JNJ to Rally on $30 Billion Acquisition of Actelion

JNJ to Rally on $30 Billion Acquisition of Actelion

The US President Donald Trump’s call for a lower drug pricing prompted a selloff of pharmaceutical stocks in mid-March. Since then, the stock price of consumer, pharmaceutical and medical device company Johnson & Johnson (NYSE: JNJ) has lost about 3% to record a low of $124.02 last week. However, on the basis of facts presented below, we anticipate a recovery in the stock of JNJ.

Last Wednesday, during the annual general meeting of Switzerland based biotech firm Actelion (SIX: ATLN), the shareholders voted in favour of the $30 billion acquisition of the company by JNJ. The shareholders also approved the demerger of Actelion’s research and development unit into a separate company (Idorsia). The spinoff is a part of the acquisition agreement signed by JNJ in February. JNJ stated that it is on track to complete the acquisition in the second quarter 2017.

Furthermore, JNJ will have a stake of 16% in the spin-out, with rights to increase the holding to 32%. Following the acquisition, Actelion would get delisted and the spinoff company Idorsia would be listed separately.

The US-based JNJ announced that it had successfully bought 73.25% of the voting rights during the tender period, which ended last week. JNJ paid $280 per share, which translates into a premium of 23% over the traded price on the day the acquisition agreement was signed. The company also stated that it would buy the rest of the shares before mid-April.

Notably, in December, the French firm Sanofi made an attempt to acquire Actelion. However, it did not succeed. The acquisition would enable JNJ to have access to drugs for the treatment of pulmonary arterial hypertension, a rare disease. JNJ has a market capitalisation of about $309 billion, while Actelion has a market capitalisation of about $28 billion.

The company has raised the dividend payout for 54 consecutive years. The dividend raise did not stop the company from posting an increase in the operational earnings for 33 consecutive years. So, investors anticipate another dividend raise in April. Another important point to note is JNJ has a cash reserve of $41.9 billion. So, the $30 billion acquisition would not hurt them too much. JNJ’s net debt (total liabilities-net cash-receivables) of $17.2 billion equals only one year’s earnings.

The acquisition is also earnings accretive. Assuming all goes well and the transaction gets completed in the 2Q17, total revenues of JNJ are expected to increase 6.7% y-o-y to $75.7 billion. JNJ is also expected to post earnings of $7.10 per share. The estimates include revenue of $1.3 billion and earnings of $0.07 per share from Actelion.

The price chart indicates that the stock has broken the descending trend line and is currently consolidating at 124.80. Next minor resistance is at 126.30. The buying support is also confirmed by the rising money flow index reading. So, there exists a higher probability of an uptrend in the stock of JNJ.

JNJ - Technical Analysis - 11th April 2017

To capitalise on the forecasted upswing, a trader can invest in a high or above option contract which expires on or around April 19th. The trade can be opened when the stock trades near $124.30 in the equity market.

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