RP Management LLC, an investor in royalty streams from pharmaceuticals, offered to buy Elan Corp. (ELN) for about $6.5 billion, threatening the Irish drugmaker’s plan to embark on its own acquisitions.
A sale of Elan would allow shareholders to avoid the substantial risks of the company’s plan to make purchases with the $3.25 billion it will receive from selling its stake in the Tysabri multiple-sclerosis drug to Biogen Idec Inc. (BIIB:US), the New York-based firm, known as Royalty Pharma, said in a statement today. The informal offer of $11 per American depositary receipt is 3.8 percent above the closing price Feb. 22, and represents “the full value of Elan today,” RP said.
The offer is a challenge to Dublin-based Elan’s strategy of reinvesting the proceeds from the Tysabri divestiture, which will leave the company with virtually no operations. Chief Executive Officer Kelly Martin’s plan to buy drugs that are on the market, late-stage experimental products or some early-stage clinical research projects drew skepticism from investors when announced Feb. 6. The company said Feb. 22 it also would buy back $1 billion of stock.
“The conservative investors will say, let’s tender the shares because of the uncertainty about what management will do with the cash,” Olav Zilian, an analyst at Helvea SA in Geneva who has a reduce recommendation on the stock, said in a telephone interview. “It’s still open as to where the cash will be reinvested and shareholders possibly have no say in that.”
Royalty Pharma said it went public with its offer after Elan failed to respond an approach made last week.
The proposal doesn’t give shareholders time to assess the Tysabri deal and realize its full benefits, Elan said in a statement today. Management has been working for “more than a year on a number of strategic transactions that, should they be consummated, would be to the benefit of our public shareholders,” Elan said
“Any credible proposal which may be made by Royalty Pharma or any other party will of course be considered by the company alongside the strategic transactions and unique investment thesis referred to above,” Elan said.
Martin declined to comment through a spokesman, Jonathan Birt of FTI Consulting.
Elan climbed above the offer price in New York trading. Royalty Pharma may need to pay more to win over shareholders, Adrian Howd, an analyst with Berenberg Bank, said in a telephone interview. An offer of $13 to $14 a share is “more rational,” he said.
Elan’s ADRs rose 5.1 percent to $11.14 at the close in New York, giving the company a market value of $6.63 billion.
Still, Royal Pharma is “the best candidate for this transaction” and shareholders should support it, Marko Kozul, an analyst with Leerink Swann & Co., wrote in a note.
Royalty Pharma plans to pay for the acquisition with available cash and debt, the firm said. Financial advisers led by JPMorgan Chase & Co. and lenders led by Bank of America Corp. are working with Royalty Pharma to put in place the debt financing for the offer, the firm said.
Royalty Pharma contacted Elan Chairman Robert Ingram on Feb. 18 and made a proposal at a meeting on Feb. 20 and hasn’t received a formal response, according to the firm’s statement. Royalty Pharma said it was “surprised” by Elan’s Feb. 22 announcement of a share buyback that didn’t mention the takeover proposal.
“While Elan’s management has demonstrated its ability to execute several significant disposals, the current senior management team of Elan has not made any significant acquisitions or in-licensed any significant late stage products for Elan and thus does not have a track record of generating attractive returns from acquisitions or in-licensed products,” Royalty Pharma said.
The firm is committed to working toward a recommended transaction, Royalty Pharma said. Ingram was “cordial” but “guarded” during the meeting, which took place in L.A. and lasted a couple of hours, George Lloyd, the executive vice president of investments at Royalty Pharma, said in a phone interview today.
Lloyd said he wants Elan to allow Royalty Pharma to do due diligence and he wouldn’t rule out raising the bid if merited.
“We’ve followed Elan for a long time and we know Tysabri very well,” Lloyd said. “Elan is essentially a cash and royalty business. It’s an extremely attractive asset for us.”
Royalty Pharma, founded in 1996, owns royalty interests in 37 approved and marketed pharmaceutical products, according to the firm’s statement. For example, in 2004, the firm bought Memorial Sloan-Kettering Cancer Center’s U.S. royalty interest in Amgen Inc.’s Neupogen drug. Pablo Legorreta, the founder, previously worked as a banker at Lazard.
In addition to paying $3.25 billion in cash for Elan’s 50 percent stake in Tysabri, Weston, Massachusetts-based Biogen agreed to pay Elan royalties for as long as the drug is sold. Tysabri generated $1.6 billion in sales in 2012.
Biogen will pay a royalty of 12 percent of sales for the first 12 months. After that, Elan will receive 18 percent on sales up to $2 billion and 25 percent on sales of more than $2 billion.
Elan has a stake in a research project by Johnson & Johnson and Pfizer Inc. into treatments for Alzheimer’s disease, but the most advanced product, bapineuzumab, failed in a clinical trial last year.
J&J gained its share in bapineuzumab and the right to help develop the drug with its 2009 purchase of an 18 percent stake in Elan. Al Wasilewski, a spokesman for J&J, declined to comment on the Royalty Pharma bid. Elan also has a drug, ELND005, in clinical trials for agitation or aggression in Alzheimer’s patients, and for bipolar disorder.
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