment Share on other sites More sharing options...
Hielko Posted January 30, 2017 Share Posted January 30, 2017 ADR fees are as far as I know (almost?) always in the range of $0.02/$0.05 per share per year. Not an issue for a stock with this price. But if you buy a one dollar stock it can be huge. Link to comment Share on other sites More sharing options...
netnet Posted January 30, 2017 Share Posted January 30, 2017 If the deal goes through as expected the stub will be free, BUT the risk is the deal will not go through. If you wait, the stub, will probably trade down from it's when issued price. which is still more expensive than free, but one risk will be removed. For me the downside of a broken deal is too high. I will wait for the spinoff. I should add that I like well funded heath tech/biotech/drug discovery spinoffs. They seem to do quite well. Link to comment Share on other sites More sharing options...
indirect Posted January 31, 2017 Share Posted January 31, 2017 Buying stub after the distribution lessens risk at a price. Buying well financed spinoff, you always have to wonder if the management couldn't sell to PE or competitor or wants to get rid of problem subsidiary. e.g. spne, agfs from dow, CRC loaded with debt ( 6 billion) from parent. This is obviously not the case here. Link to comment Share on other sites More sharing options...
rb Posted January 31, 2017 Share Posted January 31, 2017 Anyone know why this thing was down 6%? Link to comment Share on other sites More sharing options...
udravi Posted January 31, 2017 Share Posted January 31, 2017 From Deutsche Bank: Actelion shares are trading down on news that the French drug agency (ANSM) has recommended in a letter to physicians that new patients should not be initiated on Actelion’s drug Uptravi (~40% of 2020E sales) pending investigation into reports of patient deaths on initiation of therapy. The relationship between these deaths and Uptravi is unclear. The letter is believed to have been made prior to the confirmed offer from J&J but has only now been picked up by the market. We believe it is most likely that J&J was aware of the warning prior to its confirmed offer to acquire the company but we are awaiting confirmation of this. We believe the measure is likely to be precautionary and we remind investors that Uptravi’s efficacy and safety has been proven in a large randomised Phase III trial and ~1500 patients were initiated on drug in the US as of the end of 3Q16 with no similar action by the FDA. Given the seeming rarity of these events, it is likely to lead to (at worst) tightened precautions and warnings when initiating patients on therapy. This is unlikely to materially impact the drug’s commercial opportunity or conclusion of the transaction. From Reuters The trader said the spectre of potential problems with Actelion’s newest PAH drug have prompted market uncertainty even though the French advisory was issued before J&J announced its $30 bln takeover of Actelion on Jan. 26 Link to comment Share on other sites More sharing options...
rb Posted January 31, 2017 Share Posted January 31, 2017 Thanks Link to comment Share on other sites More sharing options...
antao Posted February 1, 2017 Share Posted February 1, 2017 Quick additional notes: 1. R&D NewCo will be led by Actelion founder and CEO Jean-Paul Clozel and Jean-Pierre Garnier, Actelion’s chairman, will be its chairman. 2. The shares of R&D NewCo will be distributed to Actelion's shareholders as a stock dividend upon closing of the tender. 3. J&J will initially hold a 16 percent stake in R&D NewCo and will have rights to an additional 16 percent of the company's equity through a convertible note. It will also get an option on ACT-132577, a product within R&D NewCo being developed for resistant hypertension and now in phase 2 clinical development. 4. The transaction is expected to close by the end of the second quarter, with J&J commencing the tender offer by mid-February. 5. R&D NewCo preliminary valuations start to emerge: - Berenberg Bank: $1 billion to $2 billion - Jefferies: 14 to 20 CHF per share 6. Downside if deal breaks is mitigated by the existence of other suitors like Sanofi & others (rumors include Shire, Novartis and Amgen). We like this deal a lot and the spinoff part of the consideration - which is being largely neglected - may very well become a very lucrative investment. Link to comment Share on other sites More sharing options...
netnet Posted February 3, 2017 Share Posted February 3, 2017 Does anyone have the base rate on the number of deals like this that have not been completed? Looks as if the only thing other than a Trump nuclear war would be 67% not tendering or some kind of major accounting scandal, I figure that it odds of the deal going through are 80 to 95%. Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 3, 2017 Share Posted February 3, 2017 6. Downside if deal breaks is mitigated by the existence of other suitors like Sanofi & others (rumors include Shire, Novartis and Amgen). If the deal breaks because of a MAC due to ph3 trials or Uptravi sales risk, then the mitigation might not be as great with the other suitors. Link to comment Share on other sites More sharing options...
rb Posted February 3, 2017 Share Posted February 3, 2017 Based on the premium JNJ is willing to pay if this doesn't go through it will be because of a serious issue comes up. If that's the case I don't think a lot of other suitors would step up. Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 3, 2017 Share Posted February 3, 2017 Yep, I agree with that point about "serious issues". My reading of the MAC clauses don't seem to point to any concern with pipeline phase trials, only with reduction in sales of current approved drugs. I think the market probably always undervalues these deals with uncertain stubs afterwards, like CVRs, etc. Link to comment Share on other sites More sharing options...
fareastwarriors Posted February 4, 2017 Share Posted February 4, 2017 From Deutsche Bank Markets Research 1/31/17 Uptravi patient deaths; action likely limited to label warnings in worst case ANSM Dear Doctor letter on Uptravi Actelion shares are trading down on news that the French drug agency (ANSM) has recommended in a letter to physicians that new patients should not be initiated on Actelion's drug Uptravi (~40% of 2020E sales) pending investigation into reports of patient deaths on initiation of therapy. The relationship between these deaths and Uptravi is unclear. The letter is believed to have been made prior to the confirmed offer from J&J but has only now been picked up by the market. We believe it is most likely that J&J was aware of the warning prior to its confirmed offer to acquire the company but we are awaiting confirmation of this. We believe the measure is likely to be precautionary and we remind investors that Uptravi's efficacy and safety has been proven in a large randomised Phase III trial and ~1500 patients were initiated on drug in the US as of the end of 3Q16 with no similar action by the FDA. Given the seeming rarity of these events, it is likely to lead to (at worst) tightened precautions and warnings when initiating patients on therapy. This is unlikely to materially impact the drug's commercial opportunity or conclusion of the transaction. Likely a precautionary measure; tightened warnings in a worst case We believe the ANSM's action is likely to be a precautionary measure and is unlikely to lead to any drastic action such as withdrawal of drug from the market. Uptravi has been rigorously tested in a large randomized Phase III trial (1,156 patients) and its risk benefit proven with a 40% reduction in risk of disease progression. Investors may recall that a small imbalance in deaths as first event was observed in the trial that favoured placebo (4.9% deaths on Uptravi vs 3.1% on placebo). However, no increase in all cause mortality was seen in the overall study and a numerically lower incidence of PAH related mortality was observed vs placebo. We believe it is most likely that the decision of the ANSM is a precautionary measure. We believe experience of treatment in France is likely to be modest given restricted reimbursement and thus events are rare in the broader context of the drug's use. If (in the unlikely event) these deaths are proven to be related to the drug, it is likely to lead to (at worst) tightened precautions and warnings when initiating patients on drug. We would expect the ANSM's decision to lead to a broader assessment of the risks to patients when initiating treatment by the EMA and FDA. However, the risk this leads to more draconian measures such as severely restricted prescribing, our withdrawal from the market is very small in our view. Link to comment Share on other sites More sharing options...
antao Posted February 10, 2017 Share Posted February 10, 2017 EMA panel recommends that use of Actelion's Uptravi may continue (http://www.reuters.com/article/us-actelion-johnson-johnson-uptravi-idUSKBN15P1KU) Link to comment Share on other sites More sharing options...
writser Posted February 21, 2017 Author Share Posted February 21, 2017 Some more details have been made available: link - Tender offer will run from March 3 to March 30 with a possible extension. At least 67% has to be tendered. - 500m reimbursement fee if the offer isn't succesful. - R&D Newco will be financed by 420m CHF cash from Actelion, and a credit facility plus a convertible loan of 580m CHF from JNJ. - first tranche of convertible loan (235m) will automatically convert in a 16% stake in R&D Newco. The remaining tranche (345m) is convertible in an additional 16% stake. So R&D Newco starts out with ~655m cash and the second tranche of convertibles imply a valuation of ~2.1b. If you value the spinoff at $750m upside is roughly 7%. Looks great but I don't think I can handicap regulatory issues / medical trials very well so I only have a small position. Link to comment Share on other sites More sharing options...
netnet Posted March 4, 2017 Share Posted March 4, 2017 Article in the WSJ, Friday, March 3. https://www.wsj.com/articles/actelions-founders-start-new-biotech-with-j-js-backing-1488456001 By Denise Roland March 2, 2017 7:00 a.m. ET 0 COMMENTS Jean-Paul and Martine Clozel had to sell their house and work out of a rented garage when they started biotech company Actelion Ltd. Twenty years later, after selling the Swiss company to Johnson & Johnson in an unusual, $30 billion deal, the husband-and-wife team is starting over again. They are embarking on the creation of a new global biotech competitor—armed with nearly $1 billion in capital, a deep-pocketed partner in J&J and soon, a stock listing in Zurich. Dr. Clozel, 61 years old, is slated to walk away with about $1.5 billion for his 5% stake in Actelion. Johnson & Johnson persuaded him to sell only after agreeing to let him strip out Actelion’s early-stage research and development to form a separate company. I haven't looked it up, but WSJ says that the couple started and ran the firm, but the husband walked away with 1.5 billion, presumably they both walked away with the money, so it's a bit sexist. Link to comment Share on other sites More sharing options...
GatorCapital Posted March 23, 2017 Share Posted March 23, 2017 I believe JP Morgan is the custodian bank for the ALIOY ADR. Does anybody know if they are automatically tendering the underlying shares? Link to comment Share on other sites More sharing options...
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