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Royalty Pharma Bids $6.6B for Elan, but Is It a Fair Offer?

By Cormac Sheridan
Staff Writer

DUBLIN, Ireland – Shares in Elan Corp. plc (NYSE:ELN) rose 5 percent to $11.14 Monday in response to an indicative $11 per-share takeover offer from Royalty Pharma.

Although Dublin, Ireland-based Elan issued a critical response to the offer, which represents a 4 percent premium to its closing share price Friday, it was not an outright refusal. The investor response suggested there is an appetite in the market for an exit. The company is now in play.

With the ink barely dry on its new post-Tysabri strategy to diversify its business through acquisitions and in-licensing deals and to return $1 billion cash to shareholders, Elan suddenly has an alternative strategic possibility to consider.

New York-based Royalty Pharma is offering the certainty of cash today vs. the uncertainty attached to Elan's ability to acquire or in-license assets that have no visibility at present, plus the added uncertainty over future revenues for the multiple sclerosis (MS) drug Tysabri (natalizumab), in which it retains a substantial minority interest. Moreover, management expenses are expected to be in the range of $170 million to $190 million this year.

"I think it's not totally unreasonable," Richard Parkes, analyst at Deutsche Bank in London, told BioWorld International. "I think there's room for Royalty Pharma to increase the offer." The gap between what Parkes considers a fair offer and the stock's current trading price is small.

"If it's getting close to $12, it's fair value for locking it in today," he said. At $11 per share, however, it may be too parsimonious. "It's a 9 percent discount to my net-present-value valuation," he said.

New York-based Leerink Swank analyst Marko Kozul recommended that shareholders accept the proposal as is. "We previously characterized risk in Elan moving forward with M&A or in-licensing of new pipeline compounds, which would also likely require the company to ultimately build an operating infrastructure and sales force," he wrote in a research note.

Kozul said the deal would represent a hedge for Royalty Pharma against any issues that might arise with BG-12, Biogen Idec's oral MS drug, which has a March 28 PDUFA date.

"Given Royalty Pharma already owns a stake in BG-12, we believe they are the ideal candidate for the transaction and willing to pay a slight premium for it. We do not believe other parties would be willing to offer more than this, given this is not a competition for an attractive pipeline, but rather for Tysabri royalties and leverages parts of Elan Capital's attractive financial make-up," Kozul wrote.

Strip out the $3.25 billion cash Elan will receive for Tysabri, once its asset disposal deal with Biogen Idec, of Weston, Mass., closes, and Royalty Pharma's offer represents a discount of almost 17 percent on Elan's remaining royalty stream for the product, Parkes said. Its royalty rate starts at 12 percent this year and rises to 18 percent thereafter on sales up to $2 billion. It rises to 25 percent on sales above $2 billion.

"The question is what do we think peak revenues for Tysabri can be," Nick Turner, analyst at Mirabaud Securities in London, told BioWorld International.

"It becomes a question of what is the revenue stream likely to be worth." Tysabri achieved total sales of $1.6 billion in 2012, but it is facing stiff competition from several recently approved and soon-to-be-approved MS drugs, Turner added.

In tabling the outline offer, Royalty cast doubt on Elan's ability to execute successfully its diversification strategy – "the current senior management team of Elan has not made any significant acquisitions or in-licensed any significant late-stage products for Elan and thus does not have a track record of generating attractive returns from acquisitions or in-licensed products for Elan," it stated.

For its part, Elan said it "notes the heavily conditional nature of this indication of interest.

Any credible proposal, which may be made by Royalty Pharma or any other party, will of course be considered by the company" alongside its newly minted strategy.

For Elan shareholders, the choice boils down to cashing in their chips now or backing a management team embarking on a build-and-buy strategy, when it is best known for selling off assets.

"If I was a shareholder of Elan, I would want that cash now and then Royalty Pharma can do what they want with it," Turner noted.