J&J Expands Pipeline With $4.9B Centocor Purchase

By Don Long

Johnson & Johnson today confirmed that it agreed to purchase Centocor Inc. in a $4.9 billion stock deal that will beef up the health care giant¿s pharmaceutical offerings.

J&J, of New Brunswick, N.J., will pay about $61 in stock for each of the 83 million Centocor shares outstanding, with the deal expected to close in the fourth quarter. Centocor¿s stock (NASDAQ:CNTO) had gained $8.062 per share, or 16.3 percent, to $57.56 at noon EDT.

Among the key products J&J will get in the acquisition are the anti-clotting heart treatments ReoPro and Retavase, and Remicade, a therapeutic for Crohn¿s disease. Besides its application for Crohn¿s, Remicade is on track for FDA-approval for rheumatoid arthritis, an indication offering a huge potential in an under served sector.

David Molowa, an analyst with Bear Stearns Co. in New York, believes new data supporting the added application for Remicade was critical to J&J¿s decision.

The deal was ¿long rumored,¿ Molowa said. ¿Obviously the two companies went back and forth a few times on the valuations. I think the new data coming out on Remicade for rheumatoid arthritis is what pushed J&J over the edge to pay up the money. They finally recognized the value of the product.¿

In May, talks between the firms reportedly broke down over price ¿ further complicated perhaps by Centocor¿s alliance with Eli Lilly and Co., of Indianapolis, for marketing of ReoPro.

In the areas of anti-clotting therapeutics, Centocor, of Malvern, Pa., has gained a large share of the market. ReoPro produced $365 million in sales last year. And with a wave of new data supporting the drug¿s benefits, a doubling of near-term sales has been predicted.

The deal will benefit both firms, analysts said.

Molowa said, ¿Centocor¿s management did well for their shareholders. Centocor¿s cardiovascular business is a fine fit with J&J¿s stent business. There will be lots of cross-selling opportunities. There¿s also some overlap in the gastrointestinal side.¿

Jay Silverman, senior analyst at BancBoston Robertson Stephens Inc. in New York, called the purchase price ¿a little lower than I would have thought ¿ Centocor¿s fundamentals have improved since the takeover rumors started.¿ A strength of the deal is that ¿it looks like J&J will leave Centocor alone, which is nice,¿ he said.

¿A deal like this was inevitable, given the consolidation in the industry,¿ Silverman said. ¿Centocor fits J&J so well. The resources of J&J are what Centocor needed to really exploit the opportunities of their existing drugs.¿ And, Silverman added, ¿over time, Centocor shareholders will be able to enjoy J&J¿s stock, which is finally waking up.¿

Since ReoPro is used in conjunction with late-stage cardiovascular procedures, it should boost J&J¿s stent sales, which have been flat. More generally, the health care giant clearly is strengthening its prescription therapeutics where it has had setbacks in development of new products. In return, Centocor cannot help but benefit from J&J¿s heavy market presence and clinical trial expertise.

In a Wednesday morning conference call, Centocor¿s CEO Dave Holveck called the merger with J&J ¿a major leap forward in [our] development. This opens a large window of opportunity for us in the area of cardiovascular disease and monoclonal antibodies.¿

Bill Weldon, head of J&J¿s pharmaceutical group, called the development of ReoPro a ¿major success¿ in drug development and that J&J will ¿continue and value¿ the marketing alliance between Centocor and Eli Lilly.

Overall, he said the merger reflects J&J¿s strategy and belief that there will be ¿increasing convergence in pharmaceuticals, diagnostics and medical devices¿ in the treatment of disease and that the deal would provide ¿significant near- and long-term revenue growth.¿

Centocor on Wednesday released second-quarter earnings showing product sales of $115 million, a 65 percent increase from the comparable quarter in 1998. Net income was $9.1 million, or 13 cents per share.

J&J¿s stock (NYSE:JNJ) was off 43.75 cents at $96 midday Wednesday, well within the $85.71 to $104.76 range stipulated for the $61 valuation on each Centocor share.