Elan dresses up for a date, but single life beckons

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If last week’s failure of bapineuzumab left Elan looking like a Tysabri shell, today’s plan to spin off the group’s early-stage drug discovery business only reinforces this view.

And although the company has denied that it is being set up for a trade sale this is still the scenario that some investors see as the logical endgame for a one-product stock with a chief executive who for some time now has been on the verge of retirement. Obviously, there is only one buyer: Biogen Idec. But a look beneath the surface reveals little to suggest that the Tysabri partner is about to pull the takeover trigger.

Biogen has Elan right where it wants it. Through a deal that runs until 2019 Biogen will continue to benefit from 50% of the value of Tysabri, a multiple sclerosis drug that generated in-market sales of $1.5bn last year. And under the terms of this alliance it can buy out the entire Tysabri interest should anyone else bid for Elan – meaning that any other bidder would need to negotiate with both parties and be prepared to pay way over the odds in an acquisition.

Stalemate

With Biogen not pushed to move and able to stymie other potential buyers, a stalemate looks set to ensue.

After spinning out the discovery business Neotype Biosciences to shareholders Elan will be left with just two assets in addition to Tysabri: a 49.9% interest in Janssen AI, the bapineuzumab joint venture with Johnson & Johnson, and ELND005, an early-stage beta amyloid aggregation inhibitor with possible CNS applications.

Janssen AI is also subject to change-of-control provisions that would enable J&J to buy out full rights “at the then fair value” should Elan change hands. However, following the project’s failure last week, fair value right now must be close to zero (Bapi programme shelved as second Alzheimer’s trial fails, August 7, 2012).

Although Elan’s chief executive, Kelly Martin, insists that he is not necessarily setting the company up to be bought, investors will seize on several other facts that could favour a takeover. For instance, Elan has over $4bn of tax losses that could be utilised to boost an acquirer’s bottom line; if Elan becomes immediately profitable after the spin-out this could help set an earnings multiple-based valuation; and the possible paying down of Elan’s remaining $625m of debt before its 2016 due date could further tidy up its capital structure.

Moreover, Mr Martin, who had agreed to remain until the bapi data were released, insists that there are currently “zero discussions” with the board regarding a new leader. Were Elan to appoint a new chief executive this could be seen as shutting the door to a trade sale.

Valuation

Valuation of course is another issue. EvaluatePharma’s consensus forecast data suggest that Elan’s share of Tysabri has an NPV of $5.2bn, based on patent expiry in 2017; Elan says recent developments have given it at least three more years of patent life, and setting the patent expiry year at 2020 gives an NPV of $6.1bn. Even if it did make sense immediately for Biogen to buy out Elan, the current enterprise value alone – $6.5bn – shows how expensive it would be even before factoring in a takeout premium.

If Biogen were a super-confident buyer it might – just might – be prepared to pay over the odds, were it not for one other fact: it also owns the multiple sclerosis drug BG-12, which happens to be the pharma industry’s most valuable asset (Biogen and Gilead top tables with most valuable R&D assets, August 8, 2012).

If BG-12 is launched it should increase Biogen’s share of the multiple sclerosis market, in no small part at Tysabri’s expense; for Biogen to achieve largely the same aim by shelling out $7bn to own Elan and all of Tysabri holds little logic.

A final piece of the puzzle is Biogen's contractual duty to promote Tysabri while the deal with Elan remains in place. The fact it might also be selling a key competitor could put a strain on the relationship; the deal can be wound up in the event of a material breach, such as failure to promote Tysabri strongly enough.

A scenario under which a long, drawn-out litigation is settled by M&A does suggest one path to Elan being bought. But investors will have to wait several years for a takeover. And be prepared to accept a much lower price.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com

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