Elan Armed With Biogen Billions Hunts for Deals: Real M&A

Elan Corp. (ELN)’s impending cash influx will give the drug developer leeway to buy something it lacks: a product.

Elan agreed this month to sell its rights to a multiple sclerosis treatment to Biogen Idec Inc. (BIIB) for $3.25 billion and a share of royalties, leaving it with no medicines and more cash than almost every other specialty pharmaceutical company.

Even after the Dublin-based company spends $1 billion on buybacks, the windfall will give Elan cash equal to 45 percent of its $6.3 billion market value, topping 99 percent of peers, according to data compiled by Bloomberg. While Elan’s cash hoard has made itself a target, with RP Management LLC today disclosing a $6.5 billion offer for the drug developer, Royal Bank of Canada says Elan’s options include buying Acorda Therapeutics Inc. (ACOR) and Avanir Pharmaceuticals Inc. (AVNR) and using one sales force to sell their drugs for neurological disorders.

“Elan is going to go shopping with this significant cash inflow,” Steven Silver, a New York-based equity analyst at Standard & Poor’s, said in a telephone interview. “It’s a lot of money.”

Elan said Feb. 6 that it agreed to sell its stake in Tysabri, a multiple sclerosis medicine that’s administered intravenously, to Weston, Massachusetts-based Biogen. The companies had been splitting profits equally on the drug, which generated $1.6 billion of sales in 2012.

In addition to the cash, Biogen will give Elan 12 percent of net sales of Tysabri for the first year. The royalty will then increase based on the drug’s annual revenue.

Development Halted

The companies are awaiting regulatory approval and expect the transaction to close by June 30. At that point, Elan will be left without any major products. It ended development of one Alzheimer’s treatment, bapineuzumab, last year after it failed to improve symptoms. ELND005, another drug for the disorder, is in phase 2 trials and potential sales are years away, said Adrian Howd, a London-based analyst for Berenberg Bank.

Elan plans to use $1 billion of the Biogen cash to fund stock buybacks, the company said Feb. 22. In order to help spend the rest, Elan has already “spent significant time evaluating assets around the world and establishing relationships that might ultimately lead to constructive strategic transactions,” according to last week’s statement.

Chief Executive Officer Kelly Martin said in an interview this month that the first investment could happen soon after the Biogen deal closes. Jonathan Birt, a spokesman for Elan, declined to comment further.

Only One

The company had $608 million of cash and equivalents at the end of 2012. Adding the Biogen funds and deducting the planned buybacks yields a balance of about $2.9 billion, or 45 percent of its current market capitalization. Only Nagano, Japan-based Kissei Pharmaceutical Co. has a higher proportion among the 101 other specialty drug companies worldwide with market values exceeding $1 billion, data compiled by Bloomberg show.

Also working in Elan’s favor is that it’s based in Ireland, where the corporate tax rate is just 12.5 percent, versus the 35 percent maximum in the U.S.

“They’re sitting on a pile of cash,” Eric Schmidt, a New York-based analyst for Cowen Group Inc., said in a phone interview. Elan could leverage the low tax rate to facilitate the purchase of “some interesting products and potentially arbitrage the tax situation.”

While Martin said he isn’t focused on a particular therapeutic area, it would make sense to “roll up” some companies within the same area so that their products can be sold by the same sales team, according to Michael Yee, a San Francisco-based analyst for RBC. Elan’s first few deals may be small so that it can build a sales force, he said.

Acorda, Avanir

Acorda and Avanir already sell treatments for neurological disorders and could “benefit from a larger infrastructure, greater capital and a larger balance sheet,” Yee said in a phone interview. “Synergies can be derived.”

Acorda sells Ampyra for multiple sclerosis. The $1.2 billion company, which is based in Ardsley, New York, also makes Zanaflex for spastic muscles. Avanir, an Aliso Viejo, California-based company with an equity value of $375 million, is the maker of Nuedexta, used to control abnormal emotional outbursts.

Yee said Elan could also consider Anaheim, California-based Questcor Pharmaceuticals Inc. (QCOR), a $1.8 billion company that sells H.P. Acthar, a treatment for MS and infant seizures.

‘Too Many’

The conventional wisdom is that “there are too many single-product companies” in the neurology industry, David Amsellem, a New York-based analyst for Piper Jaffray Cos., said in a phone interview. “For a company that has deep pockets and is looking for higher-margin, longer-duration assets, those are companies that potentially could be sellable.”

Jazz Pharmaceuticals Plc (JAZZ), a $3.3 billion company, is another attractive takeover candidate in the industry, Amsellem said. The Dublin-based corporation’s best-selling medicine is Xyrem, a narcolepsy treatment.

Representatives for Acorda, Avanir, Questcor and Jazz said the companies don’t comment on takeover speculation.

Elan could be vulnerable to receiving takeover proposals, according to a Feb. 11 note by Guillaume van Renterghem, a London-based analyst for UBS AG.

Royalty Offer

Elan could become a “takeover candidate for an investor or organization aiming at extracting a cash return as quickly as possible,” he said in the note. “This could possibly lead to unwinding the company and running it for cash.”

RP Management, an investor in royalty streams from pharmaceuticals, offered to buy Elan for $11 per American depositary receipt, or about $6.5 billion, according to a statement today. Royalty Pharma, as the suitor is known, contacted Elan Chairman Robert Ingram on Feb. 18 and made a proposal at a meeting on Feb. 20 and hasn’t received a formal response, according to the statement.

The bid, a 3.8 percent premium to Elan’s Feb. 22 price, undervalues the company, Berenberg’s Howd said. Today, Elan’s ADRs climbed 6.4 percent to $11.28, signaling investors are betting Royalty Pharma’s offer is too low.

Given the company’s cash influx and recent comments about wanting to find new assets, it seems more likely that Elan will be a buyer, Cowen’s Schmidt said last week.

“They want to be acquirers,” he said. “We’re all just waiting to see what their next move is.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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