Royalty Pharma makes $6.5B unsolicited bid for Elan - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)
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Royalty Pharma makes $6.5B unsolicited bid for Elan

by Andrew Bulkeley  |  Published February 25, 2013 at 8:48 AM
Just days after Elan Corp. plc did its best to assuage investors' concerns about its future strategy, pharmaceuticals investor RP Management LLC swooped in Monday, and unveiled a surprise $6.5 billion offer for the drugmaker, attempting to capitalize on the uncertainty surrounding the Dublin-based company.

RP Management, the New York investment vehicle of former Lazard banker Pablo Legorreta, said it would offer $11 a share for Elan. The bid represents a 3.8% premium to the stock's Friday close and a 12.6% premium to Elan's $10.35 per share closing price on Feb. 15, the last trading day before RP approached the company about a potential buyout.

The offer is also worth 16.4 times and 12.1 times RP's projected 2014 and 2015 Ebitda for Elan, respectively, the potential buyer said.

The announcement switched on Elan shares, which gained 9.5%, or €0.76, in midday Dublin trading to €8.73, or $11.61 above RP's proposed approach. Its stock jumped to $11.41 premarket on Nasdaq.

The suitor, also known as Royalty Pharma, met Elan representatives on Feb. 20 to outline its approach. But the target has since ignored its overtures and failed to mention the negotiations while detailing its new strategy Friday for investors.

RP has made its pitch at a time of considerable weakness for Elan. The target has already signed a deal to sell the rights to its lone revenue driver, multiple sclerosis treatment Tysabri, to Biogen Idec Inc. for $3.25 billion. Elan and Biogen share the rights and profits to the drug equally, but Elan craves independence and wants the financial and strategic freedom to turn itself into a diversified pharmaceutical entity. As such, Elan, now essentially a pharmaceutical shell receiving royalties on Tysabri, aims to use the cash from the Biogen deal to acquire or in-license drugs and build up a new portfolio. The company believes it can leverage its Irish tax structure in acquisition talks.

Analysts, however, are skeptical of Elan's prospects. While Elan is expected to attempt to roll up either in-market or close to market products, analysts are tepid as to whether it can find worthwhile assets at good valuations given the competition in the industry for such drugs.

RP is capitalizing on that uncertainty with its bid. In its statement Monday, RP attacked Elan management's lack of experience acquiring or in-licensing significant late-stage products. It also pressured investors, noting their "simple and clear choice." Either they can support a company whose assets consist of cash and a royalty stream while management invests in a "variety of yet-to-be-disclosed business assets," or sell their stock for an amount the buyer believes to represent full value for the company today.

"[T]he risks and lack of earnings visibility associated with Elan's acquisition and in-licensing strategy are substantial," RP wrote, cautioning that several companies have suffered "poor returns" pursuing such a strategy and that Elan would have to build its own infrastructure and sales force just to gain synergies from any prospective buyouts.

Analysts such as Leerink Swann LLC's Marko Kozul have sided with RP.

"We believe Royalty Pharma is the best candidate for this transaction and the deal as it is structured and we recommend ... shareholders support it," he wrote in a note to investors Monday. Kozul added that he doesn't believe anyone else would offer more for Elan given "this is not a competition for an attractive pipeline" but rather a play for Tysabri royalties that leverages parts of Elan's "attractive financial makeup."

"Ultimately, we believe Royalty Pharma will end up with this asset and if Elan ... management declines the current bid, [its] shareholders may protest and keep management at the negotiating table," he wrote.

Elan couldn't immediately be reached for comment, but it released a statement Monday chiding RP for its "highly opportunistic timing" in making an "indicative, conditional proposal."

"[This comes] before shareholders have had the opportunity to assess and realize the full benefit of the Tysabri transaction and the partial unlocking of its value," Elan said.

Elan also noted the "heavily conditional nature" of the offer and said it would consider any "credible proposal which may be made by Royalty Pharma or any other party" alongside its current plan. Elan told investors Friday it would launch a $1 billion share buyback along with its acquisition strategy. RP has reserved the right to reduce its bid if Elan moves forward with any such plans.

RP said it would finance the acquisition from existing funds as well as new financing from a consortium led by Bank of America Merrill Lynch. It said its management activities give it access to investment capital of $1 billion.

Elan developed the Tysabri MS drug together with Biogen and surprised investors in early February by agreeing to sell its half of the medicine to its partner. In addition to the one-time sale price, Elan will also pocket 12% of Tysabri's global net sales over the first year after the deal closes. Thereafter, Elan will get 18% of up to $2 billion of Tysabri annual global net sales and 25% of sales that exceed $2 billion. The drug had revenue of $1.6 billion in 2012.

Johnson & Johnson is Elan's largest shareholder, with an 18% stake.

RP was founded in 1996 by Legorreta and pockets revenue earned on drugs developed elsewhere by buying into royalty streams. The company has royalties on 37 marketed treatments, among them blockbuster biologics such as AbbVie Inc.'s Humira and J&J's Remicade.

RP is taking advice from JPMorgan Chase & Co., BofA and Groton Partners LLC.

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Tags: Bank of America Merrill Lynch | Biogen Idec Inc. | Elan Corp. plc | Groton Partners LLC | JPMorgan Chase & Co. | Kelly Martin | Lazard | Pablo Legorreta | RP Management LLC | Tysabri

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