Johnson & Johnson's (NYSE:JNJ) acquisition of Actelion (OTCPK:ALIOY) makes a lot of sense on a number of levels. There have been some concerns about the price being paid by the company, which is understandable as I also believe it is on the richer side. However, the benefits of the deal far outweigh the negatives coming from the higher multiples JNJ is paying.
The deal is worth $30 billion and Actelion shareholders will receive $280 for each share. It is an all-cash transaction which means the debt metrics of the company will not be affected. At this price, Johnson & Johnson is paying almost 15x last year sales for the current product line. Keep in mind that the R&D and product pipeline will be separated and work on stand-alone basis. JNJ will own only 16% of the R&D and future drug candidates with an option to increase this ownership to 32% through a convertible note. Suffice to say that the price looks a little steep. If the pipeline and R&D were included in the deal, then there would have been a justification that a future successful drug candidate will potentially make it a cheaper deal. Current structure of the deal limits the potential benefits from the Actelion pipeline for JNJ.
