It seems that the swine flu pandemic has attracted many large pharmaceutical players towards the vaccine business, the latest being Johnson & Johnson (JNJ). Yesterday, J&J acquired an 18% stake in a Netherlands-based biotech company, Crucell NV, for $440 million. The deal will primarily focus on developing a universal vaccine for influenza treatment using Crucell’s genetically engineered antibody technology.

Additionally, vaccines for other diseases will be developed in due course. Following the deal, J&J’s per-share earnings will be reduced by 2 cents to 4 cents in 2009.

Per the deal, Crucell will retain the European marketing right for the vaccine which will be jointly produced by the companies, while Johnson & Johnson will market the vaccine in the rest of the world. Accordingly, Crucell is eligible to receive royalties on global sales.

Although the vaccine influenza vaccine is still in an early stage of development, this move is quite advantageous for Crucell as it would have been difficult for the company to bear late-stage development expenses on its own.

We believe the move by Johnson & Johnson should boost its topline going forward as vaccines are becoming one of the most sought-after segments in the pharmaceutical industry. Although J&J is one of the largest players in the pharmaceutical segment, it does not have a strong presence in vaccines. This deal will enable J&J to compete with established vaccines players such as GlaxoSmithKline (GSK), Merck (MRK), Novartis (NVS) and Sanofi-Aventis (SNY).

Johnson & Johnson is in a diversifying mode, which is evident from its deal with Ireland-based biotech company Elan Corporation (ELN) a few months back. For an 18.4% stake in Elan, J&J paid $885 million in addition to $500 million investment for a majority stake in the Alzheimer’s disease pipeline — another prime target of the pharmaceutical industry.

For the full year of 2008, J&J’s pharmaceutical division contributed 39% of its total annual sales while the consumer segment and the medical devices segment and diagnostics accounting for 25% and 36%, respectively. We believe the pharmaceutical segment will get a strong boost on the successful execution of the recently signed deals.

The company’s strong cash balance augurs well for such further acquisitions. We have a Neutral recommendation on the stock.
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