A breakup worth billons

Biogen Idec purchases Elan’s share in Tysabri franchise for more than $3 billion; Elan is already entertaining acquisition offers

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WESTON, Mass.—Billions of dollars exchanged hands in thepharma industry last month, and billions more may follow, as a result of Irishpharma Elan Corp. PLC's Feb. 6 announcement that it will sell itsinterest in the multiple sclerosis (MS) drug Tysabri to partner Biogen Idec foran upfront payment of $3.25 billion. And as analysts were still digesting thishigh-value transaction, news came of a potential $6 billion-plus acquisitionoffer for Elan by Royalty Pharma Management LLC.
Under the companies' restructuring of their 50/50 deal,Biogen will make future contingent payments to Elan in an amount equal to 12percent of global net sales of Tysabri for the first year, followed bycontingent payments of 18 percent on annual global net sales of Tysabri up to$2 billion, or 25 percent on annual global net sales that exceed that amount.
Full ownership of Tysabri is expected to enable Biogen todovetail its marketing with other MS drugs, including Avonex and Tecfidera.Biogen said the deal will boost its earnings within the first year from 20cents to 30 cents to 50 cents to 60 cents per share—and will continuethereafter, depending on the sales success of Tysabri.
"Full ownership will improve our ability to navigate itsrole as part of our leadership in MS," said Dr. George A. Scangos, CEO ofBiogen Idec, in a statement. "Tysabri is a remarkably efficacious drug, andwith the increased awareness of our risk-stratification capabilities, we believeMS patients' use of Tysabri will continue to expand over the long term. Weappreciate Elan's tremendous partnership and the productive approach to ourdiscussions that led to a transaction that benefits the shareholders of bothcompanies. We expect a smooth transition to the closing of the transaction."
Tysabri, or natalizumab, has had quite a journey until thispoint. The drug was approved in 2004 by the U.S. Food and Drug Administration(FDA), but was subsequently withdrawn from the market after it was linked withthree cases of the rare neurological condition progressive multifocalleukoencephalopathy (PML) when administered in combination with interferonbeta-1a, another immunosuppressive drug often used in the treatment of MS.After a review of safety information and no further deaths, the drug was returnedto the U.S. market in 2006 after the FDA found that its clinical benefitsoutweighed the risks involved.
Today, Tysabri is marketed and distributed by Biogen andElan in more than 65 countries for the treatment of MS in patients who have hadan inadequate response to, or are unable to tolerate, alternative MStreatments.
The transaction has been approved by the boards of directorsof both companies and is subject to the customary review process under the HartScott Rodino Antitrust Improvements Act in the United States and othercustomary review processes, and is expected to close by the end of the secondquarter, assuming a standard regulatory approval timeframe.
The move could be a sign of big things to come for Elan,which hinted that the proceeds from the sale may be diverted to "a number ofstrategic transactions" the company has been working on for the past year "that,should they be consummated, would be to the benefit of our public shareholders."
"Returning capital through share repurchase, diversifyingbusiness and asset risk/reward through non-traditional business structureswhile simultaneously capturing the long-term, high-margin royalty income fromTysabri will offer a compelling investment thesis for our currentshareholders," the company said in a Feb. 25 press release.
Just days before that press release was issued on Feb. 18,Royalty Pharma reportedly initiated contact with Elan, followed by a meeting onFeb. 20 in which Royalty Pharma made an indicative proposal "to acquire theentire issued and to-be-issued share capital of Elan." The offer was for $11per share of Elan stock—a 6.3-percent premium over Elan's closing price on Feb.15 of $10.35—for a total of approximately $6.5 billion.
But with that hefty price tag came several conditions,includingthe completion of due diligence of Elan, no acquisitions on Elan's part, thecompletion of the Tysabri transaction and unanimous recommendation of the offerby Elan's board of directors, among others.
While acknowledging "the highly opportunistic timing of theannouncement by Royalty Pharma," Elan noted the highly conditional nature ofthe offer, and that it was made "before the company's shareholders have had theopportunity to assess and realize the full benefit of the Tysabri transactionand the partial unlocking of its value."
"Further announcements will be made if and whenappropriate," Elan stated in a press release as we put this issue to press.

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