Elan Likely To Receive Higher Takeout Bids
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Elan Corporation (NYSE: ELN) has been in the news over the past few months because of a hotly contested battle with Royalty Pharma. The battle began on Feb. 25, 2013, when Royalty offered to buy Elan for approximately $6.6 billion in cash. This deal would have meant that Elan shareholders would have received $11 per share. Since that announcement, there have been a series of moves by both companies in an attempt to get what they want. The timeline is as follows:
- March 4, 2013: Elan announces that it plans to pay a recurring special dividend to shareholders based on its Tysabri royalties. Tysabri was jointly developed with Biogen (NASDAQ: BIIB) back in 2004. Since 2006, Tysabri has managed to gain traction in the marketplace. It is considered most effective at reducing the frequency and severity of sudden immobilization and partial paralysis experienced by multiple sclerosis patients. Last month, Biogen acquired Elan's remaining share in Tysabri for $3.25 billion in cash and recurring royalty payments.
- April 15, 2013: Royalty Pharma announced that it had raised its bid from $11 per share to $12 per share.
- May 20, 2013: Royalty Pharma announced that it had raised its bid from $12 per share to $12.50 per share.
- June 7, 2013: Royalty Pharma announced that it had raised its bid from $12.50 per share to $13 per share plus a Contingent Value Right of up to $2.50 per share. The CVR will be based on the future upside of Tysabri, including approval in secondary progressive multiple sclerosis and certain sales milestones.
Elan Explores Sales Options
On Monday, June 17, 2013, Elan announced that it would begin a formal sale process. This was decided because of the offers and interest that the company had received up to that point. Elan advised shareholders not to tender Royalty Pharma's latest offer, but that it would invite Royalty to participate in the formal process.
Royalty Likely To Bid Higher
Now that Royalty is just a part of the process, it will need to start making more investor-friendly deals. Given that its recent offer could be worth up to $15.50 per share, it is likely that Royalty will come back with at least a higher cash portion and a lower CVR. This will appease investors and make it more likely that such a deal could garner enough shareholder support to pass.
Royalty has already increased its initial offer by $2 per share, with the potential for that to be $4.50 per share. The reason for this is likely the hidden value in Tysabri. As mentioned above, Biogen acquired the remaining rights to Tysabri earlier this year. Upon that announcement, Biogen announced that the deal would boost its earnings from the very first year, increasing earnings by $0.20 to $0.30 in 2013. Biogen expects that increase to continue after 2013 as well.
The deal stipulates that Elan is to receive 12% of annual Tysabri sales for the first 12 months after the deal closes. After that initial period, royalties will skyrocket to 18% of sales up to $2 billion and 25% of sales over $2 billion. Given that sales were $1.6 billion in 2012, an increase of 8% from 2011, Elan appears to be sitting in a great spot. Royalty likely recognizes this and wants to acquire the company while a deal still makes sense.
Biogen Could Bid
While Biogen already owns the full rights to Tysabri, the company is obligated to continue paying Elan's perpetual royalty. If Biogen believes that Tysabri sales will continue to grow at higher than expected rates, it would make sense for the company to try and acquire Elan at a price that is a discount to the royalty stream. Over the past 4 years, Tysabri sales have shown tremendous growth:
- 2009 Annual Sales: $1.06 Billion
- 2010 Annual Sales: $1.20 Billion
- 2011 Annual Sales: $1.50 Billion
- 2012 Annual Sales: $1.60 Billion
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