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Royalty Offer Remains Unattractive to Elan

Zacks Equity Research

Elan Corporation’s (ELN) Board of Directors again rejected Royalty Pharma’s offer to acquire all its shares. Following a thorough review and consideration process, Elan concluded that Royalty Pharma’s most recent offer also substantially undervalued the company.

Elan strongly advised its shareholders not to take any action in relation to Royalty Pharma’s latest offer.

Last week, Royalty Pharma had increased its offer to $13.00 per share in cash, along with a contingent value right (CVR) up to $2.50 per share, to acquire all of the shares of Elan. Elan, however, believes that the offer is wholly inadequate for its shareholders.

Royalty Pharma’s new offer represented an upfront cash value of $4.9 billion for Elan's Tysabri royalty ($6.2 billion including the maximum aggregate amount payable under the CVRs). Royalty Pharma believed that the amount represented a 52% to 92% premium to $3.25 billion, at which Elan sold approximately half of its interest in Tysabri to Biogen Idec Inc. (BIIB). Tysabri is marketed for the treatment of multiple sclerosis.

The new offer of $13.00 up to $15.50 per share also represented a premium of 56% to 97% to the undisturbed enterprise value at Elan. Royalty Pharma also reduced the Acceptance Threshold to 50% plus one Elan share in accordance with the terms of the revised offer document.

Elan shareholders were expected to receive $13.00 in cash along with one CVR for each Elan share held by them. Every CVR represented the contractual right to receive additional cash payments on achieving certain payment events.

Elan believes that the CVRs are well short of Tysabri’s value in the event of achievement of the events which would lead to the CVR payments. Last month Elan stated that the underlying value of Tysabri is $11.85 per share with an upside potential of $17.15 per share.

We remind investors that Royalty Pharma’s previous three offers of $12.50 per share, $11.25 per share and $11.00 per share were successively rejected by Elan’s Board.

Meanwhile, the Board of Elan continued to recommend its shareholders to vote in favour of its four previously announced strategic transactions. The strategic transactions include a couple of acquisitions in addition to the divestment of its pipeline candidate ELND005 (agitation/aggression in Alzheimer’s disease and Downs Syndrome).

The company also intends to initiate a cash repurchase program. However, these transactions will only go through upon approval from Elan’s shareholders after the company’s Extraordinary General Meeting on Jun 17, 2013. The company believes that these initiatives will help to diversify its business and reduce risk.

Elan presently carries a Zacks Rank #2 (Buy). Meanwhile, stocks like Jazz Pharmaceuticals (JAZZ) and Santarus Inc. (SNTS) currently look better positioned with a Zacks Rank #1 (Strong Buy).

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