Elan shareholders mull the unravelling of a business

How the Irish biotech firm got to this point and how the EGM may play out

Sun, Jun 16, 2013, 16:09

Irish biotech group Elan has been through many critical moments in its volatile history. Tomorrow, shareholders gather for an extraordinary general meeting that increasingly seems likely to mark the beginning of the end for Elan as an independent entity.

Q. How has Elan got to this point?

A. Back in February, Elan sold its share of the blockbuster multiple sclerosis drug Tysabri, which it had discovered, to its US partner Biogen, for $3.25 billion plus a significant share of future royalties.

Shortly afterwards, Royalty Pharma, a Dublin-based fund that acquires royalty rights to patented drugs announced its interest in acquiring Elan.

Having initially told shareholders that it would take some time to decide on any payback to shareholders from the Biogen deal, and to announce plans for investing the rest of the cash, Elan then announced a major $1 billion share buyback via a Dutch auction. It also announced plans to channel 20 per cent per cent of future royalty income from Tysabri back to shareholders in dividends and purchase the $600 million outstanding debt in the company held by bondholders.

The share buyback was approved overwhelmingly at an extraordinary general meeting on April 12th, with most of it eventually taken up by Johnson & Johnson selling down its 18 per cent stake in Elan.

Three days later, Royalty Pharma submitted a formal offer for the business.

Q. So how does this get us to tomorrow’s meeting?

A. A month after the initial Royalty offer, Elan embarked on a spending spree. In the space of a week, it announced that it would spend:

l $1 billion acquiring a portion of the royalties of four respiratory drugs that US company Theravance Therapeutics is developing with GlaxoSmithKline, with 20 per cent of those royalties passing to shareholders along with the Tysabri dividend;

l €263.5million in cash and shares for specialty pharma business AOP Orphan, rising possibly to €533.5 million depending on pipeline development;

l $40 million for a 48 per cent stake in Dubai-based emerging economy focused specialty pharma business Newbridge, with an option to purchase the remaining stake in Newbridge by 2015 for $244 million;

l $70 million into the spin-out of its last remaining development programme ELND-005 to privately-held Speranza Therapeutics, in which it will have an 18 per cent stake.

l $200 million into a new share buyback programme.

l $800 million in a new bond issue to raise funds on the debt markets repayable in 2021. This rose subsequently to $850 million.

The acquisitions require approval at an extraordinary general meeting and the fundraising is dependent on those deals progressing.

Q. And what’s been happening in the meantime with the Royalty offer?

A. Elan rejected the Royalty offer back on April 22nd. Royalty has not given up however, raising its bid from the original $11.25 a share to $12.50 a share on May 20th and $13 a share (plus a “contingent value right” of up to $2.50 a share – this means they will pay up to a further $2.50 a share if sales of Tysabri rise towards the upper limit of Elan’s suggested scenario) on June 7th.

However, it has consistently said its offer is dependent on shareholders rejecting the Elan transactions for Theravance et al. In a misstep, it stated formally in its offer document that its offer would “lapse” – i.e. it would be forced to withdraw it – if any of the measures (the acquisitions of Theravance and AOP Orphan, the spin-off of ELND-005 or the share buyback) passed. It has tried since to persuade the Irish takeover Panel to allow it to continue with its offer if either the buyback and/or the ELND-005 motions succeeds. That was rejected on June 6th, a move that Royalty is now challenging in the High Court. That hearing will not take place until after the EGM.

Q. If shareholders passed the last EGM, why is that not likely this time?

A. Last time round was a simple share buyback. This time, investors are being asked to back an ambitious plan. There is a view that Elan’s proposals have been designed more as a defence against Royalty’s bid than any considered strategic vision.

Most people vote by proxy – submit their intentions in writing ahead of the meeting – and Royalty reported that a review of proxies for US shareholders showed the Theravance and AOP Orphan resolutions will not succeed and that the ELND-005 might not. It appears a narrow majority favours the buyback.

Those proxies represent around 61 per cent of all shares. A further 14 per cent of shares held by US investors have not been voted. Ordinary shareholders in Ireland and elsewhere hold just under 25 per cent of the shares. Some of those will also have been voted by proxy (by Saturday’s deadline). Other investors will vote at the meeting. Those votes could be critical – especially in relation to ELND-005 and the share buyback.

Q. And what then?

A. The company, apparently conceding it is unlikely to get all resolutions through (and therefore also negating the $850 million fundraising), announced on Friday that they are formally putting the company on the market. It says it has, in the past week, received a number of unsolicited offers. However, it continues to advise against accepting the Royalty bid – the only firm approach to date – saying it fundamentally undervalues the company.