Royalty Pharma proposes to acquire Elan, gets cold shoulder instead

NEW YORK—RP Management, LLC (Royalty Pharma) has announced aproposal to acquire Dublin-based Elan Corporation, plc. The company noted thatinitial contact was made on Feb. 18 with Elan's chairman of the board, followedby a meeting on Feb. 20 in which Royalty Pharma made an indicative proposal "toacquire the entire issued and to-be-issued share capital of Elan."

Royalty Pharma's proposal, on an indicative basis, is for$11 per share of Elan stock and Elan ADS. The potential offer represents a6.3-percent premium over Elan's closing price on Feb. 15 of $10.35, and comesout to an aggregate deal total of approximately $6.5 billion.

Royalty Pharma has attached several pre-conditions to itsproposal, which includes the completion of due diligence of Elan, noacquisitions on Elan's part (excluding the pending completion of Elan's sale ofits multiple sclerosis drug Tysabri to Biogen Idec Inc.), the completion of theTysabri transaction and unanimous recommendation of the offer by Elan's boardof directors, among others.

Elan's response to the proposal has been disinterested,noting the "highly opportunistic timing of the announcement … before the company's shareholders have had the opportunity to assess and realize the fullbenefit of the Tysabri transaction and the partial unlocking of its value."Elan notes that it has spent more than a year working on "a number of strategictransactions that, should they be consummated, would be to the benefit of ourpublic shareholders." The company noted that "any credible proposal" made byRoyalty Pharma or other parties would of course be considered alongside itscurrent strategic plans.

The Tysabri transaction consists of a restructuring ofElan's profit share agreement with Biogen Idec, and will provide Elan with$3.25 billion in an upfront payment. Elan released a Feb. 22 announcementregarding its plans for the funding, and chief among those plans are itsstrategic initiatives for various business assets, noted Elan in its pressrelease.

"From a portfolio point of view, these assets will,characteristically, diversify Elan from a product, science/clinical,therapeutic and geographic point of view … we have spent significant timeevaluating assets around the world and establishing relationships that mightultimately lead to constructive strategic transactions," the company noted. "Weare pleased with our progress along these lines. We are enthusiastic about theopportunities that exist and we expect to be in a position to announce a numberof strategic transactions upon or following the close of the Tysabrirestructuring."

Once the transaction is complete, Elan will also refinanceits outstanding debt and will initiate a $1 billion share repurchase program.Though the company has been sparing with any specifics, it remains optimisticregarding its outlook and options following the Tysabri transaction.

"Our actions over the past years have been consistent intheme and execution. We have reduced risk (financial, asset concentration,infrastructure burden) while, at the same time, preserving the upside fromfuture advancement of science, clinical or commercial products," said KellyMartin, CEO of Elan, in a press release. "By unlocking a portion of the Tysabriasset value while retaining a significant earnings upside, we have a uniqueopportunity to reward shareholders, diversify our business and create a highlydistinctive business platform upon which to advance to the benefit ofshareholders and patients around the world."

Robert Cyran, a Reuters Breakingviews columnist, determinedthat the proposal "probably won't be enough" to sway Elan from its currentplans, noting that the company is now "primarily a cash-rich royalty machinerather than a drug producer." The dangers of such a "cash shell," according toCyran, are that "management pursues value-destructive deals, overpays itselffor doing relatively little or both," though he did concede that Elan'sdecision to repurchase $1 billion worth of its own stock and refinance its debtsomewhat reduces that risk. As it stands, however, Cyran still deems Royalty Pharma's deal "too scrawny."