Johnson & Johnson Is in Talks
To Purchase Scios for $2 Billion
By ROBIN SIDEL, SCOTT HENSLEY and DAVID P. HAMILTON
Staff Reporters of THE WALL STREET JOURNAL
Johnson & Johnson, looking to fill its sparse pipeline for new drug development, is in advanced discussions to buy biotechnology concern Scios Inc. for about $2 billion, according to people familiar with the situation.
Negotiations between the two companies have been progressing for several weeks, but no deal has been reached. Indeed, another bidder could still emerge for Scios, which has held talks with other suitors in recent months, these people said.
Under the terms being discussed, Johnson & Johnson would pay about $45 a share for Scios, a 23-year-old unprofitable biotechnology company that sells one drug and is developing another that has created a big buzz in the health-care industry.
That would represent a premium of nearly 30% to Scios's current trading price, although people familiar with the matter noted that the two sides haven't yet agreed on price. At 4 p.m. in Nasdaq Stock Market trading Thursday, Scios rose 89 cents, or 2.6%, to $34.69. Representatives for both companies declined to comment.
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Like many of its rivals, Johnson & Johnson needs to develop new drugs in the face of rising competition. But drug development is a risky, expensive and lengthy process, prompting powerful pharmaceutical titans with strong balance sheets to look for new drugs via acquisitions or complicated licensing agreements.
In pursuing Scios, Johnson & Johnson -- which has made 52 acquisitions in the past decade -- would be following its tradition of buying companies that already have successful drugs. Two years ago, it bought Alza Corp., a maker of specialty medicines and drug-delivery technology, for $12 billion. It also bought Centocor Corp. for $4.6 billion in 1999. Last year, it acquired Tibotec-Virco NV, a closely held Belgian drug company for $320 million.
Based in Sunnyvale, Calif., Scios suffered a series of setbacks before it brought its first drug -- called Natrecor -- to market in 2001. Natrecor, used to treat patients with congestive heart failure, has been a big hit for Scios. It is expected to generate as much as $170 million in revenue this year and has been estimated to have a peak sales potential of $500 million to $600 million. But those sales prospects could be increased significantly under Johnson & Johnson's powerful marketing and sales force.
At the same time, Scios has been searching for a marketing partner for an experimental oral drug to treat rheumatoid arthritis, a painful degenerative joint condition. If successful, it could be a good fit with Johnson & Johnson's own injectable rheumatoid arthritis drug, Remicade.
For Johnson & Johnson, the phenomenal sales growth of Remicade and anemia fighter Procrit/Eprex have helped make up for a lack of new drugs from the company's own laboratories. Those sales also have helped offset other setbacks for the New Brunswick, N.J., health-care products company, including the decision three years ago to stop marketing Propulsid, a heartburn medicine, over cardiac concerns.
Still, Johnson & Johnson needs new drugs and an ambitious revamping of the company's research-and-development operation undertaken several years ago hasn't yet started to pay off. Its sparse drug pipeline holds few immediate prospects for new drugs.
Since 1998, sales of the company's top seven drugs grew at a compound rate of 26% a year, according to J.P. Morgan analyst Michael Weinstein. But the portfolio is showing its age and sales growth for these specific medicines will slow to 12% this year and 9% in 2004, he wrote in a recent report.
Absent major acquisitions, he estimated total pharmaceutical sales growth would slip to 8% to 9% annually beginning this year, from about 15% in 2002. Slower growth is a major challenge because 60% of Johnson & Johnson's operating profits come from pharmaceuticals sales, which last year were $17.2 billion, or 47% of total revenue.
To make matters worse, just as J&J's drug portfolio is flagging, new competition for its most important products are hitting the market. Amgen Inc. launched Aranesp, a long-acting anemia drug. Enbrel, a rival to Remicade also sold by Amgen, got a boost late last year when the Food and Drug Administration approved a factory expansion that will ease supply constraints.
If completed, the Scios purchase would end the independent existence of one of biotech's oldest companies. Started in 1981 as California Biotechnology, it was part of a second generation of biotechnology firms founded by venture capitalists and other financiers in hope of duplicating the success of Genentech Inc. But CalBio, as it was known for most of its first decade, repeatedly failed to live up to that promise.
By the late 1990s, Scios had seen a promising kidney-disease drug fail in clinical trials, then watched as the Food and Drug Administration rejected Natrecor. A new management team led by former Genentech sales executive Richard Brewer revamped the Natrecor trial and in 2001, it received FDA approval -- the first new treatment for heart failure in more than a decade. |
