Alzheimer’s Setback Makes Elan Takeover Bait to Biogen

Bad news for Elan Corp. (ELN)’s Alzheimer’s drug is turning into good news for Biogen Idec Inc.’s takeover options.

Elan sank 15 percent, the most since 2009, on July 24 following disappointing results for bapineuzumab, an Alzheimer’s therapy developed with Pfizer Inc. (PFE) and Johnson & Johnson. The failure of that drug would leave Elan with a single major product, the multiple sclerosis treatment Tysabri that Biogen co-owns, priming the $7.1 billion company for a deal with Biogen, Jefferies Group Inc. and Royal Bank of Canada said.

While data compiled by Bloomberg show Elan is still more expensive relative to earnings than every specialty drugmaker greater than $5 billion, the chance to fully own Tysabri may spur Biogen (BIIB) to offer at least $15 a share, a 25 percent premium to yesterday’s price, RBC said. Tysabri’s sales will double to $3 billion a year within half a decade, and Biogen can generate more profit as the only owner, according to Jefferies. An acquirer of Dublin-based Elan would also benefit from Ireland’s low corporate tax rate, RBC said.

“Biogen would love to buy Elan to own 100 percent of Tysabri,” Ib Sonderby, founder and chief executive officer of Zoar Invest in Copenhagen, said in a telephone interview. Sonderby, who says he’s owned Elan shares for a decade, pushed for changes to its board in 2010. “It would be a much easier target for them if they fail on bapineuzumab.”

Phone calls and an e-mail message to Elan weren’t returned. Biogen Chief Financial Officer Paul Clancy declined to comment on the possibility of the Weston, Massachusetts-based drugmaker buying Elan.

‘Great Partner’

“They’re a great partner,” Clancy said in a phone interview. Tysabri is a “great therapy for patients.”

Elan would be the drugmaker’s biggest deal, topping the $6.1 billion merger of Biogen Inc. and Idec Pharmaceuticals Corp. that created the company in 2003, data compiled by Bloomberg show.

American depositary receipts of Elan tumbled as low as $11.31 this week after Pfizer said bapineuzumab failed to improve symptoms of dementia in the first of four late-stage trials. Pfizer, J&J (JNJ) and Elan are trying to develop the first therapy targeting an underlying cause of Alzheimer’s, which afflicts an estimated 5.4 million Americans, rather than just its symptoms.

Today, the shares fell 0.6 percent to 9.54 euros in Dublin. They rose 0.2 percent to $11.99 in New York.

The three other bapineuzumab studies probably won’t show positive results, according to Michael Yee, a San Francisco- based analyst with RBC. While a disappointment, failure simplifies Elan’s outlook and makes a takeover by Biogen more likely, he said.

Consolidating Profits

“One should assume that bapi does not work,” he said in a phone interview. If the studies fail, Elan’s stock may fall to $10, Yee added. There is “strategic value for Elan to be acquired by Biogen, because they could consolidate the 50 percent partnership stake in Tysabri. They would be consolidating the profit share, cutting costs and driving accretion.”

Biogen could pay $15 a share and still boost its earnings, the analyst estimated. Elan closed at $11.97 yesterday. The company, at one time valued at $21 billion, has retreated 82 percent since its peak in June 2001. The Standard & Poor’s 500 Index advanced 11 percent over that span. Elan posted at least seven straight years of net losses before earning $560.1 million last year.

After Elan’s plunge this week, its Irish shares are still valued at 51 times profit from the past 12 months, data compiled by Bloomberg show. That’s more than double the industry median and the highest among similar-sized companies.

‘Real Asset’

An acquirer would benefit from Ireland’s low corporate tax rate and Elan’s $3.19 billion in net operating losses at the end of 2011, which could be used to reduce the buyer’s taxes, said Corey Davis, a New York-based analyst for Jefferies.

“The real asset is the fact that they’re an Irish company,” Davis said in a phone interview, citing the country’s 12.5 percent corporate tax rate that prompted two other transactions in the industry last year.

Jazz Pharmaceuticals Inc. of Palo Alto, California, bought Dublin-based Azur Pharma Ltd. and moved to Ireland. The combined company, which makes a narcolepsy drug, is known as Jazz Pharmaceuticals Plc. (JAZZ) Alkermes Plc (ALKS), which makes an addiction therapy, bought Elan’s drug technologies unit and moved its headquarters to Dublin from Waltham, Massachusetts.

Davis estimates Elan would fetch as much as $15 a share in a takeover, 9.9 percent more than the current 20-day average. Buyers have paid an average premium of 40 percent in pharmaceutical and biotechnology deals greater than $1 billion in the last three years, data compiled by Bloomberg show.

Elan’s Losses

Biogen buying out its partner would follow the pattern set by GlaxoSmithKline Plc, which agreed this month to pay $3 billion for Human Genome Sciences Inc. (HGSI), RBC’s Yee said. The two drugmakers collaborated for two decades before London-based Glaxo made its takeover approach to gain full ownership of the lupus drug Benlysta and other experimental therapies.

Human Genome’s shares had tumbled 75 percent in the year before Glaxo’s interest became public in April, as Benlysta’s initial sales disappointed investors.

Tysabri, administered intravenously, produced $1.5 billion in 2011 sales and is Biogen’s second-best selling drug behind Avonex, an MS therapy delivered through a shot. The company is awaiting approval in the U.S. and Europe for BG-12, its first pill for the disease, which may draw peak annual revenue of more than $3 billion if approved, said Eric Schmidt, a New York-based analyst at Cowen & Co.

BG-12

Positive data on BG-12 drove Biogen’s shares up 155 percent in the past two years, giving the drugmaker the third-biggest gain in the NYSE Arca Biotechnology Index (BTK) of 20 companies. A decision from the U.S. Food and Drug Administration is expected this year.

Elan may become an even more attractive target after BG-12 enters the market next year, said Marko Kozul, an analyst for Boston-based Leerink Swann LLC. The drug may eat into some of Tysabri’s sales and further weigh on Elan’s shares, he said.

“It would make sense for Biogen to see how BG-12 launches and what share of Tysabri’s market does it take,” Kozul said in a telephone interview. “That could potentially further weaken Elan, so if you’re Biogen, you could buy Elan at a cheaper price.”

BG-12 and other medicines’ prospects mean that Biogen doesn’t need to buy Elan, Cowen’s Schmidt said. In addition to Tysabri, BG-12 and Avonex, Biogen sells the cancer therapy Rituxan, and late-stage data are expected this year on experimental medicines for Lou Gehrig’s disease and hemophilia.

Earnings Estimates

Analysts project Biogen’s revenue will climb 50 percent to $7.56 billion by 2015, according to estimates compiled by Bloomberg. Elan’s may increase 60 percent, the forecasts show.

Biogen “has plenty of great growth drivers” without owning all of Tysabri, Schmidt wrote in an e-mail.

If Elan’s bapineuzumab does well in future studies, the drugmaker may draw takeover interest from New Brunswick, New Jersey-based J&J or New York-based Pfizer, Sonderby said.

Joan Campion, a spokeswoman for Pfizer, and Bill Price, a spokesman at J&J, said the companies don’t comment on market speculation, when asked whether they are interested in acquiring Elan.

Irish Tax

Failure in the first late-stage study doesn’t mean bapineuzumab won’t succeed, Rudolph Tanzi, professor of neurology at Harvard Medical School in Boston, said after the data were reported. The trial was done in patients genetically predisposed to Alzheimer’s, and doctors are awaiting results from studies in patients without the higher genetic risk.

If those studies go poorly, Elan would be left with little other than Tysabri “except for a ton of things in their early- stage pipeline,” Jefferies’ Davis said.

“In the hands of Biogen, with synergies and maybe being able to take advantage of their Irish tax rate, it could be worth a lot more to them,” the analyst said. If “the next bapi trial fails and we’re down to $10 or so and Biogen comes in and offers $15, it would be a hard offer for Elan to refuse.”

To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Reg Gale at rgale5@bloomberg.net

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