Elan Risking $2 Billion If Royalty Pharma Walks: Real M&A

Elan Corp. shareholders risk losing $2 billion by listening to the company’s board and rejecting Royalty Pharma’s takeover bid.

While Royalty Pharma boosted its unsolicited offer to as much as $15.50 a share this month, at least five analysts covering Dublin-based Elan see the stock falling if that bid disappears, according to data compiled by Bloomberg. UBS AG estimates a 28 percent plunge to $9.70, which would wipe out $2 billion of market value.

Shareholders vote next week on whether to endorse the sale to Royalty Pharma or back Elan Chief Executive Officer Kelly Martin’s strategy of buying drug rights as an independent company. Even after Elan said June 10 that other potential suitors had emerged, S&P Capital IQ said Royalty Pharma is probably the only realistic option. Leerink Swann LLC said Elan shareholders should accept the Royalty Pharma transaction.

“The acquisition is really supporting the stock price at this point,” Steven Silver, a New York-based equity analyst at S&P, said in a telephone interview. “While Elan’s management continues to outright dismiss all of Royalty Pharma’s offers, I would think that the raised offer should entice some Elan shareholders. It’s a fair offer.”

Royalty Pharma sweetened its bid on June 7 to $13 a share in cash plus as much as $2.50 a share in additional payments if performance targets are met. This was its fourth attempt to purchase Elan in less than four months, following an $11-a-share bid in February and $11.25 and $12.50 offers in May.

Maintaining Pressure

While investors viewed the starting bids as too low, the latest offer may finally be enough to close the deal, said Keith Moore, an event-driven strategist at MKM Partners LLC in Stamford, Connecticut.

“Royalty Pharma has kept up the pressure,” he said in a phone interview. “Shareholders are most likely going to side with Royalty Pharma now. Ultimately, it was going to be hard for Elan to fight the battle.”

Representatives for Elan declined to elaborate beyond its recent comments to shareholders. Elan said June 3 that Royalty Pharma’s bid is too low because its interest in Tysabri and net cash should be valued at $15.50 to $20.80 a share. The stock closed at $13.56 yesterday.

No Products

Elan ended development of Alzheimer’s medicine bapineuzumab last year after it failed to improve symptoms. It then sold its stake in multiple sclerosis treatment Tysabri to Biogen Idec Inc. for $3.25 billion of cash. While Elan receives a royalty on the drug’s revenue, the sale left it without any major products.

Selling to Royalty Pharma would enable shareholders to avoid the risks of CEO Martin’s plan to reinvest the cash. Elan’s owners will vote June 17 on four transactions he’s proposed: a $1 billion investment in Theravance Inc.’s royalties; a 263.5 million euro ($351 million) takeover of AOP Orphan Pharmaceuticals AG; the spin-out of an experimental Alzheimer’s drug called ELND005 to Speranza Therapeutics; and $200 million in share buybacks.

If the proposals are voted down, Royalty Pharma will be allowed to proceed with its acquisition of Elan.

Today, Elan shares lost 3.4 percent, the most in four months, to $13.10.

The decline “suggests that some Elan stockholders are worried that Elan’s proposals may be approved, leading Royalty Pharma to have to lapse its offer,” Royalty Pharma CEO Pablo Legorreta said in a statement today. “If Elan’s proposals are approved and Royalty Pharma’s offer does lapse, I would expect Elan’s stock price to fall far further. I urge Elan stockholders to vote against all four of Elan’s proposals.”

Analysts Puzzled

Elan’s recent estimate that it should be valued at $15.50 to $20.80 left analysts such as Leerink Swann’s Marko Kozul puzzled.

“I don’t think those numbers are anywhere near realistic,” San Francisco-based Kozul said in a phone interview. “We would recommend that shareholders take the deal.”

Deutsche Bank AG estimates Elan’s value as a standalone entity is $12.10, while Royal Bank of Canada sees the stock falling to at least $12 in the absence of a takeover. MKM sees it tumbling to $11, and Leerink Swann’s Kozul pegs it at $10.

Guillaume van Renterghem, a London-based UBS analyst, suggests $9.70, which would give Elan a market capitalization of $4.96 billion, down from $6.93 billion yesterday.

Undervaluing Tysabri

Elan said June 10 that Royalty Pharma’s revised takeover proposal still undervalues its rights to Tysabri. The drug is already marketed as a once-monthly intravenous infusion for relapsing forms of MS and generated about $1.6 billion in sales last year. It’s also being tested for another form of the disease called secondary-progressive MS. Results of the trial are expected in 2015.

Royalty Pharma said it will make its first CVR payment to Elan shareholders if Tysabri receives approval from the U.S. Food and Drug Administration for expanded usage.

Physicians that Kozul surveyed planned to increase use of Tysabri in secondary-progressive MS by 18 percent on average if the trial succeeds. That would add about 80 cents a share to his $10 fair value estimate for Elan, though he said not to count on positive results from the trial.

“Royalty Pharma’s being quite generous in providing up to $2.50 when our survey is telling us that the average benefit would be only 80 cents,” he said.

Additional Interest

Still, RBC’s Michael Yee said some traders are betting on a higher offer, either from Royalty Pharma or another suitor. A specialty pharmaceutical company could acquire Elan to take advantage of its low Irish corporate tax rate, the San Francisco-based analyst said.

Elan has hired Citigroup Inc. to assess “several unsolicited corporate enquiries.”

For other acquirers, the tax benefits from a takeover of Elan and possible cost-cutting opportunities may not be enough to justify a deal, David Maris, a New York-based analyst at Bank of Montreal, said in an interview this week. While generic drugmaker Mylan Inc. and Forest Laboratories Inc., which develops an Alzheimer’s drug, have the wherewithal to buy Elan, it wouldn’t make much sense, Maris said.

Nina Devlin, a spokeswoman for Canonsburg, Pennsylvania-based Mylan, declined to comment on whether it’s weighing a bid for Elan. Frank Murdolo of New York-based Forest Labs didn’t respond to a phone call or e-mail.

With much of Elan’s shareholder base now made up of merger arbitrage funds, the odds the company is sold to Royalty Pharma have increased, MKM’s Moore said.

Selling Shareholders

Fidelity Investments and Wellington Management Co. are among institutional investors that cut their Elan stakes during the first quarter. Fidelity, which remains the biggest shareholder, sold off about one-third of its holdings. In May, Royalty Pharma CEO Legorreta said those reductions are a sign the owners were content with the takeover offer.

Nicole Goodnow, a spokeswoman at Fidelity, declined to comment. A representative at Wellington didn’t return a phone call seeking comment yesterday. The investment firm had declined last month to respond to Legorreta’s comments.

Investors will probably vote against Elan’s proposals, putting pressure on the company to strike a friendly deal with Royalty Pharma at a higher price, according to John Maysles, an event-driven senior analyst at Elevation LLC in Los Angeles. If Elan continues to fight the deal, Royalty Pharma could just go through with a hostile takeover if it has enough shareholder support, Maysles said in a phone interview.

“The market’s looking for Royalty to sweeten one last time,” he said. “It will come down to whether or not the two parties talk and are able to negotiate a higher bid. If not, Royalty Pharma can go directly to shareholders with what they have now or maybe a slightly improved cash offer.”

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