The markets weren't impressed, believing J&J overpaid for the drug and drug delivery specialist. Nonetheless, the acquisition will certainly broaden and diversify J&J's focus. Especially considering Alza's success in drug delivery, the merged company will be left with a stronger global pharmaceutical business.
Johnson & Johnson this week agreed to acquire the developing pharma company Alza. The all-share transaction is thought to be worth approximately $11.8 billion, raising investor concerns that Alza may have been overvalued. This was reflected in the fall of J&J's shares on Monday, closing down 3.2% at $85.38.
The deal will certainly boost J&J's pharmaceutical business. The group is organized into three main business areas: pharmaceuticals, consumer goods and devices. In 1998, the pharmaceutical division saw six of its late stage drugs fail and in 2000 it halted marketing of Propulsid (cisapride) in the US due to safety concerns.
Alza, on the other hand, has a promising pipeline of products and an expertise in urology and oncology. Furthermore, Alza has a host of delivery techniques that will help broaden J&J's portfolio and enhance sales of older drugs. It's currently working on some promising battery-powered skin patches and time-released implants for biotechnology medicines that will help J&J to penetrate new markets. A further attraction of the deal is that the two companies have been collaborating through marketing agreements and therefore know each other very well. For example, they co-developed Duragesic (fentanyl patch), which posted 2000 sales of $656 million, accounting for 5.6% of J&J's total ethical sales. In turn, Alza will benefit by gaining a broader geographical expansion with a deeper penetration in US and Europe.
Unlike many of its peers, J&J has avoided a "mega merger" survival strategy. However, given that J&J is composed of over 190 companies, it is inherent in the company's expansion strategy to enter into collaborations and acquire new businesses. Between 1998 and 1999, it acquired the orthopedics device company DePuy and the biotech powerhouse Centocor. Alza will be J&J's latest and largest conquest, giving it expertise in drug delivery.