We lived a long time with Elan (ELN). We always appreciated its science and scientists, and, at times, we hated its former management, or whoever caused it to turn from ascending towards becoming a citadel of sciences, especially neurosciences, into an almost bankrupt firm with less everything valuable in it than what was necessary for its survival. What saved it at the time was the emergence of Tysabri, for multiple sclerosis, which we knew it was second to none in treatment of relapsing remitting multiple sclerosis. We were certain that this drug, like Aaron's cane, would swallow up all magicians' staffs.
Then came the PML story that was so magnified by the stock market that took the drug off the market in spite of the FDA refusal to do that, knowing in fact that the drug's benefits outweighs the risk of the virus in MS - a debilitating life-threatening disease. The decision to withdraw the drug from the market was in fact Biogen Idec's (BIIB) idea. The partner already had a best selling MS drug on the market, Avonex, which continued to be a blockbuster best selling drug for MS thanks to Tysabri's withdrawal. When Tysabri was brought back to the market it started selling against a tremendous effort by the short sellers to box it, incessantly reminding investors about the PML complication and the virus that the drug would transform in the brain from a nice Dr. Jekyll, to the evil Mr. Hyde.
Regardless, the drug sales mounted but with difficulty, and Elan cleared its mess thanks to Dr. Garo Armen, Chairman and president of Agenus (AGEN), who was hired by Elan as interim president to do the job of cleaning, restructuring and advising the firm. Dr. Armen did an excellent job until he left to take care of Agenus.
A test that pinpoints patients susceptible to develop PML when they take Tysabri, or any of the many drugs, especially immunosuppressant drugs was created and used. Tysabri's sales began to rally since, promising billions of dollars in revenues from Tysabri's MS sales, and trust us, billions of additional dollars from the drug's sales as a treatment for other diseases, including Crohn's disease, which the FDA had granted approval of Tysabri regarding this nasty diseases.
All this time, we remained shareholders of this firm. The reason is our understanding of the importance of Tysabri, hence, its value that sooner or later would be realized. More important was our confidence in this firm's science and the capabilities of its scientists to solve the problems of the most different system, i.e., the nervous system.
Here we are. The unavoidable happened. The news brought us the announced agreement between Tysabri's partners. Indeed, we expected Biogen Idec to swallow the drug as long as the partnership remained and as it was impossible for Elan to raise $3.25 billion to pay BIIB for its 50% share in the drug. It is Biogen Idec that has this sort of money and it also has many reasons for controlling Tysabri.
What do we do now?
We know exactly what we will do, yet, let us first have a quick look at the deal, which, according to Elan will cause the following changes:
1. 1. Fill Elan's coffers with $3.25 billion to do whatever it pleases with it
Gr2. Grant Elan a double digit royalty at least
3. 3. Provide capital and long-term cash flow for growth and business diversification
Up front cash payment of $3.25 billion to Elan is a monstrous amount of money. For the royalty, in the first 12 months 12% of Tysabri global net sales (all indications) will be granted to Elan and tiered royalty structure after 12 months - 18% on up to $2 billion in global net sales (all indications). Over $2 billion of global net sales (all indications), the royalties mount to 25%.
The outcome provides tax efficient capital and long-term cash flow to Elan. According to Elan's CEO, Kelly Martin, the transaction enables Elan and its shareholders to realize, upon close, a meaningful percentage of the current value of Tysabri while maintaining long-term cash flow realization through the multi-tiered royalty structure of the complete asset.
Mr. Martin believes that the restructuring of this business collaboration provides Elan with significant strategic flexibility. Future actions will be guided by the firm's consistent and multi-year approach of dynamic risk/reward assessment of business opportunities.
In signing this deal, Elan is opening the door for diversification, de-risking the company to move forward; and for the patients to continue to benefit from the profound efficacy of Tysabri. The risk of one asset and a single collaborator was not ideal.
To read the entire press release click here.
What is our decision?
Stay with Elan Is our answer. We have always been believers in this firm's scientists' inspiration and capability. More important, we like the deal and believe it serves the purpose of both Biogen Idec and Elan's futures.
Disclosure: Long Elan.
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