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Vaccine rush

As Johnson & Johnson moves to acquire Crucell, what is the attraction for Big Pharma?

Johnson & Johnson employees running into a Crucell mineJohnson & Johnson (J&J) is set to buy Dutch biotechnology company Crucell for €1.75bn ($2.29bn), which I think offers both parties a good deal.

J&J initially signed an early stage collaboration agreement with Crucell in September 2009, at the same time taking a 17.9 per cent stake in the business at €20.67 per share. Earlier that year, Wyeth had reportedly come close to acquiring Crucell; so, J&J's stake was probably a strategic decision to stop anyone else taking over the vaccine manufacturer.

This follows a lesson learnt through its involvement with Millennium Pharmaceuticals. J&J had EU co-promotion rights to the company's lead product, Velcade. However, in 2008 Takeda acquired Millennium for $8.8bn, a price which, it would appear, J&J was unwilling to pay for a greater slice of Velcade's success (assuming there was an interest). It is worthy of note that the Crucell announcement comes close to a year after the initial deal between the two companies. At the time the initial stake was taken a standstill agreement was signed, which meant J&J could not increase its holding without Crucell's consent for three years. Clearly, Crucell's board or major shareholders now consider the proposed deal terms acceptable.

Formal agreement
As expected following the September announcement that the two companies were in advanced negotiations, a formal agreement on the terms was announced on October 6. The terms remained unchanged from those put forward earlier and the companies stated that both boards unanimously recommended the offer, indicating that Crucell shareholders deeming the deal inadequate would not be given a better offer.

However, Crucell shareholders are set to vote on the deal at a forthcoming EGM. Van Herk Groep, Crucell's second-largest shareholder, which has described the offer as too low, increased its stake to more than 10 per cent. This would be sufficient to prevent J&J from starting a compulsory squeeze-out to obtain all remaining shares, which requires 95 per cent acceptance.

Moreover, in conjunction with other shareholders, the Van Herk Groep stake may be enough to prevent J&J from reaching 80 per cent acceptance which, subject to certain conditions, is the target required to consummate the offer and allow the sale of Crucell's entire business to a J&J subsidiary. It should be noted that due to the way in which Crucell would operate within J&J's business structure, a full acquisition is not considered critical.

This is in stark contrast to the case of Novartis and Alcon, where Alcon needs to be fully integrated if Novartis is to benefit from the synergies and cost savings that are key to unlocking value from the acquisition. As such, J&J can afford to play a long game with Crucell if need be and, although the voting power or unsatisfied shareholders may prevent a full acquisition from going through in the near-term, this could be viewed by the acquirer as a more favourable option than giving in to demands, which could impact the price it has to pay in subsequent takeovers.

The strong interest in Crucell from J&J is indicative of the attractiveness of the vaccines space to Big Pharma and the proposed deal is just another example to add to the list, following Pfizer's acquisition of Wyeth and AstraZeneca's acquisition of MedImmune, both of which brought a greater position in vaccines to their new owners, among other benefits.

In an industry plagued by the rapidly approaching patent cliff and the ever increasing threat of genericisation, generic-proof vaccines are increasingly regarded as a key revenue generator for Big Pharma. Our figures show that sales have tripled in the last five years alone. In 2004, we estimate the market was worth $7.1bn, rising to in excess of $20bn last year.

This staggering growth can be attributed to several factors, primarily the launch and rapid uptake of blockbuster vaccines, such as Wyeth/Pfizer's Prevnar (2009 global sales in excess of $1.8bn) and Merck & Co's Gardasil (2009 sales of $1.7bn). However, the market was also boosted by the 2009 influenza A (H1N1) pandemic.

The reported value of H1N1 vaccines of GlaxoSmithKline (GSK), Sanofi Pasteur and Novartis alone accounted for approximately $3bn. Crucell is set to record a spike in sales growth for its Quinvaxem paediatric vaccine, after a production failure for its rival Shantha Biotechnics. As an aside, Shantha Biotechnics was bought by sanofi-aventis (S-A) last year for over six times its annual sales value, which is a further example of Big Pharma moving into the space.

As growth slows down in developed markets, vaccines also provide Big Pharma with a further way into emerging markets, where large patient populations and increasing access to medicines through public health initiatives and burgeoning middle-classes are driving sales volume up at a higher rate.

The fit
J&J has made a number of acquisitions in the infectious disease market over the last decade, including Tibotec in 2002 and Peninsula in 2005. This latest move, though a good fit, is relatively small once more. Crucell, one of two large independent vaccine manufacturers in Europe, generated revenues of almost $500m last year and if replicated this would add less than 1 per cent to J&J's top-line in 2011, which is likely to be around $63.5bn.

The vaccine sector is renowned for being oligopolistic, following rules rather different from those for most other pharmaceutical products. As such, Crucell's expertise will be key to J&J if it hopes to compete with established vaccine companies like Sanofi Pasteur, GSK and Merck. The endemic vaccines market, in particular, is associated with high barriers to entry.

However, Crucell has an increasing focus on lower-volume, higher-value vaccine markets in which market share may be easier to capture. The company's strengths in the discovery, manufacture and commercialisation of vaccines will create a strong platform for J&J in the vaccine market. Meanwhile, J&J's development resources and extensive global sales and marketing function will ensure that maximum value is extracted from Crucell's assets.

J&J's offer of €24.75 per ordinary share represents a 20 per cent premium on the cost of J&J's initial stake. It is also a 58 per cent premium to the stock price before the offer was made and approximately 121 per cent more than the price before Wyeth's talks to buy the company in January 2009, which were said to value it in the region of $1.35bn. However, several stakeholders have commented that J&J's offer, worth 5.5 times estimated sales value, is too low and badly timed.

In a joint statement, the companies confirmed that Crucell's senior management team will remain in place and current employment levels will be maintained.

Crucell looks set to become a 'centre for vaccines' within the J&J Pharmaceutical Group, maintaining all its facilities and its headquarters in Leiden. Both companies have also recognised the importance of Crucell's current entrepreneurial culture and have made a commitment to supporting this.

By 2015, J&J is forecast to lose prescription pharmaceutical sales of more than $10bn from mature and expiring products, compared to 2008 levels. This will have a considerable impact by any company's standards.

New launches
All ten of its 2008 blockbusters face a decline over the period to 2015. However, through an impressive number of new launches this will be overcome, with a return to sustained growth from 2012. While this will be a significant achievement and an R&D output not expected to be matched by any other Big Pharma peer, J&J's overall prescription pharmaceutical performance will remain modest without further additions.

Prior to this announcement, J&J was also put forward as a possible, but unlikely, rival to S-A that could come in with a bid for biotech company Genzyme.

We forecast J&J will experience prescription pharmaceutical growth of just 1.7 per cent CAGR across 2010–15. As such, acquisitions or late-stage in-licensing deals will be required to improve this outlook. However, with its wider business spanning OTC, medical devices and diagnostic segments, the company may consider these areas more deserving of greater investment than prescription pharmaceuticals.

The Author
Giles Somers
is senior healthcare analyst at Datamonitor

To comment on this article, email pme@pmlive.com

5th November 2010

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