Aside from concerns about the company's valuation, I didn't feel comfortable about Johnson & Johnson's margins; nor did I feel that the company's top-selling drug, Zytiga, was the answer to long-term prosperity. My biggest source of anxiety stemmed from the competition for which Johnson & Johnson seemed to be unprepared. One threat was from Medivation ( MDVN). In that article, I said: "I do wonder, though, how JNJ will respond to increased competition and further threats of weakening margins. "Companies like Medivation -- which has a strong oral medication drug that rivals Zytiga -- should not be taken lightly. This is where JNJ's extraordinarily well-diversified business should offset potential near-term headwinds."
Well, it's taken two months but investors have finally gotten some answers. On Monday, Johnson & Johnson announced it agreed to acquire privately held Aragon Pharmaceuticals for $650 million in upfront cash. It may pay as much as $1 billion if certain milestones are met. The deal gives Johnson & Johnson rights to Aragon's ARN-509, a prostrate cancer drug now in Phase II development. That may weaken Medivation, whose drug Xtandi has become a dominant force in battling prostate cancer. Medivation has been fighting Aragon to keep ARN-509 off the shelves, suggesting that Medivation holds the rights to the drug -- claims that have led to legal action. In the middle of all of this has been Aragon, which has had difficulty financing ARN-509's development. But with Johnson & Johnson, financing will not be an issue. Medivation's management, which now sees potentially faster development of a competing drug, understands that. But they also understand that ARN-509 will complement Zytiga's strengths and give Johnson & Johnson the ability to take on new approaches to treat prostate cancer patients that Johnson & Johnson would have otherwise not considered. That forces the hand of Medivation, which is not in a position to take risks. I'm not suggesting Johnson & Johnson has effectively killed any of Medivation's growth potential. The deal is just one move in a long chess game. Plus, the purchase still has to pass regulatory approval -- although I believe it will. In the meantime, Medivation still has legal pieces it can play, even if that only serves to sedate Johnson & Johnson's momentum. But will it matter?