Medivation Inc (MDVN), Dendreon Corporation (DNDN): 3 Positives From Johnson & Johnson (JNJ)’s Latest Acquisition

Johnson & Johnson (NYSE:JNJ) completed its acquisition of privately held Aragon Pharmaceuticals earlier this week. Plans for the deal were first announced by J&J in June. Buyouts of smaller companies don’t always work out that great, but the Aragon pickup should be good for Johnson & Johnson (NYSE:JNJ) — and its shareholders. Here are three positives that I see from this latest acquisition.

Source: Johnson & Johnson.

1. Good fit

Johnson & Johnson (NYSE:JNJ)’s Zytiga pulled in sales of $961 million in 2012. This year is looking to be even better, with sales for the prostate cancer drug totaling $739 million in just the first six months of 2013. That’s the good news. The bad news is that Johnson & Johnson (NYSE:JNJ) loses patent exclusivity for Zytiga in a little over three years from now.

Aragon’s androgen receptor signaling inhibitor ARN-509, which is in phase 2 clinical trials, appears to be a good fit for J&J. Like Zytiga, ARN-509 targets prostate cancer. If eventually approved, the drug could potentially be marketed as a complementary treatment alongside Zytiga. Johnson & Johnson (NYSE:JNJ)’s sales team should be able to easily incorporate the second product into their strategy.

2. Good move to fend off rivals

With Zytiga going off-patent in 2016 and no potential replacement in late-stage studies, J&J has reason to worry about its prostate cancer franchise. Several other companies would love to capture market share from the big drugmaker.

Medivation Inc (NASDAQ:MDVN) is coming on strong with its prostate cancer drug Xtandi. The company, along with partner Astellas Pharma, racked up nearly $158 million in sales for Xtandi during the first half of this year. Like ARN-509, Xtandi is an adrogen receptor inhibitor.

Dendreon Corporation (NASDAQ:DNDN) is also still plugging away with prostate cancer vaccine Provenge. While Provenge has been a big commercial disappointment since its approval in 2010, Dendreon Corporation (NASDAQ:DNDN) is making efforts to position the vaccine as part of a regimen that includes rival drugs. The company has a clinical study under way with Provenge in combination with Zytiga and another study in process with Xtandi.

3. Good use of cash

As of the end of June, J&J reported total cash (including cash equivalents and short-term investments) of more than $25 billion. Putting that cash to good use seems like a smart move. I think the purchase of Aragon qualifies as a good use.

J&J paid $650 million up front for Aragon with up to $350 million more to possibly follow if specified milestones are reached. Basically, we’re talking about paying at most $1 billion for a prostate cancer program that could realistically bring that much or more in every year if all goes well.

Investors are hoping they get to experience a bit of deja vu with the Aragon acquisition. J&J gained Zytiga with its buyout of Cougar Biotechnology in 2009. The price tag for that purchase? $1 billion. Zytiga made most of that cost back in its first year on the market.