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Elan outlines how it will use Tysabri sale proceeds

by Jonathan Marino  |  Published February 22, 2013 at 4:27 PM
MoneyPill227x128.jpgElan Corp. plc on Friday offered investors a peek at its plans for the $3.25 billion in cash it hauled in by selling the shared rights of its lone revenue driver, multiple sclerosis blockbuster Tysabri.

Dublin-based Elan, which is selling Tysabri to Biogen Idec Inc., outlined in a Friday statement at least three strategic moves it will make once its deal with Biogen closes.

First, Elan plans to use an unspecified portion of the proceeds to invest in a variety of business assets that will give the company a diversified presence both geographically and in terms of therapeutic focus. Elan said it has spent "significant time" leading up to the deal evaluating assets and forming relationships that might lead to "constructive strategic transactions."

Elan, led by CEO Kelly Martin, indicated that it will be in position to announce "a number" of strategic deals once it consummates the Biogen transaction.

RBC Capital Markets LLC analyst Michael Yee believes Elan will roll up synergistic assets.

"We think the first few deals will be relatively small to start," he wrote in a note to clients Friday, adding that the company would need to first assemble a commercial sales force and then add products on top of it. "We expect Elan to have $2 [billion] to $3 [billion] in cash to work with to buy things," he wrote.

Yee noted that for Elan to make the leap to a $12 to $15 per share value, it would need to acquire products earning $500 million or more in annual revenue on top of the Tysabri royalties it is retaining and generate around $500 million in net income. Elan's stock traded at $10.90 per share early Friday, moving up roughly 6% from a $10.29 per share close on Thursday.

In a previous research note, Yee has warned that such upside isn't easily achievable in the short term. Marko Kozul, an analyst at Leerink Swann LLC, echoed those sentiments Friday. Kozul pointed out that Elan has indicated an interest in looking for assets addressing large market opportunities through small patient numbers -- just the type of drugs other pharmaceutical buyers have been chasing for years.

"We believe this reflects an orphan disease-like candidate which for considerable time has been a 'hot area' and well-vetted landscape with few stones unturned," Kozul wrote Friday. "While [Elan] may have spent significant time evaluating such assets globally, we are skeptical that these assets are easy to find or at attractive valuations."

Elan has said it could leverage its low Irish tax structure to create more value than a traditional acquirer, lowering the tax rate of targets if they are based in high-tax jurisdictions. It has also floated the idea that it could use its sizable cash war chest to pounce on biotechnology companies in need of liquidity.

Based on such requirements, Yee has speculated that potential targets include Acorda Therapeutics Inc. ($1.19 billion market capitalization), which has drugs for MS and spasticity; Avanir Pharmaceuticals Inc. ($375.91 million), which targets central nervous system disorders; XenoPort Inc. ($344.55 million), which produces treatments for neurological disorders and is developing treatments for Parkinson's disease and spasticity; and Auxilium Pharmaceuticals Inc. ($811.75 million), which makes urology and sexual health drugs.

Acquisitions aside, a second use of the Tysabri deal's proceeds will be share repurchases. Elan intends to institute such a program by utilizing $1 billion of the up-front cash it gets from Biogen. The company added that the up-front cash will have "little to no tax burden" given it is based in Ireland, and that following the deal, it will retain more than $1.5 billion accumulated tax losses. Elan has about 600 million shares outstanding.

Lastly, while the company was unclear if it would use money from the Tysabri deal for debt repayment, it did say that the transaction will give it the opportunity to refinance roughly $600 million in outstanding debt. Elan will divulge the details of the refinancing following the deal, which is expected to close by the end of the second quarter.

Elan used to split the profits and control of Tysabri equally with Biogen, but on Feb. 6 it sold its share of the drug to Biogen for $3.25 billion. Biogen now owns full strategic, commercial and decision-making rights to the drug, while Elan retained a piece of future sales.

Tysabri brought in $1.51 billion in worldwide revenue in 2011. That figure climbed to about $1.6 billion in 2012.

Tags: Acorda Therapeutics Inc. | Auxilium Pharmaceuticals Inc. | Avanir Pharmaceuticals Inc. | Biogen Idec Inc. | Elan Corp. plc | Kelly Martin | Tysabri | XenoPort Inc.

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