CRXL: JNJ Bid Welcome, But Only ~4%
Premium over Last Year's Equity Investment? Negotiations Continue; Raising PT to $35 from $25
Crucell announced on Friday, as required by Dutch law, that it is in “advanced negotiations” to sell the company to Johnson & Johnson (JNJ, Not Rated) for €24.75 a share (or $2.3 billion in total value), a 56% premium to Thursday night’s closing price. With little spread after the shares reacted to the news, the market appears to be pricing CRXL as if this were a done deal. Given that the term “negotiations” was used in the company’s press release, we believe the deal price could be a base offer and that terms from JNJ may get a bit sweeter for CRXL shareholders, notwithstanding the possibility of another suitor stepping up with a better offer. As a result, we are maintaining our Buy rating on CRXL and raising our price target to $35 from $25 a share, suggesting 8%-10% upside from the current bid.
JNJ Entering the High-Value Vaccine Segment. Vaccines are known to be among the fastest growing segments in the drug industry, with global sales up 16% in 2009, to $22.1 billion, and projections for $35 billion in sales by 2015. As a result, we believe acquiring CRXL (currently the largest independent vaccine manufacturer) is a logical move, particularly by JNJ, which is just entering the segment. JNJ’s initiative to focus on preventative healthcare is highly consistent with this bid―hence our prior thesis that a deal between these two companies was possible. JNJ’s current partnership with CRXL (universal flu antibody) was valued at more than $1 billion with potential milestones, and licensing the FluCell candidate (cell-based flu vaccine in Phase II) would have likely cost JNJ or another licensee several hundred million dollars. As a result, purchasing CRXL made the most sense. In our view, these two programs plus CRXL’s many other assets are behind the “advanced negotiation” discussions.
JNJ Getting a Good Deal at This Price.
Last year, JNJ acquired an 18% equity stake in CRXL for an estimated $31 a share. We believe CRXL is in a substantially better position today than it was at the time of the JNJ transaction. For example, CRXL’s pipeline and technology partnerships have advanced, its Korean manufacturing facility to expand production capacity for Quinvaxem (the company’s largest product) is almost complete, and Quinvaxem’s competition is having issues with supply, creating a windfall for Crucell. The take-out bid for the entire company, at an estimated $32.40 per share, is only around 4% higher than the price JNJ paid last year. As a result, we believe JNJ is getting a very good deal at this valuation―and the bid may go higher.
Where’s Pfizer and the Others?
Given that Wyeth was previously looking to acquire CRXL in early 2009 prior to getting bought out itself by Pfizer, and that Crucell has current product and product development relationships with Pfizer, one might expect that another bid could be coming―unless these two pharma giants don’t mind becoming partners. In fact, Sanofi, Glaxo, and Novartis also have important relationships with CRXL, suggesting to us that these major vaccine players are paying attention to this deal. As JNJ and its large balance sheet move to enter the vaccine segment with CRXL’s proprietary technologies, the industry may have gotten a wake-up call, and it wouldn’t surprise us if some competitors take action.
Take-Out Bid Amounts to Roughly 4x Revenues; Much More Behind the Scenes.
With $455 million in net cash and many assets that, in our view, are not being recognized by the market, such as the drug pipeline, platform technologies, vaccine manufacturing plants, and NOLs, we believe CRXL is a highly attractive asset.
Madison Williams 20-9-2010