Johnson & Johnson said yesterday that it would pay $2.7 billion in cash to buy a small California biotechnology company with one heart drug on the market and a potentially significant arthritis treatment in development.
The acquisition of Scios Inc. of Sunnyvale, Calif., comes at a crucial time for the biotech sector, as investors struggle to shake the lingering effects of a controversy last year involving ImClone Systems Inc. and its troubles winning approval of its cancer drug, Erbitux. That flap spooked other big pharmaceutical companies that might otherwise have considered making significant investments in biotechnology companies.
Johnson & Johnson, of New Brunswick, N.J., has had success with deals similar to the Scios acquisition. Given Johnson & Johnson's reputation as a conservatively run company, analysts said other pharmaceutical firms may view the deal as a signal that it's safe to invest in small biotech companies again.
"It's going to have a big impact on people's attitudes," said James McCamant, editor at large of the Medical Technology Stock Letter, a California publication that follows the biotech industry closely.
Johnson & Johnson said it would pay $45 a share, roughly a 30 percent premium over Scios's closing price on Thursday, just before rumors of a deal surfaced in the market. Scios has already won Food and Drug Administration approval to market Natrecor, a medicine for congestive heart failure that analysts say could eventually become a $500 million-a-year product as members of the baby-boom generation age. It is the first big drug approved in a decade to treat that debilitating heart condition, and Christine Poon, Johnson & Johnson's chairman of pharmaceuticals, called it a "truly unique product for a largely underserved and growing market."
Perhaps more significant for Johnson & Johnson over the long term could be an experimental Scios drug designed to target rheumatoid arthritis and possibly other diseases that involve chronic inflammation. That drug, called SCIO-469, is a pill that would compete with some of the biotech industry's biggest blockbusters, particularly Enbrel, an injectable drug that has drastically improved the lives of many patients with debilitating forms of arthritis.
The biggest biotech buyout was Amgen Inc.'s acquisition of Immunex Corp. for $16 billion about a year ago, primarily to get its hands on Enbrel. In 1999, Johnson & Johnson paid nearly $5 billion to acquire Centocor Inc., the maker of Remicade, another injectable treatment that works in a way similar to Enbrel. Analysts consider that acquisition a success for Johnson & Johnson, as was its $13.5 billion buyout, in 2001, of Alza Corp., which specialized in developing novel ways to get drugs into the body.
"If Scios follows the pattern of recent J&J acquisitions, it will be a plus longer term but expensive shorter term," UBS Warburg analyst David Lothson said in a report yesterday.
Though many people think of Johnson & Johnson solely as a maker of consumer products such as baby powder and Band-Aids, it is actually a vast, $36 billion-a-year medical conglomerate whose holdings include nearly 200 operating companies and an extensive portfolio of prescription drugs including antibiotics and epilepsy treatments.
The Scios acquisition is the first major deal of its type to be announced since the ImClone scandal broke, dominating headlines about the biotech industry for much of last year. In that case, Bristol-Myers Squibb Co. had agreed to pay ImClone and its shareholders about $2 billion for rights to Erbitux, ImClone's main experimental drug. But both companies were embarrassed when the FDA rejected ImClone's tests as inadequate and sent the company back to the laboratory. Subsequent investigations, still in progress, focused on suspected insider trading at ImClone, including trades by lifestyle maven Martha Stewart, a minor ImClone investor.
The big question now is whether the markets will view Johnson & Johnson's acquisition of Scios as a turning point, sparking a broader rally in biotech shares
McCamant, the newsletter editor, predicted a dramatic bounce in the second half of the year, after investors know the outcome of the U.S. government's confrontation with Iraq. He said other events, such as expected FDA approval of major drugs from biotech companies like Genentech Inc., will help tip investor sentiment this year.
"I think people will be shocked by how much the biotech industry moves" once a rally begins, McCamant said.
There seems to be pent-up demand in the market from frustrated technology investors. ImClone itself jumped 17 percent yesterday to close at $10.99 after one analyst upgraded the stock.