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Johnson & Johnson (JNJ) to Acquire Alios BioPharma

Zacks Research Staff

On Tuesday, Johnson & Johnson (JNJ) announced that the company had plans to add Alios BioPharma, a private biotechnology company focused on treating viral diseases, to its assets. Alios BioPharma is currently working on an orally administered treatment for RSV, or respiratory syncytial virus, and Alios is in phase 2 in developing the medicine.

JNJ has stated that the acquisition will cost about $1.75 billion in cash, and the purpose of the acquisition was to enhance JNJ’s possibilities of treating viral infections including RSV, an infection that has yet to be countered by a preventative therapy. Alios BioPharma has also agreed to the acquisition, and we can see that that both CEOs are pleased with the deal since both companies are going to be complementing each other in the development of a cure for RSV.

JNJ has been focused on selling its assets in the past years, and this acquisition is the first for JNJ in some time. Earlier in the year, JNJ has sold its K-Y brand of lubricants to Reckitt Benckiser, and in January, JNJ also cashed in on a sale, worth $4.5 billion, of its clinical testing division to the private equity group, Carlyle Group (CG). By looking at the simple graphic below we can tell that JNJ has been doing quite well, and the company’s stock has been outperforming the S&P 500 index considerably, by almost 10%.



It is clear that JNJ seeks to promote its business by adding Alios BioPharma, however it is unclear whether or not JNJ will be making more acquisitions or continuing with its selling policy that is has been undertaking for the majority of this year. JNJ’s stock price has been relatively volatile and turbulent this Tuesday after the news, most probably because the acquisition is that of a small, private company, rather than a larger publicly traded biotechnology firm, which would have most likely seen that firm’s stock move in a more volatile fashion. Alios BioPharma was advised by Goldman Sachs, while the law firm Baker & McKenzie advised JNJ. JNJ’s stock price closed at $106.59, only 5 cents higher than Monday’s close.

JNJ’s Financials

The question that remains though is whether JNJ is a good investment. Many analysts have revised and slightly decreased their EPS expectations for the current quarter (9/2014), from $1.47/share EPS to $1.42/share EPS, 90 days ago. Nonetheless, let’s look at how the Q2 results for JNJ compare from this year and last year, 2013:

6/2014

6/2013

Revenue (in millions)

$19495

Revenue (in millions)

$17877

Gross Profit (in millions)

$13456

Gross Profit (in millions)

$12388

Net Income (in millions)

$4326

Net Income (in millions)

$3833

Diluted Net EPS

1.51

Diluted Net EPS

1.33


We can see how everything has improved year over year, especially its EPS, which has grew by 12.16% versus the previous year. It is only likely that the company will continue growing and bettering itself, with new and innovative treatments. Another important thing to consider is the company’s market capitalization, enterprise value, forward P/E, and PEG ratios, and how they compare to the industry’s averages.

Please bear in mind that the enterprise value is per Yahoo! Finance, and it is as of Tuesday, September 30th. The forward P/E and PEG ratios are well below industry averages of 36.00, and 5.14, respectively, hinting at a good investment opportunity with JNJ.

JNJ important Figures

Market Capitalization (Billion)

$302.05

Enterprise Value (Billion)

$285.98

Forward P/E Ratio

18.08

PEG Ratio

2.66


Round Up

From the financials above, we can conclude that the company is in good shape, and it is currently a Zacks Rank #2 (Buy), which indicates that investors ought to look closer at this strong company. Looking at the EPS Surprises chart below, we can also tell how the company is not struggling to beat expectations and surprise positively.



JNJ maintains an average EPS surprise rate of 4.75%, surprising last quarter (6/2014) by 7.79% and it owns an earnings ESP of 4.93%. Investors should keep an eye on JNJ, especially due to how it will likely beat earnings estimates when the conference call takes place on (10/14/2014) before the opening bell.

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