From courtship to formal engagement

After months of talking and speculation, Johnson & Johnson makes official its $2.3 billion bid to acquire Dutch biotech Crucell

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NEW BRUNSWICK, N.J.—There have been a few bumps in the road in Johnson & Johnson's quest to acquire Leiden, the Netherlands-based Crucell NV—Crucell's second-largest shareholder grumbling about the offer price being too low and problems at the company's South Korean manufacturing plant begin the most notable—but J&J officially made its $32.30 per-share bid for the company in early December.

The Dutch biotech firm's CEO, Ronald Brus, along with the Crucell management board and the Crucell supervisory board, are urging shareholders to accept J&J's long-awaited $2.3 billion bid. The offer represents a premium of 58 percent over the closing price of the ordinary shares as of Sept. 16, 2010, the day before J&J and Crucell announced they were in negotiations for a merger and acquisition deal, and a premium of 63 percent over the 30-day trading average of the ordinary shares of Sept. 16.

J&J, which already owns an 18 percent stake in the company, is looking in part to expand in the arena of influenza vaccinations after losing patent protection on a couple former top-selling drugs.

"Crucell would give J&J a vaccine platform at a time when the vaccine business is becoming increasingly attractive because of its cost-effectiveness, limited exposure to generics and growth opportunities," notes Larry Biegelsen, an analyst at Wells Fargo Securities in New York.

According to an August 2010 report by market research company Kalorama Information, the global market for vaccines totaled $22.1 billion in 2009, up from $19 billion in 2008, and will expand 9.7 percent annually in the next five years.

Despite assertions since September by Van Herk Groep, which has a 9.6 percent stake in Crucell, that the current offer is "meager" and came too early, Tom Muller, an analyst at Theodoor Gilissen Bankiers NV, says the offer represents "a nice premium" and adds, "It shows that the company has created value over the past years. The shareholders will be willing to sell." He currently has a "buy" rating for Crucell.

"There will not be a higher bid," predicted Fabian Smeets, an analyst at Rabo Securities in Amsterdam, in an early December interview with Bloomberg, adding: "The shareholder base is very diverse, and it will be difficult to band them together to force a higher bid."

In a shareholders meeting in Amsterdam on Dec. 10, Brus said that Crucell's future prospects were brighter being part of a larger pharmaceuticals group with more financial and other resources to drive research. J&J possesses a large marketing and sales operation that would be available to Crucell, he notes, which would allow the company to compete more effectively with rivals that are backed by Big Pharma or who had already been absorbed into Big Pharma.
"Crucell will become the vaccines center within J&J while we can keep our own identity," Brus told shareholders. "We are very confident that J&J wants us for our know-how and our people. That is why we are enthusiastic about becoming part of the biggest healthcare firm in the world."

In fact, J&J has said that it plans to keep Crucell's facilities, retain senior management and maintain employment levels.

"Crucell's strength in the manufacture, discovery and commercialization of vaccines would create a strong platform for Johnson & Johnson," J&J officials agreed in a statement.

While there have been sour grapes from Van Herk Groep, Delta Lloyd Asset Management, which owns around 5 percent of the outstanding stocks, has been more positive about the acquisition, with Jack Jonk, head of equities at Delta Lloyd, saying the proposal seems to be a move "in the right direction" and one that makes sense strategically.

Noting that the vaccine market has just about tripled over the past half-decade, and noting that "vaccines are increasingly regarded as a key revenue generator for Big Pharma, as they are generics-proof," Giles Somers, a senior healthcare analyst at Datamonitor, says, "Strategically, J&J has already made a number of acquisitions in infectious diseases, so the fit is very good. Furthermore, backed by J&J's global sales and marketing capabilities, Crucell could compete more effectively with the Big Pharma players already in the vaccines space."

Aside from Van Herk Groep, the only significant hitch that has arisen thus far were problems at a South Korean vaccine production plant, which had a material impact on Crucell's third-quarter earnings and full-year outlook. This forced the company to cease shipments of its pediatric vaccine Quinvaxem and its hepatitis B vaccine Hepavax-Gene in October of last year, pending an investigation into whether sterilization operations were compromised at the plant. Although the core cause of the sterility problem is still under investigation, the facility is expected to resume production in February.

Shortly before J&J made its official acquisition offer, it and Crucell noted that the immediate financial impact of the Korea manufacturing issues to Crucell would not alone constitute a "material adverse effect" on the J&J bid. However, any Korea-related effects associated with the period prior to commencement of the share-purchase offer, along with any further developments that may arise or become known to J&J, might need to be taken under consideration.

The acceptance period for the J&J offer began on Dec. 9, 2010, and ends—unless extended for some reason—on Feb. 16.  Crucell will convene an extraordinary general meeting related to the acquisition offer on Feb. 8 at the Okura Hotel in Amsterdam.

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