J&J buys Actelion for $30B - Why you should invest: THE BOTTOM LINE

Trade at your own risk. The information provided here is of the nature of a general comment only and neither purports nor intends to be, specific trading advice.

(scroll to bottom for THE BOTTOM LINE)

A month ago, Johnson & Johnson (JNJ) announced the pending acquisition of Actelion (ATLN), a Swiss R&D company with promising drugs in its new pipeline. Pharmaceutical deals are often into the billions of dollars for even prospective treatments that have yet to be proven. See Allergan's acquisition of Naurex in July 2015, and of course who can forget Theranos?

In this case, JNJ is paying $30B for Actelion's proven drug pipeline, generating 1.929B CHF ($1.925B USD) in 2015 from sales of Tracleer, Opsumit, and Uptravi, all three used to treat rare diseases. Sales are already established, and JNJ expects this acquisition to immediately add value to its bottom line.

Actelion's R&D will be spun out into a new company, headed by current CEO Jean-Paul Clozel. JNJ will receive a 16% stake in this new company, provisionally dubbed "R&D Newco", with a future option to acquire an additional 16%.

What do you get?

Each Actelion shareholder will receive a cash buyout of $280 USD (280 CHF) and 1 new share of "R&D Newco".

Actelion shares have come down slightly from their high of 277 CHF in late January to 269 CHF. Expect the 11 CHF difference to be attributed to perceived risks in the deal prior to closing in 2Q 2017 (albeit low), arbitrage and other international transaction costs.

Why is this a good deal?

ATLN investors will also receive 1 new share of the new R&D company as a dividend, essentially for free. This is good because:

• Jean-Paul Clozel has an excellent track record in developing new drugs.
• Trust the corporate types: JNJ is 16% invested, and has reserved another possible 16% for future. Evidently they perceive very good value here.
• It's free! Represents zero financial risk to the investor, since all of the initial investment is recouped from sale of the original ATLN stock.

THE BEAR:

• The deal hasn't closed yet. This is expected to close in 2Q 2017 pending regulatory approval and approval from 67% of ATLN shareholders. ATLN shares were up 20% on news of the offer. It's possible (but unlikely) to be left holding devalued shares of ATLN if the deal fails to pass. Just see what is happening with Unilever today after Kraft withdrew its deal yesterday.

THE BULL:

• Be prepared to make a marginal profit on the sale of ATLN stock when the deal goes through.
• Get one free share of Jean-Paul Clozel's new R&D company for each ATLN share that you sell. Free means zero risk to you!

THE BOTTOM LINE:

Buy Actelion (ATLN) now. In 4 months you will recoup your original investment AND additional shares of a Swiss R&D firm with proven leadership. This is a rare low-risk investment that I absolutely recommend.