Bloomberg News

Bankers-Turned-CEOs Fight for Elan in Year’s Top Hostile Bid

June 14, 2013

Elan CEO Kelly Martin

Kelly Martin, Elan’s CEO since 2003, has responded to Royalty Pharma's bid with four proposed transactions he bills as a value-creating alternative to the takeover plan. Photographer: Barry Cronin/Bloomberg

One worked for Lazard Ltd., the other for Merrill Lynch & Co. One studied industrial engineering at the Universidad Iberoamericana in Mexico, the other politics at Princeton University.

Now Pablo Legorreta, 49, who was a Lazard mergers and acquisitions banker, and Kelly Martin, 54, a former debt markets and private-client banker at Merrill, have been vying for control of Elan since February in the biggest hostile takeover battle this year. The fight, which took a twist today as Elan authorized a formal sale process, underscores interest in the lucrative niche of buying royalties from drug inventors amid a dearth of new blockbuster medicines.

Legorreta, chief executive officer of closely held Royalty Pharma, launched an indicative bid on Feb. 25 for Elan, increasing its formal offer twice, to at least $13 per American depositary receipt, or $6.7 billion. Martin, Elan’s CEO since 2003, has responded with four proposed transactions he bills as a value-creating alternative to the takeover plan. Legorreta says they are intended only to thwart his offer.

While Legorreta’s bid has won over many analysts as fair, he risks losing the battle among investors, whose votes on the four transactions will be revealed on June 17.

Authorized Sale

Still, the outcome may work in Legorreta’s favor. While Elan today urged shareholders not to tender into the current Royalty offer, its board approved a sale process and invited Royalty to participate, according to an Elan statement. Elan shares rose as much as 9.5 percent to $13.81 on the news.

“Elan’s move is a reaction to its shareholders not supporting management’s measures that would have fended off Royalty’s bid,” said Erik Gordon, a professor at the University of Michigan Law School and Ross School of Business. “It’s a last-ditch effort.”

Whatever the outcome, it would be a turnabout for Legorreta, who last September met with Martin to discuss the possibility of Elan buying Royalty. By October, Legorreta told him he wanted to acquire Elan instead, according to the two sides.

“There was a discussion about how to work together,” said the bearded Legorreta, who started Royalty Pharma in 1996, in an interview in London on May 28. “But time went by and I sort of made it clear in a diplomatic way that we would be in control.”

Contingency Terms

Legorreta had made his bid contingent on investors rejecting all four of Elan’s transactions, including a stock buyback proposal that the early voting indicated may be approved. That result could torpedo his offer unless he can convince the Irish commercial court and takeover panel to permit him to alter his contingency terms. A hearing is scheduled for next week.

Elan became vulnerable to a takeover last July following disappointing results for an experimental Alzheimer’s drug called bapineuzumab. Its stock tumbled 12 percent. The failure of that drug would leave Elan with a single major product, the multiple sclerosis treatment Tysabri marketed by Biogen Idec Inc. Elan’s 2013 revenues will total about $204 million, according to the average of four analyst estimates compiled by Bloomberg.

Legorreta pioneered the drug royalty business in 1996 with the founding of Royalty Pharma, which now has $1.4 billion in revenue and a 96 percent profit margin, according to company documents. It focuses on buying royalty streams of drugs for critical care and life-threatening diseases.

Industrial Engineer

Royalty’s $10.2 billion in total assets as of December dwarfs its next biggest competitor, closely held HealthCare Royalty Partners, which has $1.5 billion in equity capital.

An industrial engineer by training, Legorreta, who is Mexican-born and part French, began his career in mergers and acquisitions advisory at Lazard in Paris during the 1980s before moving to New York in 1990 with the bank.

Legorreta handled general mergers and acquisitions across a range of industries, he said. He was inspired to start his business after observing a similar model developed at and later abandoned by defunct investment bank PaineWebber in the 1980s.

“I had a high degree of interest in biotechnology personally, an industry that created amazing drugs and targeted therapies,” he said.

In 1992, he set up two private partnerships with friends that bought drug royalties from other investors. Four years later he started Royalty Pharma with Rory Riggs, who worked at PaineWebber and is now Royalty Pharma’s chairman.

Longer-term Vision

Legorreta, who may take his company public in a few years as part of a “longer-term vision,” said his business model exploits the lack of major new drug discoveries by large pharmaceutical companies. Instead they outsource the work to small biotechnology firms and universities, he said.

“When you look at big pharma, they’re just marketing machines,” he said.

His company helps “recycle” capital in the industry by paying those drug inventors for the royalties, he said, and the money in turn provides funding for them to develop more drugs.

One of his early deals was with Memorial Sloan-Kettering Cancer Center in New York. Sloan-Kettering discovered Neupogen and Neulasta, which help cancer patients grow white blood cells. Starting in 2004, Royalty Pharma agreed to pay $400 million for 80 percent of the royalty stream the hospital was receiving from Amgen Inc., which was marketing the drugs. Neulasta, Amgen’s second best-selling drug, and Neupogen together generated about $5.4 billion in sales last year.

Generic Competition

Legorreta now has a portfolio of 38 approved and marketed pharmaceutical products.

While he berates big pharma for no longer making important discoveries in medicine, Royalty Pharma, too, has become vulnerable to drugs reaching the end of their patent protection. Three of the blockbuster drugs in its portfolio, including Neupogen and Neulasta, will start facing generic competition next year.

“They’re relying on the pharma model to create drugs that create royalties,” said Les Funtleyder, managing director and healthcare strategist at New York-based investment firm Poliwogg LLC. “And there has been increased competition in the royalty space.” Since Legorreta founded his company, competitors have started at least six other healthcare royalty firms, according to Royalty Pharma.

Tysabri Royalties

Acquiring Elan would give Royalty Pharma access to royalties for Tysabri, an intravenous infusion discovered by Elan for multiple sclerosis. Biogen Idec agreed to buy Elan’s stake in the drug for $3.25 billion in cash plus future royalties on Feb. 6. Sales of the drug may reach $2.03 billion by 2016, according to the average of 12 analyst estimates compiled by Bloomberg.

Elan has said that Royalty Pharma’s bid is too low because its interest in Tysabri and net cash should be valued at $15.50 to $20.80 a share.

Still, most analysts have said Royalty’s price was generous. “We would recommend that shareholders take the deal,” Leerink Swann’s Marko Kozul said.

The battle with Elan has marked a coming out for Legorreta, who had sought to keep a low profile while building Royalty Pharma.

“For a long time we were just trying to do things that made sense and were sort of useful for the whole pharma industry,” Legorreta said. “We decided to do it quietly.” Now, he said he can no longer stay under the radar.

“The business has gotten very big,” he said. “It’s changed.”

To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net; Makiko Kitamura in London at mkitamura1@bloomberg.net

To contact the editor responsible for this story: Kristen Hallam at khallam@bloomberg.net


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