Elan Corp. plc's financial struggles and subsequent restructuring will have a widespread impact on the North American biotechnology industry, already operating in a depressed market, and a number of the 55 joint ventures biotech companies have with the Dublin, Ireland-based firm.

In its recovery plan, some details of which were issued July 31, Elan also reported that it would restructure the company, shedding employees and assets outside its new areas of focus.

"The plans are to retain a number of the relationships that are compatible with our core competencies in the areas of neurology, pain and autoimmune diseases," Garo Armen, chairman of Elan, told BioWorld Today Wednesday as employees were being laid off in Dublin.

Armen said Elan would "evaluate appropriately" the joint ventures, which Elan values as "in excess of $1 billion" to the company, in deciding which of them to retain. No decisions have been made, and it may be "several years" before they all are worked out.

"Whereas the joint venture areas were much broader," now the business ventures have to "meet the focus of the new company," he said.

"Elan had very lofty goals, including moving into oncology and primary care and hospital products," Armen said, but "because of the changes that have been imposed upon the company," that will no longer be possible.

Elan also said when announcing its restructuring plan that it intends to divest financial assets, noncore businesses, products and assets as part of a plan to raise $1.5 billion in the next nine months and an additional $500 million by the end of 2003.

That is where Elan is likely to impact biotechnology companies in North America.

Elan has retained investment banking firms Morgan Stanley & Co. Inc., of New York, and UBS Warburg LLC, of Stamford, Conn., to determine which assets to retain and which to divest. The firms also will be doing "balance sheet restructuring" and "simplifying some of the financial structures that have been put into place," Armen said.

A source close to Elan said that the investment firms may consider auctioning off the joint ventures, with Morgan Stanley preparing the documents and then sending them out to prospective buyers. However, the individual said the process is "not a fire sale."

"We're in the process of determining how we can optimize the monetary potential of these opportunities so we can pull back from supporting them on an ongoing basis while we reap the benefits of our investments up to this point," Armen said.

"We need to work with these companies to make sure there is as orderly a transition as possible," Armen said, but noted that won't be possible in some cases.

In sum, Armen said, "We hope to extract as much as possible."

"We have a vested interest in their fortunes, as well, because we don't want to see their values decline," Armen said.

The impact of the Elan moves will vary from company to company.

Privately held ChemGenex Therapeutics Inc., of Menlo Park, Calif., entered into a joint venture in cancer with Elan in April 2001, yet Harry Pedersen, ChemGenex's executive vice president of corporate development, said any divestiture would have "minimal impact" on ChemGenex because the project "hadn't scaled up yet."

"They seem to be open to winding it down," he said. "They appear to be very sensitive to the needs of their partners. They don't want to cause damage to the companies. They're doing their best to minimize the impact on the companies. The impact hasn't been good, obviously, but we'll see."

Elan Heavily Invested In Joint Ventures

Elan has invested quite a bit in its joint venture partners.

Pharmaceutical analyst Peter Frawley, of Merrion Stockbrokers Ltd. in Dublin, said, "theoretically," most of the joint ventures are funded 80 percent by the partner and 20 percent by Elan. However, based on Elan's reporting in its 2001 annual report, Frawley said it is evident that Elan actually was funding about 90 percent of the research and development costs of the ventures.

"One of the biggest drains on their cash was the funding of the joint venture programs that they had, and because the drugs were beginning to go into Phase I and Phase II," the contributions by Elan were growing, Frawley said.

"They were funding 90 percent of the cost either through direct investment or loans to the joint venture partners," Frawley said.

Little is known about many of the joint venture pipelines, Frawley said, and if there are blockbusters in the pipeline, then the share prices of the publicly traded joint venture partners do not reflect it, since most have lost significant value since the deals were formed - a widespread trend, however, certainly not confined to biotech companies partnered with Elan.

"Given the share price of the joint venture partners it wouldn't initially give you confidence in the quality of those pipelines, and you would question the appetite of other investors" to take Elan's place as a partner, Frawley said.

Isis Pharmaceuticals Inc., of Carlsbad, Calif., restructured its joint venture with Elan in early July. Isis prepaid $19.7 million in 12 percent convertible debt held by Elan, $14.7 million of which was in cash. It was determined that Isis would fund its portion of the ongoing joint venture and development, rather than accruing additional convertible debt. The company said the transaction saved Isis $12.3 million in interest and allowed it to avoid 2.2 million shares of potential dilution over the remaining life of the obligation.

Isis has two joint ventures with Elan, Orasense Ltd. and HepaSense Ltd., and Isis owns an 80.1 percent share of each.

Inex Pharmaceuticals Corp., of Vancouver, British Columbia, entered its joint venture, Onco TCS, with Elan for cancer treatments in 2001. The company is set to release pivotal data in the fourth quarter, said biotech analyst Christine Charette of BMO Nesbitt Burns Research in Vancouver, British Columbia. The Onco TCS (Transmembrane Carrier System) deal was valued at $39 million and initiated in May 2001, with Elan providing the majority of the funding for the program. Onco TCS is the company's proprietary formulation of a lipid-based delivery system. The system encapsulates the drug vincristine. Inex sold 5.7 million shares of its common stock at C$7 per share to raise C$40 million (US$25 million) in November. (See BioWorld Today, Nov. 27, 2001, and May 1, 2001.)

Because Inex is so far along in its clinical trials, Charette said, "Elan not being there would not be an impact."

"The only question right now is, does Elan walk away or does Inex pay Elan to exit the joint venture," Charette said.

In a research note dated July 9 commenting on Elan's plan to raise cash by selling assets, Charette wrote, "If Inex buys Elan out of the joint venture with equity, Elan is likely to want early liquidity to meet its nine-month time frame.

"The potential stock overhang and the uncertainty is likely to lead to weakness in Inex," she wrote.

No Comments