Irish biotechnology group Elan has dismissed a proposal from Royalty Pharma to buy the company for $6.5 billion (€5 billion) as “highly opportunistic” and “heavily conditional”.

Royalty Pharma announced yesterday it had made a proposal to acquire Elan for $11 (€8.32) per share, a 4 per cent premium to its closing price last Friday.

Management at Elan said the proposal was not “credible”, while stressing that it would consider the bid alongside a number of strategic options under discussion over the past year “to the benefit of our public shareholders”.

The approach from Royalty Pharma comes after Elan’s sale of its interest in multiple sclerosis drug Tysabri to Biogen for $3.25 billion earlier this month.

Share buybacks

Elan will return $1 billion to shareholders through share buybacks and plans to reinvest the remaining money into the company with strategic acquisitions and refinancing its existing debt.

Royalty Pharma said it was “surprised” that its proposal – initially made to Elan on February 18th – had not been mentioned when the firm announced plans last Friday to launch instead new acquisitions with part of its Biogen cash. However, under Irish Takeover Panel rules, a company is not required to disclose that it has received an offer from a third party unless rumour or speculation leads to an “anomalous movement” in its share price.

Company’s acquisitions

Royalty said the takeover offered Elan investors a way of avoiding annual operating costs of up to $170 million and lack of certainty over the company’s acquisitions and associated costs.

“The risks and lack of earnings visibility associated with Elan’s acquisition and in-licensing strategy are substantial,” it said.

“The current senior management team of Elan has not made any significant acquisitions or in-licensed any significant late stage products for Elan and thus does not have a track record of generating attractive returns from acquisitions or in-licensed products for Elan.”

Deutsche Bank analyst Richard Parkes said: “The offer is only a 4 per cent premium to the closing price on Friday and it’s close to a 10 per cent discount to our net present value, which is made up of the expected cash post the Tysabri transaction and the future value of the royalty streams from the drug.”

Product royalties

Royalty Pharma is one of the biggest private investment managers in royalties from biopharmaceutical companies. The group was established in 1996 and controls rights to 37 drugs, including Johnson Johnson’s Remicade, Merck’s Januvia and Gilead’s Atripla, including Pfizer’s Lyrica and Amgen’s Neupogen.

The next step will be for Royalty to approach Elan shareholders, the majority of which are institutional investors in the US.

Parkes added: “I think if the offer was raised closer to $12 it would test the resolve of shareholders more meaningfully and I think Royalty Pharma have probably got room to increase the bid more towards that kind of level.”

Elan shares rose as much as 10 per cent in early trade on the Irish stock exchange yesterday but closed lower following Elan’s response, adding 6.9 per cent to €8.52.

Royalty Pharma said it will continue its discussions with Elan and its shareholders over the coming weeks.

Credit rating agency Moody’s last night said its evaluation of Elan remains unchanged until there is greater clarity on the likelihood and the terms of any proposed transaction. – Additional reporting: Financial Times service