Biogen to Pay Elan $3.25 Billion for Full Tysabri Rights

Biogen Idec Inc. rose to its highest value ever after the drugmaker agreed to buy partner Elan Corp.’s stake in the Tysabri multiple sclerosis medicine for $3.25 billion in cash plus future royalties.

Biogen gained 2.3 percent to $160.98 at 4 p.m. New York time, its highest price since the company began trading in 1991. The shares of the Weston, Massachusetts-based drugmaker have gained 32 percent in the last 12 months.

The agreement gives Biogen all rights to the product, the companies said in separate statements today, and leaves Dublin-based Elan to hunt for possible acquisitions with the proceeds. The companies had been splitting profit equally on Tysabri, which generated $1.6 billion in sales in 2012 and is Biogen’s second-best selling drug.

“The deal puts Tysabri marketing rights 100 percent in Biogen hands and accordingly we see incremental medium- to long-term upside potential to revenues,” Ravi Mehrotra, an analyst with Credit Suisse, wrote in a research note today, calling the purchase a “significant positive” for Biogen. He recommends buying Biogen shares.

The move ends speculation that Biogen would buy Elan and transforms the Irish company into an investment vehicle in search of health-care assets. Elan’s experimental drug for Alzheimer’s disease failed in late-stage trials last year, leaving Tysabri as the company’s single major product.

Elan’s Shares

Elan’s American depositary receipts, each representing one ordinary share, declined 10 percent to $9.40, their biggest one-day decline since July 24. The stock’s drop may reflect selling by investors who had been speculating on an acquisition by Biogen, Corey Davis, an analyst with Jefferies & Co. in New York, said in an e-mail.

Investors also may be skeptical that Elan can create more value through acquisitions than it would by repurchasing shares or paying dividends, said Richard Parkes of Deutsche Bank AG in London.

“This move gives us a chance to reinvest a fair amount of capital across a whole host of assets and helps us redefine and reposition the whole company,” Elan Chief Executive Officer Kelly Martin said in an interview. The company seeks a “balanced portfolio of assets” that would include products already on the market and experimental medicines, he said.

Under the terms of the deal, Biogen will pay Elan 12 percent of global net sales of Tysabri for the first year. After the first year, the payments will be 18 percent on annual sales of as much as $2 billion and 25 percent on sales of more than $2 billion. Elan has said Tysabri sales may reach $2.5 billion to $3 billion by 2016, Eric Schmidt, an analyst with Cowen & Co., wrote in a research note. He estimated $1.9 billion by 2017.

Companies’ Advisers

Centerview Partners LLC acted as exclusive financial adviser to Biogen, while Ropes & Gray LLP was legal counsel. Citigroup Inc. and Ondra Partners are acting as financial advisers to Elan, who had Cadwalader, Wickersham & Taft LLP and A&L Goodbody as legal counsels.

Tysabri was left as Elan’s single major product after the experimental Alzheimer’s drug bapineuzumab failed to improve cognitive or functional ability in patients in late-stage studies.

Future actions will be guided by Elan’s “assessment of business opportunities,” Martin said in the statement. “We are enthusiastic about the market opportunities around the globe and remain flexible and creative about the manner in which we would participate in those opportunities.”

Seeking Assets

Elan isn’t in talks to sell the company and has been negotiating for months to acquire assets, Martin, 53, said in the interview. The first investment could happen shortly after the deal closes, he said.

“Elan has no track record of running a fully integrated specialty pharma company, so a lot of uncertainty remains,” Guillaume van Renterghem, an analyst at UBS AG in London, said in a telephone interview. “Investors would probably appreciate getting their cash back instead of seeing the company diversify through the acquisition of assets.” He recommends buying Elan shares.

Martin, a former Merrill Lynch & Co. investment banker who joined Elan in 2003, planned to leave the company by May 1 last year. The board asked him to stay until the bapineuzumab trial results, and once the drug failed, efforts to find a new CEO ended. After the failure, Elan said it wouldn’t discourage suitors that approached it about an acquisition, and announced the spinoff of its drug discovery unit into a company called Prothena Corp., completed in December.

Earnings Impact

Elan didn’t consider winding down the company and returning the proceeds to shareholders, Martin told reporters today. He said he plans to stay involved as the Tysabri deal closes and as the company reviews possible acquisitions and licensing opportunities.

Elan plans to return a portion of the capital to shareholders though the amount and timing would depend on investment opportunities, he said. The $3.25 billion in cash that Biogen will pay equals more than half of Elan’s $6.23 billion market value.

For Biogen, purchasing full control of Tysabri will add about 20 cents to 30 cents a share to 2013 earnings, or 50 cents to 60 cents when adjusted for some items, the company said in a statement. Biogen said it anticipates the deal will continue to add to profit depending on how well Tysabri sells. The purchase has been approved by both companies’ boards and is expected to close by the end of the second quarter, Biogen said.

Next Step

“This is a natural next step for Biogen Idec and Tysabri, and it underscores our deep, long-term commitment to improving the lives of MS patients around the world,” Biogen Chief Executive Officer George Scangos said in the statement. “Full ownership will improve our ability to navigate its role as part of our leadership in MS.”

Tysabri is Biogen’s second-best-seller after the MS medicine Avonex. The company also is awaiting regulatory approval for another drug for MS, BG-12, now known as Tecfidera.

“Biogen has three sales forces, one for each product,” Credit Suisse’s Mehrotra wrote today. “However, over time, we see an obvious consolidation into one sales force with a central message that could effectively state, ‘We are THE MS Company. What approach to treatment would you or your patient like? We have the best drug in each segment.”’

Biogen told analysts in response to questions on a conference call today that it had no current plans to reorganize its sales strategy, though it wouldn’t rule out future changes.

Biogen also said it plans to open a $500 million to $750 million line of credit to fund working capital needs. The company had $3.7 billion in cash, equivalents and marketable securities at the end of 2012, according to a Jan. 28 statement.

Tysabri is a once-monthly infusion for relapsing forms of multiple sclerosis, a disease that affects more than 2.1 million people worldwide, according to the National Multiple Sclerosis Society.

Higher Efficacy

The drug has shown higher efficacy in staving off the neurological attacks that characterize relapsing MS. It is generally recommended for patients who have already tried other therapies because it’s associated with a rare brain infection called progressive multifocal leukoencephalopathy, or PML. Biogen has developed a test to help determine patients’ risk.

Biogen also is testing Tysabri in secondary-progressive MS, a form of the disease that follows relapsing-remitting in which the disease progresses more steadily. The drug is in the third and final stage of clinical trials generally required for approval, with data expected in 2015.

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