Johnson and Johnson Acquires Biotech Concern Scios

17 February 2003 00:00  [Source: ICB Americas]

In a deal that will establish a biotech portfolio rivaling that of biotech behemoth Amgen, Johnson & Johnson (J&J) has agreed to buy biotechnology concern Scios Inc. in a cash-for-stock exchange valued at $2.4 billion. J&J will gain Scios's heart failure drug-widely considered an under-leveraged product-which will help to offset the expected sales deceleration of Procrit (epoetin alfa) and Remicade (infliximab). Scios's small-molecule recombinant protein platforms, led by a risky potential blockbuster for rheumatoid arthritis (RA), fortify J&J's thinning drug development pipeline.

Under the deal, J&J is offering $45 for each of Scios's 59.8 million shares outstanding. Scios brings $250 million in cash. J&J says the merger will dilute earnings by 5 cents in 2003 and 2004. The company maintains its 2003 earnings per share (EPS) outlook of $2.62, excluding special charges. An estimated $700 million charge for in-process research and development will impact EPS by 23 cents.

The merger is expected to close in the second quarter of 2003, subject to approval by Scios shareholders and US regulatory authorities. Scios will retain its name and management as a free-standing J&J company.

Driving the deal is congestive heart failure (CHF) drug Natrecor (nesiritide), launched in 2001, and investigative drug SCIO-469, an oral suppressant of TNF alpha in Phase II trials to treat RA.

Indications for two lead preclinical TGF-beta receptor inhibitors will be announced in 2003, based on activity in reducing scar formation or fibrosis, a precondition of diseases such as CHF, chronic obstructive pulmonary disease, and liver cirrhosis. "This acquisition will help to fill out J&J's pharma pipeline for 2005, 2006 and beyond," says Morgan Stanley analyst Glenn Reicin.

Analysts peg Natrecor's US sales potential in the range of $300 million to $600 million by 2006, assigning the largess of the deal to SCIO-469. "Excluding late-stage development drugs, roughly $1.7 billion from pipeline candidates by 2006 can sustain pharmaceutical business growth of 10 percent," says Morgan Stanley's Mr. Reicin. "Natrecor alone could fill roughly one-third of that figure, powered by J&J's Ortho Biotech Products LP and Centocor Inc. sales forces. SCIO-469 has the potential of helping to fill the remaining $1.1 [billion] to $1.2 billion."

Scios projects US sales of Natrecor, a first-in-class human B-type natriuretic peptide (rhBNP), at $180 million to $185 million in 2003. GlaxoSmithKline PLC holds development and commercialization rights to Natrecor in Europe.

Presently, Natrecor complements the sale of Cypher, a sirolimus-eluting stent, and Centecor drugs ReoPro (abciximab) for acute coronary care, and Retavase (retaplase) for heart attacks. The companies will seek to expand Natrecor to the outpatient setting for less severe heart failure, based on results of Scios's Fusian Phase II trial, as well as in hospital settings and emergency rooms.

"Scios has addressed the CHF opportunity through the clinical cardiologist," adds Mr. Reicin. "Centocor and OrthoBiotech would add their respective strong relationships in the emergency room and critical care unit."

Naysayers point to potentially marginal revenues in preventative indications for Natrecor, as older diuretics and angiotensin-converting enzyme (ACE) inhibitors, available as generics, treat at low cost. However, J&J is mulling new formulations for Natrecor and administration methods using Alza Corp.'s drug delivery technology.

Another potential synergy exists in the rheumatoid arthritis segment between SCIO-469, which is administered orally, and Centocor's Remicade, which is administered via infusion. J&J may be able to fold existing efforts in this area, both on the development side and the marketing side, into the SCIO-469 program to realize potential cost savings and exploit the potential of the drug, say analysts.

Competing compounds in the same drug class as SCIO-469, a p38 kinase MAP inhibitor, include oral COX-2 inhibitors, Amgen Inc.'s injectible interleukin-1 blocker Kineret (anakinra), and injectible anti-TNF alpha drugs, including Amgen's Enbrel (etanercept), Abbott Laboratories' Humira (adalimumab) and Pharmacia Corp.'s CDP870.

Analysts assume J&J has viewed data from the Natrecor Phase II Fusian trial, as well as Phase II data for SCIO-469, both expected to be released in 2003. A second kinase inhibitor, SCIO-323, is in Phase I trials.

On February 7, reports of the merger hoisted shares of the 23-year old Sunnyvale, Calif.-based Scios by 22 percent, or $7.51, to $42.20, more than double the 52-week low of $19.95. The union caps a nearly 7 percent premium on Scios's stock last Monday, when definitive statements by the companies sent Scios shares up $1.72 to $43.92 and J&J shares up 20 cents to $52.04.

Barring acquisitions, JPMorgan has projected growth for J&J's pharmaceutical sales to slow from 16 percent in 2002, to total $17.2 billion, to 8 percent to 9 percent in 2003 to 2005 on competitive pressures for Procrit, Remicade and Risperdal (risperidone), generic competition for oral contraceptives, and a depleted pipeline.

"The absence of a pharmaceutical pipeline and anticipated stent competition in 2004 and 2005 make externally offsetting the expected 2004 to 2005 growth slowdown a 2003 imperative," says JPMorgan analyst Michael Weinstein. "As such, we look for J&J to use the windfall of coated stents to pursue pipeline-rebuilding acquisitions."

The merger highlights pharmaceutical companies' risk-averse trolling of the biotech market for merger candidates with marketed or promising late-state drugs. For example, kinase inhibitors sparked an $800 million deal between Novartis AG and Vertex Pharmaceuticals Inc. in 2000.

In 1999, Bayer AG dissolved a commercial alliance with Scios for Natrecor, after the Food and Drug Administration requested additional data on the drug, subsequent to a new drug application filing in 1998. Scios and J&J downplayed a small interpretive study to be presented at the annual American College of Cardiology meeting in March, which raises safety questions about Natrecor in acute heart failure.

Scios posted full-year 2002 sales of $111.2 million, driven by Natrecor at $107.3 million.

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