Elan Falls Most in Six Months on Skepticism on Strategy

Elan Corp. fell the most in almost seven months in New York trading on skepticism the Irish drugmaker will profitably reinvest the proceeds from selling the Tysabri multiple-sclerosis drug to Biogen Idec Inc.

Elan’s American depositary receipts declined 10 percent to close at $9.40 in New York, their biggest drop since July 24. In Dublin trading, the company’s shares rose as much as 11 percent before turning lower as Elan executives briefed analysts on a conference call.

Chief Executive Officer Kelly Martin plans to use much of the $3.25 billion in cash from the deal, which amounts to more than half of Elan’s market value, to invest in pharmaceutical assets. Investors are skeptical Elan will create more value through acquisitions than it would have by share buybacks or dividends, said Richard Parkes of Deutsche Bank AG in London.

“The selling means that investors are uncertain what the company will do going forward and what the return to shareholders will be,” Olav Zilian, an analyst with Helvea SA in Geneva, said in an interview. “In the end, the question is where the cash will be spent.”

The deal gives Biogen all rights to Tysabri, Elan said in a statement today. The companies had been splitting profit equally on the medicine, which generated $1.6 billion in sales in 2012. The deal ends speculation that Biogen would buy Elan and transforms the Irish company into an investment vehicle in search of health-care assets.

Asset Portfolio

“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,” 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.

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.

Trial Failure

Martin, a former Merrill Lynch & Co. banker who joined Elan in 2003, planned to leave the company by May 1 last year. The board asked him to stay until trial results were in from an experimental treatment for Alzheimer’s disease, bapineuzumab. 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 speculation mounted that Biogen would bid for the company.

“My guess is you’re now seeing the last remaining hope that Biogen might have bought the entire company come out of the stock,” said Corey Davis, an analyst at Jefferies & Co. in New York. He has a buy rating on Elan’s stock.

Van Renterghem, the UBS analyst, told Martin on the conference call that Elan “looks to me like a publicly traded private equity fund” and asked why investors would be happy with Martin investing their cash rather than doing it themselves. He also asked how many Elan directors wanted to return all the cash to shareholders.

“There was complete alignment as far as the direction of the company,” Martin said of the board. “We’re not going to be a private equity company, so to speak. We have some of the characteristics to your point, your valid point that we have capital to invest.”

Outmaneuvering Competitors

Analysts also questioned how Elan could compete with other drug companies that also are seeking acquisitions and unearth the rare assets that are attractive. “What gives you the confidence that you can outmaneuver competitors in a competitive environment for end licensing and acquisitions for late-stage products,” Parkes of Deutsche Bank said on the call.

Elan has an advantage over other potential acquirers because it has tax losses that it can use to offset profits, and also benefits from low Irish corporate taxes, Elan executives said. That makes it easier to find transactions that will pay off, they said. Elan is essentially paying no tax on the $3.25 billion from Biogen, Chief Financial Officer Nigel Clerkin said.

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.

“Investors need to trust that the cash will be invested in lower-risk assets,” said Jonathan Birt, a spokesman for Elan at FTI Consulting in London, when asked about the stock decline. “This is a good deal: Analysts see the total value at $6 to $8 billion.”

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