Elan Received Buyout Bid Before Buyback

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When Elan (NYSE: ELN) sold its stake in the blockbuster selling multiple sclerosis drug Tysabri to partner Biogen (NASDAQ: BIIB) in early February, many investors at both companies were left questioning the deal and the motive.

Dublin, Ireland based Elan pocketed $3.25 billion in the sale (on which it will pay little tax) and also inked a royalty payment plan for future sales of the dynamic drug. The hefty payout resulted in a credit downgrade for drug behemoth Biogen, despite the fact it gained sole control over the effective MS treatment. It's yet to be seen who the clear winner is in this arrangement but Biogen obviously sees big things for Tysabri, which brought in some $1.6 billion in sales in 2012 alone.

What Elan PLans to Do With the Payout

Analysts and investors have been clamoring for news regarding what Elan intends to do with the hefty takings and now they have some answers. In addition to the $1 billion share buyback announced Feb. 22, the company intends to engage in “a number a strategic transactions” with a share of the proceeds, according to a statement. It will also refinance its $600 million in debt.

Elan CEO Kelly Martin said in a statement, “Understandably, many market participants are looking forward to further clarity around how we intend to deploy the significant upfront payment we will be receiving. We have been making significant progress in this regard and are prepared to move expeditiously, upon close, on the redeployment of capital.”

The share buyback may appease some investors who viewed the Tysabri deal with skepticism. So much so, they sent shares reeling the day the deal was announced it what was the stock’s biggest slide in seven months. At the time Elan said it would share some proceeds with shareholders, but didn’t go into detail.

London's Breenberg Bank analyst Adrian Howd told Bloomberg, “They’ve now put some numbers around that. And it looks as if the timing of the use of other proceeds, in term of investments in pipeline and new products, is more progressed than some had thought." Howd recommends buying Elan shares.

Shedding Assets

Elan has been cleaning house. The now stripped-down, streamlined company sold its Elan Drug Technologies unit to Alkermes in 2011. Last December, it spun off Prothena Corporation (NASDAQ: PRTA), its early stage drug research company. Elan surmises the two separated companies will each be worth more apart than conjoined.

Prothena is focused on the discovery and development of antibodies to treat myriad diseases. More specifically it researches disease causing proteins. Potential therapies can be used to treat ailments such as Alzheimer's, Parkinson's, and Multiple Sclerosis. The company's aim is to apply its extensive expertise in generating novel antibodies and then work with strategic partners to eventually bring their findings to clinical trails.

Prothena CEO Dale Schenk said after the spin-off, but before the Tysabri sale, that the promise of Prothena’s drug pipeline “will be more visible to investors now that the company is out from under the umbrella of the Tysabri effort.” Who knew the hit drug was such a drag?

Elan's Future and Fate

No doubt some investors believed Elan would use the proceeds from the Biogen and Alkermes sale to fund research on its Alzheimer’s disease treatments. Elan is working with giants Johnson & Johnson and Pfizer on a drug for the dementia-like progressive ailment that causes problems with memory, thinking and behavior. In the U.S., the disease affects more than 5 million, or one in eight, a number that is expected to swell in the near future. 

There were high hopes for the trio’s collaboration, but those hopes were doused last year when the most advanced experimental stage treatment failed in trials. The setback was viewed by some as a chance for Biogen to takeover Elan, since it left the Irish pharmaceutical with just a single major money-making product--Tysabri. At the time, several analysts agreed Biogen would love to own 100% of Tysabri.  Now it's clear Biogen's love affair is with Tysabri alone, not Elan plus Tysabri.    

Elan continues to work on a drug to treat agitation and aggression in Alzheimer's patients, and for bipolar disorders. ELND005 is currently in clinical trials. The company is also working on treatments for Parkinson’s, Crohn’s and several other autoimmune diseases.

But the real benefit from Elan is quite simply its Irish homestead. An acquirer would gain advantage merely from Ireland’s low corporate tax rate: 12.5%.

With M&A activity off to its strongest start in six years, someone with strategic plans and an affinity for Ireland’s business friendly environment could come to court Elan.

And someone has.

Word just broke that Royal Pharma contacted Elan on Feb. 18 about buying the company outright in a $6.6 billion deal, or $11 a share. But, RP Management hasn't heard back from Elan and was reportedly taken aback after the share buyback was announced. RP questions Elan's plans to remain a stand alone company.

Elan shares traded up after the news to $11.40, a sure sign markets expect a higher bid or additional offers. Shareholders have little faith that Elan's CEO Kelly Martin will do the right thing.  Activist investors are likley to push for a sale of the company.

The saga is still unfolding.

 


DianeAlter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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